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 June 30, 2006

OR

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ     Accelerated Filer o     Non-Accelerated Filer 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 – 65,636,628 shares as of August 3, 2006

 

 

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
INDEX

				Page No.
PART I. FINANCIAL INFORMATION
ITEM 1.		Financial Statements
		Condensed Consolidated Balance Sheets - June 30, 2006 (Unaudited) and December 31, 2005			3
		Condensed Consolidated Statements of Income (Unaudited) - Three Months and Six Months Ended June 30, 2006 and 2005			4
		Condensed Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2006 and 2005			5
		Notes to Condensed Consolidated Financial Statements (Unaudited)			6
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk			28
ITEM 4.		Controls and Procedures			28
PART II. OTHER INFORMATION
ITEM 1.		Legal Proceedings			29
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			30
ITEM 4.		Submission of Matters to a Vote of Security Holders			31
ITEM 6.		Exhibits			32
SIGNATURES					36
EXHIBIT INDEX					37
EX-31.1
EX-31.2
EX-32.1
EX-32.2

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

		(Unaudited)				December 31,
		June 30, 2006				2005
ASSETS
Current assets
Cash and cash equivalents		$	159,366			$	207,900
Short-term investments			53,397				52,885
Trade receivables, less allowances of $28,337 and $27,216, respectively			666,549				676,361
Inventories			406,213				341,614
Prepaid expenses			26,125				20,816
Other current assets			141,772				128,304
Total current assets			1,453,422				1,427,880
Securities and other investments			67,714				54,154
Property, plant and equipment, at cost			614,021				606,085
Less accumulated depreciation and amortization			336,443				329,119
			277,578				276,966
Goodwill			438,065				389,134
Other assets			216,796				205,059
		$	2,453,575			$	2,353,193
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable		$	34,359			$	34,472
Accounts payable			158,697				180,725
Deferred income			192,457				136,135
Other current liabilities			231,266				228,699
Total current liabilities			616,779				580,031
Notes payable – long-term			592,105				454,722
Other long-term liabilities			167,917				165,591
Shareholders’ equity
Preferred shares, no par value, authorized 1,000,000 shares, none issued			—				—
Common shares, par value $1.25, authorized 125,000,000 shares; issued 74,833,351 and 74,726,031 shares, respectively outstanding 65,632,286 and 68,721,847 shares, respectively			93,542				93,408
Additional capital			215,999				199,033
Retained earnings			1,141,181				1,140,468
Treasury shares, at cost (9,201,065 and 6,004,184 shares, respectively)			(388,222	)			(256,336	)
Accumulated other comprehensive income (loss)			14,274				(23,437	)
Other			—				(287	)
Total shareholders’ equity			1,076,774				1,152,849
		$	2,453,575			$	2,353,193

See accompanying notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Net Sales
Products		$	375,007			$	297,701			$	666,988			$	533,973
Services			351,389				321,249				683,099				620,127
			726,396				618,950				1,350,087				1,154,100
Cost of sales
Products			269,925				215,569				477,772				383,658
Services			282,045				246,041				553,016				474,234
			551,970				461,610				1,030,788				857,892
Gross Profit			174,426				157,340				319,299				296,208
Selling and administrative expense			119,488				89,936				221,732				171,944
Research, development and engineering expense			17,454				14,054				36,574				28,319
			136,942				103,990				258,306				200,263
Operating Profit			37,484				53,350				60,993				95,945
Other income (expense)
Investment income			4,767				2,612				8,887				5,327
Interest expense			(8,126	)			(3,782	)			(15,955	)			(6,534	)
Miscellaneous, net			(5,219	)			(4,894	)			(4,487	)			(5,153	)
Minority interest			(1,837	)			(1,507	)			(2,829	)			(2,463	)
Income from continuing operations before taxes			27,069				45,779				46,609				87,122
Taxes on income			(9,847	)			(14,629	)			(16,686	)			(28,120	)
Income from continuing operations			17,222				31,150				29,923				59,002
Income from discontinued operations, net of taxes			—				820				—				909
Net income		$	17,222			$	31,970			$	29,923			$	59,911
Basic weighted-average shares outstanding			67,035				71,031				67,780				71,344
Diluted weighted-average shares outstanding			67,439				71,511				67,992				71,874
Basic earnings per share:
Income from continuing operations		$	0.26			$	0.44			$	0.44			$	0.83
Income from discontinued operations			—				0.01				—				0.01
Net income		$	0.26			$	0.45			$	0.44			$	0.84
Diluted earnings per share:
Income from continuing operations		$	0.26			$	0.44			$	0.44			$	0.82
Income from discontinued operations			—				0.01				—				0.01
Net income		$	0.26			$	0.45			$	0.44			$	0.83
Cash dividends paid per common share		$	0.215			$	0.205			$	0.430			$	0.410

See accompanying notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months Ended
		June 30,
		2006				2005
Cash flow from operating activities:
Net income		$	29,923			$	59,911
Adjustments to reconcile net income to cash provided by operating activities:
Income from discontinued operations			—				(909	)
Minority share of income			2,829				2,463
Depreciation and amortization			45,443				39,699
Share-based compensation			7,750				(2,550	)
Deferred income taxes			(515	)			3,907
(Gain) loss on sale of assets, net			(898	)			378
Cash provided (used) by changes in certain assets and liabilities:
Trade receivables			16,530				21,596
Inventories			(56,036	)			(31,692	)
Prepaid expenses			(4,898	)			(10,000	)
Other current assets			(3,806	)			(17,927	)
Accounts payable			(24,640	)			(14,948	)
Certain other assets and liabilities			63,082				21,497
Net cash provided by operating activities			74,764				71,425
Cash flow from investing activities:
Payments for acquisitions, net of cash acquired			(32,396	)			(18,241	)
Proceeds from maturities of investments			32,883				22,835
Payments for purchases of investments			(30,554	)			(18,179	)
Proceeds from sale of fixed assets			6,442				—
Capital expenditures			(23,101	)			(29,824	)
Rotable spares expenditures			(6,823	)			(7,382	)
Increase in certain other assets			(33,368	)			(13,590	)
Net cash used by investing activities			(86,917	)			(64,381	)
Cash flow from financing activities:
Dividends paid			(29,210	)			(29,171	)
Notes payable borrowings			861,125				581,109
Notes payable repayments			(736,102	)			(544,313	)
Distribution of affiliate’s earnings to minority interest holder			(718	)			(629	)
Issuance of common shares			1,792				3,555
Repurchase of common shares			(132,063	)			(56,031	)
Net cash used by financing activities			(35,176	)			(45,480	)
Effect of exchange rate changes on cash			(1,205	)			(2,437	)
Decrease in cash and cash equivalents			(48,534	)			(40,873	)
Cash and cash equivalents at the beginning of the period			207,900				184,045
Cash and cash equivalents at the end of the period		$	159,366			$	143,172

See accompanying notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

FORM 10-Q

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements 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 United States generally accepted accounting principles; 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, 2005.

