UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER 30, 2009~~MARCH 31, 2010

Commission File Number001-16407

ZIMMER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


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

345 East Main Street, Warsaw, IN 46580

(Address of principal executive offices)

Telephone:(574) 267-6131

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):


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

(Do not check if a smaller reporting company)

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

As of ~~October 20, 2009, 212,979,017~~April 23, 2010, 202,807,605 shares of the registrant’s $.01 par value common stock were outstanding.

Part I — Financial Information


Item 1.	*Financial Statements*

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(In millions, except per share amounts, unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Three Months Ended March 31,
	2009			2008			2009			2008			2010			2009

Net Sales	$	975.6		$	952.2		$	2,988.1		$	3,090.9		$	1,062.8		$	992.6
Cost of products sold		249.3			237.2			716.4			754.2			268.4			230.2

Gross Profit		726.3			715.0			2,271.7			2,336.7			794.4			762.4

Research and development		52.1			47.9			153.8			144.0			51.0			51.9
Selling, general and administrative		413.0			403.7			1,269.0			1,269.5			446.7			423.7
Certain claims (Note 14)		35.0			47.5			35.0			47.5
Acquisition, integration, realignment and other (Note 2)		22.2			5.6			65.7			25.4			2.6			7.0
Net curtailment and settlement (Note 11)		—			—			(32.1	)		—

Operating expenses		522.3			504.7			1,491.4			1,486.4			500.3			482.6

Operating Profit		204.0			210.3			780.3			850.3			294.1			279.8
Interest and other income (expense), net		(4.2	)		28.2			(11.9	)		36.0
Interest and other, net														(14.6	)		(3.7	)

Earnings before income taxes		199.8			238.5			768.4			886.3			279.5			276.1
Provision for income taxes		49.9			23.5			206.2			204.4			74.1			73.9

Net earnings		149.9			215.0			562.2			681.9
Less: Net earnings attributable to noncontrolling interest		—			(0.3	)		—			(0.8	)

Net Earnings of Zimmer Holdings, Inc.	$	149.9		$	214.7		$	562.2		$	681.1		$	205.4		$	202.2

Earnings Per Common Share
Basic	$	0.70		$	0.96		$	2.60		$	2.98		$	1.01		$	0.91
Diluted	$	0.70		$	0.95		$	2.59		$	2.97		$	1.01		$	0.91
Weighted Average Common Shares Outstanding
Basic		213.6			224.7			216.6			228.5			203.0			221.5
Diluted		214.5			225.6			217.4			229.7			204.2			222.1

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

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except share ~~amounts, unaudited)~~amounts)


									March 31,				December 31,
		September 30 ,			December 31,				2010				2009
		2009			2008				(Unaudited)

ASSETS	ASSETS							ASSETS
Current Assets:
Cash and cash equivalents		$	439.7		$	212.6			$	821.2			$	691.7
Restricted cash			2.8			2.7
Certificates of deposit										50.2				66.4
Accounts receivable, less allowance for doubtful accounts			743.2			732.8				767.1				751.4
Inventories, net			972.1			928.3				896.5				913.2
Prepaid expenses and other current assets			65.5			103.9				118.0				105.4
Deferred income taxes			225.5			198.3				220.8				209.9

Total current assets			2,448.8			2,178.6				2,873.8				2,738.0
Property, plant and equipment, net			1,239.7			1,264.1				1,190.5				1,221.7
Goodwill			2,883.2			2,774.8				2,712.3				2,783.5
Intangible assets, net			873.9			872.1				834.0				858.0
Other assets			202.5			149.4				211.4				184.3

Total Assets		$	7,648.1		$	7,239.0			$	7,822.0			$	7,785.5

																LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	121.0		$	186.4			$	136.0			$	134.6
Income taxes payable			15.6			6.6
Income taxes										67.9				57.5
Other current liabilities			540.1			578.1				451.3				498.6

Total current liabilities			676.7			771.1				655.2				690.7
Other long-term liabilities			392.5			353.9				325.9				328.5
Long-term debt			600.2			460.1				1,127.0				1,127.6

Total Liabilities			1,669.4			1,585.1				2,108.1				2,146.8

Commitments and Contingencies (Note 14)
Stockholders’ Equity:
Zimmer Holdings, Inc. Stockholders’ Equity:
Common stock, $0.01 par value, one billion shares authorized, 253.9 million shares issued in 2009 (253.7 million in 2008)			2.5			2.5
Common stock, $0.01 par value, one billion shares authorized, 254.2 million shares issued in 2010 (254.1 million in 2009)										2.5				2.5
Paid-in capital			3,197.9			3,138.5				3,231.6				3,214.6
Retained earnings			4,947.7			4,385.5				5,307.9		��		5,102.5
Accumulated other comprehensive income			351.2			240.0				304.9				358.6
Treasury stock, 40.9 million shares in 2009 (30.1 million in 2008)			(2,520.6	)		(2,116.2	)

Total Zimmer Holdings, Inc. stockholders’ equity			5,978.7			5,650.3
Noncontrolling interest			—			3.6
Treasury stock, 51.4 million shares in 2010 (49.9 million in 2009)										(3,133.0	)			(3,039.5	)

Total Stockholders’ Equity			5,978.7			5,653.9				5,713.9				5,638.7

Total Liabilities and Stockholders’ Equity		$	7,648.1		$	7,239.0			$	7,822.0			$	7,785.5

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

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS’ EQUITY~~CASH FLOWS

(In millions, unaudited)

Zimmer Holdings, Inc. Stockholders
Accumulated

Other
Total

Common Shares Paid-in
Retained
Comprehensive
Treasury Shares Noncontrolling
Stockholders’

Number Amount Capital Earnings Income Number Amount Interest Equity

Balance January 1, 2009
253.7 $ 2.5 $ 3,138.5 $ 4,385.5 $ 240.0 (30.1 ) $ (2,116.2 ) $ 3.6 $ 5,653.9
Net earnings — — — 562.2 — — — — 562.2
Other comprehensive income — — — — 111.2 — — — 111.2
Purchase of noncontrolling interest — — (5.0 ) — — — — (3.6 ) (8.6 )
Stock compensation plans, including tax benefits 0.2 — 64.4 — — — — — 64.4
Share repurchases — — — — — (10.8 ) (404.4 ) — (404.4 )

Balance September 30, 2009
253.9 $ 2.5 $ 3,197.9 $ 4,947.7 $ 351.2 (40.9 ) $ (2,520.6 ) $ — $ 5,978.7

For the Three Months

Ended March 31,
2010 2009

Cash flows provided by (used in) operating activities:

Net earnings of Zimmer Holdings, Inc. $ 205.4 $ 202.2
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization 84.9 79.6
Share-based compensation 12.7 17.1
Income tax benefit from stock option exercises 1.7 0.1
Excess income tax benefit from stock option exercises (0.7 ) —
Inventorystep-up
1.3 4.2
Changes in operating assets and liabilities, net of effect of acquisitions:
Income taxes 2.3 44.9
Receivables (32.5 ) (6.3 )
Inventories 17.2 (32.2 )
Accounts payable and accrued expenses (37.1 ) (111.5 )
Other assets and liabilities 4.3 (13.5 )

Net cash provided by operating activities 259.5 184.6

Cash flows provided by (used in) investing activities:

Additions to instruments (39.3 ) (45.3 )
Additions to other property, plant and equipment (11.6 ) (30.9 )
Purchases of certificates of deposit (4.0 ) —
Sales of certificates of deposit 20.0 —
Acquisition of intellectual property rights — (7.6 )
Investments in other assets (2.9 ) (0.6 )

Net cash used in investing activities (37.8 ) (84.4 )

Cash flows provided by (used in) financing activities:

Net borrowing under credit facilities — 210.0
Proceeds from employee stock compensation plans 4.9 3.3
Excess income tax benefit from stock option exercises 0.7 —
Repurchase of common stock (93.5 ) (301.4 )
Acquisition of noncontrolling interest — (7.8 )

Net cash used in financing activities (87.9 ) (95.9 )

Effect of exchange rates on cash and cash equivalents (4.3 ) (4.1 )

Increase in cash and cash equivalents 129.5 0.2
Cash and cash equivalents, beginning of year 691.7 212.6

Cash and cash equivalents, end of period $ 821.2 $ 212.8

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

5

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~
~~(In millions, unaudited)~~

For the Nine Months Ended September 30,
2009 2008

Cash flows provided by (used in) operating activities:

Net earnings of Zimmer Holdings, Inc. $ 562.2 $ 681.1
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization 249.6 196.0
Net curtailment and settlement (32.1 ) —
Gain on sale of investments — (38.8 )
Share-based compensation 57.7 50.4
Inventorystep-up
9.9 3.2
Income tax benefit from stock option exercises 0.7 10.6
Excess income tax benefit from stock option exercises (0.1 ) (6.5 )
Changes in operating assets and liabilities, net of effect of acquisitions:
Income taxes (4.9 ) (66.2 )
Receivables 10.9 (11.9 )
Inventories (22.3 ) (106.5 )
Accounts payable and accrued expenses (133.6 ) 141.3
Other assets and liabilities 34.0 (21.5 )

Net cash provided by operating activities 732.0 831.2

Cash flows provided by (used in) investing activities:

Additions to instruments (102.7 ) (186.5 )
Additions to other property, plant and equipment (76.8 ) (189.2 )
Proceeds from sale of investments — 54.9
Acquisition of intellectual property rights (32.9 ) —
Investments in other assets (35.5 ) (18.6 )

Net cash used in investing activities (247.9 ) (339.4 )

Cash flows provided by (used in) financing activities:

Net borrowing under credit facilities 141.0 220.0
Proceeds from employee stock compensation plans 7.6 54.2
Excess income tax benefit from stock option exercises 0.1 6.5
Repurchase of common stock (404.4 ) (688.9 )
Acquisition of noncontrolling interest (8.6 ) —

Net cash used in financing activities (264.3 ) (408.2 )

Effect of exchange rates on cash and cash equivalents 7.3 (5.1 )

Increase in cash and cash equivalents 227.1 78.5
Cash and cash equivalents, beginning of year 212.6 463.9

Cash and cash equivalents, end of period $ 439.7 $ 542.4

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

6

~~ZIMMER HOLDINGS, INC. AND SUBSIDIARIES~~

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


1.	Basis of Presentation

The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the ~~2008~~2009 Annual Report onForm 10-K filed by Zimmer Holdings, Inc. In ~~the~~our opinion, ~~of management,~~ the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The December 31, ~~2008~~2009 condensed balance sheet data was derived from audited financial statements, ~~(other than as it relates to the adjustments for the adoption of the Financial Accounting Standards Board’s (FASB) new guidance related to noncontrolling interests as described below),~~ but does not include all disclosures required by accounting principles generally accepted in the United States of America. Results for interim periods should not be considered indicative of results for the full year. Certain amounts in the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2008~~March 31, 2009 have been reclassified to conform to the current year presentation.

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


2.	Significant Accounting Policies

~~Noncontrolling Interests~~ — On January 1, 2009, we adopted the FASB’s newly issued guidance related to noncontrolling interests. This new guidance changes the accounting and reporting for minority interests, which are now recharacterized as noncontrolling interests and classified as a component of equity. This new guidance requires retroactive adoption of the presentation and disclosure requirements for existing noncontrolling interests. This adoption did not have a material impact on our consolidated financial statements or results of operations. During the nine month period ended September 30, 2009, we acquired 100 percent ownership of our only outstanding noncontrolling interest for approximately $8.6 million. This purchase was recorded as an equity transaction and is reflected as a financing activity in our consolidated statement of cash flows. As a result, the carrying balance of the noncontrolling interests of $3.6 million was eliminated and the remaining $5.0 million, representing the difference between the purchase price and carrying balance, was recorded as a reduction in paid-in capital. Transactions with noncontrolling interests had the following effect on equity attributable to Zimmer Holdings, Inc.:

Three Months
Nine Months

Ended September 30, Ended September 30,
2009 2008 2009 2008
(In millions) (In millions)

Net earnings of Zimmer Holdings, Inc. $ 149.9 $ 214.7 $ 562.2 $ 681.1
Transfers to noncontrolling interests:
Decrease in equity related to the purchase of noncontrolling interests (0.8 ) — (5.0 ) —

Change from net earnings of Zimmer Holdings, Inc. and transfers to noncontrolling interests $ 149.1 $ 214.7 $ 557.2 $ 681.1

Acquisition, Integration, Realignment and Other — We recognize ~~incremental~~ expenses resulting directly from our business combinations and ~~significant nonrecurring and unusual~~other items as “Acquisition, integration, realignment and other” expenses. Acquisition, integration, realignment and other expenses for the three month periods ended March 31, 2010 and 2009 included (in millions):

Three Months

Ended March 31,
2010 2009

Impairment of assets $ 0.4 $ —
Consulting and professional fees 1.0 3.1
Employee severance and retention (0.1 ) 0.2
Information technology integration 0.1 0.1
Facility and employee relocation — 0.8
Distributor acquisitions — 0.3
Certain litigation matters (0.8 ) —
Contract terminations 2.0 1.0
Other — 1.5

Acquisition, integration, realignment and other $ 2.6 $ 7.0

Recent Accounting Pronouncements —There are no recently issued accounting pronouncements that we have yet to adopt that are expected to have a material effect on our financial position, results of operations, or cash flows.

