Welcome everyone tothe Zimmer third quarter 2007 financial results conference call. (OperatorInstructions) This presentation contains forward-looking statements withinthe Safe Harbor Provisions of the Private Securities Litigation Reform Act of1995 based on current expectations, estimates, forecasts and projections aboutthe orthopedics industry, management's beliefs, and assumptions made bymanagement. These statements are not guarantees of future performanceand involve risks, uncertainties and assumptions that could cause actualoutcomes and results to differ materially from those in the forward-lookingstatements. For a list and description of the risks and uncertainties, see thedisclosure materials filed by Zimmer with the Securities and ExchangeCommission. Zimmer disclaims any intention or obligation to update or reviseany forward-looking statement, whether as a result of new information, futureevents, or otherwise. This presentation also contains certain non-GAAP financialmeasures. A reconciliation of such information to the most directly comparableGAAP financial measures, along with the other financial and statisticalinformation for the periods to be presented on this conference call, wasincluded in the press release announcing our earnings which may be accessed onthe Zimmer website at www.zimmer.com under the section entitled InvestorRelations. I would now like to turn the conference over to Mr. DavidDvorak, President and Chief Executive Officer of Zimmer Holdings Inc.

Thank you Jennifer.Good morning, everyone. Welcome to Zimmer third quarter 2007 conference call.Joining me on the call today are Jim Crines, our Executive Vice President ofFinance and Chief Financial Officer; and Sean O'Hara, who is our Associate Directorof Investor Relations and Strategic Planning. We are pleased to be hosting thiscall to discuss a solid third quarter for Zimmer. Consolidated sales for the quarter of $903 million, were up10% to prior year, 8% constant currency, and we delivered leverage earnings at18% growth. Our sales performance was less than 1% shy of our own guidance, andshowed continued stability in the orthopedic market. America’sknee growth helped to drive a 9% increase in our core reconstructive categoryfor the third straight quarter. Earnings growth was driven by increases in sales, marginexpansion, and disciplined expense control, while not sacrificing necessaryinvestments in R&D and SG&A to drive future sales. In the third quarter, each of our geographic segmentscontributed positively to our performance. Americasrevenue was up 9% to $547 million, led by 10% growth in knees, and continuedstrength in extremities. Europe continued its steadysequential growth since the start of the year, up 8% constant currency at $226million. Europe was led by solid growth in both hips andknees, and double-digit growth in both extremities and dental. Finally, Asia Pacific revenues in the third quarter were$130 million, up 5% from the prior year. Tougher comps and continued pricepressure in Japanslowed growth sequentially in that region. Turning to our product categories, our worldwidereconstructive sales comprised of knees, hips, extremities and dental grew at11% reported and 9% constant currency. Including the third quarter this marksthe fourth quarter of 8% to 9% constant currency growth in this area. Zimmer Spine grew 7%, as the addition of Endius has begun toprovide a bit of a lift to our spine business, as it fills key…

Thanks, David. Sales of $903.2 million for the quarterrepresents an increase of 10.2% reported and 7.8% constant currency. As Davidpointed out, these sales results are less than 1% below the company's guidanceand First call consensus estimates. The shortfall is attributed to slower than anticipatedgrowth in our hip, trauma, and OSP product segments. The weaker U.S. dollar compared with prior year added 2.4%,or $19.4 million in revenue in the quarter, and also resulted in recognition ofgreater losses on foreign exchange contracts under our hedging program, whichare reported in cost of products sold. As expected, price was flat for thequarter and the Americaspricing contributed a point to growth in the quarter. In Europe,Germany, France,and Italyreported negative price of 3.4%, 1.3%, and 0.5% respectively. While othermarket in Europe were flat or slightly positive. AsiaPacific results include negative price of 3.4% in Japan,offset by flat to positive prices in other Asia Pacific markets. Turning to our revenue growth by major product category,worldwide reconstructive sales increased 11.2% reported, 8.7% constantcurrency. Knee sales fueled by the ongoing introduction and launch of ournext-gen Gender Solutions Knee improved 9.3%. Pricing added 0.2%, while volumeand mix contributed 9.1%. In thequarter, our supply chain was able to comfortably meet U.S.demand for the product. Flex knees now make up approximately 47% of our kneeunits on a global basis, up from 42% in the second quarter. In other knee systems Zimmer Uni, Segmental, as well as our ProlongHighly Crosslinked Polyethylene grew in double digits. The Natural-Kneecontinued to experience modest cannibalization and competitive losses beforethe release of our Gender Flex design for the Natural-Knee scheduled for the fourthquarter. Geographically, our knee salesin constant currency increased 9.9% in the Americas,5.6% in Europe, and a very strong 12.1% in Asia Pacific. Hip sales increased 5.2% reflecting a volume and mixincrease of 5.6% offset by a…