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 six-month period ended June 30, 2006 are not necessarily indicative of results to be expected for the full year.

The company has reclassified the presentation of the cash flow statement for the six months ended June 30, 2005 to conform to the current year presentation.

2. SHARE-BASED COMPENSATION

Stock options, restricted stock units (RSUs), restricted shares and performance shares have been issued to officers and other management employees under the company’s 1991 Equity and Performance Incentive Plan, as amended and restated (1991 Plan). The stock options generally vest over a four- or five-year period and have a maturity of ten years from the issuance date. Option exercise prices equal the fair market value of the common stock on the date of grant. RSUs provide for the issuance of a share of the company’s common stock at no cost to the holder and generally vest after three to seven years with no partial vesting. During the vesting period, employees are paid the cash equivalent of dividends on RSUs. Unvested RSUs are forfeited upon termination unless the Board of Directors determines otherwise. Restricted share grants are subject to forfeiture under certain conditions and have a three-year vesting period. Performance shares are granted based on certain management objectives, as determined by the Board of Directors each year. Each performance share earned entitles the holder to the then current value of one common share. The performance share objectives are generally calculated over a three-year period and no shares are granted unless certain threshold management objectives are met. To cover the exercise and/or vesting of its share-based payments, the company generally issues new shares from its authorized, unissued share pool. The number of common shares that may be issued pursuant to the 1991 Plan was 5,629, of which 1,233 shares were available for issuance at June 30, 2006.

Effective January 1, 2006, the company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), which requires the company to recognize costs resulting from all share-based payment transactions in the financial statements, including stock options, RSUs, restricted shares and performance shares, based on the fair market value of the award as of the grant date. SFAS No. 123R supersedes SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), and APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). The company has adopted SFAS No. 123R using the modified prospective application method of adoption, which requires the company to record compensation cost related to unvested stock awards as of December 31, 2005 by recognizing the unamortized grant date fair value of these awards over the remaining requisite periods of those awards with no change in historical reported earnings. Awards granted after December 31, 2005 are valued at fair value in accordance with provisions of SFAS No. 123R and recognized on a straight-line basis over the requisite periods of each award. The company estimated forfeiture rates for the six months ended June 30, 2006 based on its historical experience.

As a result of adopting SFAS No. 123R, the company’s net income was lower for the three and six months ended June 30, 2006 by $1,764 and $3,817 (net of $1,010 and $2,129 tax benefit), respectively, than if the company had continued to account for share-based compensation under APB No. 25. The impact on both basic and diluted earnings per share for the three and six months ended June 30, 2006 was $0.03 and $0.06, respectively, per share. The impact on cash flow from operating and financing activities for the six months ended June 30, 2006 was not material.

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

2. SHARE-BASED COMPENSATION (continued)

Prior to 2006, the company accounted for stock-based compensation in accordance with APB No. 25 using the intrinsic value method, which did not require that compensation cost be recognized for the company’s stock options provided the option exercise price was not below the common stock fair market value on the date of grant. Under APB No. 25, the company was required to record expense over the vesting period for the value of RSUs, restricted shares and performance shares granted. Prior to 2006, the company provided pro forma disclosure amounts in accordance with SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, as if the fair value method defined by SFAS No. 123 was applied to its share-based compensation. The company’s net income and net income per share for the three and six months ended June 30, 2005 would have been reduced if compensation cost related to stock options had been recorded in the financial statements based on fair value at the grant dates.

The estimated fair value of the options granted during 2006 and prior years was calculated using a Black-Scholes option pricing model. The following summarizes the assumptions used in the Black-Scholes model for the six months ended June 30:

		2006				2005
Expected life (in years)			3-6				4-6
Weighted average volatility			33	%			30	%
Risk-free interest rate			4.55 - 4.96	%			3.54 - 3.76	%
Expected dividend yield			1.58 - 1.63	%			1.41 - 1.52	%

The Black-Scholes model incorporates assumptions to value share-based awards. The risk-free rate of interest for periods within the contractual life of the option is based on a zero-coupon U.S. government instrument over the contractual term of the equity instrument. Expected volatility is based on historical volatility of the price of the company’s common stock. The company generally uses the midpoint of the life of the grant to estimate option exercise timing within the valuation model. This methodology is not materially different from the company’s historical data on exercise timing. Separate groups of employees that have similar historical exercise behavior with regard to option exercise timing and forfeiture rates are considered separately for valuation and attribution purposes.

Pro forma net income as if the fair value based method had been applied to all awards is as follows:

	Three Months Ended							Six Months Ended
	June 30,							June 30,
			2005							2005
Net income as reported			$	31,970						$	59,911
Add: Share-based compensation programs recorded as expense, net of tax				(2,013	)						(1,726	)
Deduct: Total share-based employee compensation expense determined under fair value based method for all awards, net of tax				645							(1,086	)
Pro forma net income			$	30,602						$	57,099
Earnings per share:
Basic – as reported			$	0.45						$	0.84
Basic – pro forma			$	0.43						$	0.80
Diluted – as reported			$	0.45						$	0.83
Diluted – pro forma			$	0.43						$	0.79

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

2. SHARE-BASED COMPENSATION (continued)

As of June 30, 2006, unrecognized compensation cost of $10,074 for stock options, $6,477 for RSUs, $146 for restricted shares and $7,342 for performance shares, is expected to be recognized over a weighted-average period of approximately 2.3, 3.4, 1.6 and 1.6 years, respectively.

