2003 FORM 10-K ZIMMER HOLDINGS, INC. AND SUBSIDIARIES The Company will continue to identify and capitalize on external sources of innovative technologies through possible acquisitions of other complementary products, businesses, technology licensing arrangements and strategic alliances. The Zimmer Institute, and the Company’s affiliations with medical teaching institutions, will continue to play an integral role in facilitating training for surgeons, sales associates and other medical professionals on the procedures for applying MIS  techniques to orthopaedic surgery. In addition, the Company has developed and maintains close relationships with a number of orthopaedic surgeons who assist in product research and development. As part of its focused research and development efforts and desire to create breakthrough orthopaedic treatments, the Company has established an Orthobiologics group with its own full-time staff and projects. The Company is actively involved in the field of biologics and is committed to investing in biologics research activities, with a short-term focus on developing products for the spine market, such as a  CopiOs $^{TM}$ calcium phosphate bone void filler. The Company is working to develop biological materials to repair and reinforce damaged or degenerated tissues. These materials potentially could transform treatment of damaged joints by biological regeneration rather than replacement with inert materials. Orthobiologics products that are currently marketed for sale include the following: 1) CMI, 2)  Collagraft ˛  Bone Graft Matrix, which is a bone void filler material made of HA/TCP and bovine collagen, and 3)  Denovo ˛ -C, which is an autologous cell implantation service for articular cartilage repair. The Company has also publicly announced certain active or pending research and development activities of the Orthobiologics group. For instance, the Company is collaborating with ISTO Technologies on a project to develop a chondral and osteochondral cartilage graft for cartilage tissue repair and regeneration. The Company is also working with Tissue Science Laboratories plc, a company based in the United Kingdom (‘‘TSL’’), with respect to final development and distribution of the Rotator Cuff Repair Patch, an innovative, nonresorbable biological collagen patch for repair of rotator cuff injuries in the shoulder. This product is being developed and manufactured by TSL. The Company is subject to government regulation with regard to its products and operations in the countries in which it conducts business. It is the policy of the Company to comply with all regulatory requirements applicable to its products and operations. In the United States, numerous regulations govern the development, testing, manufacturing, marketing and distribution of medical devices, including, among others, the Federal Food, Drug and Cosmetic Act and regulations issued or proposed thereunder. The FDA regulates product safety and efficacy, laboratory and manufacturing practices, labeling The Company is subject to various government regulations pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the United States, exclusion from participation in government healthcare programs, including Medicare, Medicaid, Veterans Administration (VA) health programs and Civilian Health and Medical Program Uniformed Service (CHAMPUS). The scope and enforcement of these laws and regulations are uncertain and subject to rapid change, especially in light of the lack of applicable precedent and regulations. The Company believes that its operations are in material compliance with these laws. Government agencies and legislative bodies in the United States and throughout the world influence or regulate medical device payment. The Company believes that its experience in dealing with governmental regulatory requirements, its efficient means of distribution and its emphasis on the ongoing development of efficacious, cost effective and technologically advanced products should enable it to continue to compete effectively within this regulated environment. Regulatory requirements affecting the Company and its products have continued to increase. It is the policy of the Company to comply with all regulatory requirements governing its operations and products, and the Company believes that the manufacturing, quality control and internal control procedures that it employs are in material compliance with all applicable regulations. In many of the foreign countries in which the Company markets its products, the Company is subject to local regulations affecting, among other things, product standards, packaging requirements, labeling requirements and import. Many of the regulations applicable to the Company’s devices and products in these countries are similar to those of the FDA. The member countries of the European Union have adopted the European Medical Device Directives, which create a single set of medical device regulations for all member countries. These regulations require companies that wish to manufacture and distribute medical devices in European Union member countries to obtain CE Marks for their products. The Company maintains a certified status with the European and Canadian Notified Bodies, which provides for CE marking of products for these markets. and record keeping for medical devices and review of required manufacturers’ reports of adverse experience to identify potential problems with marketed medical devices. A few of the devices developed and marketed by the Company are in a category for which the FDA has implemented stringent clinical investigation and pre-market approval requirements. The FDA has the authority to halt the distribution of certain medical devices; detain or seize adulterated or misbranded medical devices; or order the repair, replacement or refund of the costs of such devices. There are also certain requirements of state, local and foreign governments that must be complied with in the manufacture and marketing of the Company’s products. ORTHOBIOLOGICS GOVERNMENT REGULATIONS AND QUALITY SYSTEMS 12