76

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~realignment and other” expenses. Acquisition, integration, realignment and other expenses for the three and nine month periods ended September 30, 2009 and 2008 included (in millions):~~

Three Months Ended

September 30, Nine Months Ended September 30,
2009 2008 2009 2008

Impairment of assets $ 0.9 $ — $ 2.2 $ 1.6
Consulting and professional fees 0.6 2.0 3.2 5.4
Employee severance and retention, including share-based compensation acceleration 1.6 — 18.4 —
Information technology integration 0.5 — 0.7 0.4
Facility and employee relocation 2.9 1.4 4.7 5.8
Vacated facilities — — 1.4 —
Distributor acquisitions 4.8 1.3 7.9 7.7
Certain litigation matters 9.3 — 14.1 —
Contract terminations 0.7 — 8.6 —
Other 0.9 0.9 4.5 4.5

Acquisition, Integration, Realignment and Other $ 22.2 $ 5.6 $ 65.7 $ 25.4

During the nine month period ending September 30, 2009, we commenced a global realignment initiative to focus on business opportunities that best support our strategic priorities. As part of this realignment, we initiated changes in our work force, including the elimination of positions in some areas and planned increases in others, to balance the requirements necessary to support long-term growth. Approximately 300 employees from across the globe were affected by these actions. As a result of these changes in our work force and severance costs from acquisitions, we recorded expense of $18.4 million related to severance and other employee termination-related costs. These termination benefits were provided in accordance with our existing or local government policies and are considered ongoing benefits. These costs were accrued when they became probable and estimable and were recorded as part of other current liabilities. The majority of these costs were paid by September 30, 2009. Certain litigation matters relate to costs recognized during the period for the estimated settlement of various ongoing legal matters. Contract termination costs relate to terminated agreements in connection with the integration of acquired companies. Consulting and professional fees relate to third-party integration consulting performed in a variety of areas such as tax, compliance, logistics and human resources and fees related to matters involving severance and termination benefits.
~~Subsequent Events~~ — In May 2009, the FASB issued new guidance related to the accounting for and disclosure of subsequent events, which is effective for interim and annual periods ending after June 15, 2009. This new guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance introduces new terminology but is based on the same principles that previously existed in the auditing standards. Under this new guidance we are required to provide disclosure of the date through which we have evaluated subsequent events and whether that date represents the date the financial statements were issued or the date the financial statements were available to be issued. For the financial statements related to the three and nine month periods ending September 30, 2009 and 2008 contained herein, we have evaluated subsequent events through November 4, 2009 representing the date these financial statements were issued.
~~FASB Accounting Standards Codification~~ — Effective for interim and annual periods ending after September 15, 2009, the FASB has defined a new hierarchy for U.S. GAAP and established the FASB Accounting Standards Codification (ASC) as the sole source for authoritative guidance to be applied by nongovernmental

8

~~ZIMMER HOLDINGS, INC. AND SUBSIDIARIES~~

~~NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~entities. The adoption of the ASC changes the manner in which U.S. GAAP guidance is referenced, but it does not have any impact on our financial position or results of operations.~~


3.	Comprehensive Income

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

Three Months
Nine Months

Ended
Ended

September 30, September 30,
2009 2008 2009 2008
(In millions) (In millions)

Net Earnings $ 149.9 $ 215.0 $ 562.2 $ 681.9
Other Comprehensive Income:
Foreign currency cumulative translation adjustments 98.0 (102.9 ) 145.2 27.0
Unrealized foreign currency hedge gains/(losses), net of tax (25.5 ) 43.4 (37.9 ) (10.6 )
Reclassification adjustments on foreign currency hedges, net of tax (4.6 ) 10.3 (16.9 ) 45.5
Unrealized gains/(losses) on securities, net of tax 0.2 (1.5 ) (0.3 ) 24.0
Reclassification adjustments on securities, net of tax — (18.4 ) — (23.8 )
Prior service cost and unrecognized gains/(losses) in actuarial assumptions, net of tax 0.7 0.6 21.1 2.3

Total Other Comprehensive Income / (Loss) 68.8 (68.5 ) 111.2 64.4
Comprehensive (Loss) Attributable to Noncontrolling Interest — (0.3 ) — (0.8 )

Comprehensive Income Attributable to Zimmer Holdings, Inc. $ 218.7 $ 146.2 $ 673.4 $ 745.5

Three Months

Ended March 31,
2010 2009
(In millions)

Net earnings of Zimmer Holdings, Inc. $ 205.4 $ 202.2
Other Comprehensive Income:
Foreign currency cumulative translation adjustments (82.4 ) (41.6 )
Unrealized foreign currency hedge gains, net of tax 28.7 22.3
Reclassification adjustments on foreign currency hedges, net of tax (0.9 ) (6.1 )
Unrealized losses on securities, net of tax — (0.5 )
Adjustments to prior service cost and unrecognized actuarial assumptions, net of tax 0.9 14.6

Total Other Comprehensive Loss (53.7 ) (11.3 )

Comprehensive Income Attributable to Zimmer Holdings, Inc. $ 151.7 $ 190.9

4. ~~Abbott Spine Acquisition~~Inventories

March 31,
December 31,

2010 2009
(In millions)

Finished goods $ 708.7 $ 718.6
Work in progress 57.1 48.0
Raw materials 130.7 146.6

Inventories, net $ 896.5 $ 913.2

In October 2008, we acquired Abbott Spine, a former subsidiary of Abbott Laboratories, for an aggregate value of approximately $363.0 million, including a $358.0 million cash purchase price after certain working capital adjustments and $5.0 million of direct acquisition costs. The acquisition was funded by approximately $253 million of cash on-hand and $110 million from new borrowings under our Senior Credit Facility.

5. Property, Plant and Equipment
In the three month period ended June 30, 2009, we completed the final purchase price allocation, which reflects additional contract termination liabilities and changes to the preliminary fair values assigned to acquired inventory.

March 31,
December 31,

2010 2009
(In millions)

Land $ 21.6 $ 21.8
Buildings and equipment 1,144.4 1,147.7
Capitalized software costs 162.2 158.8
Instruments 1,221.5 1,210.2
Construction in progress 61.0 62.0

2,610.7 2,600.5
Accumulated depreciation (1,420.2 ) (1,378.8 )

Property, plant and equipment, net $ 1,190.5 $ 1,221.7

97

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


6.	Other Current Liabilities

March 31,
December 31,

2010 2009
(In millions)

Other current liabilities:
Salaries, wages and benefits $ 75.7 $ 95.7
Accrued liabilities 375.6 402.9

Total other current liabilities $ 451.3 $ 498.6

7. Debt
Long-term debt as of March 31, 2010 consisted of our unsecured senior notes (Senior Notes) and borrowings under our $1,350 million senior credit agreement (Senior Credit Facility). Outstanding long-term debt as of March 31, 2010 was $1,127.0 million, comprised of $998.8 million from our Senior Notes and $128.2 million from our Senior Credit Facility. There was no short-term debt outstanding. The estimated fair value of our Senior Notes as of March 31, 2010, based on quoted prices for the specific securities from transactions in active markets, was $990.9 million. The carrying value of the Senior Credit Facility approximates fair value, as the underlying instruments have variable interest rates at market value.
8. Fair Value Measurement of Assets and Liabilities
The following assets and liabilities are recorded at fair value on a recurring basis as of March 31, 2010 (in millions):

Fair Value Measurements at Reporting Date Using:
Quoted

Prices in

Active
Significant

Markets for
Other
Significant

Identical
Observable
Unobservable

Recorded
Assets
Inputs
Inputs

Balance (Level 1) (Level 2) (Level 3)

Assets

Available-for-sale securities
$ 0.9 $ 0.9 $ — $ —
Derivatives, current and long-term 33.9 — 33.9 —

$ 34.8 $ 0.9 $ 33.9 $ —

Liabilities

Derivatives, current and long-term $ 22.5 $ — $ 22.5 $ —

$ 22.5 $ — $ 22.5 $ —

8

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following ~~table summarizes the fair values of the assets acquired and liabilities assumed at the date of the Abbott Spine acquisition (in millions):~~

As of

October 16, 2008

Current assets $ 61.4
Property, plant and equipment 6.5
Instruments 17.5
Intangible assets subject to amortization:
Customer relationships (10 year useful life) 8.6
Developed technology (10 year useful life) 64.3
In-process research and development 38.5
Other assets 10.0
Goodwill 205.1

Total assets acquired 411.9

Current liabilities 19.5
Deferred taxes 29.4

Total liabilities assumed 48.9

Net assets acquired $ 363.0

Goodwill of $132.5 million, $69.9 million and $2.7 million was assigned to the Americas, Europe and Asia Pacific reporting segments, respectively. None of the goodwill is deductible for tax purposes.
5. ~~Inventories~~

September 30,
December 31,

2009 2008
(In millions)

Finished goods $ 762.9 $ 731.2
Work in progress 47.2 52.6
Raw materials 162.0 144.5

Inventories, net $ 972.1 $ 928.3

6. ~~Property, Plant and Equipment~~

September 30,
December 31,

2009 2008
(In millions)

Land $ 21.8 $ 21.7
Buildings and equipment 1,114.3 992.7
Capitalized software costs 156.5 136.7
Instruments 1,204.1 1,161.7
Construction in progress 76.0 149.0

2,572.7 2,461.8
Accumulated depreciation (1,333.0 ) (1,197.7 )

Property, plant and equipment, net $ 1,239.7 $ 1,264.1

10

~~ZIMMER HOLDINGS, INC. AND SUBSIDIARIES~~

~~NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


7.	~~Other Current and Long-Term Liabilities~~

September 30,
December 31,

2009 2008
(In millions)

Other current liabilities:
License and service agreements $ 127.3 $ 169.6
Accrued liabilities 412.8 408.5

Total other current liabilities $ 540.1 $ 578.1

Other long-term liabilities:
Accrued retirement and postretirement benefit plans $ 46.0 $ 129.9
Other long-term liabilities 346.5 224.0

Total other long-term liabilities $ 392.5 $ 353.9

8. ~~Fair Value Measurement of Assets and Liabilities~~
In September 2006, the FASB issued new guidance on fair value measurements. The new guidance defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and expands disclosures about fair value measurements. On January 1, 2008, we adopted the FASB’s guidance on fair value measurements for certain financial assets and liabilities. On January 1, 2009, we adopted the FASB’s guidance on fair value as it relates to nonfinancial assets and liabilities ~~except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. For the three and nine month periods ended September 30, 2009, there~~ were ~~no significant nonrecurring fair value measurements made subsequent to initial recognition.~~
~~The following assets and liabilities are~~ recorded at fair value on a recurring basis as of ~~September 30,~~December 31, 2009 (in millions):

Fair Value Measurements at Reporting Date Using:
Quoted
Fair Value Measurements at Reporting Date Using:
Prices in
Quoted

Active
Significant
Prices in
Significant

Markets for
Other
Significant
Active Markets
Other
Significant

Identical
Observable
Unobservable
for Identical
Observable
Unobservable

Recorded
Assets
Inputs
Inputs
Recorded
Assets
Inputs
Inputs

Balance (Level 1) (Level 2) (Level 3) Balance (Level 1) (Level 2) (Level 3)

Assets

Available-for-sale securities $ 0.9 $ 0.9 $ — $ — $ 0.9 $ 0.9 $ — $ —
Derivatives, current and long-term 13.0 — 13.0 — 12.4 — 12.4 —

$ 13.9 $ 0.9 $ 13.0 $ — $ 13.3 $ 0.9 $ 12.4 $ —

Liabilities

Derivatives, current and long-term $ 46.3 $ — $ 46.3 $ — $ 32.7 $ — $ 32.7 $ —

$ 46.3 $ — $ 46.3 $ — $ 32.7 $ — $ 32.7 $ —

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

11

~~ZIMMER HOLDINGS, INC. AND SUBSIDIARIES~~

~~NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

There were no significant nonrecurring fair value measurements made in the three month period ended March 31, 2010.


9.	Derivative Instruments and Hedging Activities

On January 1, 2009, we adopted the FASB’s new guidance related to the disclosure of derivative and hedging activities. The adoption of this guidance did not have a material impact on our consolidated financial statements or results of operations. The new guidance impacts disclosures only and requires additional qualitative and quantitative information on the use of derivatives and their impact on financial position, results of operations and cash flows. These disclosures are provided below.

We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, commodity price risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risk that we manage through the use of derivative instruments is foreign currency 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. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts and options with major financial institutions. 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, Korean Won, Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles and ~~Swedish Krona.~~Indian Rupees. We do not use derivative financial instruments for trading or speculative purposes.

We report all derivative instruments as assets or liabilities on the balance sheet at fair value.

Derivatives Designated as Hedging Instruments

Our revenues are generated in various currencies throughout the world. However, a significant amount of our inventory is produced in U.S. Dollars. Therefore, movements in foreign currency exchange rates may have different proportional effects on our revenues compared to our cost of products sold. To minimize the effects of foreign currency exchange rate movements on cash flows, we hedge intercompany sales of inventory expected to occur within the next 30 months with foreign currency exchange forward contracts and options. We designate these

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

derivative instruments as cash flow hedges. We have not entered into any derivative instruments designated as fair value or net investment in foreign operation hedges.