Share-based compensation was recognized as a component of selling, general and administrative expenses. Performance share compensation recognized in the three and six months ended June 30, 2005 was offset by reductions in the performance share accrual because the company did not meet certain performance objectives. The following table summarizes the components of the company’s share-based compensation programs recorded as expense:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Stock Options:
Pre-tax compensation expense		$	1,733			$	—			$	3,880			$	—
Tax benefit			(638	)			—				(1,389	)			—
Stock option expense, net of tax		$	1,095			$	—			$	2,491			$	—
Restricted Stock Units (RSUs):
Pre-tax compensation expense		$	881			$	613			$	2,461			$	1,122
Tax benefit			(328	)			(196	)			(881	)			(362	)
Restricted stock unit expense, net of tax		$	553			$	417			$	1,580			$	760
Restricted Shares:
Pre-tax compensation expense		$	97			$	45			$	142			$	109
Tax benefit			(35	)			(14	)			(51	)			(35	)
Restricted share expense, net of tax		$	62			$	31			$	91			$	74
Performance Shares:
Pre-tax compensation expense		$	1,397			$	(3,634	)		$	1,267			$	(3,781	)
Tax (benefit) expense			(499	)			1,173				(454	)			1,221
Performance share expense, net of tax		$	898			$	(2,461	)		$	813			$	(2,560	)
Total Share-Based Compensation:
Pre-tax compensation expense		$	4,108			$	(2,976	)		$	7,750			$	(2,550	)
Tax (benefit) expense			(1,500	)			963				(2,775	)			824
Total share-based compensation, net of tax		$	2,608			$	(2,013	)		$	4,975			$	(1,726	)

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
(In thousands, except per share amounts)

2. SHARE-BASED COMPENSATION (continued)

Options outstanding and exercisable under the 1991 Plan as of June 30, 2006 and changes during the six months ended June 30, 2006 were as follows:

						Weighted-
						Average				Weighted Average				Aggregate
						Exercise				Remaining Contractual				Intrinsic
		Shares				Price				Term (in years)				Value (1)
Outstanding at January 1, 2006			3,112			$	40.20
Granted			269				39.94
Exercised			(98	)			32.23
Expired or forfeited			(100	)			49.73
Outstanding at June 30, 2006			3,183			$	40.13				6			$	12,458
Exercisable at June 30, 2006			2,213			$	38.76				5			$	10,867

 

The aggregate intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was $962 and $3,140, respectively. The weighted-average grant-date fair value of stock options granted during the six months ended June 30, 2006 and 2005 was $13.01 and $14.25, respectively. Total fair value of stock options vested for the six months ended June 30, 2006 and 2005 was $26,135 and $24,913, respectively. Exercise of options during the six months ended June 30, 2006 and 2005 resulted in cash receipts of $2,662 and $3,617, respectively. The tax benefit during the six months ended June 30, 2006 related to the exercise of employee stock options was not material.

The following tables summarize information on unvested restricted stock units and performance shares outstanding:

		Number of				Weighted-Average
Restricted Stock Units (RSUs):		Shares				Grant-Date Fair Value
Unvested at January 1, 2006			130			$	53.94
Exercised			(3	)			52.77
Forfeited			(8	)			53.38
Vested			—				—
Granted			190				39.43
Unvested at June 30, 2006			309			$	45.05

		Number of				Weighted-Average
Performance Shares:		Shares				Grant-Date Fair Value
Unvested at January 1, 2006			363			$	53.33
Exercised			(6	)			36.55
Forfeited			—				—
Vested			—				—
Granted			199				39.46
Unvested at June 30, 2006			556			$	48.55

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. The company had 5 unvested restricted shares as of June 30, 2006 with a weighted-average grant-date fair value of $55.20, and 10 unvested restricted shares as of December 31, 2005 with a weighted-average grant-date fair value of $54.10.

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

3. 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 data show the amounts used in computing earnings per share and the effect on the weighted-average number of shares of potentially dilutive common stock.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Numerator:
Income used in basic and diluted earnings per share:
Income from continuing operations		$	17,222			$	31,150			$	29,923			$	59,002
Income from discontinued operations			—				820				—				909
Net income			17,222				31,970				29,923				59,911
Denominator:
Basic weighted-average shares			67,035				71,031				67,780				71,344
Effect of dilutive share-based compensation			404				480				212				530
Diluted weighted-average shares			67,439				71,511				67,992				71,874
Basic earnings per share:
Income from continuing operations		$	0.26			$	0.44			$	0.44			$	0.83
Income from discontinued operations			—				0.01				—				0.01
Net income		$	0.26			$	0.45			$	0.44			$	0.84
Diluted earnings per share:
Income from continuing operations		$	0.26			$	0.44			$	0.44			$	0.82
Income from discontinued operations			—				0.01				—				0.01
Net income		$	0.26			$	0.45			$	0.44			$	0.83
Anti-dilutive shares not used in calculating diluted weighted-average shares			967				791				973				668

4. INVENTORIES

Domestic inventories are valued at the lower of cost or market applied on a first-in, first out (FIFO) basis, and international inventories are valued using the average cost method, which approximates FIFO. 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:

		June 30, 2006				December 31, 2005
Finished goods		$	132,703			$	90,484
Service parts			96,258				84,264
Work in process			132,050				126,247
Raw materials			45,202				40,619
Total inventory		$	406,213			$	341,614

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

5. OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) is reported separately from retained earnings and additional capital in the condensed consolidated balance sheets. Items considered to be other comprehensive income (loss) include adjustments made for foreign currency translation (under SFAS No. 52) and pensions (under SFAS No. 87). Components of other accumulated comprehensive income (loss) consist of the following:

		June 30,				December 31,
		2006				2005
Translation adjustment		$	18,876			$	(18,835	)
Pensions, less accumulated taxes of $(1,572) for 2006 and 2005			(4,602	)			(4,602	)
Total accumulated other comprehensive income (loss)		$	14,274			$	(23,437	)
Components of comprehensive income consist of the following for the six months ended June 30:
		2006				2005
Net income		$	29,923			$	59,911
Other comprehensive income:
Translation adjustment			37,711				(15,414	)
Comprehensive income		$	67,634			$	44,497

6. INCOME TAXES

The effective tax rate for the six months ended June 30, 2006 was 35.8 percent versus 32.3 percent in the same period in 2005. The increase in effective tax rate was the result of income mix both domestically and internationally (i.e., income was earned in jurisdictions with higher tax rates) and continued losses in certain European countries requiring valuation allowances.

