ZIMMER HOLDINGS, INC.

345 East Main Street

Warsaw, Indiana 46580

March 22, 2007

Dear Fellow Stockholder:

     You are cordially invited to attend the 2007 Annual Meeting of Stockholders of Zimmer Holdings, Inc., which will be held at 9:00 a.m. on Monday, May 7, 2007, at The New York Palace Hotel, 455 Madison Avenue, New York, New York.

     This booklet includes a notice of meeting and proxy statement. The proxy statement describes the business to be conducted at the meeting and provides other information that you should know when you vote your shares. Following the required business meeting we will report on the company’s operations.

     It is important that your shares be represented whether or not you attend the meeting. Registered stockholders can vote their shares via the Internet or by using a toll-free telephone number. Instructions for using these convenient services appear on the proxy card. You can also vote your shares by marking your votes on the proxy card, signing and dating it and mailing it promptly using the envelope provided.

     We have provided space on the proxy card for comments. We urge you to use it to let us know your feelings about the company or to bring a particular matter to our attention. If you hold your shares through an intermediary, please feel free to write directly to us.

Zimmer Holdings, Inc.

345 East Main Street

Warsaw, Indiana 46580

NOTICE OF ANNUAL MEETING

OF STOCKHOLDERS

March 22, 2007

ZIMMER HOLDINGS, INC.

PROXY STATEMENT

ANNUAL MEETING AND VOTING INFORMATION

Why did I receive these proxy materials?

     You are receiving these proxy materials in connection with the solicitation of proxies on behalf of the Board of Directors of Zimmer Holdings, Inc. (“Zimmer”, “we”, “us”, “our” or the “company”) for use at the Annual Meeting of Stockholders on May 7, 2007. We are sending this proxy statement to all stockholders of record as of the close of business on March 8, 2007 for delivery beginning March 22, 2007.

Who is entitled to vote at the annual meeting?

     Holders of record of our $0.01 par value common stock at the close of business on March 8, 2007 will be entitled to vote at the meeting. As of that date, there were 236,859,062 shares of common stock outstanding and entitled to vote. We are soliciting proxies on behalf of the Board of Directors to give all stockholders who are entitled to vote on the matters that come before the meeting the opportunity to do so whether or not they attend the meeting in person.

What will stockholders vote on at the meeting?

     Four items:

Will there be any other items of business on the agenda?

     We do not expect any other items of business because the deadline for stockholder proposals and nominations has already passed. Nonetheless, in case there is an unforeseen need, the accompanying proxy gives discretionary authority to the persons named on the proxy with respect to any other matters that might be brought before the meeting. Those persons intend to vote that proxy in accordance with their best judgment.

What are the recommendations of the Board of Directors on how I should vote my shares?

     The Board of Directors recommends that you vote your shares as follows:

What is the difference between a “stockholder of record” and a “beneficial holder”?

     These terms describe how your shares are held. If your shares are registered directly in your name with The Bank of New York, our transfer agent, you are a “stockholder of record”. If your shares are held in the name of a bank, broker, trust or other nominee as custodian, you are a “beneficial holder”.

What are my voting rights?

     Holders of our common stock are entitled to one vote per share.

How do I vote by proxy?

     If you are a stockholder of record, we encourage you to vote via the Internet or by telephone. Internet and telephone voting information is provided on the proxy card. These methods are convenient and save us significant postage and processing expense. In addition, when you vote via the Internet or by telephone prior to the meeting date, your vote is recorded immediately and there is no risk that postal delays will cause your vote to arrive late and therefore not be counted.

     If you choose to vote by mail, mark your proxy card, date and sign it, and mail it in the postage-paid envelope. The shares represented will be voted according to your directions. If your proxy card is signed and returned without specifying a vote or an abstention on any proposal, it will be voted according to the recommendation of the Board of Directors on that proposal.

     If you are a beneficial holder, you must provide instructions on voting to your bank, broker, trust or other nominee holder.

How do I vote in person?

     If you are a stockholder of record, you may vote your shares in person at the meeting. However, we encourage you to vote by proxy card, by telephone, or on the Internet even if you plan to attend the meeting. If you are a beneficial holder and wish to vote in person at the meeting, you must obtain from your bank, broker, trust or other nominee holder a legal proxy issued in your name and present it to the inspectors of election with your ballot to be able to vote at the meeting.

How do I vote my shares in the 401(k) plan?

     If you participate in the Zimmer Holdings, Inc. Savings and Investment Program or the Zimmer Puerto Rico Savings and Investment Program, you may instruct the plan trustee on how to vote your shares by mail, by telephone or via the Internet as described above. Your plan trustee will vote the shares credited to your plan account in accordance with your voting instructions. The trustee votes the shares on your behalf because you are the beneficial holder, not the record holder, of the shares credited to your account. The trustee will vote the plan shares for which it does not receive voting instructions in the same proportion as the shares for which it received voting instructions.

What can I do if I change my mind after I vote my shares?

     If you are a stockholder of record, you may revoke your proxy at any time before it is voted at the meeting by: (1) giving timely written notice of the revocation to our Corporate Secretary; or (2) submitting a later-dated vote in person at the meeting, via the Internet, by telephone or by mail. If you are a beneficial holder, you may submit new voting instructions by contacting your bank, broker, trust or other nominee holder. You may also vote in person at the annual meeting if you obtain a legal proxy as described above.

What vote is required to approve each proposal?

     Directors receiving the majority of votes cast (where the number of shares voted “for” a director exceeds the number of shares voted “against” the director) will be elected, provided that if the number of nominees exceeds the number of directors to be elected (a situation we do not anticipate), the directors will be elected by a plurality of the votes cast. Ratification of the selection of our independent registered public accounting firm and approval of the stockholder proposal will each require the affirmative vote of the majority of the shares of common stock present or represented by proxy. Approval of the proposed amendments to our Restated Certificate of Incorporation will require the affirmative vote of 80% of the outstanding shares of common stock.

What effect do abstentions and broker non-votes have?

     Shares not present at the meeting and shares voting “abstain” have no effect on the election of directors. For the proposal to ratify the selection of our independent registered public accounting firm, the proposal to approve amendments to our Restated Certificate of Incorporation and the stockholder proposal, abstentions are treated as shares present or represented and

voting, so abstaining has the same effect as a vote “against” the proposal. Broker non-votes on a proposal are not counted or deemed to be present or represented for the purpose of determining whether stockholders have approved that proposal.

May I give my proxy to someone other than the individuals listed on the proxy card?