Thanks, Jim. Toconclude, I would like to comment on our guidance. As disclosed in our pressrelease last night, we have updated our fourth quarter and full year 2007guidance so I will quickly review those details with you now. We expect fourth quarter sales to be in a range of $1.027billion to $1.032 billion, or 10% to 11% growth over prior year, and adjustedearnings per share growth in a range of $1.03 to $1.05, or 1% to 3% over prioryear. With these updates, we expect full year 2007 revenue to be in a range of $3.851billion to $3.856 billion, an increase of 10% over prior year and adjustedearnings per share to be in a range of $3.91 to $3.93, an increase of 14% overprior year. This updated guidance reflects a $33 million to $38 millionreduction in constant currency growth, partially offset by an increase incontribution from foreign exchange of $15 million. Our constant currency salesgrowth has been updated to account for lower sequential growth rates in the Americas,underperforming sales trends in our Trauma and OSP categories, and theforecasted impact of hip resurfacing in the United States market. Exiting the second quarter, we anticipate an incrementalgrowth from our core reconstructive segments and a tailwind from the foreigncurrency to drive us through tougher comps in the second half. While we feelthe third quarter was solid in light of the tougher comparison, we simplyaren't experiencing the sales acceleration we had planned for. As a result, our adjusted earnings guidance has been loweredby $0.11 to $0.13 in the fourth quarter comprised of the following elements.First, $0.07 to $0.08 from the $33 million to $38 million reduction in constantcurrency sales, and that is predominantly within our higher margin hip and kneeproducts in the Americas.It is important to note that the incremental earnings from the $15 million…

Your first question comes from Tao Levy - Deutsche Bank.

If we could just touch on the guidance, you did a decent jobof running through your currentthinking. Again, the decline in some of the areas especially, for example, yourhip comment on the back of a pretty strong third quarter just doesn't seem tomake sense, given what we are seeing in the marketplace with some of the otherhip manufacturers, not necessarily on the hip resurfacing side are seeing intheir base business. Just wondering, is there anything else going on there? Isthere some impact from, for example, the DOJ settlement that you think willnegatively hit your ability of your salesforce to sell products?

No, Tao, the feedbackthat we are getting from our distributor network is that surgeons that useZimmer products for primary hip replacements, many of them now have beentrained and are using, in most cases, frankly, the Birmingham Hip Resurfacing Deviceon their younger patients. So we are seeing some significant cannibalization ofour own business through our customers, through that sales distributionchannel. I also mentioned we are seeing some competitive challengesas well in our Revision Hip line. We saw some erosion in that business in thequarter as well.

As a consequence ofthat, there is pull-through revenue opportunities that come with those Revisioncases, as well as those resurfacing cases as they train surgeons.

So what type ofstrategies can be put in place to try to combat that? Also maybe an update onyour U.S. hipresurfacing product, timelines, expectations? I know you touched on some of thedata.

We are really excited about the M/L Taper with connectivetechnology, first and foremost. The intra operative technology of that productand the MIS capabilities with respect to the M/L Taper, we are receiving greatfeedback from surgeons with respect to, so we are optimistic that we are goingto be able to generate nice growth in that area in 2008. With respect to resurfacing, you’re right, we are workingtowards filing a PMA with foreign data, and that hopefully, is going to be a2008 event, but that puts us out yet a couple more years from where we restright now, and if we need to go through a full IDE/PMA process to developU.S.-based data, that it likely a couple years further out.

In the prior conference call you talked about new productsthat were going to be launched in the fourth quarter that would help increasemomentum going into 2008. You touched on obviously the Connective products. Butthere are other products which you haven't talked about, which you hadhighlighted in the past, De Novo technology, mobile bearing knees, for example,I was just wondering there are any delays there, or do you just now expect lesscontribution from those new products? Thanks.

The De Novo productin the first instance, the natural tissue we have never said that it is allthat significant in the way of revenue generation. We are very excited aboutthe longer term opportunities with the De Novo brand, but that is further out. Theproducts that will be impactful in 2008 include a gender porous component whichwe are expecting to launch in the first half of 2008, and then as well thatNatural-Knee launch with the Gender Flex, which is under limited release rightnow, but it will find traction and become meaningful in 2008. With respect tothe mobile bearing knee, we are awaiting FDA approval still, and have not heardanything more on that front since our last call.