7. BENEFIT PLANS

The company has several pension plans covering substantially all United States 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)

7. BENEFIT PLANS (continued)

		Pension Benefits								Other Benefits
		2006				2005				2006				2005
Components of Net Periodic Benefit Cost Three months ended June 30
Service cost		$	2,794			$	3,093			$	2			$	1
Interest cost			5,761				5,567				327				313
Expected return on plan assets			(7,749	)			(7,240	)			—				—
Amortization of prior service cost			191				280				(126	)			(153	)
Amortization of initial transition asset			—				(164	)			—				—
Recognized net actuarial loss			1,138				583				198				132
Special termination benefits			—				—				74				—
Curtailment gain			—				(41	)			—				—
Net periodic pension benefit cost		$	2,135			$	2,078			$	475			$	293

		Pension Benefits								Other Benefits
		2006				2005				2006				2005
Components of Net Periodic Benefit Cost Six months ended June 30
Service cost		$	5,587			$	6,187			$	4			$	2
Interest cost			11,521				11,133				640				626
Expected return on plan assets			(15,497	)			(14,478	)			—				—
Amortization of prior service cost			382				560				(280	)			(306	)
Amortization of initial transition asset			—				(329	)			—				—
Recognized net actuarial loss			2,276				1,165				396				264
Special termination benefits			—				—				74				—
Curtailment gain			—				(83	)			—				—
Net periodic pension benefit cost		$	4,269			$	4,155			$	834			$	586

Cash Flows

Previously, the company disclosed expected payments related to the 2006 plan year of $14,089 to its qualified and non-qualified pension plans and $2,921 to its other postretirement benefit plan. There have been no significant changes to the 2006 plan year expected payments previously disclosed. During the first half of 2006 and 2005, the company paid $7,361 and $765 related to the pension plans, respectively.

8. SEGMENT INFORMATION

The company’s segments are comprised of its three main sales channels: Diebold North America (DNA), Diebold International (DI) and Election Systems (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.

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

8. SEGMENT INFORMATION (continued)

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 Diebold Election Systems, 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 through intercompany sales that 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, income tax expense or benefit, and other non-current assets.

		DNA				DI				ES & Other				Total
Segment Information by Channel for the quarter ended June 30, 2006
Revenue from continuing operations		$	370,460			$	291,500			$	64,436			$	726,396
Operating profit			21,346				6,061				10,077				37,484
Capital and rotable expenditures			13,881				7,863				135				21,879
Depreciation			7,844				5,819				401				14,064
Segment Information by Channel for the quarter ended June 30, 2005
Revenue from continuing operations		$	346,192			$	250,347			$	22,411			$	618,950
Operating profit			42,216				9,745				1,389				53,350
Capital and rotable expenditures			13,139				4,006				27				17,172
Depreciation			9,481				3,527				179				13,187
Segment Information by Channel as of and for the six months ended June 30, 2006
Revenue from continuing operations		$	703,269			$	533,312			$	113,506			$	1,350,087
Operating profit			39,482				4,420				17,091				60,993
Capital and rotable expenditures			16,067				12,079				1,778				29,924
Depreciation			15,812				14,242				1,000				31,054
Property, plant and equipment, at cost			382,889				223,330				7,802				614,021
Segment Information by Channel as of and for the six months ended June 30, 2005
Revenue from continuing operations		$	682,686			$	443,148			$	28,266			$	1,154,100
Operating profit/(loss)			90,540				7,848				(2,443	)			95,945
Capital and rotable expenditures			24,234				12,529				443				37,206
Depreciation			17,417				8,429				527				26,373
Property, plant and equipment, at cost			433,715				192,444				4,103				630,262

Revenue Summary by Geographic Segment

		For the quarter ended								For the six months ended
		June 30,								June 30,
		2006				2005				2006				2005
The Americas:
Financial self-service solutions		$	307,766			$	288,859			$	574,379			$	574,924
Security solutions			168,597				150,356				326,846				284,810
Election systems			49,945				22,411				80,378				28,267
Lottery systems			14,491				—				33,128				—
Total Americas			540,799				461,626				1,014,731				888,001
Asia-Pacific:
Financial self-service solutions			58,177				57,539				103,523				98,918
Security solutions			12,063				8,371				20,769				14,708
Total Asia Pacific			70,240				65,910				124,292				113,626
EMEA:
Financial self-service solutions			108,566				87,292				200,162				148,351
Security solutions			6,791				4,122				10,902				4,122
Total EMEA			115,357				91,414				211,064				152,473
Total Revenue from Continuing Operations		$	726,396			$	618,950			$	1,350,087			$	1,154,100

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

8. SEGMENT INFORMATION (Continued)

Revenue Summary by Product and Service Solutions

		For the quarter ended June 30,								For the six months ended June 30,
		2006				2005				2006				2005
Financial self-service:
Products		$	245,741			$	212,690			$	425,498			$	386,037
Services			228,768				221,000				452,566				436,156
Total financial self-service			474,509				433,690				878,064				822,193
Security:
Products			75,195				66,807				144,121				126,858
Services			112,256				96,042				214,396				176,782
Total security			187,451				162,849				358,517				303,640
Total financial self-service & security			661,960				596,539				1,236,581				1,125,833
Election systems:
Products			39,780				18,204				64,441				21,078
Services			10,165				4,207				15,937				7,189
Total election systems			49,945				22,411				80,378				28,267
Lottery systems			14,491				—				33,128				—
Total revenue from continuing operations		$	726,396			$	618,950			$	1,350,087			$	1,154,100

9. 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 June 30, 2006 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. Any default, as defined in the agreements, would obligate the company for the full amount of the outstanding bonds through maturity. At June 30, 2006, 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 June 30, 2006, the maximum future payment obligations relative to these various guarantees totaled $40,946, of which $21,163 represented standby letters of credit to insurance providers, and no associated liability was recorded.

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:

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

9. GUARANTEES AND PRODUCT WARRANTIES (Continued)

		2006				2005
Balance at January 1		$	21,399			$	14,410
Current period accruals			10,735				8,551
Accrual adjustments to reflect actual experience			(750	)			—
Current period settlements			(10,376	)			(5,936	)
Balance at June 30		$	21,008			$	17,025

10. 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 results of operations of the company.

In June 2006, the company acquired Actcom, Incorporated (Actcom), a privately held company based in Virginia Beach, Virginia for $11,000. Actcom is a leader in identification and enterprise security. Actcom’s primary customers include federal government agencies, such as the Department of Defense, as well as state and municipal government agencies. At June 30, 2006, the company was in the process of estimating goodwill and other intangible assets acquired in the transaction. Actcom will be included as part of the company’s DNA segment.