     If you are a registered stockholder and wish to give your proxy to someone other than the individuals named on the proxy card, you may do so by crossing out the names appearing on the proxy card and inserting the name of another person. The person you have designated on the proxy card must present the signed card at the meeting.

Who tabulates the votes?

     Representatives of ADP Investor Communications Services will tabulate the votes and act as independent inspectors of election.

Who pays the cost of this proxy solicitation?

     We will pay the costs of this solicitation. Our employees may solicit proxies on behalf of the Board of Directors by mail, telephone, facsimile, electronic transmission and personal solicitation. In addition, we have retained The Altman Group, Inc. to assist in soliciting proxies for a fee of $5,500, plus out-of-pocket expenses. We will, upon request, reimburse brokerage firms and others for their reasonable expenses incurred for forwarding solicitation material to beneficial holders of stock. Questions concerning proxy voting or process should be directed to The Altman Group, Inc. via telephone at (800) 761-6578 (this call is toll-free in the United States).

Is there a list of stockholders entitled to vote at the annual meeting?

     A list of stockholders entitled to vote at the meeting will be available at the meeting and for ten days prior to the meeting, between the hours of 8:00 a.m. and 5:00 p.m., at our offices at 345 East Main Street, Warsaw, Indiana. If you would like to view the stockholder list, please contact our Corporate Secretary to schedule an appointment.

Does the company offer an opportunity to receive future proxy materials electronically?

     Yes. If you are a stockholder of record, you may, if you wish, receive future proxy statements and annual reports online. If you elect this feature, you will receive an e-mail message notifying you when the materials are available along with a web address for viewing the materials and instructions for voting by telephone or the Internet. If you have more than one account, you may receive separate e-mail notifications for each account. If you vote online as described above, you may sign up for electronic delivery at that time.

     If you hold your shares in a brokerage account, you may also have the opportunity to receive proxy materials electronically. Please follow the instructions of your broker.

PRINCIPAL STOCKHOLDERS

     The following table sets forth certain information concerning each person (including any group) known to us to beneficially own more than five percent (5%) of our common stock as of March 8, 2007. Unless otherwise noted, shares are owned directly or indirectly with sole voting and investment power.

SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS

     The following table sets forth, as of January 3, 2007, beneficial ownership of shares of our common stock by each current director, each of the executives named in the Summary Compensation Table and all current directors and executive officers as a group. Unless otherwise noted, such shares are owned directly or indirectly with sole voting and dispositive power.

 *    Less than 1.0%

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Under Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, our directors, executive officers and the beneficial holders of more than 10% of our common stock are required to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Based on our records and other information, we believe that during 2006 all applicable Section 16(a) filing requirements were met.

CORPORATE GOVERNANCE

     Our business is managed under the direction of the Board of Directors. The Board has responsibility for establishing broad corporate policies and for our overall performance.

Policies on Corporate Governance

     We are committed to maintaining the highest standards of business conduct and corporate governance, which we believe are essential to running our business efficiently, serving stockholders well and maintaining our integrity in the marketplace. We have adopted a Code of Business Conduct that applies to all directors, officers and employees and a Code of Ethics for Chief Executive Officer and Senior Financial Officers. The Board of Directors has adopted Corporate Governance Guidelines, which, in conjunction with the Restated Certificate of Incorporation, Restated By-Laws, as amended, Board committee charters and key Board policies, form the framework for our governance. The current version of the Code of Business Conduct, the Code of Ethics for Chief Executive Officer and Senior Financial Officers, the Board’s Corporate Governance Guidelines and the charters for each of the Audit Committee, Compensation and Management Development Committee, Corporate Governance Committee and Science and Technology Committee, as well as the Board’s policies on auditor ratification and stockholder rights plans, are available in the Investor Relations/ Corporate Governance section of our website, www.zimmer.com, and will be provided in print without charge upon written request to our Corporate Secretary at the address shown on the cover page of this proxy statement. We will either disclose on Form 8-K or post on our website any substantive amendment to, or waiver from, the Code of Ethics for Chief Executive Officer and Senior Financial Officers or a provision of the Code of Business Conduct that applies to any of our directors or executive officers. The Board regularly reviews corporate governance developments and modifies its

Corporate Governance Guidelines, committee charters and key practices as warranted. During 2006, the Board approved an amendment to our Restated By-Laws to adopt a majority vote standard for the election of directors in uncontested elections. This standard is explained in more detail below.

Director Independence

     As permitted by the rules of the New York Stock Exchange, the Board has adopted categorical standards to assist it in making determinations of director independence. These standards incorporate, and are consistent with, the definition of “independent” contained in the New York Stock Exchange listing rules. These standards are set forth in Appendix A to this proxy statement and are also included in the Board’s Corporate Governance Guidelines, which are available on our website as described above. The Board has determined that each of our non-employee directors, Stuart M. Essig, Larry C. Glasscock, Arthur J. Higgins, John L. McGoldrick and Augustus A. White, III, M.D., Ph.D., meets these standards and is independent. The Board has determined that J. Raymond Elliott, who is an employee, is not independent.

     In making its determination with respect to Mr. Essig, the Board considered his position as President and Chief Executive Officer of Integra LifeSciences Holdings Corporation, or Integra, a medical device company from which we purchase certain dental products. During 2006, the amount we paid Integra exceeded $1,000,000 but represented less than 1.00% of Integra’s gross revenues. Similarly, in making its determination with respect to Mr. Glasscock, the Board considered his position as Chairman, President and Chief Executive Officer of WellPoint, Inc., the largest commercial health benefits company in terms of membership in the United States and our primary health benefits provider. During 2006, the amount we paid WellPoint exceeded $1,000,000 but represented less than 0.1% of WellPoint’s gross revenues. After reviewing the terms of these transactions and the relationships that Messrs. Essig and Glasscock have with their respective employers, the Board determined that neither director has a direct or indirect material interest in the transactions and that our business relationships with their employers do not diminish the ability of either director to exercise his independent judgment on issues affecting our business.

Adoption of Majority Vote Standard for Election of Directors

     In September 2006, the Board approved an amendment to our Restated By-Laws to require directors to be elected by the majority of the votes cast with respect to that director in uncontested elections (number of shares voted “for” a director must exceed the number of votes cast “against” that director). In a contested election (a situation in which the number of nominees exceeds the number of directors to be elected), the standard for election of directors will be a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. If a nominee who is serving as a director is not elected at the annual meeting, under Delaware law the director would continue to serve on the Board as a “holdover director.” However, under our Restated By-Laws, as amended, any director who fails to be elected must offer to tender his or her resignation to the Board. The Corporate Governance Committee would then make a recommendation to the Board whether to accept or reject the resignation, or whether other action should be taken. The Board will act on the Corporate Governance Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date the election results are certified. The director who tenders his or her resignation will not participate in the Board’s decision. If a nominee who was not already serving as a director is not elected at the annual meeting, under Delaware law that nominee would not become a director and would not serve on the Board as a “holdover director.” In 2007, all nominees for election as directors are currently serving on the Board.

