FORM 10-K
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
F O R M  10 - K
 
 
þ      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to
Commission file number 1-4879
 
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,
P.O. Box 3077, North Canton, Ohio
(Address of principal
executive offices)
  44720-8077
(Zip Code)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (330) 490-4000
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
     
Title of each class   Name of each exchange on which registered:
     
Common Shares $1.25 Par Value   New York Stock Exchange
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o  No þ
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated Filer þ
  Accelerated Filer o   Non-accelerated filer o   Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2008, the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value was computed by using the closing price on the New York Stock Exchange on June 30, 2008 of $35.58 per share.
 
         
Common Shares, Par Value $1.25 per Share
  $ 2,321,224,755  
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
     
Class
Common Shares $1.25 Par Value
  Outstanding at February 13, 2009
66,187,798
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Listed hereunder are the documents, portions of which are incorporated by reference, and the parts of this Form 10-K into which such portions are incorporated:
 
  (1)  Diebold, Incorporated Proxy Statement for 2009 Annual Meeting of Shareholders to be held on April 23, 2009, portions of which are incorporated by reference into Part III of this Form 10-K.


 

 
TABLE OF CONTENTS
 
                 
    3  
      BUSINESS     3  
      RISK FACTORS     6  
      UNRESOLVED STAFF COMMENTS     14  
      PROPERTIES     14  
      LEGAL PROCEEDINGS     14  
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     16  
       
PART II     17  
      MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     17  
      SELECTED FINANCIAL DATA     19  
      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     20  
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     40  
      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     41  
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     86  
      CONTROLS AND PROCEDURES     86  
      OTHER INFORMATION     90  
       
PART III     91  
      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     91  
      EXECUTIVE COMPENSATION     92  
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     92  
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE     92  
      PRINCIPAL ACCOUNTANT FEES AND SERVICES     92  
       
PART IV     93  
      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     93  
    96  
    99  
 EX-10.1
 EX-10.5(i)
 EX-10.5(iii)
 EX-10.5(iv)
 EX-10.5(v)
 EX-10.5(vi)
 EX-10.7(iv)
 EX-10.10
 EX-10.24
 EX-10.25
 EX-10.28
 EX-10.29
 EX-10.30
 EX-21.1
 EX-23.1
 EX-24.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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PART I
 
ITEM 1: BUSINESS
(Dollars in thousands)
 
GENERAL
 
Diebold, Incorporated (collectively with its subsidiaries, the Company) was incorporated under the laws of the state of Ohio in August 1876, succeeding a proprietorship established in 1859.
 
The Company develops, manufactures, sells and services self-service transaction systems, electronic and physical security systems, software and various products used to equip bank facilities and voting equipment. The Company’s primary customers include banks and financial institutions, as well as public libraries, government agencies, utilities and various retail outlets. Sales of systems and equipment are made directly to customers by the Company’s sales personnel and by manufacturers’ representatives and distributors globally. The sales and support organization works closely with customers and their consultants to analyze and fulfill the customers’ needs.
 
The Company’s vision is, “To be recognized as the essential partner in creating and implementing ideas that optimize convenience, efficiency and security.” This vision is the guiding principle behind the Company’s transformation of becoming a more services-oriented company. Today, service comprises more than 50 percent of the Company’s revenue and the Company expects that this percentage will grow over time as the Company’s integrated services business continues to gain traction in the marketplace. Financial institutions are eager to reduce costs and optimize management and productivity of their ATM (automated teller machine) channels — and as a result they are increasingly exploring outsourced solutions. The Company remains uniquely positioned to provide the infrastructure necessary to manage all aspects of an ATM network — hardware, software, maintenance, transaction processing, patch management and cash management — through its integrated product and services offerings.
 
We are people-oriented, not product-oriented. We strive to be an essential partner to our customers, not a seller. Our products and services enhance our customers’ businesses. This reflects our commitment to solving each customer’s individual needs. In 2008, the Company remained focused on five key priorities: increase customer loyalty; improve quality; strengthen the supply chain; enhance communications and teamwork and rebuild profitability. The Company met or exceeded its targets within each of these priorities through a number of operational and supply chain initiatives designed to increase customer satisfaction, improve productivity, streamline processes, enhance efficiency and decrease costs.
 
PRODUCT AND SERVICE SOLUTIONS
 
The Company has three product and service solutions: Self-Service Solutions, Security Solutions and Election Systems. Financial information for the product and service solutions can be found in Note 19 to the Consolidated Financial Statements, which is incorporated herein by reference. In 2008, 2007 and 2006, the Company’s sales of products and services related to its financial self-service and security solutions accounted for 95.1, 97.8 and 92.0 percent, respectively, of consolidated net sales.
 
Self-Service Solutions
 
Self-service is technology that empowers people worldwide to access services when, where and how they may choose. One popular example is the automated teller machine (ATM). The Company offers an integrated line of self-service technologies and services, including comprehensive ATM outsourcing, ATM security and fraud, ImageWay® ATM check imaging, RemoteTellertm system and teller cash automation. The Company is a leading global supplier of ATMs and related services and holds the leading market position in many countries around the world.
 
Self-Service Hardware
The Company offers a wide variety of self-service solutions. Self-service products include a full range of ATMs including increasing deposit automation technology, cash dispensers, check-cashing machines, bulk cash recyclers and bulk check deposit technology.


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Self-Service Software
The Company offers software solutions consisting of multiple applications that process events and transactions. These solutions are delivered on the appropriate platform, allowing the Company to meet customer requirements while adding new functionality in a cost-effective manner.
 
Self-Service Support and Managed Services
From analysis and consulting to monitoring and repair, the Company provides value and support to its customers every step of the way. Services include installation and ongoing maintenance of our products, OpteView® remote services, branch transformation and distribution channel consulting. Outsourced and managed services include remote monitoring, troubleshooting for self-service customers, transaction processing, currency management, maintenance services and full support via person to person or online communication.
 
Integrated Self-Service Solutions
Each unique solution may include hardware, software, services or a combination of all three components. The Company provides value to its customers by offering a comprehensive array of integrated services and support. The Company’s service organization provides strategic analysis and planning of new systems, systems integration, architectural engineering, consulting, and project management that encompass all facets of a successful financial self-service implementation.
 
Security Solutions
 
From the safes and vaults that the Company first manufactured in 1859, to the full range of advanced security offerings it provides today, the Company’s integrated security solutions contain best-in-class products and award-winning services for its customers’ unique needs. The Company provides its customers with the latest technological advances to better protect their assets, improve their workflow and increase their return on investment. These solutions are backed with experienced global sales, installation and service teams. The Company is a global leader in providing physical and electronic security systems as well as facility transaction products that integrate security, software and assisted-service transactions, providing total security systems solutions to financial, retail, commercial and government markets.
 
Physical Security and Facility Products
The Company provides security solutions and facility products, including in-store bank branches, pneumatic tube systems for drive-up lanes, vaults, safes, depositories, bullet-resistive items, teller-assist systems, cash-handling automation, plus a global service organization that supports Diebold and non-Diebold security products.
 
Electronic Security Products
The Company provides a broad range of security products including digital surveillance, card systems, biometric technologies, alarms and remote monitoring and diagnostics.
 
Integrated Security Solutions
The Company provides global sales, service, installation, project management and monitoring of original equipment manufacturer (OEM) electronic security products to financial, government, retail and commercial customers.
 
Election Systems
 
The Company, through its wholly-owned subsidiaries Premier Election Solutions, Inc. (PESI) and Procomp Industria Eletronica S.A. (in Brazil), is a provider of voting equipment and related products. The Company provides elections equipment, software, training, support, installation and maintenance. The election systems contracts contain multiple deliverable elements and custom terms and conditions.
 
OPERATIONS
 
The principal raw materials used by the Company are steel, plastics, and electronic parts and components, which are purchased from various major suppliers. These materials and components are generally available in ample quantity at this time.


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The Company’s operating results and the amount and timing of revenue are affected by numerous factors including production schedules, customer priorities, sales volume and sales mix. During the past several years, the Company has dramatically changed the focus of its self-service business to that of a total solutions and integrated services approach. The value of unfilled orders is not as meaningful an indicator of future revenues due to the significant portion of revenues derived from the Company’s growing service-based business, for which order information is not available. Therefore, the Company believes that backlog information is not material to an understanding of its business.
 
The Company carries working capital mainly related to trade receivables and inventories. Inventories, generally, are only manufactured as orders are received from customers. The Company’s normal and customary payment terms are net 30 days from date of invoice. The Company generally does not offer extended payment terms. The Company’s government customers represent a small portion of the Company’s business. Domestically, with the exception of PESI, the Company’s contracts with its government customers do not contain fiscal funding clauses. In the event that such a clause exists, revenue would not be recognizable until the funding clause was satisfied. Internationally, contracts with Brazil’s government are subject to a twenty-five percent quantity adjustment prior to purchasing any raw materials under the contracted purchasing schedule. In general, with the exception of PESI, the Company recognizes revenue for delivered elements only when the fair values of delivered and undelivered elements are known, uncertainties regarding customer acceptance are resolved and there are no customer-negotiated refunds or return rights affecting the revenue recognized for the delivered elements.
 
SEGMENTS AND FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
 
The Company’s segments are comprised of its three main sales channels: Diebold North America (DNA), Diebold International (DI) and Election Systems (ES) & Other. The DNA segment sells financial and retail systems, and also 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 through wholly-owned subsidiaries, majority-owned joint ventures and independent distributors in every major country throughout Europe, the Middle East, Africa, Latin America and in the Asia Pacific region (excluding Japan and Korea).The ES & Other segment includes the operating results of PESI and the voting and lottery related business in Brazil. Segment financial information can be found in Note 19 to the Consolidated Financial Statements, which is incorporated herein by reference.
 
Sales to customers outside the United States in relation to total consolidated net sales continued to trend upward and were $1,603,963 or 50.6 percent in 2008, $1,417,574 or 48.1 percent in 2007 and $1,354,878 or 46.4 percent in 2006.
 
Property, plant and equipment, at cost, located in the United States totaled $437,524, $424,657 and $398,425 as of December 31, 2008, 2007 and 2006, respectively, and property, plant and equipment, at cost, located outside the United States totaled $142,427, $151,139 and $152,072 as of December 31, 2008, 2007 and 2006, respectively.
 
Additional financial information regarding the Company’s international operations is included in Note 19 to the Consolidated Financial Statements, which is incorporated herein by reference.
 
The Company’s non-U.S. operations are subject to normal international business risks not generally applicable to domestic business. These risks include currency fluctuation, new and different legal and regulatory requirements in local jurisdictions, political and economic changes and disruptions, tariffs or other barriers, potentially adverse tax consequences and difficulties in staffing and managing foreign operations.
 
COMPETITION
 
All phases of the Company’s business are highly competitive. Some of the Company’s products are in competition directly with similar products and others competing with alternative products having similar uses or producing similar results. The Company believes, based upon outside independent industry surveys, that it is a leading manufacturer of self-service systems in the United States and is also a market leader internationally. In the area of automated transaction systems, the Company competes on a global basis primarily with NCR Corporation and Wincor-Nixdorf. On a regional basis, the Company competes with many other hardware and software companies such as Grg Equipment Co. in Asia Pacific and Itautec in Latin America. In serving the security products market for the financial services industry, the Company competes with national, regional and local security

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companies. Of these competitors, some compete in only one or two product lines, while others sell a broader spectrum of products competing with the Company. The unavailability of comparative sales information and the large variety of individual products make it difficult to give reasonable estimates of the Company’s competitive ranking in or share of the market in its security product fields of activity. However, the Company is ranked as one of the top integrators in the security market.
 
In the election systems market, the Company provides product solutions and support for customers within the United States and Brazil. Competition in this market is typically from a variety of hardware, software and service companies.
 
RESEARCH, DEVELOPMENT AND ENGINEERING
 
In order to meet customers’ growing demand for self-service and security technologies faster, the Company is focused on delivering innovation to its customers by continuing to invest in technology solutions that enable customers to reduce costs and improve efficiency. Expenditures for research, development and engineering initiatives were $79,070, $73,950 and $71,625 in 2008, 2007 and 2006, respectively. Opteva® ATMs are designed with leading technology to meet our customers’ growing deposit automation needs and provide maximum value. All full function Opteva ATMs support intelligent check and automated cash deposits. Key features include check imaging with intelligent depository moduletm and bulk document intelligent depository modules.
 
PATENTS, TRADEMARKS, LICENSES
 
The Company owns patents, trademarks and licenses relating to certain products in the United States and internationally. While the Company regards these as items of importance, it does not deem its business as a whole, or any industry segment, to be materially dependent upon any one item or group of items.
 
ENVIRONMENTAL
 
Compliance with federal, state and local environmental protection laws during 2008 had no material effect upon the Company’s business, financial condition or results of operations.
 
EMPLOYEES
 
At December 31, 2008, the Company employed 16,658 associates globally. The Company’s service staff is one of the financial industry’s largest, with professionals in more than 600 locations and representation in nearly 90 countries worldwide.
 
AVAILABLE INFORMATION
 
This annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are available, free of charge, on or through the Company’s website, www.diebold.com, as soon as practicable after such material is electronically filed with or furnished to the SEC. Additionally, these reports can be furnished free of charge to shareholders upon written request to Diebold Global Communications at the corporate address, or call +1 330 490-3790 or [800] 766-5859. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
 
ITEM 1A: RISK FACTORS
 
The following are certain risk factors that could affect our business, financial condition, operating results and cash flows. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this annual report on Form 10-K because they could cause actual results to differ materially from those expressed in any forward-looking statement. The risk factors highlighted below are not the only ones we face. If any of these events actually occur, our business, financial condition, operating results or cash flows could be negatively affected.


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We caution the reader to keep these risk factors in mind and refrain from attributing undue certainty to any forward-looking statements which speak only as of the date of this annual report.
 
Demand for and supply of our products and services may be adversely affected by numerous factors, some of which we cannot predict or control. This could adversely affect our operating results.
 
Numerous factors may affect the demand for and supply of our products and services, including:
 
  •  changes in the market acceptance of our products and services;
 
  •  customer and competitor consolidation;
 
  •  changes in customer preferences;
 
  •  declines in general economic conditions;
 
  •  changes in environmental regulations that would limit our ability to sell products and services in specific markets; and
 
  •  macro-economic factors affecting banks, credit unions and other financial institutions may lead to cost-cutting efforts by customers, which could cause us to lose current or potential customers or achieve less revenue per customer.
 
If any of these factors occur, the demand for and supply of our products and services could suffer, and this would adversely affect our results of operations.
 
Increased raw material and energy costs could reduce our income.
 
The primary raw materials in our financial self-service, security and election systems product and service solutions are steel, plastics and electronic parts and components. The majority of our raw materials are purchased from various local, regional and global suppliers pursuant to long-term supply contracts. However, the price of these materials can fluctuate under these contracts in tandem with the pricing of raw materials.
 
In addition, energy prices, particularly petroleum prices, are cost drivers for our business. In recent years, the price of petroleum has been highly volatile, particularly due to the unstable political conditions in the Persian Gulf and increasing international demand from emerging markets. Any increase in the costs of energy would also increase our transportation costs. Although we attempt to pass on higher raw material and energy costs to our customers, given the competitive markets in which we operate, it is often not possible to do this.
 
Our business may be affected by general economic conditions and uncertainty that may cause customers to defer or cancel sales commitments previously made.
 
Recent economic difficulties in the United States credit markets and the global markets have led to an economic recession in some or all of the markets in which we operate. A recession or even the risk of a potential recession may be sufficient reason for customers to delay, defer or cancel purchase decisions, including decisions previously made. Under difficult economic conditions, customers may seek to reduce discretionary spending by forgoing purchases of our products and services. This risk is magnified for capital goods purchases such as ATMs and physical security products. As a result of economic conditions and other factors, financial institutions have failed and may continue to fail resulting in a loss of current or potential customers, or deferred or cancelled sales orders. Any customer delays or cancellations could materially affect our level of revenue and operating results.
 
Our sales and operating results are sensitive to global economic conditions and cyclicality, and could be adversely affected during economic downturns.
 
Demand for our products is affected by general economic conditions and the business conditions of the industries in which we sell our products and services. The business of most of our customers, particularly our financial institution and election systems customers, is, to varying degrees, cyclical and has historically experienced periodic downturns. Any future downturns in general economic conditions could adversely affect the demand for our products and services, and our sales and operating results. In addition, downturns in our customer’s industries, even during periods of strong general economic conditions, could adversely affect our sales and operating results. As a result of economic conditions and other factors, financial institutions have failed and


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may continue to fail resulting in a loss of current or potential customers, or cause them to defer or cancel sales orders. Additionally, the unstable political conditions in the Persian Gulf could lead to further financial, economic and political instability, and this could lead to an additional deterioration in general economic conditions.
 
We may be unable to achieve, or may be delayed in achieving, our cost-cutting initiatives, and this may adversely affect our operating results and cash flow.
 
We have launched a number of cost-cutting initiatives, including restructuring initiatives, to improve operating efficiencies and reduce operating costs. Although we are anticipating a substantial amount of annual cost savings associated with these cost-cutting initiatives, we may be unable to sustain the cost savings that we have achieved. In addition, if we are unable to achieve, or have any unexpected delays in achieving additional cost savings, our results of operations and cash flow may be adversely affected. Even if we meet the goals pursuant to these initiatives, we may not receive the expected financial benefits of these initiatives.
 
We face competition that could adversely affect our sales and financial condition.
 
All phases of our business are highly competitive. Some of our products are in direct competition with similar or alternative products provided by our competitors. We encounter competition in price, delivery, service, performance, product innovation, product recognition and quality.
 
Because of the potential for consolidation in any market, our competitors may become larger, which could make them more efficient and permit them to be more price-competitive. Increased size could also permit them to operate in wider geographic areas and enhance their abilities in other areas such as research and development and customer service. As a result, this could also reduce our profitability.
 
Our competitors can be expected to continue to develop and introduce new and enhanced products. This could cause a decline in market acceptance of our products. In addition, our competitors could cause a reduction in the prices for some of our products as a result of intensified price competition. Also, we may be unable to effectively anticipate and react to new entrants in the marketplace competing with our products.
 
Competitive pressures can also result in the loss of major customers. An inability to compete successfully could have an adverse effect on our operating results, financial condition and cash flows in any given period.
 
In international markets, we compete with local service providers that may have competitive advantages.
 
