UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2008

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

For the transition period from                      to                     

Diebold, Incorporated

(Exact name of registrant as specified in its charter)

Ohio		34-0183970
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)
5995 Mayfair Road, PO Box 3077, North Canton, Ohio		44720-8077
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (330) 490-4000

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $1.25 Par Value — 66,100,607 shares as of October 31, 2008

 

 

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
INDEX

PART I — FINANCIAL INFORMATION			3
ITEM 1: FINANCIAL STATEMENTS			3
CONDENSED CONSOLIDATED BALANCE SHEETS — September 30, 2008 (Unaudited) and December 31, 2007			3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) — Three Months and Nine Months Ended September 30, 2008 and 2007			4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) — Nine Months Ended September 30, 2008 and 2007			5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)			6
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			17
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			28
ITEM 4: CONTROLS AND PROCEDURES			28
PART II — OTHER INFORMATION			32
ITEM 1: LEGAL PROCEEDINGS			32
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			34
ITEM 6: EXHIBITS			34
SIGNATURES			39
EXHIBIT INDEX			40
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

DIEBOLD, INCORPORATED AND SUBSIDIARIES

		September 30,				December 31,
		2008				2007
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	212,784			$	206,334
Short-term investments			117,467				104,976
Trade receivables, less allowances of doubtful accounts of $27,330 and $33,707, respectively			591,162				544,501
Inventories			571,684				533,619
Deferred income taxes			79,606				80,443
Prepaid expenses			49,846				46,347
Other current assets			144,328				114,312
Total current assets			1,766,877				1,630,532
Securities and other investments			80,618				75,227
Property, plant and equipment, at cost			584,010				575,796
Less accumulated depreciation and amortization			378,199				355,740
Property, plant and equipment, net			205,811				220,056
Goodwill			449,596				465,484
Other assets			235,936				239,827
Total assets		$	2,738,838			$	2,631,126
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable		$	12,743			$	14,807
Accounts payable			197,008				170,632
Deferred revenue			238,295				301,248
Other current liabilities			327,537				263,951
Total current liabilities			775,583				750,638
Notes payable — long term			683,959				609,264
Pensions and other benefits			37,013				36,708
Postretirement and other benefits			35,402				29,417
Deferred income taxes			36,846				39,393
Other long-term liabilities			29,764				37,115
Minority interest			20,659				13,757
Commitments and contingencies			—				—
Shareholders’ equity
Preferred shares, no par value, authorized 1,000,000 shares, none issued			—				—
Common shares, $1.25 par value per share, authorized 125,000,000 shares, issued 75,792,982 and 75,579,237, shares, respectively, outstanding 66,100,607 and 65,965,749 shares, respectively			94,741				94,474
Additional capital			276,856				261,364
Retained earnings			1,070,462				1,036,824
Treasury shares, at cost (9,692,375 and 9,613,488 shares, respectively)			(408,358	)			(406,182	)
Accumulated other comprehensive income			85,911				128,354
Total shareholders’ equity			1,119,612				1,114,834
Total liabilities and shareholders’ equity		$	2,738,838			$	2,631,126

See accompanying Notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net sales
Products		$	473,251			$	359,972			$	1,136,868			$	978,629
Services			417,039				380,881				1,222,619				1,103,695
			890,290				740,853				2,359,487				2,082,324
Cost of sales
Products			341,306				264,494				821,261				732,982
Services			315,343				299,300				937,069				878,408
			656,649				563,794				1,758,330				1,611,390
Gross profit			233,641				177,059				601,157				470,934
Selling, general and administrative expense			147,774				117,532				405,774				342,568
Research, development and engineering expense			20,364				18,894				58,275				53,115
Impairment of asset			—				—				4,376				—
(Gain) loss on sale of assets, net			(28	)			14				(32	)			(6,407	)
			168,110				136,440				468,393				389,276
Operating profit			65,531				40,619				132,764				81,658
Other income (expense)
Investment income			6,575				6,221				19,541				16,875
Interest expense			(11,241	)			(10,045	)			(32,375	)			(29,329	)
Miscellaneous, net			(1,564	)			(1,227	)			(644	)			6,850
Minority interest			(3,003	)			(1,172	)			(6,800	)			(5,579	)
Income before taxes			56,298				34,396				112,486				70,475
Taxes on income			9,782				6,247				24,961				20,874
Net income		$	46,516			$	28,149			$	87,525			$	49,601
Weighted-average shares outstanding:
Basic			66,101				65,926				66,073				65,798
Diluted			66,758				66,985				66,459				66,720
Earnings per common share:
Basic		$	0.70			$	0.43			$	1.32			$	0.75
Diluted		$	0.70			$	0.42			$	1.32			$	0.74

See accompanying Notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

		Nine Months Ended
		September 30,
		2008				2007
Cash flow from operating activities:
Net income		$	87,525			$	49,601
Adjustments to reconcile net income to cash provided by operating activities:
Minority share of income			6,800				5,579
Depreciation and amortization			61,211				53,366
Share-based compensation			9,166				10,945
Excess tax benefits from share-based compensation			—				(867	)
Deferred income taxes			610				14,892
Impairment of assets			4,376				—
Gain on sale of assets, net			(32	)			(6,407	)
Cash provided (used) by changes in certain assets and liabilities:
Trade receivables			(67,311	)			92,589
Inventories			(53,161	)			(48,164	)
Prepaid expenses			(6,297	)			(12,686	)
Other current assets			(24,403	)			(11,134	)
Accounts payable			29,748				18,085
Deferred revenue			(61,057	)			(51,500	)
Certain other assets and liabilities			74,671				(76,451	)
Net cash provided by operating activities			61,846				37,848
Cash flow from investing activities:
Payments for acquisitions, net of cash acquired			(3,733	)			(10,028	)
Proceeds from maturities of investments			314,185				54,788
Payments for purchases of investments			(345,059	)			(31,867	)
Proceeds from sale of fixed assets			29				7,594
Capital expenditures			(32,637	)			(34,323	)
Increase in certain other assets			(17,035	)			(22,725	)
Net cash used by investing activities			(84,250	)			(36,561	)
Cash flow from financing activities:
Dividends paid			(49,917	)			(46,820	)
Notes payable borrowings			588,628				556,480
Notes payable repayments			(514,106	)			(629,774	)
Distribution of affiliates’ earnings to minority interest holder			—				(15,440	)
Excess tax benefits from share-based compensation			—				867
Issuance of common shares			—				8,323
Net cash provided (used) by financing activities			24,605				(126,364	)
Effect of exchange rate changes on cash			4,249				12,859
Increase/(decrease) in cash and cash equivalents			6,450				(112,218	)
Cash and cash equivalents at the beginning of the period			206,334				253,968
Cash and cash equivalents at the end of the period		$	212,784			$	141,750

See accompanying Notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2008

NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements of Diebold, Incorporated and its subsidiaries (collectively, the Company) have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles (GAAP); however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of the results for the interim periods.