In May 2006, the company acquired ERAS Joint Venture, LLP (ERAS), for $13,500. ERAS is a processing and imaging provider of outsourced serviced and installed systems. Estimated goodwill and other intangibles amounted to approximately $12,200 at June 30, 2006. ERAS will be included as part of the company’s DNA segment.

In February 2006, the company purchased the membership interests of Genpass Service Solutions, LLC (GSS) for approximately $10,000. GSS is an independent, third-party ATM maintenance and service provider for approximately 6,000 ATMs in 34 states and is being integrated within the company’s DNA service organization. Estimated goodwill and other intangibles amounted to approximately $6,561 at June 30, 2006.

In May 2005, the company announced the acquisition of TASC Security (Holdings) Limited (TASC Security). TASC Security is a global leader in electronic security solutions headquartered in London, England with subsidiaries in Amsterdam, Netherlands; Tokyo, Japan; San Francisco, California; Dublin, Ireland; Leeds, England; and Melbourne and Sydney, Australia; with a network of offices in Europe, the Middle East, Africa and Asia Pacific. TASC Security was purchased for approximately $26,300, including the payoff of certain debt arrangements, and has been integrated within the company’s Electronic Security and Currency Systems Group. Goodwill and other intangibles amounted to $8,855 and $9,124, respectively, at June 30, 2006.

11. PRIVATE PLACEMENT DEBT FINANCING

In March 2006, the company issued senior notes in an aggregate principal amount of $300,000 with a fixed interest rate of 5.50 percent. The maturity dates of the senior notes are staggered, with $75,000, $175,000 and $50,000 becoming due in 2013, 2016 and 2018, respectively. There are various covenants governing the senior notes, less restrictive than those that govern the company’s existing revolving credit facility. Additionally, the company entered into a derivative transaction to hedge interest rate risk on $200,000 of the senior notes, which was treated as a cash flow hedge. This reduced the effective interest rate by 14 basis points from 5.50 to 5.36 percent.

The company used $270,000 of the net proceeds from the senior notes to reduce the outstanding balance under its revolving credit facility, which has a variable interest rate. The remaining $30,000 was used to fund normal operations. Refer to management’s discussion and analysis related to “Liquidity and Capital Resources” for further information related to the company’s financing as of June 30, 2006.

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

12. RESTRUCTURING CHARGES

During the first quarter of 2005, the company initiated a restructuring plan for its manufacturing and service operations, primarily in Western Europe, to remove its excess capacity. In the second quarter of 2005, the company initiated a separate restructuring plan for the announced closing of its Danville, Virginia manufacturing operations. Total pre-tax costs to be incurred in the plans were anticipated to be approximately $27,000, of which $3,450 and $10,750 were expensed for the second quarter of 2005 and the six months ended June 30, 2005, respectively ($2,318 and $7,254 after tax, or $0.03 and $0.10 per diluted share), resulting in an accrual of approximately $1,700 as of June 30, 2005. The restructuring charges for the three and six months ended June 30, 2005 were incurred as follows: $2,497 and $9,277, respectively, against product cost of sales; $634 and $1,017, respectively, against service cost of sales and $319 and $456, respectively, against operating expenses. The restructuring charges for the quarter ended June 30, 2005 were $2,804 related to DNA and $646 related to DI.

During the first quarter of 2006, the company initiated an additional restructuring plan related to realignment of its global research and development efforts. Total pre-tax costs to be incurred related to research and development realignment were anticipated to be approximately $12,400. In addition to this plan, during the second quarter of 2006, the company incurred restructuring charges related to the termination of an Information Technology (IT) outsourcing agreement and product development rationalization.

For the quarter ended June 30, 2006, total restructuring charges were approximately $11,161 ($.10 per diluted share after tax), primarily related to the termination of the company’s IT outsourcing agreement, product development rationalization and continued realignment of global research and development efforts of $7,000, $1,000 and $938, respectively. The accrual balance as of June 30, 2006 was immaterial. Restructuring expenses were incurred as follows: $1,130 related to product cost of sales, $8,263 related to selling and administrative expense, $1,206 related to research and development, and the remaining to service cost of sales and other income (expense). These restructuring charges were incurred in the following segments: $6,299 related to DNA, $4,201 related to DI and $661 related to ES & Other. These charges were primarily related to contract termination fees.

For the six months ended June 30, 2006, total restructuring charges were approximately $14,921, primarily related to the termination of the company’s IT outsourcing agreement, realignment of global research and development efforts and product development rationalization of $7,000, $3,483 and $1,000, respectively. Restructuring expenses were incurred as follows: $1,823 related to product cost of sales, $8,814 related to selling and administrative, $3,751 related to research and development, and the remaining to service cost of sales and other income (expense). These restructuring charges were incurred in the following segments: $6,764 related to DNA, $7,496 related to DI and $661 related to ES & Other.

13. DISCONTINUED OPERATIONS

In July 2005, the company announced the sale of its campus card systems business for approximately $38,000. Because the assets related to the campus card systems business were considered held-for-sale as of June 30, 2005, the company has disclosed these operations as discontinued in the condensed consolidated statements of income for all periods presented herein in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Separate disclosure of the specific assets held-for-sale, both current and non-current, is not presented as the amounts are not material to the consolidated balance sheets. The following summarizes discontinued operations reclassified from continuing operations in the condensed consolidated statements of income:

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

13. DISCONTINUED OPERATIONS (continued)

		Three Months ended June 30								Six Months ended June 30
		2006				2005				2006				2005
Net sales		$	—			$	6,549			$	—			$	11,633
Cost of sales			—				3,864				—				7,365
Gross profit			—				2,685				—				4,268
Operating expenses			—				1,456				—				2,898
Operating profit			—				1,229				—				1,370
Income before taxes			—				1,229				—				1,370
Taxes			—				409				—				461
Net income		$	—			$	820			$	—			$	909
Earnings per share:
Basic		$	—			$	0.01			$	—			$	0.01
Diluted		$	—			$	0.01			$	—			$	0.01

14. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 clarifies the recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The company is currently evaluating the impact of FIN 48 on the company’s financial statements.

