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 June 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 o     No þ

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):

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 August 29, 2008

 

 

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q
INDEX

PART I — FINANCIAL INFORMATION			4
ITEM 1: FINANCIAL STATEMENTS			4
CONDENSED CONSOLIDATED BALANCE SHEETS — June 30, 2008 (Unaudited) and December 31, 2007			4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) — Three Months and Six Months Ended June 30, 2008 and 2007			5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) — Six Months Ended June 30, 2008 and 2007			6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)			7
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			18
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			30
ITEM 4: CONTROLS AND PROCEDURES			30
PART II — OTHER INFORMATION			36
ITEM 1: LEGAL PROCEEDINGS			36
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			38
ITEM 6: EXHIBITS			38
SIGNATURES			42
EXHIBIT INDEX			43
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

		June 30,				December 31,
		2008				2007
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	174,240			$	206,334
Short-term investments			146,364				104,976
Trade receivables, less allowances of $30,783 and $33,707, respectively			569,856				544,501
Inventories			599,915				533,619
Deferred income taxes			81,617				80,443
Prepaid expenses			49,432				46,347
Other current assets			149,189				114,312
Total Current Assets			1,770,613				1,630,532
Securities and other investments			69,314				75,227
Property, plant and equipment, at cost			596,100				575,796
Less accumulated depreciation and amortization			379,726				355,740
Property, plant and equipment, net			216,374				220,056
Goodwill			502,586				465,484
Other assets			236,118				239,827
Total assets		$	2,795,005			$	2,631,126
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Notes payable		$	35,615			$	14,807
Accounts payable			195,417				170,632
Deferred revenue			292,924				301,248
Other current liabilities			275,307				263,951
Total Current Liabilities			799,263				750,638
Notes payable — long term			645,827				609,264
Pensions and other benefits			37,180				36,708
Postretirement and other benefits			31,035				29,417
Deferred income taxes			43,193				39,393
Other long-term liabilities			33,108				37,115
Minority interest			17,500				13,757
Commitments and contingencies			—				—
Shareholders’ Equity
Preferred shares, no par value, authorized 1,000,000 shares, none issued			—				—
Common shares, 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			273,711				261,364
Retained earnings			1,040,592				1,036,824
Treasury shares, at cost (9,692,375 and 9,613,488 shares, respectively)			(408,373	)			(406,182	)
Accumulated other comprehensive income			187,228				128,354
Total shareholders’ equity			1,187,899				1,114,834
Total liabilities and shareholders’ equity		$	2,795,005			$	2,631,126

See accompanying Notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Net sales
Products		$	355,138			$	324,242			$	663,617			$	618,657
Services			417,078				370,943				805,580				722,814
			772,216				695,185				1,469,197				1,341,471
Cost of sales
Products			260,400				235,210				479,955				468,488
Services			318,359				295,977				621,726				579,108
			578,759				531,187				1,101,681				1,047,596
Gross profit			193,457				163,998				367,516				293,875
Selling, general, and administrative expense			129,703				118,062				258,000				225,036
Research, development and engineering expense			18,156				17,832				37,911				34,221
Impairment of assets			—				—				4,376				—
Gain on sale of assets, net			(5	)			(6,438	)			(4	)			(6,421	)
			147,854				129,456				300,283				252,836
Operating profit			45,603				34,542				67,233				41,039
Other income (expense)
Investment income			6,437				5,046				12,966				10,654
Interest (expense)			(10,367	)			(9,899	)			(21,134	)			(19,284	)
Miscellaneous, net			(2,885	)			3,804				920				8,077
Minority interest			(1,611	)			(3,750	)			(3,797	)			(4,407	)
Income before taxes			37,177				29,743				56,188				36,079
Taxes on income			9,963				9,925				15,179				14,627
Net income		$	27,214			$	19,818			$	41,009			$	21,452
Weighted-average shares outstanding:
Basic			66,101				65,793				66,059				65,733
Diluted			66,765				66,829				66,364				66,613
Earnings per common share:
Basic		$	0.41			$	0.30			$	0.62			$	0.33
Diluted		$	0.41			$	0.30			$	0.62			$	0.32