Your next question comes from Matt Miksic - Morgan Stanley.

I have to push you a little here on Q4. It seems after whatlooked like a pretty decent Q3, and I understand hips showed some signs ofweakness, maybe in growing a little bit south of the market, it just feels almostpremature here to just punt on the pressure from resurfacing. Can you talk about, it should be what, 10% or 15% of thetotal market, and there is one player on the market, another launching towardsthrough the end of the year? Can you help us understand at least what you areseeing so far in the market that is causing you to be so cautious?

Matt, some of what we are seeing, as David had indicated, wehad anticipated once we got to where we needed to get to, as we talked about onthe second quarter call with the inventory consignment and instrument placementto the field, that we would begin to see some competitive uptake with theGender Knee. As we look at our results for the third quarter, and as we look atwhat has been reported by some of our competitors we are not seeing thecompetitive uptake in the way we had expected to see it. As we look at that andlook at the fourth – we look at that, we look at the fourth quarter, we aregoing to be up against much tougher comps with having launched the Gender Kneein the third quarter of last year. On the hip side, with having launched in the second half oflast year, the TM Primary Stem, our large diameter head, metal-on-metal device,and then again on the hip side, as I indicated, we are seeing somecannibalization of our primary hip business to resurfacing.

So you are looking for some things to offset the pressurefrom resurfacing, and you are not seeing those come through, and that combinedwith the tough comps? Am I reading that right?

Yes, and the newproduct that we are in the process of rolling out, the Natural-Knee on the kneeside, that's still in limited release. It goes into a fuller release, and evenas we talked about in the past with the Gender launch, these product launchestake several quarters. So we won't see the M/L Taper with connectivetechnologies, a similar issue, in terms of where we are with that launch. Thatis in limited release in the fourth quarter, and will go into full release inthe first half of next year. So the uptake on those new products will have moreof an impact in 2008 than they will in the fourth quarter.

David, you talked about the Gender Knee from a unit sharestandpoint taking longer to have an impact. Can you help us understand what youmean by longer? Longer meaning how far out?

We are looking to redouble our efforts on that product, andwe are optimistic about the future of it, but that is probably going to be a 2008 event forus as well, and it is going to come in the form of both the next-gen offering,as well as the porous variant of that offering, Matt. As we get into a fulllaunch of the Natural-Knee, with the Gender Flex solution as well, we are goingto be able to find some traction with that one in 2008. So I think that all of those are really going to be 2008events, and that is part of what you are seeing impacting our fourth quarterguidance.

So longer into 2008, but not longer into 2009?

That is correct.

Just a clarification on this, the expense, the charge aroundthe federal monitor. Could you give us a little more color about what that is,and is that a recurring expense we should start taking out of our thinking onnext year's numbers? Any color you can provide on that would be helpful.

Sure. Those areestimated payments and expense reimbursements that relate to the monitor'sservices and obligations under the deferred prosecution agreement. So I thinkthat at this point in time you have to consider that to be an 18-month termexpense, and obviously as we gain greater clarity as to what that is likely tolook like through 2008 we will bake that into our guidance that we provide toyou.

Am I reading thisright? Is that like $8 million a quarter?

That is correct. Therange is $8 million to $10 million a quarter, Matt.

Wow. That seems likea big number for expenses. This is what? Travel and coordination, and I don'tknow what else? That just seems like a big number. I think a little bit surprising, since no oneelse has really talked about it.

Not just travel, Matt.I wouldn't describe it as that. That it's fees, professional fees.

So fees, so the feethat they get for being the monitor, basically, is what you are saying.

That is right.

Legal fees and so on. Finally, stepping back from thechanges to Q4, the changes in your expectations for some of these productshitting in '08 and taking longer, you have talked recently about the modelaiming for double-digit top-line growth, acceleration to the bottom line. Has anythinghappened here changing that? Can you give us an idea how you look at thelong-term fundamentals of this business?

The objectives havenot changed, Matt. We are going to execute our strategy and expand ourleadership position in hips and knees, and then accelerate the growth of our spine,dental, trauma businesses. So nothing has changed in the core strategy. This isguidance with respect to the fourth quarter, based upon some of the product depththat we have here, and we expect to find more traction in 2008, but obviouslywe will give you a lot of clarity around what that is going to look like whenwe get to finishing our plans, and coming back to you in our fourth quartercall.

Your next question comes from Bob Hopkins - Lehman Brothers.

Somewhere in the call I think I might have missed one thing,where you did comment about '08 growth rates. It was either on the top or thebottom line where you said is it wouldn't be less than 2007. Could you justclarify what that was?