In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143, which is effective for fiscal years ending after December 15, 2005. FIN 47 clarifies that the term conditional asset retirement obligation, as used in SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Thus, the timing and/or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The adoption of this standard did not have a material impact on the company’s financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140. SFAS No. 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 resolves issues addressed in SFAS No. 133, Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. The company believes that the adoption of this standard will have no material impact on its financial statements.

Effective January 1, 2006, the company adopted SFAS No. 123R, which requires the company to recognize costs resulting from all share-based payment transactions in the financial statements. Refer to Note 2 for further discussion.

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

15. SUBSEQUENT EVENTS

In July 2006, the company acquired 100% of the capital stock of Firstline, Inc. (Firstline) for $13,500. Firstline, located in Gold River, California, is a first and second line ATM maintenance service provider operating throughout the west coast and also provides limited cash handling services.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

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

As of June 30, 2006
(Unaudited)
(Dollars in thousands, except per share amounts)

OVERVIEW

Over 145 years ago, the company entered into the business of making strong, reliable safes. Diebold, Incorporated has a long tradition of safeguarding assets and protecting investments. Today, the company is a global leader in providing integrated self-service delivery systems, security and services to customers within the financial, government and retail sectors. In 2003, the company introduced Opteva, a new ATM line within the financial self-service market that provides a higher level of security, convenience and reliability. Opteva is powered by Agilis, which is a software platform for financial self-service equipment developed by the company. The combination of Opteva and Agilis provides the ability for financial institutions to customize solutions to meet their consumers’ demands and positively affect equipment performance, while providing a safer ATM. The Agilis software platform gives customers the ability to run the same software across their entire network, which helps contain costs and improve financial self-service equipment availability. Security features were engineered into the design, including consumer awareness mirrors to discourage shoulder surfing and provide consumers with increased security during ATM transactions. Opteva also includes PIN-pad positioning that helps maintain consumer security, a recessed fascia design, card reader technology with a jitter mechanism, an optional ink-dye system and an envelope depository that is designed to resist trapping. The company’s software includes the industry’s most advanced ATM protection against viruses, worms and other cyber security threats. Diebold is at the forefront in protecting ATMs from threats even before patches are developed and made available. The company established its own Global Security Task Force to collect, analyze, clarify and disseminate news and information about ATM fraud and security. The group includes associates from various departments around the world. These associates work to reduce fraud and to improve security for the industry. In addition to these advances in the company’s product line, the company also continued to make strategic acquisitions, which increased its presence in the security market, and in 2005, the company was awarded a sales contract to produce lottery machines in Brazil.

The election systems business continues to be a challenge for the company. A number of individuals and groups have raised concerns about the reliability and security of the company’s election systems products and services. The individuals and groups making these challenges oppose the use of technology in the electoral process generally and, specifically, have filed lawsuits and taken other actions to publicize what they view as flaws in the company’s election management software and firmware. These efforts have adversely affected some of the company’s customer relations with its election systems customers. Despite all of these challenges, the company continues to participate in new jurisdiction decisions to purchase voting equipment. Election systems revenues in the second quarter 2006 and for the full-year 2005 continued to increase over prior years, representing a combination of the recapture of delayed sales from 2004, a U.S. presidential election year and growth from new sales due to demand generated by HAVA.

The markets the company serves are dynamic and continue to grow. Financial institutions continue to place increasing strategic importance on their retail networks. Demand is increasing for integrated security solutions. The company’s brand is trusted by its customers. The company has a growing global footprint with a broad customer base. Besides world-class products and services that offer a competitive advantage, one of the key features of the company is the commitment, energy and knowledge of its employees. As the company focuses on the future, its long-term strategic plan includes focusing on the customer to increase loyalty, improve product and service quality, strengthen the supply chain, enhance communications through teamwork and rebuild profitability. The company announced restructuring activities in 2005 and 2006 that are in line with the long-term strategic plan including European and U.S. manufacturing capacity optimization, realignment of global research and development efforts, and reorganization of its global information technology operation and rationalization of product development.

Also, the company has initiated its multi-year profit improvement plan that targets a $100,000 reduction in the company’s cost structure by 2008. These improvements are focused on a number of key areas including forecasting, order management, product staging, improved accounts receivable collections and other elements of supply chain management. The company anticipates achieving $35,000 of these savings in 2007 with the remaining $65,000 expected to be realized in 2008.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

As of June 30, 2006
(Unaudited)
(Dollars in thousands, except per share amounts)

OVERVIEW (continued)

On June 1, 2006, as part of the company’s effort to reorganize its global information technology (IT) and business transformation operation, the company reorganized its global IT operations, and assumed implementation and support responsibilities for its global enterprise resource planning (ERP) system as well as other IT- related functions. This decision ended the company’s previous IT outsourcing agreement with a third-party provider.

The company plans to continue to optimize its manufacturing capacity, including a restructuring of its production operations, in 2006. A major component of this initiative is to establish a new manufacturing operation for financial self-service terminals and related components in the Eastern European region. The company has identified Budapest, Hungary, as the planned location for this production facility. The company plans to have this new facility operating by the fourth quarter of 2006. Additionally, as a result of this planned restructuring, the company has engaged in the consultation process required in order to close its existing production facility located in Cassis, France. In addition to the second quarter 2006 restructuring charges of $.10 per share primarily related to the company’s reorganization of its global information technology operation and product development rationalization, the company is anticipating restructuring charges during the second half of 2006 of $.38 to $.43 per share as a result of the planned closure of the Cassis production facility. While management is fully engaged in completing this realignment as quickly as possible, the likelihood that it may not be completed until 2007 has increased.

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.

The business drivers of the company’s future performance include several factors that include, but are not limited to:

	•		timing of a self-service upgrade and/or replacement cycle in mature markets such as the United States;
	•		high levels of deployment growth for new self-service products in emerging markets such as Asia-Pacific;
	•		demand for new service offerings, including outsourcing or operating a network of ATMs;
	•		demand beyond expectations for security products and services for the financial, retail and government sectors;
	•		implementation and timeline for new election systems in the United States;
	•		the company’s strong financial position; and
	•		the company’s ability to successfully integrate acquisitions.

In addition to the business drivers above, the company, as a global operation, is exposed to risks described under the caption entitled “Forward-Looking Statement Disclosure.”