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and Notes thereto together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s annual report on Form 10-K for the year ended December 31, 2007. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of the Company at September 30, 2008 and December 31, 2007, the results of its operations for the three- and nine-month periods ended September 30, 2008 and September 30, 2007 and its cash flows for the nine-month periods ended September 30, 2008 and September 30, 2007.

In addition, some of the Company’s statements in this quarterly report on Form 10-Q may be considered forward-looking and involve risks and uncertainties that could significantly impact expected results. The results of operations for the nine-month period ended September 30, 2008 are not necessarily indicative of results to be expected for the full year.

On December 21, 2007, the Company announced that, in consultation with outside advisors, it was conducting an internal review into certain accounting and financial reporting matters, including but not limited to, the review of various balance sheet accounts such as prepaid expenses, accrued liabilities, capitalized assets, deferred revenue and reserves within both the Company’s North America and International businesses. On January 15, 2008, the Company announced that it had concluded its discussion with the Office of the Chief Accountant (OCA) of the Securities and Exchange Commission (SEC) with regard to the Company’s practice of recognizing certain revenue on a bill and hold basis in its North America business segment and, as a result of those discussions, the Company determined that its previous long-standing method of accounting for bill and hold transactions was in error, representing a misapplication of GAAP. Management of the Company determined that the corrected method of recognizing revenue would be adopted retroactively after an in-depth analysis and review with its outside auditors, KPMG LLP (KPMG), an independent registered public accounting firm, the Audit Committee of the Company’s Board of Directors, and the OCA. Accordingly, management concluded that the previously issued financial statements for the fiscal years ended December 31, 2006, 2005, 2004 and 2003; the quarterly data in each of the quarters for the years ended December 31, 2006 and 2005; and the quarter ended March 31, 2007, must be restated and should no longer be relied upon. As a result, the Company restated its previously issued financial statements for those periods. Restated financial information is presented in our annual report on Form 10-K for the year ended December 31, 2007.

On January 1, 2008, the Company adopted the provision of Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R), that requires entities to measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position. The adoption of SFAS No. 158 had a cumulative effect reduction to beginning retained earnings of $1,387 as of January 1, 2008.

On January 1, 2008, the Company adopted Emerging Issues Task Force (EITF) Issue No. 06-10, Accounting for Collateral Assignment Split Dollar Life Insurance, which applies to entities that participate in collateral assignment split-dollar life insurance arrangement that extend into an employee’s retirement period (often referred to as “key person” life insurance.) The pronouncement requires employers to recognize a liability for the postretirement obligation associated with a collateral assignment arrangement if, based on an agreement with an employee, the employer has agreed to maintain a life insurance policy during the postretirement period or to provide a death benefit. The adoption of this EITF had a cumulative effect reduction to beginning retained earnings of $2,583 as of January 1, 2008.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)

NOTE 2: EARNINGS PER SHARE

The basic and diluted earnings per share computations in the condensed consolidated statements of income are based on the weighted-average number of shares outstanding during each period reported. The following table shows the amounts used in computing earnings per share and the effect on the weighted-average number of shares of potentially dilutive common shares.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Numerator:
Net income		$	46,516			$	28,149			$	87,525			$	49,601
Denominator:
Basic weighted-average shares			66,101				65,926				66,073				65,798
Effect of dilutive shares			657				1,059				386				922
Diluted weighted-average shares			66,758				66,985				66,459				66,720
Earnings per common share:
Basic		$	0.70			$	0.43			$	1.32			$	0.75
Diluted		$	0.70			$	0.42			$	1.32			$	0.74
Anti-dilutive shares not used in calculating diluted weighted-average shares			1,409				720				2,253				727

NOTE 3: OTHER COMPREHENSIVE INCOME

Items considered to be other comprehensive income include adjustments made for foreign currency translation (under SFAS No. 52), pensions (under SFAS No. 87 and SFAS No. 158), and hedging activities (under SFAS No. 133). Components of comprehensive income consist of the following:

		Nine Months Ended
		September 30,
		2008				2007
Net income		$	87,525			$	49,601
Other comprehensive income:
Translation adjustment			42,197				58,302
Realized and unrealized (loss) gain on hedges			1,075				(245	)
Pension adjustment			(829	)			3,590
Comprehensive income		$	129,968			$	111,248

Accumulated other comprehensive income is reported separately from retained earnings and additional capital in the condensed consolidated balance sheets. Components of accumulated other comprehensive income consist of the following for the nine months ended September 30, 2008 and the year ended December 31, 2007:

		September 30, 2008				December 31, 2007
Translation adjustment		$	95,811			$	138,008
Realized and unrealized gain on hedges			958				2,033
Pension adjustment			(10,858	)			(11,687	)
Total accumulated other comprehensive income		$	85,911			$	128,354

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)

NOTE 4: SHARE-BASED COMPENSATION

The Company’s share-based compensation policy is consistent with the requirements of SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), which requires that all share-based payments to employees be recognized in the statement of income based on their grant-date fair values during the period in which the employee is required to provide services in exchange for the award.

Share-based compensation was recognized as a component of selling, general and administrative expenses. Total share-based compensation expense for the three and nine months ended September 30, 2008 was $3,145 and $9,166, respectively. Total share-based compensation expense for the three and nine months ended September 30, 2007 was $3,828 and $10,945, respectively.

Options outstanding and exercisable under the Company’s 1991 Equity and Performance Incentive Plan as of September 30, 2008 and changes during the nine months ended September 30, 2008 were as follows:

						Weighted-				Weighted Average				Aggregate
		Number of				Average				Remaining				Intrinsic
		Shares				Exercise Price				Contractual Term				Value (1)
						(per share)				(in years)
Outstanding at January 1, 2008			2,884			$	41.56
Granted			336				25.53
Exercised			—				—
Expired or forfeited			(284	)			44.63
Outstanding at September 30, 2008			2,936			$	39.42				5			$	8,490
Exercisable at September 30, 2008			2,161			$	40.61				4			$	4,451

The following tables summarize information on unvested restricted stock units and performance shares outstanding for the nine-month period ended September 30, 2008:

		Number of				Weighted-Average Grant-
Restricted Stock Units (RSUs):		Shares				Date Fair Value
						(per share)
Unvested at January 1, 2008			325			$	45.14
Forfeited			(16	)			42.07
Vested			(46	)			55.20
Granted			134				28.13
Unvested at September 30, 2008			397			$	38.20

		Number of				Weighted-Average Grant-
Performance Shares:		Shares				Date Fair Value
						(per share)
Unvested at January 1, 2008			519			$	54.49
Forfeited			(131	)			55.89
Vested			(15	)			57.08
Granted			232				28.91
Unvested at September 30, 2008			605			$	44.31

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)

Unvested performance shares are based on a maximum potential payout. Actual shares granted at the end of the performance period may be less than the maximum potential payout level depending on achievement of performance share objectives.