In a number of international markets, especially those in Asia Pacific and Latin America, we face substantial competition from local service providers that offer competing products and services. Some of these companies may have a dominant market share in their territories and may be owned by local stakeholders. This could give them a competitive advantage. Local providers of competing products and services may also have a substantial advantage in attracting customers in their country due to more established branding in that country, greater knowledge with respect to the tastes and preferences of customers residing in that country and/or their focus on a single market. Further, the local providers may have greater regulatory and operational flexibility since we are subject to both U.S. and foreign regulatory requirements.
 
Because our operations are conducted worldwide, they are affected by risks of doing business abroad.
 
We generate a significant percentage of revenue from sales and service operations conducted outside the United States. Revenue from international operations amounted to approximately 50.6 percent in 2008, 48.1 percent in 2007 and 46.4 percent in 2006 of total revenue during these respective periods.
 
Accordingly, international operations are subject to the risks of doing business abroad, including the following:
 
  •  fluctuations in currency exchange rates;
 
  •  transportation delays and interruptions;
 
  •  political and economic instability and disruptions;


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  •  restrictions on the transfer of funds;
 
  •  the imposition of duties and tariffs;
 
  •  import and export controls;
 
  •  changes in governmental policies and regulatory environments;
 
  •  labor unrest and current and changing regulatory environments;
 
  •  the uncertainty of product acceptance by different cultures;
 
  •  the risks of divergent business expectations or cultural incompatibility inherent in establishing joint ventures with foreign partners;
 
  •  difficulties in staffing and managing multi-national operations;
 
  •  limitations on the ability to enforce legal rights and remedies;
 
  •  reduced protection for intellectual property rights in some countries; and
 
  •  potentially adverse tax consequences.
 
Any of these events could have an adverse effect on our international operations by reducing the demand for our products or decreasing the prices at which we can sell our products, thereby, adversely affecting our financial condition or operating results. We may not be able to continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject. In addition, these laws or regulations may be modified in the future, and we may not be able to operate in compliance with those modifications.
 
We may expand operations into international markets in which we may have limited experience or rely on business partners.
 
We continually look to expand our products and services into international markets. We have currently developed, through joint ventures, strategic investments, subsidiaries and branch offices, sales and service offerings in over 90 countries outside of the United States. As we expand into new international markets, we will have only limited experience in marketing and operating products and services in such markets. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets. Certain international markets may be slower than domestic markets in adopting our products and services, and our operations in international markets may not develop at a rate that supports our level of investment.
 
The failure of governments to certify election systems products may hinder our growth and harm our business.
 
Our election system products must go through rigorous federal and state certification processes in order for them to be sold in various states. As a result, there is a risk that our products will not be certified for use or will be decertified. Our election systems products could also be subject to differing and inconsistent laws, regulations and certification requirements which could adversely affect our business, financial condition and operating results. As a result, we may find it necessary to eliminate, modify or cancel components of our services, and this could result in additional development costs and the possible loss of revenue. Future legislative changes or other changes in law could also have an adverse effect on our business, financial condition and operating results.
 
Our election systems products might not achieve market acceptance, which could adversely affect our growth.
 
Because of the political nature of our election systems business, various individuals and advocacy groups may raise challenges, including legal challenges, in the media and elsewhere, about the reliability and security of our election systems products and services. Our election systems business is vulnerable to these types of challenges because the electronic election systems industry is emerging.

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Our ability to grow will depend on the extent to which potential customers accept our products. This acceptance may be limited by:
 
  •  the failure of prospective customers to conclude that our products are valuable and should be used;
 
  •  the reluctance of prospective customers to replace their existing solutions with our products; and
 
  •  marketing efforts of our competitors.
 
Furthermore, adverse publicity, whether directed at our products or a competitor’s products due to processing errors or other system failures, could adversely affect the electronic election systems industry as a whole, and this would have an adverse effect on our business, financial condition and operating results. In addition, these efforts may adversely affect our relations with our election systems customers.
 
We are currently subject to shareholder class action litigation, the unfavorable outcome of which might have a material adverse effect on our financial condition, operating results and cash flow.
 
A number of shareholder class action lawsuits have been filed against us and certain current and former officers and directors alleging violations of the federal securities laws and breaches of fiduciary duties with respect to our 401(k) savings plan. The securities class action was dismissed and the court entered a judgment in favor of the defendants in August 2008, but the plaintiffs have appealed the court’s decision. We believe that these lawsuits are without merit, and we intend to vigorously defend against these claims. We cannot, however, determine with certainty the outcome or resolution of these claims or any future related claims, or the timing for their resolution. In addition to the expense and burden incurred in defending this litigation and any damages that we may suffer, management’s efforts and attention may be diverted from the ordinary business operations in order to address these claims. If the final resolution of this litigation is unfavorable, our financial condition, operating results and cash flows could be materially affected.
 
Any failure to manage acquisitions, divestitures and other significant transactions successfully could harm our operating results, business and prospects.
 
As part of our business strategy, we frequently engage in discussions with third parties regarding possible investments, acquisitions, strategic alliances, joint ventures, divestitures and outsourcing arrangements, and we enter into agreements relating to such extraordinary transactions in order to further our business objectives. In order to pursue this strategy successfully, we must identify suitable candidates, successfully complete extraordinary transactions, some of which may be large and complex, and manage post-closing issues such as the integration of acquired companies or employees. Integration and other risks of extraordinary transactions can be more pronounced in larger and more complicated transactions, or if multiple transactions are pursued simultaneously. If we fail to identify and successfully complete extraordinary transactions that further our strategic objectives, we may be required to expend resources to develop products and technology internally. This may put us at a competitive disadvantage, and we may be adversely affected by negative market perceptions any of which may have a material adverse effect on our revenue, gross margin and profitability.
 
Integration issues are complex, time-consuming and expensive and, without proper planning and implementation, could significantly disrupt our business. The challenges involved in integration include:
 
  •  combining product offerings and entering into new markets in which we are not experienced;
 
  •  convincing customers and distributors that the transaction will not diminish client service standards or business focus, preventing customers and distributors from deferring purchasing decisions or switching to other suppliers (which could result in additional obligations to address customer uncertainty), and coordinating sales, marketing and distribution efforts;
 
  •  consolidating and rationalizing corporate information technology infrastructure, which may include multiple legacy systems from various acquisitions and integrating software code;
 
  •  minimizing the diversion of management attention from ongoing business concerns;

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  •  persuading employees that business cultures are compatible, maintaining employee morale and retaining key employees, integrating employees into the Company, correctly estimating employee benefit costs and implementing restructuring programs;
 
  •  coordinating and combining administrative, manufacturing, research and development and other operations, subsidiaries, facilities and relationships with third parties in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures; and
 
  •  achieving savings from supply chain and administration integration.
 
We evaluate and enter into extraordinary transactions on an ongoing basis. We may not fully realize all of the anticipated benefits of any transaction, and the timeframe for achieving benefits of a transaction may depend partially upon the actions of employees, suppliers or other third parties. In addition, the pricing and other terms of our contracts for extraordinary transactions require us to make estimates and assumptions at the time we enter into these contracts, and, during the course of our due diligence, we may not identify all of the factors necessary to estimate costs accurately. Any increased or unexpected costs, unanticipated delays or failure to achieve contractual obligations could make these agreements less profitable or unprofitable.
 
Managing extraordinary transactions requires varying levels of management resources, which may divert our attention from other business operations. These extraordinary transactions could result in significant costs and expenses and charges to earnings, including those related to severance pay, early retirement costs, employee benefit costs, asset impairment charges, charges from the elimination of duplicative facilities and contracts, in-process research and development charges, inventory adjustments, assumed litigation and other liabilities, legal, accounting and financial advisory fees, and required payments to executive officers and key employees under retention plans. Moreover, we could incur additional depreciation and amortization expense over the useful lives of certain assets acquired in connection with extraordinary transactions, and, to the extent that the value of goodwill or intangible assets with indefinite lives acquired in connection with an extraordinary transaction becomes impaired, we may be required to incur additional material charges relating to the impairment of those assets. In order to complete an acquisition, we may issue common stock, potentially creating dilution for existing shareholders, or borrow funds, affecting our financial condition and potentially our credit ratings. Any prior or future downgrades in our credit rating associated with an acquisition could adversely affect our ability to borrow and result in more restrictive borrowing terms. In addition, our effective tax rate on an ongoing basis is uncertain, and extraordinary transactions could impact our effective tax rate. We also may experience risks relating to the challenges and costs of closing an extraordinary transaction and the risk that an announced extraordinary transaction may not close. As a result, any completed, pending or future transactions may contribute to financial results that differ from the investment community’s expectations.
 
System security risks and systems integration issues could disrupt our internal operations or services provided to customers, and any such disruption could adversely affect revenue, increase costs, and harm our reputation and stock price.
 
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate confidential information or that of third parties, create system disruptions or cause shutdowns. As a result, we could incur significant expenses in addressing problems created by network security breaches. Moreover, we could lose existing or potential customers, or incur significant expenses in connection with customers’ system failures. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to eliminate or alleviate security problems, viruses and bugs could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that could impede sales, manufacturing, distribution or other critical functions.
 
Portions of our information technology infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems, and transitioning data and other aspects of the process could be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact the ability to fulfill orders and interrupt

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other processes. Delayed sales, lower margins or lost customers resulting from these disruptions could adversely affect financial results, stock price and reputation.
 
Our inability to attract, retain and motivate key employees could harm current and future operations.
 
In order to be successful, we must attract, retain and motivate executives and other key employees, including those in managerial, professional, administrative, technical, sales, marketing and information technology support positions. We also must keep employees focused on our strategies and goals. Hiring and retaining qualified executives, engineers and qualified sales representatives are critical to our future, and competition for experienced employees in these areas can be intense. The failure to hire or loss of key employees could have a significant impact on our operations.
 
We may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments.
 
Our cash flows from operations depend primarily on sales and service margins. To develop new product and service technologies, support future growth, achieve operating efficiencies and maintain product quality, we must make significant capital investments in manufacturing technology, facilities and capital equipment, research and development, and product and service technology. In addition to cash provided from operations, we have from time to time utilized external sources of financing. Depending upon general market conditions or other factors, we may not be able to generate sufficient cash flows to fund our operations and make adequate capital investments. In addition, due to the recent economic downturn there has been a tightening of the credit markets, which may limit our ability to obtain alternative sources of cash to fund our operations.
 
New product developments may be unsuccessful.
 
We are constantly looking to develop new products and services that complement or leverage the underlying design or process technology of our traditional product and service offerings. We make significant investments in product and service technologies and anticipate expending significant resources for new product development over the next several years. There can be no assurance that our product development efforts will be successful, that we will be able to cost effectively manufacture these new products, that we will be able to successfully market these products or that margins generated from sales of these products will recover costs of development efforts.
 
An adverse determination that our products or manufacturing processes infringe the intellectual property rights of others could have a materially adverse effect on our business, operating results or financial condition.
 
As is common in any high technology industry, others have asserted from time to time, and may also do so in the future, that our products or manufacturing processes infringe their intellectual property rights. A court determination that our products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require us to make material changes to our products and/or manufacturing processes. We are unable to predict the outcome of assertions of infringement made against us. Any of the foregoing could have a materially adverse effect on our business, operating results or financial condition.
 
Anti-takeover provisions could make it more difficult for a third party to acquire us.
 
Certain provisions of our charter documents, including provisions limiting the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice and permitting cumulative voting, may make it more difficult for a third party to gain control of our Board of Directors and may have the effect of delaying or preventing changes in our control or management. This could have an adverse effect on the market price of our common stock. Additionally, Ohio corporate law provides that certain notice and informational filings and special shareholder meeting and voting procedures must be followed prior to consummation of a proposed “control share acquisition,” as defined in the Ohio Revised Code. Assuming compliance with the prescribed notice and information filings, a proposed control share acquisition may be made only if, at a special meeting of shareholders, the acquisition is approved by both a majority of our voting power represented at the meeting and a majority of the voting power remaining after excluding the combined voting power of the “interested shares,” as defined in the Ohio Revised Code. The application of these provisions of the Ohio Revised Code also could have the effect of delaying or preventing a change of control.

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Any SEC investigation and Department of Justice investigation could result in substantial costs to defend enforcement or other related actions that could have a materially adverse effect on our business, operating results or financial condition.
 
We have incurred substantial expenses for legal and accounting services due to the SEC and the U.S. Department of Justice (DOJ) investigations. We could incur substantial additional costs to defend and resolve litigation or other governmental investigations or proceedings arising out of, or related to, the completed investigations. In addition, we could be exposed to enforcement or other actions with respect to these matters by the SEC’s Division of Enforcement or the DOJ.
 
In addition, these activities have diverted the attention of management from the conduct of our business. The diversion of resources to address issues arising out of the investigations may harm our business, operating results and financial condition in the future.
 
Our ability to maintain effective internal control over financial reporting may be insufficient to allow us to accurately report our financial results or prevent fraud, and this could cause our financial statements to become materially misleading and adversely affect the trading price of our common stock.
 
We require effective internal control over financial reporting in order to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we cannot provide reasonable assurance with respect to our financial statements and effectively prevent fraud, our financial statements could become materially misleading which could adversely affect the trading price of our common stock.
 
Management determined that, in certain instances, misapplication of accounting principles generally accepted in the United States (US GAAP) reflected a material weakness in our internal control over financial reporting. Our material weaknesses could harm stockholder and business confidence in our financial reporting, our ability to obtain financing and other aspects of our business. We have enhanced, and continue to enhance, our internal controls in order to remediate the material weaknesses. Implementing new internal controls and testing the internal control framework will require the dedication of additional resources, management time and expense. If we fail to establish and maintain the adequacy of our internal control over financial reporting, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business, financial condition and operating results could be harmed.
 
Any material weakness or unsuccessful remediation could affect investor confidence in the accuracy and completeness of our financial statements. As a result, our ability to obtain any additional financing, or additional financing on favorable terms, could be materially and adversely affected. This, in turn, could materially and adversely affect our business, financial condition and the market value of our securities and require us to incur additional costs to improve our internal control systems and procedures. In addition, perceptions of the Company among customers, lenders, investors, securities analysts and others could also be adversely affected.
 
We can give no assurances that the measures we have taken to date, or any future measures we may take, will remediate the material weaknesses identified or that any additional material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal control over financial reporting. In addition, even if we are successful in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or ensure the fair presentation of our financial statements included in our periodic reports filed with the SEC.
 
Low investment performance by our domestic pension plan assets may require us to increase our pension liability and expense, which may require us to fund a portion of our pension obligations and divert funds from other potential uses.
 
We sponsor several defined benefit pension plans which cover certain eligible employees. Our pension expense and required contributions to our pension plans are directly affected by the value of plan assets, the projected rate of return on plan assets, the actual rate of return on plan assets and the actuarial assumptions we use to measure the defined benefit pension plan obligations.

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Due to the significant market downturn occurring in 2008, the funded status of our pension plans has declined and actual asset returns were below the assumed rate of return used to determine pension expense. If plan assets continue to perform below expectations, future pension expense will increase. Further, as a result of the global economic instability, our pension plan investment portfolio has recently incurred greater volatility.
 
We establish the discount rate used to determine the present value of the projected and accumulated benefit obligations at the end of each year based upon the available market rates for high quality, fixed income investments. We match the projected cash flows of our pension plans against those generated by high-quality corporate bonds. The yield of the resulting bond portfolio provides a basis for the selected discount rate. An increase in the discount rate would reduce the future pension expense and, conversely, a decrease in the discount rate would increase the future pension expense.
 
Based on current guidelines, assumptions and estimates, including stock market prices and interest rates, we anticipate that we will make a cash contribution of approximately $12 million to $15 million to our pension plans in 2009. Changes in the current assumptions and estimates could result in a contribution in years beyond 2009 that is greater than the projected 2009 contribution required. We cannot predict whether changing market or economic conditions, regulatory changes or other factors will further increase our pension expenses or funding obligations, diverting funds we would otherwise apply to other uses.
 
ITEM 1B: UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2: PROPERTIES
 
The Company’s corporate offices are located in North Canton, Ohio. The Company owns manufacturing facilities in Canton, Ohio, Lynchburg, Virginia, and Lexington, North Carolina. The Company also has manufacturing facilities in Belgium, Brazil, China, Hungary and India. The Company has selling, service and administrative offices in the following locations: throughout the United States, and in Australia, Austria, Barbados, Belgium, Belize, Brazil, Canada, Chile, China, Colombia, Costa Rica, Czech Republic, Dominican Republic, Ecuador, El Salvador, France, Greece, Guatemala, Haiti, Honduras, Hong Kong, Hungary, India, Indonesia, Italy, Malaysia, Mexico, Namibia, Netherlands, New Zealand, Nicaragua, Panama, Paraguay, Peru, Philippines, Portugal, Poland, Romania, Russia, Singapore, Slovakia, South Africa, Spain, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay, Venezuela and Vietnam. The Company leases a majority of the selling, service and administrative offices under operating lease agreements.
 
The Company considers that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the Company’s business.
 
ITEM 3: LEGAL PROCEEDINGS
 
At December 31, 2008, the Company was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the Company’s financial position or results of operations. In management’s opinion, the Company’s Consolidated Financial Statements would not be materially affected by the outcome of any present legal proceedings, commitments, or asserted claims.
 
In addition to the routine legal proceedings noted above, the Company has been served with various lawsuits, filed against it and certain current and former officers and directors, by shareholders and participants in the Company’s 401(k) savings plan, alleging violations of the federal securities laws and breaches of fiduciary duties with respect to the 401(k) plan. These complaints seek compensatory damages in unspecified amounts, fees and expenses related to such lawsuits and the granting of

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extraordinary equitable and/or injunctive relief. For each of these lawsuits, the date each complaint was filed, the name of the plaintiff and the federal court in which such lawsuit is pending are as follows:
 
  •  Konkol v. Diebold Inc., et al., No. 5:05CV2873 (N.D. Ohio, filed December 13, 2005).
 
  •  Ziolkowski v. Diebold Inc., et al., No. 5:05CV2912 (N.D. Ohio, filed December 16, 2005).
 
  •  New Jersey Carpenter’s Pension Fund v. Diebold, Inc., No. 5:06CV40 (N.D. Ohio, filed January 6, 2006).
 
  •  Rein v. Diebold, Inc., et al., No. 5:06CV296 (N.D. Ohio, filed February 9, 2006).
 
