# Table	of	Contents

# UNITED	STATES	SECURITIES	AND	EXCHANGE	COMMISSION

ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)

OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

# ZIMMER	HOLDINGS,	INC.

(Exact	name	of	registrant	as	specified	in	its	charter)

Delaware

(State	of	Incorporation)

345	East	Main	Street	Warsaw,	Indiana

(Address	of	principal	executive	offices)

(IRS	Employer	Identification	No.)

(Zip	Code)

Registrant's	telephone	number,	including	area	code:	(574)	267-6131

Securities	registered	pursuant	to	Section	12(b)	of	the	Act:

Securities	registered	pursuant	to	Section	12(g)	of	the	Act:	None

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.	Yes	þ					No	o

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Act.	Yes	o					No	þ

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	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of	the	registrant's	knowledge,	in	definitive	proxy	or	information	statements incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10-K.		þ

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

The	aggregate	market	value	of	shares	held	by	non-affiliates	was	$20,033,882,275	(based	on	the	closing	price	of	these	shares	on	the	New	York	Stock	Exchange	on	June	29,	2007,	and	assuming	solely	for	the	purpose	of	this	calculation	that	all directors	and	executive	officers	of	the	registrant	are	"affiliates").	As	of	February	13,	2008,	233,185,894	shares	of	the	registrant's	$.01	par	value	common	stock	were	outstanding.

Documents	Incorporated	by	Reference

This	annual	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"	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	the	important	risks	and	uncertainties	that	may	affect	our	future	operations	that	we	describe	in	Part	I,	Item	1A	–	Risk	Factors	of	this	report.	We	may	update that	discussion	in	Part	II,	Item	1A	—	Risk	Factors	in	a	Quarterly	Report	on	Form	10-Q	we	file	hereafter.	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.

# PART	I

Item	1. Business

Item	1A. Risk	Factors

Item	1B. Unresolved	Staff	Comments

Item	2. Properties

Item	3. Legal	Proceedings

Item	4. Submission	of	Matters	to	a	Vote	of	Security	Holders 20

# PART	II

Item	5. Market	for	the	Registrant's	Common	Equity,	Related	Stockholder	Matters	and	Issuer	Purchases	of	Equity	Securities 21

Item	6. Selected	Financial	Data 22

Item	7. Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations

Item	7A. Quantitative	and	Qualitative	Disclosures	About	Market	Risk

Item	8. Financial	Statements	and	Supplementary	Data

Item	9. Changes	in	and	Disagreements	With	Accountants	on	Accounting	and	Financial	Disclosure

Item	9A. Controls	and	Procedures 63

Item	9B. Other	Information 63

# PART	III

Item	10. Directors,	Executive	Officers	and	Corporate	Governance 64

Item	11. Executive	Compensation

Item	12. Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder	Matters

# 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.	We	also provide	other	healthcare	related	services.	In	this	report,	"Zimmer"	"we",	"us",	"our"	and	similar	words	refer	collectively	to	Zimmer	Holdings,	Inc.	and	its	subsidiaries.	Zimmer	Holdings	refers	to	the	parent	company	only.

There	were	several	developments	in	2007	that	we	expect	will	have	a	significant	impact	on	our	business	for	the	foreseeable	future.

In	April	2007,	we	acquired	Endius	Incorporated,	a	privately	held	spinal	products	company	based	in	Massachusetts.	Endius	develops	and	manufactures	minimally	invasive	spine	surgery	products,	implants	and	techniques	to	treat	spine disease.	The	acquisition	of	Endius	has	expanded	our	spine	product	portfolio	to	include	innovative	minimally	invasive	instruments	and	implants.

In	May	2007,	the	Board	of	Directors	promoted	two	of	our	senior	executives	to	the	offices	of	chief	executive	officer	and	chief	financial	officer.	This	is	the	first	time	since	we	became	an	independent	public	company	that	new	persons are	holding	those	offices.

In	September	2007,	we	and	other	major	U.S.	orthopaedic	manufacturers	announced	a	settlement	reached	with	the	U.S.	Department	of	Justice	regarding	its	ongoing	investigation	of	financial	relationships	with	consulting	surgeons.	As part	of	that	settlement,	we	paid	a	$169.5	million	civil	settlement	amount	in	the	third	quarter	and	entered	into	a	Deferred	Prosecution	Agreement	("DPA")	and	a	Corporate	Integrity	Agreement	("CIA").	As	part	of	these	agreements,	we	agreed to	oversight	by	a	federal	monitor	for	18	months	and	an	independent	review	organization	for	an	additional	42	months.	We	believe	we	are	in	compliance	in	all	material	respects	with	the	requirements	of	the	DPA	and	CIA.	As	recently announced,	we	intend	to	further	expand	our	compliance	program	beyond	the	requirements	of	these	agreements	to	enhance	our	ability	to	compete	in	an	increasingly	transparent	and	regulated	environment.

In	November	2007,	we	acquired	ORTHOsoft	Inc.,	a	leader	in	computer	navigation	for	orthopaedic	surgery.	The	ORTHOsoft	acquisition	bolsters	our	Zimmer	SmartTools	strategic	initiative	designed	to	bring	innovative	tools	to	the marketplace	that	will	help	create	better	and	more	reproducible	outcomes	for	surgeons	and	patients.

We	anticipate	further	applying	both	minimally	invasive	and	computer	navigation	concepts	across	our	range	of	businesses.	During	2007,	we	expanded	our	Gender	Solutions®	platform	to	additional	knee	replacement	systems	and	to	hip replacement.	We	have	also	announced	our	intention	to	make	additional	investments	in	the	higher	growth	areas	of	spine	and	dental	products.

Finally,	beginning	in	2007,	under	the	direction	of	our	new	senior	executives,	we	undertook	an	extensive	review	of	our	operations	and	identified	a	number	of	planned	improvements	we	subsequently	announced	in	2008.	These	include developing	a	new	manufacturing	facility	in	Ireland,	upgrading	our	sales	and	distribution	capabilities	in	the	U.S.,	enhancing	our	information	technology	and	quality	systems	and	investing	in	our	spine,	dental	and	trauma	business	units.

Zimmer	Holdings	was	incorporated	in	Delaware	in	2001.	Our	history	dates	to	1927,	when	Zimmer	Manufacturing	Company,	a	predecessor,	was	founded	in	Warsaw,	Indiana.	On	August	6,	2001,	Zimmer	Holdings	was	spun	off	from its	former	parent	and	became	an	independent	public	company.

# CUSTOMERS,	SALES	AND	MARKETING

Our	primary	customers	include	musculoskeletal	surgeons,	neurosurgeons,	oral	surgeons,	dentists,	hospitals,	distributors,	healthcare	dealers	and,	in	their	capacity	as	agents,	healthcare	purchasing	organizations	or	buying	groups.	These customers	range	from	large	multinational	enterprises	to	independent	surgeons.

We	have	operations	in	more	than	25	countries	and	market	products	in	more	than	100	countries,	with	corporate	headquarters	in	Warsaw,	Indiana,	and	more	than	100	manufacturing,	distribution	and	warehousing	and/or	office	facilities worldwide.	We	manage	our	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.

We	market	and	sell	products	through	three	principal	channels:	1)	direct	to	healthcare	institutions,	such	as	hospitals,	or	direct	channel	accounts,	2)	through	stocking	distributors	and,	in	the	Asia	Pacific	region,	healthcare	dealers,	and 3)	directly	to	dental	practices	and	dental	laboratories.	With	direct	channel	accounts,	inventory	is	generally	consigned	to	sales	agents	or	customers.	With	sales	to	stocking	distributors,	healthcare	dealers,	dental	practices	and	dental	laboratories, title	to	product	passes	generally	upon	shipment.	Direct	channel	accounts	represented	approximately	80	percent	of	our	net	sales	in	2007.	No	individual	direct	channel	account,	stocking	distributor,	healthcare	dealer,	dental	practice	or	dental laboratory	accounted	for	more	than	1	percent	of	our	net	sales	for	2007.

We	stock	inventory	in	our	warehouse	facilities	and	retain	title	to	consigned	inventory	in	sufficient	quantities	so	that	products	are	available	when	needed	for	surgical	procedures.	Safety	stock	levels	are	determined	based	on	a	number	of factors,	including	demand,	manufacturing	lead	times	and

quantities	required	to	maintain	service	levels.	We	also	carry	trade	accounts	receivable	balances	based	on	credit	terms	that	are	generally	consistent	with	local	market	practices.

We	utilize	a	network	of	sales	associates,	sales	managers	and	support	personnel,	most	of	whom	are	employed	or	contracted	by	independent	distributors	and	sales	agencies.	We	invest	a	significant	amount	of	time	and	expense	in	training sales	associates	in	how	to	use	specific	products	and	how	to	best	inform	surgeons	of	product	features	and	uses.	Sales	force	representatives	must	have	strong	technical	selling	skills	and	medical	education	to	provide	technical	support	for surgeons.

In	response	to	the	different	healthcare	systems	throughout	the	world,	our	sales	and	marketing	strategies	and	organizational	structures	differ	by	region.	We	utilize	a	global	approach	to	sales	force	training,	marketing	and	medical education	to	provide	consistent,	high	quality	service.	Additionally,	we	keep	current	with	key	surgical	developments	and	other	issues	related	to	musculoskeletal	surgeons	and	the	medical	procedures	they	perform.

Americas.		The	Americas	is	our	largest	geographic	segment,	accounting	for	$2,277.0	million,	or	58	percent,	of	2007	net	sales,	with	the	United	States	accounting	for	94	percent	of	net	sales	in	this	region.	The	United	States	sales	force consists	primarily	of	independent	sales	agents,	most	of	whom	sell	products	exclusively	for	Zimmer.	Sales	agents	in	the	United	States	receive	a	commission	on	product	sales	and	are	responsible	for	many	operating	decisions	and	costs.	Sales commissions	are	accrued	at	the	time	of	sale.

In	this	region,	we	contract	with	group	purchasing	organizations	and	managed	care	accounts	and	have	promoted	unit	growth	by	offering	volume	discounts	to	customer	healthcare	institutions	within	a	specified	group.	At	negotiated thresholds	within	a	contract	buying	period,	price	discounts	increase.	Generally,	we	are	designated	as	one	of	several	preferred	purchasing	sources	for	specified	products,	although	members	are	not	obligated	to	purchase	our	products.	Contracts with	group	purchasing	organizations	generally	have	a	term	of	three	years	with	extensions	as	warranted.

A	majority	of	hospitals	in	the	United	States	belong	to	at	least	one	group	purchasing	organization.	In	2007,	individual	hospital	orders	purchased	through	contractual	arrangements	with	our	three	largest	group	purchasing	organizations accounted	for	approximately	48	percent	of	our	net	sales	in	the	United	States.	Contractual	sales	were	highest	through	Novation,	LLC,	Premier	Purchasing	Partners,	L.P.,	and	Health	Trust	Purchasing	Group,	representing	27	percent,	15	percent and	6	percent,	respectively,	of	net	sales	in	the	United	States.	No	individual	end-user,	however,	accounted	for	over	1	percent	of	our	net	sales,	and	the	top	ten	end-users	accounted	for	approximately	4	percent	of	our	aggregate	net	sales	in	the United	States.

In	the	Americas,	we	monitor	and	rank	independent	sales	agents	across	a	range	of	performance	metrics.	We	evaluate	independent	sales	agents	based	on	achieving	certain	sales	targets	and	on	maintaining	efficient	levels	of	working capital.	We	set	expectations	for	efficient	management	of	inventory	and	provide	independent	sales	agents	an	incentive	to	aid	in	the	collection	of	receivables.

Europe.		The	European	geographic	segment	accounted	for	$1,081.0	million,	or	28	percent,	of	2007	net	sales,	with	France,	Germany,	Italy,	Spain,	Switzerland	and	the	United	Kingdom	collectively	accounting	for	over	75	percent	of	net sales	in	the	region.	This	segment	also	includes	other	key	markets,	including	Benelux,	Nordic,	Central	and	Eastern	Europe,	the	Middle	East	and	Africa.	Our	sales	force	in	this	region	is	comprised	of	independent	distributors,	commissioned agents,	direct	sales	associates	and	sales	support	personnel.	In	Europe,	we	emphasize	the	advantages	of	our	clinically	proven,	established	designs	and	innovative	solutions,	such	as	minimally	invasive	surgical	procedures	and	technologies	and new	and	enhanced	materials	and	surfaces.

Asia	Pacific.		The	Asia	Pacific	geographic	segment	accounted	for	$539.5	million,	or	14	percent,	of	2007	net	sales,	with	Japan	being	the	largest	market	within	this	segment,	accounting	for	approximately	54	percent	of	the	region's	sales. This	segment	also	includes	key	markets	such	as	Australia,	New	Zealand,	Korea,	China,	Taiwan,	India,	Thailand,	Singapore,	Hong	Kong	and	Malaysia.	In	Japan	and	most	countries	in	the	Asia	Pacific	region,	we	maintain	a	network	of	dealers, who	act	as	order	agents	on	behalf	of	hospitals	in	the	region,	and	sales	associates,	who	build	and	maintain	relationships	with	musculoskeletal	surgeons	in	their	markets.	These	sales	associates	cover	over	7,000	hospitals	in	the	region.	The knowledge	and	skills	of	our	sales	associates	play	a	critical	role	in	providing	service,	product	information	and	support	to	surgeons.

# SEASONALITY

Our	business	is	somewhat	seasonal	in	nature,	as	many	of	our	products	are	used	in	elective	procedures,	which	typically	decline	during	the	summer	months	and	holiday	seasons.

# DISTRIBUTION

We	operate	distribution	facilities	domestically	in	Warsaw,	Indiana;	Dover,	Ohio;	Statesville,	North	Carolina;	Memphis,	Tennessee;	Carlsbad,	California;	and	internationally,	in	Australia,	Belgium,	Canada,	France,	Germany,	Italy, Japan,	Korea,	the	Netherlands,	Singapore,	Spain,	Switzerland	and	the	United	Kingdom.	We	generally	ship	our	orders	via	expedited	courier.	Our	operations	support	local	language	labeling	for	shipments	to	the	European	Union	member countries.	Our	backlog	of	firm	orders	is	not	considered	material	to	an	understanding	of	our	business.

# PRODUCTS

Our	products	include	joint	and	dental	reconstructive	orthopaedic	implants,	spinal	implants,	trauma	products,	and	related	orthopaedic	surgical	products.	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.	Orthopaedic	surgeons	and	neurosurgeons	use	spinal	implants	in the	treatment	of	degenerative	diseases,	deformities	and

trauma.	Trauma	products	are	used	primarily	to	reattach	or	stabilize	damaged	bone	and	tissue	to	support	the	body's	natural	healing	process.	Our	related	orthopaedic	surgical	products	include	supplies	and	instruments	designed	to aid	in	orthopaedic	surgical	procedures	and	post-operation	rehabilitation.

# Orthopaedic	Reconstructive	Implants

# Minimally	Invasive	Solutions	Procedures	and	Technologies	and	The	Zimmer	Institute

In	2007,	we	continued	to	expand	our	efforts	to	apply	minimally	invasive	surgical	techniques	to	orthopaedic	surgery,	which	we	refer	to	as	Minimally	Invasive	SolutionsTM	(MIS)	Procedures	and	Technologies.	The	principal goals	of	these	MIS	Technology	efforts	are	to	reduce	the	hardships	of	having	a	total	joint	replacement,	such	as	the	time	a	patient	must	spend	in	recovery,	pain	reduction	and	lost	time	from	work.	We	have	used	The	Zimmer Institute	to	facilitate	the	training	of	over	7,900	surgeons	on	several	MIS	Procedures.	In	2007,	we	trained	nearly	1,700	surgeons	through	The	Zimmer	Institute.	We	intend	to	continue	to	conduct	validated	objective-based	medical education	that	is	designed	to	ensure	surgical	skill	development	in	the	safe	and	effective	use	of	Zimmer	products	and	procedures.

We	continue	to	work	with	surgeons	to	evaluate	and	refine	our	MIS	procedures.	As	refinements	occur,	they	are	incorporated	into	our	course	curriculum.	We	are	focused	on	commercializing	existing	MIS	Technique approaches	and	investigating	new	ways	to	apply	MIS	Technology	principles	to	additional	procedures	and	products.

# Knee	Implants

Total	knee	replacement	surgeries	typically	include	a	femoral	component,	a	patella	(knee	cap),	a	tibial	tray	and	an	articular	surface	(placed	on	the	tibial	tray).	Knee	replacement	surgeries	include	first-time,	or	primary,	joint replacement	procedures	and	revision	procedures	for	the	replacement,	repair	or	enhancement	of	an	implant	or	component	from	a	previous	procedure.	Knee	implants	are	designed	to	accommodate	different	levels	of	ligament stabilization	of	the	joint.	While	some	knee	implant	designs,	called	cruciate	retaining	(CR)	designs,	require	the	retention	of	the	posterior	cruciate	ligament,	other	designs,	called	posterior	stabilized	(PS)	and	ultracongruent	(UC) designs,	provide	joint	stability	without	the	posterior	cruciate	ligament.	There	are	also	procedures	for	partial	reconstruction	of	the	knee,	which	treat	limited	knee	degeneration	and	involve	the	replacement	of	only	one	side,	or compartment,	of	the	knee	with	a	unicompartmental	knee	prosthesis.

Our	portfolio	of	MIS	Techniques	includes	the	MIS	Mini-Incision	Total	Knee	Procedure.	The	MIS	Mini-Incision	Total	Knee	Instruments	feature	smaller	instruments	which	accommodate	a	smaller	incision	and	less disruption	of	the	surrounding	soft	tissues.

We	offer	a	wide	range	of	products	for	specialized	knee	procedures,	including	the	following:

NexGen®	Complete	Knee	Solution.		The	NexGen	Knee	product	line	is	a	comprehensive	system	for	knee	replacement	surgery	which	has	had	significant	application	in	PS,	CR	and	revision	procedures.	The NexGen	Knee	System	offers	joint	stability	and	sizing	that	can	be	tailored	to	individual	patient	needs	while	providing	surgeons	with	a	unified	system	of	interchangeable	components.	The	NexGen	Knee	System	provides	surgeons with	complete	and	versatile	knee	instrument	options,	including	MIS	Mini-Incision	Instruments,	milling	and	multiple	traditional	saw	blade	cutting	instrument	systems.	The	breadth	and	versatility	of	the	NexGen	Knee	System allows	surgeons	to	change	from	one	type	of	implant	to	another	during	surgery,	according	to	the	needs	of	the	patient,	and	to	support	current	surgical	philosophies.

The	NexGen	Complete	Knee	Solution	Legacy®	Knee-Posterior	Stabilized	product	line	provides	stability	in	the	absence	of	the	posterior	cruciate	ligament.	The	PS	capabilities	were	augmented	through	the introduction	of	the	NexGen	Legacy	Posterior	Stabilized	Flex	Knee	(the	"LPS-Flex	Knee"),	a	high-flexion	implant	that	has	the	potential	to	accommodate	knee	flexion	up	to	a	155-degree	range	of	motion	in	some	patients.

The	NexGen	CR	product	line	is	designed	to	be	used	in	conjunction	with	a	functioning	posterior	cruciate	ligament.	The	NexGen	CR-Flex	Fixed	Bearing	Knee	is	designed	with	components	to	provide	a	greater range	of	motion	for	patients	who	require	deep	bending	in	their	daily	activities.	The	NexGen	CR-Flex	Femoral	Components	allow	the	surgeon	to	adjust	component	sizing	without	removing	additional	bone.

The	NexGen	Revision	Knee	product	line	consists	of	several	different	products	that	are	designed	to	provide	clinical	solutions	to	surgeons	for	various	revision	situations,	including	a	bone	augmentation	implant system	made	from	our	Trabecular	MetalTM	Technology	material.	These	augments	are	designed	to	address	significant	bone	loss	in	revision	surgery.

NexGen	Knee	Gender	Solutions®	femorals	represent	the	first	knee	implants	specifically	shaped	to	offer	fit	and	function	optimized	for	anatomic	features	that	are	more	commonly	seen	in	female	patients.	Gender implants	are	an	important	strategic	focus,	as	more	than	half	of	total	knee	arthroplasty	patients	are	female.	Gender	Solutions	femorals	are	available	in	both	NexGen	CR-Flex	and	LPS-Flex	configurations.

We	offer	improved	polyethylene	performance	in	the	NexGen	Knee	System	with	our	conventional	polyethylene	and	Prolong®	Highly	Crosslinked	Polyethylene,	which	offers	reduced	wear,	resistance	to	oxidation, pitting	and	cracking.	Prolong	Highly	Crosslinked	Polyethylene	is	available	in	both	NexGen	CR-Flex	and	LPS-Flex	designs.

The	Natural-Knee®	II	System.		The	Natural-Knee	II	System	consists	of	a	range	of	interchangeable,	anatomically

designed	implants	which	include	a	proprietary	Cancellous-Structured	TitaniumTM	(CSTiTM)	Porous	Coating	option	for	stable	fixation	in	active	patients	and	Durasul®	Highly	Crosslinked	Polyethylene.

Gender	Solutions®	Natural-Knee®	Flex	System.		The	Gender	Solutions	Natural-Knee	Flex	System	was	released	on	a	limited	basis	in	late	2007.	This	system	adds	Zimmer's	unique	High	Flex	and	Gender Solutions	design	concepts	to	the	Natural-Knee®	System.	The	Gender	Solutions	Natural-Knee	Flex	System	recognizes	that	two	distinct	populations	exist	in	total	knee	arthroplasty	(female	and	male)	and	offers	two	distinct implant	shapes	for	enhanced	fit.	The	system	is	compatible	with	muscle	sparing	Zimmer	Minimally	Invasive	Solutions	procedures	and	offers	high	flexion	capacity	up	to	155	degrees.	The	system	features	the	proven	clinical success	of	Zimmer's	asymmetric	tibial	plate,	CSTiTM	porous	coating	and	the	ultracongruent	articular	surface.

The	Innex®	Total	Knee	System.		The	Innex	Knee	System	offers	fixed	bearing	and	mobile	bearing	knee	components	all	designed	within	the	same	system	philosophy.	While	the	Innex	Knee	System	is	best	known for	its	mobile	bearing	knee	offering,	the	availability	of	differing	levels	of	articular	constraint	and	the	Innex	Revision	Knee	components	provide	for	a	comprehensive	mobile	and	fixed	bearing	knee	system.	The	Innex	Knee System	is	distributed	in	Europe	and	Asia	Pacific,	and	is	not	available	for	commercial	distribution	in	the	United	States.

The	Zimmer®	Unicompartmental	Knee	System.		The	Zimmer	Unicompartmental	Knee	System	offers	a	high	flexion	design	to	unicompartmental	knee	surgery.	The	high	flexion	product	was	designed	specifically for	MIS	Procedures	and	Technologies.	The	system	offers	the	surgeon	the	ability	to	conserve	bone	by	replacing	only	the	compartment	of	the	knee	that	has	had	degenerative	changes.

# Hip	Implants

Total	hip	replacement	surgeries	replace	both	the	head	of	the	femur	and	the	socket	portion	of	the	pelvis	(acetabulum)	of	the	natural	hip.	Hip	procedures	include	first	time,	or	primary,	joint	replacement	as	well	as revision	procedures.	Approximately	30	percent	of	hip	implant	procedures	involve	the	use	of	bone	cement	to	attach	or	affix	the	prosthetic	components	to	the	surrounding	bone.	The	remaining	are	press-fit	into	bone,	which	means that	they	have	a	surface	that	bone	affixes	to	through	either	ongrowth	or	ingrowth	technologies.

Our	portfolio	of	MIS	Techniques	includes	the	Zimmer	MIS	2-IncisionTM	Hip	Replacement	Procedure,	the	MIS	Posterior	Procedure,	and	the	Zimmer	MIS	Anterolateral	Techniques.	The	incision	for	a	traditional open	hip	primary	replacement	may	be	approximately	12	inches	long.	Other	less	invasive	approaches,	such	as	a	"mini"	incision	for	hips,	have	been	in	existence	for	some	time.	Our	key	hip	replacement	products	include:

VerSys®	Hip	System.		The	VerSys	Hip	System	is	supported	by	a	common	instrumentation	set	and	is	an	integrated	family	of	hip	products	with	design-specific	options	to	meet	varying	surgical	philosophies	and patient	needs.	The	VerSys	Hip	System	includes	the	following	features:	a	variety	of	stem	designs	and	fixation	options	for	both	primary	and	revision	situations,	a	modular	design	that	allows	for	a	variety	of	femoral	heads,	optimal sizing	selections,	and	a	common	instrumentation	set	for	use	with	virtually	all	VerSys	Stems.

Trabecular	Metal	Primary	Hip	Prosthesis.		The	Trabecular	Metal	Primary	Hip	Prosthesis	product	was	our	first	utilization	of	Trabecular	Metal	technology	on	a	hip	prosthesis.	The	prosthesis	utilizes	an	innovative proximal	design	to	aggressively	lock	the	prosthesis	in	the	bone	and	provide	for	an	optimized	environment	for	biological	ingrowth	to	occur	into	the	highly	porous	Trabecular	Metal	material.

Zimmer®	M/L	Taper	Hip	Prosthesis	with	KinectivTM	Technology.		The	Zimmer	M/L	Taper	Hip	Prosthesis	offers	a	wedge	design	and	proximally	porous	coated	design	that	was	based	on	long	term	clinically	proven concepts.	The	M/L	Taper	has	become	widely	used	in	MIS	Procedures	due	to	its	overall	design	and	ease	of	use.	Specific	instruments	have	been	developed	to	facilitate	the	insertion	of	the	Zimmer	M/L	Taper	Hip	Prosthesis through	the	MIS	Anterolateral	Technique.	The	addition	of	Kinectiv	Technology	provides	the	surgeon	with	a	wide	range	of	options	to	address	variations	in	the	patient's	anatomy.	The	M/L	Taper	hip	product	family	is	our	fastest growing	hip	stem	family.

Alloclassic®	(Zweymüller®)	Hip	System.		The	Alloclassic	(Zweymüller)	Hip	System	has	become	the	most	used,	primary,	cementless	hip	in	the	world.	This	is	one	of	the	few	stems	available	today	that	is practically	unchanged	since	its	introduction	in	1979.	A	new	offset	design	was	added	in	2004	and	offers	the	surgeon	increased	capability	to	restore	the	patient's	anatomical	joint	movement.

CLS®	Spotorno®	Hip	System.		The	CLS	Spotorno	Stem	is	one	of	our	largest	selling	hip	prostheses,	especially	in	the	European	markets.	Additions	to	the	product	line	in	2004	provided	the	capability	for	restoration of	the	physiological	center	of	rotation.	The	CLS	Spotorno	Stem	has	excellent	clinical	results,	confirmed	by	the	2004	Swedish	Hip	Registry	with	a	100	percent	implant	survivorship	after	11	years.

Trilogy®	Acetabular	System.		The	Trilogy	Acetabular	System,	including	titanium	alloy	shells,	polyethylene	liners,	screws	and	instruments,	is	our	primary	acetabular	cup	system.	The	Trilogy	family	of	products offers	versatile	component	designs	and	instrumentation.	One	option,	the	Longevity®	Highly	Crosslinked	Polyethylene	Liner,	is	designed	to	address	the	issue	of	wear	and	reduce	the	generation	of	debris	in	total	hip	arthroplasty. Polyethylene	debris	may	cause	the	degeneration	of	bone	surrounding	reconstructive	implants,	a	painful	condition	called	osteolysis.	We	began	offering	the	Trabecular	Metal	Modular	Primary

Acetabular	System	in	2004.	This	particular	product	incorporates	design	features	from	the	Trilogy	family	of	acetabular	shells	augmented	with	the	advanced	fixation	surface	of	Trabecular	Metal	Material.	In	addition	to	the Trabecular	Metal	Acetabular	System,	we	also	offer	a	Trabecular	Metal	Revision	Acetabular	Shell	for	advanced	fixation	in	acetabulae	with	insufficient	bone.

Alternative	Bearing	Technology.		We	have	a	broad	portfolio	of	alternative	bearing	technologies	which	include	Longevity	and	Durasul	Highly	Crosslinked	Polyethylenes,	Metasul®	Metal-on-Metal	Tribological Solution,	Cerasul®	Ceramic-on-Ceramic	Tribological	Solutions	and	the	Trilogy	AB®	Acetabular	System.	Alternative	bearings	are	designed	to	minimize	wear	over	time,	potentially	increasing	the	longevity	of	the	implant.

Durom®	Hip	Resurfacing	System.		This	product	is	particularly	suited	to	patients	who	are	at	risk	of	requiring	multiple	hip	replacements	over	their	lifetimes	since	it	preserves	more	of	the	patient's	healthy	bone stock.	A	primary	objective	of	this	system	is	to	allow	the	patient	to	return	to	an	active	lifestyle.	The	Durom	System	uses	the	highly	wear	resistant	Metasul	Metal-on-Metal	Technology	as	the	bearing	surface	for	the	implant design.	Since	1988,	Metasul	Technology	has	been	used	successfully	for	total	hip	replacement.	Today's	metal-on-metal	technology	is	the	result	of	nearly	two	decades	of	development,	research	and	clinical	evaluation,	which formed	the	foundation	for	the	Durom	Hip	Resurfacing	System.	The	option	of	the	large	diameter	heads	offers	the	advantage	of	a	low-wear	solution	while	providing	greater	joint	stability	and	high	range	of	motion	in	combination with	the	wide	range	of	cemented	and	uncemented	femoral	implants.	The	components	of	the	Durom	Hip	Resurfacing	System	are	commercially	distributed	outside	the	U.S.	for	use	in	Total	Hip	Arthroplasty	(THA),	Hemi Arthroplasty	(HA),	and/or	Total	Surface	Replacement	Arthroplasty	(SRA).	In	the	U.S.,	Durom	components	are	commercially	available	for	use	in	THA	(Durom	Acetabular	component	+	Metasul	LDH®	Large	Diameter	Heads) or	HA,	but	are	not	approved	for	use	together	in	total	SRA.

PALACOS®1	Bone	Cement.		We	have	exclusive	United	States	distribution	rights	for	the	PALACOS	line	of	bone	cement	products	manufactured	by	Heraeus	Kulzer	GmbH,	a	world	leader	in	the	development	and production	of	orthopaedic	bone	cement	products	and	other	healthcare	technologies.	We	also	have	non-exclusive	distribution	rights	in	specific	geographies	outside	of	the	United	States.	Included	in	these	brands	are	PALACOS	R and	PALACOS	R+G	Bone	Cements,	as	well	as	PALACOS	LV	and	PALACOS	LV+G	Bone	Cements.	The	PALACOS	R+G	and	PALACOS	LV+G	products	are	bone	cements	with	the	antibiotic	gentamiacin	pre-mixed	in	the formulation,	which	is	used	by	the	orthopaedic	surgeon	to	reduce	the	risk	of	postoperative	infection.	The	product's	handling	characteristics	make	it	well-suited	for	minimally	invasive	procedures.

# Extremity	Implants

Our	extremity	portfolio,	primarily	shoulder	and	elbow	products,	are	designed	to	treat	arthritic	conditions,	soft	tissue	injuries	and	fractures,	as	well	as	to	enhance	the	outcome	of	primary	or	revision	surgery. Our	key	products	include:

Bigliani/Flatow®	Complete	Shoulder	Solution	Family.		The	Bigliani/Flatow	product	line	combined	with	the	Trabecular	Metal	Humeral	Stem	gives	us	a	significant	presence	in	the	global	shoulder	implant market.

Trabecular	Metal	Reverse	Shoulder	System.		The	Trabecular	Metal	Reverse	Shoulder	System	incorporates	advanced	materials	and	design	to	offer	improved	orthobiological	ingrowth	potential	through	the utilization	of	Trabecular	Metal	technology,	while	addressing	significant	loss	of	rotator	cuff	function.	The	reverse	shoulder	system	is	designed	to	restore	function	to	patients,	who	because	of	debilitating	rotator	cuff	tears,	are	not candidates	for	traditional	shoulder	surgery	and	have	exhausted	other	means	of	repair.

Anatomical	Shouldertm	System.		The	Anatomical	Shoulder	System	can	be	adjusted	to	each	patient's	individual	anatomy.	This	portfolio	of	products	was	further	expanded	to	include	the	Anatomical	Shoulder Inverse/Reverse	System,	designed	to	address	significant	loss	of	rotator	cuff	function,	and	the	fracture	stem.	Both	the	primary	and	fracture	shoulder	implants	can	be	converted	to	a	reverse	shoulder	without	removal	of	the	initial implant.

Coonrad/Morrey	Total	Elbow.		The	Coonrad/Morrey	Total	Elbow	product	line	is	a	family	of	elbow	replacement	implant	products	to	address	patients	with	conditions	of	severe	arthritis	or	trauma.	It	remains	the largest	elbow	franchise	in	the	world.

# Dental	Products

Zimmer	Dental	Inc.,	our	dental	products	division	headquartered	in	Carlsbad,	California,	manufactures	and	distributes	(1)	dental	reconstructive	implants	–	for	individuals	who	are	totally	without	teeth	or	are	missing	one	or more	teeth;	(2)	dental	restorative	products	–	aimed	at	providing	a	more	natural	restoration	to	mimic	the	original	teeth;	and	(3)	dental	regenerative	products	–	for	soft	tissue	and	bone	rehabilitation.

# Dental	Reconstructive	Implants

Our	dental	reconstructive	implant	products	and	surgical	and	restorative	techniques	include:

Tapered	Screw-Vent®	Implant	System.		Our	highest	selling	dental	product	line	provides	the	clinician	a	tapered	geometry	which	mimics	the	natural	shape	of	a	tooth	root.	The	Tapered	Screw-Vent	System,	with	its two-stage	design,	was	developed	to	minimize	valuable	chair	time	for	restorations.

1	Registered	Trademark	of	Heraeus	Kulzer	GmbH

Featuring	a	patented	internal	hex	connection,	multiple	lead	threads	for	reduced	insertion	time	and	selective	surface	coatings,	the	Tapered	Screw-Vent	Product	is	a	technologically	advanced	dental	implant	offering	features designed	to	allow	the	clinician	to	meet	the	needs	of	patients	even	in	the	most	demanding	circumstances.	The	Zimmer®	One-Piece	Implant	System,	designed	to	complement	the	success	of	the	Tapered	Screw-Vent	System, enhances	this	product	line	by	offering	clinicians	a	fast,	convenient	restorative	option.

AdVent®	Implant	System.		Utilizing	many	features	of	the	Tapered	Screw-Vent	System,	the	AdVent	Product	is	a	transgingival,	one	stage	design	that	utilizes	the	same	surgical	system	as	the	Tapered	Screw-Vent System,	allowing	the	clinician	to	use	both	design	concepts	without	incurring	the	added	cost	of	a	second	surgical	system.

Tapered	SwissPlus®	Implant	System.		Designed	to	meet	the	needs	of	clinicians	who	prefer	a	transgingival,	one	stage,	dental	implant,	the	Tapered	SwissPlus	System	incorporates	multiple	lead	threads	for	faster insertion	time,	and	a	tapered	body	to	allow	it	to	be	placed	in	tight	interdental	spaces.	The	Tapered	SwissPlus	System	also	incorporates	an	internal	connection.

# Dental	Restorative	Products

We	commercialize	products	for	the	aesthetic	market	aimed	at	providing	a	more	natural	restoration.	We	offer	a	full	line	of	prosthetic	devices	for	each	of	the	above	dental	implant	systems	as	well	as	a	custom	solution,	as follows:

Zimmer®	Hex-Locktm	Contour	Abutment	and	Restorative	Products.		Designed	to	be	used	with	our	Tapered	Screw-Vent	and	One-Piece	Implant	Systems,	our	contour	lines	are	an	off-the-shelf	solution	for immediately	addressing	the	diversity	of	patients'	needs.	Featuring	prepared	margins,	titanium	and	ceramic	options,	and	snap-on	impression	caps,	our	abutments	are	designed	to	simplify	the	restoration	process,	save	time	for clinicians	and	technicians,	and	offer	versatility.

# Dental	Regenerative	Products

We	market	the	following	product	lines	for	use	in	regenerative	techniques	in	oral	surgery:

Puros®	Allograft	Products.		The	Puros	Material	is	an	allograft	grafting	material	which	utilizes	the	Tutoplast®2	Tissue	Processing	Technique	that	provides	exceptional	bone	and	soft	tissue	grafting	material	for	use in	oral	surgery.	Zimmer	Dental	offers	five	distinct	Puros	Allograft	products	to	use	together	or	separately	for	various	bone	and	soft	tissue	grafting	needs:	Puros	Cancellous	Particulate,	Puros	Cortical	Particulate,	Puros	Block Allografts,	Puros	Pericardium	Membranes,	and	Puros	Dermis	Membranes.	We	market	the	Puros	Allograft	Products	through	an	agreement	with	Tutogen	Medical,	Inc.

During	2007,	within	our	Dental	division,	we	released	the	4.1mm	size	of	the	Tapered	Screw-Vent	Implant	as	well	as	straight	ceramic	abutments	for	esthetic	zone	restorations.	We	extended	the	Zimmer	One-Piece implant	system,	a	single-stage	line	which	can	make	immediate	restoration	easier	and	more	convenient	for	the	surgical	and	restorative	team	by	adding	a	4.7mm	version.	In	2007,	we	expanded	our	regenerative	product	portfolio with	the	addition	of	a	thinner	Dermis	Membrane,	and	we	further	expanded	distribution	of	the	Puros	product	lines	into	Europe	and	Asia.

# Spine	Implants

Zimmer	Spine,	Inc.,	our	spine	products	division	located	in	Minneapolis,	Minnesota,	designs,	manufactures	and	distributes	medical	devices	and	surgical	instruments	that	provide	comprehensive	spine	care	solutions	for patients	with	back	pain,	neck	pain,	degenerative	disc	conditions	and	injuries	due	to	trauma.	Zimmer	Spine	offers	orthopaedic	surgeons	and	neurosurgeons	a	full	range	of	devices	for	posterior	and	anterior	applications	of	the cervical,	thoracic	and	lumbar	spine.

# Our	spine	product	offerings	include:

Dynesys®	Dynamic	Stabilization	System.		The	Dynesys	System	is	used	in	the	treatment	of	lower	back	and	leg	pain	in	skeletally	mature	patients.	Developed	to	bring	the	lumbar	vertebrae	into	a	more	natural anatomical	position	while	stabilizing	the	affected	segments,	the	Dynesys	System	uses	flexible	materials	threaded	through	pedicle	screws	rather	than	rigid	rods.	The	Dynesys	Dynamic	Stabilization	Spinal	System	is	indicated	for use	as	an	adjunct	to	fusion.

TiTLE®	2	Polyaxial	Spinal	System.		The	TiTLE	System	is	designed	for	both	minimally	invasive	and	open	procedures	in	the	thoracic	and	lumbar	spine.	Its	anti-cross	threading	cap	screw	and	built-in	friction	head aid	in	the	placement	through	small	surgical	openings.	The	NorthStarTM	Cannulated	Screw	Delivery	System	allows	for	percutaneous	placement	of	the	screws.