See accompanying Notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Six Months Ended
		June 30,
		2008				2007
		(Unaudited)				(Unaudited)
Cash flow from operating activities:
Net income		$	41,009			$	21,452
Adjustments to reconcile net income to cash provided by operating activities:
Minority share of income			3,797				4,407
Depreciation and amortization			29,374				33,059
Share-based compensation			6,021				7,117
Excess tax benefits from share-based compensation			—				(152	)
Deferred income taxes			(1,397	)			9,641
Impairment of assets			4,376				—
Loss on sale of assets, net			(4	)			(6,421	)
Cash provided (used) by changes in certain assets and liabilities:
Trade receivables			(15,905	)			96,612
Inventories			(44,082	)			(36,119	)
Prepaid expenses			(2,981	)			(6,066	)
Other current assets			(17,371	)			(6,921	)
Accounts payable			18,425				4,118
Deferred revenue			(13,090	)			1,996
Certain other assets and liabilities			(2,623	)			(60,443	)
Net cash provided by operating activities			5,549				62,280
Cash flow from investing activities:
Payments for acquisitions, net of cash acquired			(3,733	)			(9,090	)
Proceeds from maturities of investments			135,610				30,936
Payments for purchases of investments			(163,679	)			(18,939	)
Proceeds from sale of fixed assets			29				7,617
Capital expenditures			(19,778	)			(24,027	)
Increase in certain other assets			(11,179	)			(14,428	)
Net cash used by investing activities			(62,730	)			(27,931	)
Cash flow from financing activities:
Dividends paid			(33,272	)			(31,181	)
Notes payable borrowings			373,340				382,093
Notes payable repayments			(322,806	)			(502,964	)
Distribution of affiliates’ earnings to minority interest holder			—				(15,440	)
Excess tax benefits from share-based compensation			—				152
Issuance of common shares			—				6,083
Net cash provided (used) by financing activities			17,262				(161,257	)
Effect of exchange rate changes on cash			7,825				6,743
Decrease in cash and cash equivalents			(32,094	)			(120,165	)
Cash and cash equivalents at the beginning of the period			206,334				253,968
Cash and cash equivalents at the end of the period		$	174,240			$	133,803

See accompanying Notes to condensed consolidated financial statements.

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

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 and 2006. In the opinion of management, the accompanying condensed consolidated financial statements reflect all restatement adjustments of a normal recurring nature considered necessary to fairly state the financial position of the Company at June 30, 2008 and December 31, 2007, the results of its operations for the three- and six-month periods ended June 30, 2008 and June 30, 2007 and its cash flows for the six-month periods ended June 30, 2008 and June 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 six-month period ended June 30, 2008 are not necessarily indicative of results to be expected for the full year.

On January 1, 2008, the Company adopted the provision of SFAS 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 this SFAS 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.

NOTE 2: SHARE-BASED COMPENSATION

The Company’s share-based compensation policy is consistent with the requirements of Statement of Financial Accounting Standards (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 six months ended June 30, 2008 was $3,018 and $6,021, respectively. Total share-based compensation expense for the three and six months ended June 30, 2007 was $3,601 and $7,117, respectively.

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

										Weighted Average
						Weighted-Average				Remaining				Aggregate Intrinsic
		Number of Shares				Exercise Price				Contractual Term				Value (1)
		(in thousands)				(per share)				(in years)				(in thousands)
Outstanding at January 1, 2008			2,884			$	41.56
Granted			335				25.53
Exercised			—				—
Expired or forfeited			(231	)			45.13
Outstanding at June 30, 2008			2,988			$	39.48				6			$	6,090
Exercisable at June 30, 2008			2,210			$	40.65				5			$	2,738

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

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

						Weighted-Average
Restricted Stock Units (RSUs):		Number of Shares				Grant-Date Fair Value
Unvested at January 1, 2008			325			$	45.14
Exercised			—				—
Forfeited			(14	)			42.33
Vested			(46	)			55.20
Granted			134				28.13
Unvested at June 30, 2008			399			$	38.36

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

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 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 shares.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Numerator:
Net income		$	27,214			$	19,818			$	41,009			$	21,452
Denominator:
Basic weighted-average shares			66,101				65,793				66,059				65,733
Effect of dilutive shares			664				1,036				305				880
Diluted weighted-average shares			66,765				66,829				66,364				66,613
Earnings per common share:
Basic		$	0.41			$	0.30			$	0.62			$	0.33
Diluted		$	0.41			$	0.30			$	0.62			$	0.32
Anti-dilutive shares not used in calculating diluted weighted-average shares			1,329				657				2,452				735

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

NOTE 4: INVENTORIES

The Company primarily values inventories at the lower of cost or market applied on a first-in, first-out (FIFO) basis, with the notable exceptions of Brazil and Premier Election Solutions, Inc. that value inventory 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, 2008				December 31, 2007
Finished goods		$	312,350			$	252,729
Service parts			159,507				152,039
Work in process			58,597				64,414
Raw Materials			69,461				64,437
Total inventory		$	599,915			$	533,619

NOTE 5: OTHER COMPREHENSIVE INCOME

Items considered to be other comprehensive income (loss) 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 (loss) consist of the following:

		Six Months Ended
		June 30,
		2008				2007
Net income		$	41,009			$	21,452
Other comprehensive income:
Translation adjustment			59,160				44,210
Realized and unrealized (loss)/gain on hedges			(660	)			734
Pension adjustment			374				2,370
Comprehensive income		$	99,883			$	68,766

Accumulated other comprehensive income (loss) is reported separately from retained earnings and additional capital in the condensed consolidated balance sheets. Components of accumulated other comprehensive income (loss) consisted of the following for the six months ended June 30, 2008 and the year ended December 31, 2007:

		June 30, 2008				December 31, 2007
Translation adjustment		$	197,168			$	138,008
Realized and unrealized gain on hedges			1,373				2,033
Pension adjustment			(11,313	)			(11,687	)
Total accumulated other comprehensive income		$	187,228			$	128,354

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

NOTE 6: INCOME TAXES

The effective tax rate for the six months ended June 30, 2008 was 27.0 percent versus 40.5 percent in the same period in 2007. The decrease in effective tax rate was the result of income mix both domestically and internationally. During the second quarter the Company had an immaterial change to its reserve for unrecognized tax benefits.