  •  Graham v. Diebold, Inc., et al., No. 5:05CV2997 (N.D. Ohio, filed December 30, 2005).
 
  •  McDermott v. Diebold, Inc., et al., No. 5:06CV170 (N.D. Ohio, filed January 24, 2006).
 
  •  Barnett v. Diebold, Inc., et al., No. 5:06CV361 (N.D. Ohio, filed February 15, 2006).
 
  •  Farrell v. Diebold, Inc., et al., No. 5:06CV307 (N.D. Ohio, filed February 8, 2006).
 
  •  Forbes v. Diebold, Inc., et al., No. 5:06CV324 (N.D. Ohio, filed February 10, 2006).
 
  •  Gromek v. Diebold, Inc., et al., No. 5:06CV579 (N.D. Ohio, filed March 14, 2006).
 
The Konkol, Ziolkowski, New Jersey Carpenter’s Pension Fund, Rein and Graham cases, which allege violations of the federal securities laws, have been consolidated into a single proceeding. The McDermott, Barnett, Farrell, Forbes and Gromek cases, which allege breaches of fiduciary duties under the Employee Retirement Income Security Act of 1974 with respect to the 401(k) plan, likewise have been consolidated into a single proceeding. The Company and the individual defendants deny the allegations made against them, regard them as without merit, and intend to defend themselves vigorously. On August 22, 2008, the court dismissed the consolidated amended complaint in the consolidated securities litigation and entered a judgment in favor of the defendants. On September 16, 2008, the plaintiffs in the consolidated securities litigation filed a notice of appeal with the U.S. Court of Appeals for the Sixth Circuit.
 
The Company, including certain of its subsidiaries, filed a lawsuit on May 30, 2008 (Premier Election Solutions, Inc., et al. v. Board of Elections of Cuyahoga County, et al., Case No. 08-CV-05-7841, (Franklin Cty. Ct Common Pleas)) against the Board of Elections of Cuyahoga County, Ohio, the Board of County Commissioners of Cuyahoga County, Ohio, (collectively, the County), and Ohio Secretary of State Jennifer Brunner (Secretary) regarding several Ohio contracts under which the Company provided voting equipment and related services to the State of Ohio and a number of its counties. The lawsuit was precipitated by the County’s threats to sue the Company for unspecified damages. The complaint seeks a declaration that the Company met its contractual obligations. In response, on July 15, 2008, the County filed an answer and counterclaim alleging that the voting system was defective and seeking declaratory relief and unspecified damages under several theories of recovery. In addition, the County is trying to pierce the Company’s “corporate veil” and hold Diebold, Incorporated directly liable for acts and omission alleged to have been committed by its subsidiaries (even though Diebold, Incorporated is not a party of the contracts.) The Secretary has also filed an answer and counterclaim seeking declaratory relief and unspecified damages under several theories of recovery. The Butler County Board of Elections has joined in, and incorporated by reference, the Secretary’s counterclaim. The Company has not yet responded to the counterclaims.
 
The Company has filed motions to dismiss and for more definite statement of the counterclaims. The motions are fully briefed and are awaiting a decision by the court. The Secretary has also added ten Ohio counties as additional defendants, claiming that those counties also experienced problems with the voting systems, but many of those counties have moved for dismissal.
 
Management is unable to determine the financial statement impact, if any, of the federal securities class action, the 401(k) class action and the electronic voting systems action.
 
The Company was informed during the first quarter of 2006 that the staff of the SEC had begun an informal inquiry relating to the Company’s revenue recognition policy. In the second quarter of 2006, the Company was informed that the SEC’s inquiry had been converted to a formal, non-public investigation. In the fourth quarter of 2007, the Company also learned that the DOJ had

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begun a parallel investigation. The Company is continuing to cooperate with the government in connection with these investigations. The Company cannot predict the length, scope or results of the investigations, or the impact, if any, on its results of operations.
 
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
The Company’s annual meeting of shareholders was held November 12, 2008. At the meeting, the following actions were taken:
 
1. The ten nominees for director were elected by the following votes:
 
                 
    For   Withheld
Louis V. Bockius III
    53,622,656       6,445,112  
Phillip R. Cox
    46,543,977       13,523,791  
Richard L. Crandall
    53,912,122       6,155,646  
Gale S. Fitzgerald
    47,262,269       12,805,499  
Phillip B. Lassiter
    45,502,168       14,565,600  
John N. Lauer
    45,441,405       14,626,363  
Eric J. Roorda
    53,897,386       6,170,382  
Thomas W. Swidarski
    58,640,517       1,427,251  
Henry D.G. Wallace
    52,120,361       7,947,407  
Alan J. Weber
    53,887,143       6,180,625  
 
2. Ratification of appointment of KPMG as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2008 was approved by the following vote:
 
                 
For   Against   Abstained
57,394,762
    2,466,490       206,516  

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PART II
 
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
The common shares of the Company are listed on the New York Stock Exchange with a symbol of DBD. The price ranges of common shares of the Company for the periods indicated below are as follows:
 
                                                 
    2008     2007     2006  
    High     Low     High     Low     High     Low  
1st Quarter
  $ 39.30     $ 23.07     $ 48.42     $ 42.50     $ 43.84     $ 36.40  
2nd Quarter
    40.44       35.44       52.70       47.25       46.35       39.15  
3rd Quarter
    39.81       30.60       54.50       42.49       44.90       36.93  
4th Quarter
    34.47       22.50       45.90       28.32       47.13       41.41  
Full Year
  $ 40.44     $ 22.50     $ 54.50     $ 28.32     $ 47.13     $ 36.40  
 
There were approximately 75,397 shareholders at December 31, 2008, which includes an estimated number of shareholders who have shares held in their accounts by banks, brokers, and trustees for benefit plans and the agent for the dividend reinvestment plan.
 
On the basis of amounts paid and declared, the annualized quarterly dividends per share were $1.00, $0.94 and $0.86 in 2008, 2007 and 2006, respectively.
 
Information concerning the Company’s share repurchases made during the fourth quarter of 2008:
 
                                 
                Total Number of
    Maximum Number of
 
    Total Number
          Shares Purchased as
    Shares that May Yet
 
    of Shares
    Average Price
    Part of Publicly
    Be Purchased Under
 
 Period   Purchased(1)     Paid Per Share     Announced Plans     the Plans(2)  
October
    3,194     $ 33.34             2,926,500  
November
                      2,926,500  
December
                      2,926,500  
                                 
Total
    3,194     $ 33.34             2,926,500  
                                 
 
(1) Includes 3,194 shares surrendered or deemed surrendered to the Company in connection with the Company’s stock-based compensation plans.
 
(2) The total number of shares repurchased as part of the publicly announced share repurchase plan was 9,073,500 as of December 31, 2008. The plan was approved by the Board of Directors in April 1997 and authorized the repurchase of up to two million shares. The plan was amended in June 2004 to authorize the repurchase of an additional two million shares, and was further amended in August and December 2005 to authorize the repurchase of an additional six million shares. On February 14, 2007, the Board of Directors approved an increase in the Company’s share repurchase program by authorizing the repurchase of up to an additional two million of the Company’s outstanding common shares. The plan has no expiration date.

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PERFORMANCE GRAPH
 
Set forth below is a line graph comparing the yearly percentage change in the cumulative shareholder return, which includes the reinvestment of cash dividends, of the Company’s common shares with the cumulative total return of (i) the S&P 500 index, (ii) the S&P Midcap 400 index, and (iii) a Custom Composite Index (28 stocks) made up of companies selected by the Company based on similarity to the Company’s line of business and similar market capitalization. The comparison covers the five-year period starting December 31, 2003 and ended December 31, 2008. The comparisons in this graph are required by rules promulgated by the SEC and are not intended to forecast future performance of the Company’s common shares.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Diebold, Inc., The S&P 500 Index,
The S&P Midcap 400 Index And A Custom Composite Index (28 Stocks)
 
(PERFORMANCE GRAPH)
 
* $100 invested on 12/31/03 in stock & index-including reinvestment of dividends.
Fiscal year ending December 31.
 
Copyright© 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
 
As of December 31, 2008, the Custom Composite Index included 28 stocks as follows: Affiliated Computer Services Inc.; Ametek Inc.; Benchmark Electronics Inc.; Cooper Industries Limited; Corning Inc.; Crane Company; Deluxe Corp.; Donaldson Company Inc.; Dover Corp.; Fiserv Inc.; FMC Technologies Inc.; Harris Corp.; Hubbell Inc.; International Game Technology; Lennox International Inc.; Mettler Toledo International Inc.; NCR Corp.; Pall Corp.; Perkinelmer Inc.; Pitney-Bowes Inc.; Rockwell Automation Inc.; Rockwell Collins Inc.; Sauer Danfoss Inc.; Teleflex Inc.; Thermo Fisher Scientific Inc.; Thomas & Betts Corp.; Unisys Corp.; and Varian Medical Systems Inc.

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ITEM 6: SELECTED FINANCIAL DATA
 
The following table should be read in conjunction with “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II — Item 8 — Financial Statements and Supplementary Data.”
 
                                         
    Year ended December 31,  
    2008     2007     2006     2005     2004(1)  
    (In millions, except per share data)  
Results of operations
                                       
Net sales
  $ 3,170     $ 2,947     $ 2,921     $ 2,569     $ 2,388  
Cost of sales
    2,375       2,265       2,186       1,919       1,715  
                                         
Gross profit
    795       682       735       650       673  
                                         
Income from continuing operations, net of tax
    102       45       109       95       177  
(Loss) income from discontinued operations, net of tax
    (13 )     (5 )     (4 )     7       2  
                                         
Net Income
  $ 89     $ 40     $ 105     $ 102     $ 179  
                                         
Basic earnings per common share:
                                       
Income from continuing operations
  $ 1.54     $ 0.68     $ 1.63     $ 1.34     $ 2.46  
(Loss) income from discontinued operations
    (0.20 )     (0.08 )     (0.06 )     0.11       0.03  
                                         
Net Income
  $ 1.34     $ 0.60     $ 1.57     $ 1.45     $ 2.49  
                                         
Diluted earnings per common share:
                                       
Income from continuing operations
  $ 1.52     $ 0.67     $ 1.62     $ 1.33     $ 2.43  
(Loss) income from discontinued operations
    (0.19 )     (0.08 )     (0.07 )     0.10       0.03  
                                         
Net Income
  $ 1.33     $ 0.59     $ 1.55     $ 1.43     $ 2.46  
                                         
Number of weighted-average shares outstanding
                                       
Basic shares
    66       66       67       71       72  
Diluted shares
    66       67       67       71       73  
Dividends
                                       
Common dividends paid
  $ 67     $ 62     $ 58     $ 58     $ 54  
Common dividends paid per share
  $ 1.00     $ 0.94     $ 0.86     $ 0.82     $ 0.74  
Consolidated balance sheet data
                                       
(as of period end)
                                       
Current assets
  $ 1,614     $ 1,594     $ 1,658     $ 1,528     $ 1,291  
Current liabilities
    735       701       746       728       853  
Net working capital
    879       893       912       800       438  
Property, plant and equipment, net
    204       220       208       226       219  
Total long-term liabilities
    856       779       816       568       140  
Total assets
    2,538       2,595       2,560       2,341       2,119  
Shareholders’ equity
    947       1,115       998       1,045       1,126  
 
(1) The data for the year ended December 31, 2004 is derived from unaudited financial statements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008
(Unaudited)
(in thousands, except per share amounts)
 
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
The MD&A is provided as a supplement and should be read in conjunction with the Consolidated Financial Statements and accompanying Notes that appear elsewhere in this annual report.
 
Introduction
 
Diebold, Incorporated is a global leader in providing integrated self-service delivery and security systems and services to the financial, retail, commercial and government markets. Founded in 1859, and celebrating 150 years of innovation in 2009, the Company today has more than 16,000 employees with representation in nearly 90 countries worldwide.
 
During the past three years, the Company’s management continued to execute against its strategic roadmap developed in 2006 to strengthen operations and build a strong foundation for future success in its two core lines of business: financial self-service and security solutions. This roadmap was built around five key priorities: increase customer loyalty; improve quality; strengthen the supply chain; enhance communications and teamwork; and rebuild profitability. In 2008, the Company met or exceeded its targets within each of these priorities through a number of operational and supply chain initiatives designed to increase customer satisfaction, improve productivity, streamline processes, enhance efficiency and decrease costs. As a result, in 2008, income from continuing operations was $101,537 or $1.52 per share, up 126 percent and 127 percent, respectively, from 2007. Total revenue in 2008 was $3,170,080 up 8 percent from 2007.
 
In connection with the Company’s filing of the restated financial statements, the Company incurred significant legal, audit and consultation fees during 2007 and 2008. In addition, the Company incurred advisory fees in 2008 as a result of the withdrawal of the unsolicited takeover bid from United Technologies Corp.
 
Looking ahead to 2009, management has positioned the Company well to withstand the challenges of a very difficult global economy. The turmoil in the financial industry, in particular, may take some time to subside, but the Company is in a unique position to deliver value to its customers by enabling them to reduce costs and improve efficiency. Based on its solid performance in 2008, the Company believes demand for financial self-service solutions remains relatively stable. However, demand in the security business is being affected by weak new bank branch construction and retail store openings in the United States. Also, the Company will focus on remediation of its material weaknesses in its internal controls. Management estimates the total cost for remediation efforts to be approximately $3,000, which includes $2,400 of consultation fees and $600 of internal costs, including software purchases.
 
Vision and strategy
 
The Company’s vision is, “To be recognized as the essential partner in creating and implementing ideas that optimize convenience, efficiency and security.” This vision is the guiding principle behind the Company’s transformation of becoming a more services-oriented Company. Today, service comprises more than 50 percent of the Company’s revenue, and the Company expects that this percentage will grow over time as the Company’s integrated services business continues to gain traction in the marketplace. For example, financial institutions are eager to reduce costs and optimize management and productivity of their ATM channels — and they are increasingly exploring outsourced solutions. The Company remains uniquely positioned to provide the infrastructure necessary to manage all aspects of an ATM network — hardware, software, maintenance, transaction processing, patch management and cash management — through its integrated product and services offerings.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
Another area of focus within the financial self-service business is broadening the Company’s deposit automation solutions set, including check imaging, envelope-free currency acceptance, teller automation, payment and document imaging solutions. For example, check imaging is not only a regulatory compliance imperative for financial institutions but a significant potential driver of cost-savings. The Company’s ImageWay® check-imaging solution fulfills an industry-wide demand for cutting-edge technologies that enhance efficiencies. In 2008, the Company solidified its competitive position in deposit automation technology with an increase in shipments of deposit automation solutions by more than 50 percent from 2007 and expanded its solutions set with the launch of a bulk check deposit capability. And in 2009, a new bulk cash acceptor will be rolled out later in the year.
 
Within the security business, the Company is diversifying by expanding and enhancing service offerings in its financial, government, commercial and retail markets. A critical area of focus is bringing thought leadership to customers while becoming a long-term business partner in the key growth areas of internet protocol security solutions, credential management, enterprise security integration and expanded integrated solutions. One new customer relationship that characterizes the progress made in 2008 is the United States Postal Service’s selection of the Company to implement a multi-site, technologically-advanced security program. This relationship underscores the Company’s commitment to elevate its presence and security integration capabilities beyond the financial market, opening up new avenues of opportunity. For example, the Company is in the early phases of introducing an energy management solution that can control and monitor heating, ventilation, air conditioning and lighting for its customers. This is another value-added service that can help relieve customers of the every-day challenges in managing their facilities while also reducing their costs and increasing environmental efficiency.
 
The focus during 2009 will be to continue to enhance and diversify the Company’s offerings, realize synergies where sensible and make prudent decisions — taking swift action wherever necessary to capture profitable growth opportunities.
 
The Company continues to face a variety of challenges and opportunities in responding to customer needs within the election systems market. While the company fully supports the subsidiary, Premier Election Solutions, it continues to pursue strategic alternatives to ownership of the subsidiary.
 
Cost savings initiatives
 
In 2006, the Company launched the SmartBusiness (SB) 100 initiative to deliver $100,000 in cost savings by the end of 2008. This key milestone was achieved in November 2008 with significant progress made in areas such as rationalization of product development, streamlining procurement, realigning the Company’s manufacturing footprint and improving logistics.
 
In September 2008, the Company announced a new goal to achieve an additional $100,000 in cost savings called SB 200 with a goal of eliminating $70,000 by the middle of 2010 and the remainder to be eliminated by the end of 2011. More specifically, as part of cost saving initiatives, during 2008, the Company transitioned from four global Opteva manufacturing plants to two based in China and Hungary, further reduced redundancy and waste across the supply chain, rationalized its U.S. warehouse network from 89 down to three major distribution centers, and initiated a product optimization and simplification program. In addition, the Company exited unprofitable business segments in Japan and Europe as well as reduced its global workforce by more than 800 full-time positions.
 
The Company is committed to making the strategic decisions that not only streamline operations, but also enhance its ability to serve its customers. The Company remains confident in the ability to continue to execute on cost-reduction initiatives, delivering solutions that help improve customers’ businesses and creating shareholder value.
 
The Company incurred significant restructuring charges in 2008 and 2007 related to severance and reorganization costs from the previously announced reduction in the Company’s global workforce. In addition, during the fourth quarter of 2008, the Company decided to discontinue its enterprise security operations in the Europe, Middle East and Africa (EMEA) region. As a

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
result, the Company recorded an impairment charge of $16,658 related to previously recorded goodwill and certain intangible assets. In addition, the Company incurred severance expenses and other charges incidental to the closure of $1,734 in 2008. These charges, along with the results of operations of this enterprise security business, are included in loss from discontinued operations, net of tax, in the Company’s Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006. The Company anticipates incurring additional charges associated with this closure of approximately $2,200 during 2009.
 
The following discussion of the Company’s financial condition and results of operations provide information that will assist in understanding the financial statements and the changes in certain key items in those 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; and
 
  •  demand beyond expectations for security products and services for the financial, retail and government sectors.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
 
The table below presents the changes in comparative financial data for the years ended December 31, 2008, 2007 and 2006. Comments on significant year-to-year fluctuations follow the table. The following discussion should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes that appear elsewhere in this annual report.
 