Atavi®	Atraumatic	Spine	Surgery	System.		The	Atavi	family	of	minimally	invasive	access	products	includes	the	NexPosure®	System	for	cervical	applications	and	the	FlexPosure®	Products	for	lumbar applications.

Trinica®	Select	Anterior	Cervical	Plate	System.		The	Trinica	Select	Anterior	Cervical	Plate	System	and	All-Through-One	instrumentation	is	designed	to	simplify	the	surgical	procedure	while	requiring	less retraction	and	reducing	the	risk	of	soft-tissue	damage.	The	Trinica	Select	Self-Drilling	Screws	are	designed	to	provide	the	surgeon	with	the	option	to	reduce	the	amount	of	instruments,	thereby	potentially	reducing	the	amount	of retraction	and	surgical	time	required	to	implant	the	Trinica	Select	Plate.

Trabecular	Metal	Technology.		Trabecular	Metal	Technology	has	a	wide	range	of	orthopaedic	applications.	In	the	United	States,	Trabecular	Metal	Material	shapes	are	cleared	for	Vertebral	Body	Replacement procedures	as	well	as	bone	void	fillers.

2	Registered	Trademark	of	Tutogen	Medical,	Inc.

Puros®	Allograft	Products.		We	continue	to	sell	traditional	and	specialty	Puros	Allograft	Bone	Products	through	our	exclusive	U.S.	and	Canadian	distribution	agreements	with	Tutogen	Medical,	Inc.

CopiOs®	Bone	Void	Filler3.		CopiOs	Bone	Void	Filler	is	a	collagen-based	synthetic	bone	graft	material	formed	into	pads	of	various	sizes	for	surgical	implantation.	It	is	intended	for	filling	bone	voids	resulting from	trauma	or	created	by	a	surgeon.

# Trauma

Trauma	products	include	devices	used	to	stabilize	damaged	or	broken	bones	and	their	surrounding	tissues	to	support	the	body's	natural	healing	processes.	Fractures	are	most	often	stabilized	using	internal	fixation	devices such	as	plates,	screws,	nails,	wires	and	pins,	but	may	also	be	stabilized	using	external	fixation	devices	which	are	applied	externally	to	the	limb.	We	are	focused	on	addressing	unmet	clinical	needs,	aligning	our	trauma	products with	MIS	Procedures	and	on	integrating	orthobiologics	and	other	next-generation	technologies	into	our	portfolio	of	trauma	solutions.

In	2007,	the	new	standalone	Zimmer	Trauma	division	was	moved	to	a	new	office	and	manufacturing	facility	in	Warsaw,	Indiana.	Zimmer	Trauma	offers	a	comprehensive	line	of	trauma	products,	including:

M/DN®	Intramedullary	Fixation,	Sirus®	Intramedullary	Nail	System,	and	I.T.S.T.TM	Intertrochanteric/Subtrochanteric	Fixation	System.		The	M/DN,	Sirus	and	I.T.S.T.	Intramedullary	Nailing	Systems	are	utilized for	the	internal	fixation	of	long	bone	fractures.	The	systems	include	specialized	instrumentation	that	allow	the	nails	to	be	put	in	using	a	minimally	invasive	approach.	The	I.T.S.T.	nail	system	helps	surgeons	treat	patients	with fractures	of	the	hip	and	proximal	femur.	Instrumentation	for	the	I.T.S.T.	system	enables	the	use	of	the	nail	through	an	MIS	approach.	Sirus	nails	are	highly	anatomic,	designed	to	match	patients	of	every	size.	The	nails	and associated	implants	are	made	from	a	titanium	alloy,	a	material	which	is	preferred	by	many	surgeons.	The	Sirus	nails,	originally	sold	only	in	Europe	and	parts	of	Asia	Pacific,	have	recently	been	introduced	into	the	United	States, Japan	and	other	key	markets.

NCB®	Plating	System.		The	titanium	NCB	Locking	Plates	deliver	the	ability	for	surgeons	to	target	screws	with	polyaxial	freedom	and	utilize	both	conventional	and	locking	technology	in	the	treatment	of	complex fractures	of	the	distal	femur,	proximal	humerus	and	proximal	tibia.

Zimmer®	Periarticular	Locking	Plates.		The	Zimmer	Periarticular	Locking	Plate	System	combines	advanced	design	techniques	with	locking	screw	technology	to	create	constructs	for	use	in	comminuted	fractures or	where	deficient	bone	stock	or	poor	bone	quality	is	encountered.	By	combining	locking	screw	holes	with	compression	slots,	the	plates	can	be	used	as	both	locking	devices	and	fracture	compression	devices.	The	latest	addition to	this	line	is	the	Distal	Lateral	Fibular	Locking	plate.

Zimmer®	Universal	Locking	System.		The	Zimmer	Universal	Locking	System	is	a	comprehensive	system	of	mini	and	small	fragment	stainless	steel	plates,	screws	and	instruments	for	fracture	fixation.	The Universal	Locking	System	plates	resemble	standard	plates,	but	have	figure-8	shaped	holes	that	will	accommodate	standard	or	locking	screws	on	either	side	of	the	hole.	As	a	result,	the	plate	can	be	used,	depending	upon	the fracture	situation,	as	a	compression	plate,	a	locked	internal	fixator	or	as	an	internal	fixation	system	combining	both	techniques.

# Orthopaedic	Surgical	Products

We	develop,	manufacture	and	market	surgical	products	that	support	our	reconstructive,	trauma,	spinal	and	dental	product	systems	in	the	operating	room	environment	with	a	focus	on	blood	management,	surgical	wound site	management,	pain	management	and	patient	management	products.	Our	orthopaedic	surgical	products	include:

A.T.S.®	Automatic	Tourniquet	Systems.		The	A.T.S.		Tourniquet	Systems	Product	Line	is	a	family	of	tourniquet	machines	and	cuffs	designed	to	safely	create	a	bloodless	surgical	field.	The	machines	include	the A.T.S.	3000	Tourniquet,	which	utilizes	patented	technology	to	determine	a	patient's	proper	"Limb	Occlusion	Pressure"	based	on	the	patient's	specific	physiology.	The	range	of	cuffs	which	complement	the	machines	provide	the flexibility	to	occlude	blood	flow	safely	with	convenience	and	accuracy	for	limbs	of	virtually	every	size	and	shape.

Pulsavac®	Plus,	Pulsavac	Plus	AC	and	Pulsavac	Plus	LP	Wound	Debridement	Systems.		These	Pulsavac	Systems	are	used	for	cleaning	and	debridement	of	contaminants	and	foreign	matter	from	wounds	using simultaneous	irrigation	and	suction.	All	three	Pulsavac	Systems	are	completely	disposable	to	reduce	the	risk	of	cross	contamination.	While	Pulsavac	Plus	and	Pulsavac	Plus	LP	Wound	Debridement	Systems	are	both	battery powered;	the	Pulsavac	Plus	AC	Wound	Debridement	System	is	a	disposable	system	that	is	powered	by	a	reusable	AC	power	source	to	address	battery	disposal	concerns.

# HUMAN	MOTION	INSTITUTE

Our	healthcare	consulting	services	subsidiary,	commonly	known	as	the	Human	Motion	Institute	(HMI),	is	based	in	Canonsburg,	Pennsylvania.	HMI	consultants	work	to	design	a	customized	program	for	each	client	that promotes	the	active	participation	and	collaboration	of	the	physicians	and	the	hospital-based	departments	with	the	goal	of	consistently	producing	a	superior	outcome	in	the	form	of	a	growing,	efficient,	and	effective	care	delivery network.	Currently,	revenue	related	to	HMI	represents	less	than	1	percent	of	our	total	net	sales.

3	 Manufactured	by	Kensey	Nash	Corporation

# ORTHOBIOLOGICS

Our	research	and	development	efforts	include	an	Orthobiologics	group	based	in	Austin,	Texas,	with	its	own	full-time	staff	and	dedicated	projects	centralizing	our	efforts	on	the	development	of	technologies	for	orthopaedic applications,	including	the	repair	and	replacement	of	damaged	tendon,	ligament,	meniscus,	cartilage,	bone	and	spinal	nucleus	tissues.	This	group	works	on	biological	solutions	to	repair	and	regenerate	damaged	or	degenerated musculoskeletal	tissues	using	biomaterials	which	offer	the	possibility	of	treating	damaged	joints	by	biological	repair	rather	than	replacing	them	with	inert	materials.	A	sampling	of	some	of	our	key	projects	in	the	Orthobiologics area	is	set	forth	below.

We	are	collaborating	with	ISTO	Technologies,	Inc.	(ISTO)	to	develop	chondral	and	osteochondral	grafts	for	cartilage	repair.	ISTO	is	developing	cell-based	therapies	for	cartilage	regeneration	using	cells	from	juvenile donor	cartilage,	with	initial	applications	focused	upon	knee	joints.	Neocartilage	is	a	living	tissue-engineered	cartilage	graft	under	investigation	for	the	restoration	of	cartilage	defects,	reestablishment	of	joint	function	and	relief	of pain	in	the	knee.	The	Phase	I	clinical	trial	(IND)	for	Neocartilage	has	completed	patient	enrollment	with	some	patients	having	reached	the	12-month	follow-up	milestone.	We	plan	to	distribute	this	product	as	DeNovo®	ET Engineered	Tissue	Graft.	In	addition,	we	launched	the	first	Zimmer	cartilage	repair	product	(DeNovo®	NT	Natural	Tissue	Graft)	in	2007.	This	product	provides	juvenile	cartilage	tissue	pieces	for	repair	of	cartilage	defects	in	a variety	of	anatomical	sites	including	knee,	hip,	shoulder	and	ankle.

Many	orthopaedic	surgical	procedures	use	bone	grafts	to	help	regenerate	lost	or	damaged	bone.	As	noted	above,	our	Spine	and	Trauma	divisions	introduced	a	technologically-advanced	synthetic	bone	graft	material, CopiOs	Bone	Void	Filler,	in	a	paste	formulation.	This	synthetic	material	has	similarities	to	human	cancellous	bone	and	is	used	to	fill	bone	voids	or	defects.	It	can	be	soaked	in	an	individual's	own	bone	marrow	to	localize biologic	components	necessary	for	bone	growth	to	aid	in	healing.	It	is	then	placed	into	the	bone	void	where	it	is	completely	replaced	by	natural	bone	during	the	healing	process.

# RESEARCH	AND	DEVELOPMENT

We	have	extensive	research	and	development	activities	to	develop	new	surgical	techniques,	materials,	orthobiologics	and	product	designs.	The	research	and	development	functions	work	closely	with	our	strategic	brand marketing	function.	The	rapid	commercialization	of	innovative	new	materials,	orthobiologics	products,	implant	and	instrument	designs,	and	surgical	techniques	remains	one	of	our	core	strategies	and	continues	to	be	an	important driver	of	sales	growth.

Among	our	product	launches	in	2007,	we	released	the	following,	by	business	segment:

•	Hips	–	Zimmer	M/L	Taper	with	Kinectiv	Technology,	Trabecular	Metal	Acetabular	Revision	System,	32mm	Trabecular	Metal	Natural	Cup,	Zimmer	MIS	Anterior	Supine	Hip	Procedure,	Trilogy	Longevity Constrained	Liners

•	Knees	–	Zimmer	Gender	Solutions	Patellofemoral	Joint	Prosthesis,	Zimmer	MIS	LPS-Mobile	Tibial	Components*,	Trabecular	Metal	Tibial	Tray,	Prolong	LPS-Mobile	Articular	Surfaces*,	NexGen	Posterior Referencing	Instruments,	Zimmer	Segmental	Distal	Femurs,	Fluted	Stems,	Trabecular	Metal	Collars

•	Extremities	–	Anatomical	Shoulder	Fracture	Stems,	Bigliani/Flatow	Glenoid	Reamers

•	Trauma	–	Zimmer	Periarticular	Locking	Plates,	Zimmer	Universal	Locking	System

•	Dental	–	Puros	Dermis,	4.1mm	Tapered	Screw	Vent	Implant,	4.7mm	Zimmer	One-Piece	Implant,	Straight	Ceramic	Abutments •	Spine	–	Dynesys	DTO,	ARASTM	Retractor	Instrumentation,	Puros-C	Cervical	Composite	Allograft,	Trabecular	Metal	VBR-S,	VBR-L,	and	Vista-S •	OSP	–	Universal	Mixer,	Glove	Liners

•	Biologics	–	DeNovo	NT	Natural	Tissue	Graft,	CopiOs	Paste

*Not	available	for	commercial	distribution	in	the	United	States.

Other	new	product,	surgical	technique	and	instrument	introductions	in	the	orthopaedic	reconstructive	implants,	spine	implants,	trauma,	orthopaedic	surgical	products	and	orthobiologics	product	categories	are	more	fully described	above	under	the	captions	"PRODUCTS"	and	"ORTHOBIOLOGICS".	These	and	other	new	products	introduced	in	the	last	three	years	accounted	for	approximately	25	percent	of	2007	total	sales.

We	are	broadening	our	product	offerings	in	each	of	the	product	categories	and	exploring	new	technologies	with	possible	applications	in	multiple	areas.	For	the	years	ended	December	31,	2007,	2006	and	2005,	we	spent $209.6	million,	$188.3	million,	and	$175.5	million,	respectively,	on	research	and	development.	The	increased	research	and	development	expenditures	have	accelerated	the	output	of	new	orthopaedic	and	dental	reconstructive implants,	spine	and	trauma	products,	including	advanced	new	materials,	product	designs	and	surgical	techniques.	Our	primary	research	and	development	facility	is	located	in	Warsaw,	Indiana.	In	2007,	we	completed	our	research and	development	facility	expansion	project	in	Warsaw.	We	have	other	research	and	development	personnel	based	in,	among	other	places,	Winterthur,	Switzerland;	Austin,	Texas;	Minneapolis,	Minnesota;	Carlsbad,	California; Dover,	Ohio;	and	Parsippany,	New	Jersey.	As	of	December	31,	2007,	we	employed	more	than	700	research	and	development	employees	worldwide.

We	will	continue	to	identify	innovative	technologies	and	consider	acquiring	complementary	products	or	businesses,	or	establishing	technology	licensing	arrangements	or	strategic	alliances.

# GOVERNMENT	REGULATION	OF	OUR	OPERATIONS

We	are	subject	to	government	regulation	in	the	countries	in	which	we	conduct	business.	In	the	United	States,	numerous	laws	and	regulations	govern	all	the	processes	by	which	medical	devices	are	brought	to	market. These	include,	among

others,	the	Federal	Food,	Drug	and	Cosmetic	Act	and	regulations	issued	or	promulgated	thereunder.	The	U.S.	Food	and	Drug	Administration	(FDA)	has	enacted	regulations	that	control	all	aspects	of	the	development, manufacture,	advertising,	promotion	and	postmarket	surveillance	of	medical	products,	including	medical	devices.	In	addition,	the	FDA	controls	the	access	of	products	to	market	through	processes	designed	to	ensure	that	only products	that	are	safe	and	effective	are	made	available	to	the	public.

Most	of	our	new	products	fall	into	FDA	classifications	that	require	the	submission	of	a	Premarket	Notification	(510(k))	to	the	FDA.	This	process	requires	us	to	demonstrate	that	the	device	to	be	marketed	is	at	least	as	safe and	effective	as,	that	is,	substantially	equivalent	to,	a	legally	marketed	device.	We	must	submit	information	that	supports	our	substantial	equivalency	claims.	Before	we	can	market	the	new	device,	we	must	receive	an	order	from the	FDA	finding	substantial	equivalence	and	clearing	the	new	device	for	commercial	distribution	in	the	United	States.	Other	devices	we	develop	and	market	are	in	a	category	(class)	for	which	the	FDA	has	implemented	stringent clinical	investigation	and	Premarket	Approval	(PMA)	requirements.	The	PMA	process	requires	us	to	provide	clinical	and	laboratory	data	that	establishes	that	the	new	medical	device	is	safe	and	effective.	The	FDA	will	approve the	new	device	for	commercial	distribution	if	it	determines	that	the	data	and	information	in	the	PMA	constitute	valid	scientific	evidence	and	that	there	is	reasonable	assurance	that	the	device	is	safe	and	effective	for	its	intended use(s).	All	of	our	devices	marketed	in	the	United	States	have	been	cleared	or	approved	by	the	FDA,	with	the	exception	of	certain	pre-amendment	devices	which	were	in	commercial	distribution	prior	to	May	28,	1976.	The	FDA has	grandfathered	these	devices,	so	new	FDA	submissions	are	not	required.	Some	low	risk	medical	devices	(including	most	instruments)	also	do	not	require	FDA	review	and	approval	or	clearance	prior	to	commercial distribution.	The	FDA	has	the	authority	to:	halt	the	distribution	of	certain	medical	devices;	detain	or	seize	adulterated	or	misbranded	medical	devices;	or	order	the	repair,	replacement	of	or	refund	the	costs	of	such	devices.	There are	also	certain	requirements	of	state,	local	and	foreign	governments	that	we	must	comply	with	in	the	manufacture	and	marketing	of	our	products.

In	many	of	the	foreign	countries	in	which	we	market	our	products,	we	are	subject	to	local	regulations	affecting,	among	other	things,	design	and	product	standards,	packaging	requirements	and	labeling	requirements.	Many of	the	regulations	applicable	to	our	devices	and	products	in	these	countries	are	similar	to	those	of	the	FDA.	The	member	countries	of	the	European	Union	have	adopted	the	European	Medical	Device	Directive,	which	creates	a single	set	of	medical	device	regulations	for	products	marketed	in	all	member	countries.	Compliance	with	the	Medical	Device	Directive	and	certification	to	a	quality	system	enable	the	manufacturer	to	place	a	CE	mark	on	its products.	To	obtain	authorization	to	affix	the	CE	mark	to	a	product,	a	recognized	European	Notified	Body	must	assess	a	manufacturer's	quality	systems	and	the	product's	conformity	to	the	requirements	of	the	Medical	Device Directive.	We	are	subject	to	inspection	by	the	Notified	Bodies	for	compliance	with	these	requirements.

Further,	we	are	subject	to	various	federal	and	state	laws	concerning	healthcare	fraud	and	abuse,	including	false	claims	laws	and	anti-kickback	laws.	These	laws	are	administered	by,	among	others,	the	U.S.	Department	of Justice,	the	Office	of	Inspector	General	of	the	Department	of	Health	and	Human	Services	and	state	attorneys	general.	Many	of	these	agencies	have	increased	their	enforcement	activities	with	respect	to	medical	device manufacturers	in	recent	years.	In	2007,	we	and	other	major	U.S.	orthopaedic	manufacturers	settled	alleged	violations	of	the	federal	Anti-Kickback	Statute	with	the	U.S.	Department	of	Justice.	As	part	of	this	settlement,	we entered	into	a	Deferred	Prosecution	Agreement	and	a	Corporate	Integrity	Agreement	and	paid	a	civil	settlement	amount.	See	"Item	1A	—	Risk	Factors	—	RISKS	RELATED	TO	OUR	BUSINESS"	for	more	information	about our	obligations	under	these	agreements.	We	are	continuing	to	enhance	our	Corporate	Compliance	Program	and	are	applying	these	enhancements	to	all	of	our	businesses	on	a	global	basis.	We	are	monitoring	our	practices	on	an ongoing	basis	to	better	ensure	that	we	have	proper	controls	in	place	to	comply	with	the	laws	referenced	above.	Violations	of	these	laws	are	punishable	by	criminal	and/or	civil	sanctions,	including,	in	some	instances,	fines, imprisonment	and,	within	the	United	States,	exclusion	from	participation	in	government	healthcare	programs,	including	Medicare,	Medicaid	and	Veterans	Administration	(VA)	health	programs.

Our	facilities	and	operations	are	also	subject	to	complex	federal,	state,	local,	and	foreign	environmental	and	occupational	safety	laws	and	regulations,	including	those	relating	to	discharges	of	substances	in	the	air,	water and	land,	the	handling,	storage	and	disposal	of	wastes	and	the	cleanup	of	properties	by	pollutants.	We	do	not	expect	that	the	ongoing	costs	of	compliance	with	these	environmental	requirements	will	have	a	material	impact	on	our consolidated	earnings,	capital	expenditures	or	competitive	position.

# COMPETITION

The	orthopaedics	industry	is	highly	competitive.	In	the	global	markets	for	reconstructive	implants,	trauma	and	orthopaedic	surgical	products,	our	major	competitors	include:	DePuy	Orthopaedics,	Inc.	(a	subsidiary	of Johnson	&	Johnson),	Stryker	Corporation,	Biomet,	Inc.,	Synthes,	Inc.,	Smith	&	Nephew	plc,	Wright	Medical	Group,	Inc.	and	Tornier	Inc.

In	the	Americas	geographic	segment,	we	and	DePuy	Orthopaedics,	Inc.,	Stryker	Corporation,	Biomet,	Inc.,	Smith	&	Nephew,	Inc.	(a	subsidiary	of	Smith	&	Nephew	plc),	Wright	Medical	Group,	Inc.	and	Synthes,	Inc., account	for	a	large	majority	of	the	total	reconstructive	and	trauma	implant	sales.

In	the	Asia	Pacific	market	for	reconstructive	implant	and	trauma	products,	we	compete	primarily	with	DePuy	Orthopaedics,	Inc.,	Stryker	Corporation,	Synthes,	Inc.	and	Smith	&	Nephew	plc,	as	well	as	regional companies,	including	Japan	Medical	Materials	Corporation	and	Japan	Medical	Dynamic	Marketing,	Inc.	Factors,	such	as	the	dealer	system,

complex	regulatory	environments	and	the	accompanying	inability	to	compete	on	price,	make	it	difficult	for	smaller	companies,	particularly	those	that	are	non-regional,	to	compete	effectively	with	the	market	leaders	in	the	Asia Pacific	region.

The	European	reconstructive	implant	and	trauma	product	markets	are	more	fragmented	than	the	Americas	or	the	Asia	Pacific	segments.	The	variety	of	philosophies	held	by	European	surgeons	regarding	hip reconstruction,	for	example,	has	fostered	the	existence	of	many	regional	European	companies,	including	Mathys	AG	and	Waldemar	LINK	GmbH	&	Co.	KG,	which	compete	with	us	in	addition	to	the	global	competitors.	Today most	hip	implants	sold	in	Europe	are	products	developed	specifically	for	Europe,	although	global	products	are	gaining	acceptance.	Therefore,	we	will	continue	to	develop	and	produce	specially	tailored	products	to	meet	specific European	needs.

In	the	spinal	implant	category,	we	compete	globally	primarily	with	Medtronic	Sofamor	Danek,	Inc.	(a	subsidiary	of	Medtronic,	Inc.),	DePuy	Spine	(a	subsidiary	of	Johnson	&	Johnson),	Synthes,	Inc.,	Stryker	Corporation and	EBI,	L.P.,	now	operating	as	Biomet	Trauma	and	Biomet	Spine	(a	subsidiary	of	Biomet,	Inc.).

In	the	dental	reconstructive	implant	category,	we	compete	primarily	with	Nobel	Biocare	Holding	AG,	Straumann	Holding	AG,	and	Implant	Innovations,	Inc.	(a	subsidiary	of	Biomet,	Inc.).

Competition	within	the	industry	is	primarily	based	on	technology,	innovation,	quality,	reputation	and	customer	service.	A	key	factor	in	our	continuing	success	in	the	future	will	be	our	ability	to	develop	new	products	and improve	existing	products	and	technologies.	Where	possible,	we	will	continue	to	seek	patent,	trademark	and	other	intellectual	property	protection	concerning	the	surgical	techniques,	materials,	technologies	and	products	we design	and	develop.

# MANUFACTURING	AND	RAW	MATERIALS

We	manufacture	substantially	all	of	our	products	at	eight	locations	including	Warsaw,	Indiana;	Winterthur,	Switzerland;	Ponce,	Puerto	Rico;	Dover,	Ohio;	Statesville,	North	Carolina;	Carlsbad,	California;	Parsippany, New	Jersey;	and	Etupes,	France.	In	February	2008,	we	announced	plans	to	open	a	new	manufacturing	facility	in	Shannon,	Ireland.

We	believe	that	our	manufacturing	facilities	set	industry	standards	in	terms	of	automation	and	productivity	and	have	the	flexibility	to	accommodate	future	growth.	The	manufacturing	operations	at	these	facilities	are designed	to	incorporate	the	cellular	concept	for	production	and	to	implement	tenets	of	a	manufacturing	philosophy	focused	on	continuous	operational	improvement.	In	addition,	at	certain	of	our	manufacturing	facilities,	many	of the	employees	are	cross-trained.

We	generally	target	operating	our	manufacturing	facilities	at	levels	up	to	90	percent	of	total	capacity.	We	continually	evaluate	the	potential	to	in-source	products	currently	purchased	from	outside	vendors	to	on-site production.

Improving	manufacturing	process	capability	and	productivity	have	been	major	contributors	to	improvement	in	profitability	and	offset	the	impact	of	inflationary	costs.	Major	areas	of	improvement	have	included	utilization of	computer-assisted	robots	and	multi-axis	grinders	to	precision	polish	medical	devices,	automation	of	certain	manufacturing	and	inspection	processes	including	on-machine	inspection	and	process	controls,	state-of-the-art equipment	purchases	and	upgrades,	in-sourcing	of	core	products,	such	as	castings	and	forgings,	high-speed	machining,	and	negotiated	reductions	in	third	party	supplier	costs.

We	use	a	diverse	and	broad	range	of	raw	materials	in	the	manufacturing	of	our	products.	We	purchase	all	of	our	raw	materials	and	select	components	used	in	manufacturing	our	products	from	external	suppliers.	In addition,	we	purchase	some	supplies	from	single	sources	for	reasons	of	quality	assurance,	sole	source	availability,	cost	effectiveness	or	constraints	resulting	from	regulatory	requirements.	We	work	closely	with	our	suppliers	to assure	continuity	of	supply	while	maintaining	high	quality	and	reliability.	To	date,	we	have	not	experienced	any	significant	difficulty	in	locating	and	obtaining	the	materials	necessary	to	fulfill	our	production	schedules.

# INTELLECTUAL	PROPERTY

Patents	and	other	proprietary	rights	are	important	to	the	continued	success	of	our	business.	We	also	rely	upon	trade	secrets,	know-how,	continuing	technological	innovation	and	licensing	opportunities	to	develop	and maintain	our	competitive	position.	We	protect	our	proprietary	rights	through	a	variety	of	methods,	including	confidentiality	agreements	and	proprietary	information	agreements	with	vendors,	employees,	consultants	and	others who	may	have	access	to	proprietary	information.	We	own	or	control	through	licensing	arrangements	more	than	4,000	issued	patents	and	patent	applications	throughout	the	world	that	relate	to	aspects	of	the	technology incorporated	in	many	of	our	products.

# EMPLOYEES

We	employ	more	than	7,600	employees	worldwide,	including	more	than	700	employees	dedicated	to	research	and	development.	Nearly	4,700	employees	are	located	within	the	United	States	and	approximately 2,900	employees	are	located	outside	of	the	United	States,	primarily	throughout	Europe	and	in	Japan.	We	have	over	3,300	employees	dedicated	to	manufacturing	our	products	worldwide.	The	Warsaw,	Indiana	production	facility employs	more	than	1,500	employees.	Fewer	than	200	North	American	employees	are	members	of	a	trade	union	covered	by	a	collective	bargaining	agreement.

In	May	2007,	we	renewed	a	collective	bargaining	agreement	with	the	United	Steel,	Paper	and	Forestry,	Rubber	Manufacturing,	Energy,	Allied	Industrial	and	Service	Workers	International	Union	for	and	on	behalf	of Local	2737-15	covering	employees	at	the	Dover,	Ohio,	facility	which	continues	in	effect	until	May	15,	2012.

# EXECUTIVE	OFFICERS

The	following	table	sets	forth	certain	information	with	respect	to	our	executive	officers	as	of	January	31,	2008.

Bruno	A.	Melzi 60 Chairman,	Europe,	Middle	East	and	Africa

Stephen	H.L.	Ooi 54 President,	Asia	Pacific Chad	F.	Phipps 36 Senior	Vice	President,	General	Counsel	and	Secretary

Mr.	Dvorak	was	appointed	President,	Chief	Executive	Officer	and	a	member	of	the	Board	of	Directors	of	Zimmer	Holdings	on	May	1,	2007.	From	December	2005	to	April	2007,	Mr.	Dvorak	served	as	Group	President,	Global	Businesses and	Chief	Legal	Officer.	From	October	2003	to	December	2005,	Mr.	Dvorak	served	as	Executive	Vice	President,	Corporate	Services,	Chief	Counsel	and	Secretary,	as	well	as	Chief	Compliance	Officer.	Mr.	Dvorak	was	appointed	Corporate Secretary	in	February	2003.	He	joined	Zimmer	Holdings	in	December	2001	as	Senior	Vice	President,	Corporate	Affairs	and	General	Counsel.

Dr.	Blanchard	was	appointed	Senior	Vice	President,	Research	and	Development	and	Chief	Scientific	Officer	of	Zimmer	Holdings	in	December	2005.	She	is	responsible	for	global	research,	global	development,	global	quality, orthobiologics,	external	research	and	emerging	technologies.	From	October	2003	to	December	2005,	Dr.	Blanchard	served	as	Vice	President,	Corporate	Research	and	Clinical	Affairs	and	from	August	2002	to	October	2003,	she	served	as Vice	President,	Research	and	Biologics.

Ms.	Conley	was	appointed	Group	President,	Americas	and	Global	Marketing	and	Chief	Marketing	Officer	of	Zimmer	Holdings	in	December	2005.	She	is	responsible	for	all	global	marketing	and	all	Western	Hemisphere	operations, including	our	business	in	the	United	States,	Canada	and	Latin	America.	From	October	2003	to	December	2005,	Ms.	Conley	served	as	President,	Global	Products	Group	and	from	September	2002	to	October	2003,	she	served	as	President, Zimmer	Reconstructive.

Mr.	Crines	was	appointed	Executive	Vice	President,	Finance	and	Chief	Financial	Officer	of	Zimmer	Holdings	on	May	1,	2007.	From	December	2005	to	April	2007,	Mr.	Crines	served	as	Senior	Vice	President,	Finance,	Operations	and Corporate	Controller	and	Chief	Accounting	Officer.	From	October	2003	to	December	2005,	Mr.	Crines	served	as	Senior	Vice	President,	Finance/Controller	and	Information	Technology	and	from	July	2001	to	October	2003,	he	served	as Vice	President,	Finance/Controller.

Mr.	Davis	was	appointed	Vice	President,	Finance	and	Corporate	Controller	and	Chief	Accounting	Officer	of	Zimmer	Holdings	in	May	2007.	He	has	responsibility	for	internal	and	external	reporting,	planning	and	analysis,	and	corporate	and business	unit	accounting.	From	March	2006	to	May	2007,	Mr.	Davis	served	as	Director,	Financial	Planning	and	Accounting.	From	December	2003	to	March	2006,	Mr.	Davis	served	as	Director,	Finance,	Operations	and	Logistics	and	from April	2003	to	December	2003,	he	served	as	Associate	Director,	Finance.	Prior	to	joining	us,	Mr.	Davis	served	as	Vice	President	Finance/Corporate	Controller	for	International	Wire	in	Fort	Wayne,	Indiana.

Mr.	Kramer	was	appointed	President,	U.S.	Sales	of	Zimmer	Holdings	in	December	2005.	He	is	responsible	for	our	sales	activities	throughout	the	United	States.	From	August	2004	to	December	2005,	Mr.	Kramer	served	as	President, Americas.	From	October	2003	to	August	2004,	Mr.	Kramer	served	as	Vice	President,	U.S.	Sales	and	from	2001	to	October	2003,	he	was	our	Area	Vice	President	for	the	Southeast	region	of	the	United	States.

Mr.	Melzi	was	appointed	Chairman,	Europe,	Middle	East	and	Africa	of	Zimmer	Holdings	in	October	2003.	He	is	responsible	for	the	sales,	marketing	and	distribution	of	products	in	the	European,	Middle	Eastern	and	African	regions.	From March	2000	to	October	2003,	Mr.	Melzi	served	as	President,	Europe/MEA.

Mr.	Ooi	was	appointed	President,	Asia	Pacific	of	Zimmer	Holdings	in	December	2005.	He	is	responsible	for	the	sales,	marketing	and	distribution	of	products	in	the	Asia	Pacific	region,	including	responsibility	for	Japan.	From	September 2003	to	December	2005,	Mr.	Ooi	served	as	President,	Australasia,	where	he	was	responsible	for	operations	in	Asia	Pacific,	excluding	Japan.	From	September	2002	to	September	2003,	Mr.	Ooi	served	as	President,	Asia	Pacific	region.

Mr.	Phipps	was	appointed	Senior	Vice	President,	General	Counsel	and	Secretary	of	Zimmer	Holdings	in	May	2007.	He	has	global	responsibility	for	our	legal	affairs	and	he	serves	as	Secretary	to	the	Board	of	Directors.	From	December 2005	to	May	2007,	Mr.	Phipps	served	as	Associate	General	Counsel	and	Corporate	Secretary	and	from	September	2003	to	December	2005,	he	served	as	Associate	Counsel	and	Assistant	Secretary.	Prior	to	joining	us,	Mr.	Phipps	served	as Vice	President	and	General	Counsel	of	L&N	Sales	and	Marketing,	Inc.	in	Pennsylvania.

# AVAILABLE	INFORMATION

Our	Internet	website	address	is	www.zimmer.com.	Our	annual	reports	on	Form	10-K,	quarterly	reports	on	Form	10-Q,	current	reports	on	Form	8-K	and	amendments	to	those	reports	filed	or	furnished	pursuant	to Section	13(a)	or	15(d)	of	the	Exchange	Act	are	available	or	may	be	accessed	free	of	charge	through	the	Investor	Relations	section	of	our	Internet	website	as	soon	as	reasonably	practicable	after	we	electronically	file	such material	with,	or	furnish	it	to,	the	SEC.	Our	Internet	website	and	the	information	contained	therein	or	connected	thereto	are	not	intended	to	be	incorporated	by	reference	into	this	Annual	Report	on	Form	10-K.

The	following	corporate	governance	and	related	documents,	among	others,	are	available	through	our	website	or	may	be	obtained	in	print	form,	without	charge,	by	request	to	our	Investor	Relations	Department:	Corporate Governance	Guidelines,	Code	of	Business	Conduct,	Code	of	Ethics	for	Chief	Executive	Officer	and	Senior	Financial	Officers,	Audit	Committee	Charter,	Compensation	and	Management	Development	Committee	Charter, Corporate	Governance	Committee	Charter	and	Science	and	Technology	Committee	Charter.

We	intend	to	post	on	our	Internet	website	any	substantive	amendment	to,	or	waiver	from,	our	Code	of	Ethics	for	Chief	Executive	Officer	and	Senior	Financial	Officers	or	a	provision	of	our	Code	of	Business	Conduct	that applies	to	any	of	our	directors	or	executive	officers.

Risk	factors	which	could	cause	actual	results	to	differ	from	our	expectations	and	which	could	negatively	impact	our	financial	condition	and	results	of	operations	are	discussed	below	and	elsewhere	in	this	report.	The risks	and	uncertainties	described	below	are	not	the	only	ones	we	face.	Additional	risks	and	uncertainties	not	presently	known	to	us	or	that	are	currently	not	believed	to	be	significant	to	our	business	may	also	affect	our	actual results	and	could	harm	our	business,	financial	condition	and	results	of	operations.	If	any	of	the	risks	or	uncertainties	described	below	or	any	additional	risks	and	uncertainties	actually	occur,	our	business,	results	of	operations and	financial	condition	could	be	materially	and	adversely	affected.

# RISKS	RELATED	TO	OUR	BUSINESS

# If	we	fail	to	comply	with	the	terms	of	the	Deferred	Prosecution	Agreement	and	Corporate	Integrity	Agreement	we	entered	into	in	September	2007,	we	may	be	subject	to	criminal	prosecution	and/or	exclusion from	federal	healthcare	programs.

As	previously	reported,	on	September	27,	2007,	we	settled	an	investigation	conducted	by	the	United	States	Attorney's	Office	for	the	District	of	New	Jersey	(the	"U.S.	Attorney")	into	financial	relationships	between	major orthopaedic	manufacturers	and	consulting	orthopaedic	surgeons.	As	part	of	that	settlement,	we	entered	into	a	Deferred	Prosecution	Agreement	(the	"DPA")	with	the	U.S.	Attorney	and	a	Corporate	Integrity	Agreement	(the "CIA")	with	the	Office	of	Inspector	General	of	the	Department	of	Health	and	Human	Services	(the	"OIG-HHS").	Copies	of	the	DPA	and	CIA	are	filed	as	exhibits	to	this	report	and	a	copy	of	the	DPA	is	available	on	our	website at	www.zimmer.com.

The	DPA	has	a	term	of	18	months	and	provides	for	oversight	by	a	federally	appointed	monitor.	If	we	breach	the	DPA,	we	could	be	subject	to	prosecution	for	violations	of	the	federal	Anti-Kickback	Statute	that	the U.S.	Attorney	alleges	we	committed	between	2002	and	2006,	as	well	as	any	new	or	continuing	violations.	We	could	also	be	subject	to	exclusion	by	OIG-HHS	from	participation	in	federal	healthcare	programs,	including Medicaid	and	Medicare.	Any	of	these	consequences	would	have	a	material	adverse	effect	on	our	results	of	operations.

The	CIA	requires	us	to	continue	our	Corporate	Compliance	Program	and	to	adhere	to	certain	other	provisions,	including	reporting	requirements.	We	also	agreed	to	retain	an	independent	review	organization	to	perform annual	reviews	to	assist	us	in	assessing	our	compliance	with	the	CIA	to	ensure	that	arrangements	we	enter	into	do	not	violate	the	federal	Anti-Kickback	Statute.	If	we	breach	the	CIA,	the	OIG-HHS	may	take	further	action against	us,	up	to	and	including	excluding	us	from	participation	in	federal	healthcare	programs,	which	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations	and	cash	flows.

# Our	recent	settlement	with	the	Department	of	Justice	and	OIG-HHS	could	lead	to	further	governmental	investigations	or	actions	by	other	third	parties.