Nominations for Directors

     The Corporate Governance Committee will consider director nominees recommended by stockholders. A stockholder who wishes to recommend a director candidate for consideration by the Corporate Governance Committee should send such recommendation to our Corporate Secretary at the address shown on the cover page of this proxy statement, who will then forward it to the committee. Any such recommendation should include a description of the candidate’s qualifications for board service, the candidate’s written consent to be considered for nomination and to serve if nominated and elected, and addresses and telephone numbers for contacting the stockholder and the candidate for more information. A stockholder who wishes to nominate an individual as a director candidate at the annual meeting of stockholders, rather than recommend the individual to the Corporate Governance Committee as a nominee, must comply with the advance notice requirements set forth in our Restated By-Laws, as amended (see “2008 Proxy Proposals” for more information on these procedures).

     In considering candidates for the Board, the Corporate Governance Committee considers the entirety of each candidate’s credentials and does not have any specific minimum qualifications that must be met by a committee-recommended nominee. The committee is guided by the following basic selection criteria for all nominees: independence; highest character and integrity; experience and understanding of strategy and policy-setting; reputation for working constructively with others; and sufficient time to devote to Board matters. The committee also gives consideration to diversity, age, international background and experience and specialized expertise in the context of the needs of the Board as a whole. During the past year, we paid a

fee to a third-party search firm to assist the committee in identifying and evaluating potential director candidates. One of the candidates identified by the firm, Arthur J. Higgins, joined the Board of Directors effective February 12, 2007.

Stockholder Communication with the Board

     The Board has implemented a process whereby our stockholders may send communications to the Board’s attention. Any stockholder desiring to communicate with the Board, or one or more specified members thereof, should communicate in a writing addressed to Zimmer Holdings, Inc., Board of Directors, c/o Corporate Secretary, at the address shown on the cover page of this proxy statement. The Board has instructed our Corporate Secretary to promptly forward all such communications to the specified addressees thereof.

Conflicts of Interest Policy

     On an annual basis, each director and executive officer is obligated to complete a director and officer questionnaire which requires disclosure of any transactions with us in which the director or executive officer, or any member of his or her immediate family, has an interest. The Audit Committee is charged with reviewing and approving any related person transaction in which any executive officer, director, director nominee or more than 5% stockholder of the company, or any of their immediate family members, has a direct or indirect material interest. Our Compliance Officer or an attorney in our Legal Department is charged with reviewing any conflict of interest involving any other employee.

MEETINGS AND COMMITTEES OF THE BOARD

Meetings and Attendance

     The Board meets on a regularly scheduled basis during the year to review significant developments affecting us and to act on matters requiring Board approval. It also holds special meetings when an important matter requires Board action between scheduled meetings. Members of senior management regularly attend Board meetings to report on and discuss their areas of responsibility. Directors are also expected to attend the annual meeting of stockholders. All of the directors then in office attended the 2006 annual meeting. In 2006, the Board of Directors held seven meetings and committees of the Board held a total of 29 meetings. Overall attendance at these meetings was 99%. Each director attended more than 75% of the total meetings of the Board of Directors and each of the committees on which he served during 2006.

Executive Sessions of and Communication with Non-Management Directors

     Non-management directors meet in executive sessions without management present upon the adjournment of every regularly scheduled meeting of the Board and at other times they determine. The director who presides at these meetings rotates session-by-session among the non-management directors in alphabetical order of their last names.

     In order that interested parties may be able to make their concerns known to the non-management directors, the Board has adopted a method for communicating directly with the non-management directors. The Board has designated Stuart M. Essig to receive such communications on behalf of the non-management directors. Interested parties may contact Mr. Essig via e-mail at stuart.essig@zimmer.com.

Committees of the Board

     Our Restated By-Laws provide that the Board may delegate responsibility to committees. During 2006, the Board had four standing committees: an Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act, a Compensation and Management Development Committee, a Corporate Governance Committee and a Science and Technology Committee. The membership of each of the Audit Committee, the Compensation and Management Development Committee and the Corporate Governance Committee is composed entirely of independent directors. In addition, the members of the Audit Committee meet the heightened standards of independence for audit committee members required by Securities and Exchange Commission rules and New York Stock Exchange listing standards. The membership of the Science and Technology Committee is composed of two independent directors and one employee representative, and the committee works together with an Advisory Board of Science and Technology.

     The table below shows the current membership of each Board committee and the number of meetings held during 2006.

Audit Committee. The principal functions of the Audit Committee include:

     The Board of Directors has determined that both Larry C. Glasscock and Stuart M. Essig qualify as “audit committee financial experts” as defined by rules of the Securities and Exchange Commission. Stockholders should understand that this designation is an SEC disclosure requirement related to these directors’ experience and understanding with respect to certain accounting and auditing matters. The designation does not impose upon these directors any duties, obligations or liability that are greater than are generally imposed on them as members of the Audit Committee and the Board, and their designation as audit committee financial experts pursuant to this SEC requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board.

     The report of the Audit Committee appears on pages 8-9.

Compensation and Management Development Committee. The duties of the Compensation and Management Development Committee include:

     The report of the Compensation and Management Development Committee appears on page 12.

Corporate Governance Committee. The duties of the Corporate Governance Committee include:

Science and Technology Committee. The duties of the Science and Technology Committee include:

AUDIT COMMITTEE REPORT

     The Audit Committee is responsible for monitoring the integrity of the company’s financial statements, the qualifications, performance and independence of the independent registered public accounting firm, the performance of the company’s internal audit function and compliance with legal and regulatory requirements. The committee is directly responsible for the appointment, compensation, retention and oversight of the work of the independent registered public accounting firm.

     Management is responsible for the financial reporting process, including the system of internal control, for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States and for management’s report on internal control over financial reporting. The independent registered public accounting firm is responsible for auditing the consolidated financial statements and expressing an opinion as to their conformity with accounting principles generally accepted in the United States as well as rendering an opinion on management’s report on internal control over financial reporting. The committee’s responsibility is to oversee and review the financial reporting process and to review and discuss management’s report on internal control over financial reporting. Committee members are not, however, professionally engaged in the practice of accounting or auditing and do not provide any expert or other special assurance as to such financial statements concerning compliance with laws, regulations or accounting principles generally accepted in the United States or as to the independence of the independent registered public accounting firm. The committee relies, without independent verification, on the information provided to it and on the representations made by management and the independent registered public accounting firm.