NOTE 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.

		Three Months Ended
		June 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			(8,937	)			(8,252	)			—				—
Amortization of prior service cost			95				154				(129	)			(129	)
Recognized net actuarial loss			52				980				28				183
Net periodic pension benefit cost		$	682			$	2,150			$	205			$	396

		Six Months Ended
		June 30,
		2008				2007				2008				2007
		Pension Benefits								Other Benefits
Components of Net Periodic Benefit Cost
Service cost		$	4,920			$	5,731			$	1			$	3
Interest cost			14,023				12,806				610				679
Expected return on plan assets			(17,874	)			(16,504	)			—				—
Amortization of prior service cost			190				308				(258	)			(258	)
Recognized net actuarial loss			307				1,954				135				366
Net periodic pension benefit cost		$	1,566			$	4,295			$	488			$	790

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. There have been no significant changes to the 2008 plan year expected payments previously disclosed. During the first half of 2008 and 2007, the Company paid $1,407 and $7,338 related to the qualified and unqualified pension plans, respectively.

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

NOTE 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.

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.

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

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

		DNA				DI				ES & Other				Total
For the quarter ended June 30, 2008
Customer revenues		$	390,048			$	355,039			$	27,129			$	772,216
Operating profit			33,679				10,015				1,909				45,603
Capital expenditures			5,081				6,442				28				11,551
Depreciation			4,713				5,534				834				11,081
For the quarter ended June 30, 2007
Customer revenues		$	369,830			$	304,062			$	21,293			$	695,185
Operating profit (loss)			26,715				9,562				(1,735	)			34,542
Capital expenditures			7,558				3,911				595				12,064
Depreciation			4,561				5,938				225				10,724
For the six months ended June 30, 2008
Customer revenues		$	747,614			$	676,469			$	45,114			$	1,469,197
Operating profit (loss)			47,132				20,276				(175	)			67,233
Capital expenditures			7,483				12,134				161				19,778
Depreciation			9,400				9,846				1,687				20,933
Property, plant and equipment, at cost			419,088				164,149				12,863				596,100
Total Assets			656,821				2,025,266				112,918				2,795,005
For the six months ended June 30, 2007
Customer revenues		$	726,095			$	584,850			$	30,526			$	1,341,471
Operating profit (loss)			49,544				(9,477	)			972				41,039
Capital expenditures			12,653				10,544				830				24,027
Depreciation			12,604				10,036				398				23,038
Property, plant and equipment, at cost			406,981				130,973				6,182				544,136
Total Assets			694,768				1,689,651				144,945				2,529,364

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
The Americas		$	554,175			$	507,430			$	1,049,524			$	978,214
Asia Pacific			85,281				72,781				193,481				140,566
Europe, Middle East, and Africa			132,760				114,974				226,192				222,691
Revenue from customers		$	772,216			$	695,185			$	1,469,197			$	1,341,471

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

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Financial self-service:
Products		$	259,193			$	229,292			$	488,318			$	450,317
Services			290,191				248,408				554,544				484,133
Total financial self-service			549,384				477,700				1,042,862				934,450
Security:
Products			78,772				80,962				149,135				151,648
Services			116,931				115,230				232,086				224,847
Total security			195,703				196,192				381,221				376,495
Total financial self-service & security			745,087				673,892				1,424,083				1,310,945
Election systems:
Products			17,173				13,990				22,873				16,694
Services			9,956				7,303				18,950				13,832
Total election systems			27,129				21,293				41,823				30,526
Lottery systems			—				—				3,291				—
Revenue from customers		$	772,216			$	695,185			$	1,469,197			$	1,341,471

NOTE 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, 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 June 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 June 30, 2008, the maximum future payment obligations relative to these various guarantees totaled $66,544, of which $22,628 represented standby letters of credit to insurance providers. There was no associated liability recorded for any guarantees. At June 30, 2007, the maximum future payment obligations relative to these various guarantees totaled $56,165, of which $22,663 represented standby letters of credit to insurance providers. There was no associated liability recorded for any guarantees as of June 30, 2008, 2007.

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 as of June 30, 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands, except per share amounts)

		2008
Warranty Liability
Balance at January 1		$	26,494
Current period accruals			20,099
Current period settlements			(16,521	)
Balance at June 30		$	30,072

NOTE 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 statements of operations of the Company. The Company elected not to disclose proforma information as the amounts are immaterial.

In February 2008, the Company formed a partnership, D&G Centroamerica, S. de R.L. (D&G), based in the Republic of Panama for approximately $6,566. 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. Total goodwill and other intangibles resulting from the acquisition amounted to approximately $6,566 as of June 30, 2008. D&G is included as part of the Company’s 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 $7,332 as of June 30, 2008. Brixlogic is included as part of the Company’s DNA segment.