As	a	result	of	the	publicity	surrounding	our	recent	settlement	with	the	Department	of	Justice	and	OIG-HHS,	including	the	allegations	of	wrongdoing	made	by	the	U.S.	Attorney,	other	governmental	agencies,	including state	authorities,	could	conduct	investigations	or	institute	proceedings	that	are	not	precluded	by	terms	of	that	settlement.	As	previously	disclosed,	the	U.S.	Securities	and	Exchange	Commission	has	commenced	an	informal investigation	into	sales	by	us	and	other	companies	of	medical	devices	in	foreign	countries.	We	are	also	cooperating	with	an	investigative	demand	made	by	one	state	attorney	general.	While	we	believe	that	the	pending	state investigation	is	not	likely	to	have	a	material	adverse	effect	on	our	business	or	financial	condition,	similar	investigations	by	other	states	or	governmental	agencies	are	possible.	In	addition,	in	January	2008,	we	received	a	written request	from	the	United	States	Senate	Special	Committee	on	Aging	("Committee"),	seeking,	among	other	things,	additional	information	regarding	the	financial	relationships	we	publicly	disclosed	pursuant	to	the	DPA.	We responded	to	this	request	in	writing	and	through	testimony	before	the	Committee	in	February	2008.	Also,	as	previously	reported,	two	shareholder	derivative	actions	were	filed	purportedly	on	our	behalf	against	current	and	two former	directors	relating	to	oversight	of	the	conduct	that	lead	to	the	settlement	with	the	U.S.	Attorney.	In	addition,	the	settlement	with	the	U.S.	Attorney	could	increase	our	exposure	to	lawsuits	by	potential	whistleblowers	under the	federal	false	claims	acts,	based	on	new	theories	or	allegations	arising	from	the	allegations	made	by	the	U.S.	Attorney.	We	intend	to	review	and	take	appropriate	actions	with	respect	to	any	such	investigations	or	proceedings; however,	we	cannot	assure	that

the	costs	of	defending	or	resolving	those	investigations	or	proceedings	would	not	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations	and	cash	flows.

If	we	are	not	able	to	fulfill	or	otherwise	resolve	our	existing	royalty	and	other	payment	obligations	to	consulting	surgeons	and	institutions,	our	ability	to	maintain	our	existing	intellectual	property	rights	and obtain	future	rights	may	be	impaired.

We	are	reviewing	agreements	we	have	entered	into	with	consulting	surgeons	and	institutions	and	assessing	whether	we	can	fulfill	our	obligations	under	these	agreements	in	view	of	the	DPA.	If	we	do	not	perform	those obligations	or	reach	some	other	resolution	acceptable	to	the	affected	consulting	surgeons	and	institutions,	our	ability	to	use	the	intellectual	property	covered	by	those	agreements	may	be	adversely	affected.	In	addition,	our ability	to	enter	into	new	agreements	with	consulting	surgeons	or	institutions	for	the	future	development	of	intellectual	property	rights	may	be	adversely	affected.

# Our	ongoing	efforts	to	enhance	our	Corporate	Compliance	Program	globally	will	require	cooperation	by	many	employees	and	others	and	may	divert	substantial	financial	and	human	resources	from	our other	business	activities.

We	are	committed	to	devoting	sufficient	resources	to	meet	our	obligations	under	the	DPA	and	CIA.	We	have	also	announced	our	intention	to	further	enhance	our	Corporate	Compliance	Program	and	to	expand	those enhancements	into	all	of	our	businesses	on	a	global	basis.	Successful	implementation	of	this	enhanced	program	will	require	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,	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.

If	we	fail	to	retain	the	independent	agents	and	distributors	upon	whom	we	rely	heavily	to	market	our	products,	customers	may	not	buy	our	products	and	our	revenue	and	profitability	may	decline.

Our	marketing	success	in	the	United	States	and	abroad	depends	significantly	upon	our	agents'	and	distributors'	sales	and	service	expertise	in	the	marketplace.	Many	of	these	agents	have	developed	professional relationships	with	existing	and	potential	customers	because	of	the	agents'	detailed	knowledge	of	products	and	instruments.	A	loss	of	a	significant	number	of	these	agents	could	have	a	material	adverse	effect	on	our	business	and results	of	operations.	If	some	of	the	business	practices	of	our	independent	sales	agents	and	distributors	are	challenged	as	unlawful,	they	may	have	to	change	these	practices,	which	could	have	a	material	adverse	effect	on	our business	and	results	of	operations.

# If	we	do	not	introduce	new	products	in	a	timely	manner,	our	products	may	become	obsolete	over	time,	customers	may	not	buy	our	products	and	our	revenue	and	profitability	may	decline.

Demand	for	our	products	may	change,	in	certain	cases,	in	ways	we	may	not	anticipate	because	of:

•	evolving	customer	needs;

•	changing	demographics;

•	slowing	industry	growth	rates;

•	 declines	in	the	reconstructive	implant	market;

•	the	introduction	of	new	products	and	technologies;

•	evolving	surgical	philosophies;	and

•	evolving	industry	standards.

Without	the	timely	introduction	of	new	products	and	enhancements,	our	products	may	become	obsolete	over	time.	If	that	happens,	our	revenue	and	operating	results	would	suffer.	The	success	of	our	new	product	offerings will	depend	on	several	factors,	including	our	ability	to:

•	 properly	identify	and	anticipate	customer	needs;

•	commercialize	new	products	in	a	timely	manner;

•	 manufacture	and	deliver	instruments	and	products	in	sufficient	volumes	on	time;

•	 differentiate	our	offerings	from	competitors'	offerings;

•	achieve	positive	clinical	outcomes	for	new	products;

•	satisfy	the	increased	demands	by	healthcare	payors,	providers	and	patients	for	shorter	hospital	stays,	faster	post-operative	recovery	and	lower-cost	procedures;

•	innovate	and	develop	new	materials,	product	designs	and	surgical	techniques;	and

•	 provide	adequate	medical	education	relating	to	new	products.

In	addition,	new	materials,	product	designs	and	surgical	techniques	that	we	develop	may	not	be	accepted	quickly,	in	some	or	all	markets,	because	of,	among	other	factors: •	entrenched	patterns	of	clinical	practice;

•	the	need	for	regulatory	clearance;	and

•	 uncertainty	with	respect	to	third-party	reimbursement.

Moreover,	innovations	generally	require	a	substantial	investment	in	research	and	development	before	we	can	determine	their	commercial	viability	and	we	may	not	have	the	financial	resources	necessary	to	fund	the production.	In	addition,	even	if	we	are	able	to	successfully	develop	enhancements	or	new	generations	of	our	products,	these	enhancements	or	new	generations	of	products	may	not	produce	revenue	in	excess	of	the	costs	of development	and	they	may	be	quickly	rendered	obsolete	by	changing	customer	preferences	or	the	introduction	by	our	competitors	of	products	embodying	new	technologies	or	features.

We	conduct	a	significant	amount	of	our	sales	activity	outside	of	the	United	States,	which	subjects	us	to	additional	business	risks	and	may	cause	our	profitability	to	decline	due	to	increased	costs.

Because	we	sell	our	products	in	more	than	100	countries,	our	business	is	subject	to	risks	associated	with	doing	business	internationally.	In	2007,	we	derived	approximately	$1,757.2	million,	or	45%	of	our	total	revenue, from	sales	of	our	products	outside	of	the	United	States.	We	intend	to	continue	to	pursue	growth	opportunities	in	sales	internationally,	which	could	expose	us	to	additional	risks	associated	with	international	sales	and	operations. Our	international	operations

are,	and	will	continue	to	be,	subject	to	a	number	of	risks	and	potential	costs,	including:

•	changes	in	foreign	medical	reimbursement	policies	and	programs;

•	 unexpected	changes	in	foreign	regulatory	requirements;

•	 differing	local	product	preferences	and	product	requirements;

•	fluctuations	in	foreign	currency	exchange	rates;

•	 diminished	protection	of	intellectual	property	in	some	countries	outside	of	the	United	States;

•	trade	protection	measures	and	import	or	export	requirements	that	may	prevent	us	from	shipping	products	to	a	particular	market	and	may	increase	our	operating	costs;

•	foreign	exchange	controls	that	might	prevent	us	from	repatriating	cash	earned	in	countries	outside	the	United	States;

•	complex	data	privacy	requirements	and	labor	relations	laws;

•	extraterritorial	effects	of	U.S.	laws	such	as	the	Foreign	Corrupt	Practices	Act;

•	 difficulty	in	staffing	and	managing	foreign	operations;

•	labor	force	instability;

•	 potentially	negative	consequences	from	changes	in	tax	laws;	and

•	 political	and	economic	instability.

Violations	stemming	from	any	of	the	above	identified	risks	could	result	in	fines,	criminal	sanctions	against	us,	our	officers	or	our	employees,	prohibitions	on	the	conduct	of	our	business	and	damage	to	our	reputation.

# We	are	subject	to	risks	arising	from	currency	exchange	rate	fluctuations,	which	can	increase	our	costs	and	may	cause	our	profitability	to	decline.

A	substantial	portion	of	our	foreign	revenues	are	generated	in	Europe	and	Japan.	The	United	States	dollar	value	of	our	foreign-generated	revenues	varies	with	currency	exchange	rate	fluctuations.	Significant	increases	in the	value	of	the	United	States	dollar	relative	to	the	Euro	or	the	Japanese	Yen,	as	well	as	other	currencies,	could	have	a	material	adverse	effect	on	our	results	of	operations.	We	address	currency	risk	management	through	regular operating	and	financing	activities,	and,	on	a	limited	basis,	through	the	use	of	derivative	financial	instruments.	The	derivative	financial	instruments	we	enter	into	are	in	the	form	of	foreign	exchange	forward	contracts	with	major financial	institutions.	The	forward	contracts	are	designed	to	hedge	anticipated	foreign	currency	transactions,	primarily	intercompany	sale	and	purchase	transactions,	for	periods	consistent	with	commitments.	Realized	and unrealized	gains	and	losses	on	these	contracts	that	qualify	as	cash	flow	hedges	are	temporarily	recorded	in	other	comprehensive	income,	and	then	recognized	in	earnings	when	the	hedged	item	affects	net	earnings.

# We	may	fail	to	adequately	protect	our	proprietary	technology	and	other	intellectual	property,	which	would	allow	competitors	or	others	to	take	advantage	of	our	research	and	development	efforts.

Our	long-term	success	largely	depends	on	our	ability	to	market	technologically	competitive	products.	If	we	fail	to	obtain	or	maintain	adequate	intellectual	property	protection,	we	may	not	be	able	to	prevent	third	parties from	using	our	proprietary	technologies.	Also,	our	currently	pending	or	future	patent	applications	may	not	result	in	issued	patents.	In	the	United	States,	patent	applications	are	confidential	for	18	months	following	their	filing, and,	because	third	parties	may	have	filed	patent	applications	for	technology	covered	by	our	pending	patent	applications	without	our	being	aware	of	those	applications,	our	patent	applications	may	not	have	priority	over	patent applications	of	others.	In	addition,	our	issued	patents	may	not	contain	claims	sufficiently	broad	to	protect	us	against	third	parties	with	similar	technologies	or	products,	or	provide	us	with	any	competitive	advantage.	If	a	third party	initiates	litigation	regarding	our	patents,	our	collaborators'	patents,	or	those	patents	for	which	we	have	license	rights,	and	is	successful,	a	court	could	declare	our	patents	invalid	or	unenforceable	or	limit	the	scope	of coverage	of	those	patents.

The	United	States	Patent	and	Trademark	Office	(USPTO)	and	the	courts	have	not	consistently	treated	the	breadth	of	claims	allowed	or	interpreted	in	orthopaedic	reconstructive	implant	and	biotechnology	patents.	If	the USPTO	or	the	courts	begin	to	allow	or	interpret	claims	more	broadly,	the	incidence	and	cost	of	patent	interference	proceedings	and	the	risk	of	infringement	litigation	will	likely	increase.	On	the	other	hand,	if	the	USPTO	or	the courts	begin	to	allow	or	interpret	claims	more	narrowly,	the	value	of	our	proprietary	rights	may	be	reduced.	Any	changes	in,	or	unexpected	interpretations	of,	the	patent	laws	may	adversely	affect	our	ability	to	enforce	our	patent position.

In	addition,	intellectual	property	rights	may	be	unavailable	or	limited	in	some	foreign	countries,	which	could	make	it	easier	for	competitors	to	capture	market	position.	Competitors	may	also	capture	market	share	from	us by	designing	products	that	mirror	the	capabilities	of	our	products	or	technology	without	infringing	our	intellectual	property	rights.	If	we	do	not	obtain	sufficient	international	protection	for	our	intellectual	property,	our competitiveness	in	international	markets	could	be	impaired,	which	would	limit	our	growth	and	future	revenue.

We	also	rely	upon	trade	secrets,	proprietary	know-how,	and	continuing	technological	innovation	to	remain	competitive.	We	attempt	to	protect	this	information	with	security	measures,	including	the	use	of	confidentiality agreements	with	our	employees,	consultants,	and	collaborators.	These	individuals	may	breach	these	agreements	and	any	remedies	available	to	us	may	be	insufficient	to	compensate	our	damages.	Furthermore,	our	trade	secrets, know-how	and	other	technology	may	otherwise	become	known	or	be	independently	discovered	by	our	competitors.

# We	may	be	subject	to	intellectual	property	litigation	and	infringement	claims,	which	could	cause	us	to	incur	significant	expenses	or	prevent	us	from	selling	our	products.

A	successful	claim	of	patent	or	other	intellectual	property	infringement	against	us	could	adversely	affect	our	growth	and	profitability,	in	some	cases	materially.	From	time	to	time,	we	receive	notices	from	third	parties	of potential	infringement	and	receive	claims	of	potential	infringement.	We	may	be	unaware	of	intellectual	property	rights	of	others	that	may	cover	some	of	our	technology.	If	someone	claims	that	our	products	infringed	their intellectual	property	rights,	any	resulting	litigation	could	be	costly	and	time	consuming	and	would	divert	the	attention	of	management	and	key	personnel	from	other	business	issues.

The	complexity	of	the	technology	involved	and	the	uncertainty	of	intellectual	property	litigation	increase	these	risks.	Claims	of	intellectual	property	infringement	also	might	require	us	to	enter	into	costly	royalty	or	license agreements.	However,	we	may	be	unable	to	obtain	royalty	or	license	agreements	on	terms	acceptable	to	us	or	at	all.	We	also	may	be	subject	to	significant	damages	or	an	injunction	preventing	us	from	manufacturing,	selling	or using	some	of	our	products	in	the	event	of	a	successful	claim	of	patent	or	other	intellectual	property	infringement.	Any	of	these	adverse	consequences	could	have	a	material	adverse	effect	on	our	business,	financial	condition	and results	of	operations.

# We	may	complete	additional	acquisitions,	which	could	increase	our	costs	or	liabilities	or	be	disruptive.

We	intend	to	continue	to	look	for	additional	strategic	acquisitions	of	other	businesses	that	are	complementary	to	our	businesses.	Acquisition	involves	risk,	including	the	following:

•	 we	may	need	to	divert	more	management	resources	to	integration	than	we	planned,	which	may	adversely	affect	our	ability	to	pursue	other	more	profitable	activities;

•	the	difficulties	of	integration	may	be	increased	if	we	need	to	integrate	geographically	separated	organizations,	personnel	with	disparate	business	backgrounds	and	companies	with	different	corporate	cultures;

•	 we	may	not	eliminate	as	many	redundant	costs	as	we	anticipated	in	selecting	our	acquisition	candidates;	and

•	 one	or	more	of	our	acquisition	candidates	also	may	have	liabilities	or	adverse	operating	issues	that	we	failed	to	discover	through	our	diligence	prior	to	the	acquisition.

# If	we	are	unable	to	form	strategic	alliances,	or	if	our	strategic	alliances	fail	to	achieve	their	objectives,	our	operating	results	will	be	negatively	impacted.

We	have	entered	into	strategic	alliances	with	other	orthopaedic	and	biotechnology	companies.	These	include	our	collaboration	with	ISTO	Technologies,	Inc.	relating	to	regenerative	cartilage	technology	and	our distribution	agreement	with	Heraeus	relating	to	orthopaedic	bone	cement	products.	The	success	of	these	and	similar	arrangements	is	largely	dependent	on	technology	and	other	intellectual	property	contributed	by	our	strategic partners	or	the	resources,	efforts	and	skills	of	these	partners.	Disputes	and	difficulties	in	such	relationships	are	common,	often	due	to	conflicting	priorities.	Merger	and	acquisition	activity	may	exacerbate	these	issues.	The benefits	of	these	alliances	are	reduced	or	eliminated	when	strategic	partners:

•	terminate	the	agreements	or	limit	our	access	to	the	underlying	intellectual	property;

•	fail	to	devote	financial	or	other	resources	to	the	alliances	and	thereby	hinder	or	delay	development,	manufacturing	or	commercialization	activities;

•	fail	to	successfully	develop,	manufacture	or	commercialize	any	products;	or

•	fail	to	maintain	the	financial	resources	necessary	to	continue	financing	their	portion	of	the	development,	manufacturing,	or	commercialization	costs	or	their	own	operations.

Furthermore,	under	some	of	our	strategic	alliances,	we	may	make	milestone	payments	well	in	advance	of	commercialization	of	products	with	no	assurance	that	we	will	ever	recoup	these	payments.	We	also	may	make equity	investments	in	our	strategic	partners.	These	investments	may	decline	in	value	and	result	in	our	incurring	financial	statement	charges	in	the	future.

# We	depend	on	a	limited	number	of	suppliers	for	some	key	raw	materials	and	outsourced	activities.

We	use	a	number	of	suppliers	for	raw	materials	that	we	need	to	manufacture	our	products	and	to	outsource	some	key	manufacturing	activities.	These	suppliers	must	provide	the	materials	and	perform	the	activities	to	our standards	for	us	to	meet	our	quality	and	regulatory	requirements.	Some	key	raw	materials	and	outsourced	activities	can	only	be	obtained	from	a	single	source	or	a	limited	number	of	sources.	A	prolonged	disruption	or	other inability	to	obtain	these	materials	or	outsource	key	manufacturing	activities	could	materially	and	adversely	affect	our	ability	to	satisfy	demand	for	our	products,	which	could	have	a	material	adverse	effect	on	our	business	and results	of	operations.

# Our	future	profitability	may	be	affected	by	changes	to	our	product	category	and	region	sales	mix.

Reconstructive	implants	produce	the	highest	operating	profit	margins	among	our	product	categories.	These	products	accounted	for	approximately	84%	of	2007	net	sales.	Sales	in	our	Americas	region	accounted	for approximately	58%	of	2007	net	sales.	Sales	in	the	Americas	region	produce	the	highest	operating	profit	margins	in	the	geographic	markets	in	which	we	operate.	While	we	expect	net	sales	of	reconstructive	implants	and	net	sales in	the	Americas	region	to	remain	strong,	changes	to	our	product	category	mix	or	our	region	sales	mix	could	adversely	affect	our	future	profitability.

# RISKS	RELATED	TO	OUR	INDUSTRY

The	ongoing	informal	investigation	by	the	United	States	Securities	and	Exchange	Commission	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	could	have	a	material	adverse	effect	on	our	business,	financial	condition	and	cash	flows.

We	are	cooperating	fully	with	the	Securities	and	Exchange	Commission	with	regard	to	an	ongoing	informal	investigation	of	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.	The	Foreign	Corrupt	Practices	Act	prohibits	U.S.	companies	and	their	officers,	directors,	employees,	stockholders	acting	on	their	behalf	and	agents	from offering,	promising,	authorizing	or	making	payments	to	foreign	officials	for	the	purpose	of	obtaining	or	retaining	business	abroad	or	otherwise	obtaining	favorable	treatment	and	this	law	requires	companies	to	maintain	records which	fairly	and	accurately	reflect	transactions	and	to	maintain	internal	accounting	controls.	In	many	countries,	hospitals	and	clinics	are	government-owned	and	healthcare	professionals	employed	by	such	hospitals	and	clinics, with	whom	we	regularly	interact,	meet	the	definition	of	a	foreign	official	for	purposes	of	the	Foreign	Corrupt	Practices	Act.	Although	we	have	adopted	policies	and	procedures	designed	to	prevent	improper	payments	and	we conduct	training	in	this	area,	there

can	be	no	assurance	that	violations	of	these	requirements	do	not	occur	in	connection	with	sales	of	our	medical	devices.	If	we	are	found	to	have	violated	the	Foreign	Corrupt	Practices	Act,	we	may	face	sanctions	including	fines, criminal	penalties,	disgorgement	of	profits	and	suspension	or	debarment	of	our	ability	to	contract	with	governmental	agencies	or	receive	export	licenses,	which	could	have	a	material	adverse	effect	on	our	business,	financial condition	and	cash	flows.

# We	are	subject	to	healthcare	fraud	and	abuse	regulations	on	an	ongoing	basis	that	could	require	us	to	change	our	business	practices	and	restrict	our	operations	in	the	future.

Our	industry	is	subject	to	various	federal	and	state	laws	pertaining	to	healthcare	fraud	and	abuse,	including	false	claims	laws,	the	federal	Anti-Kickback	Statute,	similar	state	laws	and	physician	self-referral	laws.	We settled	alleged	violations	of	the	federal	Anti-Kickback	Statute	in	September	2007,	but	we	remain	subject	to	these	laws	on	an	ongoing	basis.	Violations	of	these	laws	are	punishable	by	criminal	and/or	civil	sanctions,	including,	in some	instances,	fines,	imprisonment	and,	within	the	United	States,	exclusion	from	participation	in	government	healthcare	programs,	including	Medicare,	Medicaid	and	Veterans	Administration	(VA)	health	programs.	The interpretation	and	enforcement	of	these	laws	and	regulations	are	uncertain	and	subject	to	rapid	change.	We	are	continuing	to	enhance	our	Corporate	Compliance	Program	and	monitoring	our	practices	on	an	ongoing	basis	to better	ensure	that	we	have	proper	controls	in	place	to	comply	with	these	laws.

# If	third-party	payors	decline	to	reimburse	our	customers	for	our	products	or	reduce	reimbursement	levels,	the	demand	for	our	products	may	decline	and	our	ability	to	sell	our	products	profitably	may	be harmed.

We	sell	our	products	and	services	to	hospitals,	doctors,	dentists	and	other	healthcare	providers,	all	of	which	receive	reimbursement	for	the	healthcare	services	provided	to	their	patients	from	third-party	payors,	such	as domestic	and	international	government	programs,	private	insurance	plans	and	managed	care	programs.	These	third-party	payors	may	deny	reimbursement	if	they	determine	that	a	device	used	in	a	procedure	was	not	in	accordance with	cost-effective	treatment	methods,	as	determined	by	the	third-party	payor,	or	was	used	for	an	unapproved	indication.	Third-party	payors	may	also	decline	to	reimburse	for	experimental	procedures	and	devices.	If	our products	are	not	considered	cost-effective	by	third-party	payors,	our	customers	may	not	be	reimbursed	for	our	products.

In	addition,	third-party	payors	are	increasingly	attempting	to	contain	healthcare	costs	by	limiting	both	coverage	and	the	level	of	reimbursement	for	medical	products	and	services.	For	example,	managed	care	programs often	prescribe	only	those	orthopaedic	recovery	products	that	match	a	patient	as	to	age,	need	for	mobility	and	other	parameters	in	an	effort	to	provide	more	cost-effective	care.	If	third-party	payors	reduce	reimbursement	levels to	hospitals	and	other	healthcare	providers	for	our	products,	demand	for	our	products	may	decline	or	we	may	experience	pressure	to	reduce	the	prices	of	our	products,	which	could	have	a	material	adverse	effect	on	our	sales	and results	of	operations.

In	international	markets,	where	the	movement	toward	healthcare	reform	and	the	development	of	managed	care	are	generally	not	as	advanced	as	in	the	United	States,	we	have	experienced	downward	pressure	on	product pricing	and	other	effects	of	healthcare	reform.	In	Japan,	for	example,	a	government-operated	insurance	system	reimburses	customers	for	our	products.	Under	this	system,	the	Japanese	government	periodically	reviews	and reduces	the	reimbursement	levels	for	products.	If	the	Japanese	government	continues	to	reduce	the	reimbursement	level	for	orthopaedic	products,	our	sales	and	results	of	operations	may	be	adversely	affected.

# The	ongoing	cost-containment	efforts	of	healthcare	purchasing	organizations	may	have	a	material	adverse	effect	on	our	results	of	operations.

Many	customers	for	our	products	have	formed	group	purchasing	organizations	in	an	effort	to	contain	costs.	Group	purchasing	organizations	negotiate	pricing	arrangements	with	medical	supply	manufacturers	and distributors,	and	these	negotiated	prices	are	made	available	to	a	group	purchasing	organization's	affiliated	hospitals	and	other	members.	If	we	are	not	one	of	the	providers	selected	by	a	group	purchasing	organization,	affiliated hospitals	and	other	members	may	be	less	likely	to	purchase	our	products,	and,	if	the	group	purchasing	organization	has	negotiated	a	strict	compliance	contract	for	another	manufacturer's	products,	we	may	be	precluded	from making	sales	to	members	of	the	group	purchasing	organization	for	the	duration	of	the	contractual	arrangement.	Our	failure	to	respond	to	the	cost-containment	efforts	of	group	purchasing	organizations	may	cause	us	to	lose market	share	to	our	competitors	and	could	have	a	material	adverse	effect	on	our	sales	and	results	of	operations.

# Our	success	depends	on	our	ability	to	effectively	develop	and	market	our	products	against	those	of	our	competitors.

We	operate	in	a	highly	competitive	environment.	Our	present	or	future	products	could	be	rendered	obsolete	or	uneconomical	by	technological	advances	by	one	or	more	of	our	present	or	future	competitors	or	by	other therapies,	including	orthobiological	therapies.	To	remain	competitive,	we	must	continue	to	develop	and	acquire	new	products	and	technologies.

In	the	global	markets	for	reconstructive	orthopaedic	implants,	trauma	products	and	other	orthopaedic	products,	a	limited	number	of	competitors,	including	DePuy	Orthopaedics,	Inc.	(a	subsidiary	of	Johnson	&	Johnson), Stryker	Corporation,	Biomet,	Inc.,	Wright	Medical	Group,	Inc.,	Synthes,	Inc.	and	Smith	&	Nephew	plc,	compete	with	us	for	the	majority	of	product	sales.	In	the	spinal	implant	category,	we	compete	globally	primarily	with Medtronic	Sofamor	Danek,	Inc.	(a	subsidiary	of	Medtronic,	Inc.),	DePuy	Spine	(a	subsidiary	of	Johnson	&	Johnson),	Synthes,	Inc.,	Stryker	Corporation	and	EBI,	L.P.	(a	subsidiary	of	Biomet,	Inc.).	In	the	dental	reconstructive implant	category,	we	compete	primarily	with	Nobel	Biocare	Holding	AG,	Straumann	Holding	AG,	and	Implant	Innovations,	Inc.	(a	subsidiary	of	Biomet,	Inc.).	Competition	is	primarily	on	the	basis	of: •	technology;

•	innovation;

•	reputation;	and •	customer	service.

In	markets	outside	of	the	United	States,	other	factors	influence	competition	as	well,	including: •	local	distribution	systems;

•	complex	regulatory	environments;	and

•	 differing	medical	philosophies	and	product	preferences.

Our	competitors	may:

•	 have	greater	financial,	marketing	and	other	resources	than	us;

•	respond	more	quickly	to	new	or	emerging	technologies;

•	 undertake	more	extensive	marketing	campaigns;

•	adopt	more	aggressive	pricing	policies;	or

•	 be	more	successful	in	attracting	potential	customers,	employees	and	strategic	partners.

Any	of	these	factors,	alone	or	in	combination,	could	cause	us	to	have	difficulty	maintaining	or	increasing	sales	of	our	products.

# We	and	our	customers	are	subject	to	various	governmental	regulations	relating	to	the	manufacturing,	labeling	and	marketing	of	our	products	and	we	may	incur	significant	expenses	to	comply	with	these regulations	and	develop	products	compatible	with	these	regulations.

The	medical	devices	we	design,	develop,	manufacture	and	market	are	subject	to	rigorous	regulation	by	the	FDA	and	numerous	other	federal,	state	and	foreign	governmental	authorities.	The	process	of	obtaining	regulatory approvals	to	market	a	medical	device,	particularly	from	the	FDA	and	certain	foreign	governmental	authorities,	can	be	costly	and	time	consuming	and	approvals	might	not	be	granted	for	future	products	on	a	timely	basis,	if	at	all. Delays	in	receipt	of,	or	failure	to	obtain,	approvals	for	future	products	could	result	in	delayed	realization	of	product	revenues	or	in	substantial	additional	costs	which	could	have	a	material	adverse	effect	on	our	business	or	results of	operations.

In	addition,	if	we	fail	to	comply	with	applicable	FDA	medical	device	or	other	material	regulatory	requirements,	including,	for	example,	the	Quality	System	Regulation,	recordkeeping	regulations,	labeling	requirements and	adverse	event	reporting	regulations,	that	failure	could	result	in,	among	other	things:

•	 warning	letters;

•	fines	or	civil	penalties;

•	injunctions;

•	repairs,	replacements	or	refunds;

•	recalls	or	seizures	of	products;

•	total	or	partial	suspension	of	production;

•	the	FDA's	refusal	to	grant	future	premarket	clearances	or	approvals;

•	 withdrawals	or	suspensions	of	current	product	applications;	and •	criminal	prosecution.

Any	of	these	actions,	in	combination	or	alone,	could	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

In	many	of	the	foreign	countries	in	which	we	market	our	products,	we	are	subject	to	regulations	affecting,	among	other	things: •	clinical	efficacy;

•	 product	standards;

•	 packaging	requirements;

•	labeling	requirements;

•	import/export	restrictions;

•	tariff	regulations;

•	tax	requirements.

Many	of	the	regulations	applicable	to	our	devices	and	products	in	these	countries,	such	as	the	European	Medical	Devices	Directive,	are	similar	to	those	of	the	FDA.	In	addition,	in	many	countries	the	national	health	or social	security	organizations	require	our	products	to	be	qualified	before	they	can	be	marketed	with	the	benefit	of	reimbursement	eligibility.	Failure	to	receive,	or	delays	in	the	receipt	of,	relevant	foreign	qualifications	also	could have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

As	both	the	FDA	and	foreign	government	regulators	have	become	increasingly	stringent,	we	may	be	subject	to	more	rigorous	regulation	by	governmental	authorities	in	the	future.	Our	products	and	operations	are	also often	subject	to	the	rules	of	industrial	standards	bodies,	such	as	the	International	Standards	Organization.	If	we	fail	to	adequately	address	any	of	these	regulations,	our	business	will	be	harmed.

# We	may	incur	product	liability	losses,	and	insurance	coverage	may	be	inadequate	or	unavailable	to	cover	these	losses.

Our	business	is	subject	to	potential	product	liability	risks	that	are	inherent	in	the	design,	development,	manufacture	and	marketing	of	medical	devices.	Our	products	are	often	used	in	surgical	and	intensive	care	settings.	In addition,	some	of	the	medical	devices	we	manufacture	and	sell	are	designed	to	be	implanted	in	the	human	body	for	long	periods	of	time.	In	the	ordinary	course	of	business,	we	are	the	subject	of	product	liability	lawsuits	alleging that	component	failures,	manufacturing	flaws,	design	defects	or	inadequate	disclosure	of	product-related	risks	or	product-related	information	resulted	in	an	unsafe	condition	or	injury	to	patients.	Product	liability	lawsuits	and claims,	safety	alerts	or	product	recalls,	regardless	of	their	ultimate	outcome,	could	have	a	material	adverse	effect	on	our	business	and	reputation	and	on	our	ability	to	attract	and	retain	customers.

As	part	of	our	risk	management	policy,	we	maintain	third-party	product	liability	insurance	coverage.	However,	product	liability	claims	against	us	may	exceed	the	coverage	limits	of	our	insurance	policies	or	cause	us	to record	a	self-insured	loss.	Even	if	any	product	liability	loss	is	covered	by	an	insurance	policy,	these	policies	may	have	substantial	retentions	or	deductibles	that	provide	that	we	will	not	receive	insurance	proceeds	until	the	losses incurred	exceed	the	amount	of	those	retentions	or	deductibles.	We	will	be	responsible	for	paying	any	losses	that	are	below	those	retentions	or	deductibles.	A	product	liability	claim	in	excess	of	applicable	insurance	could	have	a material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

Not	Applicable.

| Location | Use | Owned/Leased | Square	Feet |
| :--- | :--- | :--- | :--- |
| Warsaw,\tIndiana | Research\t&\tDevelopment,\tManufacturing,\tWarehousing,\tMarketing\t&\tAdministration | Owned | 1,400,000 |
| Warsaw,\tIndiana | Corporate\tHeadquarters\t&\tThe\tZimmer\tInstitute | Owned | 117,000 |
| Warsaw,\tIndiana | Offices,\tManufacturing\t&\tWarehousing | Leased | 90,000 |
| Carlsbad,\tCalifornia | Offices,\tResearch\t&\tDevelopment\t&\tManufacturing | Leased | 118,000 |
| Plainville,\tMassachusetts | Offices,\tManufacturing\t&\tWarehousing | Leased | 22,000 |
| Minneapolis,\tMinnesota | Offices\t&\tResearch\t&\tDevelopment | Owned | 51,000 |
| Cedar\tKnolls,\tNew\tJersey | Manufacturing\t&\tWarehousing | Leased | 23,000 |
| Parsippany,\tNew\tJersey | Research\t&\tDevelopment,\tManufacturing\t&\tWarehousing | Leased | 115,000 |
| Statesville,\tNorth\tCarolina | Manufacturing\t&\tWarehousing | Owned | 156,000 |
| Dover,\tOhio | Offices,\tResearch\t&\tDevelopment\t&\tManufacturing | Owned | 140,000 |
| Dover,\tOhio | Warehousing | Leased | 61,000 |
| Memphis,\tTennessee | Offices\t&\tWarehousing | Leased | 30,000 |
| Austin,\tTexas | Research\t&\tDevelopment | Leased | 34,000 |
| Sydney,\tAustralia | Offices\t&\tWarehousing | Leased | 36,000 |
| Vienna,\tAustria | Offices\t&\tWarehousing | Leased | 15,000 |
| Wemmel,\tBelgium | Offices\t&\tWarehousing | Leased | 15,000 |
| Mississauga,\tCanada | Offices\t&\tWarehousing | Leased | 52,000 |
| Shanghai,\tChina | Offices\t&\tWarehousing | Leased | 18,000 |
| Etupes,\tFrance | Offices,\tManufacturing\t&\tWarehousing | Owned | 90,000 |
| Freiburg,\tGermany | Offices\t&\tWarehousing | Leased | 51,000 |
| Kiel,\tGermany | Offices\t&\tWarehousing | Leased | 21,000 |
| Milan,\tItaly | Offices\t&\tWarehousing | Leased | 47,000 |
| Gotemba,\tJapan | Offices,\tService\tCenter\t&\tWarehousing | Owned | 87,000 |
| Tokyo,\tJapan | Offices\t&\tWarehousing | Leased | 24,000 |
| Seoul,\tKorea | Offices\t&\tWarehousing | Leased | 22,000 |
| Utrecht,\tNetherlands | Offices\t&\tWarehousing | Leased | 16,000 |
| Ponce,\tPuerto\tRico | Offices,\tManufacturing\t&\tWarehousing | Owned | 213,000 |
| Singapore | Offices\t&\tWarehousing | Leased | 10,000 |
| Barcelona,\tSpain | Offices\t&\tWarehousing | Leased | 16,000 |
| Baar,\tSwitzerland | Warehousing | Leased | 40,000 |
| Winterthur,\tSwitzerland\nMünsingen,\tSwitzerland\nSwindon,\tUnited\tKingdom | Offices,\tResearch\t&\tDevelopment\t&\tManufacturing\nOffices\t&\tWarehousing\nOffices\t&\tWarehousing | Leased\nOwned\nLeased | 319,000\n76,000\n70,000 |

In	February	2008	we	announced	plans	to	expand	our	global	manufacturing	network	by	adding	100,000	square	feet	of	manufacturing	capacity	at	a	new	facility	in	Shannon,	Ireland.	We	expect	to	begin	manufacturing	operations	at	this facility	in	late	2008.	We	believe	the	current	facilities,	including	manufacturing,	warehousing,	research	and	development	and	office	space,	together	with	the	planned	expansion	provide	sufficient	capacity	to	meet	ongoing	demands.	Once	a facility	reaches	85	percent	utilization,	we	examine	alternatives	for	either	expanding	that	facility	or	acquiring	new	facilities	to	meet	our	ongoing	demands.

In	addition	to	the	above,	we	maintain	more	than	100	other	offices	and	warehouse	facilities	in	more	than	25	countries	around	the	world,	including	the	United	States,	Japan,	Australia,	France,	Russia,	India,	Germany,	Italy,	Switzerland and	China.	We	believe	that	all	of	the	facilities	and	equipment	are	in	good	condition,	well	maintained	and	able	to	operate	at	present	levels.

Information	pertaining	to	legal	proceedings	can	be	found	in	Note	15	to	the	Consolidated	Financial	Statements,	which	are	included	in	this	report	under	Item	8.

# ITEM	4. Submission	of	Matters	to	a	Vote	of	Security	Holders

Our	common	stock	is	traded	on	the	New	York	Stock	Exchange	and	the	SWX	Swiss	Exchange	under	the	symbol	"ZMH."	The	high	and	low	sales	prices	for	our	common	stock	on	the	New	York	Stock	Exchange	for	the	calendar quarters	of	fiscal	years	2007	and	2006	are	set	forth	as	follows:

| Quarterly	High-Low	Share	Prices | High | Low |
| :--- | :--- | :--- |
| Year\tEnded\tDecember\t31,\t2007: |  |  |
| First\tQuarter | $88.18 | $76.90 |
| Second\tQuarter | $94.38 | $83.67 |
| Third\tQuarter | $91.00 | $75.14 |
| Fourth\tQuarter | $85.91 | $63.00 |
| Year\tEnded\tDecember\t31,\t2006: |  |  |
| First\tQuarter | $72.87 | $64.87 |
| Second\tQuarter | $68.80 | $55.68 |
| Third\tQuarter | $69.44 | $52.20 |
| Fourth\tQuarter | $79.11 | $66.93 |

We	have	not	declared	or	paid	dividends	on	our	common	stock	since	becoming	a	public	company	on	August	6,	2001.	Currently,	we	do	not	anticipate	paying	any	cash	dividends	on	the	common	stock	in	the	foreseeable	future.	Our credit	facility	also	restricts	the	payment	of	dividends	under	certain	circumstances.

The	number	of	beneficial	owners	of	our	common	stock	on	February	13,	2008	was	approximately	439,600.	On	February	13,	2008,	the	closing	price	of	the	common	stock,	as	reported	on	the	New	York	Stock	Exchange,	was	$78.51	per share.

The	information	required	by	this	Item	concerning	equity	compensation	plans	is	incorporated	by	reference	to	Item	12	of	this	report.