     The committee held 14 meetings during 2006. The meetings were designed, among other things, to facilitate and encourage communication among the committee, management, the internal auditor and the independent registered public accounting firm, PricewaterhouseCoopers LLP, or PwC.

     The committee discussed with the internal auditor and PwC the overall scope and plans for their respective audits. The committee met with the internal auditor and PwC, with and without management present, to discuss the results of their examinations and their evaluations of the company’s internal control over financial reporting. The committee reviewed and discussed compliance with Section 404 of the Sarbanes-Oxley Act of 2002, including consideration of the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard No. 2, An Audit of Internal Control over Financial Reporting Performed in Conjunction With an Audit of Financial Statements.

     The committee discussed major financial risk exposures with management and the steps management has taken to monitor and control such exposures, including risk assessment and risk management policies.

     Management has represented to the committee that the consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States, and the committee has reviewed and discussed the consolidated financial statements with management and PwC. The committee reviewed and discussed with management, the internal auditor and PwC management’s report on internal control over financial reporting and PwC’s report thereon. The committee also discussed with management and the internal auditor the process used to support certifications by the Chief Executive Officer and Chief Financial Officer that are required by the Securities and Exchange Commission and the Sarbanes-Oxley Act of 2002 to accompany periodic filings with the Securities and Exchange Commission and the processes used to support management’s report on internal control over financial reporting.

     The committee also discussed with PwC all matters required to be discussed by that firm’s professional standards, including, among other things, matters related to the conduct of the audit of the consolidated financial statements and the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1 AU Section 380, Communication with Audit Committees), as adopted by the Public Company Accounting Oversight Board in Rule 3200 T.

     PwC provided to the committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), as adopted by the Public Company Accounting Oversight Board in Rule 3600 T, and represented that PwC is independent from the company. The committee also discussed with PwC its independence from the company. When considering PwC’s independence, the committee considered if services PwC provided to the company beyond those rendered in connection with its audit and related reviews of the consolidated financial statements and attestation on management’s report on internal control over financial reporting, were compatible with maintaining its independence. The committee concluded that the provision of such services by PwC has not jeopardized PwC’s independence.

     Based on the reviews and discussions described above, and subject to the limitations on the committee’s role and responsibilities referred to above and in the charter of the Audit Committee, the committee recommended to the Board of Directors, and the Board approved, that the audited consolidated financial statements for the year ended December 31, 2006 be included in the Annual Report on Form 10-K for filing with the Securities and Exchange Commission.

     The committee has also confirmed there have been no new circumstances or developments since their respective appointments to the Audit Committee that would impair any member’s ability to act independently.

DIRECTORS AND NOMINEES

     The Board of Directors is divided into three classes whose terms expire at successive annual meetings. Two directors will be elected at the meeting to serve a term expiring in 2010. If stockholders approve Proposal 3 to require the annual election of all directors, then directors elected after this meeting will serve annual terms. The nominees for director named below are currently our directors. Each of Messrs. Glasscock and McGoldrick has been a director since 2001 and was last elected by stockholders in 2004. After the election of two directors at the meeting, we will have six directors, including the four directors whose present terms extend beyond the meeting. Listed first below are the nominees for election, followed by the directors whose terms expire in 2008 and 2009, with information including their principal occupations and other business affiliations, the year each was first elected as a director, the Board committee memberships of each and each director’s age.

Nominees for Director: 2007 – 2010 Term

EXECUTIVE COMPENSATION

Compensation Committee Report

     The Compensation and Management Development Committee consists of the four directors named below, each of whom meets the independence standards of the Board’s Corporate Governance Guidelines, the New York Stock Exchange listing standards and applicable securities laws.

     We reviewed and discussed with management the Compensation Discussion and Analysis that appears in this proxy statement beginning below. Based on our review and discussions with management, we recommended to the Board of Directors that the Compensation Discussion and Analysis be included in Zimmer’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and the proxy statement for its 2007 annual meeting of stockholders.

Compensation Discussion and Analysis

Overview

     This discussion is intended to supplement the more detailed information concerning executive compensation in the tables and narrative discussion that follow. Our goal is to provide a better understanding of our executive compensation practices and the decisions we made in 2006 concerning the compensation payable to our executive officers, including the five executives named in the Summary Compensation Table (the “named executive officers”) that appears on page 20 of this proxy statement.

     The Compensation and Management Development Committee of our Board of Directors, or the committee, plays a key role in designing and administering our executive compensation program. All principal elements of compensation paid to our executive officers are subject to approval by the committee. The report of the committee appears above.

     Historically, our executive compensation practices and related plans were patterned on those of our former parent, and we still follow a number of these legacy practices. However, since we became a separate public company in 2001, our practices and plans have evolved and will continue to change as circumstances warrant. Our executive compensation practices are also affected by the highly competitive nature of the orthopaedics industry and the location of our executive offices in Warsaw, Indiana. The fact that a number of the leading orthopaedic manufacturers in the world have significant operations in and around Warsaw, Indiana, means that there are continuing opportunities for experienced orthopaedic executives who reside in this area. On the other hand, the fact that Warsaw, Indiana, is a small town in a predominantly rural area can present challenges to attracting executive talent from other industries and parts of the country.

Philosophy

     We have designed our executive compensation program to attract, retain and motivate highly qualified executives and to align their interests with the interests of our stockholders. The ultimate goal of our program is to increase stockholder value by providing executives with appropriate incentives to achieve our business objectives. We seek to achieve this goal through a program that rewards executives for superior performance, as measured by both financial and non-financial factors, and includes major compensation components that are linked directly to increases in recognized measures of stockholder value. Our use of equity-based awards that vest over time also encourages our talented executives to remain in our employ. Executive officers are required to enter into non-competition or other restrictive covenants with us as a condition of receiving a stock-based award, a practice that we believe limits the possibility of losing executive talent to our closest competitors. We also encourage executives to act as equity owners through the stock ownership guidelines described later in this discussion.

     Our Chief Executive Officer provides significant input on the compensation, including annual merit adjustments and equity awards, of the other named executive officers and his direct reports. The committee determines the annual base salary, annual and long-term incentive opportunities and equity-based awards provided to our Chief Executive Officer and approves the compensation of other executive officers, taking into consideration the recommendations of our Chief Executive Officer.