NOTE 5: INCOME TAXES

The effective tax rate for the three months ended September 30, 2008 was 17.4 percent compared to 18.2 percent for the same period in 2007. The decrease in 2008 resulted from a larger China technology rate reduction credit and a more favorable mix of income.

The effective tax rate for the nine months ended September 30, 2008 was 22.2 percent compared to 29.6 percent for the same period in 2007. In addition to the China benefit referenced above, a significant portion of the decrease is due to higher earnings in international jurisdictions where the Company benefits from lower effective tax rates. The income shift from the U.S. to lower-taxed foreign jurisdictions was exacerbated in 2008 by non-routine expenses incurred in the United States.

NOTE 6: INVENTORIES

The Company primarily values inventories at the lower of cost or market applied on a first-in, first-out (FIFO) basis. At each reporting period, the Company identifies and writes down its excess or obsolete inventory to its net realizable value based on forecasted usage, orders and inventory aging. With the development of new products, the Company also rationalizes its product offerings and will write down discontinued product to the lower of cost or net realizable value.

Major classes of inventories are summarized as follows:

		September 30, 2008				December 31, 2007
Finished goods		$	285,209			$	252,729
Service parts			151,718				152,039
Work in process			57,843				64,414
Raw materials			76,914				64,437
Total inventories		$	571,684			$	533,619

NOTE 7: BENEFIT PLANS

The Company has several pension plans covering substantially all U.S. employees. Plans covering salaried employees provide pension benefits that are based on the employee’s compensation during the 10 years before retirement. The Company’s funding policy for salaried plans is to contribute annually, if required, at an actuarially determined rate. Plans covering hourly employees and union members generally provide benefits of stated amounts for each year of service. The Company’s funding policy for hourly plans is to make at least the minimum annual contributions required by applicable regulations. Employees of the Company’s operations in countries outside of the United States participate to varying degrees in local pension plans, which in the aggregate are not significant.

In addition to providing pension benefits, the Company provides healthcare benefits (referred to as Other Benefits) for certain retired employees. Eligible employees may be entitled to these benefits based upon years of service with the Company, age at retirement and collective bargaining agreements. Currently, the Company has made no commitments to increase these benefits for existing retirees or for employees who may become eligible for these benefits in the future. Currently, there are no plan assets and the Company funds the benefits as the claims are paid.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)

		Three Months Ended
		September 30,
		2008				2007				2008				2007
		Pension Benefits								Other Benefits
Components of Net Periodic Benefit Cost
Service cost		$	2,460			$	2,865			$	1			$	2
Interest cost			7,012				6,403				305				340
Expected return on plan assets			(8,936	)			(8,252	)			—				—
Amortization of prior service cost			96				154				(130	)			(129	)
Recognized net actuarial loss (gain)			300				1,012				189				183
Net periodic pension benefit cost		$	932			$	2,182			$	365			$	396

		Nine Months Ended
		September 30,
		2008				2007				2008				2007
		Pension Benefits								Other Benefits
Components of Net Periodic Benefit Cost
Service cost		$	7,380			$	8,596			$	2			$	5
Interest cost			21,035				19,209				915				1,019
Expected return on plan assets			(26,810	)			(24,756	)			—				—
Amortization of prior service cost			286				462				(388	)			(387	)
Recognized net actuarial loss (gain)			607				2,966				324				549
Net periodic pension benefit cost		$	2,498			$	6,477			$	853			$	1,186

Cash Flows

Previously, the Company disclosed expected payments related to the 2008 plan year of $2,776 to its qualified and non-qualified pension plans and $2,262 to its other postretirement benefit plan. In the third quarter of 2008, the Company changed its expectation for the total contributions to the qualified plan and non-qualified pension plans to $6,776. The Company’s expectation for contributions to its other postretirement benefit plans has not changed. As of September 30, 2008 and 2007, contributions of $2,122 and $10,593 were made to the qualified and non-qualified pension plans, respectively.

NOTE 8: GUARANTEES AND PRODUCT WARRANTIES

The Company has applied the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, to its agreements that contain guarantees or indemnification clauses. These disclosure requirements expand those required by SFAS No. 5, Accounting for Contingencies, by requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in effect as of September 30, 2008 in which the Company is the guarantor.

In connection with the construction of certain manufacturing facilities, the Company guaranteed repayment of principal and interest on variable rate industrial development revenue bonds by obtaining letters of credit. The bonds were issued with a 20-year original term and are scheduled to mature in 2017. At September 30, 2008, the carrying value of the liability was $11,900.

The Company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, regulatory agencies and insurance providers. If the Company is not able to make payment, the suppliers, regulatory agencies and insurance providers may draw on the pertinent bank. At September 30, 2008, the maximum future payment obligations related to these various guarantees totaled $74,251 of which $25,728 represented standby letters of credit to insurance providers. At September 30, 2007, the maximum future payment obligations relative to these various guarantees totaled $62,105, of which $22,663 represented standby letters of credit to insurance providers. There was no associated liability recorded for any guarantees as of September 30, 2008 and 2007, respectively.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)

The Company provides its customers a standard manufacturer’s warranty and records, at the time of the sale, a corresponding estimated liability for potential warranty costs. Estimated future obligations due to warranty claims are based upon historical factors such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts. Changes in the Company’s warranty liability balance are illustrated in the following table:

Warranty Liability		2008				2007
Balance at January 1		$	26,494			$	22,511
Current period accruals			39,157				20,446
Current period settlements			(24,290	)			(21,064	)
Balance at September 30		$	41,361			$	21,893

NOTE 9: ACQUISITIONS

The following mergers and acquisitions were accounted for as purchase business combinations and, accordingly, the purchase price has been or will be allocated to identifiable tangible and intangible assets acquired and liabilities assumed, based upon their respective fair values, with the excess allocated to goodwill. Results of operations from the date of acquisition of these companies are included in the condensed consolidated statements of operations of the Company.

In February 2008, the Company formed a partnership, D&G Centroamerica, S. de R.L. (D&G), based in the Republic of Panama with an initial investment of approximately $6,423. The Company owns 51 percent of the partnership. The minority partner of D&G was previously used by the Company as a distributor in Central America. Goodwill and other intangibles, net of amortization, resulting from the acquisition amounted to approximately $731 and $5,761, respectively, as of September 30, 2008. D&G is included as part of the Company’s Diebold International (DI) segment.

In January 2007, the Company acquired Brixlogic, Inc. (Brixlogic) based in San Mateo, California for approximately $8,349. Brixlogic is a software development firm previously used by the Company for various software development projects. Other intangibles, net of amortization, resulting from the acquisition amounted to approximately $6,998 as of September 30, 2008. Brixlogic is included as part of the Company’s DNA segment.

NOTE 10: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses derivatives to mitigate the negative economic consequences associated with the fluctuations in currencies and interest rates. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, requires that all derivative instruments be recorded on the balance sheet at fair value and that the changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows derivative gains and losses to be reflected in the income statement together with the hedged exposure, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. The Company does not enter into any speculative positions with regard to derivative instruments.