The comment about less than 2007 was just in the context ofthe tax rate. As David indicated, we will be giving 2008 guidance in January.

Given the health of the overall market, would it be safe toassume that it is unlikely that you would be growing less than 7% to 8% or 9%in 2008?

As we indicated, wewill be providing guidance for 2008 inJanuary as we get through our own internal planning process. It all comestogether sort of towards the back end of the fourth quarter here.

Just in terms of operating margin going forward, given theissues you are talking about in terms of hips and knees and the challenges youface there, I guess primarily on the hip side, and then also, as you mentionedlast quarter, a need to increase investment in spine and trauma, and some ofthe other businesses, can you drive operating leverage in your business in2008, or might that be a year where the incremental investment and thechallenges you face make it a limited year for operating margin expansion?

Yes, we are going to continue to move forward with our plansto invest, as we have been talking about, in those other businesses. We feelthat is essential for the long-term health of the businesses and in the bestinterest of the shareholders. We will clearly be challenged in that regard tothe extent that these monitor costs are incremental, and that it is the rightway to view those costs.

Can you talk just a little bit more about that? Becauseperhaps I don't understand exactly what is going on here, but $30 million to$40 million in expenses seems an exorbitant amount, and I was wondering if youcould just break that down for us? I know you said previously it was fees, butare there consulting fees in there? Can you break that down a little bit more?Because again, it seems like a very, very high number.

The fees areprincipally going to be professional fees, obviously and I think that the bestwe can do is to point you back to the deferred prosecution agreement, Bob, and the substance of those responsibilities areoutlined in a fair amount of detail there. Those responsibilities and thatoversight obligation that the monitor possesses are what will drive theprofessional fees. As I said, the DPA is the document that describes what theyrelate to.

Okay. I will go backand take a look. A 30,000 footquestion around your philosophy around guidance, because obviously this is thesecond conference call where we are communicating live here, and I was struckby a comment at the beginning of the call where you seemed to express somedegree of satisfaction that you almost achieved your goals. I am wondering going forward as you give guidance, howshould we be thinking about that guidance? Are those aspirational goals thatyou hope to meet, or are those things that you are 120% sure of, and hope tobeat? Just trying to understand the philosophy around guidance as you will beproviding it.

We are looking to give you the best visibility we can as tothe direction of the business. The comments on the front end of this call, wedon't think there's anything to be ashamed of about the top line growth,certainly not the 18% bottom line growth for this quarter, but we are trying togive you the best visibility we can as to what we expect the fourth quarter tolook like in light of these product launches and the timing of the traction forthose products.

Your next question comes from Steven Lichtman - Banc ofAmerica Securities.

Again on Gender, I just want to get some clarity. In termsof the operational constraints, obviously I can understand why that has beenimpactful over the past few quarters, but I am still unclear as to why that'sgoing to be unclear over the next few, assuming that those constraints are nowbehind you. Could you flesh that out a little bit more please?

The constraints thatwe are referring to in the fourth quarter are the fact that the Gender Flexcomponent for the Natural-Knee system is still in limited release as we workour way through the fourth quarter, which means we have a limited number ofsets in inventory, consignments going out into the hands of the developers anda few other surgeons. So as we get into 2008, and we will work our way over thecourse of the first half of the year, putting out more significant numbers ofinstruments and inventory consignments, to support the full launch of thatproduct. A similar story, Steve, on the Porous Gender Flex component for thenext-gen system.

But on the core GSF,that was the issue previously in terms of the constraints in terms of gainingmarket share potentially, that is behind you, right? Is the feeling that youneed the Porous coated now in order to be effective? What about the core GSF,excluding the Natural?

On the core GSF, itis really a matter of taking full advantage of the sets that are deployed inthe field. We are hitting a point now where we are anniversarying the mix, andso the unit growth has got to drive the performance in that area, and we justdidn't see that acceleration to the extent that we were expecting in the thirdquarter, and that is really the primary basis for what we are projecting outfor the fourth quarter. So we need to do a better job of taking advantage with thecore GSF.

In terms of thefourth quarter, on the EPS impact of the sales reduction, it still seems alittle bit high to me relative to the sales reduction, unless the operatingmargins on that are very, very high. Is it just that? Is there any incrementalspend that we are starting to see already as you are starting to plan for 2008? Then maybe following on to that in response to Bob'squestion, you were talking about the incremental spend in trauma and spine, butas we think about next year, are there going to be incremental spends as wellin the core hip and knee business that you now believe you need to make?