NOTE 11: 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 12: RESTRUCTURING CHARGES

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 identified one hundred twenty-five Cassis employees to be terminated. Actual termination dates varied based upon each individual employee’s circumstances. For the quarter ended June 30, 2007, the Company incurred $2,890 in expense through product cost of sales, offset by a $6,438 gain from the sale of the Cassis, France production facility included in gain (loss) on sale of assets, net. Total restructuring charges incurred to date under the DCM plan are $17,818. As of June 30, 2007, the restructuring accrual balance was $7,991. As of June 30, 2007, the Company anticipated total remaining costs related to the closure of this facility to be approximately $6,134.

As of June 30, 2008, the Company anticipates total remaining costs related to the closure of this facility to be approximately $487. For the quarter ended June 30, 2008 the Company incurred $632 product cost of sales in DI; $492 of severance costs and $140 of other costs. For the six months ended June 30, 2008, the Company incurred $632 product cost of sales in DI and $886 product cost of sales in DNA; $492 of employee severance costs and $1,026 of other costs.

As of June 30, 2008, the restructuring accrual related to the DCM plan is presented in the following table:

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

		Balance				Liabilities				Liabilities								Balance
		January 1, 2008				Incurred				Paid/Settled				Adjustments (2)				June 30, 2008
Employee severance costs		$	2,515			$	492			$	(3,087	)		$	80			$	—
Other (1)			2,902				1,026				(4,106	)			178				—
Total costs		$	5,417			$	1,518			$	(7,193	)		$	258			$	—

During the third quarter of 2007, DI announced 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 operations in Germany in light of further declines in sales opportunities resulting from a fully mature market. Total Germany plan restructuring expenses incurred for the six-months ended June 30, 2008 were $5,937. During the quarter, the Company identified fifty employees to terminate. As of June 30, 2008, the Company anticipates total remaining costs to be incurred of approximately $945. The Company expects the Germany restructuring plan, including all terminations, to be substantially complete by the end of fiscal year 2008. As of June 30, 2008, the remaining Germany plan accrual balance was not material to the Company.

For the quarter ended June 30, 2008, total Diebold North America restructuring charges incurred by the Company were $466 through product cost of sales. Restructuring charges incurred in its Diebold International segment included $1,326 through product cost of sales, $3,424 through service cost of sales, and $1,188 in operating expense.

During the fourth quarter, the Company announced a plan to reduce its global workforce (RIF plan) in an effort to optimize overall operational performance. As of June 30, 2008, the Company anticipates total costs to be incurred of approximately $29,583. For the quarter ended June 30, 2008, total DNA RIF plan restructuring charges incurred were $599 through product cost of sales, $50 through service cost of sales, and $1,155 through operating expense. Total DI RIF plan restructuring charges incurred were $62 through product cost of sales, $185 through service cost of sales, and $1,085 through operating expense. Total ES & Other RIF plan restructuring charges incurred were $46 through product cost of sales and $592 through operating expense. Total Company RIF plan restructuring expenses incurred to date were $6,569. During the quarter, the Company notified seventy-two employees of termination. The Company expects the RIF restructuring plan, including all terminations, to be substantially complete by the end of fiscal year 2008. As of June 30, 2008, the remaining RIF accrual balance was not material to the Company.

NOTE 13: FAIR VALE 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 Financial Accounting Standards Board (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.

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

	•		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:

						Fair Value Measurements at
						Reporting Date Using
						Quoted Prices in				Significant
						Active Markets				Other
						for Identical				Observable
		Fair Value as of				Assets				Inputs
		June 30, 2008				(Level 1)				(Level 2)
Assets
Short-term investments		$	146,364			$	146,364			$	—
Deferred Compensation			11,338				11,338				—
Total		$	157,702			$	157,702			$	—
Liabilities
Interest Rate Swaps		$	1,352			$	—			$	1,352
Foreign Exchange Forward Contracts			2,745				—				2,745
Total		$	4,097			$	—			$	4,097

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 LIBOR benchmark interest rate on a portion of the Company’s LIBOR-

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

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 14: SUBSEQUENT EVENTS

The Company has previously announced that it had identified a series of actions that it planned to initiate during 2008 in order to realign its global manufacturing footprint, including a transition from a four-plant global Opteva production footprint down to two plants. While the Company is still finalizing its plans in connection with this manufacturing realignment, on August 11, 2008, the Company notified its employees and the union representing the bargaining unit at its Newark, Ohio-area manufacturing facility that it intends to close this operation and move all of its production to the Company’s plant in Lexington, North Carolina. As a result of this planned closure, the Company is anticipating total restructuring charges of approximately $12,000, consisting of approximately $11,000 in cash charges and approximately $1,000 in non-cash charges. The cash charges consist primarily of employee separation charges, including pension obligations, while the non-cash charges consist primarily of charges to reduce select property, plant and equipment to their net realizable value. The Company also expects a small gain of approximately $1,000 to $2,000 in connection with the potential subsequent sale of the facility that will partially offset the restructuring charges. The Company anticipates the product relocation and employee reductions to begin in October 2008, and that the Newark-area facility will be closed no later than the end of the first quarter of 2009. The job eliminations associated with this planned closing will be included in the global workforce reduction target that was announced on February 6, 2008.