The	following	table	summarizes	repurchases	of	common	stock	settled	during	the	three	months	ended	December	31,	2007:

|  | Total	Number	of<br>Shares	Purchased | Average	Price<br>Paid	per	Share | Total	Number	of	Shares<br>Purchased	as	Part	of<br>Publicly	Announced	Plans<br>or	Programs(1) | Approximate	Dollar	Value	of<br>Shares	that	May	Yet	Be<br>Purchased	Under	Plans<br>or	Programs |
| :--- | :--- | :--- | :--- | :--- |
| October\t2007 | 679,600 | $74.89 | 18,400,200 | $685,963,162 |
| November\t2007 | 945,000 | 68.60 | 19,345,200 | 621,139,846 |
| December\t2007 | — | — | 19,345,200 | 621,139,846 |
| Total | 1,624,600 | $71.23 | 19,345,200 | $621,139,846 |

(1) In	December	2005,	our	Board	of	Directors	authorized	the	repurchase	of	up	to	$1	billion	of	common	stock	through	December	31,	2007.	In	December	2006,	our	Board	of	Directors	authorized	an	additional	repurchase	of	up	to	$1	billion	of	common	stock through	December	31,	2008.

The	financial	information	for	each	of	the	past	five	years	ended	December	31,	is	set	forth	below	(in	millions,	except	per	share	amounts):

| Summary	of	Operations | 2007 | 2006 | 2005 | 2004 | 2003(1) |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Net\tsales | $3,897.5 | $3,495.4 | $3,286.1 | $2,980.9 | $1,901.0 |
| Net\tearnings | 773.2 | 834.5 | 732.5 | 541.8 | 346.3 |
| Earnings\tbefore\tcumlative\teffect\tof\tchange\tin\taccounting\tprinciple(2) | 773.2 | 834.5 | 732.5 | 541.8 | 291.2 |
| Earnings\tper\tcommon\tshare |  |  |  |  |  |
| Basic | $3.28 | $3.43 | $2.96 | $2.22 | $1.67 |
| Diluted | 3.26 | 3.40 | 2.93 | 2.19 | 1.64 |
| Earnings\tper\tcommon\tshare\tbefore\tcumlative\teffect\tof\tchange\tin\taccounting\tprinciple(2) |  |  |  |  |  |
| Basic |  |  |  |  | $1.40 |
| Diluted |  |  |  |  | 1.38 |
| Average\tcommon\tshares\toutstanding |  |  |  |  |  |
| Basic | 235.5 | 243.0 | 247.1 | 244.4 | 207.7 |
| Diluted | 237.5 | 245.4 | 249.8 | 247.8 | 211.2 |
| Balance\tSheet\tData |  |  |  |  |  |
| Total\tassets | $6,633.7 | $5,974.4 | $5,721.9 | $5,695.5 | $5,156.0 |
| Short-term\tdebt | – | – | – | 27.5 | 101.3 |
| Long-term\tdebt | 104.3 | 99.6 | 81.6 | 624.0 | \t1,007.8 |
| Other\tlong-term\tobligations | 328.4 | 323.4 | 348.3 | 420.9 | 352.6 |
| Stockholders'\tequity | \t5,449.6 | \t4,920.5 | \t4,682.8 | \t3,942.5 | \t3,143.3 |

(1) Includes	the	results	of	the	former	Centerpulse	AG	subsequent	to	October	2,	2003.

(2) Reflects	earnings	for	the	year	ended	December	31,	2003	before	the	cumulative	effect	of	an	accounting	change	of	$55.1	million	related	to	the	January	1,	2003,	change	in	the	method	of	accounting	for	instruments	which	we	own	and	are	used	by	orthopaedic surgeons	during	total	joint	replacement	and	other	surgical	procedures.	Instruments	are	recognized	as	long-lived	assets	and	are	included	in	property,	plant	and	equipment	and	are	depreciated	using	the	straight-line	method	based	on	estimated	useful	lives, determined	principally	in	reference	to	associated	product	life	cycles,	primarily	five	years.	Prior	to	2003,	undeployed	instruments	were	carried	as	a	prepaid	cost	and	recognized	in	selling,	general	and	administrative	expense	in	the	year	in	which	the	instruments were	placed	into	service.

The	following	discussion	and	analysis	should	be	read	in	conjunction	with	the	consolidated	financial	statements	and	the	corresponding	notes	included	elsewhere	in	this	Form	10-K.

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	include	supplies	and	instruments	designed	to	aid	in 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	this	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 2006	consolidated	financial	statements	have	been	reclassified	to	conform	to	the	2007	presentation.

We	believe	the	following	developments	or	trends	are	important	in	understanding	our	financial	condition,	results	of	operations	and	cash	flows	for	the	year	ended	December	31,	2007.

# Demand	(Volume	and	Mix)	Trends

Increased	volume	and	changes	in	the	mix	of	product	sales	contributed	9	percentage	points	of	2007	sales	growth,	which	is	2	percentage	points	above	the	rate	of	growth	from	2006	compared	to	2005.	We	believe	orthopaedic	procedure volume	on	a	global	basis	will	continue	to	rise	at	mid	single	digit	rates	driven	by	an	aging	global	population,	obesity	and	more	active	lifestyles,	among	other	factors.	In	addition,	the	continued	shift	in	demand	to	premium	products,	such	as Longevity,	Durasul	and	Prolong	Highly	Crosslinked	Polyethylenes,	Trabecular	Metal	Technology	products,	high-flex	knees,	knee	revision	products	and	porous	hip	stems,	continue	to	positively	affect	sales	growth.	For	example,	during	2007, sales	of	products	incorporating	Trabecular	Metal	Technology	were	over	$210	million,	a	year-over-year	increase	of	over	26	percent.

We	believe	innovative	surgical	approaches	will	continue	to	significantly	affect	the	orthopaedics	industry.	In	2007,	we	acquired	ORTHOsoft	Inc.,	a	market	leader	in	surgical	navigation	in	orthopaedics.	Combined	with	our	SmartTools strategic	initiative,	we	are	focused	on	becoming	a	leader	in	operating	room	efficiency	and	enhancing	surgical	outcomes	through	the	use	of	innovative	navigation	devices	and	cutting	tools.	We	continued	our	significant	progress	in	the development	and	introduction	of	MIS	Implants,	Procedures	and	Technologies.	During	the	year	ended	December	31,	2007,	The	Zimmer	Institute	trained	nearly	1,700	surgeons	on	advanced	techniques,	including	approximately	850	surgeons on	MIS	Procedures.

We	believe	innovative	products	will	continue	to	affect	the	orthopaedics	industry.	In	the	second	half	of	2006,	we	launched	the	Zimmer	Gender	Solutions	High-Flex	Knee	Femoral	Implant.	High	Flex	Knees	now	make	up	approximately 44	percent	of	our	total	femoral	unit	sales	on	a	global	basis,	having	grown	from	approximately	28	percent	prior	to	the	launch	of	the	Zimmer	Gender	Solutions	Knee.

# Pricing	Trends

Selling	prices	were	flat	during	2007	compared	to	a	modest	increase	during	2006	when	compared	to	2005.	Asia	Pacific	selling	prices	decreased	1	percentage	point	for	the	year	ended	December	31,	2007,	compared	to	a	2	percent decrease	in	2006	when	compared	to	2005.	As	anticipated,	the	Japanese	government	reduced	reimbursement	rates	during	2007.	This	action	affected	sales	in	Japan	negatively	by	approximately	5	percent	for	2007,	while	other	Asia	Pacific markets	were	flat	to	positive.	Japan	represents	approximately	7	percent	of	our	sales.	The	Americas	experienced	a	1	percent	increase	in	selling	prices	during	2007,	compared	to	a	2	percent	increase	in	2006.	In	Europe,	selling	prices	for	2007 decreased	1	percent,	the	same	decrease	we	saw	in	2006	as	compared	to	2005.	Within	Europe,	Germany	and	Italy	reported	decreases	in	average	selling	prices	of	4	percent	and	2	percent,	respectively,	in	2007,	as	a	result	of	reductions	in government	implant	reimbursement	rates	and	group	purchasing	arrangements	while	most	other	European	markets	were	positive	to	flat.	Germany	and	Italy	combined	represent	approximately	11	percent	of	our	sales.	With	the	effect	of governmental	healthcare	cost	containment	efforts	and	pressure	from	group	purchasing	organizations,	global	selling	prices	are	expected	to	remain	flat	in	2008.

# Foreign	Currency	Exchange	Rates

For	2007,	foreign	currency	exchange	rates	had	a	positive	3	percent	effect	on	global	sales	growth.	If	foreign	currency	exchange	rates	remain	consistent	with	the	year	end	rates,	we	estimate	that	the	weaker	dollar	versus	foreign	currency exchange	rates	will	have	a	positive	effect	in	2008	of	approximately	2	percent	on	sales.	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	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.

# New	Product	Sales

New	products,	which	we	define	as	products	or	stock	keeping	units	("SKU's")	introduced	within	the	prior	36-month	period	to	a	particular	market,	accounted	for	25	percent,	or	$961	million,	of	2007	sales.	Adoption	rates	for	new technologies	are	a	key	indicator	of	performance	in	our	industry.	Our	sales	have	grown	with	the	introduction	of	new	products,	such	as	Trabecular	Metal	Modular	Acetabular	Cups,	certain	SKU's	of	the	NexGen	Complete	Knee	Solution including	the	Gender	Solutions	Knee	Femoral	Implant	for	the	LPS-Flex	and	CR-Flex	Knees,	the	Dynesys4	Dynamic	Stabilization	System,	the	Zimmer	M/L	Taper	Hip	Prosthesis	and	PALACOS5	Bone	Cement.

We	believe	new	products	in	our	current	pipeline	should	continue	to	favorably	affect	our	operating	performance.	Products	we	expect	to	contribute	to	new	product	sales	in	2008	include	the	Gender	Solutions	Knee	Femoral	Implant; Gender	Solutions	Natural-Knee	Flex	System;	products	incorporating	Trabecular	Metal	Technology,	including	the	Trabecular	Metal	Primary	Hip	Prosthesis,	Trabecular	Metal	Acetabular	Revision	System	and	Trabecular	Metal	Spine Implants;	Zimmer	M/L	Taper	Hip	Prosthesis	with	Kinectiv	Technology,	Durom	Acetabular	Cups	with	Metasul	LDH	Large	Diameter	Heads;	Versys	Epoch	Composite	Hip	Prosthesis;	Zimmer	Trabecular	Metal	Reverse	Shoulder	System; Anatomical	Shoulder	Inverse/Reverse	System;	Zimmer	MIS	Femoral	Nailing	Solutions;	NCB	Locking	Plate	System;	and	CopiOs	Bone	Void	Filler6.

# Acquisitions

In	April	2007,	we	acquired	Endius	Incorporated,	a	privately	held	spinal	products	company	for	an	aggregate	value	of	approximately	$80	million	in	cash,	before	adjustments	for	debt	repayment	and	other	items.

In	November	2007,	we	acquired	ORTHOsoft	Inc.,	a	leader	in	computer	navigation	for	orthopaedic	surgery,	in	a	cash	transaction	for	an	aggregate	value	of	approximately	$50	million.

# Settlement	of	Department	of	Justice	Investigation

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	ongoing	investigation	into	financial	relationships	between	the industry	and	consulting	orthopaedic	surgeons.	As	part	of	the	settlement,	we	entered	into	a	Deferred	Prosecution	Agreement	with	the	United	States	Attorney's	Office	for	the	District	of	New	Jersey.	Under	the	provisions	of	the	Deferred Prosecution	Agreement,	we	are	subject	to	oversight	by	a	federal	monitor	selected	by	the	U.S.	Attorney	for	a	period	of	18	months.	We	expect	to	continue	to	incur	costs	of	approximately	$6-9	million	per	quarter,	to	comply	with	the	Deferred Prosecution	Agreement	through	the	remainder	of	the	18	month	period.

We	settled	civil	and	administrative	claims	related	to	the	federal	investigation	for	a	cash	payment	to	the	United	States	government	of	$169.5	million.	We	recorded	a	$169.5	million	expense	during	the	third	quarter	in	connection	with the	settlement.

We	also	entered	into	a	Corporate	Integrity	Agreement	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	15	to	the	consolidated	financial	statements	included	elsewhere	in	this	Form	10-K.

# New	Accounting	Pronouncements

On	January	1,	2007,	we	adopted	FIN	48,	which	addresses	the	determination	of	whether	tax	benefits	claimed	or	expected	to	be	claimed	on	a	tax	return	should	be	recorded	in	the	financial	statements.	Under	FIN	48,	the	tax	benefits	from an	uncertain	tax	position	may	be	recognized	only	if	it	is	more	likely	than	not	that	the	tax	position	will	be	sustained	upon	examination	by	the	taxing	authorities,	based	on	the	technical	merits	of	the	position.	FIN	48	also	provides	guidance	on derecognition,	classification,	interest	and	penalties	on	income	taxes,	accounting	in	interim	periods	and	requires	increased	disclosures.

Prior	to	the	adoption	of	FIN	48,	we	had	a	long	term	tax	liability	for	expected	settlement	of	various	federal,	state	and	foreign	income	tax	liabilities	that	was	reflected	net	of	the	corollary	tax	impacts	of	these	expected	settlements	of $102.1	million,	as	well	as	a	separate	accrued	interest	liability	of	$1.7	million.	As	a	result	of	the	adoption	of	FIN	48,	we	are	required	to	present	the	different	components	of	such	liability	gross	versus	the	historical	net	presentation.	The adoption	resulted	in	the	tax	liability	for	unrecognized	tax	benefits	decreasing	by	$6.4	million	as	of	January	1,	2007.

This	decrease	in	the	tax	liability	resulted	in	a	reduction	to	retained	earnings	of	$4.8	million,	a	reduction	in	goodwill	of	$61.4	million,	the	establishment	of	a	tax	receivable	of	$58.2	million,	and	the	addition	of	an	interest/penalty payable	of	$7.9	million,	all	as	of	January	1,	2007.

Our	operating	profit	for	2008	will	be	affected	by	the	costs	we	will	incur	to	implement	a	number	of	recently	announced	initiatives	that	we	believe	will	position	us	to	respond	better	to	the	changing	needs	of	the	healthcare	market. Additionally,	during	2008	we	expect	to	incur	costs	of	approximately	$6-9	million	per	quarter	to	comply	with	the	Deferred	Prosecution

4	The	Dynesys	Dynamic	Stabilization	Spinal	System	is	indicated	for	use	as	an	adjunct	to	fusion	in	the	U.S.

5	PALACOS®	is	a	trademark	of	Heraeus	Kulzer	GmbH

Agreement.	The	infrastructure	and	operating	initiatives	we	plan	to	implement	in	2008	include:

	•	Continuing	to	enhance	our	Corporate	Compliance	Program	and	to	apply	these	enhancements	to	all	business	segments;

	•	Opening	a	new	manufacturing	facility	in	Ireland	that	will	add	an	additional	100,000	square	feet	of	international	manufacturing	capacity;

	•	Improving	our	quality	system	infrastructure;

	•	Investing	in	our	global	information	technology	systems,	including	improving	our	field-based	U.S.	inventory	and	instrument	tracking	systems;

	•	Increasing	instrument	deployments	to	permit	our	sales	and	distribution	networks	to	respond	more	rapidly	to	changes	in	surgical	demand	patterns	and	capitalize	on	new	business	opportunities;	and 	•	Investing	in	our	sales	force,	instrumentation	and	selling-related	activities	in	our	spine,	dental	and	trauma	business	segments.

We	estimate	that	these	initiatives	will	add	up	to	approximately	$100	million	in	operating	expenses	in	2008,	including	the	monitoring	fees	and	expenses.

# 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):

|  | Year	Ended	December	31, | Year	Ended	December	31, |  | Volume/ |  | Foreign |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | %\tInc | Mix | Price | Exchange |
| Americas | $2,277.0 | $2,076.5 | 10% | 8% | 1% | 1% |
| Europe | 1,081.0 | 931.1 | 16 | 8 | (1) | 9 |
| Asia\tPacific | 539.5 | 487.8 | 11 | 9 | (1) | 3 |
| Total | $3,897.5 | $3,495.4 | 12 | 9 | – | 3 |

"Foreign	Exchange"	as	used	in	the	tables	in	this	report	represents	the	effect	of	changes	in	foreign	exchange	rates	on	sales	growth.

# Net	Sales	by	Product	Category

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

|  | Year	Ended	December	31, | Year	Ended	December	31, |  | Volume/ |  | Foreign |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | %\tInc | Mix | Price | Exchange |
| Reconstructive |  |  |  |  |  |  |
| Knees | $1,636.9 | $1,460.5 | 12% | 9% | –% | 3% |
| Hips | 1,298.9 | 1,188.9 | 9 | 7 | (1) | 3 |
| Extremities | 104.0 | 77.6 | 34 | 30 | 1 | 3 |
| Dental | 221.0 | 179.0 | 23 | 16 | 4 | 3 |
| Total | 3,260.8 | 2,906.0 | 12 | 9 | – | 3 |
| Trauma | 205.8 | 194.7 | 6 | 2 | 1 | 3 |
| Spine | 197.0 | 177.4 | 11 | 9 | 1 | 1 |
| OSP\tand\tother | 233.9 | 217.3 | 8 | 5 | 1 | 2 |
| Total | $3,897.5 | $3,495.4 | 12 | 9 | – | 3 |

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

Growth	in	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 and	revision	stems.	Sales	of	bone	cement	improved	significantly,	led	by	PALACOS	Bone	Cement.	In	total,	bone	cement	sales	growth	accounted	for	1	percent	of	the	2007	hip	sales	growth	over	prior	year.	Trabecular	Metal	Acetabular	Cups, Trabecular	Metal	Primary	Hip	Prosthesis,	Durom	Acetabular	Cups	with	Metasul	LDH	Large	Diameter	Heads,	and	Longevity	and	Durasul	Highly	Crosslinked	Polyethylene	Liners	also	had	strong	growth.	We	expect	to	face	a	near	term challenge	in	hip	sales	growth	with	the	adoption	of	hip

resurfacing	in	the	U.S.	market.	New	products	are	expected	to	contribute	to	sales	growth	in	the	near	term	but	not	entirely	offset	the	lack	of	a	hip	resurfacing	product	within	our	U.S.	hip	portfolio.

The	Bigliani/Flatow	Complete	Shoulder	Solution	and	the	Coonrad/Morrey	Total	Elbow	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	Zimmer	Plates	and	Screws	led	trauma	sales.	The	Dynesys	Dynamic	Stabilization	System,	the	TiTLE	2	lumbar	pedicle	screw	system,	the	Trinica	Select	Anterior	Cerival Plate	System	and	Trabecular	Metal	Implants	led	spine	sales.	Extremity	surgical	products	led	OSP	sales.

The	following	table	presents	estimated*	2007	global	market	size	and	market	share	information	(dollars	in	billions):

The	NexGen	Complete	Knee	Solution	product	line,	including	the	Gender	Solutions	Knee	Femoral	Implants,	NexGen	LPS-Flex	Knee,	NexGen	Trabecular	Metal	Tibial	Components,	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	Trabecular	Metal	Primary	Hip	Prosthesis	led	hip	stem	sales,	but	were	partially	offset	by	weaker	sales	of	cemented	stems.	PALACOS	Bone Cement,	Trabecular	Metal	Acetabular	Cups	and	Durom	Acetabular	Cups	with	Metasul	LDH	Large	Diameter	Heads	also	exhibited	strong	growth.	Bone	cement	sales	growth	accounted	for	2	percent	of	the	2007	hip	sales	growth over	prior	year.	As	noted	above,	we	expect	that	the	adoption	of	hip	resurfacing	in	the	U.S.	market	will	adversely	affect	our	hip	sales	growth	in	the	near	term.

The	Bigliani/Flatow	Shoulder	Solution	and	the	Trabecular	Metal	Humeral	Stem	led	extremities	sales.	The	Tapered	Screw-Vent	Implant	System	led	dental	sales.	Zimmer	Periarticular	Plates	and	Zimmer	Plates	and	Screws led	trauma	sales,	but	were	offset	by	declining	sales	of	intramedullary	nails	and	compression	hip	screws.	The	Dynesys	Dynamic	Stabilization	System,	the	Trinica	Select	Anterior	Cervical	Plate	System	and	Spinal	Trabecular Metal	Implants	led	spine	sales.	Extremity	surgical	products	led	OSP	sales.

# Europe	Net	Sales

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

|  | 2007 | 2006 | %	Inc |
| :--- | :--- | :--- | :--- |
| Reconstructive |  |  |  |
| Knees | $408.2 | $352.2 | 16% |
| Hips | 467.8 | 417.8 | 12 |
| Extremities | 23.2 | 17.9 | 30 |
| Dental | 71.3 | 47.2 | 51 |
| Total | 970.5 | 835.1 | 16 |
| Trauma | 41.1 | 38.2 | 8 |
| Spine | 31.2 | 24.8 | 26 |
| OSP\tand\tother | 38.2 | 33.0 | 16 |
| Total | $1,081.0 | $931.1 | 16 |

Changes	in	foreign	exchange	rates	positively	affected	knee	sales	by	9	percent	and	hip	sales	by	8	percent.	Excluding	these	foreign	exchange	rate	effects,	the	following	product	categories	experienced	positive	sales	growth in	our	Europe	region:	the	NexGen	Complete	Knee	Solution	product	line,	including	the	NexGen	LPS-Flex	Knee,	NexGen	Trabecular	Metal	Tibial	Components,	the	NexGen	CR-Flex	Knee,	and	the	Innex	Total	Knee	System. Growth	in	porous	stems,	including	the	CLS	Spotorno	Stem,	led	hip	stem	sales.	Longevity	and	Durasul	Highly	Crosslinked	Polyethylene	Liners,	the	Durom	Hip	Resurfacing	System,	Trabecular	Metal	Acetabular	Cups	and	the Allofit	Hip	Acetabular	System	also	contributed	to	hip	sales.

The	Anatomical	Shoulder	System,	the	Anatomical	Shoulder	Inverse/Reverse	System	and	the	Coonrad/Morrey	Total	Elbow	led	extremities	sales.	The	addition	of	a	direct	sales	force	in	Italy	as	a	result	of	a	distributor acquisition	contributed	to	growth	in	dental	sales	and	the	Tapered	Screw-Vent	Implant	System	led	dental	sales.	The	Cable-Ready®	Cable	Grip	System,	Zimmer	Periarticular	Plates	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	Trabecular	Metal	Implants	led	spine	sales.	Wound	management	products	led	OSP	sales.

# Asia	Pacific	Net	Sales

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

|  | 2007 | 2006 | %	Inc	(Dec) |
| :--- | :--- | :--- | :--- |
| Reconstructive |  |  |  |
| Knees | $197.2 | $167.5 | 18% |
| Hips | 201.2 | 191.7 | 5 |
| Extremities | 6.9 | 5.5 | 27 |
| Dental | 30.8 | 26.4 | 17 |
| Total | 436.1 | 391.1 | 12 |
| Trauma | 41.8 | 39.4 | 6 |
| Spine | 5.5 | 5.7 | (4) |
| OSP\tand\tOther | 56.1 | 51.6 | 8 |
| Total | $539.5 | $487.8 | 11 |

Changes	in	foreign	exchange	rates	positively	affected	knee	sales	by	5	percent	and	positively	affected	hip	sales	by	2	percent.	Reported	decreases	in	average	selling	prices	negatively	affected	hip	sales	by	3	percent.	The NexGen	Complete	Knee	Solution	product	line,	including	NexGen	Trabecular	Metal	Tibial	Components,	the	NexGen	CR-Flex	Knee	and	the	NexGen	LPS-Flex	Knee	led	knee	sales.	Launch	of	the	Gender	Solutions	Knee	Femoral Implant	in	Australia	also	contributed	to	strong	knee	sales	for	the	year.	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	Highly	Crosslinked	Polyethylene	Liners	and	Trabecular	Metal	Acetabular	Cups	also	exhibited	growth.

Extremities	sales	increased	due	to	stronger	sales	of	our	shoulder	and	elbow	products.	The	Tapered	Screw-Vent	Implant	System	led	dental	sales.	Trauma	sales	were	led	by	strong	growth	in	Zimmer	Periarticular	Plates	and Zimmer	Plates	and	Screws,	but	were	partially	offset	by	a	reported	5	percent	decrease	in	average	selling	prices	during	2007.	A	registration	issue	with	the	ST360®	Spinal	Fixation	System	in	Japan	resulted	in	a	decrease	in	sales	of this	device,	contributing	to	the	negative	growth	in	Spine	sales	for	2007.	Powered	surgical	instruments	led	OSP	sales.

# Gross	Profit

Gross	profit	as	a	percentage	of	net	sales	was	77.5	percent	in	2007,	compared	to	77.7	percent	in	2006.	The	following	table	reconciles	the	gross	margin	for	2006	to	2007:

The	unfavorable	effect	of	year	over	year	changes	in	foreign	currency	hedge	gains	and	losses	were	partially	offset	by	lower	unit	manufacturing	costs	due	to	productivity	gains	as	well	as	favorable	geographic	sales	mix.

These	gains	were	further	offset	by	increased	inventory	charges	due	to	the	impact	of	our	newer	products	on	aging	product	lines.

# Operating	Expenses

Research	and	Development,	or	R&D,	as	a	percentage	of	net	sales	was	5.4	percent	for	2007,	which	is	unchanged	from	2006.	R&D	increased	to	$209.6	million	for	2007	from	$188.3	million	in	2006,	reflecting	increased spending	on	new	product	development	across	all	of	our	product	segments.	In	2007,	we	continued	to	make	investments	in	our	research	and	development	facilities	in	Warsaw,	Indiana.	We	continued	working	with	our	third	party partners	on	genetically	engineered	tissues	for	regenerative	therapies,	including	soft	tissue	biological	repair	and	replacement.	New	products,	which	we	define	as	those	introduced	into	a	market	in	the	preceding	thirty-six	months, accounted	for	approximately	25	percent	of	net	sales	in	2007	compared	with	24	percent	in	2006.	In	the	fourth	quarter	of	2007,	we	announced	FDA	approval	of	the	Zimmer	NexGen	LPS-Flex	Mobile	Knee.	Additionally,	in	the second	half	of	2007,	we	launched	several	new	products,	including	the	Gender	Solutions	Natural-Knee	Flex	System,	and	the	Zimmer	M/L	Taper	Prosthesis	with	Kinectiv	Technology.	We	continue	to	target	our	R&D	spending	at the	high	end	of	what	we	believe	to	be	an	industry	average	of	4-6	percent.

Selling,	general	and	administrative,	or	SG&A,	as	a	percentage	of	net	sales	was	38.2	percent	for	2007,	compared	to	38.8	percent	in	2006.	The	improvement	in	SG&A	as	a	percent	of	net	sales	from	the	prior	year	is	due	to sales	growth	and	well	controlled	spending.

Settlement	expense	of	$169.5	million	for	2007	relates	to	the	settlement	of	the	federal	investigation	into	financial	relationships	between	major	orthopaedic	manufacturers	and	consulting	orthopaedic	surgeons.	Acquisition, integration	and	other	items	for	2007	were	$25.2	million	compared	to	$6.1	million	in	2006.	The	acquisition,	integration	and	other	expenses	recorded	during	2007	reflect	in-process	research	and	development	write-offs	related	to acquisitions,	costs	related	to	the	integration	of	acquired	U.S.	distributors,	estimated	settlements	for	certain	pre-acquisition	product	liability	claims,	integration	consulting	fees	and	costs	for	integrating	information	technology systems.	The	acquisition,	integration	and	other	expenses	recorded	during	2006	included	$27.7	million	of	income	related	to	three	unrelated	matters	–	the	sale	of	the	former	Centerpulse	Austin	land	and	facilities	for	a	gain	of $5.1	million	and	the	favorable	settlement	of	two	pre-acquisition	contingent	liabilities.

# Operating	Profit,	Income	Taxes	and	Net	Earnings

Operating	profit	for	2007	decreased	3	percent	to	$1,127.6	million,	from	$1,165.2	million	in	2006.	The	decrease	is	due	principally	to	the	$169.5	million	settlement	expense.	Without	the	settlement	expense,	operating	profit would	have	been	favorable	to	2006	due	to	increased	sales	and	controlled	operating	expenses.

The	effective	tax	rate	on	earnings	before	income	taxes	and	minority	interest	increased	to	31.6	percent	for	2007,	up	from	28.6	percent	in	2006.	The	increase	in	the	effective	tax	rate	is	primarily	due	to	the	effect	of	the $169.5	million	settlement	expense	in	2007	for	which	no	tax	benefit	has	been

recognized.	Without	the	effect	of	the	settlement	expense,	the	effective	tax	rate	for	2007	would	have	been	favorable	to	2006	due	to	increased	profitability	in	lower	tax	jurisdictions.

Net	earnings	decreased	7	percent	to	$773.2	million	for	2007,	compared	to	$834.5	million	in	2006.	The	decrease	was	due	to	the	$169.5	million	settlement	expense	and	the	higher	effective	tax	rate	that	resulted	from	the settlement	expense.	Basic	and	diluted	earnings	per	share	decreased	4	percent	to	$3.28	and	$3.26,	respectively,	from	$3.43	and	$3.40	in	2006	due	to	fewer	outstanding	shares	as	a	result	of	our	stock	repurchase	program.

|  | Year	Ended	December	31, | Year	Ended	December	31, |  | Volume/ |  | Foreign |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2006 | 2005 | %\tInc | Mix | Price | Exchange |
| Americas | $2,076.5 | $1,941.8 | 7% | 5% | 2% | –% |
| Europe | 931.1 | 874.8 | 6 | 7 | (1) | – |
| Asia\tPacific | 487.8 | 469.5 | 4 | 9 | (2) | (3) |
| Total | $3,495.4 | $3,286.1 | 6 | 7 | – | (1) |

|  | Year	Ended	December	31, | Year	Ended	December	31, |  | Volume/ |  | Foreign |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2006 | 2005 | %\tInc\t(Dec) | Mix | Price | Exchange |
| Reconstructive |  |  |  |  |  |  |
| Knees | $1,460.5 | $1,366.2 | 7% | 7% | –% | –% |
| Hips | 1,188.9 | 1,140.6 | 4 | 5 | (1) | – |
| Extremities | 77.6 | 66.1 | 17 | 13 | 4 | – |
| Dental | 179.0 | 148.1 | 21 | 16 | 4 | 1 |
| Total | 2,906.0 | 2,721.0 | 7 | 7 | – | – |
| Trauma | 194.7 | 179.8 | 8 | 7 | 1 | – |
| Spine | 177.4 | 160.4 | 11 | 10 | 1 | – |
| OSP\tand\tother | 217.3 | 224.9 | (4) | (3) | – | (1) |
| Total | $3,495.4 | $3,286.1 | 6 | 7 | – | (1) |

The	NexGen	Complete	Knee	Solution	product	line	including	the	NexGen	LPS-Flex	Gender	Knee,	NexGen	CR-Flex	Gender	Knee,	NexGen	Trabecular	Metal	Tibial	Components	and	NexGen	MIS	Tibial	Components,	as	well	as Prolong	crosslinked	polyethylene	articular	surface	components,	led	knee	sales.	In	addition,	strong	growth	in	the	Zimmer	Unicompartmental	High	Flex	Knee	and	the	Innex	Total	Knee	System	was	offset,	in	part,	by	declining	sales	of	the Natural-Knee	II	System.

Growth	in	porous	stems,	including	the	new	Trabecular	Metal	Primary	Hip	Prosthesis,	Zimmer	M/L	Taper	Stem,	and	the	CLS	Spotorno	Stem	from	the	CLS	Hip	System	led	hip	sales.	Trabecular	Metal	Acetabular	Cups	and	Metasul LDH	experienced	strong	growth	offset	by	declining	sales	of	Cemented	Stems.

Orthobiologicals	and	prosthetic	implants,	including	strong	growth	of	the	Tapered	Screw-Vent	and	Internal	Hex	Implant	Systems,	led	dental	sales.	Trabecular	Metal	Shoulder	Stems	led	extremities	sales.	Zimmer	Periarticular	Plates,	the Zimmer	NCB	Plating	system,	the	Sirus	IM	Nail	and	I.T.S.T.	Intertrochanteric/Subtrochanteric	Fixation	System	experienced	strong	growth	while	sales	of	Compression	Hip	Screws	continued	to	decline.	The	Dynesys	Dynamic	Stabilization System	and	Spinal	Trabecular	Metal	Implants	led	the	growth	in	spine	sales	while	sales	of	cages	for	interbody	fusion	declined.	As	a	result	of	the	termination	of	the	OrthoPAT	7	distribution	arrangement	in	February	2006,	sales	for	this	device fell	by	over	$25	million,	accounting	for	the	decline	in	OSP	product	sales.

# 7	Trademark	of	Haemonetics	Corporation

# Americas	Net	Sales

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

|  | 2006 | 2005 | %	Inc	(Dec) |
| :--- | :--- | :--- | :--- |
| Reconstructive |  |  |  |
| Knees | $940.8 | $880.5 | 7% |
| Hips | 579.4 | 538.1 | 8 |
| Extremities | 54.2 | 46.2 | 17 |
| Dental | 105.4 | 88.8 | 19 |
| Total | 1,679.8 | 1,553.6 | 8 |
| Trauma | 117.1 | 107.5 | 9 |
| Spine | 146.9 | 132.7 | 11 |
| OSP\tand\tother | 132.7 | 148.0 | (10) |
| Total | $2,076.5 | $1,941.8 | 7 |

The	period	was	characterized	by	balanced	growth	in	hips	and	knees	augmented	by	strong	growth	in	other	product	lines.	Growth	in	porous	stems,	including	the	new	Trabecular	Metal	Primary	Hip	Prosthesis	and	the	Zimmer	M/L	Taper Stem,	led	hip	sales.	Trabecular	Metal	Acetabular	Cups,	and	Metasul	LDH	experienced	strong	growth	offset	by	declining	sales	of	Cemented	Stems.	The	NexGen	Complete	Knee	Solution	product	line	including	the	NexGen	LPS-Flex	Gender Knee,	NexGen	CR-Flex	Gender	Knee,	NexGen	Trabecular	Metal	Tibial	Components	and	the	NexGen	MIS	Stemmed	Tibial	Plate	as	well	as	Prolong	Highly	Crosslinked	Polyethylene	articular	surface	components	led	knee	sales	offset,	in part,	by	declining	sales	of	the	Natural-Knee	II	System.

Dental,	extremities	and	spine	experienced	double	digit	percentage	growth	compared	to	the	prior	year.	The	Tapered	Screw-Vent	Implant	System	led	dental	sales.	The	Trabecular	Metal	Shoulder	Stems	led	extremities	sales.	The Dynesys	Dynamic	Stabilization	System	and	Spinal	Trabecular	Metal	Implants	led	spine	sales	while	trauma	sales	returned	to	solid	growth	behind	Zimmer	Periarticular	Plates,	the	Zimmer	NCB	Plating	system,	the	Sirus	IM	Nail	and	I.T.S.T Intertrochanteric/Subtrochanteric	Fixation	System.

|  | 2006 | 2005 | %	Inc |
| :--- | :--- | :--- | :--- |
| Reconstructive |  |  |  |
| Knees | $352.2 | $327.0 | 8% |
| Hips | 417.8 | 410.3 | 2 |
| Extremities | 17.9 | 13.7 | 31 |
| Dental | 47.2 | 40.1 | 18 |
| Total | 835.1 | 791.1 | 6 |
| Trauma | 38.2 | 33.1 | 15 |
| Spine | 24.8 | 22.4 | 11 |
| OSP\tand\tother | 33.0 | 28.2 | 12 |
| Total | $931.1 | $874.8 | 6 |

Strong	knee	sales	continued	to	drive	growth	in	Europe.	Eight	percent	volume	and	mix	growth	was	offset	by	a	2	percent	drop	in	average	selling	prices	for	knees	in	Europe.	The	NexGen	Complete	Knee	Solution	product	line	and	the Innex	Total	Knee	System	led	knee	sales.	Hip	sales	growth	was	negatively	affected	by	reduced	selling	prices	in	Germany,	Italy,	Portugal	and	the	United	Kingdom.	The	CLS	Spotorno	Stem,	Longevity	Highly	Crosslinked	Polyethylene	Liners, Metasul	LDH	and	Trabecular	Metal	Acetabular	Cups	led	hip	sales.

Dental,	extremities,	trauma,	spine	and	OSP	again	experienced	double	digit	percentage	growth	compared	to	the	prior	year.	Dental	sales	were	led	by	the	Tapered	Screw-Vent	Implant	System.	The	Anatomical	Shoulder	System	led extremities	sales.	Zimmer	Periarticular	Plates	and	the	Zimmer	NCB	Plating	System	led	trauma	sales.	Trabecular	Metal	Implants	led	spine	sales.	Strong	sales	of	wound	management	products	contributed	to	the	OSP	sales	performance.

|  | 2006 | 2005 | %	Inc	(Dec) |
| :--- | :--- | :--- | :--- |
| Reconstructive |  |  |  |
| Knees | $167.5 | $158.7 | 6% |
| Hips | 191.7 | 192.2 | – |
| Extremities | 5.5 | 6.2 | (13) |
| Dental | 26.4 | 19.2 | 37 |
| Total | 391.1 | 376.3 | 4 |
| Trauma | 39.4 | 39.2 | 1 |
| Spine | 5.7 | 5.3 | 9 |
| OSP\tand\tother | 51.6 | 48.7 | 6 |
| Total | $487.8 | $469.5 | 4 |

A	stronger	U.S.	dollar	in	the	first	half	of	the	year	resulted	in	a	negative	3	percent	effect	on	sales	for	Asia	Pacific,	including	a	3	percent	drop	in	knee	sales	and	a	negative	4	percent	impact	on	hip	sales.	A	reduction	in	reimbursement prices	for	orthopaedic	implants	in	Japan	went	into	effect	April	1,	2006.	Together	with	other	price	changes	in	this	segment	this	action	led	to	a	negative	2	percent	effect	on	sales,	including	negative	2	percent	on	knees	and	negative	4	percent	on hips.	Volume	and	mix	growth	more	than	offset	the	negative	effects	of	price	and	currency	in	knees	while	netting	out	to	result	in	flat	sales	in	hips.	Strong	knee	sales	drove	growth	in	Asia	Pacific.	The	NexGen	CR-Flex	Knee	and	the	NexGen LPS-Flex	Knee	led	knee	sales.	The	continued	conversion	to	porous	stems,	including	the	VerSys	Hip	System	and	the	CLS	Spotorno	Stem	led	hip	sales.	Sales	of	Longevity	Highly	Crosslinked	Polyethylene	Liners	and	Trabecular	Metal Acetabular	Cups	also	exhibited	strong	growth.