Compensation Consultants

     In the recent past, our human resources department has engaged a number of compensation consultants to assist in a variety of projects. In 2006, we used Towers Perrin to provide us with compensation research and survey information to assist in the design and operation of our overall compensation program. More specifically, Towers Perrin provided us with market survey information on automobile programs, market pricing information for our employees, including executive officers, and fringe rate analysis. Towers Perrin also assisted us with health and welfare plan design and communication and performed other projects such as helping to draft summary plan descriptions.

     During 2006, the committee continued to engage Watson Wyatt & Company to act as its consultant and to provide additional research capabilities and expertise in designing and operating executive compensation programs. Watson Wyatt provided the committee with analyses of our non-employee director compensation practices and our executive compensation practices and assisted in the design of our performance share and stock option plans. Specifically, Watson Wyatt provided the committee with market pricing information for employees, including certain executive officers, consumer driven health and welfare benefits communication information, benchmarking comparisons for our health and welfare plans, and market survey information on automobile programs in the United States and Europe. Watson Wyatt also conducted a survey of our employees with respect to consumer driven healthcare matters.

Benchmarking

     Our human resources department and the committee may consider the compensation practices of a group of peer companies. The peer group, comprised of companies in the health care equipment and services and biotechnology industries, was originally approved by the committee in 2001, shortly after our spin-off from our former parent. With the assistance of Watson Wyatt, the committee monitors the continuing relevancy of the companies in the peer group and approves changes as members of the group alter their focus, merge or are acquired, or as new peers or competitors emerge.

     During 2006 the peer group included Amgen Inc.; C. R. Bard, Inc.; Baxter International Inc.; Becton, Dickinson and Company; Biogen Idec Inc.; Biomet, Inc.; Boston Scientific Corporation; Genzyme Corporation; Medtronic, Inc.; St. Jude Medical, Inc.; STERIS Corporation; Stryker Corporation and Thermo Electron Corporation. The committee will re-examine the peer group in 2007, taking into consideration the effects of currently contemplated and recently completed transactions involving group members.

     The committee also periodically reviews the total compensation levels of our executive officers and assesses the competitiveness of their pay relative to general market data obtained from published salary survey sources and compensation levels disclosed in the proxy statements of the peer group companies. This process typically includes a review of base pay, target bonus (total cash compensation) and long-term incentive values. The committee and our human resources department use this information to help design our executive compensation program and to make specific compensation decisions. For example, in the recent past, we have targeted our executives’ base salaries at the 50th percentile of market, based on the data obtained from the published salary survey sources.

Stock Option and Other Equity Award Practices

     Since becoming a public company, we have granted stock options and other forms of equity awards under the 2006 Stock Incentive Plan, the 2001 Stock Incentive Plan, the TeamShare Stock Option Plan and the Stock Plan for Non-Employee Directors. Executive officers are only eligible to participate in the first two plans. The committee generally authorizes and approves the following year’s annual stock option or other equity-based grants to management-level employees at its December meeting, including setting the specific grant date for such awards in advance. Until recently, the committee’s practice has been to specify an early to mid-January grant date, which represented a legacy practice of our former parent. In December 2006, the committee selected a grant date of February 6th for the 2007 management grants, a date that followed our fourth quarter and full-year 2006 earnings announcement. We expect the committee to continue this practice in selecting the grant date for the annual management grant of stock options going forward.

     In addition to the annual management grants, the committee has delegated authority to our Chief Executive Officer to grant nonqualified stock options for purposes of attracting new employees and otherwise as he may determine in his discretion to reward employee performance. Our Chief Executive Officer does not have authority to grant stock options to executive-level employees or new hires for executive-level positions. The aggregate number of shares underlying all such option grants may not exceed 100,000 per year. The grant date for any such award is the first business day of the month following the later of: (1) the date our Chief Executive Officer approves the grant or (2) if applicable, the new employee’s start date. Our Chief Executive Officer provides a report to the committee after making any such stock option grants.

     All of our stock option plans require that the exercise price of options granted under the plans be not less than the fair market value of our common stock on the date of grant. The plans define “fair market value” as the average of the high and low selling prices of our common stock on the New York Stock Exchange on the date of grant.

     We require all management-level employees to sign a non-competition agreement as a condition of receiving an option award. In addition, the stock option award agreement provides that, if the employee breaches the non-competition agreement, the committee may require the employee to forfeit his or her right to any unexercised options, even if vested. Further, to the extent any options have previously been exercised, the committee may require the employee to return to us any shares of common stock he or she received upon the exercise or any cash proceeds received upon the sale of any such shares.

Elements of Compensation

     There are four major elements of our executive compensation program: base salary, annual (short-term) cash incentives, medium-term equity-based incentives in the form of performance shares, and long-term equity-based incentives in the form of stock options and restricted stock. If appropriate, an employee’s compensation may also include special project incentives. In addition, retirement plans and welfare benefits are generally available to our employees, including executives, and we provide management-level employees with a limited range of perquisites or other benefits. The committee reviews these elements of compensation on an ongoing basis.

     Base Salaries. We use base salary as a recruiting and retention tool and to recognize individual performance and responsibility through merit and promotional increases. We typically set base salaries of executives at levels competitive with other companies within the medical device and biotech industries and the market generally, at or around the 50th percentile of salaries for comparable positions or responsibilities in the market, based on the data obtained from the published salary survey sources. We also consider individual performance, responsibilities and experience when considering merit or promotion-related increases.

     Annual (Short-Term) Cash Incentives. We create opportunities for cash compensation tied to annual objectives derived from our short-term plans. We use our Executive Performance Incentive Plan for this purpose. Each named executive officer is eligible for an annual cash incentive award in an amount based upon a percentage of his or her base salary. We typically target annual cash incentive compensation at the 65th percentile of market, based on the data from the published salary survey sources described above under “Benchmarking”.

     The performance measures and the targets or goals for those measures in making award opportunities under this plan are established by the committee at the beginning of each year and are set after a review of the factors we believe will be most important to our business over the coming year. The amount of the payment is conditioned upon our achievement of those targets with payments generally ranging from 0% of a specified percentage of an executive’s base salary if we fail to achieve a performance level of at least 85% of the target, to 200% of the specified percentage if we achieve a performance level of 120% or more of the target. In no event will the incentive payments exceed two times the specified percentage. Neither the committee nor management has any discretion to pay out or increase an award if the performance objectives are not met.

     Depending upon our year-to-date performance and subject to the approval of the committee, we may pay up to 80% of a participant’s target award in December of the year in which it is earned, and pay the remainder of the earned award in February or March of the following year. A participant may elect to defer up to 95% of his or her award under this plan by making an election in December of the year prior to the year in which the award would otherwise be payable. See the narrative following the Non-Qualified Deferred Compensation table on page 28 for more information regarding this deferral opportunity.