                                                                 
    Year ended December 31,  
    2008     2007     2006  
          % of
    %
          % of
    %
          % of
 
    Dollars     Net Sales     Change     Dollars     Net Sales     Change     Dollars     Net Sales  
    (In thousands, except percentages)  
Net sales
                                                               
Products
  $ 1,562,948       49.3       9.3     $ 1,429,646       48.5       (4.8 )   $ 1,500,998       51.4  
Services
    1,607,132       50.7       5.9       1,517,835       51.5       6.9       1,419,976       48.6  
                                                                 
      3,170,080       100.0       7.6       2,947,481       100.0       0.9       2,920,974       100.0  
                                                                 
Cost of sales
                                                               
Products
    1,145,225       36.1       7.0       1,070,286       36.3       1.2       1,057,375       36.2  
Services
    1,230,239       38.8       2.9       1,195,286       40.6       5.9       1,128,428       38.6  
                                                                 
      2,375,464       74.9       4.9       2,265,572       76.9       3.6       2,185,803       74.8  
                                                                 
Gross profit
    794,616       25.1       16.5       681,909       23.1       (7.2 )     735,171       25.2  
Selling and administrative expenses
    534,486       16.9       15.4       463,354       15.7       1.3       457,267       15.7  
Research, development and engineering expense
    79,070       2.5       6.9       73,950       2.5       3.2       71,625       2.5  
Impairment of assets
    4,376       0.1       (90.6 )     46,319       1.6       139.5       19,337       0.7  
Loss (gain) on sale of assets, net
    403       0.0       (106.3 )     (6,392 )     (0.2 )     (2,048.8 )     328       0.0  
                                                                 
      618,335       19.5       7.1       577,231       19.6       5.2       548,557       18.8  
Operating profit
    176,281       5.6       68.4       104,678       3.6       (43.9 )     186,614       6.4  
Other expense, net
    (28,906 )     (0.9 )     85.6       (15,575 )     (0.5 )     (15.0 )     (18,324 )     (0.6 )
Minority interest
    (8,413 )     (0.3 )     0.6       (8,365 )     (0.3 )     29.6       (6,452 )     (0.2 )
                                                                 
Income from continuing operations before taxes
    138,962       4.4       72.1       80,738       2.7       (50.1 )     161,838       5.5  
Taxes on income
    37,425       1.2       4.5       35,797       1.2       (32.4 )     52,916       1.8  
                                                                 
Income from continuing operations
    101,537       3.2       125.9       44,941       1.5       (58.7 )     108,922       3.7  
Loss from discontinued operations — net of tax
    (12,954 )     (0.4 )     139.9       (5,400 )     (0.2 )     23.6       (4,370 )     (0.1 )
                                                                 
Net income
  $ 88,583       2.8       124.0     $ 39,541       1.3       (62.2 )   $ 104,552       3.6  
                                                                 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
RESULTS OF OPERATIONS
 
2008 Comparison with 2007
 
Net Sales
 
The following table represents information regarding our net sales for the years ended December 31, 2008 and 2007:
 
                                 
    Year ended
       
    December 31,        
    2008   2007   $ Change   % Change
Net sales
  $ 3,170,080     $ 2,947,481     $ 222,599       7.6  
 
The increase in net sales included a net positive currency impact of approximately $48,205. Financial self-service revenue in 2008 increased by $169,456 or 8.2 percent over 2007. Within the geographic areas, there was particularly strong growth in the Americas of $125,051 and Asia Pacific of $68,226. The increase in the Americas was due to higher revenue in Brazil of $90,300 in relation to several large orders as well as positive currency impact of 8.7 percent. The Asia Pacific increase was due to higher volume, with approximately two-thirds of the total growth coming from China and with additional contributions from India and Thailand. Security solutions revenue decreased by $37,262 or 4.6 percent for 2008. Weakness in the banking segment accounted for much of the year-over-year decrease. In addition, security revenue was impacted by reduced spending by major customers in the retail market. However, the government and commercial security business, in total, was up slightly for the year. Election systems/lottery net sales of $154,108 increased by $90,405 or 141.9 percent compared to 2007. The year-over-year increase was related to increases in voting equipment revenue of $90,670, with Brazil accounting for two-thirds of the growth. The Brazilian lottery systems revenue of $4,308 was down $265 from 2007.
 
Gross Profit
 
The following table represents information regarding our gross profit for the years ended December 31, 2008 and 2007:
 
                                 
    Year ended December 31,   $ Change/
   
    2008   2007   % Point Change   % Change
Gross profit
  $ 794,616     $ 681,909     $ 112,707       16.5  
Gross profit margin
    25.1 %     23.1 %     2.0          
 
Product gross margin was 26.7 percent in 2008 compared to 25.1 percent in 2007. Product gross margin was adversely impacted by $15,982 of restructuring charges in 2008 and $27,349 in 2007. The 2007 restructuring charges were primarily related to the closure of the manufacturing plant in Cassis, France. In addition, product gross margin for 2008 was positively affected by the Brazilian election systems business and increased profitability in the U.S. election systems business, despite an inventory write down of $12,969 in 2008 compared to $3,713 in 2007. Benefits realized from cost savings initiatives were partially offset by unfavorable sales mix within North America, higher steel and commodity costs, and price erosion in certain international markets. Service gross margin for 2008 was 23.5 percent compared with 21.3 percent for 2007. Service gross margin was adversely affected by $9,663 of restructuring charges in 2008 and $1,319 in 2007. The increase in service gross margin reflects savings from our cost savings initiatives, productivity and efficiency gains, and improved product quality. These gains came despite significant year-over-year increases in fuel costs.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
Operating Expenses
 
The following table represents information regarding our operating expenses for the years ended December 31, 2008 and 2007:
 
                                     
      Year ended December 31,                
      2008     2007       $ Change     % Change  
Selling and administrative expense
    $ 534,486     $ 463,354       $ 71,132       15.4  
Research, development, and engineering expense
      79,070       73,950         5,120       6.9  
Impairment of assets
      4,376       46,319         (41,943 )     (90.6 )
Loss (gain) on sale of assets, net
      403       (6,392 )       6,795       (106.3 )
                                     
Total operating expenses
    $ 618,335     $ 577,231       $ 41,104       7.1  
                                     
 
Selling and administrative expense was adversely impacted by $11,780 of restructuring charges in 2008 compared to $1,299 of restructuring charges in 2007. In addition, selling and administrative expenses were adversely affected by non-routine expenses of $45,145 in 2008 and $7,288 in 2007. These non-routine expenses consisted of legal, audit and consultation fees, primarily related to the internal review of other accounting items, restatement of financial statements and the ongoing SEC and DOJ investigations and related advisory fees. Included in the non-routine expenses for 2008 was a $13,500 fee owed to financial advisor Goldman Sachs as a result of the withdrawal of the unsolicited takeover bid from United Technologies Corp. Selling and administrative expense in 2008 was also unfavorably impacted by a weakening of the U.S. dollar. Finally, in 2007, the Company reduced the reserve for the election systems trade receivable mainly related to two counties in California by $10,090, due to payments received. Research, development and engineering expense for both 2008 and 2007 were 2.5 percent of net sales. Restructuring charges of $63 were included in research, development and engineering expense for 2007 as compared to $3,712 of restructuring charges in 2008 related to product development rationalization. The Company incurred a charge of $4,376 for the impairment of intangible assets related to 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 impairment of assets in 2007 was a non-cash charge of $46,319 related to the goodwill impairment for PESI. The gain on sale of assets for 2007 of $6,392 was related to the sale of the Company’s manufacturing facility in Cassis, France, of which $6,438 was associated with the Company’s restructuring initiatives. Restructuring charges of $435 were included in the loss/(gain) on sale of assets in 2008.
 
Operating Profit
 
The following table represents information regarding our operating profit for the years ended December 31, 2008 and 2007:
 
                                 
    Year ended December 31,   $ Change/
   
    2008   2007   % Point Change   % Change
Operating profit
  $ 176,281     $ 104,678     $ 71,603       68.4  
Operating profit margin
    5.6 %     3.6 %     2.0          
 
The increase in operating profit resulted from the Brazilian election systems business, higher revenue and profitability in the U.S. and international service markets, and lower expense related to the goodwill impairment for PESI of $46,319 in 2007. This was partially offset by the increase in non-routine expenses as well as higher restructuring charges.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
Other Income (Expense) and Minority Interest
 
The following table represents information regarding our other income (expense) and minority interest for the years ended December 31, 2008 and 2007:
 
                                       
      Year ended December 31,       $ Change/
       
      2008       2007       % Point Change     % Change  
Investment income
    $ 25,228       $ 22,489       $ 2,739       12.2  
Interest expense
      (45,247 )       (42,200 )       (3,047 )     7.2  
Miscellaneous, net
      (8,887 )       4,136         (13,023 )     (314.9 )
                                       
Other income (expense)
    $ (28,906 )     $ (15,575 )     $ (13,331 )     85.6  
                                       
Percentage of net sales
      (0.9 )       (0.5 )       (0.4 )        
Minority interest
    $ (8,413 )     $ (8,365 )     $ (48 )     0.6  
 
The change in miscellaneous income/(expense) between years was due to moving from a foreign exchange gain in 2007 of $1,587 to a foreign exchange loss in 2008 of $9,341.
 
Income from Continuing Operations
 
The following table represents information regarding our income from continuing operations for the years ended December 31, 2008 and 2007:
 
                                       
      Year ended December 31,     $ Change/
   
      2008     2007     % Point Change   % Change
Income from continuing operations
    $ 101,537       $ 44,941       $ 56,596       125.9  
Percent of net sales
      3.2         1.5         1.7          
Effective tax rate
      26.9 %       44.3 %       (17.4 )        
 
The increase in income from continuing operations was related to the Brazilian election systems business, lower expense related to the impairment of assets, and a more favorable tax rate. This was partially offset by an unfavorable change in foreign exchange gain/(loss) between years within other income (expense). The decrease in the 2008 effective tax rate is attributable to an increase in foreign earnings in jurisdictions with lower effective tax rates. Additionally, in 2007, the Company had a significant goodwill impairment that negatively impacted the 2007 effective tax rate by 20 percent.
 
Loss from Discontinued Operations
 
The following table represents information regarding our loss from discontinued operations for the years ended December 31, 2008 and 2007:
 
                                       
      Year ended December 31,     $ Change/
   
      2008     2007     % Point Change   % Change
Loss from discontinued operations, net of tax
    $ (12,954 )     $ (5,400 )     $ (7,554 )     139.9  
Percent of net sales
      (0.4 )       (0.2 )       (0.2 )        

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
Discontinued operations in the EMEA based enterprise security business negatively impacted net income. This business was not achieving an acceptable level of profitability and therefore, the operations were closed entirely. Included in the 2008 discontinued operations was a non-cash pre-tax asset impairment charge of $16,658.
 
Net Income
 
The following table represents information regarding our net income for the years ended December 31, 2008 and 2007:
 
                                       
      Year ended December 31,     $ Change/
   
      2008     2007     % Point Change   % Change
Net income
    $ 88,583       $ 39,541       $ 49,042       124.0  
Percent of net sales
      2.8         1.3         1.5          
 
Based on the results from continuing and discontinued operations discussed above, the Company reported net income of $88,583 and $39,541 for the years ended December 31, 2008 and 2007.
 
Segment Revenue and Operating Profit Summary
 
DNA net sales of $1,535,989 for 2008 decreased $7,066 or 0.5 percent from 2007 net sales of $1,543,055. The decrease in DNA net sales was due to decreased revenue from the security solutions product and service offerings. DI net sales of $1,479,983 for 2008 increased by $139,260 or 10.4 percent over 2007 net sales of $1,340,723. The increase in DI net sales was due to revenue growth across most international markets, led by growth of $90,300 in Brazil and $62,714 in Asia Pacific. ES & Other net sales of $154,108 for 2008 increased $90,405 or 141.9 percent over 2007 net sales of $63,703. The increase was due to higher Brazilian voting revenue of $61,560 and U.S.-based election systems revenue of $29,110. Revenue from lottery systems was $4,308 for 2008, a decrease of $265 over 2007.
 
DNA operating profit for 2008 decreased by $26,054 or 23.1 percent compared to 2007. Operating profit was unfavorably affected by higher non-routine expenses, workforce optimization restructuring charges, and increased commodity costs. This was partially offset by higher service profitability and the Company’s ongoing cost reduction efforts. DI operating profit for 2008 increased by $32,727 or 62.2 percent compared to 2007. The increase was due to higher volume in Brazil and China as a result of several large orders. Operating profit for ES & Other increased by $64,930, moving from an operating loss of $60,890 in 2007 to an operating profit of $4,040 in 2008. The increase resulted from the goodwill impairment for PESI of $46,319, which occurred in 2007, and higher revenue in the Brazilian election systems business in 2008. In 2007, the Company reduced the reserve for the election systems trade receivable related to two counties in California by $10,090, primarily due to payments received.
 
Refer to Note 19 to the Consolidated Financial Statements for further details of segment revenue and operating profit.
 
2007 Comparison with 2006
 
Net Sales
 
The following table represents information regarding our net sales for the years ended December 31, 2007 and 2006:
 
                                 
    Year ended
       
    December 31,        
    2007   2006   $ Change   % Change
Net sales
  $ 2,947,481     $ 2,920,974     $ 26,507       0.9  

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
The increase in net sales included a net positive currency impact of approximately $98,589. Financial self-service revenue in 2007 increased by $132,486 or 6.8 percent over 2006, due to solid growth in the international market segments and a weakening of the U.S. dollar, which accounted for 4.6 percent of the growth. Security solutions revenue increased by $63,609 or 8.5 percent for 2007. Election systems/lottery net sales of $63,703 decreased by $169,588 or 72.7 percent compared to 2006. The year-over-year decline was related to decreases in both voting equipment revenue of $137,723 and decreased Brazilian lottery systems revenue of $31,865.
 
Gross Profit
 
The following table represents information regarding our gross profit for the years ended December 31, 2007 and 2006:
 
                                 
    Year ended December 31,   $ Change/
   
    2007   2006   % Point Change   % Change
Gross profit
  $ 681,909     $ 735,171     $ (53,262 )     (7.2 )
Gross profit margin
    23.1 %     25.2 %     (2.1 )        
 
Product gross margin was 25.1 percent in 2007 compared to 29.6 percent in 2006. Product gross margin was adversely impacted by $27,349 of restructuring charges in 2007 compared to $3,299 of restructuring charges in 2006. The 2007 restructuring charges were primarily related to the closure of the manufacturing plant in Cassis, France. In addition, product gross margin was adversely affected by lower election systems/lottery revenue and decreased profitability in the U.S. election systems business in 2007 compared to 2006 which included an inventory write down of $3,713 in 2007. Service gross margin for 2007 was 21.3 percent compared with 20.5 percent for 2006. The increase in service gross margin was due to higher revenue and profitability in DNA, which was partly attributable to a decrease in restructuring charges of $2,640 from 2006 to 2007.
 
Operating Expenses
 
The following table represents information regarding our operating expenses for the years ended December 31, 2007 and 2006:
 
                                     
      Year ended December 31,                
      2007     2006       $ Change     % Change  
Selling and administrative expense
    $ 463,354     $ 457,267       $ 6,087       1.3  
Research, development, and engineering expense
      73,950       71,625         2,325       3.2  
Impairment of assets
      46,319       19,337         26,982       139.5  
(Gain) loss on sale of assets, net
      (6,392 )     328         (6,720 )     N/M  
                                     
Total operating expenses
    $ 577,231     $ 548,557       $ 28,674       5.2  
                                     
 
Selling and administrative expense for 2007 was 15.7 percent of net sales, flat from 15.7 percent for 2006. Selling and administrative expense included $1,299 of restructuring charges in 2007 compared to $14,866 of restructuring charges in 2006 associated with the termination of the information technology outsourcing agreement, realignment of global service, and relocation of the Company’s European headquarters. In addition, non-routine expenses of $7,288, which consisted of legal, audit and consultation fees related to the internal review of other accounting items, restatement of financial statements and the ongoing SEC and DOJ investigations and related advisory fees, adversely impacted 2007 compared with $791 of similar expenses

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
for 2006. Selling and administrative expense in 2007 was also unfavorably impacted by a weakening of the U.S. dollar and incremental spend related to acquisitions. In 2007, the Company reduced the reserve for the election systems trade receivable related to two counties in California by approximately $10,090 due to payments received. Research, development and engineering expense for 2007 was 2.5 percent of net sales as compared to 2.5 percent in 2006. Restructuring charges of $63 were included in research, development and engineering expense for 2007 as compared to $4,950 of restructuring charges in 2006 related to product development rationalization. The impairment of assets in 2007 was a non-cash charge of $46,319 related to the goodwill impairment for PESI. In 2006, the non-cash charge of $19,337 related to the impairment of a portion of the costs previously capitalized relative to the Company’s enterprise resource planning system implementation. The gain on sale of assets for 2007 of $6,392 was related to the sale of the Company’s manufacturing facility in Cassis, France, of which $6,438 was associated with the Company’s restructuring initiatives.
 
Operating Profit
 
The following table represents information regarding our operating profit for the years ended December 31, 2007 and 2006:
 
                                 
    Year ended December 31,   $ Change/
   
    2007   2006   % Point Change   % Change
Operating profit
  $ 104,678     $ 186,614     $ (81,936 )     (43.9 )
Operating profit margin
    3.6 %     6.4 %     (2.8 )        
 
The decrease in operating profit resulted from lower election systems/lottery revenue, decreased profitability in the U.S. election systems business in 2007 compared to 2006, and higher expense related to the impairment of assets. Additional contributing factors were increased operating expenses resulting from a weakening of the U.S. dollar and incremental spend related to acquisitions. Restructuring charges of $23,592 or 0.8 percent of net sales related to the closure of the manufacturing plant in Cassis, France, adversely affected the operating profit in 2007 compared to $27,074 or 0.9 percent of net sales for in 2006. The 2006 restructuring charges were associated with the consolidation of global research and development and other service consolidations, termination of the information technology outsourcing agreement, relocation of the Company’s European headquarters, realignment of the Company’s global manufacturing operations and product development rationalization. In addition, non-routine expenses as described previously of $7,288 or 0.2 percent of net sales affected the operating profit in 2007 compared to $791 for 2006.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
Other Income (Expense) and Minority Interest
 
The following table represents information regarding our other income (expense) and minority interest for the years ended December 31, 2007 and 2006:
 
                                       
      Year ended December 31,       $ Change/
       
      2007       2006       % Point Change     % Change  
Investment income
    $ 22,489       $ 19,069       $ 3,420       17.9  
Interest expense
      (42,200 )       (35,305 )       (6,895 )     19.5  
Miscellaneous, net
      4,136         (2,088 )       6,224       (298.1 )
                                       
Other income (expense)
    $ (15,575 )     $ (18,324 )     $ 2,749       (15.0 )
                                       
Percentage of net sales
      (0.5 )       (0.6 )       0.1          
Minority interest
    $ (8,365 )     $ (6,452 )     $ (1,913 )     29.6  
 
The increase in interest expense was the result of higher interest rates year-over-year. The change in miscellaneous income / (expense) between years was due to movement from a position of foreign exchange loss in 2006 to a foreign exchange gain in 2007.
 