We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and that forecasted transactions have not changed significantly. 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 three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~ due to ineffectiveness and amounts excluded from the assessment of hedge effectiveness was not significant.

For forward contracts and options outstanding at ~~September 30, 2009,~~March 31, 2010, we have obligations to purchase U.S. Dollars and sell Euros, Japanese Yen, British Pounds, Canadian Dollars, Australian Dollars, Korean Won, ~~and~~ Swedish Krona, Czech Koruna, Thai Baht, Taiwan Dollars, South African Rand, Russian Rubles, and Indian Rupees and purchase Swiss Francs and sell U.S. Dollars at set maturity dates ranging from ~~October 2009~~April 2010 through ~~March~~September 2012. The notional amounts of outstanding forward contracts and options entered into with third parties to purchase U.S. Dollars at ~~September 30, 2009~~March 31, 2010 were ~~$1.2~~$1.1 billion. The notional amounts of outstanding forward contracts entered into with third parties to purchase Swiss Francs at ~~September 30, 2009~~March 31, 2010 were ~~$236~~$209 million.

As of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008,~~2009, all derivative instruments designated as cash flow hedges are recorded at fair value on the balance sheet. On our consolidated balance sheet, we recognize individual forward contracts and options with the same counterparty on a net asset/liability basis if we have a master netting agreement with the counterparty. The fair value of derivative instruments on a gross basis as of March 31, 2010 and December 31, 2009 is as follows (in millions):

2010 2009
Balance
Balance

Sheet
Fair
Sheet
Fair
Location Value Location Value

Asset Derivatives

Foreign exchange forward contracts Other current assets $ 31.9 Other current assets $23.3
Foreign exchange forward contracts Other assets 13.6 Other assets 6.3

Total asset derivatives
$ 45.5 $29.6

Liability Derivatives

Foreign exchange forward contracts Other current liabilities $ 26.2 Other current liabilities $35.4
Foreign exchange forward contracts Other long-term liabilities 7.9 Other long-term liabilities 14.5

Total liability derivatives
$ 34.1 $49.9

The fair value of outstanding derivative instruments recorded on the balance sheet at March 31, 2010, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized gain of $6.2 million, or $13.8 million after taxes, which is deferred in other comprehensive income, of which $7.5 million, or $11.5 million after taxes, is expected to be reclassified to earnings over the next twelve months.

1210

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~with~~Derivative instruments had the ~~counterparty. The fair value of derivative instruments~~following effects on ~~a gross basis as of September 30, 2009 and December 31, 2008 is as follows (in millions):~~

2009 2008
Balance
Balance

Sheet
Fair
Sheet
Fair
Location Value Location Value

Asset Derivatives

Foreign exchange forward contracts Other current assets $ 28.1 Other current assets $53.7
Foreign exchange options Other current assets 0.5 Other current assets 4.6
Foreign exchange forward contracts Other assets 7.7 Other assets 30.3

Total asset derivatives
$ 36.3 $88.6

Liability Derivatives

Foreign exchange forward contracts Other current liabilities $ 44.1 Other current liabilities $34.4
Foreign exchange forward contracts Other long-term liabilities 25.5 Other long-term liabilities 17.7

Total liability derivatives
$ 69.6 $52.1

The fair value of outstanding derivative instruments recorded on the balance sheet at September 30, 2009, together with settled derivatives where the hedged item has not yet affected earnings, was a net unrealized loss of $33.3 million, or $21.9 million net of taxes, which is deferred in other comprehensive income ~~of which $10.1 million, or $5.8 million net of taxes, is expected to be reclassified to earnings over the next twelve months.~~
~~The following gross unrealized losses from derivative instruments were recognized in other comprehensive income~~(OCI) on our consolidated balance sheet ~~(in millions):~~

Three Months
Nine Months

Ended September 30, Ended September 30,
Derivative Instrument
2009 2008 2009 2008

Foreign exchange forward contracts $ (34.2 ) $ 50.9 $ (45.9 ) $ (16.2 )
Foreign exchange options (1.0 ) 1.2 (1.9 ) 1.2

Total $ (35.2 ) $ 52.1 $ (47.8 ) $ (15.0 )

~~The following gross realized gains / (losses) from derivative instruments were reclassified from other comprehensive income on our consolidated balance sheet to cost of products sold on~~and our consolidated statement of earnings on a gross basis for the three month periods ended March 31, 2010 and 2009 (in millions):

Amount of

Amount of
Gain/(Loss)

Three Months
Nine Months
Gain Recognized
Reclassified From OCI

Ended September 30, Ended September 30, in OCI to Cost of Products Sold
Derivative Instrument
2009 2008 2009 2008 2010 2009 2010 2009

Foreign exchange forward contracts $ 4.7 $ (12.9 ) $ 15.4 $ (54.9 ) $ 30.6 $ 31.1 $ (0.4 ) $ 4.3
Foreign exchange options 0.2 — 1.1 — — 0.2 — 0.6

Total $ 4.9 $ (12.9 ) $ 16.5 $ (54.9 ) $ 30.6 $ 31.3 $ (0.4 ) $ 4.9

Derivatives Not Designated as Hedging Instruments

We enter into foreign currency forward exchange contracts with terms of one month to manage currency exposures for monetary assets and liabilities denominated in a currency other than an entity’s functional currency. As a result, any foreign currency remeasurement gains/losses recognized in earnings are generally offset with gains/losses on the foreign currency forward exchange contracts in the same reporting period. These offsetting gains/losses are recorded in cost of products sold as the underlying assets and liabilities exposed to remeasurement

13

~~ZIMMER HOLDINGS, INC. AND SUBSIDIARIES~~

~~NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

include inventory-related transactions. These contracts are settled on the last day of each reporting period. Therefore, there is no outstanding balance related to these contracts recorded on the balance sheet as of the end of the reporting period. The notional amounts of these contracts are typically in a range of $1.1 billion to ~~$1.3~~$1.4 billion per quarter.

The following ~~gains/(losses)~~gains from these derivative instruments were recognized in cost of products sold on our consolidated statement of earnings (in millions):


	Three Months					Nine Months						Three Months
	Ended September 30,					Ended September 30,						Ended March 31,
Derivative Instrument	2009			2008		2009			2008			2010		2009

Foreign exchange forward contracts	$	(9.6	)	$	1.8	$	(12.9	)	$	(1.2	)	$	7.2	$	2.6

Total	$	(9.6	)	$	1.8	$	(12.9	)	$	(1.2	)	$	7.2	$	2.6

This impact does not include any offsetting gains/losses recognized in earnings as a result of foreign currency remeasurement of monetary assets and liabilities denominated in a currency other than an entity’s functional currency.


10.	Income Taxes

During the third quarter of 2009, we settled various tax matters with the Internal Revenue Service (IRS) for all years prior to 2005. Our U.S. federal returns for years 2005 through 2007 are currently under IRS examination.

We expect that the net amount of tax liability for unrecognized tax benefits will change in the next twelve ~~months; however,~~months. We are currently under audit in numerous federal, state and foreign jurisdictions. While it is possible that such matters will be resolved in the next twelve months, we ~~do not expect these~~cannot reasonably estimate the amount or the periods in which changes in the unrecognized tax benefits will ~~have a significant impact on our results of operations or financial position.~~

During the third quarter of 2008, we reached an agreement with the U.S. Internal Revenue Service (IRS) confirming the deductibility of a portion of a 2007 civil settlement. As a result, we recorded an estimated current tax benefit of $30.8 million. The effective tax rate for the three and nine month periods ended September 30, 2008 reflect this benefit.occur.


11.	Retirement ~~and Postretirement~~ Benefit Plans

~~Defined Benefit Plans~~

We have defined benefit pension plans covering certain U.S. and Puerto Rico employees. The employees who are not participating in the defined benefit plans do receive additional benefits under our defined contribution plans. Plan benefits are primarily based on years of credited service and the participant’s compensation. In addition to the

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

U.S. and Puerto Rico defined benefit pension plans, we sponsor variousnon-U.S. pension arrangements, including retirement and termination benefit plans required by local law or coordinated with government sponsored plans.

~~ZIMMER HOLDINGS, INC. AND SUBSIDIARIES~~

~~NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

The components of net pension expense for the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2010 and 2009, ~~and 2008,~~ for our U.S. andnon-U.S. defined benefit retirement plans are as follows (in millions):


													Three Months
	Three Months Ended September 30,						Nine Months Ended September 30,						Ended March 31,
	2009			2008			2009			2008			2010			2009

Service cost	$	6.7		$	6.3		$	19.5		$	18.9		$	6.3		$	6.9
Interest cost		4.4			4.5			13.0			13.5			4.6			4.9
Expected return on plan assets		(6.3	)		(5.9	)		(18.5	)		(17.5	)		(6.5	)		(6.9	)
Amortization of unrecognized prior service cost and actuarial loss		1.6			0.6			4.6			2.1			0.8			1.7
Curtailment		—			—			0.4			—
Settlement		—			0.1			—			2.7

Net periodic benefit cost	$	6.4		$	5.6		$	19.0		$	19.7		$	5.2		$	6.6

We contributed ~~approximately $40~~$23.0 million during the ~~nine~~three month period ended ~~September 30, 2009~~March 31, 2010 to our U.S. and Puerto Rico defined benefit plans and do not expect to ~~make any~~contribute additional ~~contributions~~funds to these plans during the remainder of ~~2009.~~2010. We contributed ~~approximately $9~~$3.4 million to our foreign-based defined benefit plans in the ~~nine~~three month period ended ~~September 30, 2009~~March 31, 2010 and expect to contribute ~~an additional $5~~approximately $10 million to these foreign-based plans during the remainder of ~~2009.~~

~~Postretirement Benefit Plans~~

During the nine month period ended September 30, 2009, we amended the postretirement benefit plans for certain U.S. and Puerto Rico employees. Participants in the plan between the ages of 55 and 65 that were previously receiving benefits will continue to receive benefits until reaching the age of 65. For all other participants in the plan, no benefits will be paid after January 1, 2010. Additionally, we funded approximately $7 million to a Voluntary Employees’ Beneficiary Association (“VEBA”) trust to settle any future obligations. We recognized a curtailment gain and settlement loss related to these actions.

The components of net periodic benefit expense for the three and nine month periods ended September 30, 2009 and 2008, for our U.S. and Puerto Rico postretirement benefit plans are as follows (in millions):

Three Months

Ended September 30, Nine Months Ended September 30,
2009 2008 2009 2008

Service cost $ — $ 0.4 $ 0.8 $ 1.2
Interest cost — 0.6 1.3 1.8
Amortization of unrecognized prior service cost — (0.1 ) (0.2 ) (0.3 )
Amortization of unrecognized actuarial loss — 0.1 0.3 0.3
Settlement — — 3.2 —
Curtailment — — (35.3 ) —

Net periodic benefit cost $ — $ 1.0 $ (29.9 ) $ 3.0

15

~~ZIMMER HOLDINGS, INC. AND SUBSIDIARIES~~

~~NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


12.	Earnings Per Share

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


									Three Months
									Ended
	Three Months Ended September 30,				Nine Months Ended September 30,				March 31,
	2009		2008		2009		2008		2010		2009

Weighted average shares outstanding for basic net earnings per share		213.6		224.7		216.6		228.5		203.0		221.5
Effect of dilutive stock options and other equity awards		0.9		0.9		0.8		1.2		1.2		0.6

Weighted average shares outstanding for diluted net earnings per share		214.5		225.6		217.4		229.7		204.2		222.1

During the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2009,~~March 31, 2010, an average of ~~13.6~~12.8 million options ~~and 14.7 million options, respectively,~~ to purchase shares of common stock were not included in the computation of diluted earnings per share as the exercise prices of these options were greater than the average market price of the common stock. During the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2008,~~March 31, 2009, an average of ~~11.4~~16.3 million options ~~and 10.0 million options, respectively,~~ were not included.

In the three month period ended ~~September 30, 2009,~~March 31, 2010, we repurchased ~~approximately~~ 1.5 million shares of our common stock at an average price of ~~$45.89~~$60.62 per share for a total cash outlay of ~~$66.6~~$93.5 million, including commissions. In the nine month period ended September 30, 2009, we repurchased approximately 10.8 million shares of our common stock at an average price of $37.17 per share for a total cash outlay of $404.4 million, including commissions. In April 2008, we announced that ourOur Board of Directors previously authorized a $1.25 billion share repurchase program which was ~~originally~~ set to expire on December 31, 2009. In September 2009, the Board of Directors extended this program to December 31, 2010. ~~Approximately $730.2~~$117.6 million remains authorized for future repurchases under this ~~plan.~~program.