     Medium-Term Equity-Based Incentives. In 2006 the committee awarded performance shares tied to objective targets over a three-year period to executive officers and other management-level employees in combination with a reduced grant of nonqualified stock options. The performance shares were intended to increase the percentage of executives’ overall compensation that is contingent on our performance over three years.

     Once earned, performance shares vest in full at the end of the three-year performance period. The performance measure is a target for the compound annual growth rate, or CAGR, of our earnings per share, or EPS, over a three-year period beginning January 1, 2006 and ending December 31, 2008. The number of shares of common stock that may be earned with respect to these awards will depend upon the committee’s determination of whether and the extent to which the performance goals have been satisfied. No shares will be earned unless actual performance is at least 85% of the target. If actual performance equals at least 85% of the target, the threshold number of shares will be earned. If actual performance equals at least 100% of the target, the target number of shares will be earned, and if actual performance equals 120% or more of the target, the maximum number of shares will be earned. Neither the committee nor management has any discretion to pay out or increase the amount of the award if the performance criteria are not met. The executives have no voting or dividend rights with respect to the performance shares until the award is earned. An executive who terminates employment prior to the end of the three-year performance period due to death, disability or retirement will receive (or, if applicable, the executive’s estate will receive) a pro-rata portion of the performance shares he or she would have earned (based on the company’s actual performance during the three-year performance period) had he or she remained employed through the end of the performance period. Unless otherwise determined by the committee, an executive who terminates employment during the performance period for any other reason would forfeit his or her performance shares. An executive’s performance shares may be earned prior to the end of the performance period if we experience a change in control, but payment of such earned performance shares would be subject to

mandatory deferral until the earlier of the end of the three-year performance period or the executive’s termination of employment (other than termination of employment for “cause” or by the executive without “good reason”). Based upon our actual performance during 2006 and our anticipated performance for 2007 and 2008, management estimates that, with respect to the full three-year performance period, it is likely that our actual performance will meet or exceed the target level of performance established by the committee, which would result in at least the target number of shares being earned, and that it is unlikely that our performance will meet the level required for the maximum number of shares to be earned.

     Long-Term Equity-Based Incentives. We use stock options, and have used restricted stock, to provide longer-term incentives. Stock options and restricted stock help us retain executives and align their interests with stockholders by setting multi-year vesting requirements and making a significant portion of their compensation depend on increases in the value of our stock. Given the importance we attribute to this component, we typically target equity-based incentive compensation, including performance shares, at the 75th+ percentile of market, based on the published survey sources described above under “Benchmarking.”

     The committee has also awarded shares of restricted stock to certain of our executive officers. Shares of restricted stock vest in three equal, annual installments, commencing on the third anniversary of the date of grant, subject to continued employment. The committee has not awarded any shares of restricted stock to executive officers since January 2004, but may do so in the future. Restricted stock grants are generally intended to retain and motivate our senior officers and to align their interests with those of stockholders.

     Special Project Incentives. On occasion, we believe it is in our interests to tie opportunities for additional cash compensation to the success of a specific project. Each of our executive officers is eligible for a cash incentive award under our three-year Supplemental Performance Incentive Plan, or the Supplemental Plan. The Supplemental Plan, recommended by the committee and adopted by the Board of Directors in 2004, promotes our and stockholder interests by providing incentives to employees who have responsibilities relating directly to the integration with Centerpulse AG, which we acquired in 2003, to successfully accomplish that integration and achieve specified, measurable expense savings and efficiencies or “synergies”. The Supplemental Plan set annual and cumulative targets for the dollar value of total synergies to be achieved by the end of each of 2004, 2005 and 2006. The annual cash incentive award payments under the Supplemental Plan are based upon our achievement of those targets. Payment levels range from 0% of a specified percentage of an executive’s base salary if we fail to achieve 100% of the target to 100% of the specified percentage if we achieve 150% of the target.

     Perquisites. We provide our executive officers with a limited range of perquisites or other benefits not generally available to all salaried employees. We do not provide executive officers with company cars or car allowances unless they are living overseas and such a practice is consistent with local custom. We maintain two club memberships in Northeastern Indiana for business use by sales and management personnel and pay the cost of a small number of club memberships internationally. Non-business use of our aircraft is limited and infrequent. The committee reviews our Chief Executive Officer’s non-business use of our aircraft on an annual basis. He is taxed on the imputed income (computed using Standard Industry Fare Level rates) attributable to all such use and we do not provide any additional income to him to pay the taxes on the imputed income.

     We provide executive officers and other management-level employees who relocate their principal residence at our request with benefits provided under our relocation assistance program, including, for example, reimbursement of temporary housing and moving expenses.

     Effective January 1, 2007, executive officers may also participate in the Restated Zimmer, Inc. Long-Term Disability Income Plan for Highly Compensated Employees. This program is funded from our general assets and individual disability insurance policies paid for by us. The purpose of this plan is to provide disability benefits, as a percentage of total compensation, that are comparable to benefits provided to employees whose compensation is not limited for purposes of determining benefits payable under our base long-term disability insurance plan. In the event a participant is “totally disabled,” as defined by the plan, for 26 weeks, the participant is entitled to a monthly benefit equal to 70% of his or her monthly base earnings (including salary, sales commissions and bonus, as applicable), reduced by the benefits payable under our base long-term disability insurance plan and certain other sources of income (such as social security disability benefits). Benefits are payable until the earliest of the following: (1) the date the participant ceases to be totally disabled; (2) the date the participant accepts or refuses a job we offer to him or her at a salary at least equal to that which he or she was earning immediately prior to becoming disabled; or (3) the participant’s 65th birthday (or a later date if benefits commenced under the plan after the participant reached age 63¹/2).

     Late in 2005, the committee undertook a comprehensive review of our perquisites policies and practices. Based on their review, the committee believes the nature and costs to us of perquisites currently provided to the executive officers are reasonable.

     Retirement and Other Post-Employment Benefits. Executives may participate in our 401(k) savings plan and the benefit equalization plan that supplements the savings plan. The benefit equalization plan is discussed in more detail beginning on page 27. Executives hired before September 2, 2002 may also participate in our defined benefit pension plan and the benefit equalization plan that supplements the pension plan. These plans are discussed in more detail beginning on page 25. Executives

hired before September 2, 2002 may also participate in our retiree medical plan. Our defined benefit pension plan, the benefit equalization plan that supplements that plan and our retiree medical plan are patterned after plans of our former parent. After becoming a separate public company in 2001, we closed these plans to further participants effective September 1, 2002 in an effort to control future post-employment benefit obligations and increase stockholder value.