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of the company’s financial condition and results of operations are based upon the company’s condensed consolidated financial statements. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. The company bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Management believes there have been no significant changes during the quarter ended June 30, 2006 to the items that the company disclosed as its critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the company’s Annual Report on Form 10-K for the year ended December 31, 2005.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

As of June 30, 2006
(Unaudited)
(Dollars in thousands, except per share amounts)

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The company is currently evaluating the impact of FIN 48 on the financial statements.

In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143, which is effective for fiscal years ending after December 15, 2005. FIN 47 clarifies that the term conditional asset retirement obligation, as used in SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Thus, the timing and/or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The adoption of this standard did not have a material impact on the company’s financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140. SFAS No. 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 resolves issues addressed in SFAS No. 133, Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. The company believes that the adoption of this standard will have no material impact on its financial statements.

Effective January 1, 2006, the company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), which requires the company to recognize costs resulting from all share-based payment transactions in the financial statements. See Note 2 to the condensed consolidated financial statements for further discussion.

LIQUIDITY AND CAPITAL RESOURCES

Capital resources are obtained from income retained in the business, senior notes, committed and uncommitted credit facilities, long-term industrial revenue bonds, and operating and capital leasing arrangements. Management expects that cash provided from operations, available credit, long-term debt and the use of operating leases will be sufficient to finance planned working capital needs, investments in facilities or equipment, and the purchase of company common stock. Part of the company’s growth strategy is to pursue strategic acquisitions. The company has made acquisitions in the past and intends to make acquisitions in the future. The company intends to finance any future acquisitions with either cash provided from operations, borrowings under available credit facilities, proceeds from debt or equity offerings and/or the issuance of common shares.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

As of June 30, 2006
(Unaudited)
(Dollars in thousands, except per share amounts)

LIQUIDITY AND CAPITAL RESOURCES (continued)

During the six months ended June 30, 2006, the company generated $74,764 in cash from operating activities, an increase of $3,339 or 4.7 percent from the same period in 2005. Cash flows from operating activities are generated primarily from net income and controlling the components of working capital. Cash flows from operations during the six months ended June 30, 2006 were negatively affected by the $29,988 decrease in net income, a two-day increase in days sales outstanding (DSO) and increases in inventories, partially offset by the decrease in certain other assets and liabilities. The decrease in accounts receivable was $16,530, which was $5,066 less than the decrease of $21,596 in the six months ended June 30, 2005. This decrease was the result of DSO increasing to 76 days at June 30, 2006 compared to 74 days at June 30, 2005. The deterioration in DSO was primarily a result of slower collections in Asia Pacific partially offset by an improvement in North America. The increase in inventories in the six months ended June 30, 2006 was $56,036 and was $24,344 more than the $31,692 increase in inventories during the six months ended June 30, 2005. The increase in inventories was largely due to strong anticipated future orders as well as increases in inventory to accommodate Restriction of Hazardous Substances (RoHS) compliance in Europe. The change in certain other assets and liabilities positively affected cash flows from operations for six months ended June 30, 2006 by $63,082 as compared with $21,497 in the six months ended June 30, 2005. The change was primarily the result of timing of tax payments, a lower decrease in other current liabilities and a decrease in finance receivables in the six months ended June 30, 2006 compared to an increase in the six months ended June 30, 2005. These positive impacts were partially offset by a smaller increase in deferred income compared to the prior year period related to the service contract billings.

The company used $86,917 for investing activities in the six months ended June 30, 2006, an increase of $22,536 or 35.0 percent from the same period in 2005. The increase in the first six months of 2006 over the comparable period in 2005 was the result of the $32,396 used for 2006 acquisitions, primarily Actcom, Incorporated and ERAS Joint Venture, LLP, compared to $18,241 for the comparable period in 2005, and increases in certain other assets over the prior year period of $19,778. These increases were partially offset by a $7,282 decrease in capital and rotable expenditures.

Net cash used by financing activities was $35,176 in the six months ended June 30, 2006, a decrease of $10,304 or 22.7 percent over cash used for financing activities of $45,480 in the six months ended June 30, 2005. The decrease in 2006 compared to the same period in 2005 was offset by a $76,032 increase in stock repurchases.

In March 2006, the company secured fixed-rate long-term financing of $300,000 in senior notes in order to take advantage of attractive long-term interest rates. The maturity dates of the senior notes are staggered, with $75,000, $175,000 and $50,000 becoming due in 2013, 2016 and 2018, respectively. The company used $270,000 of the net proceeds from the offering to reduce the outstanding balance under its revolving credit facility. All other contractual cash obligations with initial and remaining terms in excess of one year and contingent liabilities remained generally unchanged at June 30, 2006 compared to December 31, 2005.

At June 30, 2006, the company had U.S. dollar denominated private placement debt outstanding of $300,000, U.S. dollar denominated outstanding bank credit lines approximating $197,523, euro denominated outstanding bank credit lines approximating 95,462 (translated at $122,105) and Indian rupee denominated outstanding bank credit lines approximating 315,000 (translated at $6,836). An additional $199,760 was available under committed credit line agreements, and $59,762 was available under uncommitted lines of credit.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

As of June 30, 2006
(Unaudited)
(Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS

Second Quarter 2006 Comparisons with Second Quarter 2005

Net Sales

Net sales for the second quarter of 2006 totaled $726,396 and were $107,446 or 17.4 percent higher than net sales for the second quarter of 2005. Security product and services revenue increased by $24,602 or 15.1 percent over second quarter 2005, due to increases in the retail, government and financial security markets as a result of strategic acquisitions, growth in the market and increased market share in DNA and DI. Financial self-service product and services revenue increased by $40,819 or 9.4 percent over the comparable period in 2005 with revenue from Europe, Middle East, and Africa (EMEA) increasing by 24.4 percent, revenue from the Americas increasing by 6.5 percent, and revenue from Asia Pacific increasing by 1.1 percent. Election systems product and services revenue of $49,945 increased by $27,534 or 122.9 percent over the second quarter of 2005 due to the resolution of some of the political debates over electronic voting that negatively impacted the overall election systems business in prior periods resulting in increased sales of election systems products. Revenue from lottery systems, which was a new market for the company during the third quarter 2005, was $14,491 in the second quarter of 2006. Revenue for the second quarter 2006 was positively impacted by approximately $10,500 or 1.7 percent related to the quarter-over-quarter strengthening of the Brazilian real.

