Diebold Nixdorf (DBD) 10-K 2005 FY Annual report

Exhibit 13.1

FINANCIAL HIGHLIGHTS
Diebold, Incorporated and Subsidiaries

							Percentage
(In thousands except ratios, employees, shareholders and per share amounts)	2005			2004			Change
Net sales	$	2,587,049		$	2,357,108			9.8
Operating profit	$	161,269		$	273,480			(41.0	)
Income from continuing operations before taxes	$	138,251		$	265,449			(47.9	)
Income from continuing operations	$	82,904		$	181,809			(54.4	)
Net income	$	96,746		$	183,797			(47.4	)
Diluted earnings per share	$	1.36		$	2.53			(46.2	)
Capital and rotable expenditures	$	62,605		$	61,238			2.2
Research, development and engineering	$	60,409		$	58,759			2.8
Depreciation	$	49,877		$	53,439			(6.7	)
Pretax profit as a percentage of net sales		5.3	%		11.3	%		—
Net cash provided by operating activities	$	116,865		$	232,648			(49.8	)
Shareholders’ equity	$	1,152,849		$	1,248,908			(7.7	)
Shareholders’ equity per share	$	16.78		$	17.44			(3.8	)
Return on average shareholders’ equity		8.1	%		15.4	%		—
Cash dividends paid:
Total	$	57,770		$	53,240			8.5
Per share	$	0.82		$	0.74			10.8
Number of employees		14,603			14,376			1.6
Number of shareholders (Note A)		87,011			91,718			(5.1	)

Note A — Includes an estimated number of shareholders who have shares held for their accounts by banks, brokers, trustees, for benefit plans and the agent for the dividend reinvestment plan.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)

OVERVIEW

The table below presents the changes in comparative financial data from 2003 to 2005. 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 related notes that appear elsewhere in this document.

	2005									2004									2003
				Percentage			Percentage						Percentage			Percentage						Percentage
				of Net			Increase						of Net			Increase						of Net
	Amount			Sales			(Decrease)			Amount			Sales			(Decrease)			Amount			Sales
Net sales
Products	$	1,293,419			50.0			11.7		$	1,158,340			49.1			14.9		$	1,008,000			48.3
Services		1,293,630			50.0			7.9			1,198,768			50.9			11.2			1,078,431			51.7
		2,587,049			100.0			9.8			2,357,108			100.0			13.0			2,086,431			100.0
Cost of sales
Products		952,321			73.6			20.7			789,287			68.1			17.4			672,307			66.7
Services		1,009,246			78.0			12.3			898,925			75.0			12.7			797,321			73.9
		1,961,567			75.8			16.2			1,688,212			71.6			14.9			1,469,628			70.4
Gross profit		625,482			24.2			(6.5	)		668,896			28.4			8.4			616,803			29.6
Selling and administrative expense		403,804			15.6			19.9			336,657			14.3			9.9			306,333			14.7
Research, development and engineering expense		60,409			2.3			2.8			58,759			2.5			0.1			58,678			2.8
		464,213			17.9			17.4			395,416			16.8			8.3			365,011			17.5
Operating profit		161,269			6.2			(41.0	)		273,480			11.6			8.6			251,792			12.1
Other income (expense) net		(16,189	)		(0.6	)		—			(313	)		—			(104.3	)		7,213			0.3
Minority interest		(6,829	)		(0.3	)		(11.5	)		(7,718	)		(0.3	)		2.3			(7,547	)		(0.4	)
Income from continuing operations before taxes		138,251			5.3			(47.9	)		265,449			11.2			5.6			251,458			12.0
Taxes on income		55,347			2.1			(33.8	)		83,640			3.5			4.3			80,188			3.8
Income from continuing operations		82,904			3.2			(54.4	)		181,809			7.7			6.2			171,270			8.2
Income from discontinued operations — net of tax		909			—			(54.3	)		1,988			0.1			9.5			1,816			0.1
Gain on sale of discontinued operations — net of tax		12,933			0.5			—			—			—			—			—			—
Income from discontinued operations		13,842			0.5			—			1,988			0.1			9.5			1,816			0.1
Net income	$	96,746			3.7			(47.4	)	$	183,797			7.8			6.2		$	173,086			8.3

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Over 145 years ago, Diebold went into the business of making strong, reliable safes. Diebold, Incorporated has a long tradition of safeguarding assets and protecting investments. Today, the company is a global leader in providing integrated self-service delivery systems, security and services to customers within the financial, government, and retail sectors. In 2003, the company introduced Opteva, a new ATM line within the financial self-service market that provides a higher level of security, convenience and reliability. Opteva is powered by Agilis, which is a software platform for financial self-service equipment that was developed by the company in 2002. The combination of Opteva and Agilis provides the ability for financial institutions to customize solutions to meet their consumers’ demands and positively affect equipment performance, while providing a safer ATM. The Agilis software platform gives customers the ability to run the same software across their entire network, which helps contain costs and improve financial self-service equipment availability. Security features were engineered into the design, including consumer awareness mirrors to discourage shoulder surfing and provide consumers with increased security during ATM transactions. Opteva also includes PIN-pad positioning that helps maintain consumer security, a recessed fascia design, card reader technology with a jitter mechanism, an optional ink-dye system and an envelope depository that is designed to resist trapping. The company’s software includes the industry’s most advanced ATM protection against viruses, worms and other cyber security threats. Diebold is at the forefront in protecting ATMs from threats even before patches are developed and made available. The company established its own Global Security Task Force to collect, analyze, clarify and disseminate news and information about ATM fraud and security. The group includes associates from various departments around the world. These associates work to reduce fraud and to improve security for the industry.

As a result of the company’s continued focus to remain a leader in technology, service and security, growth in product revenue was attributable to favorable reaction by the financial sector to this new generation of financial self-service solutions. In addition to the advances in the company’s product line, the company also made strategic acquisitions during 2005 and 2004, which increased its presence in the security market.

The election systems business continues to be a challenge for the company. In 2004, the company settled the civil action in California with the state of California and Alameda County. The company continues to face a variety of challenges and opportunities in responding to customer needs within the election systems market. A number of individuals and groups have raised challenges in the media and elsewhere, including legal challenges, about the reliability and security of the company’s election systems products and services. The parties making these challenges oppose the use of technology in the electoral process generally and, specifically, have filed lawsuits and taken other actions to publicize what they view as significant flaws in the company’s election management software and firmware. These efforts have adversely affected some of the company’s customer relations with its election systems customers.

As a result of these challenges, and because 2004 was a presidential election year, the company believes that prospective purchases of voting equipment and services by certain government entities were delayed in 2004, which resulted in lower than expected revenue for 2004. Those entities did not want to introduce a new voting solution in a presidential election year and also wanted to see how successful electronic voting was in states that had already implemented the technology. Both the settlement of the civil action and the decrease in revenues resulted in a significant negative impact on margin and earnings per share. As a result of the positive performance of the company’s voting equipment, the positive performance of electronic voting systems in past elections and the Help America Vote Act (HAVA) requirement that jurisdictions must have HAVA-compliant equipment, the company expected to continue participating in new jurisdiction decisions to purchase voting equipment in 2005 and in future years.

Election Systems (ES) revenues for 2005 did increase by $77,040 from 2004, representing a combination of the recapture of delayed sales from 2004 as well as growth from sales generated within 2005. Despite the positive revenue growth in 2005, future delays or increases in the costs of providing products and services may be encountered as a result of possible future challenges, changes in the laws and changes to product specifications, any of which may adversely affect the company’s election systems sales.

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

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

• timing of a self-service upgrade and/or replacement cycle in mature markets such as the United States;

• high levels of deployment growth for new self-service products in emerging markets such as Asia-Pacific;

• demand for new service offerings, including outsourcing or operating a network of ATMs;

• demand beyond expectations for security products and services for the financial, retail and government sectors;

• implementation and timeline for new election systems in the United States;

• the company’s strong financial position; and

• the company’s ability to successfully integrate acquisitions.

In addition to the business drivers above, as a global operation, the company is exposed to risks that include, but are not limited to:

• 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;

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• 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;

• acceptance of the company’s product and technology introductions in the marketplace;

• unanticipated litigation, claims or assessments;

• the company’s ability to reduce costs and expenses and improve internal operating efficiencies;

• the company’s ability to successfully implement measures to improve pricing;

• variations in consumer demand for financial self-service technologies, products and services;

• 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; and

• the company’s ability to achieve benefits from its cost reduction initiatives and other strategic changes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Management of the company uses historical information and all available information to make these estimates and assumptions. Actual amounts could differ from these estimates and different amounts could be reported using different assumptions and estimates.

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, allowance for bad debts and credit risk, 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 RecognitionThe company’s product revenue consists of sales of ATMs, networking software, servers, electronic security products and voting machines. Service revenue consists of sales of service contracts, installation revenue, maintenance revenue and consultation revenue of bank branch design and security system design. Revenue is recognized only after the earnings process is complete. For product sales, the company determines that the earnings process is complete when the customer has assumed risk of loss of the goods sold and all performance requirements are substantially complete. Election systems revenue is primarily generated through sales contracts consisting of multiple deliverable elements and custom terms and conditions. Each contract is analyzed based on the multiple elements included within the contract. The company determines fair value of deliverables within a multiple element arrangement based on the prices 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. For service sales, the earnings process is considered complete once the service has been performed or earned.

Allowance for Bad Debts and Credit RiskThe company evaluates the collectibility of accounts receivable based on a number of criteria. A percentage of sales is reserved for uncollectible accounts as sales occur throughout the year. This percentage is based on historical loss experience and current trends. This estimate is periodically adjusted 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.

InventoriesDomestic inventories are valued at the lower of cost or market applied on a first-in, first-out (FIFO) basis, and international inventories are valued using the average cost method, which approximates FIFO. At each reporting period, the company identifies and writes down its excess 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.

GoodwillThe company tests all existing goodwill at least annually for impairment using the fair value approach on a “reporting unit” basis in accordance with Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets. The company’s reporting units are defined as Domestic and Canada, Brazil, Latin America, Asia Pacific, Europe, Middle East and Africa (EMEA) and Election Systems. The company uses the discounted cash flow 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 during the fourth quarter each year. However, actual circumstances could differ significantly from assumptions and estimates made and could result in future goodwill impairment.

Pensions and Postretirement BenefitsAnnual net periodic expense and benefit liabilities under the company’s defined benefit plans are

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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. 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.

The following table highlights the sensitivity of our pension obligations and expense to changes in the healthcare cost trend rate:

	One-Percentage-		One-Percentage-
	Point Increase		Point Decrease
Effect on total of service and interest cost	$	87	$	(78	)
Effect on postretirement benefit obligation		1,507		(1,348	)

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.

Certain accounting guidance, including the guidance applicable to pensions, does not require immediate recognition of the effects of a deviation between actual and assumed experience or the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted. Although this netting occurs outside the basic financial statements, the net amount is disclosed as an unrecognized gain or loss in Note 11 to the Consolidated Financial Statements.

Based on the above assumptions, the company expects pension expense to decrease by $6,927 in 2006, decreasing from $15,465 in 2005 to $8,538 in 2006. The 2005 pension expense included one-time charges of approximately $3,800 resulting from a Voluntary Early Retirement Program (VERP) and $3,300 for separation costs of former executives. Changes in any of the aforementioned assumptions could result in changes in the related retirement benefit cost and obligation.