Well on the $0.07 to $0.08, that is at the margin the impactof the sales reduction of $33 million to $38 million. So there are noincremental expenses reflected in that $0.07 to $0.08. Whatever investments wehave contemplated going into the fourth quarter we have clearly taken that intoaccount in the guidance that we provided for the quarter.

Next year, as we think about that increased level ofinvestment, previously you've talked about spine, dental, and trauma. Is hipsand knees and area that we are going to be seeing increased investment as well?

We are going to seeinvestment for sure. We had some significant investments, as you well know, inthe first half of this year in DTP. We expect to have similar levels ofinvestment in 2008. Not in the same program, but will be directed certainly atthe opportunities that we have in hips and knees.

Going back to these monitor costs, is this a consistentexpense per quarter, and I guess all on the SG&A side?

That is the right wayto think about it at this stage.

Your next question comes from Mark Mullikin - Piper Jaffray.

I just want to talk about the monitoring costs a little bitmore. Do you know if your costs differ from your competitors? Are differentcompanies here being held to different standards, as far as the amount ofeffort that is going into the compliance?

We don't have anyvisibility, obviously, to the expenses that relate to the monitors for theother companies. The settlement agreements and resolution agreements thatrelate to the matter do have the same substantive provisions in them. So onehas to expect that the oversight is going to be consistent, but I can't tellyou what the expenses are going to translate into for the other companies.

Just in the spine and trauma businesses, can you give us anidea of specific steps that you are going to take to rejuvenate growth in thoseareas?

Yes, we can speak tothat. On the spine side, we saw a little bit of improvement in the performancein this quarter and would expect some more in the fourth quarter. But it is offof a small base business for us. Principally our short-term opportunities thererelate to the shoring up of the Fusion line with some of the product that wepicked up from the Endius transaction. We are expecting better things in thefuture from that division on that front, as well as Dynesys presents us withgood opportunities going forward. We need to make other internal and external developments andinvestments to continue to establish that as a more significant business. On the trauma side, as we have talked about in the past, wehave a very strong product line in certain areas, but a weak line in otherareas. Principally our strength resides in plates and screws right now, in thearea of weaknesses our nail line is one that we are looking to shore up withsome internal development efforts. So that is a gap that we look to fill as wework through 2008. But it is unlikely to be impactful any time in the firsthalf of 2008. It is probably going to be more towards the end of that year. Beyond that we just need to do a better job on sales focuswith respect to trauma and that is a global issue that we have got to resolve.

So at this point,your trauma salesforce is also within reconstructive is it not?

That is correct.

Do you have plans todivisionalize that in '08?

We have plans tobring greater focus to it within the existing structure.

How about plans foradding sales reps? Do you feel like you need to add more resources to spine or trauma?

All of thosedivisions, as well as hips and knees for that matter, that is something that weare constantly assessing, and obviously always adding.

Your next questioncomes from Kristin Stewart - Credit Suisse.

I was wondering if you could talk about the distributorsthat you have got relative to your sales expectations, it would seem that withthe investments that you have made you should be able to generate a little bitmore by way of sales. I am just curious if the guidance related to any declinein your expectations for those distributors that you brought on board? Thanks.

Kristin, we are stillin the process of integrating those acquisitions. They are contributing, and wedo expect over the long term that they will contribute in line with theexpectations that we had as we entered into those deals.

What were the expectations for when they would startcontributing? Is it a couple of quarters? A year or more? I don't know ifthere's any non-competes that you need to work through?

That is a level of detail, Kristin, that, you know, I am notgoing to provide on this call.

Your next question comes from Mike Weinstein - JP Morgan.

Let me just clarify a couple of items. Jim, the math on the $33million to $38 million sales going down to $0.07 to $0.08 EPS, using thecorporate tax rate that implies a pretax operation margin of 70% to 80%? Isthat right?

You got that about right, Mike.

On the spine business, you guys bought Endius earlier in theyear. I think you said they did about $13 million in '06, and it was obviouslytracking higher. Is the Endius deal not working? What is going on there?Obviously net of Endius, it doesn't seem like that business is growing rightnow.

That transaction, weare quite optimistic about. It is a good product fit for us, Mike. The realityof that type of a deal is, it is a small business, they have an independentdistributor network, and you are going to lose some sales as you integratethat, which is something that we anticipated. The important point for us isthat we get the products including the Title System, the Minute System, as wellas the [inaudible] system, and by the end of integrating that in, and gettingenough instruments and inventory out in the field we are already beginning tosee some decent traction with that. It is going to be a revenue synergy deal. In the short termyou are going to lose some of those revenues because you are integrating thoseindependent distributors.