13.	Segment Information

We design, develop, manufacture and market orthopaedic reconstructive implants, dental implants, spinal implants, trauma products and related surgical products which include surgical supplies and instruments designed to aid in surgical procedures and post-operation rehabilitation. We also provide other healthcare related services. Revenue related to these other healthcare related services currently represents less than 1 percent of our total net sales. We manage operations through three major geographic segments — the Americas, which is comprised

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

principally of the United States and includes other North, Central and South American markets; Europe, which is comprised principally of Europe and includes the Middle East and Africa; and Asia Pacific, which is comprised primarily of Japan and includes other Asian and Pacific markets. This structure is the basis for our reportable segment information discussed below. Management evaluates operating segment performance based upon segment operating profit exclusive of operating expenses pertaining to global operations and corporate expenses, share-based compensation, certain claims, acquisition, integration, realignment and other, net curtailment and settlement, inventorystep-up and intangible asset amortization expense. Global operations include research, development engineering, medical education, brand management, corporate legal, finance, and human resource functions, and

~~ZIMMER HOLDINGS, INC. AND SUBSIDIARIES~~

~~NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

U.S. and Puerto Rico based manufacturing operations and logistics. Intercompany transactions have been eliminated from segment operating profit. Net sales and segment operating profit are as follows (in millions):


	Net Sales				Operating Profit						Net Sales				Operating Profit
	Three Months				Three Months						Three Months				Three Months
	Ended				Ended						Ended				Ended
	September 30,				September 30,						March 31,				March 31,
	2009		2008		2009			2008			2010		2009		2010			2009

Americas	$	584.5	$	563.3	$	291.1		$	291.2		$	615.7	$	594.6	$	306.6		$	289.7
Europe		242.4		251.0		75.8			89.1			286.1		265.1		104.8			116.6
Asia Pacific		148.7		137.9		62.7			55.5			161.0		132.9		61.1			49.9

Total	$	975.6	$	952.2							$	1,062.8	$	992.6

Share-based compensation						(17.6	)		(11.0	)						(12.7	)		(17.1	)
Inventorystep-up						(2.9	)		(1.4	)						(1.3	)		(4.2	)
Certain claims						(35.0	)		(47.5	)
Acquisition, integration, realignment and other						(22.2	)		(5.6	)						(2.6	)		(7.0	)
Global operations and corporate functions						(147.9	)		(160.0	)						(161.8	)		(148.1	)

Operating profit					$	204.0		$	210.3						$	294.1		$	279.8

Net Sales Operating Profit
Nine Months
Nine Months

Ended
Ended

September 30, September 30,
2009 2008 2009 2008

Americas $ 1,768.7 $ 1,764.9 $ 876.8 $ 915.0
Europe 787.9 882.3 300.9 344.4
Asia Pacific 431.5 443.7 182.2 190.6

Total $ 2,988.1 $ 3,090.9

Share-based compensation (56.2 ) (50.4 )
Inventorystep-up
(9.9 ) (3.2 )
Certain claims (35.0 ) (47.5 )
Acquisition, integration, realignment and other (65.7 ) (25.4 )
Net curtailment and settlement (32.1 ) —
Global operations and corporate functions (380.7 ) (473.2 )

Operating profit $ 780.3 $ 850.3

17

~~ZIMMER HOLDINGS, INC. AND SUBSIDIARIES~~

~~NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Beginning in 2009, we no longer include our Dental product category sales within our Reconstructive products category. Prior year amounts related to Dental product category sales have been reclassified to conform to the current year presentation. Net sales by product category are as follows (in millions):


	Three Months				Nine Months				Three Months
	Ended				Ended				Ended
	September 30,				September 30,				March 31,
	2009		2008		2009		2008		2010		2009

Reconstructive implants	$	738.2	$	731.0	$	2,279.8	$	2,387.6	$	814.5	$	761.1
Dental		48.0		51.8		148.1		170.9		51.7		47.4
Trauma		57.6		54.6		171.2		165.2		60.4		56.9
Spine		61.7		49.7		190.5		158.0		60.0		64.6
OSP and other		70.1		65.1		198.5		209.2		76.2		62.6

Total	$	975.6	$	952.2	$	2,988.1	$	3,090.9	$	1,062.8	$	992.6


14.	Commitments and Contingencies

Intellectual Property and Product Liability-Related Litigation

In July 2008, we temporarily suspended marketing and distribution of theDurom^® Acetabular Component (DuromCup) in the U.S. Following our announcement, product liability lawsuits and other claims have been asserted against us, some of which we have settled. There are a number of claims still pending, and ~~we expect~~ additional claims ~~will~~may be submitted.

We recorded a provision of $69.0 million in 2008, representing management’s estimate of ~~these~~theDuromCup-related ~~claims. Based~~claims that would be made in association with revisions occurring within two years of the original surgery. In

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the third quarter of 2009, based on claims information we received ~~since~~after we made our initial estimate, ~~in 2008,~~ we ~~have~~ increased our estimate of the number of claims ~~we expect to receive. Accordingly, we~~for revisions within two years of the original surgery and increased the provision by $35.0 million, infor a total of $104.0 million related to such claims. We have not recorded any adjustments to the provisions since the third quarter of 2009. These provisions were recorded as “Certain Claims” in our statement of earnings. The ~~current reserve is $77.5 million~~liability outstanding as of ~~September 30, 2009. The provision~~March 31, 2010 is ~~limited~~$64.8 million, which we believe will be adequate to revisions within two years of an original surgery that occurred prior to July 2008. These parameters are consistent with our data which indicates that cup loosenings associated with surgical technique are most likely to occur within that time period. Any claims received outsidesettle the remaining of these ~~defined parameters will be managed~~Certain Claims.

Our standard product liability accruals are recognized in ~~the normal course~~selling, general and ~~reflected in~~administrative expense. We have recorded provisions as part of our standard product liability ~~accruals.~~accruals for claims relating to revisions ofDuromCup cases in the U.S. that have occurred, or are estimated to occur, more than two years after the original surgery. We recorded a provision of $9.8 million in the three month period ended March 31, 2010 for such claims, as compared with a provision of $0.9 million in the same 2009 period. The total provisions we have recorded for such claims as part of our standard product liability accruals from 2008 through March 31, 2010 amount to $42.2 million. The estimated liability outstanding relating to these claims as of March 31, 2010 is $29.0 million. It is difficult to estimate the number of claims we may eventually receive related to revisions that occur more than two years after the original surgery, so it is reasonably possible that our estimated liability may change in the near term. We will continue to evaluate the adequacy of this liability as more information becomes available.

We expect to pay the majority of the claims related to theDuromCup within the next three years.

On February 15, 2005, Howmedica Osteonics Corp. filed an action against us and an unrelated party in the United States District Court for the District of New Jersey alleging infringement of U.S. Patent Nos. 6,174,934; 6,372,814; 6,664,308; and 6,818,020. On June 13, 2007, the Court granted our motion for summary judgment on the invalidity of the asserted claims of U.S. Patent Nos. 6,174,934; 6,372,814; and 6,664,308 by ruling that all of the asserted claims are invalid for indefiniteness. On August 19, 2008, the Court granted our motion for summary judgment of non-infringement of certain claims of U.S. Patent No. 6,818,020, reducing the number of claims at issue in the suit to five. On April 9, 2009, in response to our earlier petition, the U.S. Patent and Trademark Office (USPTO) instituted re-examination proceedings against U.S. Patent No. 6,818,020. The ~~U.S. Patent and Trademark Office~~USPTO rejected all previously issued claims of U.S. Patent No. 6,818,020 as being unpatentable in light of one or more prior art references. On September 30, 2009, the Court issued an order staying proceedings in the litigation pending the outcome of the re-examination process. Subsequent to that stay order, Howmedica filed a motion seeking to certify an appeal of the summary judgment ruling on the ~~‘934, ‘814~~’934, ’814 and ~~‘308~~’308 patents. That motion ~~is pending.~~was granted on January 13, 2010. We expect that the U.S. Court of Appeals for the Federal Circuit will hear the appeal of that ruling in 2010. We continue to believe that our defenses against infringement are valid and meritorious, and we intend to continue to defend this lawsuit vigorously.

In addition to ~~certain~~ claims related to theDuromCup ~~within the parameters~~ discussed above, we are also subject to product liability and other claims and lawsuits arising in the ordinary course of business, for which we maintain insurance, subject to self-insured retention limits. We establish accruals for product liability and other claims in conjunction with outside counsel based on current information and historical settlement information for open claims, related legal fees and claims incurred but not reported. While it is not possible to predict with certainty the

~~ZIMMER HOLDINGS, INC. AND SUBSIDIARIES~~

~~NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

outcome of these cases, it is the opinion of management that, upon ultimate resolution, liabilities from these cases in excess of those recorded, if any, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Government Investigations

In September 2007, we and other orthopaedic companies settled a U.S. government investigation pertaining to consulting contracts, professional services agreements and other agreements by which remuneration is provided to orthopaedic surgeons. As part of the settlement, we entered into a Corporate Integrity Agreement ~~(the “CIA”)~~(CIA) with the Office of Inspector General of the Department of Health and Human Services ~~(the “OIG-HHS”)~~(OIG-HHS). Under the CIA, which has a term expiring in 2012, we agreed, among other provisions, to continue the operation of our enhanced

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Corporate Compliance Program, designed to promote compliance with federal healthcare program requirements, in accordance with the terms set forth in the CIA. We also agreed to retain an independent review organization 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 (42 U.S.C.§ 1320a-7b). A material breach of the CIA may subject us 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 our financial relationships with a number of Massachusetts healthcare providers. We received a similar inquiry from the Oregon Attorney General’s office in October 2008. We are cooperating fully with the investigators with regard to these matters.

In September 2007, the Staff of the U.S. Securities and Exchange Commission ~~(“SEC”)~~(SEC) informed us that it was conducting an ~~informal~~ investigation regarding potential violations of the Foreign Corrupt Practices Act ~~(“FCPA”)~~(FCPA) in the sale of medical devices in a number of foreign countries by companies in the medical device industry. In November 2007, we received a letter from the U.S. Department of Justice ~~(“DOJ”)~~(DOJ) requesting that any information provided to the SEC also be provided to the DOJ on a voluntary basis. We are continuing to provide information and cooperate fully with the SEC and the DOJ with regard to this pending investigation. In addition, as part of our global compliance program, we have been conducting our own proactive reviews regarding FCPA compliance in jurisdictions that have not been involved in the pending investigation. These reviews have yielded information indicating that certain third-party, independent distributors of our products in two South American countries made certain payments that may have potential FCPA implications. In the course of continuing dialogues with the agencies, we voluntarily disclosed information relating to these matters to the SEC and the DOJ, and the reviews are ongoing. We cannot currently predict the outcome of the investigation or the impact of our voluntary disclosures to the authorities.

~~Derivative Actions and~~Putative Class Actions

On April 24, 2008, a complaint was filed in the U.S. District Court for the Southern District of New York, Thorpe v. Zimmer, Inc., et al., naming us and two of our subsidiaries as defendants. The complaint related to a putative class action on behalf of certain residents of New York who had hip or knee implant surgery involving Zimmer products during an unspecified period. The complaint alleged that our relationships with orthopaedic surgeons and others violated the New York deceptive practices statute and unjustly enriched us. The plaintiff requested actual damages or $50.00, whichever is greater, on behalf of each class member, a permanent injunction from our engaging in allegedly improper practices in the future and restitution in an unspecified amount. The parties have stipulated to the dismissal of all claims made in this action and this case has been dismissed with prejudice.

On August 5, 2008, a complaint was filed in the U.S. District Court for the Southern District of Indiana, Plumbers and Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., et al., naming us and two of our executive officers as defendants. The complaint ~~relates~~related to a putative class action on behalf of persons who purchased our common stock between January 29, 2008 and July 22, 2008. The complaint ~~alleges~~alleged that the defendants violated the federal securities law by allegedly failing to disclose developments relating to our orthopaedic surgical products

~~ZIMMER HOLDINGS, INC. AND SUBSIDIARIES~~

~~NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

manufacturing operations in Dover, Ohio and ~~problems relating to~~ theDuromCup. The plaintiff ~~seeks~~sought unspecified damages and interest, attorneys’ fees, costs and other relief. On December 24, 2008, the lead plaintiff filed a consolidated complaint that ~~alleges~~alleged the same claims and ~~relates~~related to the same time period. The defendants filed a motion to dismiss the consolidated complaint on February 23, 2009. ~~The~~On December 1, 2009, the Court granted defendants’ motion to dismiss, without prejudice. On January 15, 2010, the plaintiff filed a motion for leave to amend the consolidated complaint. That motion is ~~pending with the court.~~pending. We believe this lawsuit is without merit, and we and the individual defendants intend to defend it vigorously.

On August 15, 2008, a shareholder derivative action, Hays v. Dvorak et al., was filed in the U.S. District Court for the Southern District of Indiana. The plaintiff sought to maintain the action purportedly on our behalf against certain of our current and former directors and two~~non-director~~ executive officers. The plaintiff alleged, among other things, breaches of fiduciary duties, abuse of control, unjust enrichment and gross mismanagement by the named defendants based on substantially the same factual allegations as the putative federal securities class action referenced above brought by the Plumbers and Pipefitters Local Union 719 Pension Fund. The plaintiff did not seek damages from us, but instead requested damages of an unspecified amount on our behalf. The plaintiff also sought equitable relief to remedy the individual defendants’ alleged misconduct, attorneys’ fees, costs and other relief. On August 20, 2009, the parties submitted a Joint Motion for Dismissal Without Prejudice. The court granted that motion on August 27, 2009 and dismissed the matter without prejudice.