Dental	experienced	double	digit	percentage	growth	compared	to	the	prior	year.	The	Tapered	Screw-Vent	Implant	System	and	the	Spline®	Implant	System	led	dental	sales.	Extremity	sales	were	impacted	by	lower	sales	of	the Bigliani/Flatow	Shoulder	Solution.	Strong	powered	instrument	sales	contributed	to	the	OSP	sales	performance.

| Year	ended	December	31,	2005	gross	margin | 77.5% |
| :--- | :--- |
| Increased\tselling\tprices | 0.1 |
| Share-based\tcompensation | (0.3) |
| Other | 0.4 |
| Year\tended\tDecember\t31,\t2006\tgross\tmargin | 77.7% |

Higher	average	selling	prices	in	our	largest	operating	segment	offset	by	lower	prices	in	Europe	and	Asia	Pacific	contributed	to	the	modest	improvement	in	gross	margin.	Other	primary	contributors	to	the	improvement	in	gross	profit margin	were	the	net	favorable	effect	of	year	over	year	changes	in	foreign	currency	hedge	gains	and	losses	and	manufacturing	productivity	gains	offset	by	underlying	exposure	gains	and	losses,	increased	inventory	charges	due	to	the	impact of	our	newer	products	on	aging	product	lines	and	increased	royalty	expenses	as	a	percentage	of	sales	due	to	a	higher	mix	of	royalty	bearing	sales.

Research	and	Development,	or	R&D,	as	a	percentage	of	net	sales	was	5.4	percent	for	2006,	compared	to	5.3	percent	in	2005.	R&D	increased	to	$188.3	million	for	2006	from	$175.5	million	in	2005,	reflecting	increased	spending	on projects	focused	on	our	redefined	corporate	strategies.

Selling,	general	and	administrative,	or	SG&A,	as	a	percentage	of	net	sales	was	38.8	percent	for	2006,	compared	to	38.3	percent	in	2005.	Share-based	compensation	added	$55.9	million	of	expense	for	the	year	ended	December	31, 2006,	or	an	additional	1.6	percentage	points	when	compared	with	2005	due	to	the	adoption	of	SFAS	123(R)	in	2006.	Absent	share-based	compensation,	SG&A	as	a	percentage	of	net	sales	decreased.	The	decrease	was	primarily	due	to	sales growth,	realized	expense	synergies	and	well	controlled	spending.

Acquisition,	integration	and	other	items	for	2006	were	$6.1	million	compared	to	$56.6	million	in	2005,	and	included	$27.7	million	of	income	related	to	three	unrelated	matters	–	the	sale	of	the	former	Centerpulse	Austin	land	and facilities	for	a	gain	of	$5.1	million	and	the	favorable	settlement	of	two	pre-acquisition	contingent	liabilities.	A	reduction	in	product	liability	accounted	for	$4.9	million	of	income.	Expense	items	included	a	$13.4	million	impairment	charge for	certain	Centerpulse	tradename	and	trademark	intangibles	based	principally	in	our	Europe	operating	segment,	$8.8	million	of	integration	consulting	expenses,	$3.3	million	of	employee	severance	and	retention	costs,	$3.0	million	of	costs related	to	integrating	our	information	technology	systems,	$2.9	million	of	in-process	research	and	development,	$2.5	million	of	personnel	expenses	and	travel	for	full-time	integration	team	members	and	$4.8	million	of	other	expenses.

Operating	profit	for	2006	increased	10	percent	to	$1,165.2	million,	from	$1,055.0	million	in	2005.	Increased	sales,	improved	gross	profit	margins,	realized	operating	expense	synergies,	controlled	operating	expenses	and	decreased acquisition	and	integration	expenses	offset	$76.0	million	of	share-based	compensation	expense	to	drive	the	increase	in	operating	profit.

The	effective	tax	rate	on	earnings	before	income	taxes	and	minority	interest	decreased	to	28.6	percent	for	2006,	down	from	29.5	percent	in	2005.	The	reasons	for	the	lower	effective	tax	rate	were	the	implementation	of	several European	restructuring	initiatives,	the	successful	negotiation	of	a	lower	ongoing	Swiss	tax	rate	(from	approximately	24	percent	to	12.5	percent)	and	the	continued	expansion	of	operations	in	lower	tax	jurisdictions,	including	Puerto	Rico.

Net	earnings	increased	14	percent	to	$834.5	million	for	2006,	compared	to	$732.5	million	in	2005.	The	increase	was	due	to	higher	operating	profit,	lower	acquisition,	integration	and	other	expenses,	decreased	interest	expense	due	to	a lower	average	outstanding	debt	balance	and	a	lower	effective	tax	rate,	offset	by	$54.5	million	of	share-based	compensation	expense,	net	of	tax.	Basic	and	diluted	earnings	per	share	increased	16	percent	to	$3.43	and	$3.40,	respectively,	from $2.96	and	$2.93	in	2005.

# OPERATING	PROFIT	BY	SEGMENT

Management	evaluates	operating	segment	performance	based	upon	segment	operating	profit	exclusive	of	operating	expenses	pertaining	to	global	operations	and	corporate	expenses,	share-based	compensation	expense,	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. For	more	information	regarding	our	segments,	see	Note	13	to	the	consolidated	financial	statements	included	in	Item	8	of	this	Form	10-K.

The	following	table	sets	forth	the	operating	profit	as	a	percentage	of	sales	by	segment	for	2007,	2006	and	2005:

# Percent	of	net	sales

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Americas | 52.0% | 52.7% | 52.6% |
| Europe | 40.0 | 41.4 | 36.3 |
| Asia\tPacific | 48.2 | 47.5 | 45.2 |

In	the	Americas,	operating	profit	as	a	percentage	of	net	sales	decreased	due	to	increased	spending	for	advertising	as	well	as	increased	sales	force	related	expenses	due	to	the

expansion	of	our	U.S.	distributor	network.	These	increases	were	partially	offset	by	improved	gross	margins.

Europe	operating	profit	as	a	percentage	of	net	sales	decreased	primarily	as	a	result	of	decreased	gross	margins	from	the	impact	of	losses	from	foreign	currency	hedges.	The	decrease	in	gross	margin	was	partially	offset	by controlled	spending.

Asia	Pacific	operating	profit	as	a	percentage	of	net	sales	increased	primarily	due	to	improved	gross	margins.	Gross	margins	increased	throughout	many	Asia	Pacific	markets,	including	Japan,	despite	decreases	in	average selling	prices	in	Japan	as	a	result	of	reductions	in	government	controlled	reimbursement	prices.	The	improvement	in	gross	margins	in	Asia	Pacific	is	due	to	favorable	product	sales	mix	and	lower	unit	manufacturing	costs.

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

European	operating	profit	as	a	percentage	of	net	sales	improved	due	to	improved	gross	margin	and	the	realization	of	expense	synergies	related	to	the	elimination	of	redundant	functions	and	controlled	selling,	general	and administrative	spending.

Asia	Pacific	operating	profit	as	a	percentage	of	net	sales	increased	primarily	due	to	product	category	mix,	and	controlled	selling,	general	and	administrative	spending.

# LIQUIDITY	AND	CAPITAL	RESOURCES

Cash	flows	provided	by	operating	activities	were	$1,084.4	million	in	2007	compared	to	$1,040.7	million	in	2006.	The	principal	source	of	cash	was	net	earnings	of	$773.2	million.	In	2007,	cash	provided	from	net	earnings was	reduced	by	$169.5	million	as	a	result	of	the	settlement	with	the	Department	of	Justice.	Non-cash	charges	included	in	net	earnings	accounted	for	another	$364.5	million	of	operating	cash.	All	other	items	of	operating	cash flows	accounted	for	a	use	of	$53.3	million	of	cash	pertaining	principally	to	investments	in	working	capital	in	support	of	sales	growth.	Also	included	in	operating	cash	flows	for	2007	is	approximately	$23	million	related	to accrued	but	unpaid	amounts	under	various	contractual	arrangements	with	healthcare	professionals	or	institutions.	Operating	cash	flows	were	increased	and	cash	flows	used	in	financing	activities	were	decreased	by	$13.6	million when	compared	with	amounts	furnished	in	the	current	report	filed	on	Form	8-K	dated	January	29,	2008.

We	continue	to	focus	on	working	capital	management.	At	December	31,	2007,	we	had	52	days	of	sales	outstanding	in	trade	accounts	receivable,	a	decrease	of	3	days	when	compared	to	December	31,	2006.	The improvement	was	achieved	through	improvement	in	all	reporting	segments.	At	December	31,	2007,	we	had	258	days	of	inventory	on	hand,	favorable	to	December	31,	2006	by	19	days.	This	decrease	reflects	higher	cost	of	goods sold	and	strong	underlying	demand	in	the	fourth	quarter	of	2007.	Our	inventory	levels	have	improved	from	a	third	quarter	high	of	330	days	as	a	result	of	seasonal	demand	patterns.

Cash	flows	used	in	investing	activities	were	$491.5	million	in	2007,	compared	to	$287.0	million	in	2006.	The	most	significant	contributor	to	the	increase	in	cash	flows	used	in	investing	activities	were	the	payments	related to	the	acquisitions	of	Endius	and	ORTHOsoft	as	well	as	additions	to	our	global	distributor	network.	Cash	payments	related	to	acquisitions	for	2007	was	$160.3	million	compared	to	$34.9	million	in	2006.	Additions	to instruments	during	2007	were	$138.5	million	compared	to	$126.2	million	in	2006.	Additions	to	instruments	increased	in	2007	compared	to	2006	due	to	an	increase	in	instrument	deployments	related	to	new	product	launches.	In 2008,	we	expect	to	spend	approximately	$155	–	$170	million	on	instruments	to	support	new	products,	sales	growth	and	MIS	Procedures.	Additions	to	other	property,	plant	and	equipment	during	2007	were	$192.7	million compared	to	$142.1	million	in	2006.	Increases	were	related	to	facility	expansions	in	Warsaw,	Indiana;	Ponce,	Puerto	Rico;	and	Winterthur,	Switzerland;	and	investment	in	new	information	technology	systems.	These	facility expansions	improved	working	conditions	and	capabilities	for	our	research	and	development	organization,	responded	to	increased	demand	and	the	transfer	of	production	to	our	other	manufacturing	sites.	During	2008,	we	expect to	purchase	approximately	$315-$330	million	in	other	property,	plant	and	equipment,	under	our	planned	infrastructure	improvements	and	international	manufacturing	expansion.

Cash	flows	used	in	financing	activities	were	$399.5	million	for	2007,	compared	to	$730.7	million	in	2006.	We	repurchased	$576.3	million	of	our	common	stock	in	2007	as	compared	with	$798.8	million	in	2006	under	our stock	repurchase	programs.	We	utilized	cash	generated	from	operating	activities	and	$149.8	million	in	cash	proceeds	received	from	employee	stock	compensation	plans	to	fund	the	repurchases.	We	may	use	excess	cash	to	fund future	purchases,	if	any,	under	our	stock	repurchase	programs.

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	$104.3	million	outstanding	under	the	Senior	Credit Facility	at	December	31,	2007,	and	an	availability	of	$1,245.7	million.	The	$104.3	million	is	for	use	in	Japan	and	carries	a	low	interest	rate.	The	Senior	Credit	Facility	contains	provisions	by	which	we	can	increase	the	line	to $1,750	million	and	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	December	31,	2007.	Commitments	under	the	Senior	Credit	Facility	are	subject	to	certain	fees,	including	a facility	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.

We	also	have	available	uncommitted	credit	facilities	totaling	$70.4	million.

Management	believes	that	cash	flows	from	operations,	together	with	available	borrowings	under	the	Senior	Credit	Facility,	are	sufficient	to	meet	our	expected	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.

# CONTRACTUAL	OBLIGATIONS

We	have	entered	into	contracts	with	various	third	parties	in	the	normal	course	of	business	which	will	require	future	payments.	The	following	table	illustrates	our	contractual	obligations	(in	millions):

| Contractual	Obligations | Total | 2008 | 2009<br>and<br>2010 | 2011<br>and<br>2012 | 2013<br>and<br>Thereafter |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Long-term\tdebt | $104.3 | $– | $– | $104.3 | $– |
| Operating\tleases | 134.3 | 35.4 | 50.0 | 28.6 | 20.3 |
| Purchase\tObligations | 24.6 | 23.2 | 1.4 | – | – |
| Long-term\tincome\ttaxes\tpayable | 137.0 | – | 57.7 | 53.9 | 25.4 |
| Other\tlong-term\tliabilities | 191.4 | – | 47.3 | 17.1 | 127.0 |
| Total\tcontractual\tobligations | $591.6 | $58.6 | $156.4 | $203.9 | $172.7 |

# CRITICAL	ACCOUNTING	ESTIMATES

Our	financial	results	are	affected	by	the	selection	and	application	of	accounting	policies	and	methods.	Significant	accounting	policies	which	require	management's	judgment	are	discussed	below.

Excess	Inventory	and	Instruments	–	We	must	determine	as	of	each	balance	sheet	date	how	much,	if	any,	of	our	inventory	may	ultimately	prove	to	be	unsaleable	or	unsaleable	at	our	carrying	cost.	Similarly,	we must	also	determine	if	instruments	on	hand	will	be	put	to	productive	use	or	remain	undeployed	as	a	result	of	excess	supply.	Reserves	are	established	to	effectively	adjust	inventory	and	instruments	to	net	realizable	value.	To determine	the	appropriate	level	of	reserves,	we	evaluate	current	stock	levels	in	relation	to	historical	and	expected	patterns	of	demand	for	all	of	our	products	and	instrument	systems	and	components.	The	basis	for	the determination	is	generally	the	same	for	all	inventory	and	instrument	items	and	categories	except	for	work-in-progress	inventory,	which	is	recorded	at	cost.	Obsolete	or	discontinued	items	are	generally	destroyed	and	completely written	off.	Management	evaluates	the	need	for	changes	to	valuation	reserves	based	on	market	conditions,	competitive	offerings	and	other	factors	on	a	regular	basis.

Income	Taxes	−	We	estimate	income	tax	expense	and	income	tax	liabilities	and	assets	by	taxable	jurisdiction.	Realization	of	deferred	tax	assets	in	each	taxable	jurisdiction	is	dependent	on	our	ability	to	generate future	taxable	income	sufficient	to	realize	the	benefits.	We	evaluate	deferred	tax	assets	on	an	ongoing	basis	and	provide	valuation	allowances	if	it	is	determined	to	be	"more	likely	than	not"	that	the	deferred	tax	benefit	will	not be	realized.	Federal	income	taxes	are	provided	on	the	portion	of	the	income	of	foreign	subsidiaries	that	is	expected	to	be	remitted	to	the	U.S.	We	operate	within	numerous	taxing	jurisdictions.	We	are	subject	to	regulatory	review or	audit	in	virtually	all	of	those	jurisdictions	and	those	reviews	and	audits	may	require	extended	periods	of	time	to	resolve.	We	make	use	of	all	available	information	and	make	reasoned	judgments	regarding	matters	requiring interpretation	in	establishing	tax	expense,	liabilities	and	reserves.	We	believe	adequate	provisions	exist	for	income	taxes	for	all	periods	and	jurisdictions	subject	to	review	or	audit.

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.	The	amounts	established	equate	to	less	than	5	percent	of	total	liabilities	and	represent management's	best	estimate	of	the	ultimate	costs	that	we	will	incur	under	the	various	contingencies.

Goodwill	and	Intangible	Assets	–	We	evaluate	the	carrying	value	of	goodwill	and	indefinite	life	intangible	assets	annually,	or	whenever	events	or	circumstances	indicate	the	carrying	value	may	not	be recoverable.	We	evaluate	the	carrying	value	of	finite	life	intangible	assets	whenever	events	or	circumstances	indicate	the	carrying	value	may	not	be	recoverable.	Significant	assumptions	are	required	to	estimate	the	fair	value	of goodwill	and	intangible	assets,	most	notably	estimated	future	cash	flows	generated	by	these	assets.	As	such,	these	fair	valuation	measurements	use	significant	unobservable	inputs	as	defined	under	Statement	of	Financial Accounting	Standards	No.	157,	Fair	Value	Measurements.	Changes	to	these	assumptions	could	require	us	to	record	impairment	charges	on	these	assets.

Share-based	Payment	–	We	account	for	share-based	payment	expense	in	accordance	with	the	fair	value

recognition	provisions	of	SFAS	123(R).	Under	the	fair	value	recognition	provisions	of	SFAS	123(R),	share-based	payment	expense	is	measured	at	the	grant	date	based	on	the	fair	value	of	the	award	and	is	recognized	over	the	requisite service	period.	Determining	the	fair	value	of	share-based	awards	at	the	grant	date	requires	judgment,	including	estimating	the	expected	life	of	stock	options	and	the	expected	volatility	of	our	stock.	Additionally,	we	must	estimate	the	amount of	share-based	awards	that	are	expected	to	be	forfeited.	We	estimate	expected	volatility	based	upon	the	implied	volatility	of	our	actively	traded	options.	The	expected	life	of	stock	options	and	estimated	forfeitures	are	based	upon	our employees'	historical	exercise	and	forfeiture	behaviors.	The	assumptions	used	in	determining	the	grant	date	fair	value	and	the	expected	forfeitures	represent	management's	best	estimates.

# RECENT	ACCOUNTING	PRONOUNCEMENTS

Information	about	recent	accounting	pronouncements	is	included	in	Note	2	to	the	Consolidated	Financial	Statements,	which	are	included	in	this	report	under	Item	8.

# MARKET	RISK

We	are	exposed	to	certain	market	risks	as	part	of	our	ongoing	business	operations,	including	risks	from	changes	in	foreign	currency	exchange	rates,	interest	rates	and	commodity	prices	that	could	affect	our	financial	condition,	results of	operations	and	cash	flows.	We	manage	our	exposure	to	these	and	other	market	risks	through	regular	operating	and	financing	activities,	and	through	the	use	of	derivative	financial	instruments.	We	use	derivative	financial	instruments	solely as	risk	management	tools	and	not	for	speculative	investment	purposes.

# FOREIGN	CURRENCY	EXCHANGE	RISK

We	operate	on	a	global	basis	and	are	exposed	to	the	risk	that	our	financial	condition,	results	of	operations	and	cash	flows	could	be	adversely	affected	by	changes	in	foreign	currency	exchange	rates.	We	are	primarily	exposed	to	foreign currency	exchange	rate	risk	with	respect	to	transactions	and	net	assets	denominated	in	Euros,	Swiss	Francs,	Japanese	Yen,	British	Pounds,	Canadian	Dollars,	Australian	Dollars	and	Korean	Won.	We	manage	the	foreign	currency	exposure centrally,	on	a	combined	basis,	which	allows	us	to	net	exposures	and	to	take	advantage	of	any	natural	offsets.	To	reduce	the	uncertainty	of	foreign	exchange	rate	movements	on	transactions	denominated	in	foreign	currencies,	we	enter	into derivative	financial	instruments	in	the	form	of	foreign	exchange	forward	contracts	with	major	financial	institutions.	These	forward	contracts	are	designed	to	hedge	anticipated	foreign	currency	transactions,	primarily	intercompany	sale	and purchase	transactions,	for	periods	consistent	with	commitments.	Realized	and	unrealized	gains	and	losses	on	these	contracts	that	qualify	as	cash	flow	hedges	are	temporarily	recorded	in	other	comprehensive	income,	then	recognized	in	cost of	products	sold	when	the	hedged	item	affects	net	earnings.

For	contracts	outstanding	at	December	31,	2007,	we	had	obligations	to	purchase	U.S.	Dollars	and	sell	Euros,	Japanese	Yen,	British	Pounds,	Canadian	Dollars,	Australian	Dollars	and	Korean	Won	or	purchase	Swiss	Francs	and	sell U.S.	Dollars	at	set	maturity	dates	ranging	from	January	2008	through	May	2010.	The	notional	amounts	of	outstanding	forward	contracts	entered	into	with	third	parties	to	purchase	U.S.	Dollars	at	December	31,	2007	and	2006,	were $1,244.6	million	and	$1,169.3	million,	respectively.	The	notional	amounts	of	outstanding	forward	contracts	entered	into	with	third	parties	to	purchase	Swiss	Francs	at	December	31,	2007	and	2006	were	$138.4	million	and	$205.0	million, respectively.	The	weighted	average	contract	rates	outstanding	are	Euro:USD	1.34,	USD:Swiss	Franc	1.19,	USD:Japanese	Yen	109,	British	Pound:USD	1.92,	USD:Canadian	Dollar	1.09,	Australian	Dollar:USD	0.78	and	USD:Korean	Won 929.

We	maintain	written	policies	and	procedures	governing	our	risk	management	activities.	Our	policy	requires	that	critical	terms	of	hedging	instruments	are	the	same	as	hedged	forecasted	transactions.	On	this	basis,	with	respect	to	cash flow	hedges,	changes	in	cash	flows	attributable	to	hedged	transactions	are	generally	expected	to	be	completely	offset	by	changes	in	the	fair	value	of	hedge	instruments.	As	part	of	our	risk	management	program,	we	also	perform	sensitivity analyses	to	assess	potential	changes	in	revenue,	operating	results,	cash	flows	and	financial	position	relating	to	hypothetical	movements	in	currency	exchange	rates.	A	sensitivity	analysis	of	changes	in	the	fair	value	of	foreign	exchange forward	contracts	outstanding	at	December	31,	2007,	indicated	that,	if	the	U.S.	Dollar	uniformly	changed	in	value	by	10	percent	relative	to	the	Euro,	Swiss	Franc,	Japanese	Yen,	British	Pound,	Canadian	Dollar,	Australian	Dollar	and	Korean Won,	with	no	change	in	the	interest	differentials,	the	fair	value	of	those	contracts	would	increase	or	decrease	earnings	before	income	taxes	in	periods	through	2010,	depending	on	the	direction	of	the	change,	by	an	average	approximate amount	of	$78.4	million,	$13.1	million,	$20.4	million,	$14.6	million,	$5.3	million,	$6.5	million	and	$2.0	million	for	the	Euro,	Swiss	Franc,	Japanese	Yen,	British	Pound,	Canadian	Dollar,	Australian	Dollar	and	Korean	Won	contracts, respectively.	Any	change	in	the	fair	value	of	foreign	exchange	forward	contracts	as	a	result	of	a	fluctuation	in	a	currency	exchange	rate	is	expected	to	be	largely	offset	by	a	change	in	the	value	of	the	hedged	transaction.	Consequently,	foreign exchange	contracts	would	not	subject	us	to	material	risk	due	to	exchange	rate	movements	because	gains	and	losses	on	these	contracts	offset	gains	and	losses	on	the	assets,	liabilities,	and	transactions	being	hedged.

We	had	net	investment	exposures	to	net	foreign	currency	denominated	assets	and	liabilities	of	approximately	$1,869.1	million	at	December	31,	2007,	primarily	in	Swiss	Francs,	Japanese	Yen	and	Euros.	Approximately	$1,178	million of	the	net	asset	exposure	at	December	31,	2007	relates	to	goodwill	recorded	in	the	Europe	and	Asia	Pacific	geographic	segments.

We	enter	into	foreign	currency	forward	exchange	contracts	with	terms	of	one	month	to	manage	currency	exposures	for	assets	and	liabilities	denominated	in	a	currency	other	than	an	entity's	functional	currency.	As	a	result,	foreign currency	translation	gains/losses	recognized	in	earnings	under	SFAS	No.	52,	"Foreign	Currency	Translation"	are	generally	offset	with	gain/losses	on	the	foreign	currency	forward	exchange	contracts	in	the	same	reporting	period.

# COMMODITY	PRICE	RISK

We	purchase	raw	material	commodities	such	as	cobalt	chrome,	titanium,	tantalum,	polymer	and	sterile	packaging.	We	enter	into	supply	contracts	generally	with	terms	of	12	to	24	months,	where	available,	on	these	commodities	to alleviate	the	effect	of	market	fluctuation	in	prices.	As	part	of	our	risk	management	program,	we	perform	sensitivity	analyses	related	to	potential	commodity	price	changes.	A	10	percent	price	change	across	all	these	commodities	would	not have	a	material	effect	on	our	consolidated	financial	position,	results	of	operations	or	cash	flows.

# INTEREST	RATE	RISK

In	the	normal	course	of	business,	we	are	exposed	to	market	risk	from	changes	in	interest	rates	that	could	affect	our	results	of	operations	and	financial	condition.	We	manage	our	exposure	to	interest	rate	risks	through	our	regular operations	and	financing	activities.

Presently,	we	invest	our	cash	and	equivalents	primarily	in	U.S.	government	treasury	funds	and	bank	deposits.	The	primary	investment	objective	is	to	ensure	capital	preservation	of	our	invested	principal	funds	by	limiting	default	and market	risk.	Currently,	we	do	not	use	derivative	financial	instruments	in	our	investment	portfolio.

Our	principal	exposure	to	interest	rate	risk	arises	from	the	variable	rates	associated	with	our	credit	facilities.	We	are	subject	to	interest	rate	risk	through	movements	in	interest	rates	on	the	committed	Senior	Credit	Facility	and	our uncommitted	credit	facilities.	Presently,	all	of	our	debt	outstanding	bears	interest	at	short-term	rates.	We	currently	do	not	hedge	our	interest	rate	exposure,	but	may	do	so	in	the	future.	Based	upon	our	overall	interest	rate	exposure	as	of December	31,	2007,	a	change	of	10	percent	in	interest	rates,	assuming	the	amount	outstanding	remains	constant,	would	not	have	a	material	effect	on	interest	expense.	Further,	this	analysis	does	not	consider	the	effect	of	the	change	in	the	level of	overall	economic	activity	that	could	exist	in	such	an	environment.

# CREDIT	RISK

Financial	instruments,	which	potentially	subject	us	to	concentrations	of	credit	risk,	are	primarily	cash,	cash	equivalents,	counterparty	transactions,	and	accounts	receivable.

We	place	our	investments	in	highly	rated	financial	institutions	and	money	market	instruments,	and	limit	the	amount	of	credit	exposure	to	any	one	entity.	We	believe	we	do	not	have	any	significant	credit	risk	on	our	cash	and equivalents	and	investments.

We	are	exposed	to	credit	loss	if	the	financial	institutions	with	which	we	conduct	business	fail	to	perform.	However,	this	loss	is	limited	to	the	amounts,	if	any,	by	which	the	obligations	of	the	counterparty	to	the	financial	instrument contract	exceed	our	obligation.	We	also	minimize	exposure	to	credit	risk	by	dealing	with	a	diversified	group	of	major	financial	institutions.	We	manage	credit	risk	by	monitoring	the	financial	condition	of	our	counterparties	using	standard credit	guidelines.	We	do	not	anticipate	any	nonperformance	by	any	of	the	counterparties.

Concentration	of	credit	risk	with	respect	to	trade	accounts	receivable	is	limited	due	to	the	large	number	of	customers	and	their	dispersion	across	a	number	of	geographic	areas	and	by	frequent	monitoring	of	the	creditworthiness	of	the customers	to	whom	credit	is	granted	in	the	normal	course	of	business.	However,	essentially	all	of	our	trade	receivables	are	concentrated	in	the	public	and	private	hospital	and	healthcare	industry	in	the	U.S.	and	internationally	or	with distributors	or	dealers	who	operate	in	international	markets	and,	accordingly,	are	exposed	to	their	respective	business,	economic	and	country	specific	variables.	Repayment	is	dependent	upon	the	financial	stability	of	these	industry	sectors and	the	respective	countries'	national	economic	and	healthcare	systems.	Exposure	to	credit	risk	is	controlled	through	credit	approvals,	credit	limits	and	monitoring	procedures	and	we	believe	that	reserves	for	losses	are	adequate.	There	is	no significant	net	exposure	due	to	any	individual	customer	or	other	major	concentration	of	credit	risk.

# Management's	Report	on	Internal	Control	Over	Financial	Reporting

The	management	of	Zimmer	Holdings,	Inc.	is	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting.	Internal	control	over	financial	reporting	is	defined	in	Rules	13a-15(f)	or	15d-15(f) promulgated	under	the	Securities	Exchange	Act	of	1934	as	a	process	designed	by,	or	under	the	supervision	of,	the	company's	principal	executive	and	principal	financial	officers	and	effected	by	the	company's	Board	of	Directors, management	and	other	personnel,	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the	preparation	of	financial	statements	for	external	purposes	in	accordance	with	U.S.	generally	accepted	accounting principles	and	includes	those	policies	and	procedures	that:

•	Pertain	to	the	maintenance	of	records	that	in	reasonable	detail	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	the	company;

•	Provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with	U.S.	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the company	are	being	made	only	in	accordance	with	authorizations	of	management	and	directors	of	the	company;	and

•	Provide	reasonable	assurance	regarding	prevention	or	timely	detection	of	unauthorized	acquisition,	use	or	disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	the	company's	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of	effectiveness	to	future	periods	are	subject	to	the	risk	that controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the	policies	or	procedures	may	deteriorate.

The	company's	management	assessed	the	effectiveness	of	the	company's	internal	control	over	financial	reporting	as	of	December	31,	2007.	In	making	this	assessment,	the	company's	management	used	the	criteria	set	forth	by	the Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO)	in	Internal	Control-Integrated	Framework.

Based	on	that	assessment,	management	has	concluded	that,	as	of	December	31,	2007,	the	company's	internal	control	over	financial	reporting	is	effective	based	on	those	criteria.

The	company's	independent	registered	public	accounting	firm	has	audited	the	effectiveness	of	the	company's	internal	control	over	financial	reporting	as	of	December	31,	2007,	as	stated	in	their	report	which	appears	in	Item	8	of	this Annual	Report	on	Form	10-K.

# Financial	Statements	and	Supplementary	Data

| ITEM	8. | Financial	Statements	and	Supplementary	Data |  |
| :--- | :--- | :--- |
| Zimmer\tHoldings,\tInc. |  |  |
| Index\tto\tConsolidated\tFinancial\tStatements | Index\tto\tConsolidated\tFinancial\tStatements | Page |
| Financial\tStatements: |  |  |
| Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm | Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm | 38 |
| Consolidated\tStatements\tof\tEarnings\tfor\tthe\tYears\tEnded\tDecember\t31,\t2007,\t2006\tand\t2005 | Consolidated\tStatements\tof\tEarnings\tfor\tthe\tYears\tEnded\tDecember\t31,\t2007,\t2006\tand\t2005 | 39 |
| Consolidated\tBalance\tSheets\tas\tof\tDecember\t31,\t2007\tand\t2006 | Consolidated\tBalance\tSheets\tas\tof\tDecember\t31,\t2007\tand\t2006 | 40 |
| Consolidated\tStatements\tof\tStockholders'\tEquity\tfor\tthe\tYears\tEnded\tDecember\t31,\t2007,\t2006\tand\t2005 | Consolidated\tStatements\tof\tStockholders'\tEquity\tfor\tthe\tYears\tEnded\tDecember\t31,\t2007,\t2006\tand\t2005 | 41 |
| Consolidated\tStatements\tof\tCash\tFlows\tfor\tthe\tYears\tEnded\tDecember\t31,\t2007,\t2006\tand\t2005 | Consolidated\tStatements\tof\tCash\tFlows\tfor\tthe\tYears\tEnded\tDecember\t31,\t2007,\t2006\tand\t2005 | 42 |
| Consolidated\tStatements\tof\tComprehensive\tIncome\tfor\tthe\tYears\tEnded\tDecember\t31,\t2007,\t2006\tand\t2005 | Consolidated\tStatements\tof\tComprehensive\tIncome\tfor\tthe\tYears\tEnded\tDecember\t31,\t2007,\t2006\tand\t2005 | 43 |
| Notes\tto\tConsolidated\tFinancial\tStatements | Notes\tto\tConsolidated\tFinancial\tStatements | 44 |

# Report	of	Independent	Registered	Public	Accounting	Firm

To	the	Stockholders	and	Board	of	Directors	of	Zimmer	Holdings,	Inc.:

In	our	opinion,	the	consolidated	financial	statements	listed	in	the	index	appearing	under	Item	15(a)(1)	present	fairly,	in	all	material	respects,	the	financial	position	of	Zimmer	Holdings,	Inc,	and	its	subsidiaries	at	December	31,	2007 and	2006,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2007	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	of	America.	In	addition,	in our	opinion,	the	financial	statement	schedule	listed	in	the	index	appearing	under	Item	15(a)(2)	presents	fairly,	in	all	material	respects,	the	information	set	forth	therein	when	read	in	conjunction	with	the	related	consolidated	financial statements.	Also	in	our	opinion,	the	Company	maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	December	31,	2007,	based	on	criteria	established	in	Internal	Control	–	Integrated	Framework	issued by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO).	The	Company's	management	is	responsible	for	these	financial	statements	and	financial	statement	schedule,	for	maintaining	effective	internal	control over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control	over	financial	reporting,	included	in	the	accompanying	Management's	Report	on	Internal	Control	Over	Financial	Reporting.	Our	responsibility	is	to express	opinions	on	these	financial	statements,	on	the	financial	statement	schedule,	and	on	the	Company's	internal	control	over	financial	reporting	based	on	our	integrated	audits.	We	conducted	our	audits	in	accordance	with	the	standards	of the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we	plan	and	perform	the	audits	to	obtain	reasonable	assurance	about	whether	the	financial	statements	are	free	of	material	misstatement	and whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our	audits	of	the	financial	statements	included	examining,	on	a	test	basis,	evidence	supporting	the	amounts	and	disclosures	in	the	financial statements,	assessing	the	accounting	principles	used	and	significant	estimates	made	by	management,	and	evaluating	the	overall	financial	statement	presentation.	Our	audit	of	internal	control	over	financial	reporting	included	obtaining	an understanding	of	internal	control	over	financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	and	testing	and	evaluating	the	design	and	operating	effectiveness	of	internal	control	based	on	the	assessed	risk.	Our	audits	also included	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinions.

As	discussed	in	Note	11	to	the	consolidated	financial	statements,	the	Company	changed	the	manner	in	which	it	accounts	for	uncertain	tax	positions	in	2007.	As	discussed	in	Notes	3	and	10,	respectively,	to	the	consolidated	financial statements,	the	Company	changed	the	manner	in	which	it	accounts	for	share-based	compensation	in	2006	and	defined	benefit	pension	and	other	postretirement	plans	effective	December	31,	2006.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	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.	A	company's	internal	control	over	financial	reporting	includes	those	policies	and	procedures	that	(i)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	the	company;	(ii)	provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally	accepted accounting	principles,	and	that	receipts	and	expenditures	of	the	company	are	being	made	only	in	accordance	with	authorizations	of	management	and	directors	of	the	company;	and	(iii)	provide	reasonable	assurance	regarding	prevention	or timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of	effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the	policies	or	procedures	may	deteriorate.