The company’s qualified pension plans remain adequately funded as of December 31, 2005. Voluntary contributions were made in the amount of $16,500 in 2005. Pension expense excludes retiree medical expense, which is also included in operating expenses and was $1,173 and $1,468 in 2005 and 2004, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Capital resources are obtained from income retained in the business, borrowings under the company’s committed and uncommitted credit facilities, long-term industrial revenue bonds, and operating and capital leasing arrangements. Refer to Notes 7 and 8 to the Consolidated Financial Statements regarding information on outstanding and available credit facilities and bonds. Refer to the table which follows for the company’s future commitments relating to operating lease agreements. Management expects that cash provided from operations, available credit, long-term debt and the use of operating leases will be sufficient to finance planned working capital needs, investments in facilities or equipment, and the purchase of company stock. Part of the company’s growth strategy is to pursue strategic acquisitions. The company has made acquisitions in the past and intends to make acquisitions in the future. The company intends to finance any future acquisitions with either cash provided from operations, borrowings under available credit facilities, proceeds from debt or equity offerings and/or the issuance of common shares. In addition, on March 2, 2006, the company secured fixed-rate long-term financing of $300,000 in order to take advantage of attractive long-term interest rates. Please see Note 21 to the Consolidated Financial Statements for further information.

During 2005, the company generated $116,865 in cash from operating activities, a decrease of $115,783, or 49.8 percent from 2004. Cash flows from operating activities are generated primarily from operating income and controlling the components of working capital. Along with the decrease in operating income, 2005 cash flows from operations were negatively affected by the $97,075 increase in accounts receivable compared with a decrease of $2,293 in 2004. Total sales increased by $229,941 in 2005 versus 2004, while days sales outstanding (DSO) increased two days over the same time period. DSO was 65 days at December 31, 2005 compared with 63 days at December 31, 2004. The deterioration in DSO was mainly due to slower accounts receivable collections in the EMEA region. This deterioration was due in large part to an enterprise resource planning system implementation in that division, which delayed the processing and mailing of invoices. An increase in inventories negatively affected cash flows from operations by $23,558 in 2005, but was $28,872 lower than the increase of $52,430 in 2004. The increase in inventories was due to the impact of transitioning to the new Opteva product solution globally and the phaseout of legacy products, as well as anticipated strong first quarter 2006 orders. Inventory turns improved to 5.8 turns at December 31, 2005 from 5.3 turns at December 31, 2004. The change in certain other assets and liabilities positively affected cash flows from operations by $38,115 as compared with a negative impact of $21,135 in 2004.The change in certain other

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assets and liabilities was primarily the result of an increase in deferred income, and a decrease in estimated income taxes.

The company used $120,413 for investing activities in 2005, a decrease of $63,899 or 34.7 percent over 2004. The decrease over the prior year was the result of lower acquisition investments, which decreased by $34,523, moving from $62,224 in 2004 to $27,701 in 2005. The company’s acquisitions in 2005 and 2004 were in the security market. In addition to decreased acquisition spending, the company had a net increase in investment purchases of $20,850, moving from $40,157 in 2004 to $61,007 in 2005, and received $29,350 in proceeds from the sale of its campus card systems business in 2005.

Cash provided by financing activities was $27,220 in 2005, compared to cash used of $37,571 in 2004. The overall positive impact of cash flow from financing activities was the result of increased net borrowings of $134,853, moving from $79,688 in 2004 to $214,541 in 2005. The increase in net borrowings was partially offset by an increase of $66,311 in company shares repurchased.

The following table summarizes the company’s approximate obligations and commitments to make future payments under contractual obligations as of December 31, 2005:

			Payment due by period
			Less than						More than
	Total		1 year		1–3 years		3–5 years		5 years
Operating lease obligations	$	191,872	$	54,413	$	82,948	$	41,005	$	13,506
Industrial development revenue bonds		13,300		—		—		—		13,300
Financing arrangement		7,023		4,615		2,408		—		—
Notes payable		489,194		34,472		—		454,722		—
Purchase commitments		18,797		6,892		6,892		5,013		—
	$	720,186	$	100,392	$	92,248	$	500,740	$	26,806

On March 2, 2006, the company issued senior notes in an aggregate principal amount of $300,000. The maturity date 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 $160,000 of the net proceeds from this offering to repay notes payable under its revolving credit facility.

RESULTS OF OPERATIONS

The company has classified the operations of its former campus card system business as a discontinued operation for all periods presented as a result of the sale of this business on July 1, 2005. Income from discontinued operations net of tax in 2005, 2004, and 2003 was 13,842, 1,988, and 1,816, respectively. Included in the income from discontinued operations, net of tax in 2005 was a $12,933 gain from the sale of the campus card system business. The following discussion and analysis reflects the company’s continuing operations.

2005 Comparison with 2004

Net SalesNet sales for 2005 totaled $2,587,049 and were $229,941 or 9.8 percent higher than net sales for 2004. Financial self-service revenue in 2005 increased by $73,855 or 4.4 percent over 2004, primarily due to strong growth in Asia Pacific, Brazil, and Latin America, partially offset by market weakness and customer delayed installations in the North American market. Security solutions revenue increased by $91,742 or 16.1 percent for 2005, due primarily to increases in the retail, government and financial security markets as a result of growth in the market, complemented by growth resulting from strategic acquisitions and increased market share.

Election systems/lottery net sales of $154,376 increased by $64,344 or 71.5 percent compared to 2004. The increase was related to Brazilian lottery systems revenue of $23,062 and higher U.S.-based electronic voting equipment revenue in 2005, as more localities purchased equipment in order to comply with HAVA.

Gross ProfitGross profit for 2005 totaled $625,482 and was $43,414 or 6.5 percent lower than gross profit for 2004. Product gross margin was 26.4 percent in 2005 compared to 31.9 percent in 2004. The decline in product gross margin was due to unfavorable sales mix, lower pricing levels of approximately $16,800, manufacturing and supply chain inefficiencies of $10,025, and higher energy costs of $600. The unfavorable sales mix was driven by a lower mix of revenue from the higher-margin North American regional bank market and increased security and election system revenues, which carry a lower gross margin. In addition, included in product cost of sales were $13,371 of restructuring charges, which adversely affected the product gross margin. Services gross margin for 2005 was 22.0 percent compared with 25.0 percent for 2004. The decline in services gross margin was due to lower pricing levels and higher product maintenance, energy and pension costs. In addition, services gross margin was adversely affected by $4,505 of restructuring charges included in service cost of sales in 2005.

Operating ExpensesTotal operating expenses for 2005 were 17.9 percent of net sales, up from 16.8 percent for 2004. The increase in operating expenses as a percentage of sales was due in part to higher information technology expenses and professional fees associated with the company’s continued enterprise resource planning and software implementation project. The company also recorded in the fourth quarter $15,490 in expense to reserve for an approximately $32,500 ES trade receivable related primarily to two counties in California. Also

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included in operating expenses in 2005 were $18,588 in restructuring charges that further adversely affected current year operating expenses as a percentage of sales. Finally, acquisitions which carried a higher operating expense as a percentage of revenues, also affected the year over year comparison.

Other Income (Expense)Investment income for 2005 was $12,165 and decreased $134 or 1.1 percent over investment income for 2004. The decrease was due to a smaller investment portfolio in 2005. Interest expense for 2005 was $16,511 and increased $5,854 or 54.9 percent compared to 2004. The increase was due to higher borrowing rates and higher borrowing levels year over year. Miscellaneous expense, net for 2005 was $11,843 and increased $9,888 from 2004. Included in the increase in miscellaneous expense, net was foreign exchange losses of $9,035. The increase in foreign exchange loss was primarily due to the weakening of the U.S. dollar as compared to the Brazilian real as well as a strengthening of the U.S.-dollar compared to the euro.

Income from Continuing OperationsIncome from continuing operations for 2005 was $82,904 and decreased $98,905 or 54.4 percent over income from continuing operations for 2004. The decrease was primarily due to lower gross margins, higher operating expense, increased foreign exchange losses and a higher effective tax rate in 2005. The effective tax rate for 2005 was 40.0 percent as compared to 31.5 percent for 2004. The increase in the tax rate was primarily attributable to valuation allowances established in 2005 relating to certain international net operating losses.

Net IncomeNet income for 2005 was $96,746 and decreased by $87,051 or 47.4 percent over net income for 2004. Included in the decrease in net income is the impact of the increase in the effective tax rate during 2005 and lower income from continuing operations.

Segment Revenue and Operating Profit Summary Diebold North America (DNA) net sales of $1,422,170 for 2005 increased $22,347 or 1.6 percent over 2004 net sales of $1,399,823. The increase in DNA net sales was due to increased revenue from the security solutions product and service offerings which more than offset reduced financial self service product and service offerings. Diebold International (DI) net sales of $1,010,503 for 2005 increased by $143,250 or 16.5 percent over 2004 net sales of $867,253. The increase in DI net sales was attributed to strong revenue growth of $34,636 in Asia Pacific and higher revenue from Latin America of $66,950 and from EMEA of $41,664. During 2005, revenue was positively impacted by the year-over-year strengthening of the Brazilian real, partially offset by a weakening euro and certain other currencies. ES & Other net sales of $154,376 for 2005 increased $64,344 or 71.5 percent over 2004. The increase was related to the result of higher U.S. based revenue in 2005, as more localities purchased electronic voting equipment in order to comply with HAVA.

DNA operating profit for 2005 decreased by $89,575 or 40.7 percent compared to 2004. The decrease was primarily due to unfavorable revenue mix and pricing pressure as well as restructuring charges of $20,326 for 2005. DI operating profit for 2005 decreased by $23,359 or 38.4 percent compared to 2004. The decrease was primarily due to sales mix and restructuring charges of $16,138 for 2005. The operating loss in ES & other decreased by $723 or 9.4 percent, moving from $7,713 in 2004 to $6,990 in 2005. This decrease in ES & other operating loss was a result of higher margins on products sold in 2005.

2004 Comparison with 2003

Net SalesNet sales for 2004 totaled $2,357,108 and were $270,677 or 13.0 percent higher than net sales for 2003. In 2004, the company achieved growth in all sales categories, except election systems/lottery. Financial self-service product revenue increased by $132,754 or 19.5 percent over 2003, due to the continued favorable customer response to the Opteva financial self-service product line in the Americas and Asia-Pacific and the positive currency effects in EMEA of $10,719 and Brazil of $4,979. Opteva orders increased $252,463 in 2004 as compared with 2003. Security product revenue increased by $36,533 or 15.2 percent over 2003, which was attributable to increases in the retail, government and financial security markets as a result of growth in the market, complemented by growth resulting from strategic acquisitions and increased market share. Total service revenue for financial self-service and security solutions increased $111,540 or 10.5 percent over 2003 as the company continued to expand its service customer base through increased market share and acquisitions.

Election systems/lottery net sales of $90,032 decreased by $10,150 or 10.1 percent over 2003 and partially offset the increases in financial self-service and security solutions net sales noted above. The decrease in election systems sales was due to the challenges discussed earlier and because 2004 was a presidential election year.