Income from Continuing Operations
 
The following table represents information regarding our income from continuing operations for the years ended December 31, 2007 and 2006:
 
                                       
      Year ended December 31,     $ Change/
   
      2007     2006     % Point Change   % Change
Income from continuing operations
    $ 44,941       $ 108,922       $ (63,981 )     (58.7 )
Percent of net sales
      1.5         3.7         (2.2 )        
Effective tax rate
      44.3 %       32.7 %       11.6          
 
The decrease in income from continuing operations was related to lower election systems/lottery revenue, decreased profitability in the U.S. election systems business in 2007 compared to 2006, and higher expense related to the impairment of assets between years. For the reconciliation between the U.S. statutory rate and the Company’s effective tax rate, see Note 4 to the Consolidated Financial Statements.
 
Loss from Discontinued Operations
 
The following table represents information regarding our loss from discontinued operations for the years ended December 31, 2007 and 2006:
 
                                       
      Year ended December 31,     $ Change/
   
      2007     2006     % Point Change   % Change
Loss from discontinued operations, net of tax
    $ (5,400 )     $ (4,370 )     $ (1,030 )     23.6  
Percent of net sales
      (0.2 )       (0.1 )       (0.1 )        

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
Discontinued operations in the EMEA based enterprise security business negatively impacted net income, moving from a loss of $4,370 net of tax in 2006 to a loss net of tax of $5,400 in 2007. This business was not achieving an acceptable level of profitability and therefore the operations were closed entirely in 2008.
 
Net Income
 
The following table represents information regarding our net income for the years ended December 31, 2007 and 2006:
 
                                       
      Year ended December 31,     $ Change/
   
      2007     2006     % Point Change   % Change
Net income
    $ 39,541       $ 104,552       $ (65,011 )     (62.2 )
Percent of net sales
      1.3         3.6         (2.3 )        
 
Based on the results from continuing and discontinued operations discussed above, the Company reported net income of $39,541 and $104,552 for the years ended December 31, 2007 and 2006.
 
Segment Revenue and Operating Profit Summary
 
DNA net sales of $1,543,055 for 2007 increased $23,386 or 1.5 percent over 2006 net sales of $1,519,669. The increase in DNA net sales was due to increased revenue from the security solutions product and service offerings. DI net sales of $1,340,723 for 2007 increased by $172,709 or 14.8 percent over 2006 net sales of $1,168,014. The increase in DI net sales was due to revenue growth across all international markets, led by growth of $51,560 in EMEA and $46,910 in Asia Pacific. ES & Other net sales of $63,703 for 2007 decreased $169,588 or 72.7 percent compared to 2006. The decrease was due to decreases in Brazilian voting revenue of $24,728 and U.S.-based election systems revenue of $112,995, as political debates over electronic voting negatively impacted the U.S. election systems business, resulting in decreased sales of election systems products. Revenue from lottery systems was $4,573 for 2007, a decrease of $31,865 over 2006.
 
DNA operating profit for 2007 decreased by $6,796 or 5.7 percent compared to 2006. The decrease was due to higher operating expenses consisting of incremental spend related to acquisitions as well as higher non-routine expenses associated with the legal, audit and consultation fees for the internal review of other accounting items, restatement of financial statements, and the ongoing SEC and DOJ investigations and related advisory fees. DI operating profit for 2007 increased by $25,974 or 97.6 percent compared to 2006. The increase was due to strong financial self-service revenue growth and increased profitability. The improvement was partially offset by an increase in restructuring charges from 2006 to 2007 of $3,949 and higher non-routine expenses previously mentioned. Operating profit for ES & Other decreased by $101,114, moving from an operating profit of $40,224 in 2006 to an operating loss of $60,890 in 2007. The decrease in ES & Other operating profit resulted from the goodwill impairment for PESI of $46,319 in 2007 and lower revenue associated with the sales of election systems/lottery products and services. In 2007, the Company reduced the reserve for the election systems trade receivable related to two counties in California by approximately $10,090 due to payments received.
 
Refer to Note 19 to the Consolidated Financial Statements for further details of segment revenue and operating profit.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Capital resources are obtained from income retained in the business, borrowings under the Company’s senior notes, committed and uncommitted credit facilities, long-term industrial revenue bonds, and operating and capital leasing arrangements. Refer to Notes 9 and 10 to the Consolidated Financial Statements regarding information on outstanding and available credit

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
facilities, senior notes and bonds. Management expects that the Company’s capital resources will be sufficient to finance planned working capital needs, investments in facilities or equipment, and the purchase of the Company’s shares for at least the next 12 months. 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.
 
The following table summarizes the results of our Consolidated Statement of Cash Flows for the years ended December 31, 2008, 2007 and 2006:
 
                               
      Year ended December 31,  
      2008       2007       2006  
Net cash flow provided (used) by:
                             
Operating activities
    $ 284,691         150,260       $ 232,926  
Investing activities
      (142,484 )       (80,370)         (171,324 )
Financing activities
      (87,689 )       (135,276)         (23,774 )
Effect of exchange rate changes on cash and cash equivalents
      (19,416 )       17,752         5,747  
                               
Net increase (decrease) in cash and cash equivalents
    $ 35,102       $ (47,634)       $ 43,575  
                               
 
During 2008, the Company generated $284,691 in cash from operating activities, an increase of $134,431 or 89.5 percent from 2007. Cash flows from operating activities are generated primarily from operating income and controlling the components of working capital. The primary reasons for the increase were the $49,042 increase in net income, a $30,149 increase in accounts payable and a $175,832 net change in certain other assets and liabilities, offset by a lower decrease of $110,316 in trade receivables, a $62,605 increase in inventory and a $41,943 decrease in asset impairments. The change in certain other assets and liabilities was primarily the result of a $16,000 increase in accruals for legal, audit and consultation fees, an $11,100 increase in warranty reserves, a $10,600 increase in restructuring accruals, an $11,976 change in notes receivable collections, net, as well as increases in VAT taxes and freight accruals as a result of increased product revenue and a $70,661 foreign currency translation impact on certain assets and liabilities. The decrease in trade receivables was $10,633 in 2008 compared to $120,949 in 2007 as a result of continued focus on cash collections. However, there were lower fourth quarter sales and accounts receivable levels in 2008 compared to 2007. Days sales outstanding was 45 days at December 31, 2008 compared to 46 days at December 31, 2007. The movement in inventory is largely due to foreign currency translation impact. The Company impaired $4,376 of intangible assets in 2008 continuing operations related to previously acquired customer contracts compared to $46,319 in 2007 related to PESI goodwill.
 
Net cash used for investing activities was $142,484 in 2008, an increase of $62,114 or 77.3 percent over 2007. The Company had net purchases of investments in 2008 of $53,681 compared to net proceeds from maturities of investments in 2007 of $6,845. Also, the Company’s capital expenditures increased by $14,673 in 2008 compared to 2007, largely due to investments in information technology systems that help focus in improving operational efficiency. This increase was offset by a decrease of $13,661 in payments for acquisitions, moving from $18,122 in 2007 for three domestic acquisitions and earn-out payments to $4,461 in 2008 for earn-out payments related to prior acquisitions.
 
Net cash used for financing activities was $87,689 in 2008, a decrease of $47,587 or 35.2 percent over 2007. The Company had net repayments of $17,771 in 2008 compared to net repayments of $64,059 in 2007. Also, the Company paid $18,236 to

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
minority interest holders, offset by issuance of common shares of $8,544 in 2007 and paid $3,523 to minority interest holders in 2008.
 
The following table summarizes the Company’s approximate obligations and commitments to make future payments under contractual obligations as of December 31, 2008:
 
                                                   
              Payment Due by period  
              Less Than
                      More Than
 
      Total       1 Year       1-3 Years       3-5 Years       5 Years  
Operating lease obligations
    $ 218,582       $ 66,058       $ 89,679       $ 38,200       $ 24,645  
Industrial development revenue bonds
      11,900                                 11,900  
Notes payable
      605,184         10,596         294,588         75,000         225,000  
Interest on bonds and notes payable(1)
      156,519         29,414         41,192         37,818         48,095  
Purchase commitments
      19,488         11,403         8,085                  
                                                   
      $ 1,011,673       $ 117,471       $ 433,544       $ 151,018       $ 309,640  
                                                   
(1) Amounts represent estimated contractual interest payments on outstanding bonds and notes payable. Rates in effect as of December 31, 2008 are used for variable rate debt.
 
The Company also has uncertain tax positions of $9,009 recorded in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48), for which there is a high degree of uncertainty as to the expected timing of payments.
 
The Company expects to contribute $12,000 to $15,000 to its pension plans in the year ended December 31, 2009.
 
In March 2006, the Company issued senior notes in an aggregate principal amount of $300,000. 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 this offering to repay notes payable under its revolving credit facility and used the remaining $30,000 in operations. See Note 9 to the Consolidated Financial Statements for further information. The Company does not participate in transactions that facilitate off-balance sheet arrangements.
 
The Company has a credit facility with borrowing limits of $509,665, ($300,000 and €150,000, translated), at December 31, 2008. Under the terms of the credit facility agreement, the Company has the ability to increase the borrowing limits an additional $150,000. This facility expires on April 27, 2010. The Company intends to begin the renewal process in the second half of 2009. The private placement investors and financial institutions continue to express support in meeting the credit needs of the Company. The Company believes that its financial position and its strong relationships with its credit group should help facilitate the renewal process, though there can be no assurance that the Company will be able to renew the credit facility on commercially acceptable terms. As of December 31, 2008, $294,588 was outstanding under the Company’s credit facility and $215,077 was available for borrowing.
 
The average interest rate on the Company’s bank credit lines was 3.90 percent, 5.46 percent and 4.66 percent for the years ended December 31, 2008, 2007 and 2006, respectively. Interest on financing charged to expense for the years ended December 31 was $30,137, $33,077 and $34,883 for 2008, 2007 and 2006, respectively.
 
The Company’s financing agreements contain various restrictive financial covenants, including net debt to capitalization and net interest coverage ratios. As of December 31, 2008, the Company was in compliance with the financial covenants in our debt agreements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
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 Consolidated Financial Statements. The Consolidated Financial Statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of the accompanying Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include the value of purchase consideration, valuation of trade receivables, inventories, goodwill, intangible assets, other long-lived assets, legal contingencies, guarantee obligations, indemnifications and assumptions used in the calculation of income taxes, pension and postretirement benefits and customer incentives, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic difficulties in the United States credit markets and the global markets. Management monitors the economic condition and other factors and will adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile foreign currency and equity, and declines in the global economic environment have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
 
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. Management believes that, of its significant accounting policies, its policies concerning revenue recognition, allowances for doubtful accounts, inventories, goodwill, and pensions and postretirement benefits are the most critical because they are affected significantly by judgments, assumptions and estimates. Additional information regarding these policies is included below.
 
Revenue Recognition The Company’s revenue recognition policy is consistent with the requirements of Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), and Staff Accounting Bulletin 104 (SAB 104). In general, the Company records revenue when it is realized, or realizable and earned. The Company considers revenue to be realized, or realizable and earned, when the following revenue recognition requirements are met: persuasive evidence of an arrangement exists, which is a customer contract; the products or services have been accepted by the customer via delivery or installation acceptance; the sales price is fixed or determinable within the contract; and collectability is probable.
 
For product sales, the Company determines that the earnings process is complete when title, risk of loss and the right to use equipment has transferred to the customer. Within the North America business segment, this occurs upon customer acceptance. Where the Company is contractually responsible for installation, customer acceptance occurs upon completion of the installation of all items at a job site and the Company’s demonstration that the items are in operable condition. Where items are contractually only delivered to a customer, revenue recognition of these items is upon shipment or delivery to a customer location depending on the terms in the contract. Within the International business segment, customer acceptance is upon the earlier of delivery or completion of the installation depending on the terms in the contract with the customer. The Company has the following revenue streams related to sales to its customers:
 
Self-Service Product & Service Revenue Self-service products pertain to ATMs. Included within the ATM is software, which operates the ATM. The related software is considered more than incidental to the equipment as a whole. Revenue is recognized in accordance with SOP 97-2. The Company also provides service contracts on ATMs.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
Service contracts typically cover a 12-month period and can begin at any given month during the year after the standard 90-day warranty period expires. The service provided under warranty is significantly limited as compared to those offered under service contracts. Further, warranty is not considered a separate element of the sale. The Company’s warranty covers only replacement of parts inclusive of labor. Service contracts are tailored to meet the individual needs of each customer. Service contracts provide additional services beyond those covered under the warranty, and usually include preventative maintenance service, cleaning, supplies stocking and cash handling, all of which are not essential to the functionality of the equipment. For sales of service contracts, where the service contract is the only element of the sale, revenue is recognized ratably over the life of the contract period. In contracts that involve multiple-element arrangements, amounts deferred for services are determined based upon vendor specific objective evidence of the fair value of the elements as prescribed in SOP 97-2. The Company determines fair value of deliverables within a multiple element arrangement based on the price charged when each element is sold separately.
 
Physical Security & Facility Revenue The Company’s Physical Security and Facility Products division designs and manufactures several of the Company’s financial service solutions offerings, including the RemoteTellertm System (RTS). The business unit also develops vaults, safe deposit boxes and safes, drive-up banking equipment and a host of other banking facilities products. Revenue on sales of the products described above is recognized when the four revenue recognition requirements of SAB 104 have been met.
 
Election Systems Revenue The Company, through its wholly-owned subsidiaries, PESI and Procomp Industria Eletronica S.A. , offers voting equipment. Election systems revenue consists of election equipment, software, training, support, installation and maintenance. The election equipment and software components are included in product revenue. The training, support, installation and maintenance components are included in service revenue. The election systems contracts contain multiple deliverable elements and custom terms and conditions. Revenue on election systems contracts is recognized in accordance with SOP 97-2. The Company recognizes revenue for delivered elements only when the fair value of undelivered elements are known, uncertainties regarding customer acceptance are resolved and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. The Company determines fair value of deliverables within a multiple-element arrangement based on the price charged when each element is sold separately. Some contracts may contain discounts and, as such, revenue is recognized using the residual value method of allocation of revenue to the product and service components of contracts.
 
Integrated Security Solutions Revenue Diebold Integrated Security Solutions provides global sales, service, installation, project management and monitoring of OEM electronic security products to financial, government, retail and commercial customers. These solutions provide the Company’s customers a single-source solution to their electronic security needs. Revenue is recognized in accordance with SAB 104. Revenue on sales of the products described above is recognized upon shipment, installation or customer acceptance of the product as defined in the customer contract. In contracts that involve multiple-element arrangements, amounts deferred for services are determined based upon the fair value of the elements as prescribed in EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.
 
Software Solutions & Service Revenue The Company offers software solutions consisting of multiple applications that process events and transactions (networking software) along with the related server. Sales of networking software represent software solutions to customers that allow them to network various different vendors’ ATMs onto one network and revenue is recognized in accordance with SOP 97-2.
 
Included within service revenue is revenue from software support agreements, which are typically 12 months in duration and pertain to networking software. For sales of software support agreements, where the agreement is the only element of the sale, revenue is recognized ratably over the life of the contract period. In contracts that involve multiple-element arrangements,

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
amounts deferred for support are determined based upon vendor specific objective evidence of the fair value of the elements as prescribed in SOP 97-2.
 
Allowances for Doubtful Accounts The Company evaluates the collectibility of accounts receivable based on (1) a percentage of sales, which is based on historical loss experience and current trends, are reserved for uncollectible accounts as sales occur throughout the year and (2) periodic adjustments for known events such as specific customer circumstances and changes in the aging of accounts receivable balances. Since the Company’s receivable balance is concentrated primarily in the financial and government sectors, an economic downturn in these sectors could result in higher than expected credit losses.
 
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 PESI that value inventory using the average cost method, which approximates FIFO. At each reporting period, the Company identifies and writes down its excess and 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.
 
Goodwill Goodwill is the cost in excess of the net assets of acquired businesses. The Company tests all existing goodwill at least annually for impairment using the fair value approach on a “reporting unit” basis in accordance with SFAS 142, Goodwill and Other Intangible Assets. The Company’s reporting units are defined as Domestic and Canada, Brazil, Latin America, Asia Pacific, EMEA and Election Systems. The Company uses the discounted cash flow method and the guideline company method for determining the fair value of its reporting units. As required by SFAS 142, the determination of implied fair value of the goodwill for a particular reporting unit is the excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities in the same manner as the allocation in a business combination. Implied fair value goodwill is determined as the excess of the fair value of the reporting unit over the fair value of its assets and liabilities. The Company’s fair value model uses inputs such as estimated future segment performance. The Company uses the most current information available and performs the annual impairment analysis as of November 30 each year. However, actual circumstances could differ significantly from assumptions and estimates made and could result in future goodwill impairment. The Company tests for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the carrying value of a reporting unit below its reported amount.
 
Pensions and Postretirement Benefits Annual net periodic expense and benefit liabilities under the Company’s defined benefit plans are determined on an actuarial basis. Assumptions used in the actuarial calculations have a significant impact on plan obligations and expense. Annually, management and the investment committee of the Board of Directors review the actual experience compared with the more significant assumptions used and make adjustments to the assumptions, if warranted. The healthcare trend rates are reviewed with the actuaries based upon the results of their review of claims experience. The expected long-term rate of return on plan assets is determined using the plans’ current asset allocation and their expected rates of return based on a geometric averaging over 20 years. The discount rate is determined by analyzing the average return of high-quality (i.e., AA-rated) fixed-income investments and the year-over-year comparison of certain widely used benchmark indices as of the measurement date. The rate of compensation increase assumptions reflects the Company’s long-term actual experience and future and near-term outlook. Pension benefits are funded through deposits with trustees. The market-related value of plan assets is calculated under an adjusted market value method in order to determine the Company’s net periodic benefit obligation. The value is determined by adjusting the fair value of assets to reflect the investment gains and losses (i.e., the difference between the actual investment return and the expected investment return on the market-related value of assets) during each of the last five years at the rate of 20 percent per year.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
Postretirement benefits are not funded and the Company’s policy is to pay these benefits as they become due. The following table represents assumed health care cost trend rates at December 31, 2008 and 2007, respectively.
 