NOTE 11: RESTRUCTURING AND OTHER CHARGES

The following table summarizes the Company’s restructuring charges by plan for the three- and nine-month periods ended September 30, 2008 and 2007:

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
DCM Plan		$	1,243			$	734			$	2,761			$	18,552
Germany Plan			269				485				6,673				485
RIF Plan			5,403				—				11,716				—
Newark Plan			7,063				—				7,130				—
Other			479				—				1,254				—
Total		$	14,457			$	1,219			$	29,534			$	19,037

During the first quarter of 2006, the Company announced a plan (DCM Plan) to close its production facility in Cassis, France in an effort to optimize its global manufacturing operations. During the first quarter of 2007, the Company notified one hundred twenty-five Cassis employees to be terminated. Actual termination dates varied based upon each individual employees circumstances. For the quarter ended September 30, 2007, the Company incurred $734 in expense through product cost of sales. Total restructuring charges incurred as of September 30, 2007 under the DCM Plan were $18,552.

For the quarter ended September 30, 2008, the DCM Plan restructuring charges were $1,243 of DI product cost of sales which included $1,085 of severance costs and $158 of other costs. For the nine months ended September 30, 2008, the DCM Plan restructuring charges were $1,875 of DI product cost of sales and $886 of Diebold North America (DNA) product cost of sales. The DCM plan costs incurred of $2,761 included $1,577 of severance costs and $1,184 of other costs. The company expects remaining expenses in relation to the DCM plan to be immaterial. As of September 30, 2008, the DCM accrual balance was not material to the Company.

During the third quarter of 2007, the Company notified seventeen employees of termination as a result of its plans to downsize its operations in Germany (Germany Plan) in an effort to remove excess capacity. During the first quarter of 2008, the Germany Plan was modified to initiate a closure of its operations in light of further declines in sales opportunities resulting from a fully mature market. Total Germany Plan restructuring expenses incurred for the nine months ended September 30, 2008 were $6,673, $6,207 incurred in DI and $466 incurred in DNA. Restructuring charges in the DI segment for the nine months ended September 30, 2008 included $1,361 of product cost of sales, $3,501 of service cost of sales, $1,372 of operating expense and the remaining in other income and expense. Restructuring charges in the DNA segment for the nine months ended September 30, 2008 included $466 of product cost of sales. As of and for the quarter ended September 30, 2008, the Germany Plan accrual balance, remaining expenses and actual restructuring charges were not material. The Company expects the Germany Plan, including all terminations, to be substantially complete by the end of fiscal year 2008.

During the fourth quarter of 2007, the Company announced a plan to reduce its global workforce (RIF Plan) in an effort to optimize overall operational performance. As of September 30, 2008, the Company anticipates total remaining costs to be incurred of approximately $2,500. Total restructuring charges for the three and nine months ended September 30, 2008 were $5,403 and $11,716, respectively. For the nine months ended September 30, 2008, total DNA RIF Plan restructuring charges incurred were $847 through product cost of sales, $673 through service cost of sales and $1,556 through operating expense. Total DI RIF Plan restructuring charges incurred were $157 through product cost of sales, $2,537 through service cost of sales and $5,308 through operating expense. Total Election Systems (ES) & Other RIF Plan restructuring charges incurred were $46 through product cost of sales and $592 through operating expense.

For the quarter ended September 30, 2008, total DNA RIF Plan restructuring charges of $51 were incurred through product cost of sales, service cost of sales, and operating expense. Total DI RIF Plan restructuring charges incurred were $22 through product cost of sales, $2,104 through service cost of sales, and $3,226 through operating expense. During the third quarter, the Company notified seventy eight employees of termination. The Company expects the RIF Plan, including all terminations, to be substantially complete by the end of fiscal year 2008. As of September 30, 2008, the RIF Plan accrual balance was not material to the Company.

During the second quarter of 2008, the Company announced plans to close its manufacturing facility in Newark, Ohio (the Newark Plan) as part of its continued focus on its strategic global manufacturing realignment plan. The company gave notice to its one hundred employees and the collective bargaining unit representing its Newark, Ohio manufacturing facility of its plans to close this operation. As of September 30, 2008 the Company anticipates total remaining costs incurred to be approximately $3,700. Total restructuring

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)

charges for the Newark Plan were $7,063 and $7,130 for the three and nine months ended September 30, 2008, respectively, and were recognized through product cost of sales in the DNA segment. The Company anticipates the closure of this facility to be substantially complete by the end of the first quarter of 2009. As of September 30, 2008, the Newark Plan accrual balance was approximately $6,800.

The Company incurred legal, consultation, audit and financial advisory fees (collectively referred to as non-routine expenses) of $24,665 and $41,839 for the three and nine months ended September 30, 2008, respectively, related to the filing of the restated financial statements and the unsolicited takeover bid from United Technologies Corp. Financial advisory fees of $13,500 were recorded in the third quarter 2008 related to the withdrawal of the unsolicited takeover bid from United Technologies Corp. As of September 30, 2008, the accrual balance for these non-routine expenses was approximately $18,000.

NOTE 12: FAIR VALUE OF ASSETS AND LIABILITIES

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS 157), for its financial assets and liabilities, as required. In February 2008, the FASB issued FASB Staff Position No. 157-2, which deferred the effective date of SFAS 157 for nonfinancial assets and liabilities except for those recognized or disclosed on a recurring basis. SFAS 157 establishes a common definition for fair value to be applied to GAAP guidance requiring the use of fair value, establishes a framework for measuring fair value, and expands disclosure requirements about such fair value measurements. The standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.

The Company adopted SFAS 157 on January 1, 2008 with respect to financial assets and financial liabilities that are measured at fair value within the condensed consolidated financial statements and deferred the adoption for non-financial assets and non-financial liabilities until January 1, 2009. Accordingly, the provisions of SFAS 157 were not applied to long-lived assets and goodwill and other intangible assets measured for impairment testing purposes.

The hierarchy that prioritizes the inputs to valuation techniques used to measure fair value is divided into three levels:

	§		Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
	§		Level 2 — Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
	§		Level 3 — Unobservable inputs for which there is little or no market data.

The Company measures its financial assets and liabilities using one or more of the following three valuation techniques outlined in SFAS 157:

	§		Market approach — Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
	§		Cost approach — Amount that would be required to replace the service capacity of an asset (replacement cost).
	§		Income approach — Techniques to convert future amounts to a single present amount based upon market expectations.