Understood. It seems like with the smaller spine deals thatthe whole industry has done in the last few years, that every single one ofthem ends up being tough on the integration. Is that a fair statement?

Because of thedistribution channel, I there are issues there, but I will tell you that webuilt that into our business case. Our view as to the benefits of thattransaction have not changed.

David, I want tocircle back to the resurfacing discussion, because you have raised this asbeing an issue on the business in the short run, which makes us all wonder whenare these guys going to be able to have a product in the U.S.?There is an open question there about your ability to file a PMA with foreigndata in 2008. When do you think will you get visibility on that?

All we can do is give you updates on a quarterly basis as tohow we are tracking in that regard. We can't give you any assurance that we aregoing to be successful on that front with the foreign data, obviously, and ifwe are, it is a couple of years out, and if we aren't and we have to go througha full IDE/PMA to develop the U.S. data, it is obviously about double that timeperiod.

The Mobile Bearing Knee, you really didn't talk about itreally at all here. Someone asked a question about it. You made a comment andyou haven't had a discussion with the FDA, you haven't heard from the FDA sincethe last earnings call, which would have been three months ago. It doesn'tsound like your visibility is very good on the timing of that approval, ormaybe you can give us a little bit more?

We have doneeverything that we can do on that, and we are awaiting the FDA's response to usand so there really isn't anything more to tell you at this stage.

Your next question comes from Raj Denhoy - Bear Stearns.

I wanted to talk a little more on resurfacing. One of thequestions that has come up with that product is whether it is going to beincremental to the market growth, or whether it's going to be cannibalizingexisting sales. It sounds from your commentary that you are thinking it's goingto be more the latter, and that it should be taking procedures that would havebeen done with traditional hips. Is that fair to say? Do you think it'ssomewhat of a mix here at this point?

Well, I think it isboth. I think that it is probably expanding the market, but also picking upsome opportunities that otherwise would have gone to traditional hipprocedures. We are seeing it obviously on the side where the traditional hipprocedure is being lost to the resurfacing but in addition to that, I think itis also the case that when the surgeons go in and get trained on theresurfacing product, you may lose the primary total hip procedure even if theyare not using the resurfacing, because they have been exposed to anothercompany's product at that point in time.

So it does sound that this could be somewhat longer term, ina sense that you might actually be losing surgeons competitively here?

Well, procedures.

But not actually the surgeon shifting their entire businessover to another competitor?

We haven't seen a lot of that but we probably have seen someprocedure loss, and in instances, some of the primary business.

You continue to buy back stock here at a pretty good rate.Obviously there has been a lot of commentary about reinvesting your businessand looking for opportunities to accelerate some of the product lines in the spine,trauma, and other areas. Perhaps could you just talk a little bit about theopportunities for investment in the business? Are there programs that are nowstarting to come up? Are you looking for more things to invest in? Are youlooking more aggressively outside? I guess the level of investment, and alsothe urgency at which you are going to be tackling these things, and reallytrying to reaccelerate the business here?

We certainly are focused on opportunities outside and inside.As we think about inside, obviously, we have talked specifically about thekinds of investments we are already making in dental, talked about trauma andthe issues around sales focus, and our intention to invest there. As we look on the outside we will as we always have, applysome fairly rigid criteria to those opportunities. We are looking for thingsthat have good strategic fit, that keep us within musculoskeletal health, anydeals that we would look at, pay a lot of attention to as we model out theopportunities -- accretion, dilution, diligent IP, as we have said, the focuswe have on spine, dental, biologics, particularly in the spine area, that getsto be an issue. Appropriate valuations gets to be an issue, and we focus, asyou can well imagine in this environment on compliant business practices. So weare active, and will remain active in exploring opportunities on the outside,subject to the discipline that I described.

Your next question comes from Michael Matson - WachoviaSecurities.

With regard to the changes in compliance practices and thefederal monitor, obviously you talked about the charges that the federalmonitor is going to result in. But are there going to be any hits toproductivity from your other employees in terms of having to spend more time tracking their work withconsultants, and spending on entertainment, things like that? Is there anypossibility that those sorts of things could put some pressure on your marginsas well?

Well, I think that as far as the expenses that relate tocompliance with the deferred prosecution agreement, what we outlined in the wayof incremental expense is going to be the most significant, and that is themonitoring costs. We have a fairly significant investment and are constantlyexpanding that to ensure that we are meeting the needs, so I can't tell youwith any precision at this point in time what that will look like for 2008, butany of those incremental expenses that will relate to the fourth quarter arebaked into our guidance.

Just with regard to the guidance, you said January. Doesthat mean you are going to give it on your fourth quarter call? Is that whatyou are saying?