                 
    December 31,
    2008   2007
Healthcare cost trend rate assumed for next year
    9.00 %     7.57 %
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
    4.20 %     5.00 %
Year that rate reaches ultimate trend rate
    2099       2014  
 
The healthcare trend rates are reviewed with the actuaries based upon the results of their review of claims experience. In 2007, the Company used healthcare cost trends of 7.14 percent in 2008 reducing linearly to 5 percent in 2014 for medical benefits and 10 percent in 2008 reducing linearly to 5 percent in 2014 for prescription drug benefits. In 2008, the Company used healthcare cost trends of 9 percent in 2009, decreasing to an ultimate trend of 4.2 percent in 2099 for both medical and prescription drug benefits using the Society of Actuaries Long Term Trend Model with assumptions based on the 2008 Medicare Trustees’ projections. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:
 
                 
    One-Percentage-
  One-Percentage-
    Point Increase   Point Decrease
Effect on total of service and interest cost
  $ 80     $ (72 )
Effect on postretirement benefit obligation
  $ 1,118     $ (1,009 )
 
In accordance with SFAS 158, Employers’ Accounting for Defined Pension and Other Postretirement Plans, the Company recognizes the funded status of each of its plans in the consolidated balance sheet. Amortization of unrecognized net gain or loss resulting from experience different from that assumed and from changes in assumptions (excluding asset gains and losses not yet reflected in market-related value) is included as a component of net periodic benefit cost for a year if, as of the beginning of the year, that unrecognized net gain or loss exceeds five percent of the greater of the projected benefit obligation or the market-related value of plan assets. If amortization is required, the amortization is that excess divided by the average remaining service period of participating employees expected to receive benefits under the plan.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
Financial Accounting Standards Board Staff Position No. 132(R)-1 In December 2008, the Financial Accounting Standards Board (FASB) issued FSP No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, which amends the FASB Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. FSP No. 132(R)-1 provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. It requires companies to disclose more information about how investment allocation decisions are made, major categories of plan assets, including concentrations of risk and fair-value measurements, and the fair-value techniques and inputs used to measure plan assets. FSP No. 132(R)-1 is effective for fiscal years ending after December 15, 2009.
 
Emerging Issues Task Force Issue No. 03-6-1 In June 2008, the FASB issued Financial Accounting Standards Board Staff Position (FSP) Emerging Task Force (EITF) No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
computing earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption of FSP EITF No. 03-6-1 will not have a material impact on our Consolidated Financial Statements.
 
Statement of Financial Accounting Standards No. 162 In May 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 162 (SFAS 162), The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the US GAAP hierarchy). SFAS 162 became effective November 15, 2008. The Company does not expect the adoption of SFAS 162 to have a material effect on the Company’s financial position, results of operations or liquidity.
 
Financial Accounting Standards Board Staff Position No. 142-3 In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets, which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. The position applies to intangible assets that are acquired individually or with a group of other assets and both intangible assets acquired in business combinations and asset acquisitions. FSP No. 142-3 is effective for financial statements issued for the fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is in the process of determining the effect that adoption of FSP No. 142-3 will have on its Consolidated Financial Statements.
 
Statement of Financial Accounting Standards No. 161 In March 2008, the FASB issued SFAS No. 161 (SFAS 161), Disclosures about Derivatives Instruments and Hedging Activities — an amendment of FASB Statement No. 133. SFAS 161 applies to all entities and requires specified disclosures for derivative instruments and related hedged items accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 161 amends and expands SFAS 133’s existing disclosure requirements to provide financial statement users with a better understanding of how and why an entity uses derivatives, how derivative instruments and related hedged items are accounted for under SFAS 133, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS 161 is not expected to have a material impact on the Company’s financial position, results of operations or liquidity.
 
Statement of Financial Accounting Standards No. 160 In December 2007, the FASB issued SFAS No. 160 (SFAS 160), Non-controlling Interests in Consolidated Financial Statements — an Amendment of ARB 51. SFAS 160 applies to all entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. Under SFAS 160, non-controlling interests in a subsidiary that are currently recorded within “mezzanine” (or temporary) equity or as a liability will be included in the equity section of the balance sheet. In addition, this statement requires expanded disclosures in the financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interest of the non-controlling owners of the subsidiary.
 
SFAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. Application of SFAS 160’s disclosure requirements is retroactive. The Company is in the process of determining the effects that adoption of SFAS 160 will have on its Consolidated Financial Statements.
 
Statement of Financial Accounting Standards No. 141(R) In December 2007, the FASB issued SFAS 141 (revised 2007) (SFAS 141(R)), Business Combinations, which amends the accounting and reporting requirements for business combinations. SFAS 141(R) places greater reliance on fair value information, requiring more acquired assets and liabilities to be measured at fair value as of the acquisition date. The pronouncement also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as a capitalized cost of acquisition. SFAS 141(R) is effective for fiscal years beginning on or after

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
December 15, 2008 and the Company will implement its requirements in future business combinations. The Company does not expect the adoption of SFAS 141(R) to have a material impact on the Company’s historical financial position, results of operations or liquidity.
 
FORWARD-LOOKING STATEMENT DISCLOSURE
 
In this annual report on Form 10-K, statements that are not reported financial results or other historical information are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. These forward-looking statements relate to, among other things, the Company’s future operating performance, the Company’s share of new and existing markets, the Company’s short- and long-term revenue and earnings growth rates, the Company’s implementation of cost-reduction initiatives and measures to improve pricing, including the optimization of the Company’s manufacturing capacity, and the ongoing SEC and DOJ investigations. The use of the words “will,” “believes,” “anticipates,” “expects,” “intends” and similar expressions is intended to identify forward-looking statements that have been made and may in the future be made by or on behalf of the Company.
 
Although the Company believes that these forward-looking statements are based upon reasonable assumptions regarding, among other things, the economy, its knowledge of its business, and on key performance indicators that impact the Company, these forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed in or implied by the forward-looking statements. The Company is not obligated to update forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.
 
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements include, but are not limited to:
 
  •  the results of the SEC and DOJ investigations;
 
  •  competitive pressures, including pricing pressures and technological developments;
 
  •  changes in the Company’s relationships with customers, suppliers, distributors and/or partners in its business ventures;
 
  •  changes in political, economic or other factors such as currency exchange rates, inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the worldwide business in each of the Company’s operations, including Brazil, where a significant portion of the Company’s revenue is derived;
 
  •  the effects of the sub-prime mortgage crisis and the disruptions in the financial markets, including the bankruptcies, restructurings or consolidations of financial institutions, which could reduce our customer base and/or adversely affect our customers’ ability to make capital expenditures, as well as adversely impact the availability and cost of credit;
 
  •  acceptance of the Company’s product and technology introductions in the marketplace;
 
  •  the amount of cash and non-cash charges in connection with the planned closure of the Company’s Newark, Ohio facility, and the closure of the Company’s EMEA-based enterprise security operations;
 
  •  unanticipated litigation, claims or assessments;
 
  •  variations in consumer demand for financial self-service technologies, products and services;

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS as of December 31, 2008 (Continued)
(Unaudited)
(in thousands, except per share amounts)
 
 
  •  challenges raised about reliability and security of the Company’s election systems products, including the risk that such products will not be certified for use or will be decertified;
 
  •  changes in laws regarding the Company’s election systems products and services;
 
  •  potential security violations to the Company’s information technology systems;
 
  •  the investment performance of our pension plan assets, which could require us to increase our pension contributions;
 
  •  the Company’s ability to successfully execute its strategy related to the elections systems business
 
  •  the Company’s ability to achieve benefits from its cost-reduction initiatives and other strategic changes; and
 
  •  the risk factors described above under “Item 1A. Risk Factors.”
 
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Dollars in thousands)
 
The Company is exposed to foreign currency exchange rate risk inherent in its international operations denominated in currencies other than the U.S. dollar. A hypothetical 10 percent movement in the applicable foreign exchange rates would have resulted in a an increase or decrease in 2008 and 2007 year-to-date operating profit of approximately $12,197 and $7,038, respectively. The sensitivity model assumes an instantaneous, parallel shift in the foreign currency exchange rates. Exchange rates rarely move in the same direction. The assumption that exchange rates change in an instantaneous or parallel fashion may overstate the impact of changing exchange rates on amounts denominated in a foreign currency.
 
The Company’s risk-management strategy uses derivative financial instruments such as forwards to hedge certain foreign currency exposures. The intent is to offset gains and losses that occur on the underlying exposures, with gains and losses on the derivative contracts hedging these exposures. The Company does not enter into derivatives for trading purposes. The Company’s primary exposures to foreign exchange risk are movements in the euro/dollar, pound/dollar, dollar/yuan, dollar/forint, and dollar/real rates. There were no significant changes in the Company’s foreign exchange risks in 2008 compared with 2007.
 
The Company manages interest rate risk with the use of variable rate borrowings under its committed and uncommitted credit facilities and interest rate swaps. Variable rate borrowings under the credit facilities totaled $306,488 and $328,164 at December 31, 2008 and 2007, respectively, of which $50,000 was effectively converted to fixed rate using interest rate swaps. A one percentage point increase or decrease in interest rates would have resulted in an increase or decrease in interest expense of approximately $3,052 and $2,406 for 2008 and 2007, respectively, including the impact of the swap agreements. The Company’s primary exposure to interest rate risk is movements in the London Interbank Offered Rate (LIBOR), which is consistent with prior periods. As discussed in Note 9 to the Consolidated Financial Statements, the Company hedged $200,000 of the fixed rate borrowings under its private placement agreement, 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.

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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
         
Financial Statements:
       
    42  
    45  
    46  
    47  
    48  
    49  
Financial Statement Schedule:
       
    98  
All other schedules are omitted because they are not applicable.
       

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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders
Diebold, Incorporated:
 
We have audited the accompanying consolidated balance sheets of Diebold, Incorporated and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008. In connection with our audits of the consolidated financial statements we have also audited the financial statement schedule, Schedule II “Valuation and Qualifying Accounts”. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diebold, Incorporated and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
As discussed in Note 1 to the consolidated financial statements, the Company adopted Emerging Issues Task Force (EITF) Issue No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance, and EITF Issue No. 06-4, Accounting for Deferred Compensation and Post Retirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, effective January 1, 2008.
 
As discussed in Note 4 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Standard No. 109, effective January 1, 2007.
 
As discussed in Note 11 to the consolidated financial statements, the Company adopted the measurement date provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, effective January 1, 2008.
 
As discussed in Note 18 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157, Fair Value Measurements, effective January 1, 2008.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2009 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/  KPMG
 
Cleveland, Ohio
February 27, 2009

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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders
Diebold, Incorporated:
 
We have audited Diebold, Incorporated and Subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A(b) of the Company’s December 31, 2008 annual report on Form 10-K. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses related to the Company’s selection, application and communication of accounting policies; monitoring; manual journal entries; contractual agreements; and account reconciliations have been identified and included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A(b) of the Company’s December 31, 2008 annual report on Form 10-K. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 consolidated financial statements, and this report does not affect our report dated February 27, 2009, which expressed an unqualified opinion on those consolidated financial statements.

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In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
/s/  KPMG
 
Cleveland, Ohio
February 27, 2009

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
                 
    December 31,  
    2008     2007  
ASSETS
Current assets
               
Cash and cash equivalents
  $ 241,436     $ 206,334  
Short-term investments
    121,387       104,976  
Trade receivables, less allowances for doubtful accounts of $25,060 for 2008 and $33,707 for 2007
    447,079       494,911  
Inventories
    540,971       533,619  
Deferred income taxes
    95,086       80,443  
Prepaid expenses
    42,909       46,347  
Other current assets
    125,250       127,500  
                 
Total current assets
    1,614,118       1,594,130  
                 
Securities and other investments
    70,914       75,227  
Property, plant and equipment at cost
    579,951       575,796  
Less accumulated depreciation and amortization
    376,357       355,740  
                 
Property, plant and equipment, net
    203,594       220,056  
Goodwill
    408,303       465,484  
Deferred income taxes
    69,698        
Other assets
    171,309       239,827  
                 
Total assets
  $ 2,537,936     $ 2,594,724  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
               
Notes payable
  $ 10,596     $ 14,807  
Accounts payable
    195,483       170,632  
Deferred revenue
    195,164       251,657  
Payroll and benefits liabilities
    75,215       76,995  
Other current liabilities
    258,939       186,956  
                 
Total Current Liabilities
    735,397       701,047  
                 
Notes payable — long term
    594,588       609,264  
Pensions and other benefits
    131,792       36,708  
Postretirement and other benefits
    32,857       29,417  
Deferred income taxes
    35,307       39,393  
Other long-term liabilities
    43,737       50,304  
Minority interest
    17,657       13,757  
Shareholders’ equity
               
Preferred shares, no par value, 1,000,000 authorized shares, none issued
           
Common shares, 125,000,000 authorized shares, 75,801,434 and 75,579,237 issued shares, 66,114,560, and 65,965,749 outstanding shares, respectively
    94,752       94,474  
Additional capital
    278,135       261,364  
Retained earnings
    1,054,873       1,036,824  
Treasury shares, at cost (9,686,874 and 9,613,488 shares, respectively)
    (408,235 )     (406,182 )
Accumulated other comprehensive (loss) gain
    (72,924 )     128,354  
                 
Total shareholders’ equity
    946,601       1,114,834  
                 
Total liabilities and shareholders’ equity
  $ 2,537,936     $ 2,594,724  
                 
 
See accompanying Notes to Consolidated Financial Statements.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 
                         
    Year Ended December 31,  
    2008     2007     2006  
Net sales
                       
Products
  $ 1,562,948     $ 1,429,646     $ 1,500,998  
Services
    1,607,132       1,517,835       1,419,976  
                         
      3,170,080       2,947,481       2,920,974  
                         
Cost of sales
                       
Products
    1,145,225       1,070,286       1,057,375  
Services
    1,230,239       1,195,286       1,128,428  
                         
      2,375,464       2,265,572       2,185,803  
                         
Gross profit
    794,616       681,909       735,171  
Selling and administrative expense
    534,486       463,354       457,267  
Research, development and engineering expense
    79,070       73,950       71,625  
Impairment of assets
    4,376       46,319       19,337  
Loss (gain) on sale of assets, net
    403       (6,392 )     328  
                         
      618,335       577,231       548,557  
                         
Operating profit
    176,281       104,678       186,614  
Other income (expense)
                       
Investment income
    25,228       22,489       19,069  
Interest expense
    (45,247 )     (42,200 )     (35,305 )
Miscellaneous, net
    (8,887 )     4,136       (2,088 )
Minority interest
    (8,413 )     (8,365 )     (6,452 )
                         
Income from continuing operations before taxes
    138,962       80,738       161,838  
Taxes on income
    37,425       35,797       52,916  
                         
Income from continuing operations
    101,537       44,941       108,922  
Loss from discontinued operations, net of tax
    (12,954 )     (5,400 )     (4,370 )
                         
Net income
  $ 88,583     $ 39,541     $ 104,552  
                         
Basic weighted-average shares outstanding
    66,081       65,841       66,669  
Diluted weighted-average shares outstanding
    66,492       66,673       67,253  
Basic earnings per share:
                       
Net income from continuing operations
  $ 1.54     $ 0.68     $ 1.63  
Loss from discontinued operations
  $ (0.20 )   $ (0.08 )   $ (0.06 )
                         
Net income
  $ 1.34     $ 0.60     $ 1.57  
                         
Diluted earnings per share:
                       
Net income from continuing operations
  $ 1.52     $ 0.67     $ 1.62  
Loss from discontinued operations
  $ (0.19 )   $ (0.08 )   $ (0.07 )
                         
Net income
  $ 1.33     $ 0.59     $ 1.55  
                         
 
See accompanying Notes to Consolidated Financial Statements.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
 
                                                                         
                                        Accumulated
             
                                        Other
             
    Common Shares     Additional
    Retained
    Treasury
    Comprehensive
    Comprehensive
             
    Number     Par Value     Capital     Earnings     Shares     (Loss) Income     (Loss) Income     Other     Total  
Balance, January 1, 2006     74,726,031     $ 93,408     $ 198,619     $ 1,013,137     $ (256,336 )           $ (3,781 )   $ (287 )   $ 1,044,760  
                                                                         
Net income
                            104,552             $ 104,552                       104,552  
                                                                         
Translation adjustment
                                            50,246                       50,246  
Hedges
                                            2,428                       2,428  
Pensions
                                            (637 )                     (637 )
                                                                         
Other comprehensive income
                                            52,037       52,037                  
                                                                         
Comprehensive income
                                          $ 156,589                          
                                                                         
Stock options exercised
    336,085       420       10,703                                               11,123  
Restricted stock units issued
    4,635       6       (6 )                                              
Performance shares issued
    5,800       7       (7 )                                              
Other share-based compensation
    73,111       91       1,881                                               1,972  
Tax benefit from employee stock plans
                    1,198                                               1,198  
SFAS No. 123(R) reclass
                    4,807                                       287       5,094  
SFAS No. 158 adoption, net
                                                    (35,624 )             (35,624 )
Share-based compensation expense
                    17,195                                               17,195  
Colombia acquisition
                    816               2,592                               3,408  
DIMS acquisition
                    36               905                               941  
Dividends declared and paid
                            (57,964 )                                     (57,964 )
Treasury shares
                                    (150,259 )                             (150,259 )
                                                                         
Balance, December 31, 2006
    75,145,662     $ 93,932     $ 235,242     $ 1,059,725     $ (403,098 )           $ 12,632     $     $ 998,433  
                                                                         
Net income
                            39,541             $ 39,541                       39,541  
                                                                         
Translation adjustment
                                            88,508                       88,508  
Hedges
                                            (1,962 )                     (1,962 )
Pensions
                                            29,176                       29,176  
                                                                         
Other comprehensive income
                                            115,722       115,722                  
                                                                         
Comprehensive income
                                          $ 155,263                          
                                                                         
Stock options exercised
    241,365       302       8,252                                               8,554  
Restricted shares
    8,620       11       295                                               306  
Restricted stock units issued
    84,865       106       (106 )                                              
Performance shares issued
    98,725       123       2,500                                               2,623  
Tax benefit from employee stock plans
                    1,399                                               1,399  
Share-based compensation expense
                    13,782                                               13,782  
Dividends declared and paid
                            (62,442 )                                     (62,442 )
Treasury shares
                                    (3,084 )                             (3,084 )
                                                                         
Balance, December 31, 2007
    75,579,237     $ 94,474     $ 261,364     $ 1,036,824     $ (406,182 )           $ 128,354     $     $ 1,114,834  
                                                                         
Pension beginning retained earnings adjustment (Note 11)
                            (1,387 )                                     (1,387 )
Split-dollar life insurance beginning retained earnings adjustment (Note 1)
                            (2,584 )                                     (2,584 )
                                                                         
Net income
                            88,583             $ 88,583                       88,583  
                                                                         
Translation adjustment
                                            (99,689 )                     (99,689 )
Hedges
                                            (4,910 )                     (4,910 )
Pensions
                                            (96,679 )                     (96,679 )
                                                                         
Other comprehensive loss
                                            (201,278 )     (201,278 )                
                                                                         
Comprehensive loss
                                          $ (112,695 )                        
                                                                         
Stock options exercised
    665       1       16                                               17  
Restricted shares
    121,985       152       5,861                                               6,013  
Restricted stock units issued
    49,526       62       (62 )                                              
Performance shares issued
    50,021       63       719                                               782  
Tax expense from employee stock plans
                    (2,122 )                                             (2,122 )
Share-based compensation expense
                    12,189                                               12,189  
Colombia acquisition earnout
                    170               230                               400  
Dividends declared and paid
                            (66,563 )                                     (66,563 )
Treasury shares
                                    (2,283 )                             (2,283 )
                                                                         
Balance, December 31, 2008
    75,801,434     $ 94,752     $ 278,135     $ 1,054,873     $ (408,235 )           $ (72,924 )   $     $ 946,601  
                                                                         
 
See accompanying Notes to Consolidated Financial Statements.