Gross ProfitGross profit for 2004 totaled $668,896 and was $52,093 or 8.4 percent higher than gross profit in 2003. Product gross margin was 31.9 percent in 2004 compared with 33.3 percent in 2003. Product margins in the United States, excluding election systems, improved slightly while international product margins declined, adversely affecting overall product margins by 1.5 percent. The decline in international product margins was due to significant margin weakness in Europe as a result of pricing pressure in that market. Some pricing pressures were also experienced in Latin America and Asia Pacific, but significantly less than in the European market. The election systems business adversely affected product margins by 0.4 percentage points as a result of lower revenue on fixed costs. Services gross margin in 2004 decreased to 25.0 percent compared with 26.1 percent in 2003. This decline was a result of continued pricing pressures and increased fuel costs. In the United States, services gross margins improved slightly as the company was able to more than offset the increase in fuel costs with the efficiencies gained from field automation initiatives.

Operating ExpensesTotal operating expenses as a percentage of net sales improved significantly, moving from 17.5 percent in 2003 to 16.8 percent in 2004. The improved leveraging of selling, general and administrative expenses was achieved due to aggressive cost controls on personnel costs, despite the adverse impact of approximately $3,000 in legal and other expenses related to concluding the civil action in the state of California. The aggressive controls on personnel costs included strictly limiting the rate of replacement and new hires,

Diebold AR2005          P 23

limiting base compensation increases and implementing a corporate-wide efficiency program. In addition, the company was able to hold research and development costs flat because of the benefit from ongoing product rationalization created by the Opteva rollout.

Other Income (Expense)Investment income in 2004 decreased $697 or 5.4 percent compared with 2003 investment income, due to a smaller investment portfolio in 2004. The average investment portfolio decreased by $15,260 compared with 2003. Interest expense in 2004 increased $1,306 or 14.0 percent compared with 2003 due to higher borrowing levels in 2004. Miscellaneous, net changed by $5,523 or 154.8 percent moving from an income position of $3,568 in 2003 to an expense position of $1,955 in 2004. The change in miscellaneous, net was a result of approximately $2,700 in legal and other expenses incurred in 2004 related to concluding the civil action in the state of California as well as a 2003 gain of approximately $3,400 from the early buyout of leased ATM equipment which did not reoccur in 2004.

Income from Continuing OperationsIncome from continuing operations in 2004 was $181,809 and increased $10,539 or 6.2 percent over income from continuing operations for 2003. The increase was primarily due to higher gross margins, lower operating expenses and a higher effective tax rate in 2003. The effective tax rate was 31.5 percent in 2004 as compared with 31.9 percent in 2003. The details of the reconciliation between the U.S. statutory rate and the company’s effective tax rate are included in Note 13 to the Consolidated Financial Statements.

Net IncomeNet income for 2004 was $183,797 and increased $10,711 or 6.2 percent over net income for 2003. The increase in net income was due to strong revenue performance accompanied with aggressive operating cost controls and a lower effective tax rate, partially offset by lower gross margins and higher other expenses.

Segment Revenue and Operating Profit Summary DNA 2004 net sales of $1,399,823 increased $166,166 or 13.5 percent over 2003 net sales of $1,233,657. The increase in DNA net sales was due to increased product and service revenue from gains in market share for both security and financial self-service and the successful introduction of the Opteva product line. DI 2004 net sales of $867,253 increased by $114,661 or 15.2 percent compared with 2003 net sales of $752,592. The increase in DI net sales was primarily attributed to strong Asia-Pacific revenue growth of $54,744 or 30.7 percent, led by China and India. Also, DI growth was due to higher revenue in Brazil and positive currency impact in EMEA. The Opteva product was certified for use in Asia-Pacific during 2004, leading to increased customer orders. The Opteva product received key customer certifications in Europe in early 2005. ES 2004 net sales of $90,032 decreased by $10,150 or 10.1 percent compared with 2003 net sales of $100,182 due to challenges and opportunities in responding to customer needs within the election systems market discussed previously.

DNA operating profit in 2004 increased by $44,397 or 25.2 percent compared with 2003 due to increased sales and efficiencies gained from various internal cost control initiatives discussed previously. DI operating profit in 2004 decreased by $8,877 or 12.7 percent compared with 2003. This decrease was due to reduced profitability in EMEA, as a result of increased pricing pressure that resulted in lower operating profit margins. ES & other operating profits declined from $6,119 in 2003 to a loss of $7,713 in 2004. The $13,832 or 226.1 percent decrease in ES operating profit was a result of lower revenue as well as product recertification, legal and other expenses related to concluding the civil action in the state of California.

Refer to Note 16 to the Consolidated Financial Statements for further details of segment revenue and operating profit.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151,Inventory Costs, which is an amendment of Accounting Research Bulletin No. 43, Chapter 4,Inventory Pricing. This statement clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. The provisions of this statement are effective for inventory costs incurred during the fiscal year beginning after June 15, 2005 and are applied on a prospective basis. The company, however, elected to early adopt the statement as of January 1, 2005, because the company’s policies related to such inventory costs are already consistent with SFAS No. 151 related to such inventory costs. As such, adoption of the standard did not affect the company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004),Share-Based Payment, which is a revision of SFAS No. 123,Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and amends SFAS No. 95,Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Also, SFAS No. 123(R) provides significant additional guidance regarding the valuation of employee stock options. While SFAS No. 123(R) does not require the use of a specific option- pricing model, it does indicate that lattice models usually will provide a better estimate of fair value of an employee stock option. The company currently prepares the pro forma disclosures required under SFAS No. 123 using the Black-Scholes option-pricing model.

On April 14, 2005, the SEC announced a deferral of the effective date of SFAS No. 123(R) for calendar year companies until the beginning of 2006. Early adoption is permitted in periods in which financial statements have not yet been issued. The company adopted SFAS

Diebold AR2005          P 24

No. 123(R) on January 1, 2006 using the modified-prospective method. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

• A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

• A “modified retrospective” method that includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures of either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

As permitted by SFAS No. 123, the company currently accounts for share-based payments to employees using the APB Opinion No. 25 intrinsic-value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of the SFAS No. 123(R) fair value method will affect the company’s results of operations. The company estimates that the impact of adoption of SFAS No. 123(R) on 2005 compensation expense would have been approximately $7,600, excluding tax. The company has completed its analysis of the impact of adoption of SFAS No. 123(R) for 2006. It is expected that the impact will result in approximately $7,800, excluding tax, of additional compensation expense in 2006. The company has not concluded its analysis of the tax impact of adoption of SFAS No. 123(R) for 2006. Had the company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to the Consolidated Financial Statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.

In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Correctionswhich supersedes APB 20,Accounting Changesand SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 also carries forward without change the guidance contained in APB 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate.

SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The correction of an error in previously issued financial statements is not a change in accounting principle. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retroactively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The company does not believe that the adoption of this statement will have a material impact on its financial condition or results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 unfavorable movement in the applicable foreign exchange rates would have resulted in a decrease in 2005 and 2004 year-to-date operating profit of approximately $6,002 and $7,200, 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 dollar/euro and dollar/real rates. There were no significant changes in the company’s foreign exchange risks in 2005 compared with 2004.

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 $489,194 and $289,510 at December 31, 2005 and 2004, respectively. A one percent increase or decrease in interest rates would have resulted in an increase or decrease in interest expense of approximately $4,850 and $2,800 for 2005 and 2004, respectively. The company’s primary exposure to interest rate risk is movements in the LIBOR rate, which is consistent with prior periods.

Diebold AR2005          P 25

CONSOLIDATED BALANCE SHEETS at December 31,
Diebold, Incorporated and subsidiaries
(In thousands, except share and per share amounts)

	2005			2004
ASSETS
Current assets
Cash and cash equivalents	$	207,900		$	184,045
Short-term investments		52,885			31,654
Trade receivables, less allowances of $27,216 for 2005 and $10,176 for 2004		676,361			583,658
Inventories		341,614			322,293
Deferred income taxes		57,215			32,101
Prepaid expenses		20,816			22,892
Other current assets		71,089			57,989
Total current assets		1,427,880			1,234,632
Securities and other investments		54,154			52,248
Property, plant and equipment, at cost		606,085			614,114
Less accumulated depreciation and amortization		329,119			346,024
		276,966			268,090
Goodwill		389,134			412,625
Other assets		205,059			167,957
	$	2,353,193		$	2,135,552
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable	$	34,472		$	289,510
Accounts payable		180,725			140,324
Estimated income taxes		—			14,781
Deferred income		136,135			92,862
Other current liabilities		228,699			202,713
Total current liabilities		580,031			740,190
Notes payable — long term		454,722			—
Pensions and other benefits		39,856			41,109
Postretirement and other benefits		31,369			36,910
Deferred income taxes		49,035			11,579
Other long-term liabilities		23,785			31,324
Minority interest		21,546			25,532
Shareholders’ equity
Preferred shares, no par value, authorized 1,000,000 shares, none issued		—			—
Common shares, par value $1.25, Authorized 125,000,000 shares, issued 74,726,031 and 74,233,384 shares, respectively outstanding 68,721,847 and 71,592,293 shares, respectively		93,408			92,792
Additional capital		199,033			179,259
Retained earnings		1,140,468			1,101,492
Treasury shares, at cost (6,004,184 and 2,641,091 shares, respectively)		(256,336	)		(113,687	)
Accumulated other comprehensive loss		(23,437	)		(10,738	)
Other		(287	)		(210	)
Total shareholders’ equity		1,152,849			1,248,908
	$	2,353,193		$	2,135,552

See accompanying Notes to Consolidated Financial Statements.

Diebold AR2005          P 26

CONSOLIDATED STATEMENTS OF INCOME Years ended December 31,
Diebold, Incorporated and subsidiaries
(In thousands, except per share amounts)

	2005			2004			2003
Net sales
Products	$	1,293,419		$	1,158,340		$	1,008,000
Services		1,293,630			1,198,768			1,078,431
		2,587,049			2,357,108			2,086,431
Cost of sales
Products		952,321			789,287			672,307
Services		1,009,246			898,925			797,321
		1,961,567			1,688,212			1,469,628
Gross profit		625,482			668,896			616,803
Selling and administrative expense		403,804			336,657			306,333
Research, development and engineering expense		60,409			58,759			58,678
		464,213			395,416			365,011
Operating profit		161,269			273,480			251,792
Other income (expense)
Investment income		12,165			12,299			12,996
Interest expense		(16,511	)		(10,657	)		(9,351	)
Miscellaneous, net		(11,843	)		(1,955	)		3,568
Minority interest		(6,829	)		(7,718	)		(7,547	)
Income from continuing operations before taxes		138,251			265,449			251,458
Taxes on income		55,347			83,640			80,188
Income from continuing operations		82,904			181,809			171,270
Income from discontinued operations — net of tax		909			1,988			1,816
Gain on sale of discontinued operations — net of tax		12,933			—			—
Income from discontinued operations		13,842			1,988			1,816
Net income	$	96,746		$	183,797		$	173,086
Basic weighted-average number of shares		70,577			72,000			72,417
Diluted weighted-average number of shares		70,966			72,534			72,924
Basic earnings per share:
Income from continuing operations	$	1.17		$	2.52		$	2.37
Income from discontinued operations	$	0.20		$	0.03		$	0.02
Net income	$	1.37		$	2.55		$	2.39
Diluted earnings per share:
Income from continuing operations	$	1.17		$	2.50		$	2.35
Income from discontinued operations	$	0.19		$	0.03		$	0.02
Net income	$	1.36		$	2.53		$	2.37

See accompanying Notes to Consolidated Financial Statements.