On November 20, 2008, a complaint was filed in the U.S. District Court for the Northern District of Indiana, Dewald v. Zimmer Holdings, Inc., et al., naming us and certain of our current and former directors and employees as defendants. The complaint relates to a putative class action on behalf of all persons who were participants in or beneficiaries of our U.S. or Puerto Rico Savings and Investment Programs ~~(“plans”)~~(plans) between October 5, 2007 and the date of filing and whose accounts included investments in our common stock. The complaint alleges, among other things, that the defendants breached their fiduciary duties in violation of the Employee Retirement Income Security Act of 1974, as amended, by continuing to offer Zimmer stock as an investment option in the plans when the stock purportedly was no longer a prudent investment and that defendants failed to provide plan participants with complete and accurate information sufficient to advise them of the risks of investing their retirement savings in Zimmer stock. The plaintiff seeks an unspecified monetary payment to the plans, injunctive and equitable relief, attorneys’ fees, costs and other relief. On January 23, 2009, the plaintiff filed an amended complaint that alleges the

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

same claims and clarifies that the class period is October 5, 2007 through September 2, 2008. The defendants filed a motion to dismiss the amended complaint on March 23, 2009. The motion to dismiss is pending with the court. On June 12, 2009, the U.S. Judicial Panel on Multidistrict Litigation entered an order transferring the Dewald case to the U.S. District Court for the Southern District of Indiana for coordinated or consolidated pretrial proceedings with the Plumbers & Pipefitters Local Union 719 Pension Fund case referenced above. We believe this lawsuit is without merit, and we and the individual defendants intend to defend it vigorously.

2016


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

Overview

We are a global leader in the design, development, manufacture and marketing of orthopaedic reconstructive implants, dental implants, spinal implants, trauma products and related 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 implants restore function and aesthetics in patients who have lost teeth due to trauma or disease. Spinal implants are utilized by orthopaedic surgeons and neurosurgeons in the treatment of degenerative diseases, deformities and trauma in all regions of the spine. Trauma products are devices used primarily to reattach or stabilize damaged bone and tissue to support the body’s natural healing process. OSP includes supplies and instruments designed to aid in predominantly orthopaedic surgical procedures and post-operation rehabilitation. We have operations in more than 25 countries and market products in more than 100 countries. We manage operations through three reportable geographic segments — the Americas, Europe and Asia Pacific.

Certain percentages presented in Management’s Discussion and Analysis are calculated from the underlying whole-dollar amounts and therefore may not recalculate from the rounded numbers used for disclosure purposes. In addition, certain amounts in the ~~2008~~2009 consolidated financial statements have been reclassified to conform to the 2009 presentation. Beginning in 2009, we no longer include our Dental product category sales within our Reconstructive products category. Prior year amounts related to Dental product category sales have been reclassified to conform to the current year2010 presentation.

We believe the following developments or trends are important in understanding our financial condition, results of operations and cash flows for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2009~~March 31, 2010 and our expected results for the remainder of ~~2009.~~2010.

Demand (Volume and Mix) Trends

~~Volume~~Increased volume and changes in the mix of ~~products increased~~product sales contributed 4 ~~percent~~percentage points of sales growth during the three month period ended ~~September 30, 2009,~~March 31, 2010, compared to a 31 percent ~~increase~~decline in the same ~~2008~~2009 period. ~~The sales growth rate increase demonstrates the broad acceptance of patient specific solutions.~~

~~We believe the market for orthopaedic procedure volume temporarily decelerated from mid single digit growth rates to low single digit growth rates on a global basis due to the weakened global economy.~~ We believe long-term market growth rates will be driven by an aging global population, obesity, proven clinical benefits, new material technologies, advances in surgical techniques and more active lifestyles, among other factors. In addition, the ongoing shift in demand to premium products, such asLongevity^® andProlong^® Highly Crosslinked Polyethylenes,Trabecular Metal^TM Technology products, hip stems withKinectiv^®Technology, high-flex knees, knee revision products, porous hip stems and the introduction of patient specific devices ~~continues~~are expected to continue to positively affect sales growth.

Pricing Trends

Global selling prices decreased 1 percent during the three month period ended ~~September 30, 2009~~March 31, 2010, compared to flat pricing in the same ~~2008~~2009 period. Selling prices in ~~both~~ the Americas ~~and Europe~~ decreased 1 percent during the three month period ended ~~September 30, 2009,~~March 31, 2010, compared to flat pricing in the same ~~2008~~2009 period. Europe selling prices were flat during the three month periods ended March 31, 2010 and 2009. Asia Pacific selling prices were flat for the three month period ended ~~September 30, 2009,~~March 31, 2010, compared to a 43 percent decrease in the same ~~2008 period, as we anniversaried out~~2009 period. Bi-annual pricing adjustments went into effect in Japan on April 1, 2010, which will decrease pricing for the remainder of ~~scheduled reductions~~2010 in ~~reimbursement prices in Japan.~~our Asia Pacific region. With the effect of governmental healthcare cost containment efforts and continuing pressure from local hospitals and health systems, we expect selling prices will be down approximately 1 to 2 percent on a global basis for ~~2009.~~2010.

Foreign Currency Exchange Rates

For the three month period ended ~~September 30, 2009,~~March 31, 2010, foreign currency exchange rates resulted in a 14 percent ~~decline~~increase in sales. We estimate that an overall ~~stronger~~weaker U.S. Dollar versus foreign currency exchange rates will have a ~~negative~~positive effect of approximately 20-1 percent on sales for the year ending December 31, ~~2009.~~2010. We address currency

risk through regular operating and financing activities, and, under appropriate circumstances and subject to proper authorization, through the use of forward contracts and foreign currency options solely for managing foreign currency volatility and risk. Changes to foreign currency exchange rates affect sales growth, but due to offsetting gains/losses on hedge contracts, which are recorded in cost of products sold, the effect on net earnings in the near term is expected to be minimal.

~~Disruptive Events~~Healthcare Reform in the U.S.

Global Economic Conditions

~~Third~~First Quarter ~~andYear-to-Date~~ Results of Operations

Net Sales by Operating Segment

Net Sales by Product Category

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

Three Months

Ended

September 30, Volume/
Foreign

2009 2008 % Inc (Dec) Mix Price Exchange

Reconstructive

Knees $ 417.4 $ 411.2 2 % 4 % (1 )% (1 )%
Hips 288.2 292.3 (1 ) 1 (1 ) (1 )
Extremities 32.6 27.5 19 21 (1 ) (1 )

Total 738.2 731.0 1 3 (1 ) (1 )

Dental 48.0 51.8 (8 ) (6 ) — (2 )
Trauma 57.6 54.6 6 4 2 —
Spine 61.7 49.7 24 27 (1 ) (2 )
OSP and other 70.1 65.1 8 6 1 1

Total $ 975.6 $ 952.2 2 4 (1 ) (1 )


	Nine Months
	Ended
	September 30,							Volume/						Foreign			Three Months Ended March 31,							Volume/						Foreign
	2009		2008		% Inc (Dec)			Mix			Price			Exchange			2010		2009		% Inc (Dec)			Mix			Price			Exchange

Reconstructive
Knees	$	1,284.6	$	1,332.0		(4	)		1	%		(1	)%		(4	)%	$	460.4	$	428.5		7	%		5	%		(1	)%		3	%
Hips		895.9		965.2		(7	)		(2	)		(1	)		(4	)		315.7		299.6		5			2			(1	)		4
Extremities		99.3		90.4		10			14			(1	)		(3	)		38.4		33.0		16			14			—			2

Total		2,279.8		2,387.6		(5	)		—			(1	)		(4	)		814.5		761.1		7			4			(1	)		4

Dental		148.1		170.9		(13	)		(10	)		—			(3	)		51.7		47.4		9			3			3			3
Trauma		171.2		165.2		4			5			1			(2	)		60.4		56.9		6			1			2			3
Spine		190.5		158.0		21			24			—			(3	)		60.0		64.6		(7	)		(9	)		—			2
OSP and other		198.5		209.2		(5	)		(5	)		1			(1	)		76.2		62.6		22			19			—			3

Total	$	2,988.1	$	3,090.9		(3	)		1			(1	)		(3	)	$	1,062.8	$	992.6		7			4			(1	)		4

2318

The following table presents net sales by product category by region (dollars in millions):


	Three Months							Nine Months
	Ended							Ended
	September 30,							September 30,							Three Months Ended March 31,
	2009		2008		% Inc (Dec)			2009		2008		% Inc (Dec)			2010		2009		% Inc (Dec)

Reconstructive
Knees
Americas	$	270.5	$	264.0		2	%	$	818.3	$	824.0		(1	)%	$	286.2	$	275.8		4	%
Europe		89.6		94.5		(5	)		302.6		339.7		(11	)		113.6		104.8		8
Asia Pacific		57.3		52.7		9			163.7		168.3		(3	)		60.6		47.9		26
Hips
Americas		138.1		137.8		—			423.0		435.5		(3	)		146.8		141.6		4
Europe		99.4		106.8		(7	)		318.8		372.7		(14	)		111.8		107.9		4
Asia Pacific		50.7		47.7		6			154.1		157.0		(2	)		57.1		50.1		14
Extremities
Americas		25.3		20.3		25			76.7		65.3		17			29.6		25.6		16
Europe		5.3		5.7		(5	)		17.0		19.8		(14	)		6.5		5.7		14
Asia Pacific		2.0		1.5		33			5.6		5.3		6			2.3		1.7		34

Total		738.2		731.0		1			2,279.8		2,387.6		(5	)		814.5		761.1		7

Dental
Americas		25.4		28.3		(10	)		77.5		87.5		(11	)		27.2		26.1		4
Europe		16.2		15.3		6			53.3		58.7		(9	)		18.8		16.7		12
Asia Pacific		6.4		8.2		(23	)		17.3		24.7		(30	)		5.7		4.6		25
Trauma
Americas		31.2		31.1		—			94.8		95.4		(1	)		32.6		32.4		—
Europe		13.2		12.3		7			36.5		35.5		3			11.8		10.6		11
Asia Pacific		13.2		11.2		19			39.9		34.3		16			16.0		13.9		16
Spine
Americas		48.0		38.9		24			148.0		123.5		20			44.0		51.5		(15	)
Europe		9.8		8.3		18			32.3		27.6		17			12.9		10.5		23
Asia Pacific		3.9		2.5		55			10.2		6.9		48			3.1		2.6		20
OSP and other
Americas		46.0		42.9		7			130.4		133.7		(2	)		49.3		41.6		19
Europe		8.9		8.1		9			27.4		28.3		(3	)		10.7		8.9		19
Asia Pacific		15.2		14.1		7			40.7		47.2		(14	)		16.2		12.1		34

Total	$	975.6	$	952.2		2		$	2,988.1	$	3,090.9		(3	)	$	1,062.8	$	992.6		7

Knees

TheNexGen^® Complete Knee Solution product line, includingGender Solutions^TMKnee Femoral Implants, theNexGenLPS-Flex Knee, theNexGenCR-Flex Knee and the~~NexGen~~Gender Solutions Natural-Knee~~LCCK Revision Knee,~~^® Flex System led knee sales. In addition, sales of partial knee devices, including theZimmer^® Uni Knee and the recently releasedGender Solutions ~~Natural-KneeFlex System made a strong contribution.~~Patello Femoral Joint, contributed to Knee growth for the quarter. In Europe, changes in foreign ~~exchange rates negatively affected knee sales in the three and nine month periods ending September 30, 2009 by 6 percent and 12 percent, respectively. In Asia Pacific, changes in foreign~~currency exchange rates positively affected knee sales in the three month period ~~ending September 30, 2009~~ended March 31, 2010 by ~~2 percent and negatively~~6 percent. In Asia Pacific, changes in foreign currency exchange rates positively affected knee sales in the three month period ended March 31, 2010 by ~~4 percent on ayear-to-date~~ ~~basis.~~14 percent.

Hips

The ~~continued conversion to porous stems, including the~~Zimmer^®M/L Taper Stem, theZimmerM/L Taper Stem withKinectivTechnology, theCLS^®Spotorno^® Stem from theCLSHip System,and theAlloclassic^®Zweymüller^® Hip Stem led hip stem ~~sales, but was partially offset by weaker~~sales. In addition, sales of ~~cemented stems.~~revision Hip products such as theZMR^® Hip System and theTrabecular Metal~~Acetabular~~Revision Shell and Augment Cups ~~and~~~~Longevity~~~~and~~~~Durasul~~~~Highly Crosslinked Polyethylene Liners also made~~were strong ~~contributions. With the lack of a hip resurfacing product within our U.S. hip portfolio, we face a continuing challenge in hip sales growth with the adoption of hip resurfacing~~ in the ~~U.S. market.~~quarter when compared to the prior year period, as were sales ofBIOLOX^{^®1}deltaHeads andFitmore^® Hip Stems. In Europe, changes in foreign ~~exchange rates negatively affected hip sales in the three and nine month periods ending September 30, 2009 by 6 percent and 10 percent, respectively. In Asia Pacific, changes in foreign~~currency exchange rates positively affected hip sales in the three ~~and nine~~

¹ Registered trademark of CeramTec AG

month ~~periods ending September 30, 2009~~period ended March 31, 2010 by ~~5 percent and 1 percent, respectively.~~7 percent. In Asia Pacific, changes in foreign currency exchange rates positively affected hip sales in the three month period ended March 31, 2010 by 9 percent.