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DIEBOLD, INCORPORATED AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
                         
    Year Ended December 31,  
    2008     2007     2006  
Cash flow from operating activities:
                       
Net income
  $ 88,583     $ 39,541     $ 104,552  
Adjustments to reconcile net income to cash provided by operating activities:
                       
Loss from discontinued operations
    12,954       5,400       4,370  
Minority interest
    8,413       8,365       6,452  
Depreciation and amortization
    80,470       69,397       70,726  
Share-based compensation
    12,189       13,782       17,195  
Excess tax benefits from share-based compensation
    (168 )     (917 )     (890 )
Deferred income taxes
    (12,547 )     (7,250 )     (23,592 )
Impairment of asset
    4,376       46,319       19,337  
Loss (gain) on sale of assets, net
    403       (6,392 )     328  
Cash provided (used) by changes in certain assets and liabilities:
                       
Trade receivables
    10,633       120,949       46,109  
Inventories
    (53,650 )     8,955       (4,258 )
Prepaid expenses
    1,183       (10,256 )     (13,323 )
Other current assets
    (14,706 )     (20,055 )     (1,493 )
Accounts payable
    36,480       6,331       (36,031 )
Deferred revenue
    (49,668 )     (89,921 )     33,691  
Pension and postretirement benefits
    (2,900 )     (20,802 )     14,038  
Certain other assets and liabilities
    162,646       (13,186 )     (4,285 )
                         
Net cash provided by operating activities
    284,691       150,260       232,926  
                         
Cash flow from investing activities:
                       
Payments for acquisitions, net of cash acquired
    (4,461 )     (18,122 )     (74,320 )
Proceeds from maturities of investments
    303,410       57,433       79,304  
Payments for purchases of investments
    (357,091 )     (50,588 )     (124,648 )
Proceeds from sale of fixed assets
    42       3,242       6,442  
Capital expenditures
    (57,932 )     (43,259 )     (38,514 )
Increase in certain other assets
    (26,452 )     (29,076 )     (19,588 )
                         
Net cash used by investing activities
    (142,484 )     (80,370 )     (171,324 )
                         
Cash flow from financing activities:
                       
Dividends paid
    (66,563 )     (62,442 )     (57,964 )
Notes payable borrowings
    606,269       720,299       1,664,986  
Notes payable repayments
    (624,040 )     (784,358 )     (1,492,658 )
Distribution of affiliates’ earnings to minority interest holder
    (3,523 )     (18,236 )     (716 )
Excess tax benefits from share-based compensation
    168       917       890  
Issuance of common shares
          8,544       9,745  
Repurchase of common shares
                (148,057 )
                         
Net cash used by financing activities
    (87,689 )     (135,276 )     (23,774 )
                         
Effect of exchange rate changes on cash
    (19,416 )     17,752       5,747  
Increase (decrease) in cash and cash equivalents
    35,102       (47,634 )     43,575  
Cash and cash equivalents at the beginning of the year
    206,334       253,968       210,393  
                         
Cash and cash equivalents at the end of the year
  $ 241,436     $ 206,334     $ 253,968  
                         
Cash paid for:
                       
Income taxes
  $ 42,154     $ 53,176     $ 43,065  
Interest
  $ 30,747     $ 32,706     $ 33,235  
 
See accompanying Notes to Consolidated Financial Statements.

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
 
NOTE 1:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation The Consolidated Financial Statements include the accounts of Diebold, Incorporated and its wholly and majority owned subsidiaries (collectively, the Company). All significant intercompany accounts and transactions have been eliminated.
 
Use of Estimates in Preparation of Consolidated Financial Statements The preparation of the accompanying Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the value of purchase consideration, valuation of trade receivables, inventories, goodwill, intangible assets, and other long-lived assets, legal contingencies, guarantee obligations, indemnifications, and assumptions used in the calculation of income taxes, pension and other postretirement benefits, and customer incentives, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic difficulties in the United States credit markets and the global markets. Management monitors the economic condition and other factors and will adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile foreign currency and equity, and declines in the global economic environment have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
 
International Operations The financial statements of the Company’s Diebold International (DI) operations are measured using local currencies as their functional currencies, with the exception of Venezuela, Argentina, Barbados, Ecuador, El Salvador and Panama, which are measured using the U.S. dollar as their functional currency. The Company translates the assets and liabilities of its non-U.S. subsidiaries at the exchange rates in effect at year end and the results of operations at the average rate throughout the year. The translation adjustments are recorded directly as a separate component of shareholders’ equity, while transaction gains (losses) are included in net income. Sales to customers outside the United States approximated 50.6 percent in 2008, 48.1 percent of net sales in 2007 and 46.4 percent of net sales in 2006.
 
Reclassifications During 2008, the Company reclassified deferred product revenue for which it has not received payment as a reduction in trade receivables, net. In accordance with Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections, prior year amounts of deferred revenue and trade receivables have been adjusted to conform to current year classification. As a result of applying the accounting change retrospectively, deferred product revenue of $49,591 as of December 31, 2007, has been reclassified to reduce trade receivables, net in the Consolidated Balance Sheets. There was no impact of the accounting change on previously reported cash flows from operations, income from operations, net income or earnings per share of each prior period.
 
The Company has reclassified the presentation of certain prior-year information to conform to the current presentation, including the above reclassification of trade receivables, net.
 
Revenue Recognition The Company’s revenue recognition policy is consistent with the requirements of Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), and Staff Accounting Bulletin 104 (SAB 104). In general, the Company records revenue when it is realized, or realizable and earned. The Company considers revenue to be realized, or realizable and earned, when the following revenue recognition requirements are met: persuasive evidence of an arrangement exists, which is a customer contract; the products or services have been accepted by the customer via delivery or installation acceptance; the sales

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
price is fixed or determinable within the contract; and collectability is probable. For product sales, the Company determines that the earnings process is complete when title, risk of loss and the right to use equipment has transferred to the customer. Within the Diebold North America (DNA) business segment, this occurs upon customer acceptance. Where the Company is contractually responsible for installation, customer acceptance occurs upon completion of the installation of all items at a job site and the Company’s demonstration that the items are in operable condition. Where items are contractually only delivered to a customer, revenue recognition of these items is upon shipment or delivery to a customer location depending on the terms in the contract. Within the DI business segment, customer acceptance is upon the earlier of delivery or completion of the installation depending on the terms in the contract with the customer. The Company has the following revenue streams related to sales to its customers:
 
Self-Service Product & Service Revenue Self-service products pertain to ATMs. Included within the ATM is software, which operates the ATM. The related software is considered more than incidental to the equipment as a whole. Revenue is recognized in accordance with SOP 97-2. The Company also provides service contracts on ATMs.
 
Service contracts typically cover a 12-month period and can begin at any given month during the year after the standard 90-day warranty period expires. The service provided under warranty is significantly limited as compared to those offered under service contracts. Further, warranty is not considered a separate element of the sale. The Company’s warranty covers only replacement of parts inclusive of labor. Service contracts are tailored to meet the individual needs of each customer. Service contracts provide additional services beyond those covered under the warranty, and usually include preventative maintenance service, cleaning, supplies stocking and cash handling, all of which are not essential to the functionality of the equipment. For sales of service contracts, where the service contract is the only element of the sale, revenue is recognized ratably over the life of the contract period. In contracts that involve multiple-element arrangements, amounts deferred for services are determined based upon vendor specific objective evidence of the fair value of the elements as prescribed in SOP 97-2. The Company determines fair value of deliverables within a multiple element arrangement based on the price charged when each element is sold separately.
 
Physical Security & Facility Revenue The Company’s Physical Security and Facility Products division designs and manufactures several of the Company’s financial service solutions offerings, including the RemoteTellertm System (RTS). The business unit also develops vaults, safe deposit boxes and safes, drive-up banking equipment and a host of other banking facilities products. Revenue on sales of the products described above is recognized when the four revenue recognition requirements of SAB 104 have been met.
 
Election Systems Revenue The Company, through its wholly owned subsidiaries, Premier Election Solutions, Inc. (PESI) and Amazonia Industria Eletronica S.A. Procomp, offers voting equipment. Election systems revenue consists of election equipment, software, training, support, installation and maintenance. The election equipment and software components are included in product revenue. The training, support, installation and maintenance components are included in service revenue. The election systems contracts contain multiple deliverable elements and custom terms and conditions. Revenue on election systems contracts is recognized in accordance with SOP 97-2. The Company recognizes revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. The Company determines fair value of deliverables within a multiple element arrangement based on the price charged when each element is sold separately. Some contracts may contain discounts and, as such, revenue is recognized using the residual value method of allocation of revenue to the product and service components of contracts.
 
Integrated Security Solutions Revenue Diebold Integrated Security Solutions provides global sales, service, installation, project management and monitoring of original equipment manufacturer (OEM) electronic security products to financial, government, retail and commercial customers. These solutions provide the Company’s customers a single-source solution to

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
their electronic security needs. Revenue is recognized in accordance with SAB 104. Revenue on sales of the products described above is recognized upon shipment, installation or customer acceptance of the product as defined in the customer contract. In contracts that involve multiple-element arrangements, amounts deferred for services are determined based upon the fair value of the elements as prescribed in EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.
 
Software Solutions & Service Revenue The Company offers software solutions consisting of multiple applications that process events and transactions (networking software) along with the related server. Sales of networking software represent software solutions to customers that allow them to network various different vendors’ ATMs onto one network and revenue is recognized in accordance with SOP 97-2.
 
Included within service revenue is revenue from software support agreements, which are typically 12 months in duration and pertain to networking software. For sales of software support agreements, where the agreement is the only element of the sale, revenue is recognized ratably over the life of the contract period. In contracts that involve multiple-element arrangements, amounts deferred for support are determined based upon vendor specific objective evidence of the fair value of the elements as prescribed in SOP 97-2.
 
Depreciation and Amortization Depreciation of property, plant and equipment is computed using the straight-line method for financial statement purposes. Accelerated methods of depreciation are used for federal income tax purposes. Amortization of leasehold improvements is based upon the shorter of original terms of the lease or life of the improvement. Repairs and maintenance are expensed as incurred. Amortization of the Company’s other long-term assets such as its amortizable intangible assets and capitalized computer software is computed using the straight-line method over the life of the asset.
 
Advertising Costs Advertising costs are expensed as incurred and were $14,417, $15,232 and $13,663 in 2008, 2007 and 2006, respectively.
 
Shipping and Handling Costs The Company recognizes shipping and handling fees billed when products are shipped or delivered to a customer, and includes such amounts in net sales. Third-party freight payments are recorded in cost of sales.
 
Share-Based Compensation The Company accounts for share-based compensation arrangements, including stock options, restricted stock units (RSUs) and performance shares, in accordance with Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which requires companies to recognize in the statement of income the grant-date fair value of stock awards issued to employees and directors.
 
Taxes on Income In accordance with SFAS 109, deferred taxes are provided on an asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
Sales Tax The Company collects sales taxes from customers and accounts for sales taxes on a net basis, in accordance with EITF Issue No. 06-03.
 
Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
 
Financial Instruments The carrying amount of cash and cash equivalents, trade receivables and accounts payable, approximated their fair value because of the relatively short maturity of these instruments. The Company’s risk-management strategy uses derivative financial instruments such as forwards to hedge certain foreign currency exposures and interest rate

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
swaps to manage interest rate risk. The intent is to offset gains and losses that occur on the underlying exposures, with gains and losses on the derivative contracts hedging these exposures. The Company does not enter into derivatives for trading purposes and accounts for its derivative financial instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company recognizes all derivatives on the balance sheet at fair value. Changes in the fair values of derivatives that are not designated as hedges are recognized in earnings. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the change in the hedged assets or liabilities through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings.
 
Allowances for Doubtful Accounts The concentration of credit risk in the Company’s trade receivables with respect to financial and government customers is largely mitigated by the Company’s credit evaluation process and the geographical dispersion of sales transactions from a large number of individual customers. The Company maintains allowances for potential credit losses, and such losses have been minimal and within management’s expectations. Since the Company’s receivable balance is concentrated primarily in the financial and government sectors, an economic downturn in these sectors could result in higher than expected credit losses. The Company evaluates the collectability of accounts receivable based on (1) a percentage of sales, which is based on historical loss experience and current trends, are reserved for uncollectible accounts as sales occur throughout the year and (2) periodic adjustments for known events such as specific customer circumstances and changes in the aging of accounts receivable balances.
 
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 PESI that value inventory using the average cost method, which approximates FIFO. At each reporting period, the Company identifies and writes down its excess and 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.
 
Deferred Revenue Deferred revenue is recorded for any services that are billed to customers prior to revenue being realizable related to the service being provided. In addition, deferred revenue is recorded for any goods that are billed to and collected from customers prior to revenue being recognized.
 
Split-Dollar Life Insurance 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 arrangements that extend into an employee’s retirement period (often referred to as “key person” life insurance) and EITF Issue No. 06-4, Accounting for Deferred Compensation and Post Retirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, which applies to life insurance arrangements that provide an employee with a specified benefit that is not limited to the employee’s active service period. EITF Issue No. 06-10 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. EITF Issue No. 06-4 requires employers to recognize a liability and related compensation costs for future benefits that extend to postretirement periods. The adoption of these EITFs had a cumulative effect to beginning retained earnings of a reduction of $2,584.
 
Goodwill Goodwill is the cost in excess of the net assets of acquired businesses. The Company tests all existing goodwill at least annually for impairment using the fair value approach on a “reporting unit” basis in accordance with SFAS No. 142 (SFAS 142), Goodwill and Other Intangible Assets. The Company’s reporting units are defined as Domestic and Canada, Brazil, Latin America, Asia Pacific, EMEA and Election Systems. The Company uses the discounted cash flow method and the guideline

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
company method for determining the fair value of its reporting units. As required by SFAS No. 142, the determination of implied fair value of the goodwill for a particular reporting unit is the excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities in the same manner as the allocation in a business combination. Implied fair value goodwill is determined as the excess of the fair value of the reporting unit over the fair value of its assets and liabilities. The Company’s fair value model uses inputs such as estimated future segment performance. The Company uses the most current information available and performs the annual impairment analysis as of November 30 each year. However, actual circumstances could differ significantly from assumptions and estimates made and could result in future goodwill impairment. The Company tests for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the carrying value of a reporting unit below its reported amount.
 
The annual goodwill impairment test for 2008 resulted in no impairment. However, the Company’s fourth quarter decision to close its security business in the EMEA region resulted in an impairment of $13,171 to the Domestic and Canada reporting unit goodwill. This impairment charge is shown in the Company’s loss from discontinued operations. Upon initial acquisition, the goodwill related to the EMEA security business was classified within the Company’s Domestic and Canada reporting unit for goodwill impairment testing. The annual goodwill impairment test for 2007 resulted in an impairment charge of $46,319 related to the Elections Systems reporting unit goodwill and represented the carrying value of PESI’s goodwill.
 
The changes in carrying amounts of goodwill for the years ended December 31, 2008 and 2007 are summarized as follows:
 
                                 
    DNA     DI     ES & Other     Total  
Balance at January 1, 2007
  $ 99,799     $ 314,176     $ 45,379     $ 459,354  
Goodwill of acquired businesses & purchase accounting adjustments
    10,556       1,472       940       12,968  
Impairment loss
                (46,319 )     (46,319 )
Currency translation adjustment
    1,444       38,037             39,481  
                                 
Balance at December 31, 2007
    111,799       353,685             465,484  
Goodwill of acquired businesses & purchase accounting adjustments
    4,320       758             5,078  
Impairment loss
    (13,171 )                 (13,171 )
Currency translation adjustment
    (6,583 )     (42,505 )           (49,088 )
                                 
Balance at December 31, 2008
  $ 96,365     $ 311,938     $     $ 408,303  
                                 
 
Other Assets Included in other assets are net capitalized computer software development costs of $52,668 and $47,300 as of December 31, 2008 and 2007, respectively. Amortization expense on capitalized software was $14,332, $11,556 and $11,500 for 2008, 2007 and 2006, respectively. Other long-term assets also consist of finance receivables, customer demonstration equipment, patents, trademarks and other intangible assets. Where applicable, other assets are stated at cost and, if applicable, are amortized ratably over the relevant contract period or the estimated life of the assets. Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time to reduce the asset to the lower of its fair value or its net book value in accordance with SFAS No. 144 (SFAS 144), Accounting for the Impairment of Long-Lived Assets. For the year ended December 31, 2008, the Company impaired $4,376 of intangible assets in continuing operations of the DNA segment and $3,487 of intangible assets within loss from discontinued operations.
 