Diebold AR2005          P 27

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Diebold, Incorporated and subsidiaries
(In thousands, except share amounts)

																Accumulated
													Compre-			Other
	Common Shares												hensive			Compre-
			Par		Additional		Retained			Treasury			Income			hensive
	Number		Value		Capital		Earnings			Shares			(Loss)			Loss			Other			Total
Balance, January 1, 2003		72,989,492	$	91,237	$	130,995	$	847,091		$	(30,191	)				$	(102,413	)	$	(5,613	)	$	931,106
Net income								173,086					$	173,086									173,086
Translation adjustment														58,294									58,294
Pensions														(610	)								(610	)
Unrealized gain on investment securities														1,674									1,674
Other comprehensive income														59,358			59,358
Comprehensive income													$	232,444
Stock options exercised		662,035		827		22,701																	23,528
Restricted shares		10,000		13		375														5,272			5,660
Performance shares		17,960		22		844																	866
DIMS acquisition		115,929		145		4,695																	4,840
Dividends declared and paid								(49,242	)														(49,242	)
Treasury shares											(12,371	)											(12,371	)
Balance, December 31, 2003		73,795,416	$	92,244	$	159,610	$	970,935		$	(42,562	)				$	(43,055	)	$	(341	)	$	1,136,831
Net income								183,797					$	183,797									183,797
Translation adjustment														33,027									33,027
Pensions														(710	)								(710	)
Other comprehensive income														32,317			32,317
Comprehensive income													$	216,114
Stock options exercised		302,754		379		11,217																	11,596
Restricted shares		5,000		6		259														131			396
Restricted stock units		200				10																	10
Performance shares		130,014		163		6,723																	6,886
NCI acquisition						1,440					3,127												4,567
Dividends declared and paid								(53,240	)														(53,240	)
Treasury shares											(74,252	)											(74,252	)
Balance, December 31, 2004		74,233,384	$	92,792	$	179,259	$	1,101,492		$	(113,687	)				$	(10,738	)	$	(210	)	$	1,248,908
Net income								96,746					$	96,746									96,746
Translation adjustment														(16,053	)								(16,053	)
Pensions														3,354									3,354
Other comprehensive loss														(12,699	)		(12,699	)
Comprehensive income													$	84,047
Stock options exercised		332,412		416		11,356																	11,772
Restricted shares		9,050		11		467														(77	)		401
Restricted stock units		3,140		4		149																	153
Performance shares		148,045		185		7,802																	7,987
Dividends declared and paid								(57,770	)														(57,770	)
Treasury shares											(142,649	)											(142,649	)
Balance, December 31, 2005		74,726,031	$	93,408	$	199,033	$	1,140,468		$	(256,336	)				$	(23,437	)	$	(287	)	$	1,152,849

See accompanying Notes to Consolidated Financial Statements.

Diebold AR2005          P 28

CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31,
Diebold, Incorporated and subsidiaries
(In thousands)

	2005			2004			2003
Cash flow from operating activities:
Net income	$	96,746		$	183,797		$	173,086
Adjustments to reconcile net income to cash provided by operating activities:
Income from discontinued operations		(909	)		(1,988	)		(1,816	)
Minority interest		6,829			7,718			7,547
Depreciation and amortization		76,239			74,983			68,698
Deferred income taxes		10,063			28,486			(10,166	)
Gain on sale of discontinued operations		(20,290	)		—			—
Loss on sale of assets, net		5,327			412			540
Cash provided (used) by changes in certain assets and liabilities:
Trade receivables		(97,075	)		2,293			(128,929	)
Inventories		(23,558	)		(52,430	)		(10,541	)
Prepaid expenses		1,860			(6,402	)		1,585
Other current assets		(15,982	)		(407	)		30,423
Accounts payable		39,500			17,321			15,402
Certain other assets and liabilities		38,115			(21,135	)		57,682
Net cash provided by operating activities		116,865			232,648			203,511
Cash flow from investing activities:
Proceeds from sale of discontinued operations		29,350			—			—
Payments for acquisitions, net of cash acquired		(27,701	)		(62,224	)		(10,611	)
Proceeds from maturities of investments		40,178			12,418			51,134
Proceeds from sales of investments		—			—			31,505
Payments for purchases of investments		(61,007	)		(40,157	)		(56,974	)
Capital expenditures		(48,454	)		(50,200	)		(48,262	)
Rotable spares expenditures		(14,151	)		(11,038	)		(24,558	)
Increase in certain other assets		(38,628	)		(33,111	)		(48,143	)
Net cash used by investing activities		(120,413	)		(184,312	)		(105,909	)
Cash flow from financing activities:
Dividends paid		(57,770	)		(53,240	)		(49,242	)
Notes payable borrowings		1,184,746			917,632			447,324
Notes payable repayments		(970,205	)		(837,944	)		(502,153	)
Distribution of affiliates’ earnings to minority interest holder		(805	)		(540	)		(359	)
Issuance of common shares		9,462			8,418			17,457
Repurchase of common shares		(138,208	)		(71,897	)		(2,739	)
Net cash provided (used) by financing activities		27,220			(37,571	)		(89,712	)
Effect of exchange rate changes on cash		183			3,329			6,615
Increase in cash and cash equivalents		23,855			14,094			14,505
Cash and cash equivalents at the beginning of the year		184,045			169,951			155,446
Cash and cash equivalents at the end of the year	$	207,900		$	184,045		$	169,951
Cash paid for:
Income taxes	$	59,803		$	85,893		$	40,944
Interest		16,274			10,430			10,090
Significant noncash items:
Issuance of treasury shares for NCI acquisition	$	—		$	4,567		$	—
Issuance of common shares for DIMS acquisition		—			—			4,840

See accompanying Notes to Consolidated Financial Statements.

Diebold AR2005          P 29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts and as noted)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of ConsolidationThe Consolidated Financial Statements include the accounts of the company and its wholly and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates in Preparation of Consolidated Financial Statements

The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

ReclassificationsThe company has reclassified the presentation of certain prior-year information to conform to the current presentation.

Statements of Cash FlowsFor the purpose of the Consolidated Statements of Cash Flows, the company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

International OperationsThe financial statements of the company’s international operations are measured using local currencies as their functional currencies, with the exception of Venezuela, Argentina and Ecuador, 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 42.0 percent of net sales in 2005, 39.7 percent of net sales in 2004 and 37.3 percent of net sales in 2003.

Financial InstrumentsThe carrying amount of financial instruments, including cash and cash equivalents, trade receivables and accounts payable, approximated their fair value as of December 31, 2005 and 2004 because of the relatively short maturity of these instruments.

Revenue RecognitionThe company’s revenue recognition policy is consistent with the requirements of Statement of Position (SOP) 97-2,Software Revenue Recognitionand 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 provided to the customer; the sales price is fixed or determinable within the contract; and collectibility is probable. The sales of the company’s products do not require significant production, modification or customization of the hardware or software after it is shipped.

The company offers the following product groups and related services to its customers:

Self-Service ProductsSelf-service products pertain to Automated Teller Machines (ATMs). Included within the ATM is software, which operates the ATM. As such, the related software is considered an integral part of the equipment since without it, the equipment can not function. Revenue is recognized in accordance with Statement of Position (SOP) 97-2,Software Revenue Recognition. 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 warranties cover 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 and Facility ProductsThe company’s Physical Security and Facility Products division designs and manufactures several of the company’s financial service solutions offerings, including the RemoteTeller™ 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 SystemsThe company, through its wholly owned subsidiaries, Diebold Election Systems, Inc. (DESI) and Amazonia Industria Eletronica S.A. Procomp, offers electronic voting systems. 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. 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.

Diebold AR2005          P 30

Revenue on election systems contracts is recognized in accordance with SOP 97-2.

Integrated Security SolutionsDiebold Integrated Security Solutions provide 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 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 vendor specific objective evidence of the fair value of the elements as prescribed in EITF 00-21,Accounting for Revenue Arrangements with Multiple Deliverables.

Software Solutions and ServicesThe 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 AmortizationDepreciation 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.

Shipping and Handling CostsThe 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.

Research, Development and EngineeringTotal research, development and engineering costs charged to expense were $60,409, $58,759 and $58,678 in 2005, 2004 and 2003, respectively.

Advertising CostsAdvertising costs are expensed as incurred. Total advertising costs charged to expense were $12,725, $12,557 and $12,086 in 2005, 2004 and 2003, respectively.

Stock-based CompensationCompensation cost is measured on the date of grant only if the current market price of the underlying stock exceeds the exercise price. The company provides pro forma net income and pro forma net earnings per share disclosures for employee stock option grants made in 1995 and subsequent years as if the fair value based method had been applied in accordance with SFAS No. 123,Accounting for Stock Based Compensation. The company’s stock options are accounted for in accordance with APB Opinion No. 25,Accounting for Stock Issued to Employees. As a result, no compensation expense has been recognized in the “as reported” amounts listed in the table below.

In the following chart, the company provides net income and basic earnings per share reduced by the pro forma amounts calculating compensation cost for the company’s fixed stock option plan under the fair-value method. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 2005, 2004 and 2003, respectively: risk-free interest rate of 3.8, 2.8 and 2.8 percent; dividend yield of 1.6, 1.5 and 1.8 percent; volatility of 30, 38 and 41 percent; and average expected lives of six years for management and four years for executive management and nonemployee directors.

	2005		2004		2003
Income from continuing operations
As reported	$	82,904	$	181,809	$	171,270
Pro forma	$	78,288	$	177,305	$	167,270
Net income
As reported	$	96,746	$	183,797	$	173,086
Pro forma	$	92,130	$	179,293	$	169,086
Basic earnings per share:
Income from continuing operations — as reported	$	1.17	$	2.52	$	2.37
Income from continuing operations — pro forma	$	1.11	$	2.46	$	2.31
Net income — as reported	$	1.37	$	2.55	$	2.39
Net income — pro forma	$	1.31	$	2.49	$	2.33
Diluted earnings per share:
Income from continuing operations — as reported	$	1.17	$	2.50	$	2.35
Income from continuing operations — pro forma	$	1.10	$	2.44	$	2.29
Net income — as reported	$	1.36	$	2.53	$	2.37
Net income — pro forma	$	1.30	$	2.47	$	2.32
Weighted-average fair value of options granted during the year	$	13	$	16	$	12

Earnings per ShareBasic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if common stock equivalents were exercised and then shared in the earnings of the company.

Trade ReceivablesThe concentration of credit risk in the company’s trade receivables with respect to financial and government sectors is substantially 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

Diebold AR2005          P 31

management’s expectations except for a fourth quarter expense of $15,490 to reserve for an approximate $32,500 election systems trade receivable related primarily to two counties in California. The allowance for doubtful accounts is estimated based on various factors including revenue, historical credit losses and current trends.

InventoriesDomestic inventories are valued at the lower of cost or market applied on a first-in, first-out (FIFO) basis, and international inventories are valued using the average cost method, which approximates FIFO. At each reporting period, the company identifies and writes down its excess 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.

Other assetsIncluded in other assets are capitalized computer software development costs of $30,841 and $29,518 as of December 31, 2005 and 2004, respectively. Amortization expense on capitalized software was $11,417, $10,039 and $9,152 for 2005, 2004 and 2003, respectively. Other long-term assets also consist of pension assets, finance receivables, tooling, investment in service contracts and customer demonstration equipment. 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 of three to five years.

GoodwillGoodwill is the cost in excess of the net assets of acquired businesses. These assets are stated at cost and, effective January 1, 2002, are not amortized, but evaluated at least annually for impairment, in accordance with SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 142 establishes accounting and reporting standards for acquired goodwill and other intangible assets in that goodwill and other intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives.