# PricewaterhouseCoopers	LLP

# Chicago,	Illinois

# Consolidated	Statements	of	Earnings

| For	the	Years	Ended	December	31, | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Net\tSales | $3,897.5 | $3,495.4 | $3,286.1 |
| Cost\tof\tproducts\tsold | 875.9 | 780.1 | 739.4 |
| Gross\tProfit | \t3,021.6 | \t2,715.3 | \t2,546.7 |
| Research\tand\tdevelopment | 209.6 | 188.3 | 175.5 |
| Selling,\tgeneral\tand\tadministrative | \t1,489.7 | \t1,355.7 | \t1,259.6 |
| Settlement\t(Note\t15) | 169.5 | – | – |
| Acquisition,\tintegration\tand\tother | 25.2 | 6.1 | 56.6 |
| Operating\texpenses | \t1,894.0 | \t1,550.1 | \t1,491.7 |
| Operating\tProfit | \t1,127.6 | \t1,165.2 | \t1,055.0 |
| Interest\tincome\t(expense) | 4.0 | 3.8 | (14.3) |
| Earnings\tbefore\tincome\ttaxes\tand\tminority\tinterest | \t1,131.6 | \t1,169.0 | \t1,040.7 |
| Provision\tfor\tincome\ttaxes | 357.9 | 334.0 | 307.3 |
| Minority\tinterest | (0.5) | (0.5) | (0.9) |
| Net\tEarnings | $773.2 | $834.5 | $732.5 |
| Earnings\tPer\tCommon\tShare\t–\tBasic | $3.28 | $3.43 | $2.96 |
| Earnings\tPer\tCommon\tShare\t–\tDiluted | $3.26 | $3.40 | $2.93 |
| Weighted\tAverage\tCommon\tShares\tOutstanding |  |  |  |
| Basic | 235.5 | 243.0 | 247.1 |
| Diluted | 237.5 | 245.4 | 249.8 |

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

# Consolidated	Balance	Sheets

| December	31, | 2007 | 2006 |
| :--- | :--- | :--- |
| ASSETS |  |  |
| Current\tAssets: |  |  |
| Cash\tand\tequivalents | $\t463.9 | $265.7 |
| Restricted\tcash | 2.5 | 2.4 |
| Accounts\treceivable,\tless\tallowance\tfor\tdoubtful\taccounts | 674.3 | 625.5 |
| Inventories,\tnet | 727.8 | 638.3 |
| Prepaid\texpenses\tand\tother\tcurrent\tassets | 59.4 | 55.1 |
| Deferred\tincome\ttaxes | 154.8 | 159.2 |
| Total\tCurrent\tAssets | 2,082.7 | \t1,746.2 |
| Property,\tplant\tand\tequipment,\tnet | 971.9 | 807.1 |
| Goodwill | 2,621.4 | \t2,515.6 |
| Intangible\tassets,\tnet | 743.8 | 712.6 |
| Other\tassets | 213.9 | 192.9 |
| Total\tAssets | \t$6,633.7 | $5,974.4 |
| LIABILITIES\tAND\tSTOCKHOLDERS'\tEQUITY |  |  |
| Current\tLiabilities: |  |  |
| Accounts\tpayable | $\t174.1 | $158.0 |
| Income\ttaxes\tpayable | 85.1 | 106.5 |
| Other\tcurrent\tliabilities | 489.4 | 363.7 |
| Total\tCurrent\tLiabilities | 748.6 | 628.2 |
| Other\tlong-term\tliabilities | 328.4 | 323.4 |
| Long-term\tdebt | 104.3 | 99.6 |
| Total\tLiabilities | 1,181.3 | \t1,051.2 |
| Commitments\tand\tContingencies\t(Note\t15) |  |  |
| Minority\tInterest | 2.8 | 2.7 |
| Stockholders'\tEquity: |  |  |
| Common\tstock,\t$0.01\tpar\tvalue,\tone\tbillion\tshares\tauthorized, |  |  |
| 252.2\tmillion\t(248.9\tmillion\tin\t2006)\tissued | 2.5 | 2.5 |
| Paid-in\tcapital | 2,999.1 | \t2,743.2 |
| Retained\tearnings | 3,536.9 | \t2,768.5 |
| Accumulated\tother\tcomprehensive\tincome | 290.3 | 209.2 |
| Treasury\tstock,\t19.3\tmillion\tshares\t(12.1\tmillion\tshares\tin\t2006) | \t(1,379.2) | (802.9) |
| Total\tStockholders'\tEquity | 5,449.6 | \t4,920.5 |
| Total\tLiabilities\tand\tStockholders'\tEquity | \t$6,633.7 | $5,974.4 |

# Consolidated	Statements	of	Stockholders'	Equity

(in	millions)

|  |  |  |  |  | Accumulated |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  |  | Other |  |  | Total |
|  | Common\tShares | Common\tShares | Paid-in | Retained | Comprehensive | Treasury\tShares | Treasury\tShares | Stockholders' |
|  | Number | Amount | Capital | Earnings | Income | Number | Amount | Equity |
| Balance\tJanuary\t1,\t2005 | 245.5 | $2.5 | $2,485.2 | $1,201.5 | $253.3 | – | $– | $3,942.5 |
| Net\tearnings | – | – | – | 732.5 | – | – | – | 732.5 |
| Other\tcomprehensive\tloss | – | – | – | – | (104.0) | – | – | (104.0) |
| Stock\tcompensation\tplans,\tincluding\ttax\tbenefits | 2.3 | – | 111.0 | – | – | – | – | 111.0 |
| Share\trepurchases | – | – | – | – | – | (0.1) | (4.1) | (4.1) |
| Other | – | – | 4.9 | – | – | – | – | 4.9 |
| Balance\tDecember\t31,\t2005 | 247.8 | 2.5 | \t2,601.1 | 1,934.0 | 149.3 | (0.1) | (4.1) | 4,682.8 |
| Net\tearnings | – | – | – | 834.5 | – | – | – | 834.5 |
| Other\tcomprehensive\tincome | – | – | – | – | 95.3 | – | – | 95.3 |
| Impact\tof\tadoption\tof\tFAS\t158 | – | – | – | – | (35.4) | – | – | (35.4) |
| Stock\tcompensation\tplans,\tincluding\ttax\tbenefits | 1.1 | – | 137.9 | – | – | – | – | 137.9 |
| Share\trepurchases | – | – | – | – | – | (12.0) | (798.8) | (798.8) |
| Other | – | – | 4.2 | – | – | – | – | 4.2 |
| Balance\tDecember\t31,\t2006 | 248.9 | 2.5 | \t2,743.2 | 2,768.5 | 209.2 | (12.1) | (802.9) | 4,920.5 |
| Net\tearnings | – | – | – | 773.2 | – | – | – | 773.2 |
| Other\tcomprehensive\tincome | – | – | – | – | 81.1 | – | – | 81.1 |
| Impact\tof\tadoption\tof\tFIN\t48 | – | – | – | (4.8) | – | – | – | (4.8) |
| Stock\tcompensation\tplans,\tincluding\ttax\tbenefits | 3.3 | – | 254.3 | – | – | – | – | 254.3 |
| Share\trepurchases | – | – | – | – | – | (7.2) | (576.3) | (576.3) |
| Other | – | – | 1.6 | – | – | – | – | 1.6 |
| Balance\tDecember\t31,\t2007 | 252.2 | $2.5 | $2,999.1 | $3,536.9 | $290.3 | (19.3) | $(1,379.2) | $5,449.6 |

# Consolidated	Statements	of	Cash	Flows

| For	The	Years	Ended	December	31, | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Cash\tflows\tprovided\tby\t(used\tin)\toperating\tactivities: |  |  |  |
| Net\tearnings | $773.2 | $834.5 | $732.5 |
| Adjustments\tto\treconcile\tnet\tearnings\tto\tnet\tcash\tprovided |  |  |  |
| by\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 230.0 | 197.4 | 185.7 |
| Share-based\tcompensation | 70.1 | 76.0 | – |
| Inventory\tstep-up | 0.5 | – | 5.0 |
| Deferred\tincome\ttax\tprovision | 63.9 | 43.8 | 53.8 |
| Income\ttax\tbenefit\tfrom\tstock\toption\texercises | 40.8 | 11.6 | 34.3 |
| Excess\tincome\ttax\tbenefit\tfrom\tstock\toption\texercises | (27.0) | (8.0) | – |
| Changes\tin\toperating\tassets\tand\tliabilities,\tnet\tof |  |  |  |
| acquired\tassets\tand\tliabilities |  |  |  |
| Income\ttaxes\tpayable | 6.1 | 24.9 | 31.2 |
| Receivables | (12.5) | (76.9) | (35.3) |
| Inventories | (58.0) | (39.2) | (79.2) |
| Accounts\tpayable\tand\taccrued\tliabilities | 61.9 | (29.9) | (40.1) |
| Other\tassets\tand\tliabilities | (64.6) | 6.5 | (9.7) |
| Net\tcash\tprovided\tby\toperating\tactivities | \t1,084.4 | \t1,040.7 | 878.2 |
| Cash\tflows\tprovided\tby\t(used\tin)\tinvesting\tactivities: |  |  |  |
| Additions\tto\tinstruments | (138.5) | (126.2) | \t(150.0) |
| Additions\tto\tother\tproperty,\tplant\tand\tequipment | (192.7) | (142.1) | \t(105.3) |
| Proceeds\tfrom\tsale\tof\tproperty,\tplant\tand\tequipment | – | 16.2 | – |
| Acquisitions,\tnet\tof\tacquired\tcash | (160.3) | (34.9) | (55.8) |
| Net\tcash\tused\tin\tinvesting\tactivities | (491.5) | (287.0) | \t(311.1) |
| Cash\tflows\tprovided\tby\t(used\tin)\tfinancing\tactivities: |  |  |  |
| Net\tproceeds\t(payments)\ton\tlines\tof\tcredit | – | 18.8 | (5.3) |
| Payments\ton\tterm\tloans | – | – | \t(550.0) |
| Proceeds\tfrom\temployee\tstock\tcompensation\tplans | 149.8 | 41.3 | 76.7 |
| Excess\tincome\ttax\tbenefit\tfrom\tstock\toption\texercises | 27.0 | 8.0 | – |
| Debt\tissuance\tcosts | – | – | (1.9) |
| Repurchase\tof\tcommon\tstock | (576.3) | (798.8) | (4.1) |
| Net\tcash\tused\tin\tfinancing\tactivities | (399.5) | (730.7) | \t(484.6) |
| Effect\tof\texchange\trates\ton\tcash\tand\tequivalents | 4.8 | 9.5 | (3.9) |
| Increase\tin\tcash\tand\tequivalents | 198.2 | 32.5 | 78.6 |
| Cash\tand\tequivalents,\tbeginning\tof\tyear | 265.7 | 233.2 | 154.6 |
| Cash\tand\tequivalents,\tend\tof\tyear | $463.9 | $265.7 | $233.2 |

# Consolidated	Statements	of	Comprehensive	Income

| For	The	Years	Ended	December	31, | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Net\tEarnings | $773.2 | $834.5 | \t$\t732.5 |
| Other\tComprehensive\tIncome\t(Loss): |  |  |  |
| Foreign\tcurrency\tcumulative\ttranslation\tadjustments | \t101.1 | \t143.8 | (201.3) |
| Unrealized\tforeign\tcurrency\thedge\tgains/(losses),\tnet\tof\ttax\teffects\tof |  |  |  |
| $11.5\tin\t2007,\t$7.6\tin\t2006\tand\t$(17.8)\tin\t2005 | \t(49.8) | \t(56.7) | 71.2 |
| Reclassification\tadjustments\ton\tforeign\tcurrency\thedges,\tnet\tof\ttax\teffects\tof |  |  |  |
| $(1.3)\tin\t2007,\t$(1.8)\tin\t2006\tand\t$(12.7)\tin\t2005 | 27.0 | 8.7 | 27.6 |
| $0.9\tin\t2006\tand\t$0.9\tin\t2005 | (1.4) | (1.4) | (1.5) |
| Prior\tservice\tcost\tand\tunrecognized\t(gain)/loss\tin\tactuarial\tassumptions, |  |  |  |
| net\tof\ttax\teffects\tof\t$(0.4)\tin\t2007 | 4.2 | – | – |
|  | – | 0.9 | – |
| Other\tcomprehensive\tincome\t(loss) | 81.1 | 95.3 | (104.0) |
| Comprehensive\tIncome | $854.3 | $929.8 | \t$\t628.5 |

# Notes	to	Consolidated	Financial	Statements

# 1. BUSINESS

We	design,	develop,	manufacture	and	market	reconstructive	orthopaedic	implants,	including	joint	and	dental,	spinal	implants,	trauma	products	and	related	orthopaedic	surgical	products.	We	also	provide	other	healthcare	related services.	Joint	reconstructive	implants	restore	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.	Our	related	orthopaedic	surgical	products	include	surgical	supplies	and	instruments	designed	to	aid	in	orthopaedic	surgical	procedures	and	post-operation rehabilitation.	We	have	operations	in	more	than	25	countries	and	market	our	products	in	more	than	100	countries.	We	operate	in	a	single	industry	but	have	three	reportable	geographic	segments,	the	Americas,	Europe	and	Asia	Pacific.

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

# 2. SIGNIFICANT	ACCOUNTING	POLICIES

Basis	of	Presentation	–	The	consolidated	financial	statements	include	the	accounts	of	Zimmer	Holdings	and	its	subsidiaries	in	which	it	holds	a	controlling	equity	position.	Investments	in	companies	in	which	we	exercise	significant influence	over	the	operating	and	financial	affairs,	but	do	not	control,	are	accounted	for	under	the	equity	method.	Under	the	equity	method,	we	record	the	investment	at	cost	and	adjust	the	carrying	amount	of	the	investment	by	our proportionate	share	of	the	investee's	net	earnings	or	losses.	All	significant	intercompany	accounts	and	transactions	are	eliminated.	Certain	amounts	in	the	2006	consolidated	financial	statements	have	been	reclassified	to	conform	to	the	2007 presentation.

Use	of	Estimates	–	The	consolidated	financial	statements	are	prepared	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	and	include	amounts	that	are	based	on	management's	best	estimates	and judgments.	Actual	results	could	differ	from	those	estimates.

Foreign	Currency	Translation	–	The	financial	statements	of	our	foreign	subsidiaries	are	translated	into	U.S.	dollars	using	period-end	exchange	rates	for	assets	and	liabilities	and	average	exchange	rates	for	operating	results. Unrealized	translation	gains	and	losses	are	included	in	accumulated	other	comprehensive	income	in	stockholders'	equity.	When	a	transaction	is	denominated	in	a	currency	other	than	the	subsidiary's	functional	currency,	we	recognize	a transaction	gain	or	loss	when	the	transaction	is	settled.	Foreign	currency	transaction	gains	and	losses	included	in	net	earnings	for	the	years	ended	December	31,	2007,	2006	and	2005	were	not	significant.

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.	Revenue	is	recognized	on sales	to	stocking	distributors,	healthcare	dealers,	dental	practices	and	dental	laboratories,	which	account	for	approximately	20	percent	of	our	net	sales,	when	title	to	product	passes	to	them,	generally	upon	shipment.	Product	is	generally	sold to	distributors	at	fixed	prices	for	specified	periods.	A	distributor	may	return	product	in	the	event	that	we	terminate	the	relationship.	Under	those	circumstances,	we	record	an	estimated	sales	return	in	the	period	in	which	constructive	notice	of termination	is	given	to	a	distributor.	Product	returns	were	not	significant	for	the	years	ended	December	31,	2007,	2006	and	2005.

The	reserves	for	doubtful	accounts	were	$21.7	million	and	$20.4	million	as	of	December	31,	2007	and	2006,	respectively.

Shipping	and	Handling	–	Amounts	billed	to	customers	for	shipping	and	handling	of	products	are	reflected	in	net	sales,	and	are	not	significant.	Expenses	incurred	related	to	shipping	and	handling	of	products	are	reflected	in	selling, general	and	administrative	and	were	$104.1	million,	$95.5	million	and	$91.6	million	for	the	years	ended	December	31,	2007,	2006	and	2005,	respectively.

Acquisition,	Integration	and	Other	–	We	recognize	incremental	expenses	resulting	directly	from	our	business	combinations	and	significant	nonrecurring	items	as	"Acquisition,	integration	and	other"	expenses.	Acquisition,	integration and	other	expenses	for	the	years	ended

# Notes	to	Consolidated	Financial	Statements	(Continued)

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| (Gain)/loss\ton\tdisposition\tor\timpairment\tof\tacquired\tassets\tand\tobligations | $(1.2) | $(19.2) | $3.2 |
| Consulting\tand\tprofessional\tfees | 1.0 | 8.8 | 5.6 |
| Employee\tseverance\tand\tretention | 1.6 | 3.3 | 13.3 |
| Information\ttechnology\tintegration | 2.6 | 3.0 | 6.9 |
| In-process\tresearch\t&amp;\tdevelopment | 6.5 | 2.9 | – |
| Integration\tpersonnel | – | 2.5 | 3.1 |
| Facility\tand\temployee\trelocation | – | 1.0 | 6.2 |
| Distributor\tacquisitions | 4.1 | – | – |
| Sales\tagent\tand\tlease\tcontract\tterminations | 5.4 | 0.2 | 12.7 |
| Other | 5.2 | 3.6 | 5.6 |
| Acquisition,\tintegration\tand\tother | $25.2 | $6.1 | $56.6 |

In-process	research	and	development	charges	for	2007	are	related	to	the	acquisitions	of	Endius	and	ORTHOsoft.	Included	in	the	gain/loss	on	disposition	or	impairment	of	acquired	assets	and	obligations	for	2006	is	the	sale	of	the former	Centerpulse	Austin	land	and	facilities	for	a	gain	of	$5.1	million	and	the	favorable	settlement	of	two	pre-acquisition	contingent	liabilities.	These	gains	were	offset	by	a	$13.4	million	impairment	charge	for	certain	Centerpulse tradename	and	trademark	intangibles	based	principally	in	our	Europe	operating	segment.

Cash	and	Equivalents	–	We	consider	all	highly	liquid	investments	with	an	original	maturity	of	three	months	or	less	to	be	cash	equivalents.	The	carrying	amounts	reported	in	the	balance	sheet	for	cash	and	equivalents	are	valued	at cost,	which	approximates	their	fair	value.	Restricted	cash	is	primarily	composed	of	cash	held	in	escrow	related	to	certain	insurance	coverage.

Inventories	–	Inventories,	net	of	allowances	for	obsolete	and	slow-moving	goods,	are	stated	at	the	lower	of	cost	or	market,	with	cost	determined	on	a	first-in	first-out	basis.

Property,	Plant	and	Equipment	–	Property,	plant	and	equipment	is	carried	at	cost	less	accumulated	depreciation.	Depreciation	is	computed	using	the	straight-line	method	based	on	estimated	useful	lives	of	ten	to	forty	years	for buildings	and	improvements,	three	to	eight	years	for	machinery	and	equipment	and	generally	five	years	for	instruments.	Maintenance	and	repairs	are	expensed	as	incurred.	In	accordance	with	Statement	of	Financial	Accounting	Standards ("SFAS")	No.	144,	"Accounting	for	the	Impairment	or	Disposal	of	Long-Lived	Assets,"	we	review	property,	plant	and	equipment	for	impairment	whenever	events	or	changes	in	circumstances	indicate	that	the	carrying	value	of	an	asset	may not	be	recoverable.	An	impairment	loss	would	be	recognized	when	estimated	future	undiscounted	cash	flows	relating	to	the	asset	are	less	than	its	carrying	amount.	An	impairment	loss	is	measured	as	the	amount	by	which	the	carrying amount	of	an	asset	exceeds	its	fair	value.

Software	Costs	–	We	capitalize	certain	computer	software	and	software	development	costs	incurred	in	connection	with	developing	or	obtaining	computer	software	for	internal	use	when	both	the	preliminary	project	stage	is	completed and	it	is	probable	that	the	software	will	be	used	as	intended.	Capitalized	software	costs	generally	include	external	direct	costs	of	materials	and	services	utilized	in	developing	or	obtaining	computer	software	and	compensation	and	related benefits	for	employees	who	are	directly	associated	with	the	software	project.	Capitalized	software	costs	are	included	in	property,	plant	and	equipment	on	our	balance	sheet	and	amortized	on	a	straight-line	basis	when	placed	into	service	over the	estimated	useful	lives	of	the	software,	which	approximate	three	to	seven	years.

Instruments	–	Instruments	are	hand	held	devices	used	by	orthopaedic	surgeons	during	total	joint	replacement	and	other	surgical	procedures.	Instruments	are	recognized	as	long-lived	assets	and	are	included	in	property,	plant	and equipment.	Undeployed	instruments	are	carried	at	cost,	net	of	allowances	for	excess	and	obsolete	instruments.	Instruments	in	the	field	are	carried	at	cost	less	accumulated	depreciation.	Depreciation	is	computed	using	the	straight-line	method based	on	average	estimated	useful	lives,	determined	principally	in	reference	to	associated	product	life	cycles,	primarily	five	years.	We	review	instruments	for	impairment	in	accordance	with	SFAS	No.	144.	Depreciation	of	instruments	is recognized	as	selling,	general	and	administrative	expense.

Goodwill	–	We	account	for	goodwill	in	accordance	with	SFAS	No.	142,	"Goodwill	and	Other	Intangible	Assets".	Goodwill	is	not	amortized	but	is	subject	to	annual	impairment	tests.	Goodwill	has	been	assigned	to	reporting	units, which	are	consistent	with	our	operating	segments.	We	perform	annual	impairment	tests	by	comparing	each	reporting	unit's	fair	value	to	its	carrying	amount	to	determine	if	there	is	potential	impairment.	We	perform	this	test	in	the	fourth quarter	of	the	year.	If	the	fair	value	of	the	reporting	unit	is	less	than	its	carrying	value,	an	impairment	loss	is	recorded	to	the	extent	that	the	implied	fair	value	of	the	reporting	unit	goodwill	is	less	than	the	carrying	value	of	the	reporting	unit goodwill.	The	fair	value	of	the	reporting	unit	and	the	implied	fair	value	of	goodwill	are	determined	based	upon	market	multiples.

Intangible	Assets	–	We	account	for	intangible	assets	in	accordance	with	SFAS	No.	142.	Intangible	assets	are	initially	measured	at	their	fair	value.	We	have	determined	the	fair	value	of	our	intangible	assets	either	by	the	fair	value	of the	consideration	exchanged	for	the	intangible	asset,	or	the	estimated	after-tax	discounted	cash	flows	expected	to	be	generated	from	the	intangible	asset.	Intangible	assets	with	an	indefinite	life,	including	certain	trademarks	and	trade	names, are	not	amortized.	The	useful	lives	of	indefinite	life	intangible	assets	are	assessed	annually	to	determine	whether	events	and	circumstances	continue	to	support	an	indefinite	life.	Intangible	assets	with	a	finite	life,	including	core	and	developed technology,	certain	trademarks	and	trade	names,

customer	related	intangibles	and	patents	and	licenses	are	amortized	on	a	straight-line	basis	over	their	estimated	useful	life,	ranging	from	three	to	forty	years.	Intangible	assets	with	an	indefinite	life	are	tested	for	impairment	annually,	or whenever	events	or	circumstances	indicate	that	the	carrying	amount	may	not	be	recoverable.	An	impairment	loss	is	recognized	if	the	carrying	amount	exceeds	the	estimated	fair	value	of	the	asset.	The	amount	of	the	impairment	loss	to	be recorded	would	be	determined	based	upon	the	excess	of	the	asset's	carrying	value	over	its	fair	value.	Intangible	assets	with	a	finite	life	are	tested	for	impairment	whenever	events	or	circumstances	indicate	that	the	carrying	amount	may	not	be recoverable.

The	useful	lives	of	intangible	assets	range	from	3	to	40	years.	In	determining	the	useful	lives	of	intangible	assets,	we	consider	the	expected	use	of	the	assets	and	the	effects	of	obsolescence,	demand,	competition,	anticipated technological	advances,	changes	in	surgical	techniques,	market	influences	and	other	economic	factors.	For	technology	based	intangible	assets,	we	consider	the	expected	life	cycles	of	products,	absent	unforeseen	technological	advances, which	incorporate	the	corresponding	technology.	Trademarks	and	trade	names	that	do	not	have	a	wasting	characteristic	(i.e.,	there	are	no	legal,	regulatory,	contractual,	competitive,	economic	or	other	factors	which	limit	the	useful	life)	are assigned	an	indefinite	life.	Trademarks	and	trade	names	that	are	related	to	products	expected	to	be	phased	out	are	assigned	lives	consistent	with	the	period	in	which	the	products	bearing	each	brand	are	expected	to	be	sold.	For	customer relationship	intangible	assets,	we	assign	useful	lives	based	upon	historical	levels	of	customer	attrition.

Research	and	Development	–	We	expense	all	research	and	development	costs	as	incurred.	Research	and	development	costs	include	salaries,	prototypes,	depreciation	of	equipment	used	in	research	and	development,	consultant	fees	and amounts	paid	to	collaborative	partners.

Income	Taxes	–	We	account	for	income	taxes	in	accordance	with	SFAS	No.	109,	"Accounting	for	Income	Taxes"	and	related	interperations,	including	FIN	48.	Deferred	tax	assets	and	liabilities	are	determined	based	on	differences between	financial	reporting	and	tax	bases	of	assets	and	liabilities	and	are	measured	using	the	enacted	tax	rates	in	effect	for	the	years	in	which	the	differences	are	expected	to	reverse.	Federal	income	taxes	are	provided	on	the	portion	of	the income	of	foreign	subsidiaries	that	is	expected	to	be	remitted	to	the	U.S.

Derivative	Financial	Instruments	–	We	account	for	all	derivative	financial	instruments	in	accordance	with	SFAS	No.	133,	"Accounting	for	Derivative	Instruments	and	Hedging	Activities,"	as	amended	by	SFAS	No.	138,	"Accounting for	Certain	Derivative	Instruments	and	Certain	Hedging	Activities	(an	amendment	of	FASB	Statement	No.	133)"	and	SFAS	No.	149,	"Amendment	of	Statement	133	on	Derivative	Instruments	and	Hedging	Activities".	SFAS	No.	133 requires	that	all	derivative	instruments	be	reported	as	assets	or	liabilities	on	the	balance	sheet	and	measured	at	fair	value.	We	maintain	written	policies	and	procedures	that	permit,	under	appropriate	circumstances	and	subject	to	proper authorization,	the	use	of	derivative	financial	instruments	solely	for	hedging	purposes.	The	use	of	derivative	financial	instruments	for	trading	or	speculative	purposes	is	prohibited	by	our	policy.	We	are	exposed	to	market	risk	due	to	changes in	currency	exchange	rates.	As	a	result,	we	utilize	foreign	exchange	forward	contracts	to	offset	the	effect	of	exchange	rate	fluctuations	on	anticipated	foreign	currency	transactions,	generally	intercompany	sales	and	purchases	expected	to occur	within	the	next	twelve	to	thirty	months.	Derivative	instruments	that	qualify	as	cash	flow	hedges	are	designated	as	such	from	inception.	We	maintain	formal	documentation	regarding	our	objectives,	the	nature	of	the	risk	being	hedged, identification	of	the	instrument,	the	hedged	transaction,	the	hedging	relationship	and	how	effectiveness	of	the	hedging	instrument	will	be	assessed.	Our	policy	requires	that	critical	terms	of	a	hedging	instrument	are	effectively	the	same	as	a hedged	forecasted	transaction.	On	this	basis,	with	respect	to	a	cash	flow	hedge,	changes	in	cash	flows	attributable	to	the	hedged	transaction	are	generally	expected	to	be	completely	offset	by	the	cash	flows	attributable	to	hedge	instruments. We,	therefore,	perform	quarterly	assessments	of	hedge	effectiveness	by	verifying	and	documenting	those	critical	terms	of	the	hedge	instrument	and	that	forecasted	transactions	have	not	changed.	We	also	assess	on	a	quarterly	basis	whether there	have	been	adverse	developments	regarding	the	risk	of	a	counterparty	default.	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	net	earnings.	The	ineffective	portion	of	a	derivative's	change	in	fair	value,	if	any,	is	reported	in	cost	of	products	sold	immediately.	The	net	amount recognized	in	earnings	during	the	years	ended	December	31,	2007,	2006	and	2005,	due	to	ineffectiveness	and	amounts	excluded	from	the	assessment	of	hedge	effectiveness,	was	not	significant.

For	contracts	outstanding	at	December	31,	2007,	we	have	an	obligation	to	purchase	U.S.	Dollars	and	sell	Euros,	Japanese	Yen,	British	Pounds,	Canadian	Dollars,	Australian	Dollars	and	Korean	Won	and	purchase	Swiss	Francs	and sell	U.S.	Dollars	at	set	maturity	dates	ranging	from	January	2008	through	May	2010.	The	notional	amounts	of	outstanding	forward	contracts	entered	into	with	third	parties	to	purchase	U.S.	Dollars	at	December	31,	2007	were $1,244.6	million.	The	notional	amounts	of	outstanding	forward	contracts	entered	into	with	third	parties	to	purchase	Swiss	Francs	at	December	31,	2007,	were	$138.4	million.	The	fair	value	of	outstanding	derivative	instruments	recorded	on the	balance	sheet	at	December	31,	2007,	together	with	settled	derivatives	where	the	hedged	item	has	not	yet	affected	earnings,	was	a	net	unrealized	loss	of	$55.8	million,	or	$45.4	million	net	of	taxes,	which	is	deferred	in	other comprehensive	income,	of

which,	$44.9	million,	or	$38.2	million,	net	of	taxes,	is	expected	to	be	reclassified	to	earnings	over	the	next	twelve	months.

We	also	enter	into	foreign	currency	forward	exchange	contracts	with	terms	of	one	month	to	manage	currency	exposures	for	assets	and	liabilities	denominated	in	a	currency	other	than	an	entity's	functional	currency.	As	a	result,	any foreign	currency	translation	gains/losses	recognized	in	earnings	under	SFAS	No.	52,	"Foreign	Currency	Translation"	are	generally	offset	with	gains/losses	on	the	foreign	currency	forward	exchange	contracts	in	the	same	reporting	period.

Other	Comprehensive	Income	–	Other	comprehensive	income	refers	to	revenues,	expenses,	gains	and	losses	that	under	generally	accepted	accounting	principles	are	included	in	comprehensive	income	but	are	excluded	from	net earnings	as	these	amounts	are	recorded	directly	as	an	adjustment	to	stockholders'	equity.	Other	comprehensive	income	is	comprised	of	foreign	currency	translation	adjustments,	unrealized	foreign	currency	hedge	gains	and	losses,	unrealized gains	and	losses	on	available-for-sale	securities	and	amortization	of	prior	service	costs	and	unrecognized	gains	and	losses	in	actuarial	assumptions.

The	components	of	accumulated	other	comprehensive	income	are	as	follows	(in	millions):

|  | Balance	at<br>December	31,<br>2006 | Other<br>Comprehensive<br>Income	(Loss) | Balance	at<br>December	31,<br>2007 |
| :--- | :--- | :--- | :--- |
| Foreign\tcurrency\ttranslation | $267.7 | $101.1 | $368.8 |
| Foreign\tcurrency\thedges | (22.6) | (22.8) | (45.4) |
| Unrealized\tgains\t(losses)\ton\tsecurities | (0.5) | (1.4) | (1.9) |
| Unrecognized\tprior\tservice\tcost\tand\tunrecognized\t(gain)\t/\tloss\tin\tactuarial\tassumptions | (35.4) | 4.2 | (31.2) |
| Accumulated\tother\tcomprehensive\tincome | $209.2 | $81.1 | $290.3 |

Treasury	Stock	–	We	account	for	repurchases	of	common	stock	under	the	cost	method	and	present	treasury	stock	as	a	reduction	of	shareholders	equity.	We	may	reissue	common	stock	held	in	treasury	only	for	limited	purposes.

Accounting	Pronouncements	–	In	June	2006,	the	FASB	issued	Interpretation	No.	48,	"Accounting	for	Uncertainty	in	Income	Taxes,	an	interpretation	of	FAS	109,	Accounting	for	Income	Taxes"	(FIN	48),	to	create	a	single	model	to address	accounting	for	uncertainty	in	tax	positions.	See	our	income	tax	disclosures	in	Note	11	for	more	information	regarding	the	adoption	of	FIN	48.

In	September	2006,	the	FASB	issued	SFAS	No.	158,	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans	–	an	amendment	of	FASB	Statements	No.	87,	88,	106	and	132(R)."	This	Statement	requires recognition	of	the	funded	status	of	a	benefit	plan	in	the	statement	of	financial	position.	SFAS	No.	158	also	requires	recognition	in	other	comprehensive	income	of	certain	gains	and	losses	that	arise	during	the	period	but	are	deferred	under pension	accounting	rules,	as	well	as	modifies	the	timing	of	reporting	and	adds	certain	disclosures.	The	Statement	provides	recognition	and	disclosure	elements	to	be	effective	as	of	the	end	of	the	fiscal	year	after	December	15,	2006	and measurement	elements	to	be	effective	for	fiscal	years	ending	after	December	15,	2008.	We	adopted	SFAS	No.	158	on	December	31,	2006.	See	our	pension	and	other	postretirement	disclosures	in	Note	10.

In	December	2004,	the	FASB	issued	SFAS	No.	123(R),	"Share-Based	Payment",	which	is	a	revision	to	SFAS	No.	123.	SFAS	123(R)	requires	all	share-based	payments	to	employees,	including	stock	options,	to	be	expensed	based	on their	fair	values.	We	adopted	SFAS	123(R)	on	January	1,	2006	using	the	modified	prospective	method	and	did	not	restate	prior	periods.

In	September	2006,	the	FASB	issued	SFAS	No.	157,	"Fair	Value	Measurements",	which	defines	fair	value,	establishes	a	framework	for	measuring	fair	value	in	generally	accepted	accounting	principles	and	expands	disclosures	about fair	value	measurements.	This	Statement	does	not	require	any	new	fair	value	measurements,	but	provides	guidance	on	how	to	measure	fair	value	by	providing	a	fair	value	hierarchy	used	to	classify	the	source	of	the	information.

SFAS	No.	157	is	effective	for	financial	statements	issued	for	fiscal	years	beginning	after	November	15,	2007	and	interim	periods	within	those	fiscal	years.	In	February	2008,	the	FASB	issued	FASB	Staff	Position	(FSP)	No.	SFAS	157-2, which	delays	the	effective	date	of	certain	provisions	of	SFAS	No.	157	relating	to	non-financial	assets	and	liabilities	measured	at	fair	value	on	a	non-recurring	basis	until	fiscal	years	beginning	after	November	15,	2008.	The	adoption	of SFAS	No.	157	is	not	expected	to	have	a	material	impact	on	our	consolidated	financial	statements	or	results	of	operations.

In	February	2007,	the	FASB	issued	SFAS	No.	159,	"The	Fair	Value	Option	for	Financial	Assets	and	Financial	Liabilities	–	Including	an	amendment	of	FASB	Statement	No.	115"	(SFAS	No.	159).	SFAS	No.	159	creates	a	"fair	value option"	under	which	an	entity	may	elect	to	record	certain	financial	assets	or	liabilities	at	fair	value	upon	their	initial	recognition.	Subsequent	changes	in	fair	value	would	be	recognized	in	earnings	as	those	changes	occur.	The	election	of	the fair	value	option	would	be	made	on	a	contract-by-contract	basis	and	would	need	to	be	supported	by	concurrent	documentation	or	a	preexisting	documented	policy.	SFAS	No.	159	requires	an	entity	to	separately	disclose	the	fair

value	of	these	items	on	the	balance	sheet	or	in	the	footnotes	to	the	financial	statements	and	to	provide	information	that	would	allow	the	financial	statement	user	to	understand	the	impact	on	earnings	from	the	changes	in	the	fair	value. SFAS	No.	159	is	effective	for	fiscal	years	beginning	after	November	15,	2007.	We	do	not	expect	the	adoption	of	SFAS	No.	159	will	have	a	material	impact	on	our	financial	position	or	results	of	operations.

In	December	2007,	the	FASB	issued	SFAS	No.	141(R),	"Business	Combinations",	which	is	a	revision	of	SFAS	141.	SFAS	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	our	financial	statements	for	business	combinations	that	preceded	the effective	date.	For	deferred	tax	assets	and	income	tax	reserves	recorded	as	part	of	business	combinations,	these	assets	will	be	accounted	for	under	SFAS	109	and	FIN	48	after	the	effective	date	regardless	of	the	acquisition	date.	Therefore,	if a	remeasurement	of	those	assets	and	liabilities	is	warranted	after	the	effective	date	of	this	statement,	it	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	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.

# 3. SHARE-BASED	COMPENSATION

Our	share-based	payments	primarily	consist	of	stock	options,	restricted	stock,	restricted	stock	units	(RSUs),	performance	shares	and	an	employee	stock	purchase	plan.	We	did	not	grant	any	RSUs	or	performance	shares	until	2006. Prior	to	January	1,	2006,	we	accounted	for	share-based	payments	under	APB	Opinion	No.	25,	"Accounting	for	Stock	Issued	to	Employees,"	and	related	Interpretations	("APB	25").	Under	APB	25,	share-based	payment	expense	was	not significant	because	the	exercise	price	of	the	stock	options	generally	equaled	the	market	price	of	the	underlying	stock	on	the	measurement	date	of	the	stock	options	and	we	had	awarded	few	shares	of	restricted	stock	and	no	RSUs	or performance	shares.	No	share-based	payment	expense	was	reflected	in	net	income	for	the	employee	stock	purchase	plan	under	the	provisions	of	APB	25,	as	the	employee	purchase	price	discount	met	the	acceptable	thresholds	under Section	423	of	the	Internal	Revenue	Code.

We	have	elected	the	modified	prospective	method	for	adopting	SFAS	123(R).	Under	the	modified	prospective	method,	the	provisions	of	SFAS	123(R)	apply	to	all	share-based	payments	granted	or	modified	after	the	date	of	adoption. For	share-based	payments	granted	prior	to	the	date	of	the	adoption,	the	unrecognized	expense	related	to	the	unvested	portion	at	the	date	of	adoption	will	be	recognized	in	net	earnings	under	the	grant	date	fair	value	provisions	used	for	our pro	forma	disclosures	under	SFAS	123.	For	the	year	ended	December	31,	2007,	share-based	payment	expense	was	$70.1	million	or	$48.1	million	net	of	the	related	tax	benefits.	For	the	year	ended	December	31,	2006,	share-based	payment expense	was	$76.0	million	or	$54.5	million	net	of	the	related	tax	benefits.	Share-based	payment	expense	for	the	year	ended	December	31,	2005	under	APB	25	was	not	significant.	The	following	is	the	pro	forma	expense	disclosure	under SFAS	123	for	the	year	ended	December	31,	2005	(in	millions,	except	per	share	amounts):

|  | 2005 |
| :--- | :--- |
| Net\tearnings,\tas\treported | $732.5 |
| Deduct:\tTotal\tshare-based\tpayment\texpense\tdetermined\tunder\tSFAS\t123\tfor\tall\tawards,\tnet\tof\ttax | (46.1) |
| Pro\tforma\tnet\tearnings | $686.4 |
| Earnings\tper\tshare: |  |
| Basic\t–\tas\treported | $2.96 |
| Basic\t–\tpro\tforma | 2.78 |
| Diluted\t–\tas\treported | 2.93 |
| Diluted\t–\tpro\tforma | 2.75 |

Prior	to	adopting	SFAS	123(R),	we	classified	all	tax	benefits	of	deductions	resulting	from	the	exercise	of	non-qualified	stock	options	as	operating	cash	flows.	SFAS	123(R)	requires	the	cash	flows	resulting	from	excess	tax	benefits (i.e.,	tax	deductions	realized	for	stock	options	exercised	in	excess	of	the	tax	benefit	recognized	on	the	related	share-based	payment	expense)	to	be	classified	as	financing	cash	flows.

# Stock	Options

We	had	three	equity	compensation	plans	in	effect	at	December	31,	2007:	the	2006	Stock	Incentive	Plan	(the	"2006	Plan"),	the	TeamShare	Stock	Option	Plan	and	the	Stock	Plan	for	Non-Employee	Directors.	The	2006	Plan	replaced the	2001	Stock	Incentive	Plan	(the	"2001	Plan"),	which	by	its	terms	expired	in	August	2006.	Following	stockholder	approval	of	the	2006	Plan	in	May	2006,	no	further	awards	were	granted	under	the	2001	Plan.	However,	vested	and	unvested stock	options	previously	granted	under	the	2001	Plan	remained	outstanding

as	of	December	31,	2007.	We	have	reserved	the	maximum	number	of	shares	of	common	stock	available	for	award	under	the	terms	of	each	of	these	plans	and	have	registered	52.9	million	shares	of	common	stock.	The	2006	Plan	provides	for the	grant	of	nonqualified	stock	options	and	incentive	stock	options,	long-term	performance	awards	in	the	form	of	performance	shares	or	units,	restricted	stock,	restricted	stock	units	and	stock	appreciation	rights.	The	Compensation	and Management	Development	Committee	of	the	Board	of	Directors	determines	the	grant	date	for	annual	grants	under	our	equity	compensation	plans.	The	date	for	annual	grants	under	the	2006	Plan	to	our	executive	officers	is	expected	to	occur in	February	of	each	year	following	the	earnings	announcements	for	the	previous	quarter	and	full	year.	The	TeamShare	Stock	Option	Plan	provides	for	the	grant	of	non-qualified	stock	options	and,	in	certain	jurisdictions,	stock	appreciation rights,	while	the	Stock	Plan	for	Non-Employee	Directors	provides	for	awards	of	stock	options,	restricted	stock	and	restricted	stock	units	to	non-employee	directors.	It	has	been	our	practice	to	issue	shares	of	common	stock	upon	exercise	of stock	options	from	previously	unissued	shares.	The	total	number	of	awards	which	may	be	granted	in	a	given	year	and/or	over	the	life	of	the	plan	under	each	of	our	equity	compensation	plans	is	limited.	At	December	31,	2007,	an	aggregate	of 14.4	million	shares	were	available	for	future	grants	and	awards	under	these	plans.

Stock	options	granted	to	date	under	our	plans	generally	vest	over	four	years.	We	recognize	expense	related	to	stock	options	on	a	straight-line	basis	over	the	vesting	period	for	the	entire	award,	less	awards	expected	to	be	forfeited	using estimated	forfeiture	rates.	Stock	options	are	granted	with	an	exercise	price	equal	to	the	market	price	of	our	common	stock	on	the	date	of	grant,	except	in	limited	circumstances	where	local	law	may	dictate	otherwise.	In	the	past,	certain options	have	had	price	thresholds,	which	affect	exercisability.	All	such	price	thresholds	have	been	satisfied.	The	total	number	of	awards	which	may	be	granted	in	a	given	year	and/or	over	the	life	of	the	plan	under	each	of	our	stock	option plans	is	limited	to	control	dilution.