The Company has no financial assets or liabilities for which fair value was measured using Level 3 inputs. Assets and liabilities subject to fair value measurement are as follows:

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)

						Fair Value Measurements at
						Reporting Date Using
						Quoted Prices in				Significant
						Active Markets				Other
		Fair Value as of				for Identical				Observable
		September 30,				Assets				Inputs
		2008				(Level 1)				(Level 2)
Assets
Short-term investments		$	117,467			$	117,467			$	—
Deferred Compensation			9,876				9,876				—
Forward Exchange Forward Contracts			11,537				—				11,537
Total		$	138,880			$	127,343			$	11,537
Liabilities
Interest Rate Swaps		$	1,679			$	—			$	1,679
Total		$	1,679			$	—			$	1,679

Short-Term Investments The Company has investments in certificates of deposit that are recorded at cost, which approximates fair value due to their short term nature and lack of volatility.

Deferred Compensation Plan The fair value of the Company’s deferred compensation plan is derived from investments in a mix of money market, fixed income and equity funds managed by Vanguard.

Foreign Exchange Forward Contracts A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The foreign exchange contracts are valued using the market approach based on observable market transactions of forward rates.

Interest Rate Swaps The Company has variable rate debt and is subject to fluctuations in interest related cash flows due to changes in market interest rates. The Company’s policy allows it to periodically enter into derivative instruments designated as cash flow hedges to fix some portion of future variable rate based interest expense. The Company has executed two pay-fixed receive-variable plain vanilla interest rate swaps to hedge against changes in the London Interbank Offered Rate (LIBOR) benchmark interest rate on a portion of the Company’s LIBOR- based credit facility. The fair value of the swap is determined using the income approach and is calculated based on LIBOR rates at the reporting date.

NOTE 13: SEGMENT INFORMATION

The Company’s segments are comprised of its three main sales channels: DNA, DI and ES & Other. These sales channels are evaluated based on revenue from customers and operating profit contribution to the total corporation. The reconciliation between segment information and the condensed consolidated financial statements is disclosed. Revenue summaries by geographic segment and product and service solutions are also disclosed. All income and expense items below operating profit are not allocated to the segments and are not disclosed.

The DNA segment sells and services financial and retail systems in the United States and Canada. The DI segment sells and services financial and retail systems over the remainder of the globe. The ES & Other segment includes the operating results of Premier Election Solutions, Inc. and the voting and lottery related business in Brazil. Each of the sales channels buys the goods it sells from the Company’s manufacturing plants or through external suppliers. Intercompany sales between legal entities are eliminated in consolidation and intersegment revenue is not significant. Each year, intercompany pricing is agreed upon which drives sales channel operating profit contribution. As permitted under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, certain information not routinely used in the management of these segments, information not allocated back to the segments or information that is impractical to report is not shown. Items not allocated are as follows: interest income, interest expense, equity in the net income of investees accounted for by the equity method and income tax expense or benefit.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)

The following table presents Diebold’s revenue by reportable segment for the three- and nine-month periods ended September 30, 2008 and 2007, respectively.

		DNA				DI				ES & Other				Total
For the quarter ended September 30, 2008
Customer revenue		$	386,989			$	426,521			$	76,780			$	890,290
Operating profit			19,929				30,064				15,538				65,531
Capital expenditures			5,163				7,424				272				12,859
Depreciation			10,621				5,716				727				17,064
For the quarter ended September 30, 2007
Customer revenue		$	388,912			$	343,274			$	8,667			$	740,853
Operating profit (loss)			31,860				11,377				(2,618	)			40,619
Capital expenditures			2,196				7,887				212				10,295
Depreciation			8,565				3,214				200				11,979
For the nine months ended September 30, 2008
Customer revenue		$	1,134,603			$	1,102,990			$	121,894			$	2,359,487
Operating profit			67,061				50,340				15,363				132,764
Capital expenditures			12,646				19,558				433				32,637
Depreciation			21,123				18,175				2,414				41,712
Property, plant and equipment, at cost			423,362				147,555				13,093				584,010
Total assets			445,081				2,181,947				111,810				2,738,838
For the nine months ended September 30, 2007
Customer revenue		$	1,115,007			$	928,124			$	39,193			$	2,082,324
Operating profit (loss)			81,405				1,900				(1,647	)			81,658
Capital expenditures			14,849				18,431				1,043				34,323
Depreciation			21,169				13,250				598				35,017
Property, plant and equipment, at cost			412,446				140,621				6,080				559,147
Total assets			584,809				1,887,784				153,651				2,626,244

The following table presents Diebold’s revenue by geographic region for the three- and nine-month periods ended September 30, 2008 and 2007, respectively.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
The Americas		$	642,990			$	525,600			$	1,692,514			$	1,503,814
Asia Pacific			123,442				79,899				316,923				220,465
Europe, Middle East, and Africa			123,858				135,354				350,050				358,045
Revenue from customers		$	890,290			$	740,853			$	2,359,487			$	2,082,324

The following table presents Diebold’s revenue by Product and Service Solution for the three- and nine-month periods ended September 30, 2008 and 2007, respectively.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Financial self-service:
Products		$	324,414			$	270,509			$	812,732			$	720,823
Services			290,225				249,227				844,769				733,361
Total financial self-service			614,639				519,736				1,657,501				1,454,184
Security:
Products			78,755				86,509				227,890				238,158
Services			120,116				125,941				352,202				350,789
Total security			198,871				212,450				580,092				588,947
Total financial self-service & security			813,510				732,186				2,237,593				2,043,131
Election systems:
Products			69,326				2,954				92,199				19,648
Services			6,698				5,713				25,648				19,545
Total election systems			76,024				8,667				117,847				39,193
Lottery systems			756				—				4,047				—
Revenue from customers		$	890,290			$	740,853			$	2,359,487			$	2,082,324

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2008
(Unaudited)
(Dollars in thousands, except per share amounts)

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Diebold is on the verge of its 150^th year in business, providing self-service delivery and security innovations and solutions to the financial, retail, commercial and government markets. Drawing from its history as the premier manufacturer of safes and vaults in the United States, Diebold today is transforming itself into a leading provider of integrated services for the industries in which it operates. During the third quarter of 2008, Diebold filed all of its late reports with the SEC on September 30, meeting the filing schedule previously announced by the company. Diebold filed its annual report on Form 10-K for the year ended December 31, 2007 and its Quarterly Reports on Form 10-Q for the quarters ended June 30, 2007, September 30, 2007, March 31, 2008 and June 30, 2008. The completion of these filings also marks the conclusion of the previously disclosed internal review of other accounting items.

In connection with the Company’s filing of the restated financial statements, the Company incurred significant legal, audit and consultation fees during 2007 and 2008. In addition, the Company incurred financial advisory fees in 2008 as a result of the withdrawal of the unsolicited takeover bid from United Technologies Corp.

In addition, Diebold raised its expectations for full-year 2008 earnings per share. The upward revision is a result of earlier-than-expected progress from the Smart Business 200 a series of additional cost-reduction actions to eliminate another $100,000 in costs, with $70,000 expected to be recognized by the middle of 2010, improved profitability from the Brazilian voting and lottery businesses, continued demand for the company’s solutions in the global financial markets and a lower anticipated effective tax rate.