Under SFAS No. 142, the company is required to test all existing goodwill for impairment on a “reporting unit” basis. The reporting units were determined on a geographical basis that combines two or more component-level reporting units with similar economic characteristics within a single reporting unit. A fair-value approach is used to test goodwill for impairment. The company uses the discounted cash flow 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 assets and liabilities. When available and as appropriate, comparative market multiples were used to corroborate results of the discounted cash flows. An impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. The annual impairment tests were performed as of November 30, 2005, 2004 and 2003 and resulted in no impairment charges.

The changes in carrying amount of goodwill for the years ended December 31, 2005 and 2004 are as follows:

							ES &
	DNA			DI			Other		Total
Balance at January 1, 2004	$	26,928		$	258,100		$	46,618	$	331,646
Goodwill of acquired businesses & purchase accounting adjustments		53,757			5,241			–		58,998
Currency translation adjustment		113			21,868			–		21,981
Balance at December 31, 2004	$	80,798		$	285,209		$	46,618	$	412,625
Goodwill of acquired businesses & purchase accounting adjustments		(16,628	)		3,843			–		(12,785	)
Currency translation adjustment		70			(10,776	)		–		(10,706	)
Balance at December 31, 2005	$	64,240		$	278,276		$	46,618	$	389,134

Taxes on IncomeDeferred 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. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. 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.

Deferred IncomeDeferred income is largely related to service contracts and deferred installation revenue. Service contract revenue may be billed in advance of the service period. Service contract revenue is recognized as it is earned on a straight-line basis over the contract period.

Comprehensive Income (Loss)The company displays comprehensive income (loss) in the Consolidated Statements of Shareholders’ Equity and accumulated other comprehensive loss separately from retained earnings and additional capital in the Consolidated Balance Sheets and Statements of Shareholders’ Equity. Items considered to be other comprehensive income (loss) include adjustments made for foreign currency translation (under SFAS No. 52), pensions (under SFAS No. 87) and unrealized holding gains and losses on available-for-sale securities (under SFAS No. 115).

Diebold AR2005          P 32

Accumulated other comprehensive loss consists of the following:

	2005			2004			2003
Translation adjustment	$	(18,835	)	$	(2,783	)	$	(35,810	)
Pensions less accumulated taxes of $(1,572), $(3,541) and $(3,159), respectively		(4,602	)		(7,955	)		(7,245	)
	$	(23,437	)	$	(10,738	)	$	(43,055	)

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.

NOTE 2: SECURITIZATIONS

In 2001, the company entered into a securitization agreement, which involved the sale of a pool of its lease receivables to a wholly owned, unconsolidated, qualified special purpose subsidiary, DCC Funding LLC (DCCF). One of the conditions set forth in the securitization agreement between DCCF and the conduit was that the composition of the pool of securitized lease receivables represent only customers with an AA credit rating or higher. The pool of lease receivables included within the securitized program consisted primarily of one large customer with such a credit rating. During the third quarter of 2004, this customer, with approval from the conduit, elected to transfer its leasing rights to another entity. This other entity had a credit rating of less than the required rating to remain securitized in accordance with the securitization agreement, which led to the termination of the securitization agreement. During 2004, as a result of the termination, the balance of the securitized pool of lease receivables of $35,905 was recorded on the company’s Consolidated Financial Statements and the 364-day facility agreement balance of $28,973 that funded the securitization was repaid.

The company did not initiate any unilateral right to cause the termination of the securitization, nor did the company have the unilateral ability to cause DCCF to liquidate or change DCCF.

The following schedule represents the activity pertaining to the securitization for the years ended December 31, 2004 and 2003:

	2004			2003
Proceeds:
Securitizations	$	—		$	248
Payments to DCCF		(37,639	)		(23,500	)
Net securitization payments*	$	(37,639	)	$	(23,252	)
Cash received from DCCF*	$	10,726		$	29,392

* Included as part of the change in certain other assets and liabilities within the operating activities section of the Consolidated Statement of Cash Flows.

NOTE 3: INVESTMENT SECURITIES

The marketable debt and equity securities are stated at fair value. The fair value of securities and other investments is estimated on quoted market prices. The company’s investment securities, excluding the cash surrender value of insurance contracts of $54,154 and $52,248 as of December 31, 2005 and 2004, respectively, consisted entirely of certificates of deposit due within one year. The certificates of deposit of $52,885 and $31,654 at December 31, 2005 and 2004 are stated at cost basis, which equaled the fair value of the investments due to their short-term nature.

At December 31, 2003, the investment portfolio was classified as available-for-sale. Realized gains (losses) from the sale of securities were $0, $0 and $220 in 2005, 2004 and 2003, respectively. Proceeds from the sale of available-for-sale securities were $0, $0 and $31,505 in 2005, 2004 and 2003, respectively. Gains and losses are determined using the specific identification method.

NOTE 4: INVENTORIES

Major classes of inventories at December 31 are summarized as follows:

	2005		2004
Finished goods	$	90,484	$	92,806
Service parts		84,264		77,715
Work in process		126,247		123,156
Raw materials		40,619		28,616
	$	341,614	$	322,293

NOTE 5: PROPERTY, PLANT AND EQUIPMENT

The following is a summary of property, plant and equipment, at cost less accumulated depreciation, at December 31:

	2005			2004
Land and land improvements	$	8,287		$	7,295
Buildings		74,094			91,674
Machinery and equipment		281,097			301,458
Rotable spares		115,688			111,374
Leasehold improvements		13,910			11,904
Construction in progress		113,009			90,409
	$	606,085		$	614,114
Less accumulated depreciation		(329,119	)		(346,024	)
	$	276,966		$	268,090

Diebold AR2005          P 33

Costs associated with the enterprise resource planning system of $103,794 and $79,960 as of December 31, 2005 and 2004, respectively, were included in construction in progress. Amortization expense related to a capitalized portion of the system was $686 and $0 for the years ended December 31, 2005 and 2004, respectively. During 2005, 2004, and 2003, depreciation expense, computed on a straight-line basis over the estimated useful lives of the related assets, was $49,877, $53,439 and $49,653, respectively.

NOTE 6: FINANCE RECEIVABLES

The components of finance receivables for the net investment in sales-type leases are as follows:

	2005			2004
Total minimum lease receivable	$	32,649		$	36,131
Estimated unguaranteed residual values		2,629			3,000
		35,278			39,131
Less:
Unearned interest income		(2,435	)		(2,792	)
Unearned residuals		(415	)		(413	)
		(2,850	)		(3,205	)
	$	32,428		$	35,926

Future minimum lease receivables due from customers under sales-type leases as of December 31, 2005 are as follows:

2006	$	14,447
2007		8,462
2008		5,865
2009		3,230
2010		639
Thereafter		6
	$	32,649

NOTE 7: DEBT

The notes payable balances as of December 31 were as follows:

	2005		2004
Notes payable — current:
Revolving foreign currency loans1	$	9,376	$	119,405
Revolving U.S. dollar loans		25,096		170,105
	$	34,472	$	289,510
		2005		2004
Notes payable — long term:
Revolving euro loans2	$	154,722	$	—
Revolving U.S. dollar loans		300,000		—
	$	454,722	$	—

1  INR 396,000 borrowings and other foreign currency loans translated at the applicable December 31, 2005 spot rate; €88,090 borrowing translated at the applicable December 31, 2004 spot rate.

2 €130,578 borrowing translated at the applicable December 31, 2005 spot rate.

The company has a credit facility with JP Morgan Chase Bank, N.A. with borrowing limits of $200,000 and 150,000 euros. In 2005, the company amended its credit facility. The credit facility borrowing limit remains the same, however, the amendment allows the company to add additional borrowing capacity of up to $150,000 under the facility and increases the term of the credit facility to five years, expiring on April 27, 2010.

The amount of committed loans at December 31, 2005 that remained available was €19,422 ($23,013 translated). In addition to the committed lines of credit, $40,000, 37,000 Brazilian real ($15,842 translated), and 42,000 Indian rupees ($932 translated) in uncommitted lines of credit were available as of December 31, 2005.

The average rate on the bank credit lines was 3.45 percent, 2.29 percent and 2.36 percent for the years ended December 31, 2005, 2004 and 2003, respectively. Interest on financing charged to expense for the years ended December 31 was $12,874, $9,000 and $6,710 for 2005, 2004 and 2003, respectively.

The company’s financing agreements contain various restrictive covenants, including net debt to capitalization and interest coverage ratios. As of December 31, 2005, the company was in compliance with all restrictive covenants.

Diebold AR2005           P 34

NOTE 8: OTHER LONG-TERM LIABILITIES

Included in other long-term liabilities are bonds payable and a financing agreement. Bonds payable at December 31 consisted of the following:

	2005		2004
Industrial Development Revenue Bond due January 1, 2017	$	5,800	$	5,800
Industrial Development Revenue Bond due June 1, 2017		7,500		7,500
Long-term bonds payable	$	13,300	$	13,300

In 1997, industrial development revenue bonds were issued on behalf of the company. The proceeds from the bond issuances were used to construct new manufacturing facilities in the United States. The company guaranteed the payments of principal and interest on the bonds by obtaining letters of credit. Each industrial development revenue bond carries a variable interest rate, which is reset weekly by the remarketing agents. As of December 31, 2005, the company was in compliance with the covenants of its loan agreements and believes the covenants will not restrict its future operations.

A financing agreement was entered into in July 2002 with Fleet Business Credit, LLC in order to finance the purchase of an enterprise resource planning system. The financing agreement was for $24,862, payable in quarterly installments of $2,128, which includes interest at 5.75 percent and service fees through May 2007. The outstanding balance of the financing agreement was $7,023 and $11,381 as of December 31, 2005 and 2004, respectively. Interest paid related to the financing agreement was $541, $784 and $1,043 in 2005, 2004 and 2003, respectively.

NOTE 9: SHAREHOLDERS’ EQUITY

On the basis of amounts declared and paid, the annualized quarterly dividends per share were $0.82, $0.74 and $0.68 in 2005, 2004 and 2003, respectively.

Fixed Stock OptionsUnder the 1991 Equity and Performance Incentive Plan (1991 Plan) as amended and restated, common shares are available for grant of options at a price not less than the fair market value of the common shares on the date of grant and, accordingly, no compensation cost has been recognized. In general, options are exercisable in cumulative annual installments over five years, beginning one year from the date of grant. In February 2001, the 1991 Plan was amended to extend the term of the 1991 Plan for 10 years beginning April 2, 2001 and increase the numbers of shares available in the 1991 Plan by 3,000,000 in addition to other miscellaneous administrative matters. The number of common shares that may be issued or delivered pursuant to the 1991 Plan is 5,817,712, of which 1,734,847 shares were available for issuance at December 31, 2005. The 1991 Plan will expire on April 2, 2011.