That is correct.

How big of a deal isit, in your view, probably early next year you are going to have the oldestknee platform on the market with the launch of DePuy's new Sigma Knee? Obviouslyyou have Gender, but let's be frank, it seems like that has been prettydisappointing. It is really more of a line extension than a completely new kneesystem. Are there plans to launch a new knee, and is that going to causefurther pain next year?

We continue to have the number one knee system on themarket, and we are excited about many of the introductions that are coming out.We have outlined those with specificity. We think that we are going to be ableto get good traction out of Gender. We think that the Natural-Knee Gender Flexoffering is going to be meaningful in 2008, so we have a good lineup, includingthe mobile bearing opportunity, provided we get the FDA clearance on that.

With regard to the reinvestment that you talk about in the spineand trauma businesses, is that going to be primarily in R&D, SG&A, orsort of spread across both areas?

It is going to bespread across different areas, depending upon which of those divisions. Thereare instances where we have a pretty full product line in some of thosedivisions; others where we have some gaps that we are looking to fill.Obviously those gaps in the trauma area we have talked about some internaldevelopment efforts there. On the spine side, it is going to be a combination ofinternal and external developments. We are looking to develop critical mass inall those business divisions. More feet on the street is going to be necessaryto accomplish that objective as well.

In your hip product category, I guess about a year ago you were rolling outyour large diameter metal-on-metal hip. I was just wondering if you could giveus any kind of an sense of where things stand with the penetration of thatproduct, because I guess we had thought that would be sort of a mix driver,because some of the other companies, that percentage, it is gotten to be 30% ormore.

We continue to see, as I indicated in my comments,significant growth with that large diameter head metal-on-metal product line, Ithink I had indicated in my scripted comments that we saw an increase withinthe Metasul brand of over 50% in the quarter. So we are still ramping that uplevel of penetration, and I would tell you it is not at the levels that you,not yet at the levels that you quoted with respect to competition.

Your next question comes from Robert Faulkner - ThomasWeisel.

I want to dig in a little bit on the guidance, and just askwhat in your mind changed from last quarter at this time to now? Resurfacingwas out there. Some of your constraints were visible. Maybe they became moreprofound, and the comparisons were also known. So is this a function of becomingmore familiar with the operations in forecasting dynamics, or did somethingreally jump out this quarter, learning that resurfacing was worse, et cetera?

The point that you raised is a contributor, I will tell you.I think that we are learning more specifically as to how effective we are doingin some of these different product areas on the execution side, and where weare challenged on the product offering side. The short statement to that is really the expectedacceleration on the Americasside, hips and knees both, wasn't there at the levels that we anticipated it.Now we think there are good opportunities going forward, and we think that weunderstand what we need to do with a fair amount of specificity at this pointto fully exploit the opportunities that we have in the marketplace with ourcurrent offering. But it is a degree of familiarity, and not finding thetraction. We talked specifically as well about the selling on the next-genGender side, and as we move into this fourth quarter, and start to overlap onthe mix benefit that we enjoyed a year ago, obviously if we are not taking thecompetitive business at the levels that we originally had forecasted, thatgrowth starts to fall off on the year-over-year comparisons.

In terms of the acceleration, was that more of a forecastingdynamic? I think you maybe mentioned earlier one particular product that wasn'tdoing what you expected, or is there a real product inside the hip businessthat isn't accelerating the way you thought it would be?

I think it is acrossthe various lines that we described earlier in the call.

As a follow-up, maybe could you comment on use of cash, orat least let us know how you are thinking about the two alternatives youmentioned. One is acquisitions, the other is share repurchase. How do you thinkabout allocating cash to one versus the other? Do you have a preference?

I would tell you, webelieve with any of the opportunities we would be looking at in terms ofacquisitions, we have with our balance sheet the opportunity to do whatever weneed to do, whether it is to fund those out of available free cash flow, or ifwe were to need to, draw down on our credit facility, we could do that but otherwiseput available free cash flow to work through our share repurchase program. Franklydon't see a need to build cash on thebalance sheet.

Finally, the $0.07 to $0.08 that you attributed to operatingdeleverage in the fourth quarter in your guidance, that is a lot of deleverage.It rounds to about I think 50%, unless I am doing the math incorrectly. How doyou think about kind of the impact? Are we back to the old marginal flowthroughargument with that forecast?

What we said on that is $0.08 is specifically attributed tothe $33 million to $38 million reduction in constant currency sales, which wehave said is predominantly talking about our high-margin hip and knee productsales in our Americasbusiness.