As previously disclosed, five shareholder lawsuits were filed against the Company and certain current and former officers and directors in 2005 and 2006, alleging violations of the federal securities laws. The complaints sought unspecified compensatory damages, attorney’s fees and extraordinary equitable and/or injunctive relief. The cases were consolidated into a single proceeding in the Northern District of Ohio, captioned In re Diebold, Inc. Securities Litigation. On August 22, 2008, the court granted the Company’s motion to dismiss the consolidated cases, and entered a judgment in favor of the Company and the other defendants, dismissing the complaint with prejudice; however, the plaintiffs have filed a notice of appeal. A separate class action against the Company and certain current and former officers and directors filed by participants in the Company’s 401(k) plan, alleging breaches of duties under the Employee Retirement Income Security Act of 1974, remains outstanding.

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

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

BACKGROUND OF THE RESTATEMENT

In the first quarter of 2006, the Division of Enforcement of the Securities and Exchange Commission (SEC) initiated an informal inquiry into certain of the Company’s accounting and financial reporting matters and requested the Company provide certain documents and information, specifically related to its practice of recognizing certain revenue on a bill and hold basis. In the third quarter of 2006, the Company was informed that the SEC’s previous informal inquiry related to revenue recognition had been converted to a formal, non-public investigation.

On July 25, 2007, the Company announced that it would delay the release of its earnings results for the quarter ended June 30, 2007, as well as the filing of its quarterly report on Form 10-Q for that quarter, while the Company sought guidance from the Office of the Chief Accountant of the SEC (OCA) as to the Company’s revenue recognition policy. The guidance sought related to the Company’s long-standing practice of recognizing certain revenue on a bill and hold basis within its North America business segment.

On October 2, 2007, the Company announced it was discontinuing its use of bill and hold as a method of revenue recognition in both its North America business segment and its International businesses.

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. The review was conducted primarily by outside counsel of the Company and was done in consultation and participation with the Company’s internal audit staff and management, as well as outside advisors including forensic accountants and independent legal counsel to the Audit Committee.

During the course of the review, certain questions were raised as to certain prior accounting and financial reporting items in addition to bill and hold revenue recognition, including whether the prepaid expenses, accrued liabilities, capitalized assets, deferred revenue, and reserves had been recorded accurately and timely. Accordingly, the Company informed the SEC that the scope of the review was expanded beyond the initial revenue recognition issues to include these additional items. This review has been completed as of the date of the filing of this quarterly report on Form 10-Q.

On January 15, 2008, the Company announced that it had concluded its discussion with the OCA 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 U.S. generally accepted accounting principles (GAAP). In addition, the Company disclosed that revenue previously recognized on a bill and hold basis would be recognized upon customer acceptance of products at a customer location. Management of the Company determined that this 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 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 has restated its previously issued financial statements for those periods. Restated financial information is presented in Diebold’s annual report on Form 10-K for the year ended December 31, 2007.

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 second quarter of 2008, Diebold announced it remains on track to meet its three-year, $100,000 cost-reduction target under its Smart Business 100 program by the end of 2008. As previously announced, Diebold is now executing 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. Smart Business 200 actions include additional strategic global manufacturing realignment; further consolidation of the

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

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 to reduce its four-plant global Opteva production footprint down to two locations. While the Company is still finalizing its plans, it has given notice to approximately one hundred associates at its 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 Most of Lexington’s Opteva ATM production lines will be moved to existing plants in China and Hungary.

Diebold has also progressed in its work with Menlo Worldwide Logistics to rationalize and optimize its warehouse network in the United States. Diebold will reduce its U.S. warehouse infrastructure from 89 facilities to three strategically located regional distribution and final customization facilities. This effort is to be completed by the end of the third quarter of 2008. The goal is to reduce customer lead times while simultaneously reducing required inventory levels.

Additionally, the Company has just completed an Opteva product rationalization program in North America, reducing its ATM product configuration complexity by more than 90 percent. Although the number of unique product configurations will be greatly reduced, the Company will retain current features and functions in more standardized packages. This is a major step toward the Company’s goal to transition from a “build-to-order” manufacturing model to a “just-in-time” pull system with a global capability for post-production customization.

Also during the second quarter of 2008, Diebold announced it was chosen as the exclusive ATM provider to the Bank of China for the 2008 Summer Olympic Games in Beijing, China. Bank of China planned to install Diebold Opteva ATMs in key competition venues and facilities in the Olympic and Media villages. The ATMs will provide operation prompts in three languages: Chinese, English and French.