Extremities

Extremities sales growth was strong across all regions as these types of procedures have become more widely accepted. TheBigliani/Flatow^® Complete Shoulder Solution and theZimmer Trabecular MetalReverse Shoulder System led extremities sales.

Dental

~~Negative~~Dental sales ~~growth for our dental business reflects overall weakness in~~improved following a year of weaker demand caused by the global ~~economy. While dental sales~~economic downturn in ~~the Americas and Asia Pacific reflect this weakness, dental sales in Europe in the three month period increased 6 percent,~~2009. Sales were led by theTapered Screw-Vent^® Implant System. Regenerative product sales exhibited strong growth in the three month period ended March 31, 2010.

Trauma

ZimmerPeriarticular Locking Plates and the~~I.T.S.T.~~ITST^TM® Intertrochanteric/Subtrochanteric Fixation System led trauma sales, ~~but were partially offset by declining~~while sales of ~~compression hip screws. Femoral~~cable products also made a strong contribution in the quarter. Tibial nail and ~~tibial nails~~interlocking screw sales within the ~~new~~Zimmer Natural Nail^TM system ~~also made a contribution during~~increased as we continued the ~~three month period.~~roll-out of this product line.

Spine

InOur spinal business in the ~~fourth quarter of 2008, we acquired Abbott Spine. As a result of~~Americas continued to experience challenges related to the ~~acquisition,~~Dynesys^® Dynamic Stabilization System. Growth in spine sales ~~have increased but~~in Europe and Asia Pacific was driven by the ~~increase is offset in part by sales dis-synergies associated with~~stabilization of our distribution channels, which followed the integration activity of ~~the business.~~2009. Solid sales of ~~acquired fusion devices as well as legacy vertebral body replacement devices~~thePathFinder^® and ~~bone graft substitutes~~Sequoia^® Pedicle Screw Systems and ourUniversal Clamp^® System partly offset a decline in sales of theDynesys^® ~~Dynamic Stabilization System~~ system in the three month ~~period.~~period ended March 31, 2010.

OSP and other

OSP sales were led byPALACOS^{^®12} Bone ~~Cement. OSP products had positive sales growth of 8 percent for the three month period ended September 30, 2009~~Cement and ~~a negative growth rate of 5 percent on ayear-to-date~~ ~~basis. This improvement in the third quarter 2009 was driven by the effect of anniversarying out of the voluntary suspension and recall of certain products during 2008 and by the reintroduction of~~powered instruments. Our wound debridement products ~~in 2009.~~also made a strong contribution as we continue to make progress recovering market share after a voluntary recall and temporary suspension of production.

¹ ~~Trademark of Heraeus Kulzer GmbH~~

Expenses as a Percent of Net Sales


	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended March 31,
	2009			2008			Inc (Dec)			2009			2008			Inc (Dec)			2010			2009			Inc (Dec)

Cost of products sold		25.6	%		24.9	%		0.7			24.0	%		24.4	%		(0.4	)		25.3	%		23.2	%		2.1
Research and development		5.3			5.0			0.3			5.1			4.7			0.4			4.8			5.2			(0.4	)
Selling, general and administrative		42.3			42.4			(0.1	)		42.5			41.1			1.4			42.0			42.7			(0.7	)
Certain claims		3.6			5.0			(1.4	)		1.2			1.5			(0.3	)
Acquisition, integration, realignment and other		2.3			0.6			1.7			2.2			0.8			1.4			0.2			0.7			(0.5	)
Net curtailment and settlement		—			—			—			(1.1	)		—			1.1

Operating expenses		53.5			53.0			0.5			49.9			48.1			1.8

Operating profit		20.9			22.1			(1.2	)		26.1			27.5			(1.4	)		27.7			28.2			(0.5	)
Interest and other income (expense),net		(0.4	)		3.0			3.4			(0.4	)		1.2			1.6
Interest and other, net																				(1.4	)		(0.4	)		1.0

Cost of Products Sold

The increase in cost of products sold as a ~~percent~~percentage of net sales for the three month ~~2009~~ period ended March 31, 2010 compared to the same ~~2008~~2009 period was driven by higher manufacturing costs per unit due to lower production levels ~~during 2009. These costs were partially offset by~~in late 2009 into 2010. Additionally, we recognized foreign currency hedge losses in the 2010 period compared to hedge gains recognized in the 2009 ~~period compared to hedge losses recognized in the 2008~~ period. ~~On ayear-to-date~~ basis, the improvement in gross margin is due to foreign currency hedge gains recognized in the 2009 period compared to hedge losses recognized in the 2008 period. These hedge gains were partially offset by higher manufacturing costs per unit as well as increased inventory~~step-up~~ ~~as a result of the Abbott Spine acquisition.~~

² Registered trademark of Heraeus Kulzer GmbH

Under our hedging program, for derivatives which qualify as hedges of future cash flows, the effective portion of changes in fair value is temporarily recorded in other comprehensive income, and then recognized in cost of products sold when the hedged item affects earnings.

Operating Expenses

Research and development expense, or R&D, ~~increased~~decreased to ~~$52.1~~$51.0 million ~~and $153.8~~from $51.9 million for the three ~~and nine~~ month ~~periods~~period ended September 30, 2009, respectively, from $47.9 million and $144.0 million in the same 2008 periods, respectively. This increase reflects additional spending on certain development, clinical and external research activitiesMarch 31, 2010 compared to the ~~delay~~same 2009 period. R&D spending in the 2009 period was higher due to development activities ~~experienced in 2008~~related to theContinuum^TM Acetabular System andZimmer MMC^TM Cup products as ~~we implemented~~well as theZimmer Natural Nail system. While currently below the low end of our ~~enhanced compliance program. We~~target range of 5 to 6 percent of sales, we expect R&D spending in ~~2009~~2010 to ~~be over 5 percent of sales~~reach that target for the full ~~year.~~year as new development programs accelerate.

Selling, general and administrative expense, or SG&A, increased to ~~$413.0~~$446.7 million from ~~$403.7~~$423.7 million for the three month period ended ~~September 30, 2009~~March 31, 2010 compared to the same ~~2008 period. This is a slight~~2009 period, which represents an improvement in SG&A ~~margin~~as a percentage of sales by ~~ten~~70 basis points. ~~SG&A expense in the 2008 period included approximately $20 million~~The 70 basis point improvement represents controlled spending during a time of non-recurring costs, such as monitor fees and consulting and legal fees associated with the global roll-out of our enhanced compliance program. In this challenging economic environment, we are carefully managing our SG&A spend, reducing expenses in certain areas in order to fund growth and productivity initiatives. Areas of investment include marketing and promotion and medical education and training. Additionally, the acquisition of Abbott Spine increased SG&A costs for items such as selling expenses, increased instrument depreciation and amortizationincreasing sales. Part of the ~~acquired intangible assets.~~

~~On ayear-to-date~~ basis, SG&A expense decreased modestly from the same 2008 period, but SG&A margin has increased by 140 basis points. SG&A expense in the 2008 period included approximately $50 million of non-recurring costs such as monitor fees and consulting and legal fees associated with the global roll-out of our enhanced compliance program. The savings from these non-recurring costs have been partially offset by increased spending in 2009 to fund initiatives and Abbott Spine costs, as discussed above. Additionally, SG&A marginsales improvement is ~~negatively impacted by the decrease in revenues~~ caused by changes in foreign currency ~~rates.~~rates, which positively impacted SG&A as a percentage of sales. A majority of our SG&A ~~spend~~spending is incurred in the U.S., primarily from our corporate headquarters and similar functions at our various

businesses such as Dental, Trauma, Spine and OSP. Therefore, SG&A expense does not respond to changes in foreign currency rates proportionally to our ~~revenue, which has caused SG&A margin to increase.~~revenue.

~~Certain~~The overall dollar increase in spending was driven by higher product liability claims ~~expense is a provision for estimated~~~~Durom~~~~Cup patients undergoing revision surgeries within specified times. A provision~~(see discussion of $69.0 million was originally recorded during 2008 with an additional $35.0 million recorded during the three month period ended September 30, 2009, bringing the total provision to $104.0 million for these claims. For more information regarding certainproduct liability claims ~~see~~in Note 14 to the consolidated financial ~~statements.~~statements), increased medical education and training activities, increased instrument costs and incremental costs associated with certain operational excellence and growth initiatives. These were partially offset by lower costs, including elimination of monitor fees, related to the settlement with the U.S. government that successfully concluded in March 2009.

Acquisition, integration, realignment and other expenses for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2009~~March 31, 2010 were ~~$22.2~~$2.6 million, ~~and $65.7 million, respectively,~~ compared to ~~$5.6 million and $25.4~~$7.0 million in the same ~~2008 periods.~~2009 period. The ~~increase~~decrease is due to a reduction in ~~the three month 2009 period compared~~consulting and professional fees and lower legal fees due to the ~~same 2008 period relates primarily to approximately $9.3 million~~settlement of certain litigation matters recognized during the 2009 period as well as costs incurred related to acquired distributors. During the nine month 2009 period, we initiated a workforce realignment, which included the elimination of positions in some areas and planned increases in others, to balance the requirements necessary to support long-term growth. As a result of this realignment and severance costs from acquisitions, we incurred approximately $18.4 million of severance and termination-related expenses. Other items contributing to the increase on a~~year-to-date~~ basis include $8.6 million of expenses related to contract termination costs, $14.1 million of certain litigation matters that were recognized during the period and various costs incurred to integrate the Abbott Spine business acquired in the fourth quarter of 2008.

We recognized a net curtailment and settlement gain of $32.1 million during the nine month period ended September 30, 2009 related to amending our U.S. and Puerto Rico postretirement benefit plans. For more information regarding the net curtailment and settlement gain, see Note 11 to the consolidated financial statements.matters.

Operating Profit, Interest and Other Expense, Income Taxes and Net Earnings

Operating profit for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2009 was $204.0~~March 31, 2010 increased to $294.1 million, ~~and $780.3 million, respectively,~~ from ~~$210.3 million and $850.3 million~~$279.8 in the same ~~2008 periods.~~2009 period. The ~~decrease~~reduction in operating profit to sales ratio is primarily due to higher ~~operating expenses as a percent of sales and lower reported revenues on ayear-to-date~~ ~~basis.~~production costs.

Interest and other, ~~expense,~~ net for the three and nine month periods ended September 30, 2009, increased to $4.2 million and $11.9 million, respectively, compared to income of $28.2 million and $36.0 million in the same 2008 periods. Interest and other income in the 2008 periods reflects realized gains of $30.1 million for the three month period ~~and $38.8~~ended March 31, 2010, increased to $14.6 million, ~~for~~compared to $3.7 million in the ~~nine month period, related to the sale of certain marketable securities. Excluding the effect of these gains~~same 2009 period. The increase in ~~2008,~~ interest expense ~~increased in the 2009 periods as the~~is a result of ~~increased long-term debt used to partially fund~~ the ~~Abbott Spine acquisition and share repurchases.~~senior unsecured notes that we issued in November 2009.

The effective tax rate on earnings before income taxes ~~increased to 25.0 percent~~ for the three month period ended ~~September 30, 2009,~~March 31, 2010 decreased to 26.5 percent, from ~~9.8~~26.8 percent in the same 2008 period. The effective tax rate for the 2008 period reflected a tax benefit of approximately $30.8 million related to a 2007 civil settlement. Additionally, the effective tax rate on earnings for the nine month period ended September 30, 2008 was impacted by this tax benefit. The effective tax rate for the nine month period ended September 30, 2009 ~~increased to 26.8 percent from 23.1 percent in the same 2008~~ period.

Net earnings ~~decreased 30~~increased 1.6 percent to ~~$149.9~~$205.4 million for the three month period ended ~~September 30, 2009,~~March 31, 2010, compared to ~~$214.7~~$202.2 million in the same ~~2008~~2009 period. Net earnings decreased 17 percent to $562.2 million for the nine month period ended September 30, 2009, compared to $681.1 million in the same 2008 period. For the three month 2009 period, basic earnings per share decreased 27 percent to $0.70 from $0.96. Diluted earnings per share for the three month 2009 period decreased 26 percent to $0.70 from $0.95 in the same 2008 period. For the nine month 2009 period, basic earnings per share decreased 13 percent to $2.60 from $2.98 in the same 2008 periodBasic and diluted earnings per share ~~also decreased 13~~both increased 11 percent to ~~$2.59~~$1.01, from ~~$2.97~~$0.91 in the same ~~2008~~2009 period. The disproportional change in earnings per share as compared with net earnings is attributed to the effect of ~~2009~~2010 and ~~2008~~2009 share repurchases.