A	summary	of	stock	option	activity	for	the	year	ended	December	31,	2007	is	as	follows	(options	in	thousands):

|  | Stock	Options | Exercise	Price |
| :--- | :--- | :--- |
| Outstanding\tat\tDecember\t31,\t2006 | 14,184 | $59.75 |
| Options\tgranted | 3,641 | 81.92 |
| Options\texercised | (3,134) | 45.91 |
| Options\tcancelled | (584) | 75.22 |
| Outstanding\tat\tDecember\t31,\t2007 | 14,107 | $67.94 |

The	following	table	summarizes	information	about	stock	options	outstanding	at	December	31,	2007	(options	in	thousands):

|  |  | Weighted |  | Exercisable | Exercisable |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Range\tof\tExercise\tPrices | Options | Average\nRemaining\nContractual\tLife | Weighted\nAverage\nExercise\tPrice | Options | Weighted\nAverage\nExercise\tPrice |
| $19.50\t–\t$27.50 | 298 | 2.20 | $24.62 | 298 | $24.62 |
| $27.51\t–\t$37.50 | 1,317 | 3.21 | 31.04 | 1,317 | 31.04 |
| $39.50\t–\t$51.00 | 1,115 | 5.10 | 42.83 | 1,115 | 42.83 |
| $55.00\t–\t$70.50 | 3,298 | 6.96 | 68.71 | 1,890 | 69.64 |
| $71.00\t–\t$91.00 | 8,079 | 8.28 | 78.70 | 2,122 | 77.04 |
|  | 14,107 | 7.12 | $67.94 | 6,742 | $58.01 |

We	use	a	Black-Scholes	option-pricing	model	to	determine	the	fair	value	of	our	stock	options.	For	stock	options	granted	during	the	years	ended	December	31,	2007	and	2006,	expected	volatility	was	derived	from	the	implied	volatility of	our	traded	options	that	were	actively	traded	around	the	grant	date	of	the	stock	options	with	exercise	prices	similar	to	the	stock	options	and	maturities	of	over	one	year.	In	periods	prior	to	January	1,	2006,	expected	volatility	was	derived based	upon	historical	volatility	of	our	common	stock.	The	change	in	determining	the	expected	volatility	assumption	was	based	upon	our	traded	options	with	maturities	over	one	year	being	more	actively	traded	than	in	the	past	along	with	the guidance	provided	by	the	Securities	and	Exchange	Commission	in	Staff	Accounting	Bulletin	No.	107.	The	expected	term	of	the	stock	options	has	been	derived	from	historical	employee	exercise	behavior.	The	risk-free	interest	rate	is determined	using	the	implied	yield	currently	available	for	zero-coupon	U.S.	government	issues	with	a	remaining	term	equal	to	the	expected	life	of	the	options.	A	dividend	yield	of	zero	percent	has	been	used	as	we	have	not	paid	a	dividend since	becoming	a	public	company	in	2001.

The	weighted	average	fair	value	of	the	options	granted	in	the	years	ended	December	31,	2007,	2006	and	2005	were	determined	using	the	following	assumptions:

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Dividend\tYield | –% | –% | –% |
| Volatility | 23.8% | 25.7% | 30.2% |
| Risk-free\tinterest\trate | 4.4% | 4.5% | 4.1% |
| Expected\tlife\t(years) | 5.1 | 5.1 | 5.3 |

The	weighted	average	fair	value	for	options	granted	during	2007,	2006	and	2005	were	$22.60,	$22.32	and	$28.11,	respectively.	The	total	intrinsic	value	of	stock	options	exercised	during	the	years	ended	December	31,	2007,	2006	and 2005	were	$124.5	million,	$40.5	million	and	$109.2	million,	respectively.	For	the	years	ended	December	31,	2007	and	2006,	share-based	payment	expense	related	to	stock	options	was	$73.4	million	and	$66.3	million,	respectively,	or $50.4	million	and	$47.7	million	net	of	the	related	tax	benefits,	respectively.	For	the	year	ended	December	31,	2006,	the	impact	on	basic	and	diluted	EPS	related	to	share-based	payment	expense	on	stock	options	was	$0.19.	Since	prior	to adoption	of	SFAS	123(R)	the	exercise	price	of	stock	options	granted	generally	equaled	the	market	price	of	the	underlying	stock	on	the	measurement	date,	the	expense	related	to	stock	options	represents	the	impact	of	adopting	this	standard.

Summarized	information	about	outstanding	stock	options	as	of	December	31,	2007	that	are	already	vested	and	that	we	expect	to	vest,	as	well	as	stock	options	that	are	currently	exercisable,	is	as	follows:

|  | Options	Already<br>Vested	and	Expected<br>to	Vest* | Options<br>that	are<br>Exercisable |
| :--- | :--- | :--- |
| Number\tof\toutstanding\toptions\t(in\tthousands) | 13,484 | 6,742 |
| Weighted\taverage\tremaining\tcontractual\tlife | 7.1\tyears | 5.7\tyears |
| Weighted\taverage\texercise\tprice\tper\tshare | $67.50 | $58.01 |
| Intrinsic\tvalue\t(in\tmillions) | $85.3 | $83.4 |

# * Includes	effects	of	estimated	forfeitures

As	of	December	31,	2007,	there	was	$111.4	million	of	unrecognized	share-based	payment	expense	related	to	nonvested	stock	options	granted	under	our	plans.	That	expense	is	expected	to	be	recognized	over	a	weighted	average	period of	2.8	years.

# Performance	Shares	and	RSUs

We	granted	performance	shares	in	2006,	the	vesting	of	which	depends	on	our	achievement	of	objective	performance	targets	over	a	three	year	period	ended	December	31,	2008.	In	addition,	we	granted	performance-based	RSUs	in	July 2007,	the	vesting	of	which	depends	on	our	achievement	of	objective	performance	targets	over	an	18	month	period	ended	December	31,	2008.	To	the	extent	our	actual	performance	meets	or	exceeds	the	respective	performance	targets	and	the performance	shares	and/or	RSUs	are	earned,	they	will	generally	vest	at	the	end	of	the	performance	period	ending	December	31,	2008.	We	also	granted	RSUs	in	December	2007.	These	RSUs	are	not	tied	to	our	performance	and	will	vest ratably	on	the	first	and	second	anniversaries	of	the	date	of	grant,	provided	that	the	recipient	is	still	our	employee.	Each	of	these	awards	will	be	converted	into	one	share	of	our	common	stock	upon	vesting.

A	summary	of	nonvested	performance	share	and	RSU	activity	for	the	year	ended	December	31,	2007	is	as	follows	(Performance	shares	and	RSUs	in	thousands):

|  | Performance<br>Shares	and	RSUs | Grant	Date<br>Fair	Value |
| :--- | :--- | :--- |
| Outstanding\tat\tJanuary\t1,\t2007 | 905 | $67.86 |
| Granted | 348 | 72.78 |
| Forfeited | (106) | 67.86 |
| Outstanding\tat\tDecember\t31,\t2007 | 1,147 | $69.35 |

The	fair	value	of	the	awards	was	determined	based	upon	the	fair	market	value	of	our	common	stock	on	the	date	of	grant.	SFAS	123(R)	requires	us	to	estimate	the	number	of	performance	shares	and	RSUs	that	will	vest,	and	recognize share-based	payment	expense	on	a	straight	line	basis	over	the	requisite	service	period.	As	of	December	31,	2007,	we	estimate	that	approximately	418,000	performance	shares	and	RSUs	will	vest.	If	our	estimate	were	to	change	in	the	future, the	cumulative	effect	of	the	change	in	estimate	will	be	recorded	in	that	period.	Based	upon	the	number	of	performance	shares	and	RSUs	that	we	expect	to	vest,	the	unrecognized	share-based	payment	expense	as	of	December	31,	2007	was $20.4	million,	and	is	expected	to	be	recognized	over	a	period	of	1.8	years.	For	the	years	ended	December	31,	2007	and	2006,	pre-tax	expense	(income)	related	to	these	awards	was	$(3.3)	million	and	$9.7	million,	respectively,	or $(2.3)	million	and	$6.8	million	net	of	the	related	tax	benefits,	respectively.

We	have	made	acquisitions	that	took	place	during	the	years	2007	and	2006,	certain	of	which	are	described	below.	These	acquisitions	were	accounted	for	under	the	purchase	method	of	accounting	pursuant	to	SFAS	No.	141,	"Business Combinations"	(SFAS	No.	141).	Accordingly,	the	results	of	operations	of	the	acquired	companies	have	been	included	in	our	consolidated	results	of	operations	subsequent	to	the	transaction	dates,	and	the	respective	assets	and	liabilities	of	the acquired	companies	have	been	recorded	at	their	estimated	fair	values	in	our	consolidated	statement	of	financial	position	as	of	the	transaction	dates,	with	any	excess	purchase	price	being	allocated	to	goodwill.	Pro	forma	financial	information and	other	information	required	by	SFAS	No.	141	have	not	been	included	as	the	acquisitions	did	not	have	a	material	impact	upon	our	financial	position	or	results	of	operations.

# ORTHOsoft	Inc.

In	November	2007,	we	acquired	ORTHOsoft	Inc.	(ORTHOsoft),	a	leader	in	computer	navigation	for	orthopaedic	surgery,	in	a	cash	transaction	for	an	aggregate	value	of	approximately	$50	million.	We	recorded	$31.4	million	in

goodwill	in	connection	with	the	acquisition.	The	acquisition	of	ORTHOsoft	bolsters	our	SmartTools	strategic	initiative	to	bring	innovative	tools	to	the	marketplace	that	will	help	create	better	and	more	reproducible	outcomes	for	surgeons and	patients.

# Endius	Incorporated

In	April	2007,	we	acquired	Endius	Incorporated	(Endius),	a	privately	held	spinal	products	company	based	in	Massachusetts,	for	an	aggregate	value	of	approximately	$80	million	in	cash,	before	adjustments	for	debt	repayment	and other	items.	We	recorded	$42.3	million	in	goodwill	in	connection	with	the	acquisition.	Endius	develops	and	manufactures	minimally	invasive	spine	surgery	products,	implants	and	techniques	to	treat	spine	disease.	The	acquisition	of	Endius has	expanded	our	spine	product	portfolio	to	include	innovative	minimally	invasive	instruments	and	implants.

# Musculoskeletal	Management	Systems,	LLC

In	June	2006,	we	acquired	Musculoskeletal	Management	Systems,	LLC,	more	commonly	known	as	the	Human	Motion	Institute	(HMI),	a	privately-held,	hospital-focused	consulting	company	based	in	Pennsylvania	for	a	cash	purchase price	of	$15.0	million.	We	recorded	$13.0	million	of	goodwill	in	connection	with	the	acquisition.

# 5. INVENTORIES

Inventories	at	December	31,	2007	and	2006,	consist	of	the	following	(in	millions):

|  | 2007 | 2006 |
| :--- | :--- | :--- |
| Finished\tgoods | $564.2 | $489.1 |
| Work\tin\tprogress | 50.3 | 46.4 |
| Raw\tmaterials | 113.3 | 102.8 |
| Inventories,\tnet | $727.8 | $638.3 |

Reserves	for	excess	and	obsolete	inventory	were	$143.7	million	and	$129.5	million	at	December	31,	2007	and	2006,	respectively.

# 6. PROPERTY,	PLANT	AND	EQUIPMENT

Property,	plant	and	equipment	at	December	31,	2007	and	2006,	was	as	follows	(in	millions):

|  | 2007 | 2006 |
| :--- | :--- | :--- |
| Land | $19.4 | $17.6 |
| Building\tand\tequipment | 855.3 | 724.6 |
| Capitalized\tsoftware\tcosts | 98.7 | 59.1 |
| Instruments | 903.8 | 768.5 |
| Construction\tin\tprogress | 98.7 | 105.3 |
|  | 1,975.9 | 1,675.1 |
| Accumulated\tdepreciation | (1,004.0) | (868.0) |
| Property,\tplant\tand\tequipment,\tnet | $971.9 | $807.1 |

# 7. GOODWILL	AND	OTHER	INTANGIBLE	ASSETS

The	following	table	summarizes	the	changes	in	the	carrying	amount	of	goodwill	for	the	years	ended	December	31,	2007	and	2006	(in	millions):

|  | Americas | Europe | Asia	Pacific | Total |
| :--- | :--- | :--- | :--- | :--- |
| Balance\tat\tJanuary\t1,\t2006 | $1,426.2 | $896.9 | $105.7 | $2,428.8 |
| Change\tin\tfair\tvalue\testimates\tof\tCenterpulse\trelated\tto: |  |  |  |  |
| Income\ttaxes | (51.5) | – | – | (51.5) |
| Integration\tliability | (0.2) | (1.7) | (0.2) | (2.1) |
| Change\tin\tfair\tvalue\testimates\tof\tImplex\trelated\tto: |  |  |  |  |
| Earn-out\tpayment | 28.0 | – | – | 28.0 |
| Integration\tliability | (0.5) | – | – | (0.5) |
| Purchase\tof\tMusculoskeletal |  |  |  |  |
| Management\tSystems | 12.1 | – | – | 12.1 |
| Currency\ttranslation | – | 98.7 | 2.1 | 100.8 |
| Balance\tat\tDecember\t31,\t2006 | 1,414.1 | 993.9 | 107.6 | 2,515.6 |
| Change\tin\tfair\tvalue\testimates\tof\tCenterpulse\trelated\tto: |  |  |  |  |
| Integration\tliability | (0.1) | (1.0) | (0.1) | (1.2) |
| Income\ttaxes | 16.3 | – | – | 16.3 |
| Impact\tof\tFIN\t48\tadoption | (61.4) | – | – | (61.4) |
| Change\tin\tfair\tvalue\testimates\tof\tMusculoskeletal\tManagement\tSystems\trelated\tto: |  |  |  |  |
| Earn-out\tpayment\tliability | 0.3 | – | – | 0.3 |
| Integration\tliability | 0.6 | – | – | 0.6 |
| Purchase\tof\tEndius | 42.3 | – | – | 42.3 |
| Purchase\tof\tORTHOsoft\tInc. | 31.4 | – | – | 31.4 |
| Other | – | 9.9 | – | 9.9 |
| Currency\ttranslation | – | 63.5 | 4.1 | 67.6 |
| Balance\tat\tDecember\t31,\t2007 | $1,443.5 | $1,066.3 | $111.6 | $2,621.4 |

During	the	year	ended	December	31,	2007,	goodwill	was	reduced	by	$61.4	million	related	to	the	adoption	of	FIN	48	and	increased	by	$83.6	million	related	to	the	acquisitions	of	Endius,	ORTHOsoft	and	a	foreign-based	distributor. During	the	year	ended	December	31,	2006,	goodwill	was	reduced	by	$51.5	million	related	to	changes	in	the	fair	value	estimates	of	Centerpulse.	$46.0	million	of	this	reduction	was	a	decrease	to	the	long	term	tax	liability	related	to	the expiration	of	the	applicable	statute	of	limitations.	The	remaining	reduction	primarily	relates	to	the	release	of	valuation	allowances.

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

|  | Core<br>Technology | Developed<br>Technology | Trademarks	and<br>Trade	Names | Customer<br>Relationships | Other | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| As\tof\tDecember\t31,\t2007: |  |  |  |  |  |  |
| Intangible\tassets\tsubject\tto\tamortization: |  |  |  |  |  |  |
| Gross\tcarrying\tamount | $144.8 | $433.3 | $35.6 | $44.5 | $75.7 | $733.9 |
| Accumulated\tamortization | (27.9) | (116.4) | (13.1) | (6.2) | (26.4) | (190.0) |
| Intangible\tassets\tnot\tsubject\tto\tamortization: |  |  |  |  |  |  |
| Gross\tcarrying\tamount | – | – | 199.9 | – | – | 199.9 |
| Total\tidentifiable\tintangible\tassets | $116.9 | $316.9 | $222.4 | $38.3 | $49.3 | $743.8 |
| As\tof\tDecember\t31,\t2006: |  |  |  |  |  |  |
| Intangible\tassets\tsubject\tto\tamortization: |  |  |  |  |  |  |
| Gross\tcarrying\tamount | $119.1 | $417.3 | $33.4 | $35.5 | $48.7 | $654.0 |
| Accumulated\tamortization | (20.5) | (88.1) | (9.8) | (4.0) | (20.2) | (142.6) |
| Intangible\tassets\tnot\tsubject\tto\tamortization: |  |  |  |  |  |  |
| Gross\tcarrying\tamount | – | – | 201.2 | – | – | 201.2 |
| Total\tidentifiable\tintangible\tassets | $98.6 | $329.2 | $224.8 | $31.5 | $28.5 | $712.6 |

Total	amortization	expense	for	finite-lived	intangible	assets	was	$47.4	million,	$42.4	million	and	$41.7	million	for	the	years	ended	December	31,	2007,	2006	and	2005,	respectively,	and	was	recorded	as	part	of	selling,	general	and administrative.	Estimated	annual	amortization	expense	for	the	years	ending	December	31,	2008	through	2012	is	$49.8	million,	$50.4	million,	$49.9	million,	$47.2	million	and	$46.8	million,	respectively.

# 8. OTHER	CURRENT	AND	LONG-TERM	LIABILITIES

Other	current	and	long-term	liabilities	at	December	31,	2007	and	2006,	consist	of	the	following	(in	millions):

|  | 2007 | 2006 |
| :--- | :--- | :--- |
| Other\tcurrent\tliabilities: |  |  |
| License\tand\tservice\tagreements | $149.9 | $115.0 |
| Fair\tvalue\tof\tderivatives | 50.0 | 24.1 |
| Salaries,\twages\tand\tbenefits | 59.3 | 49.3 |
| Accrued\tliabilities | 230.2 | 175.3 |
| Total\tother\tcurrent\tliabilities | $489.4 | $363.7 |
| Other\tlong-term\tliabilities: |  |  |
| Long-term\tincome\ttax\tpayable | $137.0 | $102.1 |
| Other\tlong-term\tliabilities | 191.4 | 221.3 |
| Total\tother\tlong-term\tliabilities | $328.4 | $323.4 |

We	have	a	five	year	$1,350	million	senior	credit	agreement	(the	"Senior	Credit	Facility").	The	Senior	Credit	Facility	is	a	revolving,	multi-currency,	senior	unsecured	credit	facility	maturing	November	30,	2012.	Available	borrowings under	the	Senior	Credit	Facility	at	December	31,	2007,	were	$1,245.7	million.	The	Senior	Credit	Facility	contains	provisions	whereby	borrowings	may	be	increased	to	$1,750	million	and	the	maturity	date	may	be	extended	for	up	to	two	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	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	December	31,	2007.	Commitments	under	the	Senior	Credit	Facility	are	subject	to	certain	fees,	including	a	facility	and	a	utilization	fee.

The	weighted	average	interest	rate	for	borrowings	under	the	Senior	Credit	Facility	was	1.17	percent	at	December	31,	2007.	Borrowings	under	the	Senior	Credit	Facility	at	December	31,	2007	and	2006	are	Japanese	Yen	based borrowings.	We	paid	$8.5	million,	$5.8	million	and	$15.3	million	in	interest	during	2007,	2006	and	2005,	respectively.

Debt	issuance	costs	of	$22.8	million	were	incurred	to	obtain	the	Senior	Credit	Facility	arrangement.	These	costs	were	capitalized	and	are	amortized	to	interest	expense	over	the	lives	of	the	related	facility.	At	December	31,	2007, unamortized	debt	issuance	costs	were	$4.4	million.

# 10. RETIREMENT	AND	POSTRETIREMENT	BENEFIT	PLANS

We	have	defined	benefit	pension	plans	covering	certain	U.S.	and	Puerto	Rico	employees	who	were	hired	before	September	2,	2002.	Employees	hired	after	September	2,	2002	are	not	part	of	the	U.S.	defined	benefit	plans.	Employees who	had	not	become	a	member	of	the	Puerto	Rico	defined	benefit	plans	by	March	1,	2004	are	not	part	of	the	Puerto	Rico	defined	benefit	plans.	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	average	eligible	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.

We	also	provide	comprehensive	medical	and	group	life	insurance	benefits	to	certain	U.S.	and	Puerto	Rico	eligible	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.	Employees	hired	after	September	2,	2002,	are	not	eligible	for	retiree	medical	and	life	insurance	benefits.

We	use	a	December	31	measurement	date	for	our	benefit	plans.

We	adopted	SFAS	158	(see	Note	2	–	Accounting	Pronouncements)	as	of	December	31,	2006.	The	adoption	of	SFAS	158	had	the	following	effects	on	our	consolidated	balance	sheet	as	of	December	31,	2006	as	we	recognized	the funded	status	of	our	defined	benefit	and	postretirement	benefit	plans	with	a	corresponding	adjustment	to	Accumulated	Other	Comprehensive	Income:

|  | Prior	to	Additional	Minimum<br>Liability	Adjustment	and<br>SFAS	158	Adoption | Additional<br>Minimum	Liability<br>Adjustments | SFAS	158<br>Adjustments | Post<br>SFAS	158 |
| :--- | :--- | :--- | :--- | :--- |
| Prepaid\tpension | $21.1 | $3.0 | $(23.0) | $1.1 |
| Other\tassets | 173.8 | – | 19.1 | 192.9 |
| Short-term\taccrued\tbenefit\tliability | (10.5) | – | 8.9 | (1.6) |
| Long-term\taccrued\tbenefit\tliability | (34.8) | – | (40.2) | (75.0) |
| Accumulated\tother\tcomprehensive\tincome | 3.0 | (3.0) | 35.4 | 35.4 |

# Defined	Benefit	Plans

The	components	of	net	pension	expense	for	the	years	ended	December	31,	2007,	2006	and	2005	for	our	defined	benefit	retirement	plans	are	as	follows	(in	millions):

|  | U.S.	and	Puerto	Rico | U.S.	and	Puerto	Rico | U.S.	and	Puerto	Rico | Non-U.S. | Non-U.S. | Non-U.S. |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 |
| Service\tcost | $13.0 | $13.1 | $11.4 | $10.8 | $10.2 | $8.7 |
| Interest\tcost | 8.9 | 7.4 | 5.6 | 5.7 | 4.8 | 4.9 |
| Expected\treturn\ton\tplan\tassets | (11.0) | (8.2) | (6.4) | (8.0) | (6.6) | (6.0) |
| Amortization\tof\tprior\tservice\tcost | – | – | (0.1) | – | 0.1 | – |
| Amortization\tof\tunrecognized\tactuarial\tloss | 2.9 | 3.7 | 2.1 | 0.2 | 0.2 | 0.6 |
| Net\tperiodic\tbenefit\tcost | $13.8 | $16.0 | $12.6 | $8.7 | $8.7 | $8.2 |

The	weighted	average	actuarial	assumptions	used	to	determine	net	pension	expense	for	our	defined	benefit	retirement	plans	were	as	follows:

|  | U.S.	and	Puerto	Rico | U.S.	and	Puerto	Rico | U.S.	and	Puerto	Rico | Non-U.S. | Non-U.S. | Non-U.S. |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 |
| Discount\trate | 6.14% | 5.84% | 6.25% | 3.64% | 3.20% | 3.78% |
| Rate\tof\tcompensation\tincrease | 3.84% | 3.84% | 3.82% | 3.12% | 2.27% | 2.28% |
| Expected\tlong-term\treturn\ton\tplan\tassets | 8.00% | 8.25% | 8.50% | 4.73% | 4.70% | 4.77% |

The	expected	long-term	rates	of	return	on	plan	assets	is	based	on	the	period	expected	benefits	will	be	paid	and	the	historical	rates	of	return	on	the	different	asset	classes	held	in	the	plans.	The	expected	long-term	rate	of	return	is	the weighted	average	of	the	target	asset	allocation	of	each	individual	asset	class.	We	believe	that	historical	asset	results	approximate	expected	market	returns	applicable	to	the	funding	of	a	long-term	benefit	obligation.

Discount	rates	were	determined	for	each	of	our	defined	benefit	retirement	plans	at	their	measurement	date	to	reflect	the	yield	of	a	portfolio	of	high	quality	bonds	matched	against	the	timing	and	amounts	of	projected	future	benefit payments.

Changes	in	projected	benefit	obligations	and	plan	assets,	for	the	years	ended	December	31,	2007	and	2006	for	our	defined	benefit	retirement	plans,	were	(in	millions):

|  | U.S.	and	Puerto	Rico<br>2007 | 2006 | Non-U.S.<br>2007 | 2006 |
| :--- | :--- | :--- | :--- | :--- |
| Projected\tbenefit\tobligation\t–\tbeginning\tof\tyear | $144.2 | $130.4 | $167.9 | $146.5 |
| Plan\tamendments | 0.9 | 0.6 | (1.2) | – |
| Service\tcost | 13.0 | 13.1 | 10.8 | 10.2 |
| Interest\tcost | 8.8 | 7.4 | 5.7 | 4.8 |
| Employee\tcontributions | – | – | 12.2 | 10.4 |
| Benefits\tpaid | (2.8) | (1.5) | (16.4) | (17.3) |
| Actuarial\t(gain)\tloss | 1.9 | (5.8) | (5.7) | 1.5 |
| Translation\tloss | – | – | 8.3 | 11.8 |
| Projected\tbenefit\tobligation\t–\tend\tof\tyear | $166.0 | $144.2 | $181.6 | $167.9 |
| Plan\tassets\tat\tfair\tmarket\tvalue\t–\tbeginning\tof\tyear | $115.3 | $85.6 | $159.7 | $135.7 |
| Actual\treturn\ton\tplan\tassets | 6.7 | 11.2 | 3.4 | 10.5 |
| Company\tcontributions | 28.0 | 20.0 | 13.3 | 9.9 |
| Employee\tcontributions | – | – | 12.2 | 10.4 |
| Benefits\tpaid | (2.8) | (1.5) | (16.4) | (17.3) |
| Expenses | – | – | – | – |
| Translation\tgain | – | – | 8.2 | 10.5 |
| Plan\tassets\tat\tfair\tmarket\tvalue\t–\tend\tof\tyear | $147.2 | $115.3 | $180.4 | $159.7 |
| Funded\tstatus | $(18.8) | $(28.9) | $(1.2) | $(8.1) |
| Amounts\trecognized\tin\tconsolidated\tbalance\tsheet: |  |  |  |  |
| Prepaid\tpension | $– | $1.1 | $7.1 | $– |
| Short-term\taccrued\tbenefit\tliability | (5.6) | (0.7) | – | – |
| Long-term\taccrued\tbenefit\tliability | (13.2) | (29.3) | (8.3) | (8.1) |
| Net\tamount\trecognized | $(18.8) | $(28.9) | $(1.2) | $(8.1) |
| Amounts\trecognized\tin\taccumulated\tother\tcomprehensive\tincome: |  |  |  |  |
| Unrecognized\tprior\tservice\tcost | $1.0 | $0.2 | $(1.1) | $– |
| Unrecognized\tactuarial\tloss | 43.2 | 39.8 | 6.0 | 7.3 |
| Net\tamount\trecognized | $44.2 | $40.0 | $4.9 | $7.3 |

We	estimate	the	following	amounts	recorded	as	part	of	accumulated	other	comprehensive	income	will	be	recognized	as	part	of	our	net	pension	expense	during	2008:

|  | Puerto	Rico | Non-U.S. |
| :--- | :--- | :--- |
| Unrecognized\tprior\tservice\tcost | $0.1 | $(0.1) |
| Unrecognized\tactuarial\tloss | 2.5 | 0.2 |
|  | $2.6 | $0.1 |

The	weighted	average	actuarial	assumptions	used	to	determine	the	projected	benefit	obligation	for	our	defined	benefit	retirement	plans	were	as	follows:

The	accumulated	benefit	obligation	for	U.S.	and	Puerto	Rico	defined	benefit	retirement	pension	plans	was	$116.8	million	and	$94.5	million	as	of	December	31,	2007	and	2006,	respectively.	The	accumulated	benefit	obligation	for non-U.S.	defined	benefit	retirement	plans	was	$150.9	million	and	$150.3	million	as	of	December	31,	2007	and	2006,	respectively.

The	benefits	expected	to	be	paid	out	in	each	of	the	next	five	years	and	for	the	five	years	combined	thereafter	are	as	follows	(in	millions):

The	U.S.	and	Puerto	Rico	defined	benefit	retirement	plans'	overall	investment	strategy	is	to	maximize	total	returns	by	emphasizing	long-term	growth	of	capital	while	avoiding	risk.	We	have	established	target	ranges	of	assets	held	by the	plans	of	50	to	75	percent	for	equity	securities	and	25	to	50	percent	for	debt	securities.	The	plans	strive	to	have	sufficiently	diversified	assets	so	that	adverse	or	unexpected	results	from	one	asset	class	will	not	have	an	unduly	detrimental impact	on	the	entire	portfolio.	The	investments	in	the	plans	are	rebalanced	quarterly	based	upon	the	target	asset	allocation	of	the	plans.

The	investment	strategies	of	non-U.S.	based	plans	vary	according	to	the	plan	provisions	and	local	laws.	The	majority	of	the	assets	in	non-U.S.	based	plans	are	located	in	Switzerland	based	plans.	These	assets	are	held	in	trusts	and	are commingled	with	the	assets	of	other	Swiss	companies,	with	representatives	of	all	the	companies	making	the	investment	decisions.	The	overall	strategy	is	to	maximize	total	returns	while	avoiding	risk.	The	trustees	of	the	assets	have established	target	ranges	of	assets	held	by	the	plans	of	30	to	50	percent	in	debt	securities,	20	to	37	percent	in	equity	securities,	15	to	24	percent	in	real	estate,	3	to	15	percent	in	cash	funds	and	0	to	12	percent	in	other	funds.

As	of	December	31,	2007	and	2006,	our	defined	benefit	pension	plans'	assets	did	not	hold	any	direct	investment	in	Zimmer	Holdings	common	stock.

We	expect	that	we	will	have	no	minimum	funding	requirements	by	law	in	2008	for	the	qualified	U.S.	and	Puerto	Rico	defined	benefit	retirement	plans.	However,	we	expect	to	voluntarily	contribute	between	$20	million	to	$24	million to	these	plans	during	2008.	Additionally,	we	expect	to	contribute

approximately	$6	million	million	to	our	non-qualified	defined	benefit	retirement	plan	during	2008.	Contributions	to	non-U.S.	defined	benefit	plans	are	estimated	to	be	approximately	$10	million	in	2008.	We	do	not	expect	the plan	assets	in	any	of	our	plans	to	be	returned	to	us	in	the	next	year.

# Defined	Contribution	Plans

We	also	sponsor	defined	contribution	plans	for	substantially	all	of	the	U.S.	and	Puerto	Rico	employees	and	certain	employees	in	other	countries.	The	benefits	of	these	plans	relate	to	local	customs	and	practices	in	the countries	concerned.	We	expensed	$12.8	million,	$12.6	million	and	$11.3	million	related	to	these	plans	for	the	years	ended	December	31,	2007,	2006	and	2005,	respectively.

# Postretirement	Benefit	Plans

The	components	of	net	periodic	expense	for	the	year	ended	December	31,	2007,	2006	and	2005	for	our	unfunded	postretirement	benefit	plans	are	as	follows	(in	millions):

Changes	in	benefit	obligations	for	our	postretirement	benefit	plans	were	(in	millions):

|  | 2007 | 2006 |
| :--- | :--- | :--- |
| Benefit\tobligation\t–\tbeginning\tof\tyear | $38.5 | $39.8 |
| Plan\tamendments | – | (3.6) |
| Service\tcost | 1.6 | 1.6 |
| Interest\tcost | 2.2 | 2.2 |
| Employee\tcontributions | 0.1 | 0.1 |
| Benefits\tpaid | (0.9) | (0.6) |
| Actuarial\tgain | (2.2) | (1.0) |
| Benefit\tobligation\t–\tend\tof\tyear | $39.3 | $38.5 |
| Funded\tstatus | $(39.3) | $(38.5) |
| Amounts\trecognized\tin\tconsolidated\tbalance\tsheet: |  |  |
| Short-term\taccrued\tbenefit\tliability | $(1.3) | $(0.9) |
| Long-term\taccrued\tbenefit\tliability | (38.0) | (37.6) |
| Net\tamount\trecognized | $(39.3) | $(38.5) |
| Amounts\trecognized\tin\taccumulated\tother\tcomprehensive\tincome: |  |  |
| Unrecognized\tprior\tservice\tcost | $(2.9) | $(3.3) |
| Unrecognized\tactuarial\tloss | 8.0 | 10.5 |
| Net\tamount\trecognized | $5.1 | $7.2 |

A	one	percentage	point	change	in	the	assumed	healthcare	cost	trend	rates	would	have	no	significant	effect	on	the	service	and	interest	cost	components	of	net	postretirement	benefit	expense	and	the	accumulated postretirement	benefit	obligation.	The	effect	of	a	change	in	the	healthcare	cost	trend	rate	is	tempered	by	an	annual	cap	that	limits	medical	costs	we	pay.

       Amounts	recorded	as	part	of	accumulated	other	comprehensive	income	that	will	be	recognized	as	part	of	our	postretirement	benefit	expense	during	2008	are	not	expected	to	be	material.

# 11. Income	Taxes

| For	the	Years	Ended	December	31, | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| United\tStates\toperations | $597.0 | $727.3 | $706.5 |
| Foreign\toperations | 534.6 | 441.7 | 334.2 |
| Total | $1,131.6 | $1,169.0 | $1,040.7 |
| The\tprovision\tfor\tincome\ttaxes\tconsists\tof\t(in\tmillions): |  |  |  |
| Current: |  |  |  |
| Federal | $173.0 | $178.5 | $150.5 |
| State | 25.0 | 22.2 | 22.7 |
| Foreign | 96.0 | 89.5 | 80.3 |
|  | 294.0 | 290.2 | 253.5 |
| Deferred: |  |  |  |
| Federal | 39.0 | 31.7 | 63.0 |
| State | 19.0 | 5.0 | – |
| Foreign | 5.9 | 7.1 | (9.2) |
|  | 63.9 | 43.8 | 53.8 |
| Provision\tfor\tincome\ttaxes | $357.9 | $334.0 | $307.3 |

A	reconciliation	of	the	U.S.	statutory	income	tax	rate	to	our	effective	tax	rate	is	as	follows:

| For	the	Years	Ended	December	31, | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| U.S.\tstatutory\tincome\ttax\trate | 35.0% | 35.0% | 35.0% |
| State\ttaxes,\tnet\tof\tfederal\tdeduction | 2.7 | 1.3 | 0.9 |
|  | (7.0) | (4.3) | (3.9) |
| Tax\tbenefit\trelating\tto\toperations\tin\tPuerto\tRico | (3.1) | (2.0) | (1.3) |
| Tax\tbenefit\trelating\tto\tU.S.\tmanufacturer's\tdeduction\tand\texport\tsales | (1.2) | (1.2) | (0.8) |
| R&amp;D\tcredit | (0.4) | (0.1) | (0.5) |
| Non-deductible\texpenses | 0.2 | 0.1 | 0.1 |
| Department\tof\tJustice\tSettlement | 5.2 | – | – |
| In-process\tresearch\tand\tdevelopment\tcharges | 0.2 | – | – |
| Other | – | (0.2) | – |
| Effective\tincome\ttax\trate | 31.6% | 28.6% | 29.5% |

Deferred	income	taxes	reflect	the	net	tax	effects	of	temporary	differences	between	the	carrying	amounts	of	assets	and	liabilities	for	financial	reporting	purposes	and	the	amounts	used	for	income	tax	purposes.	We	have	established valuation	allowances	for	deferred	tax	assets	when	the	amount	of	expected	future	taxable	income	is	not	likely	to	support	the	use	of	the	deduction	or	credit.

The	components	of	deferred	taxes	consisted	of	the	following	(in	millions):

| December	31, | 2007 | 2006 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets: |  |  |
| Inventory | $118.6 | $114.7 |
| Fixed\tassets | – | 1.8 |
| Net\toperating\tloss\tcarryover | 101.4 | 138.6 |
| Tax\tcredit\tcarryover | 20.7 | 88.4 |
| Capital\tloss\tcarryover | 1.7 | 1.7 |
| Accrued\tliabilities | 97.3 | 95.3 |
| Share-based\tcompensation | 35.7 | 21.4 |
| Unremitted\tearnings\tof\tforeign\tsubsidiaries | 94.0 | 36.4 |
| Other | 24.4 | 20.9 |
| Total\tdeferred\ttax\tassets | 493.8 | 519.2 |
| Less:\tValuation\tallowances | (55.7) | (35.5) |
| Total\tdeferred\ttax\tassets\tafter\tvaluation | 438.1 | 483.7 |
| Deferred\ttax\tliabilities: |  |  |
| Fixed\tassets | $(36.3) | $(26.9) |
| Intangible\tassets | (174.8) | (167.7) |
| Accrued\tliabilities | (1.4) | (5.4) |
| Other | (3.0) | (0.9) |
| Total\tdeferred\ttax\tliabilities | (215.5) | (200.9) |
| Total\tnet\tdeferred\ttax\tassets | $222.6 | $282.8 |

The	vast	majority	of	the	net	operating	loss	carryover	is	available	to	reduce	future	federal	and	state	taxable	earnings.	At	December	31,	2007,	these	net	operating	loss	carryovers	generally	expire	within	a	period	of	1	to	19	years. Valuation	allowances	for	net	operating	loss	carryovers	have	been	established	in	the	amount	of	$16.3	million	and	$10.4	million	at	December	31,	2007	and	December	31,	2006,	respectively.	The	tax	credit	carryovers	are	entirely	available	to offset	future	federal	and	state	tax	liabilities.	At	December	31,	2007,	these	tax	credit	carryovers	generally	expire	within	a	period	of	1	to	15	years.	We	have	established	valuation	allowances	for	certain	tax	credit	carryovers	in	the	amount	of $20.2	million	and	$15.0	million	at	December	31,	2007	and	December	31,	2006,	respectively.	The	entire	capital	loss	carryover	is	also	available	to	reduce	future	federal	taxable	earnings;	however,	the	capital	loss	carryover	is	subject	to	a valuation	allowance	and	expires	in	2	years.	The	remaining	valuation	allowances	of	$17.5	million	and	$8.4	million	at	December	31,	2007	and	December	31,	2006,	respectively,	relate	primarily	to	potential	capital	losses.	We	have	established valuation	allowances	related	to	certain	business	combination	transactions	that,	if	not	ultimately	required,	will	result	in	a	reduction	of	goodwill.	These	allowances	were	approximately	$33.9	million	and	$29.0	million	at	December	31,	2007	and December	31,	2006,	respectively.

At	December	31,	2007,	we	had	an	aggregate	of	approximately	$493	million	of	unremitted	earnings	of	foreign	subsidiaries	that	have	been,	or	are	intended	to	be,	indefinitely	reinvested	for	continued	use	in	foreign	operations.	If	the	total undistributed	earnings	of	foreign	subsidiaries	were	remitted,	a	significant	amount	of	the	additional	tax	would	be	offset	by	the	allowable	foreign	tax	credits.	It	is	not	practical	for	us	to	determine	the	additional	tax	of	remitting	these	earnings.

In	September	2007,	we	reached	a	settlement	with	the	United	States	Department	of	Justice	in	an	ongoing	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.	No	tax	benefit	has	been	recorded	related	to	the	settlement	expense	due	to	the uncertainty	as	to	the	tax	treatment.	We	intend	to	pursue	resolution	of	this	uncertainty	with	taxing	authorities,	but	are	unable	to	ascertain	the	outcome	or	timing	for	such	resolution	at	this	time.	For	more	information	regarding	the settlement,	see	Note	15.