     When we were separating from our former parent, the Board of Directors granted Mr. Elliott additional age and service credit for purposes of calculating his pension benefits and determining his eligibility for retiree health and life insurance benefits, in part, because of his willingness to undertake responsibility for our spin-off from our former parent and our transition to an independent public company. The additional pension benefits will be paid from our general assets pursuant to the benefit equalization plan that supplements the pension plan or a similar, unfunded, nonqualified pension benefit arrangement, and will be offset by supplemental pension benefits payable to Mr. Elliott by the former parent. The present value of the accumulated benefit attributable to the additional service credit is shown in footnote (2) to the Pension Benefits table.

     We have entered into change in control severance agreements with eleven management-level employees, including each of the named executive officers. The agreements are intended to provide for continuity of management in the event we undergo a change in control. Under these agreements, a covered executive may be entitled to severance payments in the event we undergo a change in control and the executive’s employment is terminated. See “Change in Control Arrangements” on page 33 for a more detailed description of the material terms of these agreements.

2006 Named Executive Officer Compensation

     Base Salaries. In December 2005, the committee approved the following base salaries for the named executive officers for 2006:

     The increases for Messrs. Elliott, Leno and Melzi were consistent with the range of annual salary increases of 3% to 4% applicable to salaried employees. Mr. Dvorak and Ms. Conley were given significantly larger increases because they were promoted to positions of greater responsibility.

     Executive Performance Incentive Plan. The target incentive award opportunities under the Executive Performance Incentive Plan for the named executive officers were 100% of base salary for Mr. Elliott, 60% of base salary for Mr. Leno, 50% of base salary for Mr. Melzi, 60% of base salary for Mr. Dvorak and 60% of base salary for Ms. Conley. For 2006, the performance goals for the named executive officers included goals based upon earnings per share (representing 50% of each award), revenue (representing 25% of each award) and cash flow (representing 25% of each award). For 2006, we achieved 103% of the earnings per share target, 101% of the revenue target and 106% of the cash flow target. This resulted in a payment equal to 116.5% of the specified percentage of each executive’s base salary. Based on these results, the committee approved the awards shown in footnote 3 to the Summary Compensation Table for each of the named executive officers. The committee did not adjust the performance measures or goals nor did they exercise discretion as to the amount or payment of these awards.

     Stock Options. The committee acted in December 2005 to award options to purchase an aggregate of 2,276,427 shares to 892 employees with a grant date of January 18, 2006. The options generally vest in installments of 25% per year on the first through fourth anniversaries of the grant date, commencing January 18, 2007. The options may vest on an accelerated basis on or after January 18, 2007 if the executive reaches age 60 or retires. The number of shares underlying the options granted to each named executive officer is shown in the Grants of Plan Based Awards table. In determining the number of shares underlying each executive officer’s award, the committee considered the officer’s individual performance in the context of fixed share guidelines associated with his or her salary grade. In addition, in view of the three-year performance share grant, the committee reduced the number of shares underlying the stock options granted to executive officers in January 2006 to approximately 75% of the number granted in January 2005.

     Performance Shares. The committee acted in December 2005 to grant a total of 934,278 performance shares to 55 employees with a grant date of January 18, 2006. The threshold, target and maximum number of performance shares granted to each named executive officer is shown in the Grants of Plan Based Awards table. As described above under “Elements of Compensation – Medium-Term Equity-Based Incentives,” the maximum number of performance shares granted represents the maximum number of shares of our common stock that will be earned if the actual CAGR of our EPS for the three-year

performance period equals or exceeds 120% of the target set by the committee. The three-year performance period commenced on January 1, 2006 and ends on December 31, 2008.

     Special Project Incentives. The incentive opportunities for the named executive officers under the Supplemental Plan for 2006 were based on our achievement of the goals described under “Elements of Compensation—Special Project Incentives” above. The target amounts under the Supplemental Plan for the named executive officers for 2006 were the same percentages of base salary identified above in the discussion of the Executive Performance Incentive Plan, with the resulting payments reduced by the aggregate payments made to the executives under the Supplemental Plan for 2004 and 2005. As of the end of 2006, we had achieved more than 150% of the targeted dollar value of total synergies to be achieved. This resulted in a payment equal to 100% of the specified percentage of each executive’s base salary, reduced by the payments made to the executive under the plan for each of 2004 and 2005. Based on these results, the committee approved the awards shown in footnote 3 to The Summary Compensation Table for each of the named executive officers. The committee did not adjust the performance measures or goals nor did they exercise discretion as to the amount or payment of these awards.

Compensation Decisions Effective for 2007

     Employment Agreement with Mr. Elliott. On November 18, 2006, Mr. Elliott notified us that he intends to resign from his positions as our President and Chief Executive Officer in the first half of 2007, assuming a successor CEO has been named. We entered into an employment agreement with Mr. Elliott that will become effective on the date that he resigns from his positions as President and Chief Executive Officer (the “effective date”) and will end on November 30, 2007, unless both parties agree to extend the term. Under the employment agreement, Mr. Elliott will continue to serve as Chairman of the Board and will receive a base salary equal to his base salary in effect immediately prior to the effective date. During the term of the employment agreement, Mr. Elliott will not be entitled to participate in any annual (short-term) cash incentive plans, equity-based compensation plans or special project incentive plans, except that he will be entitled to receive his supplemental bonus earned under the Supplemental Plan through 2006 and the pro-rata number of performance shares earned under the three-year medium-term equity-based incentive plan.

     Base Salaries. In December 2006, the committee approved the following base salaries for the named executive officers:

     With the exception of Mr. Elliott, the base salary increases for the named executive officers are consistent with the range of annual salary increases of 3% to 4% applicable to salaried employees. Mr. Elliott’s 2007 salary level was left unchanged due to his planned retirement.

     Executive Performance Incentive Plan. In December 2006, the committee approved target incentive award opportunities under the Executive Performance Incentive Plan for 2007 for the named executive officers of 60% of base salary for Mr. Leno, 50% of base salary for Mr. Melzi, 60% of base salary for Mr. Dvorak and 60% of base salary for Ms. Conley. Mr. Elliott is not eligible to receive an annual incentive award under the plan for 2007. Actual payout percentages will range between 0% and 200% of the specified percentage of the executive’s base salary based upon our actual 2007 performance, as explained above under “Elements of Compensation – Annual (Short-Term) Cash Incentives.”