Pensions and Postretirement Benefits Annual net periodic expense and benefit liabilities under the Company’s defined benefit plans are determined on an actuarial basis. Assumptions used in the actuarial calculations have a significant impact on plan obligations and expense. Annually, management and the Investment Committee of the Board of Directors review the actual

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
experience compared with the more significant assumptions used and make adjustments to the assumptions, if warranted. The healthcare trend rates are reviewed with the actuaries based upon the results of their review of claims experience. The expected long-term rate of return on plan assets is determined using the plans’ current asset allocation and their expected rates of return based on a geometric averaging over 20 years. The discount rate is determined by analyzing the average return of high-quality (i.e., AA-rated) fixed-income investments and the year-over-year comparison of certain widely used benchmark indices as of the measurement date. The rate of compensation increase assumptions reflects the Company’s long-term actual experience and future and near-term outlook. Pension benefits are funded through deposits with trustees. The market-related value of plan assets is calculated under an adjusted market value method in order to determine the Company’s net periodic benefit obligation. The value is determined by adjusting the fair value of assets to reflect the investment gains and losses (i.e., the difference between the actual investment return and the expected investment return on the market-related value of assets) during each of the last five years at the rate of 20 percent per year. Postretirement benefits are not funded and the Company’s policy is to pay these benefits as they become due.
 
In accordance with SFAS 158, Employers’ Accounting for Defined Pension and Other Postretirement Plans, the Company recognizes the funded status of each of its plans in the Consolidated Balance Sheet. Amortization of unrecognized net gain or loss resulting from experience different from that assumed and from changes in assumptions (excluding asset gains and losses not yet reflected in market-related value) is included as a component of net periodic benefit cost for a year if, as of the beginning of the year, that unrecognized net gain or loss exceeds five percent of the greater of the projected benefit obligation or the market-related value of plan assets. If amortization is required, the amortization is that excess divided by the average remaining service period of participating employees expected to receive benefits under the plan.
 
Comprehensive (Loss) Income The Company displays comprehensive (loss) income in the Consolidated Statements of Shareholders’ Equity and accumulated other comprehensive (loss) income separately from retained earnings and additional capital in the Consolidated Balance Sheets and Statements of Shareholders’ Equity. Items considered to be other comprehensive (loss) income include adjustments made for foreign currency translation (under SFAS No. 52) pensions, net of tax (under SFAS No. 87 and SFAS No. 158) and hedging activities (under SFAS No. 133).
 
Accumulated other comprehensive (loss) income consists of the following:
 
                         
    Year Ended December 31,  
    2008     2007     2006  
       
 
Translation adjustment
  $ 38,319     $ 138,008     $ 49,500  
Realized and unrealized (losses) gains on hedges
    (2,877 )     2,033       3,995  
Pensions less accumulated taxes of ($64,573), ($6,213), and ($23,812), respectively
    (108,366 )     (11,687 )     (40,863 )
                         
Total accumulated other comprehensive (loss) income
  $ (72,924 )   $ 128,354     $ 12,632  
                         
 
Translation Adjustments Translation adjustments are not booked net of tax. Those adjustments are accounted for under the indefinite reversal criterion of APB Opinion No. 23, Accounting for Income Taxes — Special Areas.

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
NOTE 2:   EARNINGS PER SHARE
 
The following data show the amounts used in computing earnings per share and the effect on the weighted-average number of shares of dilutive potential common stock:
 
                         
    December 31,  
    2008     2007     2006  
       
 
Numerator:
                       
Income used in basic and diluted earnings per share:
                       
Income from continuing operations — net of tax
  $ 101,537     $ 44,941     $ 108,922  
Loss from discontinued operations — net of tax
    (12,954 )     (5,400 )     (4,370 )
                         
Net income
  $ 88,583     $ 39,541     $ 104,552  
                         
Denominator:
                       
Weighted-average number of common shares used in basic earnings per share
    66,081       65,841       66,669  
Effect of dilutive shares
    411       832       584  
                         
Weighted-average number of common shares and dilutive potential common shares used in diluted earnings per share
    66,492       66,673       67,253  
                         
Basic earnings per share:
                       
Income from continuing operations — net of tax
  $ 1.54     $ 0.68     $ 1.63  
Loss from discontinued operations — net of tax
    (0.20 )     (0.08 )     (0.06 )
                         
Net income
  $ 1.34     $ 0.60     $ 1.57  
                         
Diluted earnings per share:
                       
Income from continuing operations — net of tax
  $ 1.52     $ 0.67     $ 1.62  
Loss from discontinued operations — net of tax
    (0.19 )     (0.08 )     (0.07 )
Net income
  $ 1.33     $ 0.59     $ 1.55  
                         
Anti-dilutive shares not used in calculating diluted weighted-average shares
    2,469       1,141       976  
 
NOTE 3:   SHARE-BASED COMPENSATION AND EQUITY
 
DIVIDENDS
 
On the basis of amounts declared and paid, the annualized quarterly dividends per share were $1.00, $0.94 and $0.86 for the years ended December 31, 2008, 2007 and 2006, respectively.
 
EMPLOYEE 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 closing price of the Company’s 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. 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. Performance shares are granted based on certain management objectives,

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
as determined by the Board of Directors each year. Each performance share earned entitles the holder to one common share. The performance share objectives are generally calculated over a three-year period and no shares are granted unless certain management threshold 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 4,730 of which 663 shares were available for issuance at December 31, 2008.
 
The Company recognizes costs resulting from all share-based payment transactions in the financial statements, including stock options, RSUs and performance shares, based on the fair market value of the award as of the grant date. The Company adopted SFAS 123(R) 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 123(R) and recognized on a straight-line basis over the requisite periods of each award. The Company estimated forfeiture rates for the year ended December 31, 2008 based on its historical experience.
 
The estimated fair value of the options granted during 2008 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 years ended December 31, 2008, 2007 and 2006:
 
                         
    December 31,  
    2008     2007     2006  
       
 
Expected life (in years)
    5-7       6       3-6  
Weighted-average volatility
    27 %     28 %     33 %
Risk-free interest rate
    2.71 – 3.14 %     3.64 – 4.72 %     4.55 – 5.11 %
Expected dividend yield
    1.97 – 1.86 %     1.63 %     1.58 – 1.63 %
 
The Black-Scholes model incorporates assumptions to value share-based awards. The risk-free rate of interest is based on a zero-coupon U.S. government instrument over the expected life of the equity instrument. Expected volatility is based on historical volatility of the price of the Company’s common stock. The Company uses historical data estimate option exercise timing within the valuation model. 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.
 
As of December 31, 2008, unrecognized compensation cost of $4,818 for stock options, $5,893 for RSUs and $4,280 for performance shares is expected to be recognized over a weighted-average period of approximately 2.6, 1.9 and 1.2 years, respectively.

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
Share-based compensation was recognized as a component of selling and administrative expenses. The following table summarizes the components of the Company’s share-based compensation programs recorded as expense:
 
                         
    December 31,  
    2008     2007     2006  
       
 
Stock Options:
                       
Pre-tax compensation expense
  $ 3,371     $ 4,908     $ 7,242  
Tax benefit
    (1,247 )     (1,816 )     (2,680 )
                         
Stock option expense, net of tax
  $ 2,124     $ 3,092     $ 4,562  
                         
RSUs:
                       
Pre-tax compensation expense
  $ 3,683     $ 3,827     $ 5,075  
Tax benefit
    (1,363 )     (1,416 )     (1,878 )
                         
RSU expense, net of tax
  $ 2,320     $ 2,411     $ 3,197  
                         
Restricted Shares:
                       
Pre-tax compensation expense
  $ 7     $ 93     $ 188  
Tax benefit
    (3 )     (34 )     (70 )
                         
Restricted share expense, net of tax
  $ 4     $ 59     $ 118  
                         
Performance Shares:
                       
Pre-tax compensation expense
  $ 4,267     $ 4,383     $ 4,690  
Tax benefit
    (1,579 )     (1,622 )     (1,735 )
                         
Performance share expense, net of tax
  $ 2,688     $ 2,761     $ 2,955  
                         
Deferred Shares:
                       
Pre-tax compensation expense
  $ 861     $ 571     $  
Tax benefit
    (319 )     (211 )      
                         
Deferred share expense, net of tax
  $ 542     $ 360     $  
                         
Total Share-Based Compensation:
                       
Pre-tax compensation expense
  $ 12,189     $ 13,782     $ 17,195  
Tax benefit
    (4,511 )     (5,099 )     (6,363 )
                         
Total share-based compensation, net of tax
  $ 7,678     $ 8,683     $ 10,832  
                         

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
Options outstanding and exercisable under the 1991 Plan as of December 31, 2008 and changes during the year ended were as follows:
 
                                 
                Weighted-Average
       
          Weighted-Average
    Remaining
    Aggregate Intrinsic
 
    Number of Shares     Exercise Price     Contractual Term     Value(1)  
          (per share)     (in years)        
Outstanding at January 1, 2008
    2,884     $ 41.56                  
Options expired or forfeited
    (291 )   $ 44.47                  
Options exercised
                           
Options granted
    336     $ 25.53                  
                                 
Outstanding at December 31, 2008
    2,929     $ 39.43       5     $ 1,344  
                                 
Options exercisable at December 31, 2008
    2,166     $ 40.60       4     $ 498  
                                 
 
(1) The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year in 2008 and the exercise price, multiplied by the number of “in-the-money” options) that would have been received by the option holders had all option holders exercised their options on December 31, 2008. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.
 
The aggregate intrinsic value of options exercised for the years ended December 31, 2008, 2007 and 2006 was $0, $3,475 and $3,424, respectively. The weighted-average grant-date fair value of stock options granted for the years ended December 31, 2008, 2007 and 2006 was $6.61, $14.06 and $13.15, respectively. Total fair value of stock options vested for the years ended December 31, 2008, 2007 and 2006 was $27,954, $27,243 and $24,754, respectively. Exercise of options during the year ended December 31, 2008 and 2007 resulted in cash receipts of $0 and $8,544, respectively. The tax (expense)/benefit during the years ended December 31, 2008 and 2007 related to the exercise of employee stock options were $(2,122) and $311, respectively.
 
The following table summarizes information on unvested RSUs:
 
                 
          Weighted-Average
 
          Grant-Date Fair
 
RSUs:
  Number of Shares     Value  
          (per share)  
 
Unvested at January 1, 2008
    325     $ 45.14  
Forfeited
    (22 )     40.61  
Vested
    (48 )     54.55  
Granted
    134       28.13  
                 
Unvested at December 31, 2008
    389     $ 38.36  
                 
 
The weighted average grant date fair value of RSUs granted for the years ended December 31, 2008, 2007 and 2006 was $28.13, $47.17 and $39.45, respectively. The aggregate intrinsic value of RSUs vested during the years ended December 31, 2008, 2007 and 2006 was $2,627, $3,998 and $382, respectively.
 

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
The following table summarizes information on unvested performance shares outstanding:
                 
          Weighted-Average
 
          Grant-Date Fair
 
Performance Shares:
  Number of Shares     Value  
          (per share)  
 
Unvested at January 1, 2008
    519     $ 54.49  
Forfeited
    (131 )     55.89  
Vested
    (15 )     57.08  
Granted
    232       28.91  
                 
Unvested at December 31, 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. The weighted average grant date fair value of performance shares granted for the years ended December 31, 2008, 2007 and 2006 was $28.91, $58.65 and $39.46, respectively. The aggregate intrinsic value of performance shares vested during the years ended December 31, 2008, 2007 and 2006 was $857, $2,545 and $213, respectively.
 
NON-EMPLOYEE SHARE-BASED COMPENSATION
 
In connection with the acquisition of Diebold Colombia, S.A. in December 2006, the Company issued 7 restricted shares with a grant-date fair value of $46 per share. These restricted shares vest in five years. The Company also issued warrants to purchase 35 common shares with an exercise price of $46 per share and grant-date fair value of $14.66 per share. The grant-date fair value of the warrants was valued using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 4.45 percent, dividend yield of 1.63 percent, expected volatility of 30 percent, and contractual life of six years. The warrants vest 20 percent per year for five years and will expire in December 2016.
 
RIGHTS AGREEMENT
 
On January 28, 1999, the Board of Directors announced the adoption of a Rights Agreement that provided for Rights to be issued to shareholders of record on February 11, 1999. The description and terms of the Rights were set forth in the Rights Agreement, dated as of February 11, 1999, between the Company and The Bank of New York, as Agent. The Rights Agreement expired on February 11, 2009.
 
NOTE 4: INCOME TAXES
 
The components of income from continuing operations before income taxes were as follows:
 
                         
    Year Ended December 31,  
    2008     2007     2006  
 
Domestic
  $ (4,837 )   $ (21,415 )   $ 50,808  
Foreign
    143,799       102,153       111,030  
                         
Total
  $ 138,962     $ 80,738     $ 161,838  
                         

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
Income tax expense (benefit) from continuing operations is comprised of the following components:
 
                         
    Year Ended December 31,  
    2008     2007     2006  
 
Current:
                       
U.S. Federal
  $ 21,073     $ 8,021     $ 14,886  
Foreign
    38,441       30,862       33,863  
State and local
    4,560       1,527       5,623  
                         
Total current
  $ 64,074     $ 40,410     $ 54,372  
Deferred:
                       
U.S. Federal
  $ (27,172 )   $ (9,500 )   $ (75 )
Foreign
    45       2,298       (671 )
State and local
    478       2,589       (710 )
                         
Total deferred
  $ (26,649 )   $ (4,613 )   $ (1,456 )
                         
Total income tax expense
  $ 37,425     $ 35,797     $ 52,916  
                         
 
In addition to the income tax expenses listed above for the years ended December 31, 2008, 2007 and 2006, income tax (benefit) expense allocated directly to shareholders’ equity for the same periods were $(55,782), $16,144, and $(23,497), respectively. Income tax benefit allocated to discontinued operations for the year ended December 31, 2008 was $(10,045).
 
A reconciliation of the U.S. statutory tax rate and the effective tax rate for continuing operations is as follows:
 
                         
    Year Ended December 31,  
    2008     2007     2006  
 
Statutory tax rate
    35.0 %     35.0 %     35.0 %
State and local income taxes, net of federal tax benefit
    2.3       2.4       2.3  
Foreign income taxes
    (6.9 )     0.9       (2.4 )
Accrual adjustments
    4.6       0.1       0.1  
U.S. taxed foreign income
    (4.3 )     (4.6 )     1.0  
Subsidiary losses
    (1.1 )     (11.0 )     (2.7 )
Goodwill impairment
          20.0        
Other
    (2.7 )     1.5       (0.6 )
                         
Effective tax rate
    26.9 %     44.3 %     32.7 %
                         
 
Effective January 1, 2007, the Company adopted FIN 48, which prescribes a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken, or expected to be taken, in a tax return.

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DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
Details of the unrecognized tax benefits are as follows:
 
                 
   
2008
    2007  
 
Balance at January 1
  $ 10,714     $ 9,020  
Increases related to prior year tax positions
    531        
Decreases related to prior year tax positions
    (1,381 )     (1,231 )
Increases related to current year tax positions
    1,539       4,631  
Decreases related to current year tax positions
           
Settlements
    (2,368 )     (1,706 )
Reduction due to lapse of applicable statute of limitations
    (26 )      
                 
Balance at December 31
  $ 9,009     $ 10,714  
                 
 
The entire amount of unrecognized tax benefits, if recognized, would affect the Company’s effective tax rate.
 
The Company classifies interest expense and penalties related to the underpayment of income taxes in the financial statements as income tax expense. Consistent with the treatment of interest expense, the Company accrues interest income on overpayments of income taxes where applicable and classifies interest income as a reduction of income tax expense in the financial statements. As of December 31, 2008 and 2007, accrued interest and penalties related to unrecognized tax benefits totaled approximately $3,149 and $2,474.
 
The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months. The expected timing of payments cannot be determined with any degree of certainty.
 
At December 31, 2008, the Company is under audit by the IRS for tax years ending December 31, 2007, 2006 and 2005. All federal tax years prior to 2002 are closed by statute. The Company is subject to tax examination in various U.S. state jurisdictions for tax years 2003 to the present, as well as various foreign jurisdictions for tax years 1997 to the present.

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Table of Contents

 
DIEBOLD INCORPORATED AND SUBSIDIARIES
FORM 10-K as of December 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share amounts)
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
 
                 
    December 31,  
    2008     2007  
 
Deferred Tax Assets:
               
Postretirement benefits
  $ 7,799     $ 7,663  
Accrued expenses
    31,303       20,352  
Warranty accrual
    12,012       5,287  
Deferred compensation
    16,984       17,488  
Bad debts
    7,916       10,988  
Inventory
    18,575       14,454  
Deferred revenue
    19,144       20,974  
Pension
    41,935       (6,533 )
Research and development credit
    3,170        
Foreign tax credit
    20,550       16,299  
Net operating loss carryforward
    114,902       89,083  
State deferred taxes
    12,329       6,597  
Other
    10,160       10,218  
                 
      316,779       212,870  
Valuation allowance
    (97,188 )     (85,429 )
                 
Net deferred tax assets
  $ 219,591     $ 127,441  
                 
Deferred Tax Liabilities:
               
Property, plant and equipment
    15,287       5,615  
Goodwill
    47,193       55,447  
Finance receivables
    6,660       6,828  
Software capitalized
    4,310       3,558  
Partnership income
    15,445       13,084  
Other
    1,219       1,859  
                 
Net deferred tax liabilities
    90,114       86,391  
                 
Net deferred tax asset
  $ 129,477     $ 41,050  
                 
 
At December 31, 2008, the Company’s domestic and international subsidiaries had deferred tax assets relating to net operating loss (NOL) carryforwards of $114,902. Of these NOL carryforwards, $66,208 expires at various times between 2009 and 2028. The remaining NOL carryforwards of approximately $48,694 do not expire. The Company has a valuation allowance to reflect the estimated amount of deferred tax assets that, more likely than not, will not be realized. The valuation allowance relates primarily to certain international and state NOLs. The net change in total valuation allowance for the years ended December 31, 2008 and 2007 was an increase of $11,759 and $32,167, respectively.
 
A determination of the unrecognized deferred tax liability on undistributed earnings of