The following is a summary with respect to options outstanding at December 31, 2005, 2004 and 2003, and activity during the years then ended:

	2005					2004					2003
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at the beginning of year		2,986,419		$	37		2,821,625		$	34		2,809,014		$	32
Options granted		576,150			50		494,509			52		750,924			37
Options exercised		(332,412	)		30		(303,795	)		31		(662,453	)		28
Options expired or forfeited		(117,925	)		46		(25,920	)		35		(75,860	)		35
Outstanding at the end of year		3,112,232		$	40		2,986,419		$	37		2,821,625		$	34
Options exercisable at end of year		1,949,067					1,497,260					1,255,820

Diebold AR2005           P 35

The following table summarizes pertinent information regarding fixed stock options outstanding and options exercisable at December 31, 2005:

	Options Outstanding						Options Exercisable
			Weighted-
	Number		Average		Weighted-		Number		Weighted-
	of		Remaining		Average		of		Average
	Options		Contractual		Exercise		Options		Exercise
Range of Exercise Prices	Outstanding		Life (in Years)		Price		Exercisable		Price
$23–33		471,975		4.46	$	26.58		442,535	$	26.44
34–44		1,627,173		5.72		36.66		1,026,283		36.49
45–55		1,013,084		7.49		52.25		480,249		51.32
		3,112,232		6.10	$	40.20		1,949,067	$	37.86

Restricted Share GrantsThe 1991 Plan provides for the issuance of restricted shares to certain employees. Restricted shares totaling 9,050 were issued during 2005 and 10,000 restricted shares were outstanding as of December 31, 2005. The shares are subject to forfeiture under certain circumstances. Unearned compensation representing the fair market value of the shares at the date of grant will be charged to income over the three-year vesting period. During 2005, 2004 and 2003, $199, $396 and $5,031, respectively was charged to expense relating to the 1991 Plan restricted shares.

Performance Share GrantsThe 1991 Plan provides for the issuance of common shares to certain employees based on certain management objectives, as determined by the Board of Directors each year. Each performance share earned entitles the holder to the then current value of one common share. All of the management objectives are calculated over a three-year period. No amount is payable unless certain threshold management objectives are met. During 2005, 2004 and 2003, 241,600, 258,000 and 258,570 performance shares were granted, respectively, to certain employees. In addition, the Board of Directors elected to issue a one-time award to certain executive officers totaling 24,800 shares in 2002 that will be paid out after seven years of employment, or earlier, if targeted stock performance levels are achieved, or in the event of death, disability or retirement. The accrual for performance share grants was reduced in 2005 based on the unfavorable financial performance of the company. This decrease reduced expense by $5,140 in 2005. The compensation cost for the performance-based share plan was $8,557 and $8,677 in 2004 and 2003, respectively.

Restricted Stock UnitsIn 2004, the company began providing for the issuance of restricted stock units (RSUs) to certain employees in lieu of stock options under the 1991 Plan. RSUs vest three years after the grant date with no partial vesting. During the vesting period, employees are paid the cash equivalent of dividends on RSUs. Employees receive one share of common stock for each vested RSU. In 2005, the company granted 62,630 RSUs. Expense on RSU grants is recognized ratably over the vesting period. The compensation cost charged against income for the RSUs was $2,347 and $1,075 in 2005 and 2004, respectively, and the corresponding obligation is recorded in long-term liabilities at December 31, 2005.

Rights AgreementOn 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 are set forth in the Rights Agreement, dated as of February 11, 1999, between the company and The Bank of New York, as Agent. Under the Rights Agreement, the Rights trade together with the common shares and are not exercisable. In the absence of further Board action, the Rights generally will become exercisable and allow the holder to acquire common shares at a discounted price if a person or group acquires 20 percent or more of the outstanding common shares. Rights held by persons who exceed the applicable threshold will be void. Under certain circumstances, the Rights will entitle the holder to buy shares in an acquiring entity at a discounted price. The Rights Agreement also includes an exchange option. In general, after the Rights become exercisable, the Board of Directors may, at its option, effect an exchange of part or all of the Rights (other than Rights that have become void) for common shares. Under this option, the company would issue one common share for each Right, subject to adjustment in certain circumstances. The Rights are redeemable at any time prior to the Rights becoming exercisable and will expire on February 11, 2009, unless redeemed or exchanged earlier by the company.

Diebold AR2005           P 36

NOTE 10: EARNINGS PER SHARE

(In thousands, except per share amounts)

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.

	2005		2004		2003
Numerator:
Income used in basic and diluted earnings per share:
Income from continuing operations	$	82,904	$	181,809	$	171,270
Income from discontinued operations		13,842		1,988		1,816
Net income	$	96,746	$	183,797	$	173,086
Denominator:
Weighted average number of common shares used in basic earnings per share		70,577		72,000		72,417
Effect of dilutive fixed stock options		389		534		507
Weighted-average number of common shares and dilutive potential common shares used in diluted earnings per share		70,966		72,534		72,924
Basic earnings per share
Income from continuing operations	$	1.17	$	2.52	$	2.37
Income from discontinued operations	$	0.20	$	0.03	$	0.02
Net income	$	1.37	$	2.55	$	2.39
Diluted earnings per share
Income from continuing operations	$	1.17	$	2.50	$	2.35
Income from discontinued operations	$	0.19	$	0.03	$	0.02
Net income	$	1.36	$	2.53	$	2.37

Fixed stock options on 977, 375 and 195 common shares in 2005, 2004 and 2003, respectively, were not included in computing diluted earnings per share, because their effects were antidilutive.

NOTE 11: BENEFIT PLANS

Qualified Pension BenefitsThe company has several pension plans covering substantially all United States employees. Plans covering salaried employees provide pension benefits based on the employee’s compensation during the 10 years before retirement. The company’s funding policy for salaried plans is to contribute annually if required at an actuarially determined rate. Plans covering hourly employees and union members generally provide benefits of stated amounts for each year of service. The company’s funding policy for hourly plans is to make at least the minimum annual contributions required by applicable regulations. Employees of the company’s operations in countries outside of the United States participate to varying degrees in local pension plans, which in the aggregate are not significant. In addition to these plans, union employees in one of the company’s U.S. manufacturing facilities participate in the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers-Communications Workers of America (IUE-CWA) multi-employer pension fund. Pension expense related to the multi-employer pension plan was $434, $489 and $424 for 2005, 2004 and 2003, respectively.

Supplemental Executive Retirement Benefits The company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable at retirement based upon a percentage of the participant’s compensation, as defined.

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

The postretirement benefit obligation was determined by application of the terms of medical and life insurance plans together with relevant actuarial assumptions and healthcare cost trend rates. The company uses a September 30 measurement date for its pension and other benefits.

Diebold AR2005           P 37

The following table sets forth the change in benefit obligation, change in plan assets, funded status, Consolidated Balance Sheet presentation and relevant assumptions for the company’s defined benefit pension plans and other benefits at December 31:

	Pension Benefits						Other Benefits
	2005			2004			2005			2004
Change in benefit obligation
Benefit obligation at beginning of year	$	370,641		$	345,609		$	21,991		$	29,172
Service cost		12,374			11,906			3			39
Interest cost		22,266			21,201			1,255			1,434
Amendments		—			—			—			(3,756	)
Actuarial loss (gain)		11,712			4,494			2,077			(1,252	)
Benefits paid		(13,590	)		(12,739	)		(3,514	)		(3,646	)
Special termination benefits		6,730			—			1,382			—
Curtailments		(1,262	)		—			—			—
Settlements		(49	)		—			—			—
Other		(123	)		(170	)		—			—
Benefit obligation at end of year	$	408,699		$	370,641		$	23,194		$	21,991
Change in plan assets
Fair value of plan assets at beginning of year	$	318,524		$	293,778		$	—		$	—
Actual return on plan assets		43,148			36,013			—			—
Employer contribution		18,060			1,472			3,514			3,646
Benefits paid		(13,589	)		(12,739	)		(3,514	)		(3,646	)
Fair value of plan assets at end of year	$	366,143		$	318,524		$	—		$	—
Funded status
Funded status	$	(42,556	)	$	(52,117	)	$	(23,194	)	$	(21,991	)
Unrecognized net actuarial loss		64,101			69,993			9,120			7,571
Unrecognized prior service cost (benefit)		1,931			3,491			(5,620	)		(6,233	)
Unrecognized initial transition asset		—			(658	)		—			—
Prepaid (accrued) pension cost	$	23,476		$	20,709		$	(19,694	)	$	(20,653	)
Amounts recognized in Balance Sheets
Prepaid benefit cost	$	56,731		$	50,042		$	—		$	—
Accrued benefit cost		(39,428	)		(43,089	)		(19,694	)		(20,653	)
Intangible asset		—			2,260			—			—
Accumulated other comprehensive income		6,173			11,496			—			—
Net amount recognized	$	23,476		$	20,709		$	(19,694	)	$	(20,653	)

	Pension Benefits									Other Benefits
	2005*			2004			2003			2005			2004			2003
Components of net periodic benefit cost
Service cost	$	12,374		$	11,906		$	10,255		$	3		$	39		$	59
Interest cost		22,266			21,201			19,765			1,255			1,434			1,791
Expected return on plan assets		(28,956	)		(29,085	)		(28,154	)		—			—			—
Amortization of prior service cost		1,119			1,213			1,224			(613	)		(478	)		(295	)
Amortization of initial transition asset		(658	)		(1,495	)		(1,495	)		—			—			—
Recognized net actuarial loss (gain)		2,331			924			(372	)		528			473			497
Special termination benefits		6,060			—			—			—			—			—
Curtailment loss		1,094			—			156			—			—			6
Settlement (gain) loss		(165	)		—			(72	)		—			—			107
Net periodic pension benefit cost	$	15,465		$	4,664		$	1,307		$	1,173		$	1,468		$	2,165

* Includes one-time charges of $3,800 resulting from the VERP and $3,300 for separation costs of former executives

Diebold AR2005           P 38

Information for pension plans with an accumulated benefit obligation in excess of plan assets.

December 31	2005		2004
Projected benefit obligation		58,987		61,701
Accumulated benefit obligation		57,075		59,239
Fair value of plan assets		18,122		16,732

Minimum liabilities have been recorded in 2005 and 2004 for the plans whose total accumulated benefit obligation exceeded the fair value of the plan’s assets. The accumulated benefit obligation for all defined benefit pension plans was $371,920 and $336,771 at December 31, 2005 and 2004, respectively.

Additional Information

	Pension Benefits						Other Benefits
	2005			2004			2005			2004
(Decrease) increase in minimum liability included in other comprehensive (loss) income — net of taxes	$	(3,354	)	$	710			N/A			N/A
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31
Discount rate		5.750	%		6.125	%		5.750	%		6.125	%
Rate of compensation increase		3.000	%		3.000	%
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31
Discount rate		6.125	%		6.250	%		6.125	%		6.250	%
Expected long-term return on plan assets		8.500	%		8.500	%
Rate of compensation increase		3.000	%		3.000	%

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 or better), 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. 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.

Assumed healthcare cost trend rates at

December 31	2005			2004
Healthcare cost trend rate assumed for next year		7.00	%		7.20	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		5.00	%		5.00	%
Year that rate reaches ultimate trend rate		2012			2009

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	$	87	$	(78	)
Effect on postretirement benefit obligation		1,507		(1,348	)

Plan AssetsThe company’s pension weighted-average asset allocations at December 31, 2005 and 2004, and target allocation for 2006, by asset category are as follows:

	Target			Percentage of Pension Plan
Asset Category	Allocation			Assets at December 31
	2006			2005			2004
Equity securities		70	%		70	%		70	%
Debt securities		30	%		30	%		30	%
Total					100	%		100	%

     Diebold AR2005           P 39

Cash Flows

Contributions— The company contributed $18,060, including contributions to the nonqualified plan, to its pension plans and $3,514 to its other postretirement benefit plan in 2005. Also, the company expects to contribute $14,089 to its pension plans and $2,921 to its other postretirement benefit plan in 2006.