In regard to Smart Business 200 cost savings initiatives, actions include additional strategic global manufacturing realignment; further consolidation of the Company’s supply chain and distribution network; and initiating a product rationalization and simplification program to improve margins, reduce the cash conversion cycle and improve inventory turnover.

Work has continued on the Company’s strategic global manufacturing realignment plan. The Company’s plans are moving forward, and it has given notice during the third quarter 2008 to approximately one hundred associates at the Newark, Ohio-area manufacturing facility that the Company intends to close this operation and move all of its production to Diebold’s plant in Lexington, North Carolina by the end of the first quarter of 2009. Most of Lexington’s Opteva ATM production lines will be moved to existing plants in China and Hungary.

Diebold has continued to work with Menlo Worldwide Logistics to rationalize and optimize its warehouse network in the United States. Diebold reduced its U.S. warehouse infrastructure from 89 facilities to three strategically located regional distribution and final customization facilities. The goal is to reduce customer lead times while simultaneously reducing required inventory levels.

The Company also continued to incur restructuring charges in the third quarter 2008 related to severance and reorganization costs from the previously announced reduction in the Company’s global workforce.

During the third quarter of 2008, The United States Postal Service (USPS) chose Diebold to implement a multi-site, technologically-advanced, video security program. With more than 40,000 sites across the country, the USPS has selected Diebold Security to manage this nationwide implementation under a three-year agreement. The contract has the potential to span more than 12 years.

Also during the third quarter of 2008, Diebold announced it was chosen to provide on-site service and support for Catalina Marketing’s network of point-of-sale printers in more than 25,000 grocery and drug stores, mass merchandisers and pharmacies throughout the United States.

In Brazil, Banco do Brasil chose Diebold to provide more than 5,400 ATMs and check dispensers, enabling the financial institution to expand its reach to new and existing customers at its branches in all Brazilian states, as well as through new retail locations.

For the Company’s Premier Election Solutions subsidiary, the performance and near-term market expectations for this business remain unchanged from prior expectations. While Diebold fully supports its elections subsidiary, the Company also continues to pursue strategic alternatives to ownership of this company.

The Company intends the discussion of its financial condition and results of operations that follows to provide information that will assist in understanding the financial statements, the changes in certain key items in those financial statements from year to year and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect the financial statements.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2008
(Unaudited)
(In thousands, except per share amounts)

RESULTS OF OPERATIONS

The following table summarizes the results of our operations for the three- and nine-month periods ended September 30, 2008 and 2007:

		Three Months Ended																Nine Months Ended
		September 30,																September 30,
		2008								2007								2008								2007
						% of								% of								% of								% of
		Dollars				Net Sales				Dollars				Net Sales				Dollars				Net Sales				Dollars				Net Sales
Net sales		$	890,290				100.0	%		$	740,853				100.0	%		$	2,359,487				100.0	%		$	2,082,324				100.0	%
Gross profit			233,641				26.2	%			177,059				23.9	%			601,157				25.5	%			470,934				22.6	%
Operating expenses			168,110				18.9	%			136,440				18.4	%			468,393				19.9	%			389,276				18.7	%
Operating profit			65,531				7.4	%			40,619				5.5	%			132,764				5.6	%			81,658				3.9	%
Net income			46,516				5.2	%			28,149				3.8	%			87,525				3.7	%			49,601				2.4	%
Diluted earnings per share			0.70				N/A				0.42				N/A				1.32				N/A				0.74				N/A

Third Quarter 2008 Comparisons with Third Quarter 2007

Net Sales

The following table represents information regarding our net sales for the three-month periods ended September 30, 2008 and 2007:

		Three Months Ended
		September 30,
		2008				2007				Change				% Change
Net sales		$	890,290			$	740,853			$	149,437				20.2	%

Net sales for the third quarter of 2008 increased 20.2 percent from the comparable period in 2007. The increase in net sales included a net positive currency impact of approximately $21,630. Financial self-service revenue increased by $94,903 or 18.3 percent over the same period in 2007. The increase resulted from higher revenue in the Americas of $63,325 and strong revenue growth in Asia Pacific of $42,275. The increase in the Americas was due to strong revenue growth in Brazil from several large orders as well as positive growth in both Latin America and domestic revenues. The Asia Pacific increase was due to higher volume in China of $32,541, which included a large order expected to be recognized as revenue during the fourth quarter but occurred during the third quarter due to customer acceptance occurring sooner than planned. There was a partially offsetting decrease of $10,697 in Europe, Middle East, and Africa (EMEA). Security solutions revenue decreased by $13,579 or 6.4 percent from the third quarter of 2007 as new bank branch construction and retail store openings remained weak in the United States. Election systems revenue increased $67,357 or 777.2 percent over the third quarter of 2007 of which the Brazilian election systems business, historically occurring every other year, accounted for more than 85 percent of the increase. There was $756 of lottery systems revenue in the third quarter of 2008 in comparison with none for the same period of 2007.

Gross Profit

The following table represents information regarding our gross profit for the three-month periods ended September 30, 2008 and 2007:

		Three Months Ended
		September 30,
		2008				2007				Change				% Change
Gross profit		$	233,641			$	177,059			$	56,582				32.0	%
Gross profit margin			26.2	%			23.9	%			2.3	%

Gross profit margin for the third quarter of 2008 increased by 2.3 percentage points compared to third quarter of 2007 due to higher gross profit margins in product and service. Product gross margin was 27.9 percent compared to 26.5 percent in the comparable

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2008
(Unaudited)
(In thousands, except per share amounts)

period of 2007. The increase in product gross margin was the result of gross profit associated with the Brazil voting business of $25,348 and a higher mix of revenue from China. This favorable impact was partially offset by higher restructuring charges, unfavorable security product revenue mix, and lower overall volume in the security business of $7,754. Additionally, the Company’s ongoing cost reduction efforts more than offset the year-over-year increase in commodity prices. Restructuring charges of $8,434 or 1.8 percent of net sales were included in product costs of sales for the third quarter of 2008, while restructuring charges of $838 were recorded in the third quarter of 2007. Restructuring charges in the third quarter of 2008 related primarily to severance costs from the previously announced ongoing reduction in the Company’s global workforce, which is on track to be completed by the end of 2008. Service gross margin was 24.4 percent compared to 21.4 percent in the third quarter of 2007. The increase in service margin was the result of productivity and efficiency gains achieved in part due to improved product quality, which resulted in improved service margins domestically and internationally. Service margins were adversely impacted by restructuring charges of $2,265 or 0.5 percent of net sales in the third quarter of 2008 compared to restructuring charges of $181 in the third quarter of 2007.