In	June	2006,	the	Financial	Accounting	Standards	Board	(FASB)	issued	Interpretation	No.	48,	Accounting	for	Uncertainty	in	Income	Taxes	–	an	interpretation	of	FASB	Statement	No.	109,	Accounting	for	Income	Taxes (FIN	48).	FIN	48	addresses	the	determination	of	whether	tax	benefits	claimed	or	expected	to	be	claimed	on	a	tax	return	should	be	recorded	in	the	financial	statements.	Under	FIN	48,	we	may	recognize	the	tax	benefit	from	an uncertain	tax	position	only	if	it	is	more	likely	than	not	that	the	tax	position	will	be	sustained	on	examination	by	the	taxing	authorities,	based	on	the	technical	merits	of	the	position.	The	tax	benefits	recognized	in	the	financial statements	from	such	a	position	should	be	measured	based	on	the	largest	benefit	that	has	a	greater	than	fifty	percent	likelihood	of	being	realized	upon	ultimate	settlement.	FIN	48	also	provides	guidance	on	derecognition, classification,	interest	and	penalties	on	income	taxes,	accounting	in	interim	periods	and	requires	increased	disclosures.

We	adopted	FIN	48	on	January	1,	2007.		Prior	to	the	adoption	of	FIN	48	we	had	a	long	term	tax	liability	for	expected	settlement	of	various	federal,	state	and	foreign	income	tax	liabilities	that	was	reflected	net	of	the corollary	tax	impact	of	these	expected	settlements	of	$102.1	million,	as	well	as	a	separate	accrued	interest	liability	of	$1.7	million.	As	a	result	of	the	adoption	of	FIN	48,	we	are	required	to	present	the	different	components	of such	liability	on	a	gross	basis	versus	the	historical	net	presentation.	The	adoption	resulted	in	the	financial	statement	liability	for	unrecognized	tax	benefits	decreasing	by	$6.4	million	as	of	January	1,	2007.	The	adoption	resulted in	this	decrease	in	the	liability	as	well	as	a	reduction	to	retained	earnings	of	$4.8	million,	a	reduction	in	goodwill	of	$61.4	million,	the	establishment	of	a	tax	receivable	of	$58.2	million,	which	was	recorded	in	other	current	and non-current	assets	on	our	consolidated	balance	sheet,	and	an	increase	in	an	interest/penalty	payable	of	$7.9	million,	all	as	of	January	1,	2007.	Therefore,	after	the	adoption	of	FIN	48,	the	amount	of	unrecognized	tax	benefits	is $95.7	million	as	of	January	1,	2007,	of	which	$28.6	million	would	impact	our	effective	tax	rate,	if	recognized.	The	amount	of	unrecognized	tax	benefits	is	$135.2	million	as	of	December	31,	2007.	Of	this	amount,	$41.0	million would	impact	our	effective	tax	rate,	if	recognized.

A	reconciliation	of	the	beginning	and	ending	amounts	of	unrecognized	tax	benefits	is	as	follows	(in	millions):

| Balance	at	January	1,	2007 | $95.7 |
| :--- | :--- |
| Increases\trelated\tto\tprior\tperiods | 27.4 |
| Decreases\trelated\tto\tprior\tperiods | (5.5) |
| Increases\trelated\tto\tcurrent\tperiod | 21.9 |
| Decreases\trelated\tto\tsettlements\twith\ttaxing\tauthorities | (1.3) |
| Decreases\trelated\tto\tlapse\tof\tstatue\tof\tlimitations | (3.0) |
| Balance\tat\tDecember\t31,\t2007 | $135.2 |

We	recognize	accrued	interest	and	penalties	related	to	unrecognized	tax	benefits	in	income	tax	expense	in	the	Consolidated	Statements	of	Earnings,	which	is	consistent	with	the	recognition	of	these	items	in	prior	reporting periods.	As	of	January	1,	2007,	we	recorded	a	liability	of	$9.6	million	for	accrued	interest	and	penalties,	of	which	$7.5	million	would	impact	our	effective	tax	rate,	if	recognized.	The	amount	of	this	liability	is	$19.6	million	as	of December	31,	2007.	Of	this	amount,	$14.7	million	would	impact	our	effective	tax	rate,	if	recognized.

We	expect	that	the	amount	of	tax	liability	for	unrecognized	tax	benefits	will	change	in	the	next	twelve	months;	however,	we	do	not	expect	these	changes	will	have	a	significant	impact	on	our	results	of	operations	or financial	position.

The	U.S.	federal	statute	of	limitations	remains	open	for	the	year	2003	and	onward	with	years	2003	and	2004	currently	under	examination	by	the	IRS.	It	is	reasonably	possible	that	a	resolution	with	the	IRS	for	the	years 2003	through	2004	will	be	reached	within	the	next	twelve	months,	but	we	do	not	anticipate	this	would	result	in	any	material	impact	on	our	financial	position.	In	addition,	for	the	1999	tax	year	of	Centerpulse,	which	we	acquired in	October	2003,	one	issue	remains	in	dispute.	The	resolution	of	this	issue	would	not	impact	our	effective	tax	rate,	as	it	would	be	recorded	as	an	adjustment	to	goodwill.

State	income	tax	returns	are	generally	subject	to	examination	for	a	period	of	3	to	5	years	after	filing	of	the	respective	return.	The	state	impact	of	any	federal	changes	remains	subject	to	examination	by	various	states	for	a period	of	up	to	one	year	after	formal	notification	to	the	states.	We	have	various	state	income	tax	returns	in	the	process	of	examination,	administrative	appeals	or	litigation.	It	is	reasonably	possible	that	such	matters	will	be resolved	in	the	next	twelve	months,	but	we	do	not	anticipate	that	the	resolution	of	these	matters	would	result	in	any	material	impact	on	our	results	of	operations	or	financial	position.

Foreign	jurisdictions	have	statutes	of	limitations	generally	ranging	from	3	to	5	years.	Years	still	open	to	examination	by	foreign	tax	authorities	in	major	jurisdictions	include	Australia	(2003	onward),	Canada	(1999 onward),	France	(2005	onward),	Germany	(2005	onward),	Italy	(2003	onward),	Japan	(2001	onward),	Puerto	Rico	(2005	onward),	Singapore	(2003	onward),	Switzerland	(2004	onward),	and	the	United	Kingdom	(2005	onward).

Our	tax	returns	are	currently	under	examination	in	various	foreign	jurisdictions.	The	major	foreign	tax	jurisdictions	under	examination	include	Germany,	Italy	and	Switzerland.	It	is	reasonably	possible	that	such	audits	will	be	resolved in	the	next	twelve	months,	but	we	do	not	anticipate	that	the	resolution	of	these	audits	would	result	in	any	material	impact	on	our	results	of	operations	or	financial	position.

# 12. CAPITAL	STOCK	AND	EARNINGS	PER	SHARE

We	have	2	million	shares	of	Series	A	Participating	Cumulative	Preferred	Stock	authorized	for	issuance,	none	of	which	were	outstanding	as	of	December	31,	2007.

The	numerator	for	both	basic	and	diluted	earnings	per	share	is	net	earnings	available	to	common	stockholders.	The	denominator	for	basic	earnings	per	share	is	the	weighted	average	number	of	common	shares	outstanding	during	the period.	The	denominator	for	diluted	earnings	per	share	is	weighted	average	shares	outstanding	adjusted	for	the	effect	of	dilutive	stock	options	and	other	equity	awards.	The	following	is	a	reconciliation	of	weighted	average	shares	for	the basic	and	diluted	share	computations	for	the	years	ending	December	31	(in	millions):

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Weighted\taverage\tshares\toutstanding\tfor\tbasic\tnet\tearnings\tper\tshare | 235.5 | 243.0 | 247.1 |
| Effect\tof\tdilutive\tstock\toptions\tand\tother\tequity\tawards | 2.0 | 2.4 | 2.7 |
| Weighted\taverage\tshares\toutstanding\tfor\tdiluted\tnet\tearnings\tper\tshare | 237.5 | 245.4 | 249.8 |

For	the	year	ended	December	31,	2007,	an	average	of	3.1	million	options	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.	For	the	years	ended	December	31,	2006	and	2005,	an	average	of	7.6	million	and	2.9	million	options,	respectively,	were	not	included.

In	December	2005,	our	Board	of	Directors	authorized	a	stock	repurchase	program	of	up	to	$1	billion	through	December	31,	2007.	In	December	2006,	our	Board	of	Directors	authorized	an	additional	stock	repurchase	program	of	up	to $1	billion	through	December	31,	2008.	As	of	December	31,	2007	we	had	acquired	approximately	19,345,200	shares	at	a	cost	of	$1,378.9	million,	before	commissions.

# 13. SEGMENT	DATA

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	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	expense,	settlement,	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.	Management reviews	accounts	receivable,	inventory,	property,	plant	and	equipment,	goodwill	and	intangible	assets	by	reportable	segment	exclusive	of	U.S	and	Puerto	Rico	based	manufacturing	operations	and	logistics	and	corporate	assets.

Net	sales,	segment	operating	profit	and	year-end	assets	are	as	follows	(in	millions):

|  | Net	Sales | Net	Sales | Net	Sales | Operating	Profit | Operating	Profit | Operating	Profit | Year-End	Assets | Year-End	Assets |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | 2007 | 2006 |
| Americas | $2,277.0 | $2,076.5 | $1,941.8 | $1,184.2 | $1,093.7 | $1,020.8 | $2,552.6 | $2,444.9 |
| Europe | \t1,081.0 | 931.1 | 874.8 | 432.6 | 385.9 | 317.9 | \t1,999.2 | \t1,864.7 |
| Asia\tPacific | 539.5 | 487.8 | 469.5 | 260.1 | 231.5 | 212.4 | 348.3 | 314.1 |
| Net\tsales | $3,897.5 | $3,495.4 | $3,286.1 |  |  |  |  |  |
| Share-based\tpayment\texpense |  |  |  | (70.1) | (74.8) | – |  |  |
| Inventory\tstep-up |  |  |  | (0.5) | – | (5.0) |  |  |
| Settlement |  |  |  | (169.5) | – | – |  |  |
| Acquisition,\tintegration\tand\tother |  |  |  | (25.2) | (6.1) | (56.6) |  |  |
| Global\toperations\tand\tcorporate\tfunctions |  |  |  | (484.0) | (465.0) | (434.5) | \t1,733.6 | \t1,350.7 |
| Operating\tprofit |  |  |  | $1,127.6 | $1,165.2 | $1,055.0 |  |  |
| Total\tassets |  |  |  |  |  |  | $6,633.7 | $5,974.4 |

U.S.	sales	were	$2,140.3	million,	$1,962.5	million	and	$1,845.6	million	for	the	years	ended	December	31,	2007,	2006	and	2005,	respectively.	Sales	to	any	individual	country	outside	of	the	U.S.	were	not	significant.	Sales	are attributable	to	a	country	based	upon	the	customer's	country	of	domicile.

Net	sales	by	product	category	are	as	follows	(in	millions):

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Reconstructive |  |  |  |
| Knees | $1,636.9 | $1,460.5 | $ 1,366.2 |
| Hips | \t1,298.9 | \t1,188.9 | \t 1,140.6 |
| Extremities | 104.0 | 77.6 | 66.1 |
| Dental | 221.0 | 179.0 | 148.1 |
| Total | \t3,260.8 | \t2,906.0 | \t 2,721.0 |
| Trauma | 205.8 | 194.7 | 179.8 |
| Spine | 197.0 | 177.4 | 160.4 |
| OSP\tand\tother | 233.9 | 217.3 | 224.9 |
| Total | $3,897.5 | $3,495.4 | $ 3,286.1 |

Long-lived	tangible	assets	as	of	December	31,	2007	and	2006	are	as	follows:

For	segment	reporting	purposes,	deployed	instruments	are	included	in	the	measurement	of	operating	segment	assets	while	undeployed	instruments	at	U.S.	and	Puerto	Rico	based	manufacturing	operations	and	logistics	are	included	in global	operations	and	corporate	functions.	The	majority	of	instruments	are	purchased	by	U.S.	and	Puerto	Rico	based	manufacturing	operations	and	logistics	and	are	deployed	to	the	operating	segments	as	needed	for	the	business.

Depreciation	and	amortization	included	in	operating	segment	profit	for	the	years	ended	December	31,	2007,	2006	and	2005	was	as	follows	(in	millions):

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Americas | $66.9 | $56.7 | $51.0 |
| Europe | 60.7 | 46.5 | 40.8 |
| Asia\tPacific | 22.7 | 18.7 | 14.8 |
| Global\toperations\tand\tcorporate\tfunctions | 79.7 | 75.5 | 79.1 |
|  | $230.0 | $197.4 | $185.7 |

# 15. COMMITMENTS	AND	CONTINGENCIES

# Product	Liability	and	Intellectual	Property-Related	Litigation

As	a	result	of	our	acquisition	of	Centerpulse	in	2003,	we	acquired	the	entity	involved	in	Centerpulse's	hip	and	knee	implant	litigation	matter.	The	litigation	was	a	result	of	a	voluntary	recall	of	certain	hip	and	knee implants	manufactured	and	sold	by	Centerpulse.	On	March	13,	2002,	a	U.S.	Class	Action	Settlement	Agreement	was	entered	into	by	Centerpulse	that	resolved	U.S.	claims	related	to	the	affected	products	and	a	settlement	trust was	established	and	funded	for	the	most	part	by	Centerpulse.	The	court	approved	the	settlement	arrangement	on	May	8,	2002.	Under	the	terms	of	the	settlement	agreement,	we	will	reimburse	the	settlement	trust	a	specified amount	for	each	revision	surgery	over	4,000	and	revisions	on	reprocessed	shells	over	64.	As	of	December	31,	2007,	the	claims	administrator	has	received	4,133	likely	valid	claims	for	hips	(cut-off	date	June	5,	2003)	and	knees (cut-off	date	November	17,	2003)	and	200	claims	for	reprocessed	shells	(cut-off	date	September	8,	2004).	We	believe	the	litigation	liability	recorded	as	of	December	31,	2007	is	adequate	to	provide	for	any	future	claims regarding	the	hip	and	knee	implant	litigation.

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.	We	continue	to	believe	that	our	defenses	are	valid	and	meritorious,	and	we	intend	to	defend	the	Howmedica	lawsuit	vigorously.

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,	these	cases	will	not	have	a	material	adverse	effect	on	our	consolidated	financial	position,	results	of	operations	or cash	flows.

# Government	Investigations	and	Related	Litigation

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	civil	and	administrative	claims	related	to	the	federal	investigation	for	a	cash	payment	to	the	United	States	government	of	$169.5	million.	We	recorded	a	$169.5	million	expense	during	the	third	quarter	of	2007 in	connection	with	the	settlement.

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	that	agreement.	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	are	cooperating	fully	with	the	investigators	with	regard	to	this	matter.	We	understand	that	similar	inquiries	were	directed	to	other	companies	in	the	orthopaedics industry.

In	June	2006,	we	received	a	subpoena	from	the	United	States	Department	of	Justice,	Antitrust	Division,	requesting	that	we	produce	documents	for	the	period	beginning	January	2001	through	June	2006,	pertaining	to	an investigation	of	possible	violations	of	federal	criminal	law,	including	possible	violations	of	the	antitrust	laws,	involving	the	manufacture	and	sale	of	orthopaedic	implant	devices.	We	are	cooperating	fully	with	federal	authorities with	regard	to	this	matter.	We	understand	that	similar	inquiries	were	directed	to	at	least	four	other	companies	in	the	orthopaedics	industry.

On	September	25,	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	with	regard	to	this	informal investigation.

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	seek	to	maintain	the	action	purportedly	on	our	behalf	against	all	of	our	current	directors	and	two	former	directors.	On	December	10,	2007, the	plaintiffs	filed	a	consolidated	amended	derivative	complaint,	which	claims,	among	other	things,	breaches	of	fiduciary	duty	by	the	individual	defendants	which	allegedly	allowed	misconduct	to	occur,	including	alleged	illegal payments	to	doctors,	and	caused	us	financial	harm,	including	the	cost	of	the	settlement	with	the	federal	government	described	above.	The	plaintiffs	do	not	seek	damages	from	us,	but	instead	request	damages	of	an	unspecified amount	on	our	behalf.	The	plaintiffs	also	request	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	motions	are	currently	pending	with	the	court.

# 16. QUARTERLY	FINANCIAL	INFORMATION	(UNAUDITED)

(in	millions,	except	per	share	data)

|  | 2007	Quarter	Ended | 2007	Quarter	Ended | 2007	Quarter	Ended | 2007	Quarter	Ended | 2006	Quarter	Ended | 2006	Quarter	Ended | 2006	Quarter	Ended | 2006	Quarter	Ended |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Mar | Jun | Sep | Dec | Mar | Jun | Sep | Dec |
| Net\tsales | $950.2 | $970.6 | $903.2 | $1,073.5 | $860.4 | $881.6 | $819.8 | $933.6 |
| Gross\tprofit | \t743.8 | \t754.2 | \t704.0 | 819.6 | \t671.0 | \t681.6 | \t636.6 | \t726.1 |
| Net\tearnings | \t233.4 | \t231.5 | 44.5 | 263.8 | \t205.6 | \t200.9 | \t183.3 | \t244.7 |
| Net\tearnings\tper\tcommon\tshare |  |  |  |  |  |  |  |  |
| Basic | 0.99 | 0.98 | 0.19 | 1.13 | 0.83 | 0.82 | 0.76 | 1.03 |
| Diluted | 0.98 | 0.97 | 0.19 | 1.12 | 0.82 | 0.81 | 0.76 | 1.02 |

# Changes	in	and	Disagreements	With	Accountants	on	Accounting	and	Financial	Disclosure

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	December	31,	2007,	that	has	materially	affected,	or	is reasonably	likely	to	materially	affect,	our	internal	control	over	financial	reporting.	Management's	report	on	internal	control	over	financial	reporting	appears	in	this	report	at	the	conclusion	of	Part	II,	Item	7A.

During	the	fourth	quarter	of	2007,	the	Audit	Committee	of	the	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.

We	submitted	the	Annual	CEO	Certification	for	2007	required	by	the	New	York	Stock	Exchange	to	the	exchange	on	June	4,	2007.

The	information	required	by	this	Item	concerning	our	directors	and	executive	officers	is	incorporated	herein	by	reference	from	our	definitive	Proxy	Statement	for	our	2008	Annual	Meeting	of	Stockholders	which	will	be	filed	with	the Commission	pursuant	to	Regulation	14A	within	120	days	after	the	end	of	our	most	recent	fiscal	year	and	the	information	included	under	the	caption	"Executive	Officers"	in	Part	I	of	this	report.

The	information	required	by	this	Item	concerning	remuneration	of	our	officers	and	directors	and	information	concerning	material	transactions	involving	such	officers	and	directors	is	incorporated	herein	by	reference	from	our definitive	Proxy	Statement	for	our	2008	Annual	Meeting	of	Stockholders	which	will	be	filed	with	the	Commission	pursuant	to	Regulation	14A	within	120	days	after	the	end	of	our	most	recent	fiscal	year.

The	information	required	by	this	Item	concerning	the	stock	ownership	of	management	and	five	percent	beneficial	owners	and	related	stockholder	matters,	including	equity	compensation	plan	information,	is	incorporated	herein	by reference	from	our	definitive	Proxy	Statement	for	our	2008	Annual	Meeting	of	Stockholders	which	will	be	filed	with	the	Commission	pursuant	to	Regulation	14A	within	120	days	after	the	end	of	our	most	recent	fiscal	year.

# ITEM	13. Certain	Relationships	and	Related	Transactions,	and	Director	Independence

The	information	required	by	this	Item	concerning	certain	relationships	and	related	transactions	is	incorporated	herein	by	reference	from	our	definitive	Proxy	Statement	for	our	2008	Annual	Meeting	of	Stockholders	which	will	be	filed with	the	Commission	pursuant	to	Regulation	14A	within	120	days	after	the	end	of	our	most	recent	fiscal	year.

# ITEM	14. Principal	Accounting	Fees	and	Services

The	information	required	by	this	Item	concerning	principal	accounting	fees	and	services	is	incorporated	herein	by	reference	from	our	definitive	Proxy	Statement	for	our	2008	Annual	Meeting	of	Stockholders	which	will	be	filed	with the	Commission	pursuant	to	Regulation	14A	within	120	days	after	the	end	of	our	most	recent	fiscal	year.

# PART	IV

# ITEM	15. Exhibits	and	Financial	Statement	Schedules

(a)	1.	Financial	Statements

The	following	consolidated	financial	statements	of	Zimmer	Holdings,	Inc.	and	its	subsidiaries	are	set	forth	in	Part	II,	Item	8.

Consolidated	Statements	of	Earnings	for	the	Years	Ended	December	31,	2007,	2006	and	2005

Consolidated	Balance	Sheets	as	of	December	31,	2007	and	2006

Consolidated	Statements	of	Stockholders'	Equity	for	the	Years	Ended	December	31,	2007,	2006	and	2005 Consolidated	Statements	of	Cash	Flows	for	the	Years	Ended	December	31,	2007,	2006	and	2005 Consolidated	Statements	of	Comprehensive	Income	for	the	Years	Ended	December	31,	2007,	2006	and	2005 Notes	to	Consolidated	Financial	Statements

2.	Financial	Statement	Schedules

# Schedule	II.	Valuation	and	Qualifying	Accounts

Other	financial	statement	schedules	are	omitted	because	they	are	not	applicable	or	the	required	information	is	shown	in	the	financial	statements	or	the	notes	thereto.

# 3.	Exhibits

A	list	of	exhibits	required	to	be	filed	as	part	of	this	report	is	set	forth	in	the	Index	to	Exhibits,	which	immediately	precedes	such	exhibits,	and	is	incorporated	herein	by	reference.

# Signatures

Pursuant	to	the	requirements	of	Section	13	or	15(d)	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.

David	C.	Dvorak

President	and	Chief	Executive	Officer

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	registrant	and	in	the	capacities	and	on	the	dates	indicated.

| Signature | Title | Date |
| :--- | :--- | :--- |
| /s/\t\tDavid\tC.\tDvorak | President,\tChief\tExecutive\tOfficer\tand\tDirector | February\t29,\t2008 |
| David\tC.\tDvorak | (Principal\tExecutive\tOfficer) |  |
| /s/\t\tJames\tT.\tCrines | Executive\tVice\tPresident,\tFinance | February\t29,\t2008 |
| James\tT.\tCrines | and\tChief\tFinancial\tOfficer |  |
|  | (Principal\tFinancial\tOfficer) |  |
| /s/\t\tDerek\tM.\tDavis | Vice\tPresident,\tFinance,\tand\tCorporate\tController | February\t29,\t2008 |
| Derek\tM.\tDavis | and\tChief\tAccounting\tOfficer |  |
|  | (Principal\tAccounting\tOfficer) |  |
| /s/\t\tJohn\tL.\tMcGoldrick\nJohn\tL.\tMcGoldrick | Director | February\t29,\t2008 |
| /s/\t\tStuart\tM.\tEssig\nStuart\tM.\tEssig | Director | February\t29,\t2008 |
| /s/\t\tLarry\tC.\tGlasscock\nLarry\tC.\tGlasscock | Director | February\t29,\t2008 |
| /s/\t\tArthur\tJ.\tHiggins | Director | February\t29,\t2008 |

# Index	to	Exhibits

# Exhibit	No 	 Description

	3.1 Restated	Certificate	of	Incorporation	of	Zimmer	Holdings,	Inc.	dated	July	28,	2001,	together	with	Certificate	of	Amendment	of	Restated	Certificate	of	Incorporation	of	Zimmer	Holdings,	Inc.	dated	May	9,	2007 (incorporated	by	reference	to	Exhibit	3.1	to	the	Registrant's	Quarterly	Report	on	Form	10-Q	filed	August	7,	2007)

	3.2 Certificate	of	Designations	of	Series	A	Participating	Cumulative	Preferred	Stock	of	Zimmer	Holdings,	Inc.,	dated	as	of	August	6,	2001	(incorporated	by	reference	to	Exhibit	3.2	to	the	Registrant's	Current	Report	on Form	8-K	filed	November	13,	2001)

	3.3 Restated	By-Laws	of	Zimmer	Holdings,	Inc.	effective	November	30,	2007	(incorporated	by	reference	to	Exhibit	3.1	to	the	Registrant's	Current	Report	on	Form	8-K	filed	November	27,	2007)

	4.1 Specimen	Common	Stock	certificate	(incorporated	by	reference	to	Exhibit	4.3	to	the	Registrant's	Registration	Statement	on	Form	S-8	filed	January	20,	2006)

10.1* Zimmer	Holdings,	Inc.	2001	Stock	Incentive	Plan	(incorporated	by	reference	to	Appendix	B	to	the	Registrant's	definitive	Proxy	Statement	on	Schedule	14A	filed	March	24,	2003)

10.2* First	Amendment	to	the	Zimmer	Holdings,	Inc.	2001	Stock	Incentive	Plan	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Current	Report	on	Form	8-K	filed	December	15,	2005)

10.3* Zimmer	Holdings,	Inc.	2006	Stock	Incentive	Plan,	as	amended	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Current	Report	on	Form	8-K	filed	December	13,	2006)

10.4* Zimmer	Holdings,	Inc.	Executive	Performance	Incentive	Plan,	effective	August	6,	2001	(incorporated	by	reference	to	Appendix	C	to	the	Registrant's	definitive	Proxy	Statement	on	Schedule	14A	filed	March	24,

10.5* Zimmer	Holdings,	Inc.	Stock	Plan	for	Non-Employee	Directors,	effective	August	6,	2001	(incorporated	by	reference	to	Exhibit	10.6	to	the	Registrant's	Current	Report	on	Form	8-K	filed	August	6,	2001)

10.6* First	Amendment	to	the	Zimmer	Holdings,	Inc.	Stock	Plan	for	Non-Employee	Directors	(incorporated	by	reference	to	Exhibit	10.3	to	the	Registrant's	Current	Report	on	Form	8-K	filed	December	15,	2005)

10.7* Restated	Zimmer	Holdings,	Inc.	Deferred	Compensation	Plan	for	Non-Employee	Directors,	effective	January	1,	2005	(incorporated	by	reference	to	Exhibit	10.2	to	the	Registrant's	Current	Report	on	Form	8-K	filed December	15,	2005)

10.8* Restated	Zimmer,	Inc.	Long-Term	Disability	Income	Plan	for	Highly	Compensated	Employees	(incorporated	by	reference	to	Exhibit	10.9	to	the	Registrant's	Annual	Report	on	form	10-K	filed	February	28,	2007)

10.9* Employment	Agreement	with	J.	Raymond	Elliott	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Current	Report	on	Form	8-K	filed	November	20,	2006)

10.10* Change	in	Control	Severance	Agreement	with	David	C.	Dvorak	(incorporated	by	reference	to	Exhibit	10.4	to	the	Registrant's	Quarterly	Report	on	Form	10-Q	filed	November	9,	2007)

10.11* Form	of	Change	in	Control	Severance	Agreement	with	Bruno	A.	Melzi	(incorporated	by	reference	to	Exhibit	10.3	to	the	Registrant's	Quarterly	Report	on	Form	10-Q	filed	May	8,	2002)

10.12* Change	in	Control	Severance	Agreement	with	Sheryl	L.	Conley	(incorporated	by	reference	to	Exhibit	10.2	to	the	Registrant's	Quarterly	Report	on	Form	10-Q	dated	filed	August	8,	2003)

10.13* Form	of	Change	in	Control	Severance	Agreement	with	James	T.	Crines	and	Cheryl	R.	Blanchard	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Quarterly	Report	on	Form	10-Q	filed	May	8,	2007)

10.14* Form	of	Change	in	Control	Severance	Agreement	with	Chad	F.	Phipps	and	Derek	M.	Davis	(incorporated	by	reference	to	Exhibit	10.5	to	the	Registrant's	Quarterly	Report	on	Form	10-Q	filed	November	9,	2007)

10.15* Change	in	Control	Severance	Agreement	with	Jon	E.	Kramer	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Quarterly	Report	on	Form	10-Q	filed	November	8,	2004)

10.16* Change	in	Control	Severance	Agreement	with	Stephen	Hong	Liang,	Ooi	(incorporated	by	reference	to	Exhibit	10.21	to	the	Registrant's	Annual	Report	on	Form	10-K	filed	March	12,	2003)

10.17* Benefit	Equalization	Plan	of	Zimmer	Holdings,	Inc.	and	Its	Subsidiary	or	Affiliated	Corporations	Participating	in	the	Zimmer	Holdings,	Inc.	Savings	and	Investment	Program	(incorporated	by	reference	to Exhibit	10.2	to	the	Registrant's	Quarterly	Report	on	Form	10-Q	filed	August	9,	2005)

10.18* Benefit	Equalization	Plan	of	Zimmer	Holdings,	Inc.	and	Its	Subsidiary	or	Affiliated	Corporations	Participating	in	the	Zimmer	Holdings,	Inc.	Retirement	Income	Plan	or	the	Zimmer	Puerto	Rico	Retirement	Income Plan	(incorporated	by	reference	to	Exhibit	10.3	to	the	Registrant's	Quarterly	Report	on	Form	10-Q	filed	August	9,	2005)

10.19* First	Amendment	of	Benefit	Equalization	Plan	of	Zimmer	Holdings,	Inc.	and	Its	Subsidiary	or	Affiliate	Corporations	Participating	in	the	Zimmer	Holdings,	Inc.	Retirement	Income	Plan	or	the	Zimmer	Puerto	Rico Retirement	Income	Plan	(incorporated	by	reference	to	Exhibit	10.4	to	the	Registrant's	Quarterly	Report	on	Form	10-Q	filed	August	9,	2005)

# Index	to	Exhibits	(Continued)

10.20* Second	Amendment	of	Benefit	Equalization	Plan	of	Zimmer	Holdings,	Inc.	and	its	Subsidiary	or	Affiliate	Corporations	Participating	in	the	Zimmer	Holdings,	Inc.	Retirement	Income	Plan	or	the	Zimmer	Puerto	Rico Retirement	Income	Plan	(incorporated	by	reference	to	Exhibit	10.2	to	the	Registrant's	Current	Report	on	Form	8-K	filed	May	4,	2006)

10.21* Form	of	Non-Disclosure,	Non-Competition	and	Non-Solicitation	Employment	Agreement	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Current	Report	on	Form	8-K	filed	March	27,	2006)

10.22* Non-Disclosure,	Non-Competition	and	Non-Solicitation	Employment	Agreement	with	Stephen	Hong	Liang,	Ooi	(incorporated	by	reference	to	Exhibit	10.2	to	the	Registrant's	Current	Report	on	Form	8-K	filed March	27,	2006)

10.23* Confidentiality,	Non-Competition	and	Non-Solicitation	Agreement	with	Bruno	A.	Melzi	(incorporated	by	reference	to	Exhibit	10.3	to	the	Registrant's	Current	Report	on	Form	8-K	filed	March	27,	2006)

10.24* Form	of	Nonqualified	Stock	Option	Award	Letter	under	the	Zimmer	Holdings,	Inc.	2001	Stock	Incentive	Plan	(incorporated	by	reference	to	Exhibit	10.3	to	the	Registrant's	Current	Report	on	Form	8-K	filed January	11,	2006)

10.25* Form	of	Restricted	Stock	Award	Letter	under	the	Zimmer	Holdings,	Inc.	2001	Stock	Incentive	Plan	(incorporated	by	reference	to	Exhibit	10.2	to	the	Registrant's	Current	Report	on	Form	8-K	filed	January	12,	2005)

10.26* Form	of	Nonqualified	Performance-Conditioned	Stock	Option	Grant	Award	Letter	under	the	Zimmer	Holdings,	Inc.	2001	Stock	Incentive	Plan	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Current Report	on	Form	8-K	filed	January	21,	2005)

10.27* Form	of	Performance	Share	Award	Letter	under	the	Zimmer	Holdings,	Inc.	2001	Stock	Incentive	Plan	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Current	Report	on	Form	8-K	filed	January	11, 2006)

10.28* Form	of	Performance	Share	Award	Letter	under	the	Zimmer	Holdings,	Inc.	2001	Stock	Incentive	Plan	(for	Non-U.S.	employees)	(incorporated	by	reference	to	Exhibit	10.2	to	the	Registrant's	Current	Report	on Form	8-K	filed	January	11,	2006)

10.29* Form	of	Nonqualified	Stock	Option	Award	Letter	under	the	Zimmer	Holdings,	Inc.	Stock	Plan	for	Non-Employee	Directors	(incorporated	by	reference	to	Exhibit	10.2	to	the	Registrant's	Current	Report	on	Form	8-K filed	April	5,	2005)

10.30* Form	of	Restricted	Stock	Unit	Award	Letter	under	the	Zimmer	Holdings,	Inc.	Stock	Plan	for	Non-Employee	Directors	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Current	Report	on	Form	8-K	filed February	21,	2006)

10.31* Form	of	Nonqualified	Stock	Option	Award	Letter	under	the	Zimmer	Holdings,	Inc.	2006	Stock	Incentive	Plan	(incorporated	by	reference	to	Exhibit	10.2	to	the	Registrant's	Current	Report	on	Form	8-K	filed December	13,	2006)

10.32* Form	of	Nonqualified	Stock	Option	Award	Letter	for	Non-U.S.	Employees	under	the	Zimmer	Holdings,	Inc.	2006	Stock	Incentive	Plan	(incorporated	by	reference	to	Exhibit	10.3	to	the	Registrant's	Current	Report	on Form	8-K	filed	December	13,	2006)

10.33* Form	of	Restricted	Stock	Award	Letter	under	the	Zimmer	Holdings,	Inc.	2006	Stock	Incentive	Plan	(five-year	vesting)	(incorporated	by	reference	to	Exhibit	10.4	to	the	Registrant's	Current	Report	on	Form	8-K	filed December	13,	2006)

10.34* Form	of	Restricted	Stock	Unit	Award	Letter	for	Non-U.S.	Employees	under	the	Zimmer	Holdings,	Inc.	2006	Stock	Incentive	Plan	(five-year	vesting)	(incorporated	by	reference	to	Exhibit	10.5	to	the	Registrant's Current	Report	on	Form	8-K	filed	December	13,	2006)

10.35* Form	of	Restricted	Stock	Unit	Award	Letter	under	the	Zimmer	Holdings,	Inc.	2006	Stock	Incentive	Plan	(two-year	vesting)	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Current	Report	on	Form	8-K filed	December	11,	2007)

10.36* Form	of	Restricted	Stock	Unit	Award	Letter	for	Non-US	Employees	under	the	Zimmer	Holdings,	Inc.	2006	Stock	Incentive	Plan	(two-year	vesting)	(incorporated	by	reference	to	Exhibit	10.2	to	the	Registrant's Current	Report	on	Form	8-K	filed	December	11,	2007)

10.37* Form	of	Performance-Based	Restricted	Stock	Unit	Award	Letter	under	the	Zimmer	Holdings,	Inc.	2006	Stock	Incentive	Plan	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Quarterly	Report	on Form	10-Q	filed	August	7,	2007)

10.38* Summary	Compensation	Sheet

10.40 Settlement	Agreement	dated	September	27,	2007,	among	the	United	States	of	America,	acting	through	the	United	States	Department	of	Justice	and	on	behalf	of	the	Office	of	Inspector	General	of	the	Department	of Health	and	Human	Services,	and	Zimmer	Holdings,	Inc.	on	behalf	of	its	wholly	owned	subsidiary	Zimmer,	Inc.	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Quarterly	Report	on	Form	10-Q	filed November	9,	2007)

10.41 Corporate	Integrity	Agreement	dated	September	27,	2007,	among	Zimmer	Holdings,	Inc.,	Zimmer,	Inc.	and	the	Office	of	Inspector	General	of	the	Department	of	Health	and	Human	Services	(incorporated	by reference	to	Exhibit	10.2	to	the	Registrant's	Quarterly	Report	on	Form	10-Q	filed	November	9,	2007)

10.42 Deferred	Prosecution	Agreement	dated	September	27,	2007,	between	Zimmer,	Inc.	and	the	United	States	Attorney's	Office	for	the	District	of	New	Jersey	(incorporated	by	reference	to	Exhibit	10.3	to	the	Registrant's Quarterly	Report	on	Form	10-Q	filed	November	9,	2007)

10.43 Zimmer,	Inc.	Monitor	Agreement	and	Agreement	Regarding	Fees	and	Reimbursements,	dated	October	25,	2007	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Current	Report	on	Form	8-K	filed October	31,	2007)

10.44 Form	of	Indemnification	Agreement	with	Non-Employee	Directors	(incorporated	by	reference	to	Exhibit	10.1	to	the	Registrant's	Current	Report	on	Form	8-K	filed	February	25,	2008)

21 List	of	Subsidiaries	of	Zimmer	Holdings,	Inc.

23 Consent	of	PricewaterhouseCoopers	LLP

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 Certification	pursuant	to	18	U.S.C.	Section	1350,	as	adopted	pursuant	to	Section	906	of	the	Sarbanes-Oxley	Act	of	2002

* indicates	management	contracts	or	compensatory	plans	or	arrangements

# Valuation	and	Qualifying	Accounts

# Schedule	II

| Description | Balance	at<br>Beginning<br>of	Period | Additions<br>Charged<br>(Credited)<br>to	Expense | Deductions<br>to	Reserve | Effects	of<br>Foreign<br>Currency | Balance	at<br>End	of<br>Period |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Doubtful\tAccounts: |  |  |  |  |  |
| Year\tEnded\tDecember\t31,\t2005 | $28.4 | $(2.2) | $(1.5) | $(1.4) | $23.3 |
| Year\tEnded\tDecember\t31,\t2006 | 23.3 | (3.2) | (1.0) | 1.3 | 20.4 |
| Year\tEnded\tDecember\t31,\t2007 | 20.4 | 1.4 | (1.2) | 1.1 | 21.7 |
| Excess\tand\tObsolete\tInventory: |  |  |  |  |  |
| Year\tEnded\tDecember\t31,\t2005 | $124.1 | $21.6 | $(18.5) | $(6.2) | $121.0 |
| Year\tEnded\tDecember\t31,\t2006 | 121.0 | 32.6 | (26.0) | 1.9 | 129.5 |
| Year\tEnded\tDecember\t31,\t2007 | 129.5 | 38.6 | (26.9) | 2.5 | 143.7 |
| Excess\tand\tObsolete\tInstruments: |  |  |  |  |  |
| Year\tEnded\tDecember\t31,\t2005 | $36.4 | $10.0 | $(7.8) | $(0.9) | $37.7 |
| Year\tEnded\tDecember\t31,\t2006 | 37.7 | 8.3 | (5.4) | 0.1 | 40.7 |
| Year\tEnded\tDecember\t31,\t2007 | 40.7 | 3.1 | (12.5) | 0.4 | 31.7 |



Question: what is the percent change in consulting and professional fees from 2006 to 2007?
Calculation: consulting_fees_2007 = 8.8
consulting_fees_2006 = 1.0
change = consulting_fees_2007 - consulting_fees_2006
percent_change = change / consulting_fees_2006
answer = percent_change * 100
Answer: 780%