Benefit Payments

	Pension		Other
	Benefits		Benefits
2006	$	15,750	$	2,921
2007		17,283		2,597
2008		18,333		2,541
2009		19,560		2,126
2010		20,903		1,973
2011-2015		130,518		8,904

Retirement Savings PlanThe company offers an employee 401(k) Savings Plan (Savings Plan) to encourage eligible employees to save on a regular basis by payroll deductions, and to provide them with an opportunity to become shareholders of the company. Effective July 1, 2003, a new enhanced benefit to the Savings Plan became effective. All new salaried employees hired on or after July 1, 2003 are provided with an employer basic matching contribution in the amount of 100 percent of the first three percent of eligible pay and 50 percent of the next three percent of eligible pay. This new enhanced benefit is in lieu of participation in the pension plan for salaried employees. For employees hired prior to July 1, 2003, the company matched 60 percent of participating employees’ first 3 percent of contributions and 30 percent of participating employees’ second 3 percent of contributions. Total company match was $9,214, $7,714 and $7,129 in 2005, 2004 and 2003, respectively.

Deferred Compensation PlansThe company has deferred compensation plans that enable certain employees to defer receipt of a portion of their compensation and nonemployee directors to defer receipt of director fees at the participants’ discretion.

NOTE 12: LEASES

The company’s future minimum lease payments due under operating leases for real and personal property in effect at December 31, 2005 are as follows:

			Real		Vehicles and
Expiring	Total		Estate		Equipment
2006	$	54,413	$	21,896	$	32,517
2007		46,762		18,285		28,477
2008		36,186		15,732		20,454
2009		24,852		14,392		10,460
2010		16,153		12,023		4,130
Thereafter		13,506		13,254		252
	$	191,872	$	95,582	$	96,290

Rental expense under all lease agreements amounted to approximately $59,210, $52,064 and $47,202 for 2005, 2004 and 2003, respectively.

NOTE 13: INCOME TAXES

The components of income from continuing operations before income taxes were as follows:

	2005		2004		2003
Domestic	$	84,271	$	192,336	$	174,182
Foreign		53,980		73,113		77,276
	$	138,251	$	265,449	$	251,458

Income tax expense (benefit) from continuing operations is comprised of the following components:

	2005			2004		2003
Current:
U.S. Federal	$	16,315		$	27,277	$	71,778
Foreign		24,774			18,360		12,102
State and local		3,913			8,679		8,091
	$	45,002		$	54,316	$	91,971
Deferred:
U.S. Federal	$	9,540		$	17,710	$	(14,434	)
Foreign		2,275			9,467		6,114
State and local		(1,470	)		2,147		(3,463	)
	$	10,345		$	29,324	$	(11,783	)
Total income tax expense	$	55,347		$	83,640	$	80,188

In addition to the income tax expenses listed above for 2005, 2004 and 2003, income tax (expense) benefit allocated directly to shareholders’ equity for the same periods were ($222), $2,721, and $4,657, respectively.

A reconciliation of the U.S. statutory tax rate and the effective tax rate for continuing operations is as follows:

	2005			2004			2003
Statutory tax rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal tax benefit		1.2			1.7			1.2
Foreign income taxes		5.9			0.8			(3.5	)
Accrual adjustments		2.9			(4.5	)		1.3
Other		(5.0	)		(1.5	)		(2.1	)
Effective tax rate		40.0	%		31.5	%		31.9	%

Diebold AR2005           P 40

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:

	2005			2004
Deferred Tax Assets:
Postretirement benefits	$	7,528		$	9,221
Accrued expenses		33,118			21,376
Warranty accrual		2,448			35
Deferred compensation		10,907			3,922
Capital loss		–			9,164
Bad debts		6,638			1,226
Inventory		8,161			1,014
Deferred revenue		63			11,320
Net operating loss carryforwards		49,709			23,915
State deferred taxes		2,509			4,143
Other		9,144			9,588
		130,225			94,924
Valuation allowance		(35,541	)		(8,551	)
Net deferred tax assets	$	94,684		$	86,373
Deferred Tax Liabilities:
Pension	$	9,975		$	7,287
Property, plant and equipment		17,387			18,992
Goodwill		36,445			29,163
Finance receivables		6,535			6,727
Software capitalized		2,648			2,354
Partnership income		6,953			2,210
Other		6,561			(882	)
Net deferred tax liabilities		86,504			65,851
Net deferred tax asset	$	8,180		$	20,522

At December 31, 2005, the company’s domestic and international subsidiaries had deferred tax assets relating to net operating loss (NOL) carryforwards of $49,709. Of these NOL carryforwards, $19,511 expires at various times between 2006 and 2024. The remaining NOL carryforwards of approximately $30,198 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 NOLs.

The net change in the total valuation allowance for the years ended December 31, 2005 and 2004 was an increase of $26,990 and $4,255 respectively. The increase in 2005 included a $3,162 increase to the beginning of the year valuation allowance established for EMEA NOL carryforwards. The increase was necessary due to circumstances that caused a change in judgment about the company’s ability to utilize the NOL carryforwards in future years.

A determination of the unrecognized deferred tax liability on undistributed earnings of non-U.S. subsidiaries and investments in foreign unconsolidated affiliates is not practicable. However, no liability for U.S. income taxes on such undistributed earnings has been provided because it is the Company’s policy to reinvest these earnings indefinitely in operations outside the United States.

NOTE 14: COMMITMENTS AND CONTINGENCIES

At December 31, 2005, 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 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 recently been served with various lawsuits, filed against it and certain named 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. The company and the individual defendants deny the allegations made against them, regard them as without merit, and intend to defend themselves vigorously. Management is unable to determine the financial statement impact, if any, of these legal proceedings as of December 31, 2005.

NOTE 15: GUARANTEES AND PRODUCT WARRANTIES

The company has applied the provisions of FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, to its agreements that contain guarantees or indemnification clauses. These disclosure requirements expand those required by SFAS No. 5,Accounting for Contingencies, by requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in effect as of December 31, 2005 in which the company is the guarantor.

In connection with the construction of certain manufacturing facilities, the company guaranteed repayment of principal and interest on variable rate industrial development revenue bonds by obtaining letters of credit. The bonds were issued with a 20-year original term and are scheduled to mature in 2017. Any default, as defined in the agreements, would obligate the company for the full amount of the outstanding bonds through maturity. At December 31, 2005, the carrying value of the liability was $13,300. The company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, regulatory agencies and insurance providers. If the company is not able to make payment, the suppliers, regulatory agencies and insurance providers may draw on the pertinent bank. At December 31, 2005, the maximum future payment obligations relative to these various guarantees totaled $47,344, of which $16,786 represented standby letters of credit to insurance providers, and no associated liability was recorded.

Diebold AR2005      P 41

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

	2005			2004
Balance at January 1	$	14,410		$	12,096
Current period accruals		22,751			13,227
Current period settlements		(15,762	)		(10,913	)
Balance at December 31	$	21,399		$	14,410

NOTE 16: SEGMENT INFORMATION

The company’s segments are comprised of its three main sales channels: Diebold North America (DNA), Diebold International (DI) and Election Systems (ES) & Other. These sales channels are evaluated based on revenue from customers and operating profit contribution to the total corporation. The reconciliation between segment information and the Consolidated Financial Statements is disclosed. Revenue summaries by geographic area and product and service solutions are also disclosed. All income and expense items below operating profit are not allocated to the segments and are not disclosed.

The DNA segment sells 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. The ES & Other segment includes the operating results of DESI and the voting and lottery related business in Brazil. Each of the sales channels buys the goods it sells from the company’s manufacturing plants through intercompany sales that are eliminated in consolidation, and intersegment revenue is not significant. Each year, intercompany pricing is agreed upon which drives sales channel operating profit contribution. As permitted under SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, certain information not routinely used in the management of these segments, information not allocated back to the segments or information that is impractical to report is not shown. Items not allocated are as follows: interest income, interest expense, equity in the net income of investees accounted for by the equity method, income tax expense or benefit, and other non-current assets.

Segment Information by Channel

	DNA		DI		ES & Other			Total
2005
Customer revenues	$	1,422,170	$	1,010,503	$	154,376		$	2,587,049
Operating profit (loss)		130,743		37,516		(6,990	)		161,269
Capital and rotable expenditures		42,616		18,926		1,063			62,605
Depreciation		32,102		16,655		1,120			49,877
Property, plant and equipment		398,372		202,460		5,253			606,085
2004
Customer revenues	$	1,399,823	$	867,253	$	90,032		$	2,357,108
Operating profit (loss)		220,318		60,875		(7,713	)		273,480
Capital and rotable expenditures		42,223		18,663		352			61,238
Depreciation		30,865		21,666		908			53,439
Property, plant and equipment		423,420		186,650		4,044			614,114
2003
Customer revenues	$	1,233,657	$	752,592	$	100,182		$	2,086,431
Operating profit		175,921		69,752		6,119			251,792
Capital and rotable expenditures		43,763		28,096		961			72,820
Depreciation		30,314		18,570		769			49,653
Property, plant and equipment		388,436		155,730		3,692			547,858

Diebold AR2005       P 42

	2005			2004			2003
Revenue Summary by Geographic Area
The Americas	$	1,945,326		$	1,791,685		$	1,588,507
Asia-Pacific		267,498			232,862			178,118
Europe, Middle East and Africa		374,225			332,561			319,806
Total revenue	$	2,587,049		$	2,357,108		$	2,086,431
Total Revenue
Domestic vs. International
Domestic	$	1,499,445		$	1,421,339		$	1,307,823
Percentage of total revenue		58.0	%		60.3	%		62.7	%
International		1,087,604			935,769			778,608
Percentage of total revenue		42.0	%		39.7	%		37.3	%
Total revenue	$	2,587,049		$	2,357,108		$	2,086,431
Revenue Summary by Product and Service Solutions
Financial self-service:
Products	$	879,195		$	814,236		$	681,482
Services		891,865			882,969			819,532
Total financial self-service		1,771,060			1,697,205			1,501,014
Security:
Products		276,509			276,739			240,206
Services		385,104			293,132			245,029
Total security		661,613			569,871			485,235
Total financial self-service and security		2,432,673			2,267,076			1,986,249
Election systems/lottery		154,376			90,032			100,182
Total revenue	$	2,587,049		$	2,357,108		$	2,086,431

The company had no customers that accounted for more than 10 percent of total net sales in 2005, 2004 and 2003.

NOTE 17: ACQUISITIONS

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

The company is party to a joint venture partnership with Shanghai Xinsheng Aviation Industry Investment Co., Ltd. In September 2005, an additional 7 percent of ownership was purchased for approximately $9,500. With this purchase, the company increased its ownership interest from 78 to 85 percent in the joint venture.

In May 2005, the company acquired TASC Security (Holdings) Limited and its subsidiaries (TASC). TASC is a global leader in electronic security solutions headquartered in London, England with regional offices in Amsterdam, Netherlands; Tokyo, Japan; San Francisco, USA; Dublin, Ireland; Leeds, England; and Melbourne and Sydney, Australia; along with a network of offices in Europe, the Middle East, Africa and Asia Pacific. TASC was purchased for approximately $26,300, including the payoff of certain debt arrangements, and has been integrated within the company’s security group. Goodwill and intangible assets resulting from the acquisition were approximately $17,000 and $8,700, respectively.