Operating Expenses

The following table represents information regarding our operating expenses for the three-month periods ended September 30, 2008 and 2007:

		Three Months Ended
		September 30,
		2008				2007				Change				% Change
Selling, general and administrative expense		$	147,774			$	117,532			$	30,242				25.7	%
Research, development and engineering expense			20,364				18,894				1,470				7.8	%
(Gain) loss on sale of assets, net			(28	)			14				(42	)			-300.0	%
Total operating expenses		$	168,110			$	136,440			$	31,670				23.2	%
Percent of net sales			18.9	%			18.4	%			0.5	%

Selling, general and administrative expense for the third quarter of 2008 as a percent of net sales was 16.6 percent compared to 15.9 percent for the same period in 2007. The increase in selling, general and administrative expense as a percent of sales between years resulted in part due to higher non-routine expenses and restructuring charges in the third quarter of 2008 as compared to the third quarter of 2007. Non-routine expenses of $24,665 or 2.8 percent of net sales impacted the third quarter of 2008 compared to $3,323 of non-routine expenses in the third quarter of 2007. The non-routine expenses were mainly from legal, audit and consultation fees related to the internal review of other accounting items, restatement of financial statements and the ongoing SEC and U.S. Department of Justice (DOJ) investigations and other advisory fees. Included in the non-routine expenses for the third quarter of 2008 was a $13,500 fee owed to financial advisor Goldman Sachs as a result of the withdrawal of the unsolicited takeover bid from United Technologies Corp. Additionally, restructuring charges of $2,111 or 0.2 percent of net sales were included in selling, general and administrative expense for the third quarter of 2008. The restructuring charges were primarily related to severance costs from the previously announced ongoing reduction in the Company’s global workforce, which is on track to be completed by the end of 2008. There were restructuring charges of $200 included in selling, general and administrative expense for the third quarter of 2007. Research, development, and engineering expense for 2008 was 2.3 percent of net sales as compared to 2.6 percent in 2007. Research, development and engineering expense increased on a dollar basis due to restructuring charges and was down slightly as a percent of net sales due to higher sales volume. Restructuring charges of $1,673 were included in research, development and engineering expense for the third quarter of 2008 as compared to no charges in the same period of 2007.

Operating Profit

The following table represents information regarding our operating profit for the three-month periods ended September 30, 2008 and 2007:

		Three Months Ended
		September 30,
		2008				2007				Change				% Change
Operating profit		$	65,531			$	40,619			$	24,912				61.3	%
Operating profit margin			7.4	%			5.5	%			1.9	%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2008
(Unaudited)
(In thousands, except per share amounts)

Operating profit margin for the third quarter of 2008 was 7.4 percent compared to 5.5 percent for the same period in 2007. The increase in operating profit margin between years was due to the Brazilian voting business, the Company’s ongoing cost reduction efforts, higher mix of revenue from China, and improved service gross profit, reduced by higher non-routine expenses and restructuring charges. Operating profit in the third quarter of 2008 included non-routine expenses of $24,665 or 2.8 percent of net sales compared to $3,323 or 0.4 percent of net sales of non-routine expenses for the comparable period in 2007. In addition, restructuring charges of $14,483 or 1.6 percent of net sales adversely affected the operating profit in the third quarter of 2008 compared to $1,219 or 0.2 percent of net sales for the comparable period in 2007.

Other Income (Expense) and Minority Interest

The following table represents information regarding our other income (expenses) and minority interest for the three-month periods ended September 30, 2008 and 2007:

		Three Months Ended
		September 30,
		2008				2007				Change				% Change
Investment income		$	6,575			$	6,221			$	354				5.7	%
Interest expense			(11,241	)			(10,045	)			(1,196	)			11.9	%
Miscellaneous, net			(1,564	)			(1,227	)			(337	)			27.5	%
Other income (expense)		$	(6,230	)		$	(5,051	)		$	(1,179	)			23.3	%
Percentage of Net Sales			-0.7	%			-0.7	%			0.0	%
Minority interest		$	(3,003	)		$	(1,172	)		$	(1,831	)			156.2	%

Interest expense for the third quarter of 2008 increased $1,196 or 11.9 percent from the comparable period in 2007. Higher interest expense was related to foreign exchange hedging activity. Minority interest was higher in the third quarter of 2008 by $1,831 due to higher profitability in China.

Net Income

The following table represents information regarding our net income for the three-month periods ended September 30, 2008 and 2007:

		Three Months Ended
		September 30,
		2008				2007				Change				% Change
Net income		$	46,516			$	28,149			$	18,367				65.2	%
Percent of net sales			5.2	%			3.8	%			1.4	%
Effective tax rate			17.4	%			18.2	%			-0.8	%

Net income for the third quarter of 2008 increased $18,367 or 65.2 percent compared to the third quarter of 2007. The increase was due to higher gross profits and a lower effective tax rate, partially offset by higher operating expense levels resulting from increased non-routine expenses and restructuring charges. The 2008 effective tax rate was positively affected by a $3,740 discrete benefit related to China technology tax credit.

Segment Analysis and Operating Profit Summary

Diebold North America (DNA) third quarter of 2008 net sales decreased slightly by $1,923 or 0.5 percent compared to the same period in 2007 as lower security solutions revenue was partially offset by higher financial self-service revenue. Third quarter of 2008 net sales for Diebold International (DI) increased $83,247 or 24.3 percent over the comparable period in 2007. The increase in DI net sales was attributable to strong revenue growth in Brazil from several large orders and Asia Pacific due to higher China volume. Election Systems (ES) & Other third quarter of 2008 net sales increased $68,113 compared to third quarter of 2007, of which Brazilian election systems revenue, historically occuring every other year, accounted for $58,581 of the increase.

DNA third quarter of 2008 operating profit decreased $11,931 or 37.5 percent compared to the third quarter of 2007. Operating profit in the third quarter of 2008 was negatively impacted by workforce optimization restructuring charges, higher non-routine expenses and unfavorable financial self-service and security solutions revenue mix. DI operating profit for the third quarter of 2008 increased $18,687 or 164.2 percent compared to the same period in 2007. The DI operating profit for the third quarter of 2008 was favorably affected by higher financial self-service revenue and profitability in Asia Pacific and Brazil, partially offset by higher restructuring charges and non-routine expenses. ES & Other third quarter of 2008 operating profit was $18,156 higher than the third quarter of 2007 due to increased volume in the Brazilian election systems business.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2008
(Unaudited)
(In thousands, except per share amounts)

Refer to Note 13 to the condensed consolidated financial statements for details of segment revenue and operating profit.