In Brazil, Diebold is also a leader in sales, as the Company has partnered with Caixa Economica Federal in one of the largest ATM sales agreements in history. To better serve its widespread customer base in Brazil, Caixa will integrate more than nine thousand six hundred Diebold full-function ATMs into its existing fleet at its branches across the nation.

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.

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.

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

RESULTS OF OPERATIONS

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

		Three Months Ended																Six Months Ended
		June 30,																June 30,
		2008								2007								2008								2007
						% of								% of								% of								% of
		Dollars				Net Sales				Dollars				Net Sales				Dollars				Revenue				Dollars				Net Sales
Net sales		$	772,216				100.0	%		$	695,185				100.0	%		$	1,469,197				100.0	%		$	1,341,471				100.0	%
Gross profit			193,457				25.1	%			163,998				23.6	%			367,516				25.0	%			293,875				21.9	%
Operating expenses			147,854				19.1	%			129,456				18.6	%			300,283				20.4	%			252,836				18.8	%
Operating profit			45,603				5.9	%			34,542				5.0	%			67,233				4.6	%			41,039				3.1	%
Net income			27,214				3.5	%			19,818				2.9	%			41,009				2.8	%			21,452				1.6	%
Diluted earnings per share			0.41				N/A				0.30				N/A				0.62				N/A				0.32				N/A

Second Quarter 2008 Comparisons with Second Quarter 2007

Net Sales

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

		Three Months Ended
		June 30,
		2008				2007				% Change
Net sales		$	772,216			$	695,185				11.1	%

Net sales for the second quarter of 2008 totaled $772,216 and were $77,031 or 11.1 percent higher than net sales for the second quarter of 2007. The increase in net sales included a net positive currency impact of approximately $34,497. Financial self-service revenue increased by $71,684 or 15.0 percent over the comparable period in 2007 with revenue from Asia Pacific increasing by 25.1 percent, revenue from Europe, Middle East, and Africa (EMEA) increasing by 18.2 percent, and revenue from the Americas increasing by 12.0 percent. Security solutions revenue decreased by $489 or 0.2 percent over the second quarter of 2007 due to new bank branch construction and retail store openings remaining weak in the United States. Election systems revenue was $27,129, and increased by $5,836 or 27.4 percent over the second quarter of 2007. There was no revenue in the second quarter of either year from lottery systems.

Gross Profit

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

		Three Months Ended
		June 30,
		2008				2007				% Change
Gross profit		$	193,457			$	163,998				18.0	%
Gross profit margin			25.1	%			23.6	%			1.5	%

Gross profit for the second quarter of 2008 totaled $193,457 and was $29,459 or 18.0 percent higher than gross profit in the second quarter of 2007. Product gross margin was 26.7 percent in the second quarter of 2008 compared to 27.5 percent in the comparable period of 2007. Restructuring charges of approximately $3,519 were included in product costs of sales for the second quarter of 2008 while restructuring charges of approximately $2,890 were recorded in the second quarter of 2007. Restructuring charges in the second 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. Restructuring charges in the second quarter of 2007 related entirely to the closing of the manufacturing

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

operations in Cassis, France and adversely affected product gross margin by 0.9 percentage points. The decrease in product gross margin was primarily the result of higher restructuring charges and a higher mix of revenue from lower margin market segments. In addition, some pricing pressure in Asia Pacific and Europe and significant increases in certain commodity prices adversely affected margins, partially offset by the Company’s ongoing cost-reduction program. Service gross margin was 23.7 percent compared to 20.2 percent in the second quarter of 2007. Restructuring charges of approximately $3,847 were included in service costs of sales for the second quarter of 2008 and adversely affected service gross margin by 0.9 percent., while no restructuring charges related to service costs of sales were recorded in the second quarter of 2007. The year-over-year improvement in service margin was driven by better product quality, improved international margins as a result of previous restructuring actions, and continued gains in productivity and efficiency as the Company continues to implement the latest tools and technology across its global service organization, partially offset by higher restructuring charges. Service margins also improved in the United States despite significantly higher fuel costs. Given how rapidly fuel prices have risen, however, the Company was able to recover only a portion of this increase to date through pricing actions.

Operating Expenses

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

		Three Months Ended
		June 30,
		2008				2007				% Change
Selling, general, and administrative expense		$	129,703			$	118,062				9.9	%
Research, development and engineering expense			18,156				17,832				1.8	%
(Gain) on sale of assets, net			(5	)			(6,438	)			-99.9	%
Total operating expense		$	147,854			$	129,456				14.2	%
Percentage of net sales			19.1	%			18.6	%			0.5	%

Selling and administrative expense for the second quarter of 2008 was $129,703 or 16.8 percent of net sales as compared to $118,062 or 17.0 percent of net sales in 2007. Non-routine expenses of $8,459 or 1.1 percent of net sales impacted the second quarter of 2008 compared to $662 of non-routine expenses in the second 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 DOJ investigations and other advisory fees. Additionally, restructuring charges of approximately $3,633 or 0.5 percent of net sales were included in selling and administrative expense for the second quarter of 2008 and 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 no restructuring charges included in selling and administrative expense for the second quarter of 2007. Research, development, and engineering expense for the second quarter of 2008 was 2.4 percent of net sales compared to 2.6 percent for the second quarter of 2007. The gain on sale of assets in the second quarter of 2008 was $6,433 lower compared to 2007, resulting from the gain on sale of the Company’s manufacturing plant in Cassis, France in the second quarter of 2007 associated with the Company’s restructuring initiatives.