     For 2007, the performance measures for the named executive officers include goals for adjusted earnings per share (representing 50% of each award), consolidated revenue (representing 25% of each award) and consolidated free cash flow (representing 25% of each award). The committee approved the performance levels for adjusted earnings per share and consolidated revenue in December 2006 and approved the performance levels for consolidated free cash flow in February 2007. Adjusted earnings per share is calculated excluding acquisition and integration expenses and purchase accounting adjustments. Adjusted earnings per share must equal or exceed the target level in order for composite performance to exceed 100% of target.

     We consider the specific goals for the performance measures to be confidential. Over the past five years, with respect to performance measures applicable to the named executive officers, we have achieved composite performance in excess of the target level five times but have never achieved the maximum performance level. The payout percentage over the past five years has been between approximately 117% and 169% of the executive’s target award opportunity with an average approximate

payout percentage over the past five years of 148% of the target award opportunity. Generally, the committee has set the target performance level for each performance measure such that the relative difficulty of achieving it is consistent from year to year.

     Stock Options. The committee acted in December 2006 to award options to purchase an aggregate of 2,180,673 shares to 1,035 employees with a grant date of February 6, 2007. The number of shares underlying the options granted to each named executive officer was as follows: 0 shares to Mr. Elliott; 75,000 shares to Mr. Leno; 52,500 shares to Mr. Melzi; 52,500 shares to Mr. Dvorak; and 37,500 shares to Ms. Conley. The employee must remain employed for at least one year following the date of grant for any portion of an option grant to become exercisable. Because of Mr. Elliott’s retirement plans, the committee did not grant him any options in 2007. With respect to executive officers other than Mr. Elliott, as a group, the number of shares underlying the stock options granted in February 2007 was approximately 90% of the number granted in January 2006.

Stock Ownership Guidelines for Executive Officers

     Our executive officers must meet stock ownership guidelines the Board of Directors has established in order to align their interests more closely with those of our stockholders. The committee oversees compliance with these guidelines and periodically reviews the guidelines. The guidelines require (1) our Chief Executive Officer to own shares with a value equal to at least five times his base salary; (2) other designated executive officers, including the other named executive officers, to own shares with a value equal to at least three times the executive’s base salary; and (3) other executive officers to own shares with a value equal to at least the executive’s base salary. All shares owned by an executive officer count toward these guidelines, including shares owned indirectly, shares held in our 401(k) savings plan or Employee Stock Purchase Plan, as well as restricted shares and performance shares (at the target award level). In addition, one-half of the gain on vested stock options is counted toward these guidelines. All executive officers are currently in compliance with the guidelines or are pursuing approved plans that will enable them to achieve compliance within the five-year time frame prescribed in the guidelines. We have approved procedures by which every executive officer must obtain clearance prior to selling any shares of our common stock, in part to ensure no officer falls out of compliance with the stock ownership guidelines.

     In addition, our policies prohibit our executives from engaging in any transaction in which they may profit from short-term speculative swings in the value of our stock. This includes “short sales” (selling borrowed securities which the seller hopes can be purchased at a lower price in the future) or “short sales against the box” (selling owned, but not delivered securities) and buying or selling “put” and “call” options (publicly available rights to sell or buy securities within a certain period of time at a specified price) or the like. Any other transactions involving our stock or derivative securities that could affect ownership by an executive, such as entering into “zero cost collars” or variable prepaid forward contracts and transfers to pooled investment vehicles, must be pre-cleared pursuant to our procedures.

Tax and Accounting Considerations

     Section 162(m). Section 162(m) of the Internal Revenue Code, or the Code, limits the deductibility of compensation paid to the most highly-compensated executive officers of U.S. public companies to $1,000,000 per year unless the compensation qualifies as performance-based. The committee’s policy is to take into account Section 162(m) in establishing compensation of our executives. However, the deductibility of some types of compensation payments can depend upon the timing of the vesting or an executive’s exercise of previously granted awards. Interpretations of and changes in applicable tax laws and regulations as well as other factors beyond our control also can affect deductibility of compensation. For these and other reasons, the committee has determined that it will not necessarily seek to limit executive compensation to that sum which is deductible under Section 162(m) of the Code. In 2006, the impact of the Section 162(m) limitation on our after-tax compensation expense was negligible.

     The Executive Performance Incentive Plan, 2006 Stock Incentive Plan and 2001 Stock Incentive Plan each contain performance-based conditions and have been approved by stockholders so that payments under those plans will not be limited by Section 162(m). We believe that the stock options and performance shares granted under these plans qualify as performance-based compensation. We will continue to monitor developments and assess alternatives for preserving the deductibility of compensation payments and benefits to the extent reasonably practicable, consistent with our compensation policies and what we believe is in the best interests of our stockholders.

     Section 409A. On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable to nonqualified deferred compensation arrangements. As amended, Section 409A of the Code affects the payments of certain types of deferred compensation to key employees. While the Section 409A regulations have not been finalized yet, we believe we are operating in good faith compliance with the statutory provisions which were effective January 1, 2005, and Internal Revenue Service guidance. A more detailed discussion of our nonqualified deferred compensation arrangements is provided on pages 27-28.

     Accounting for Stock-Based Compensation. Beginning on January 1, 2006, we began accounting for stock-based payments in accordance with the requirements of Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-

Based Payment” (“SFAS 123(R)”), using the modified-prospective method. In accordance with this method, we did not adjust our financial statements for earlier periods to reflect the effect of SFAS 123(R).

     Financial Statement Restatements. We have not adopted a policy regarding the recovery of performance-based awards in the event of a financial statement restatement beyond the requirements of Section 302 of the Sarbanes-Oxley Act of 2002. That statute provides that, in the event that a U.S. public company is required to prepare an accounting restatement due to the material noncompliance of the company, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer must reimburse the company for (1) any bonus or other incentive-based or equity-based compensation received by that person from the company during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and (2) any profits realized from the sale of securities of the company during that 12-month period.

Compensation Committee Interlocks and Insider Participation

     None of the members of the Compensation and Management Development Committee during 2006 or as of the date of this proxy statement is or has been our officer or employee or had any relationship requiring disclosure under Item 404 of Regulation S-K of the Securities and Exchange Commission. None of our executive officers served on the compensation committee or board of any company that employed any member of the Compensation and Management Development Committee or Board of Directors or otherwise under circumstances requiring disclosure under Item 404 of Regulation S-K.

Executive Officer Compensation Tables and Notes

     The following tables set forth information regarding compensation paid to our Chief Executive Officer, Chief Financial Officer and each of our three other most highly compensated executive officers based on total compensation earned during 2006 excluding increases in pension value.

SUMMARY COMPENSATION TABLE

GRANTS OF PLAN BASED AWARDS IN 2006

OUTSTANDING EQUITY AWARDS AT 2006 FISCAL YEAR-END