Nine Months ended September 30, 2008 Comparisons with Nine Months ended September 30, 2007

Net Sales

The following table represents information regarding our net sales for the nine-month periods ended September 30, 2008 and 2007:

		Nine Months Ended
		September 30,
		2008				2007				Change				% Change
Net sales		$	2,359,487			$	2,082,324			$	277,163				13.3	%

Net sales for the nine months ended September 30, 2008 were 13.3 percent higher than net sales for the comparable period in 2007. The increase in net sales included a net positive currency impact of $89,641. Financial self-service revenue for the nine months ended September 30, 2008 increased by $203,317 or 14.0 percent compared to the same period in 2007. The increase resulted from higher revenue in the Americas of $108,852 and strong revenue growth in Asia Pacific of $99,751. The increase in the Americas was due to strong revenue growth in Brazil from several large orders as well as positive growth in both Latin America and domestic revenues. The Asia Pacific increase resulted from higher volume in China of $77,825. The typical revenue seasonality in China was affected by the 2008 Summer Olympics, which resulted in purchases occurring earlier in 2008, rather than being concentrated in the fourth quarter. In addition, a large order expected to be recognized as revenue during the fourth quarter was instead recognized as revenue during the third quarter due to customer acceptance occurring sooner than planned. There was a partially offsetting decrease of $5,286 in EMEA. Security solutions revenue for the nine months ended September 30, 2008 decreased $8,855 or 1.5 percent versus the comparable period in 2007 due to lower revenue in all market segments. Election systems revenue increased by 200.7 percent compared to the nine months ended September 30, 2007. Brazilian election systems revenue, which historically occurs every other year, accounted for 78.1 percent of the increase. There was $4,047 of lottery systems revenue in the nine months ended September 30, 2008 in comparison with none for the same period of 2007.

Gross Profit

The following table represents information regarding our gross profit for the nine-month periods ended September 30, 2008 and 2007:

		Nine Months Ended
		September 30,
		2008				2007				Change				% Change
Gross profit		$	601,157			$	470,934			$	130,223				27.7	%
Gross profit margin			25.5	%			22.6	%			2.9	%

Gross profit margin for the nine months ended September 30, 2008 increased by 2.9 percentage points compared to the nine months ended September 30, 2007. Product gross margin was 27.8 percent compared to 25.1 percent in the comparable period of 2007. The increase in product gross margin was the result of gross profit associated with the Brazil voting business of $26,391, a higher mix of revenue from China, and lower restructuring charges. Additionally, the Company’s ongoing cost reduction efforts more than offset the year-over-year increase in commodity prices. Restructuring charges of $13,255 or 1.2 percent of net sales were included in product costs of sales for the first nine months of 2008 while restructuring charges of $25,094 or 2.6 percent of net sales were included for the same period in 2007. Restructuring charges in the third quarter of 2008 related primarily to severance costs from the previously announced ongoing reduction in the Company’s global workforce, which is on track to be completed by the end of 2008. Service gross margin was 23.4 percent compared to 20.4 percent in the first nine months of 2007. The increase in service gross margin was the result of productivity and efficiency gains achieved in part due to improved product quality, which resulted in improved service gross margins domestically and internationally. Service gross margins were adversely impacted by restructuring charges of $6,995 or 0.6 percent of net sales in the first nine months of 2008 compared to restructuring charges of $181 in the comparable period of 2007.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2008
(Unaudited)
(In thousands, except per share amounts)

Operating Expenses

The following table represents information regarding our operating expenses for the nine-month periods ended September 30, 2008 and 2007:

		Nine Months Ended
		September 30,
		2008				2007				Change				% Change
Selling, general and administrative expense		$	405,774			$	342,568			$	63,206				18.5	%
Research, development and engineering expense			58,275				53,115				5,160				9.7	%
Impairment of asset			4,376				—				4,376				100.0	%
(Gain) loss on sale of assets, net			(32	)			(6,407	)			6,375				-99.5	%
Total operating expenses		$	468,393			$	389,276			$	79,117				20.3	%
Percent of net sales			19.9	%			18.7	%			1.2	%

Selling, general and administrative expense for the nine months ended September 30, 2008 was 17.2 percent of net sales as compared to 16.5 percent of net sales for the first nine months of 2007. The increase in selling, general and administrative expense as a percent of sales between years resulted in part due to higher non-routine expenses and restructuring charges, increased sales volume and a weakening of the U.S. dollar. Selling, general and administrative expense was impacted by non-routine expenses of $41,839 or 1.8 percent of net sales for the nine months ended September 30, 2008 compared to $4,212 of non-routine expenses for the nine months ended September 30, 2007. The non-routine expenses consisted primarily of legal, audit and consultation fees related to the internal review of other accounting items, restatement of financial statements and the ongoing SEC and DOJ investigations and other advisory fees. Included in the non-routine expenses for the first nine months of 2008 was a $13,500 fee owed to financial advisor Goldman Sachs as a result of the withdrawal of the unsolicited takeover bid from United Technologies Corp. In addition, restructuring charges of $7,037 or 0.3 percent of net sales were included in the first nine months of 2008 compared to restructuring charges of $200 for the comparable period in 2007. Research, development and engineering expense for the first nine months of 2008 was 2.5 percent of net sales as compared to 2.6 percent in 2007. Research, development and engineering expense increased on the dollar basis due to restructuring charges and was down slightly as a percent of net sales due to higher sales volume. The Company incurred a charge of $4,376 for the impairment of asset in the first quarter of 2008 related to the write down of intangible assets from the 2004 acquisition of TFE Technology Holdings, a maintenance provider of network and hardware service solutions to federal and state government agencies and commercial firms. The gain on sale of assets in 2007 resulted from the gain on the sale of the Company’s manufacturing plant in Cassis, France of $6,438 associated with the Company’s restructuring initiatives, and was offset by other immaterial gains and losses.

Operating Profit

The following table represents information regarding our operating profit for the nine-month periods ended September 30, 2008 and 2007:

		Nine Months Ended
		September 30,
		2008				2007				Change				% Change
Operating profit		$	132,764			$	81,658			$	51,106				62.6	%
Operating profit margin			5.6	%			3.9	%			1.7	%

Operating profit margin for the nine months ended September 30, 2008 was 1.7 percent higher than the comparable period of 2007. The increase in operating profit margin between years resulted in part due to the Brazilian voting business, the Company’s ongoing cost reduction efforts, higher mix of revenue from China and improved service gross profit, partially offset by higher non-routine expenses and restructuring charges. Operating profit in the first nine months of 2008 included non-routine expenses of $41,839 or 1.8 percent of net sales compared to $4,212 of non-routine expenses for the comparable period in 2007. In addition, restructuring charges of $29,561 or 1.3 percent of net sales adversely affected the operating profit in the first nine months of 2008 compared to $19,037 or 0.9 percent of net sales for the comparable period in 2007.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of September 30, 2008
(Unaudited)
(In thousands, except per share amounts)

Other Income (Expense) and Minority Interest

The following table represents information regarding our other income (expense) and minority interest for the nine-month periods ended September 30, 2008 and 2007:

		Nine Months Ended
		September 30,
		2008				2007				Change				% Change
Investment income		$	19,541			$	16,875			$	2,666				15.8	%
Interest expense			(32,375	)			(29,329	)			(3,046	)			10.4	%
Miscellaneous, net			(644	)			6,850				(7,494	)			-109.4	%
Other income (expense)		$	(13,478	)		$	(5,604	)		$	(7,874	)			140.5	%
Percentage of Net Sales			-0.6	%			-0.3	%			-0.3	%
Minority interest		$	(6,800	)		$	(5,579	)		$	(1,221	)			21.9	%