Operating Profit

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

		Three Months Ended
		June 30,
		2008				2007				% Change
Operating profit		$	45,603			$	34,542				32.0	%
Operating profit margin			5.9	%			5.0	%			0.9	%

Operating profit for the second quarter of 2008 totaled $45,603 and was $11,061 or 32.0 percent higher than operating profit for the comparable period of 2007. The increase was largely due to higher financial self-service revenue and profit. Restructuring charges of $11,388 or 1.5 percent of net sales affected the operating profit in the second quarter of 2008 compared to restructuring income of $3,548 or 0.5 percent of net sales for the comparable period in 2007. In addition, non-routine expenses of $8,459 or 1.1 percent of net sales affected the

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

operating profit in the second quarter of 2008 compared to $662 or 0.1 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 (expense) and minority interest for the three-month periods ended June 30, 2008 and June 30, 2007:

		Three Months Ended
		June 30,
		2008				2007				% Change
Investment income		$	6,437			$	5,046				27.6	%
Interest expense			(10,367	)			(9,899	)			4.7	%
Miscellaneous, net			(2,885	)			3,804				-175.8	%
Other income (expense)		$	(6,815	)		$	(1,049	)			549.7	%
Percentage of net sales			-0.9	%			-0.2	%			-0.7	%
Minority interest		$	(1,611	)		$	(3,750	)			-57.0	%

Investment income for the second quarter of 2008 was $6,437 and increased by $1,391 or 27.6 percent compared to the comparable period in 2007. Interest expense for the second quarter of 2008 was $10,367 and increased $468 or 4.7 percent compared to 2007. Miscellaneous, net was $6,689 lower in 2008 mainly due to a change in foreign exchange gain (loss) between years. Minority interest was $2,139 lower in the second quarter of 2008 than the comparable period in 2007.

Net Income

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

		Three Months Ended
		June 30,
		2008				2007				% Change
Net income		$	27,214			$	19,818				37.3	%
Percentage of net sales			3.5	%			2.9	%			0.6	%
Effective tax rate			26.8	%			33.4	%			-6.6	%

Net income for the second quarter of 2008 was $27,214 and increased $7,396 or 37.3% percent compared with the second quarter of 2007. The effective tax rate for the second quarter of 2008 was 26.8% percent versus 33.4 percent in the second quarter of 2007. The 2008 effective tax rate was impacted by restructuring charges, including asset write-offs related to business operations in Western Europe.

Segment Analysis and Operating Profit Summary

Diebold North America (DNA) second quarter of 2008 net sales of $390,048 increased $20,218 or 5.5 percent over second quarter of 2007 net sales of $369,830. The increase in DNA net sales was due to higher financial self-service product and services revenue. Diebold International (DI) second quarter of 2008 net sales of $355,039 increased by $50,977 or 16.8 percent compared with net sales in the comparable period in 2007 of $304,062. The increase in DI net sales was attributable to strong Europe, Middle East and Africa (EMEA) revenue growth of $17,786 as well as growth in Asia-Pacific, Brazil, and Latin America. Election Systems (ES) & Other second quarter of 2008 net sales of $27,129 increased by $5,836 or 27.4 percent compared to second quarter of 2007 net sales of $21,293.

DNA second quarter of 2008 operating profit of $33,679 increased $6,964 compared with second quarter of 2007 operating profit of $26,715. DI operating profit for the second quarter of 2008 was $10,015, an increase of $453 or 4.7 percent compared with the second quarter of 2007. ES & Other second quarter of 2008 operating profit was $1,909 and improved by $3,644 or 210.0 percent compared to an operating loss

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

of $1,735 in the second quarter of 2007. This improvement was a result of increased margin and sales volume in the election systems business.

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

Six Months Ended June 30, 2008 Comparisons with Six Months Ended June 30, 2007

Net Sales

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

		Six Months Ended
		June 30,
		2008				2007				% Change
Net sales		$	1,469,197			$	1,341,471				9.5	%

Net sales for the six months ended June 30, 2008 totaled $1,469,197 and were $127,726 or 9.5 percent higher than net sales for the comparable period in 2007. The increase in net sales included a net positive currency impact of approximately $68,011 or 4.6 percent. Financial self-service revenue for the six months ended June 30, 2008 increased by $108,412 or 11.6 percent over the comparable period in 2007 with revenue from Asia Pacific increasing by 49.4 percent and revenue from the Americas increasing by 7.5 percent. Security solutions revenue for the six months ended June 30, 2008 increased by $4,726 or 1.3 percent over the comparable period in 2007. This increase occurred in the first quarter of 2008 prior to the slowdown in new bank branch construction and retail store openings becoming weak in the United States in the second quarter of 2008. ES revenue of $41,823 increased by $11,297 or 37.0 percent over the six months ended June 30, 2007. There was $3,291 of lottery systems revenue in the six months ended June 30, 2008 with no revenue in the comparable period of 2007.