Liquidity and Capital Resources

Cash flows provided by operating activities were ~~$732.0~~$259.5 million for the ~~nine~~three month period ended ~~September 30, 2009,~~March 31, 2010, compared to ~~$831.2~~$184.6 million in the same ~~2008~~2009 period. The principal source of cash from operating activities was net ~~earnings of $562.2 million.~~earnings. Non-cash items included in net earnings accounted for another ~~$285.1~~$98.9 million of operating cash. All other items of operating cash flows reflect a use of ~~$115.3~~$44.8 million of ~~cash. The resolution~~cash, compared to a use of $118.5 million in the same 2009 period. In the 2009 period we resolved outstanding payments to healthcare professionals and institutions, ~~resulted~~resulting in ~~increased~~substantial cash ~~outflows~~outflows. A reduction in inventory levels during the 2010 period compared

to an increase in inventory levels during the 2009 period ~~compared~~also contributed to the ~~delay~~improvement in ~~similar~~cash flows from operating activities, partially offset by higher tax payments ~~during the 2008 period as we implemented our enhanced global compliance program. The resolution of these outstanding payments, along with a change~~ in the ~~timing of employee bonus payments compared to the 2008 period, contributed to a decrease in accrued expenses for the nine month period ended September 30, 2009.~~2010 period.

At ~~September 30, 2009,~~March 31, 2010, we had 6360 days of sales outstanding in trade accounts receivable, which isrepresents an increase of 4 days compared to ~~September 30, 2008~~December 31, 2009 and ~~flat~~a decrease of 1 day compared ~~June 30,~~to March 31, 2009. At ~~September 30, 2009,~~March 31, 2010, we had ~~353~~302 days of inventory on hand, ~~a decrease~~which is consistent with December 31, 2009 and an improvement of 2271 days ~~compared to June 30,~~from March 31, 2009. Over the past two years we have made significant investments in inventory, including investments in response to growing demand for systems that provide more versatility and better fit for patients. In the third quarter of 2009, we have made progress rationalizing these investments through reductions in field-based consignments and through the use of new inventory management tools to speed returns and redeployments. The continued build out of pipeline inventory for planned product launches will partially offset these reductions in field consignments.

Cash flows used in investing activities were ~~$247.9~~$37.8 million for the ~~nine~~three month period ended ~~September 30, 2009,~~March 31, 2010, compared to ~~$339.4~~$84.4 million ~~used in investing~~ in the same ~~2008~~2009 period. Additions to instruments decreased by $6.0 million during the ~~nine~~three month period ended ~~September 30, 2009~~March 31, 2010 compared to the ~~2008 period, asyear-over-year~~ ~~spending on instruments is expected to decrease compared to the significant investments made in 2008.~~same 2009 period. Spending on other property, plant and equipment decreased to ~~$76.8~~$11.6 million during the ~~nine~~three month period ended ~~September 30, 2009~~March 31, 2010, compared to ~~$189.2~~$30.9 million in the same ~~2008~~2009 period. We expect ~~decreased~~ spending on property, plant and equipment ~~compared~~and instruments to ~~2008 levels, as certain planned infrastructure initiatives from 2008 are completed and~~increase over subsequent quarters in 2010 as we ~~adjust spending~~replace machinery and equipment in the normal course of business and invest in instruments to ~~lower production volumes. Acquired intellectual property rights~~support our new product launches. During the first quarter of ~~$32.9~~2010, we purchased and sold approximately $4.0 million ~~relate to lump-sum payments made to certain healthcare professionals~~ and ~~institutions~~$20.0 million, respectively, in ~~place~~certificates of ~~future royalty payments~~deposit that ~~otherwise would~~ have ~~been due under the terms of an existing contractual arrangement.~~original maturities greater than 90 days. Investments in other assets ~~of $35.5 million~~in both 2010 and 2009 primarily ~~relates~~relate to payments to acquire certain foreign-based distributors.

Cash flows used in financing activities were ~~$264.3~~$87.9 million for the ~~nine~~three month period ended ~~September 30, 2009,~~March 31, 2010, compared to ~~$408.2~~$95.9 million ~~used in financing activities~~ in the same ~~2008~~2009 period. ~~We borrowed $141.0 million from our credit facilities during the nine month period ended September 30, 2009 to repurchase shares of our common stock.~~ For the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, we purchased ~~10.8~~1.5 million common shares for a total of ~~$404.4~~$93.5 million, including commissions, under our stock repurchase program authorized by our Board of Directors, compared to ~~$688.9~~$301.4 million in the same ~~2008~~2009 period. In the 2009 period, we borrowed against our senior credit facility, in part, to fund these share repurchases. Proceeds from our stock compensation plans have ~~decreased~~increased in the ~~nine~~three month period ended ~~September 30, 2009,~~March 31, 2010, compared to the same ~~2008~~2009 period, due to ~~a decrease~~an increase in employee stock option exercises.

We have two outstanding tranches of unsecured senior notes (Senior Notes): $500 million aggregate principal amount of 4.625% Senior Notes due November 30, 2019 and $500 million aggregate principal amount of 5.75% Senior Notes due November 30, 2039. Interest on the Senior Notes is payable on May 30 and November 30 of each year beginning on May 30, 2010 until maturity. We may redeem the Senior Notes at our election in whole or in part at any time prior to maturity.

We have a five year $1,350 million revolving, multi-currency, senior unsecured credit facility maturing November 30, 2012 ~~(the “Senior~~(Senior Credit ~~Facility”)~~Facility). We had ~~$600.2~~$128.2 million outstanding under the Senior Credit Facility at ~~September 30, 2009,~~March 31, 2010, and ~~therefore, our available borrowings were $749.8~~an availability of $1,221.8 million. ~~The Senior Credit Facility contains provisions whereby borrowings may be increased to $1,750 million and we may request that the maturity date be extended for two additional one-year periods.~~

We and certain of our wholly-owned foreign subsidiaries are the borrowers under the Senior Credit Facility. Borrowings under the Senior Credit Facility are used for general corporate purposes and bear interest at a LIBOR-based rate plus an applicable margin determined by reference to our senior unsecured long-term credit rating and the amounts drawn under the Senior Credit Facility, at an alternate base rate, or at a fixed rate determined through a competitive bid process. The Senior Credit Facility contains customary affirmative and negative covenants and events of default for an unsecured financing arrangement, including, among other things, limitations on consolidations, mergers and sales of assets. Financial covenants include a maximum leverage ratio of 3.0 to 1.0 and a minimum interest coverage ratio of 3.5 to 1.0. If we fall below an investment grade credit rating, additional restrictions would

result, including restrictions on investments, payment of dividends and stock repurchases. We were in compliance with all covenants under the Senior Credit Facility as of September 30, 2009. Commitments under the Senior Credit Facility are subject to certain fees, including a facility fee and a utilization fee. The Senior Credit Facility is rated A- by Standard & Poor’s Ratings Services and is not rated by Moody’s Investors’ Service, Inc.

We also have available uncommitted credit facilities totaling ~~$106.5~~$83.9 million.

We may use excess cash or further borrow against our Senior Credit Facility, subject to limits set by our Board of Directors, to repurchase additional common stock under the $1.25 billion program which expires December 31, 2010. $117.6 million remains authorized for future repurchases under this program.

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

Recent Accounting Pronouncements

~~Effective for interim and annual periods ending after September 15, 2009, the FASB has defined~~There are no recently issued accounting pronouncements that we have yet to adopt that are expected to have a new hierarchy for U.S. GAAP and established the FASB Accounting Standards Codification (ASC) as the sole source for authoritative guidance to be applied by nongovernmental entities. The adoption of the ASC changes the manner in which U.S. GAAP guidance is referenced, but it does not have any impactmaterial effect on our financial position, or results of ~~operations.~~operations, or cash flows.

Critical Accounting ~~Policies~~Estimates

~~Except as set forth below, there~~There were no changes in the ~~nine~~three month period ended ~~September 30, 2009~~March 31, 2010 to the application of critical accounting ~~estimates~~policies as described in our Annual Report onForm 10-K for the year ended December 31, ~~2008.~~2009.

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. Changes to these assumptions could require us to record impairment charges on these assets.

~~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,~~In the fourth quarter of 2009 we incurred a goodwill impairment charge of $73.0 million related ~~fees and for claims incurred but not reported. We use an actuarial model~~ to ~~assist management~~our U.S. Spine reporting unit. Although there were signs of improvement in determining an appropriate level of accruals for product liability claims. Historical patterns of claim loss development over time are statistically analyzed to arrive at factors which are then applied to loss estimates in the actuarial model. During the three month period ended ~~September 30,~~March 31, 2010, such as growth in sales of acquired Abbott Spine products, our U.S. Spine reporting unit continues to experience challenges, so we performed another impairment test in the first quarter of 2010.

Using methodology similar to that used in the fourth quarter of 2009, ~~in addition~~we determined the estimated fair value of the reporting unit using an equal weighting of income and market approaches. The estimated fair value of the reporting unit was greater (although not substantially greater) than the carrying value of the net assets, so we did not record a goodwill impairment charge.

If the estimated cash flows of the U.S. Spine reporting unit decrease relative to our ~~general product liability~~current estimates, ~~and the $69.0 million provision recorded in 2008 related~~we may have to ~~the~~~~Durom~~~~Cup, we recorded an additional provision for certain claims of $35.0 million representing management’s updated estimate of liability to~~~~Durom~~Cup patients undergoing revisions associated with surgeries occurring before July 2008 and within two years of the original surgery date. These parameters are consistent with our data which indicates that cup loosenings associated with surgical technique are most likely to occur within that time period. Any claims received outside of these defined parameters will be managedrecord impairment charges in the ~~normal course and reflected~~future. Factors that could result in our ~~standard quarterly~~cash flows being lower than our current estimates include: 1) decreased revenues caused by changes in the healthcare market, poor execution of our operating plans, or our inability to generate new product ~~liability accruals.~~revenue from our research and development activities, and 2) our inability to achieve the estimated operating margins in our forecasts due to unforeseen factors. Additionally, changes in the broader economic environment could cause changes to our estimated discount rates which will impact our estimated fair values, or may cause changes to the comparable transaction methodology we employed under the market approach of estimating fair value.

We have five other reporting units subject to goodwill impairment testing, but no interim impairment testing was performed on these reporting units as there were no events or circumstances that would warrant an interim test. For each of those five reporting units, the estimated fair value substantially exceeded its carrying value at the last annual impairment test.

Forward-Looking Statements

This quarterly report contains certain statements that are forward-looking statements within the meaning of federal securities laws. When used in this report, the words “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,” “potential,” “project,” “target,” “forecast,” “intend,” “assume,” “guide,” “seek” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to:


	•	competition;

	•	pricing pressures;

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


	•	the impact of the recently enacted federal healthcare reform ~~measures in~~legislation, including the ~~U.S. and elsewhere,~~ new excise tax on medical devices;

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

	•	the costs of defending or resolving putative class action litigation ~~and lawsuits, investigations~~arising out of trading or ~~other proceedings resulting from~~ownership of our ~~September 2007 settlement with the United States government and other matters;~~stock;

	•	our compliance through 2012 with the Corporate Integrity Agreement we entered into as part of the September 2007 ~~settlement;~~settlement with the United States government;

	•	the success of our quality initiatives;


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

	•	challenges relating to changes in and compliance with governmental laws and regulations affecting our U.S. and international businesses, including regulations of the U.S. Food and Drug Administration and foreign government regulators, such as more stringent requirements for regulatory clearance of our products;

	•	tax reform measures, tax authority examinations and associated tax risks and potential obligations;

	•	retention of our independent agents and distributors;

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

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

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

	•	product liability claims;

	•	the impact of temporarily suspending U.S. marketing and distribution of theDuromCup on our ~~revenues,~~sales growth, our customer relationships, our entry into the U.S. hip resurfacing market and product liability claims;

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

	•	our ability to form and implement strategic alliances;

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

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

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

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

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.

We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be set forth in our periodic reports and our other filings with the Securities and Exchange Commission.


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*

There have been no material changes from the information provided in our Annual Report onForm 10-K for the year ended December 31, ~~2008.~~2009.


Item 4.	*Controls and Procedures*

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

3024

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 inRule 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 inRule 13a-15(f) of the Securities Exchange Act of 1934) that occurred during the quarter ended ~~September 30, 2009~~March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II — Other Information


Item 1.	*Legal Proceedings*

Information pertaining to legal proceedings can be found in Note 14 to the interim consolidated financial statements included in Part I of this report.


Item 1A.	*Risk Factors*

Except as set forth below, ~~and in our Quarterly Reports onForm 10-Q~~ ~~for the quarters ended March 31, 2009 and June 30, 2009,~~ there have been no material changes from the risk factors disclosed in Part I — Item 1A of our Annual Report onForm 10-K for the year ended December 31, ~~2008.~~2009.

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

~~The~~entitled “The impact of healthcare reform in the U.S. on us is uncertain” is replaced in its entirety by the following:

The impact of the recently enacted federal healthcare reform legislation on our business remains uncertain.

~~There is increasing emphasis within~~During the ~~federal government to reform healthcare in~~first quarter of 2010, the U.S. ~~Although~~Congress passed and the President signed into law the Patient Protection and Affordable Care Act, as well as the Health Care and Education Reconciliation Act of 2010, which represent a significant change to the current U.S. healthcare system. The legislation is far-reaching and is intended to expand access to health insurance coverage over time. The new law will likely have a significant impact upon various ~~proposals have received support in the House~~aspects of Representatives or Senate committees, there still is no consensus on key issues such as whether there will be an employer mandate for healthcare insurance or a public healthcare insurance program and howour business operations. For example, to ~~pay for increased costs. To~~ the extent that the number of uninsured or underinsured patients is reduced, demand for our products in the U.S. could marginally increase. However, ~~efforts to pay~~the new law provides for ~~healthcare reform through~~new taxes and fees, including a ~~proposed new~~2.3 percent excise tax on medical devices scheduled to be implemented in 2013 that will apply to U.S. sales of a majority of our medical device ~~companies~~products.