The foreign exchangeis hedged, so it affects the whole $38 million?

That is right.

Your next question comes from Jason Wittes - Leerink Swann.

Another questionabout the monitor expense, is that all external expense, or is there someinternal expense as well? In other words, is all that money going to themonitor, or also some changes being done internally that are part of it?

That is all external.

In terms of yourGender-Specific Knee outlook, you are lowering it, and I am wondering, is thatjust because the amount of time it is going to take to launch, or is that alsobecause some of the response has been muted, in part due to the fact that atleast a couple of your competitors have responded with what you would calltheir own versions of Gender-Specific?

The latter is thefair way to characterize it. As we have said, we have not seen the competitiveuptake that we had anticipated we would see at this stage. We still believe itis a very unique device, and we have to do a better job of executing to getafter that competitive opportunity. We will have further opportunities as we get into the launchof the Gender Flex component for the Natural-Knee, and we get the porouscomponent out for the next-gen line, but to your point, and at least in thefirst nine months of this year, we have been challenged, and in some caseswould acknowledge that competitors have put effective countermeasures in place.

Your next question comes from Brian Wong - BroadpointCapital.

I have just a quick question regarding your distributionagreement with Regeneration Technologies. Just wondering if you could commenton where you are with that? Are you still on track for the fourth quarterlaunch of that product?

Yes. We are workingthrough those logistical details of getting those products launched, and it ispretty much in line with the expectations we had outlined in earlier calls.

Can we just get the 30,000-foot view, what do you see as thegrowth rate of the overall market. Is it accelerating? Is it staying the same?Just your thoughts on the overall market in general, please?

The overall market, we don't see changes relative to ourview in the past. I mean, we are still of the belief that on the unit side youare looking at mid-single digit growth, with mix opportunity of 1% to 3%. Ithink that for any of the companies within this industry that have new systemsout, they are probably on the high end of that mix, if they are successfullylaunching those products, maybe even above that. We think that the marketcontinues to be a very attractive market.

Your next question comes from Jeff Johnson - Robert W.Baird.

Understanding you are not going to '08 guidance at thispoint, but as we look at the $0.07 to $0.08 cut to Q4 from an operationalstandpoint, is it fair to say, given that we are moving some of these productlaunches out a little bit, that we should kind of gauge our '08 number in asimilar manner, as far as the first couple of quarters could see similaroperational impact from these lack of new products, and the loss of Americas hipand knee business?

We will be specificabout that as we provide the 2008 guidance, but clearly the trends that we areforecasting now for the fourth quarter are going to provide a different base tojump off of into 2008, so it is going to have an impact in that regard.

Fair enough. Again,the first half of the year we should think of this as maybe Q4, if that is atrough number, so slowly recovering throughout 2008?

I would appreciate it if you would just bear with us and letus come back to you with the 2008 guidance, and we will give you as muchclarity as possible once we solidify our plans. We are going to be in a muchbetter position to do that intelligently in January.

Fair enough. On the monitoring expenses, sorry to beat thatissue. We have read through the DPA, if it is an 18-month agreement, assumingeverybody complies with everything they are supposed to and what have you, isit fair to think we can kind of punt on '08, as far as the expenses, but as welook into '09 those expenses should go away? Again, assuming full compliance oneverybody's end?

Yes, after the firstquarter of 2009.

Your final question comes from Greg Simpson - StifelNicolaus.

If could I follow up on Rob Faulkner's question on Gender,David, on your question about competitive share, should we take it to assumethat you think you have gained competitive share, but just not at the rate thatyou thought you would, or you don't think you have gained share it at all?

No, we have gained competitiveshare, but you are right to say not at the rate that we thought we would. As weare examining those trends, we look out to the fourth quarter, and as I said, youstart to overlap with that mix benefit that we enjoyed last year, and obviouslywhat we are counting on for acceleration in the year-over-year comparisons ismore competitive.

Not trying to back-door '08 guidance or anything along thoselines, but with respect to Gender again, if you look at interest level andtraining of competitive surgeons, does it give you a sense of hope, in terms ofgaining additional competitive share as we go forward, but again just not atthe pace you thought? Is that process accelerating?

No, we are still enthusiastic about the opportunity withGender. I think we need to do a better job of executing on that opportunity.

There are no further questions at this time. Are there anyclosing remarks?

Thanks, Jennifer. I just wanted to say thanks to everyonefor joining us today, and for your continued interest in Zimmer. We are lookingforward to speaking to you again on our fourth quarter and full year 2007conference call, which will take place on Tuesday, January 29 at 8:00 a.m. Have a good day.