Gross Profit

Gross profit for the second quarter of 2006 totaled $174,426 and was $17,086 or 10.9 percent higher than gross profit in the second of quarter 2005. Product gross margin was 28.0 percent compared to 27.6 percent in the comparable period of 2005. Restructuring charges of approximately $1,100 were included in product costs of sales for the second quarter of 2006 while restructuring charges of approximately $2,500 and other charges of approximately $2,800 were recorded in the second quarter of 2005. Restructuring charges in the second quarter of 2006 related primarily to product development rationalization and adversely affected product margins by 0.3 percentage points. Restructuring and other charges in the second quarter of 2005 related primarily to realignment actions taken in Western Europe and adversely affected product gross margin by 1.8 percentage points. The remaining decrease in product gross margin was attributable to a higher mix of revenue from the lower margin security and international financial self-service businesses, coupled with lower-than-expected production volume in Europe resulting in higher supply chain costs. This decrease in product gross margin was partially offset by cost improvements and pricing discipline. Service gross margin was 19.7 percent compared to 23.4 percent in the second quarter of 2005. Restructuring charges of approximately $400 were included in service costs of sales for the second quarter of 2006, while restructuring and other charges of approximately $600 were recorded in the second quarter of 2005. The year-over-year decline in service margin was a result of margin declines in EMEA, service acquisitions that currently operate below expected gross margin levels and increased service costs associated with investments in customer service engineers and associated resources to continue improving performance in targeted areas.

Operating Expenses

Total operating expenses were 18.9 percent of net sales, up from 16.8 percent in the second quarter of 2005. Restructuring charges of approximately $9,500, or 1.3 percent of net sales, were included in operating expenses for the second quarter of 2006 and were primarily related to the termination of the IT outsourcing agreement and product development rationalization. Only approximately $300 of restructuring charges were included in operating expenses for the second quarter of 2005. In addition, the increase in quarter-over-quarter operating expenses was attributable to a $7,084, or 1.1 percent of net sales, increase in share-based compensation expense primarily related to the impact of expensing stock options due to the adoption of SFAS No. 123R, as well as increases in information technology costs, intangible amortization expense related to acquisitions and higher legal expenses.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

As of June 30, 2006
(Unaudited)
(Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS (continued)

Other Income (Expense)

Other income and expense for the second quarter of 2006 totaled $10,415 of net expense and was $2,844 higher than the second quarter of 2005. This expense increase was due primarily to higher interest expense of $4,344 as a result of increases in both borrowing levels and interest rates during the second quarter of 2006 compared with second quarter of 2005. The adverse impact of increased interest expense was partially offset by an increase in investment income of $2,155 in the second quarter of 2006.

Income from Continuing Operations and Net Income

Income from continuing operations for the second quarter of 2006 was $17,222 and decreased $13,928 or 44.7 percent compared with the second quarter of 2005. Income from discontinued operations related to the campus card systems business in the second quarter of 2005 was $820. While total product gross margins were flat between quarters, the decline in income from continuing operations and net income was due primarily to lower service gross margins both domestically and internationally, and higher operating costs and interest expense, as well as a higher effective tax rate. The effective tax rate for the second quarter of 2006 was 36.4 percent versus 32.0 percent in the second quarter of 2005. The increase in effective tax rate was the result of income mix both domestically and internationally and continued losses in certain European countries requiring valuation allowances.

Segment Analysis

DNA second quarter 2006 net sales of $370,460 increased $24,268 or 7.0 percent over second quarter 2005 net sales of $346,192. The increase in DNA net sales was due to increased financial self-service product revenue related to incremental sales, especially to a Canadian-based customer. DI second quarter 2006 net sales of $291,500 increased by $41,153 or 16.4 percent compared with net sales in the comparable period in 2005 of $250,347. The increase in DI net sales was attributable to strong EMEA revenue growth of $23,943 as well as growth in Asia-Pacific and Latin America. ES & Other second quarter 2006 net sales of $64,436 increased by $42,025 or 187.5 percent compared to second quarter 2005 net sales of $22,411. This increase was due primarily to resolution of some of the political debates over electronic voting that negatively impacted the overall election systems business in prior periods, which resulted in increased sales of election systems products. Also, the increase in ES & Other net sales was due to the addition of lottery systems revenue of $14,491 in the second quarter 2006, a new market for the company in Brazil beginning with third quarter 2005.

DNA second quarter 2006 operating profit of $21,346 decreased $20,870 compared with second quarter 2005 operating profit of $42,216. This decrease was due primarily to a higher mix of revenue from the lower margin security business and unfavorable financial self-service sales mix. DI operating profit for the second quarter of 2006 was $6,061, a decrease of $3,684 or 37.8 percent compared with the second quarter of 2005. The unfavorable movement in DI operating profit was due primarily to lower-than-expected production volume which resulted in higher supply-chain costs and service margin declines in EMEA in the second quarter of 2006 compared to the second quarter of 2005. ES & Other second quarter of 2006 operating profit was $10,077 and improved by $8,688 or 625.5 percent compared to an operating profit of $1,389 in the second quarter of 2005. This improvement was a result of increased margin and sales volume in election systems as well as profits from the addition of lottery systems sales.

Refer to Note 8 to the condensed consolidated financial statements for details of segment revenue and operating profit.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

As of June 30, 2006
(Unaudited)
(Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS (continued)

Six Months Ended June 30, 2006 Comparisons with Six Months Ended June 30, 2005

Net Sales

Net sales for the six months ended June 30, 2006 totaled $1,350,087 and were $195,987 or 17.0 percent higher than net sales for the comparable period in 2005. Financial self-service product revenue for the six months ended June 30, 2006 increased by $39,461 or 10.2 percent over the comparable period in 2005, due primarily to gains in market share and market growth in EMEA and Latin America as well as the benefits from the positive foreign currency effects. Security product revenue increased by $17,263 or 13.6 percent for the six months ended June 30, 2006, due primarily to increases in the retail, government and financial security markets as a result of growth in the market, complemented by growth resulting from strategic acquisitions and increased market share. Total service revenue for financial self-service and security solutions increased $54,023 or 8.8 percent over the comparable period in 2005, as the company continued to expand its service customer base.

Election systems net sales of $64,441 increased by $43,363 or 205.7 percent compared to the six months ended June 30, 2005. In 2005, voting purchases were delayed by county and state governments within the United States as a result of ongoing political debates over electronic voting.

Gross Profit