Many of the details of the new law will be included in new and ~~efforts~~revised regulations, which have not yet been promulgated, and require additional guidance and specificity to ~~contain healthcare costs, directly through pricing or reimbursement controls or indirectly~~be provided by ~~government-sponsored healthcare insurance,~~the Department of Health and Human Services, Department of Labor and Department of the Treasury. Accordingly, while it is too early to understand and predict the ultimate impact of the new legislation on our business, the legislation could have a material adverse effect on our ~~sales~~business, cash flows, financial condition and results of operations. ~~Accordingly, the impact of healthcare reform on the medical device industry in general or us in particular remains uncertain.~~


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

The following table summarizes repurchases of common stock settled during the three month period ended ~~September 30, 2009:~~March 31, 2010:

Total Number of
Approximate

Shares Purchased
Dollar Value of

as Part of
Shares that May

Total Number
Publicly
Yet Be Purchased

of Shares
Average Price
Announced Plans
Under Plans

Purchased Paid per Share or Programs* or Programs

July 2009 — $ — 39,490,867 $ 796,726,122
August 2009 1,450,000 45.89 40,940,867 730,190,146
September 2009 — — 40,940,867 730,190,146

Total 1,450,000 $ 45.89 40,940,867 $ 730,190,146

Total Number of
Approximate

Shares Purchased
Dollar Value of

as Part of
Shares that May

Total Number
Publicly
Yet Be Purchased

of Shares
Average Price
Announced Plans
Under Plans

Purchased Paid per Share or Programs* or Programs

January 2010 1,042,413 $ 62.36 50,936,061 $ 146,113,286
February 2010 500,000 57.01 51,436,061 117,602,079
March 2010 — — 51,436,061 117,602,079

Total 1,542,413 $ 60.62 51,436,061 $ 117,602,079

* Includes repurchases made under expired programs as well as the current program authorizing $1.25 billion of repurchases through December 31, 2010.

31


Item 5.	*Other Information*

During the period covered by this report, the Audit Committee of our Board of Directors ~~was not asked to, and did not, approve~~approved the engagement of PricewaterhouseCoopers LLP, our independent registered public accounting firm, to perform ~~any~~certain non-audit ~~services.~~services related to certain accounting and tax matters. This disclosure is made pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002.


Item 6.	*Exhibits*

The following exhibits are filed or furnished as part of this report:


10.1	*	Form of Change in Control Severance Agreement with Jeffrey B. Paulsen
31.1		Certification pursuant toRule 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 toRule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99		Zimmer Holdings, Inc. Employee Stock Purchase Plan (As amended and restated effective January 1, 2010)
101		The following materials from Zimmer Holdings, Inc.’s Quarterly Report onForm 10-Q for the quarter ended ~~September 30, 2009,~~March 31, 2010, formatted in XBRL (Extensible Business Reporting Language): (1) the Consolidated Statements of Earnings, (2) the Consolidated Balance Sheets, (3) the Consolidated Statements of ~~Stockholders’ Equity, (4) the Consolidated Statements of~~ Cash Flows, and ~~(5)~~(4) Notes to Consolidated Financial Statements, tagged as blocks of text.


*		indicates management contracts or compensatory plans or arrangements

3226

SIGNATURES

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

~~ZIMMER HOLDINGS, INC.~~
~~(Registrant)~~
~~By:~~ ZIMMER HOLDINGS, INC.
(Registrant)
Date: May 4, 2010 By:
/s/ James T. Crines

~~James T. Crines~~

~~Executive Vice President, Finance and~~

~~Chief Financial Officer~~

~~Date: November 4, 2009~~


	~~By:~~		James T. Crines
			Executive Vice President, Finance and
			Chief Financial Officer

Date: May 4, 2010		By:	/s/ Derek M. Davis
			Derek M. Davis
			Vice President, Finance and Corporate
			Controller and Chief Accounting Officer

~~Derek M. Davis~~
~~Vice President, Finance and Corporate~~

~~Controller and Chief Accounting Officer~~

~~Date: November 4, 2009~~

3327


			Page

Part I — Financial Information
	Item 1.	Financial Statements
		Consolidated Statements of Earnings for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~		3
		Consolidated Balance Sheets as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008~~2009		4
		~~Consolidated Statement of Stockholders’ Equity as of September 30, 2009~~		5
		Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~		65
		Notes to Interim Consolidated Financial Statements		76
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2117
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		3024
	Item 4.	Controls and Procedures		3024

Part II — Other Information
		There is no information required to be reported under any items except those indicated below.
	Item 1.	Legal Proceedings		3125
	Item 1A.	Risk Factors		3125
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		3126
	Item 5.	Other Information		3226
	Item 6.	Exhibits		3226
Signatures				3327
EX-10.1
EX-31.1
EX-31.2
EX-32
EX-99
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
~~EX-101 DEFINITION LINKBASE DOCUMENT~~


	Zimmer Holdings, Inc. Stockholders
										Accumulated
										Other											Total
	Common Shares				Paid-in			Retained		Comprehensive		Treasury Shares						Noncontrolling			Stockholders’
	Number		Amount		Capital			Earnings		Income		Number			Amount			Interest			Equity

Balance January 1, 2009		253.7	$	2.5	$	3,138.5		$	4,385.5	$	240.0		(30.1	)	$	(2,116.2	)	$	3.6		$	5,653.9
Net earnings		—		—		—			562.2		—		—			—			—			562.2
Other comprehensive income		—		—		—			—		111.2		—			—			—			111.2
Purchase of noncontrolling interest		—		—		(5.0	)		—		—		—			—			(3.6	)		(8.6	)
Stock compensation plans, including tax benefits		0.2		—		64.4			—		—		—			—			—			64.4
Share repurchases		—		—		—			—		—		(10.8	)		(404.4	)		—			(404.4	)

Balance September 30, 2009		253.9	$	2.5	$	3,197.9		$	4,947.7	$	351.2		(40.9	)	$	(2,520.6	)	$	—		$	5,978.7


	For the Three Months
	Ended March 31,
	2010			2009

Cash flows provided by (used in) operating activities:
Net earnings of Zimmer Holdings, Inc.	$	205.4		$	202.2
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		84.9			79.6
Share-based compensation		12.7			17.1
Income tax benefit from stock option exercises		1.7			0.1
Excess income tax benefit from stock option exercises		(0.7	)		—
Inventorystep-up		1.3			4.2
Changes in operating assets and liabilities, net of effect of acquisitions:
Income taxes		2.3			44.9
Receivables		(32.5	)		(6.3	)
Inventories		17.2			(32.2	)
Accounts payable and accrued expenses		(37.1	)		(111.5	)
Other assets and liabilities		4.3			(13.5	)

Net cash provided by operating activities		259.5			184.6

Cash flows provided by (used in) investing activities:
Additions to instruments		(39.3	)		(45.3	)
Additions to other property, plant and equipment		(11.6	)		(30.9	)
Purchases of certificates of deposit		(4.0	)		—
Sales of certificates of deposit		20.0			—
Acquisition of intellectual property rights		—			(7.6	)
Investments in other assets		(2.9	)		(0.6	)

Net cash used in investing activities		(37.8	)		(84.4	)

Cash flows provided by (used in) financing activities:
Net borrowing under credit facilities		—			210.0
Proceeds from employee stock compensation plans		4.9			3.3
Excess income tax benefit from stock option exercises		0.7			—
Repurchase of common stock		(93.5	)		(301.4	)
Acquisition of noncontrolling interest		—			(7.8	)

Net cash used in financing activities		(87.9	)		(95.9	)

Effect of exchange rates on cash and cash equivalents		(4.3	)		(4.1	)

Increase in cash and cash equivalents		129.5			0.2
Cash and cash equivalents, beginning of year		691.7			212.6

Cash and cash equivalents, end of period	$	821.2		$	212.8


	For the Nine Months Ended September 30,
	2009			2008

Cash flows provided by (used in) operating activities:
Net earnings of Zimmer Holdings, Inc.	$	562.2		$	681.1
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		249.6			196.0
Net curtailment and settlement		(32.1	)		—
Gain on sale of investments		—			(38.8	)
Share-based compensation		57.7			50.4
Inventorystep-up		9.9			3.2
Income tax benefit from stock option exercises		0.7			10.6
Excess income tax benefit from stock option exercises		(0.1	)		(6.5	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Income taxes		(4.9	)		(66.2	)
Receivables		10.9			(11.9	)
Inventories		(22.3	)		(106.5	)
Accounts payable and accrued expenses		(133.6	)		141.3
Other assets and liabilities		34.0			(21.5	)

Net cash provided by operating activities		732.0			831.2

Cash flows provided by (used in) investing activities:
Additions to instruments		(102.7	)		(186.5	)
Additions to other property, plant and equipment		(76.8	)		(189.2	)
Proceeds from sale of investments		—			54.9
Acquisition of intellectual property rights		(32.9	)		—
Investments in other assets		(35.5	)		(18.6	)

Net cash used in investing activities		(247.9	)		(339.4	)

Cash flows provided by (used in) financing activities:
Net borrowing under credit facilities		141.0			220.0
Proceeds from employee stock compensation plans		7.6			54.2
Excess income tax benefit from stock option exercises		0.1			6.5
Repurchase of common stock		(404.4	)		(688.9	)
Acquisition of noncontrolling interest		(8.6	)		—

Net cash used in financing activities		(264.3	)		(408.2	)

Effect of exchange rates on cash and cash equivalents		7.3			(5.1	)

Increase in cash and cash equivalents		227.1			78.5
Cash and cash equivalents, beginning of year		212.6			463.9

Cash and cash equivalents, end of period	$	439.7		$	542.4


			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Recorded		Assets		Inputs		Inputs
	Balance		(Level 1)		(Level 2)		(Level 3)

Assets
Available-for-sale securities	$	0.9	$	0.9	$	—	$	—
Derivatives, current and long-term		33.9		—		33.9		—

	$	34.8	$	0.9	$	33.9	$	—

Liabilities
Derivatives, current and long-term	$	22.5	$	—	$	22.5	$	—

	$	22.5	$	—	$	22.5	$	—


	As of
	October 16, 2008

Current assets	$	61.4
Property, plant and equipment		6.5
Instruments		17.5
Intangible assets subject to amortization:
Customer relationships (10 year useful life)		8.6
Developed technology (10 year useful life)		64.3
In-process research and development		38.5
Other assets		10.0
Goodwill		205.1

Total assets acquired		411.9

Current liabilities		19.5
Deferred taxes		29.4

Total liabilities assumed		48.9

Net assets acquired	$	363.0


	September 30,		December 31,
	2009		2008
	(In millions)

Finished goods	$	762.9	$	731.2
Work in progress		47.2		52.6
Raw materials		162.0		144.5

Inventories, net	$	972.1	$	928.3


	2010			2009
	Balance			Balance
	Sheet	Fair		Sheet	Fair
	Location	Value		Location	Value

*Asset Derivatives*
Foreign exchange forward contracts	Other current assets	$	31.9	Other current assets	$23.3
Foreign exchange forward contracts	Other assets		13.6	Other assets	6.3

Total asset derivatives		$	45.5		$29.6

*Liability Derivatives*
Foreign exchange forward contracts	Other current liabilities	$	26.2	Other current liabilities	$35.4
Foreign exchange forward contracts	Other long-term liabilities		7.9	Other long-term liabilities	14.5

Total liability derivatives		$	34.1		$49.9


															Amount of
											Amount of				Gain/(Loss)
	Three Months					Nine Months					Gain Recognized				Reclassified From OCI
	Ended September 30,					Ended September 30,					in OCI				to Cost of Products Sold
Derivative Instrument	2009		2008			2009		2008			2010		2009		2010			2009

Foreign exchange forward contracts	$	4.7	$	(12.9	)	$	15.4	$	(54.9	)	$	30.6	$	31.1	$	(0.4	)	$	4.3
Foreign exchange options		0.2		—			1.1		—			—		0.2		—			0.6

Total	$	4.9	$	(12.9	)	$	16.5	$	(54.9	)	$	30.6	$	31.3	$	(0.4	)	$	4.9


					Total Number of		Approximate
					Shares Purchased		Dollar Value of
					as Part of		Shares that May
	Total Number				Publicly		Yet Be Purchased
	of Shares		Average Price		Announced Plans		Under Plans
	Purchased		Paid per Share		or Programs*		or Programs

July 2009		—	$	—		39,490,867	$	796,726,122
August 2009		1,450,000		45.89		40,940,867		730,190,146
September 2009		—		—		40,940,867		730,190,146

Total		1,450,000	$	45.89		40,940,867	$	730,190,146


*		Includes repurchases made under expired programs as well as the current program authorizing $1.25 billion of repurchases through December 31, 2010.

ZIMMER HOLDINGS, INC.
(Registrant)

Date: May 4, 2010

/s/ James T. Crines