Gross Profit

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

		Six Months Ended
		June 30,
		2008				2007				% Change
Gross profit		$	367,516			$	293,875				25.1	%
Gross profit margin			25.0	%			21.9	%			3.1	%

Gross profit for the six months ended June 30, 2008 totaled $367,516 and was $73,641 or 25.1 percent higher than gross profit in the six months ended June 30, 2007. Product gross margin was 27.7 percent in the six-month period ended June 30, 2008 compared to 24.3 percent in the comparable period in 2007. The improvement in product gross margin was primarily due to lower restructuring charges, partially offset by a higher mix of revenue from the international financial self-service business and lower than expected production volume in Europe that resulted in higher supply chain costs. Product gross margins were adversely affected by restructuring charges of approximately $4,821 in the first six months of 2008 and $24,256 in the comparable period of 2007. Service gross margin in the six months ended June 30, 2008 increased to 22.8 percent compared with 19.9 percent in the six months ended June 30, 2007. Service gross margins were adversely affected by restructuring charges of approximately $4,730 in first six month of 2008 and there were no restructuring charges for the comparable period in 2007. The increase in service margin was driven by better product quality, improved international margins as a result of previous restructuring actions, and continued gains in productivity and efficiency as the Company continues to implement the latest tools and technology across its global service organization, partially offset by higher restructuring charges. Service margins also improved in the United States despite significantly higher fuel costs. Given how rapidly fuel prices have risen, however, the Company was able to recover only a portion of this increase to date through pricing actions.

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

Operating Expenses

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

		Six Months Ended
		June 30,
		2008				2007				% Change
Selling, general, and administrative expense		$	258,000			$	225,036				14.6	%
Research, development and engineering expense			37,911				34,221				10.8	%
Impairment of asset			4,376				—				100.0	%
(Gain) on sale of assets, net			(4	)			(6,421	)			-99.99	%
Total operating expense		$	300,283			$	252,836				18.8	%
Percentage of net sales			20.4	%			18.8	%			1.6	%

Selling and administrative expense for the six-months ended June 30, 2008 was $258,000 or 17.6 percent of net sales as compared $225,036 or 16.8 percent of net sales in the six-months ended June 30, 2007. The increase in selling and administrative expense as a percent of sales between years resulted in part due to higher non-routine expenses and restructuring charges in the six-months ended June 30, 2008 as compared to the six-months ended June 30, 2007, a weakening of the U.S. dollar, and a $5,000 reduction in the reserve for bad debts related to the collection of the previously reserved for election receivables from a county in California that occurred in 2007. Non-routine expenses of $17,174 or 1.2 percent of net sales impacted the first six-months of 2008 compared to $888 of non-routine expenses for the same period in 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 DOJ investigations and other advisory fees. Additionally, restructuring charges of approximately $4,926 or 0.3 percent of net sales were included in operating expenses for the six-months ended June 30, 2008 and 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 no restructuring charges included in selling and administrative expense for the comparable period in 2007. Research, development and engineering expense for the first six months of 2008 and 2007 was 2.6 percent of net sales in both years, respectively. The impairment of assets in the six-months ended June 30, 2008 both of $4,376 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 loss on sale of assets in the first six months of 2008 was $6,417 lower compared to 2007, resulting from the gain on sale of the Company’s manufacturing plant in Cassis, France in the second quarter of 2007 associated with the Company’s restructuring initiatives.

Operating Profit

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

		Six Months Ended
		June 30,
		2008				2007				% Change
Operating profit		$	67,233			$	41,039				63.8	%
Operating profit margin			4.6	%			3.1	%			1.5	%

Operating profit for the six months ended June 30, 2008 totaled $67,233 and was $29,194 or 63.8 percent higher than operating profit for the comparable period in 2007 due in part to higher revenue and higher gross profit margin. Non-routine expenses of $17,174 or 1.2 percent of net sales adversely affected the operating profit in 2008 compared to $888 for the comparable period in 2007. Restructuring charges of $15,078 or 1.0 percent of net sales affected the operating profit in the first six months of 2008 compared to $17,818 or 1.3 percent of net sales for the comparable period in 2007.

Other Income (Expense) and Minority Interest

The following table represents information regarding our other expense and minority interest for the six-month periods ended June 30, 2008 and June 30, 2007:

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

		Six Months Ended
		June 30,
		2008				2007				% Change
Investment income		$	12,966			$	10,654				21.7	%
Interest expense			(21,134	)			(19,284	)			9.6	%
Miscellaneous, net			920				8,077				-88.6	%
Other (expense)		$	(7,248	)		$	(553	)			1,210.7	%
Percentage of net sales			-0.5	%			0.0	%			-0.5	%
Minority interest		$	(3,797	)		$	(4,407	)			-13.8	%