In August 2004, the company acquired Antar-Com, Inc., an industry-leading electronic security systems integrator, for a total purchase price of $26,913. Upon acquisition, Antar-Com, Inc. was named Diebold Enterprise Security Systems, Inc., a wholly-owned subsidiary, and was integrated into the company’s domestic security service operation. Goodwill and other intangible assets resulting from the acquisition were approximately $13,500 and $8,700, respectively.

In June 2004, the company acquired TFE Technology Holdings, LLC (TFE), a third-party maintenance provider of network and hardware service solutions to federal and state government agencies and commercial firms, for a total purchase price of $34,450, including the payoff of certain debt arrangements. TFE was subsequently renamed Diebold Information and Security Systems, LLC and was integrated into the company’s domestic security service operation. Goodwill and other intangibles resulting from the acquisition were approximately $7,500 and $23,000, respectively.

In January 2004, a subsidiary of the company merged with Newell Communications, Inc. (NCI), based in Richmond, Virginia. NCI provides a full spectrum of security and communications solutions. The merger was effected in a combination of 80.5 percent stock and 19.5 percent cash for a total purchase price of $5,500. As a result of the merger, NCI became a wholly-owned subsidiary of the company. Goodwill resulting from the acquisition amounted to approximately $5,100.

NOTE 18: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, established accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recognized on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative instrument’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative

Diebold AR2005      P 43

instrument’s gains and losses to partially or wholly offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment.

Since a substantial portion of the company’s operations and revenue arise outside of the United States, financial results can be significantly affected by changes in foreign exchange rate movements. The company’s financial risk management strategy uses forward contracts to hedge certain foreign currency exposures. Such contracts are designated at inception to the related foreign currency exposures being hedged. The company’s 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 any speculative positions with regard to derivative instruments. The company’s forward contracts generally mature within six months.

The company manages its debt portfolio by using interest rate swaps to achieve an overall desired position of fixed and variable rates. In 2005, the company entered into two interest rate swap contracts that remained outstanding at December 31, 2005. The interest rate swaps relate to debt held by the company and convert $50,000 notional amount from variable rates to fixed rates. The variable rate for these contracts at December 31, 2005, which is based on three-month LIBOR rate, was 4.54 percent versus fixed rates of 4.59 percent and 4.72 percent. The contracts mature in five and ten years.

Based on current interest rates for similiar transactions, the fair value of all interest rate swap agreements is not material to the financial statements as of December 31, 2005. Credit and market risk exposures are limited to the net interest differentials. The net payments or receipts from interest rate swaps are recorded as part of interest expense and are not material to the financial statements for the year ended December 31, 2005.

The company records all derivatives on the balance sheet at fair value. For derivative instruments not designated as hedging instruments, changes in their fair values are recognized in earnings in the current period. The fair value of the company’s forward contracts was not material to the financial statements as of December 31, 2005 and 2004, respectively.

NOTE 19: RESTRUCTURING CHARGES

During 2005, the company initiated a restructuring plan for its manufacturing and service operations to remove excess capacity in Western Europe and the United States. Also in 2005, the company announced the closing of its Danville, Virginia manufacturing operations and had other restructuring activity throughout its global operations. Total pre-tax costs incurred in the plans in 2005 were $39,028 ($26,300 after tax), resulting in an accrual of $3,397 as of December 31, 2005. The restructuring charges for 2005 were incurred as follows: $13,371 against product cost of sales; $4,505 against service cost of sales and $21,152 against selling, general and administrative and other costs. The restructuring charges for the year ended December 31, 2005 were $22,890 in DNA and $16,138 in DI.

The charges were comprised primarily of severance and other employee costs associated with staff reductions. Staff reductions resulted in approximately 300 involuntary employee terminations.

NOTE 20: DISCONTINUED OPERATIONS

The assets related to the company’s campus card systems business were considered held-for-sale as of June 30, 2005; therefore, the company has disclosed these operations as discontinued in the consolidated statements of income for all periods presented herein in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. In July 2005, the company sold the card system business for $38,050, which consisted of $29,350 in cash and a promissory note of $8,700. The resulting gain on the sale was $20,290 million ($12,933 net of tax) in 2005. Furthermore, separate disclosure of the specific assets held-for-sale, both current and non-current, is not presented because the amounts are not material to the consolidated balance sheets.

NOTE 21: SUBSEQUENT EVENTS

On February 28, 2006, the company signed an agreement to purchase a membership interest in Genpass Service Solutions, LLC (GSS) for $9,724. GSS is an independent, third-party ATM maintenance and service provider.

On March 2, 2006, the company issued senior notes in an aggregate principal amount of $300,000, with a weighted average fixed interest rate of 5.50 percent. The maturity dates of the senior notes are staggered, with $75,000, $175,000, and $50,000 becoming due in 2013, 2016, and 2018, respectively. The covenants governing the senior notes are similar to those established for the credit facility discussed in Note 8. Additionally, the company entered into a derivative transaction to hedge $200,000 of the aggregate principal, which is treated as a cash flow hedge. This reduced the effective weighted average interest rate by 14 basis points or from 5.50 to 5.36 percent. The company used $160,000 of the net proceeds from the offering to reduce the outstanding balance under its revolving credit facility, which has a higher interest rate and related fees.

NOTE 22: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

See “Comparison of Selected Quarterly Financial Data (Unaudited)” on page 49 of this Annual Report.

Diebold AR2005      P 44

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders Diebold, Incorporated:

We have audited the accompanying consolidated balance sheets of Diebold, Incorporated and subsidiaries (Company) as of December 31, 2005 and 2004, 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, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements 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, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Diebold, Incorporated’s internal control over financial reporting as of December 31, 2005, 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 March 10, 2006 expressed an unqualified opinion on management’s assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting as of December 31, 2005.

Cleveland, Ohio
March 10, 2006

Diebold AR2005      P 45

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders Diebold, Incorporated:

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Diebold, Incorporated:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (Item 9A(b) of Form 10-K), that Diebold, Incorporated (the Company) did not maintain effective internal control over financial reporting as of December 31, 2005, because of the effect of a material weakness identified in management’s assessment, 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. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and 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 control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment as of December 31, 2005:

A material weakness in internal control over financial reporting as of December 31, 2005 existed because the Company did not have personnel with sufficient technical knowledge to analyze complex revenue contracts to ensure that such transactions were accounted for in accordance with generally accepted accounting principles at its voting subsidiary, Diebold Election Systems, Inc. (DESI). Specifically, the review of these contracts did not provide for effective identification of, and consideration of, terms of certain arrangements within the contracts that impact the accounting required for the related revenue for such arrangements. This material weakness resulted in a material overstatement in the Company’s revenue and a material understatement in deferred revenue balances in the Company’s preliminary interim and annual financial statements for the year ended December 31, 2005. This weakness if not remediated could result in a material adjustment to revenue, cost of sales, inventory and deferred revenue.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Diebold, Incorporated and subsidiaries (Company) as of December 31, 2005 and 2004, 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, 2005. The aforementioned material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2005 consolidated financial statements, and this report does not affect our report dated March 10, 2006, which expressed an unqualified opinion on those consolidated financial statements.

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by COSO. Also, in our opinion, because of the effect of the material weakness described above 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, 2005, based on criteria established in Internal Control—Integrated Framework issued by COSO.

Cleveland, Ohio
March 10, 2006

Diebold AR2005    P 46

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the framework inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

This evaluation identified the following material weakness in the Company’s internal control over financial reporting as of December 31, 2005:

The Company did not have personnel with sufficient technical knowledge to analyze complex revenue contracts to ensure that such transactions were accounted for in accordance with generally accepted accounting principles at its voting subsidiary, Diebold Election Systems, Inc. (DESI). Specifically, the review of these contracts did not provide for effective identification of, and consideration of, terms of certain arrangements within the contracts that impact the accounting required for the related revenue for such arrangements. This material weakness resulted in material overstatements of revenue and material understatements of deferred revenue balances in the Company’s preliminary interim and annual financial statements for the year ended December 31, 2005. The revenue and deferred revenue balances were corrected by management prior to the issuance of the Company’s consolidated financial statements.

As a result of these deficiencies, the Company concluded that its internal control over financial reporting was not effective as of December 31, 2005.

KPMG LLP, the company’s independent registered public accounting firm, has issued an auditors’ report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. This report is included at page 46 of this Annual Report on Form 10-K.

OTHER INFORMATION

The company had included as Exhibit 31 to its Annual Report on Form 10-K for fiscal year 2005 filed with the Securities and Exchange Commission certificates of the Chief Executive Officer and Chief Financial Officer of the company certifying the quality of the company’s public disclosure, and the company has submitted to the New York Stock Exchange a certificate of the Chief Executive Officer of the company certifying that he is not aware of any violation by the company of New York Stock Exchange corporate governance standards.

Diebold AR2005    P 47

MANAGEMENT’S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS

The management of Diebold, Incorporated is responsible for the contents of the Consolidated Financial Statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The Consolidated Financial Statements necessarily include amounts based on judgments and estimates. Financial information elsewhere in the Annual Report is consistent with that in the Consolidated Financial Statements.

The company maintains a comprehensive accounting system which includes controls designed to provide reasonable assurance as to the integrity and reliability of the financial records and the protection of assets. An internal audit staff is employed to regularly test and evaluate both internal accounting controls and operating procedures, including compliance with the company’s statement of policy regarding ethical and lawful conduct. The Audit Committee of the Board of Directors, composed of directors who are not members of management, meets regularly with management, the independent auditors and the internal auditors to ensure that their respective responsibilities are properly discharged. KPMG LLP and the Director of Internal Audit have full and free independent access to the Audit Committee. The role of KPMG LLP, an independent registered public accounting firm, is to provide an objective examination of the Consolidated Financial Statements and the underlying transactions in accordance with the standards of the Public Company Accounting Oversight Board. The report of KPMG LLP accompanies the Consolidated Financial Statements.

FORWARD-LOOKING STATEMENT DISCLOSURE

In this Annual Report, the use of the words “believes,” “anticipates,” “expects” 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, including statements concerning future operating performance, the company’s share of new and existing markets, and the company’s short- and long-term revenue and earnings growth rates. Although the company believes that its outlook is based upon reasonable assumptions regarding the economy, its knowledge of its business, and on key performance indicators, which affect the company, there can be no assurance that the company’s goals will be realized. The company is not obligated to report changes to its outlook. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The uncertainties faced by the company could cause actual results to differ materially from those anticipated in forward-looking statements. These include, but are not limited to:

• 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;

• acceptance of the company’s product and technology introductions in the marketplace;

• unanticipated litigation, claims or assessments;

• the company’s ability to reduce costs and expenses and improve internal operating efficiencies;

• the company’s ability to successfully implement measures to improve pricing;

• variations in consumer demand for financial self-service technologies, products and services;

• 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 company’s ability to achieve benefits from its cost-reduction initiatives and other strategic changes.

Diebold AR2005    P 48

COMPARISON OF SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)

	First Quarter					Second Quarter				Third Quarter				Fourth Quarter
	2005		2004			2005		2004		2005		2004		2005		2004
Net sales	$	535,150	$	493,629		$	618,950	$	545,729	$	622,333	$	606,194	$	810,616	$	711,556
Gross profit		138,868		138,521			157,340		162,677		143,667		168,991		185,607		198,707
Income from continuing operations		27,852		29,225			31,150		42,937		13,499		47,423		10,403		62,224
Income from discontinued operations		89		(103	)		820		690		12,933		855		—		546
Net income	$	27,941	$	29,122		$	31,970	$	43,627	$	26,432	$	48,278	$	10,403	$	62,770
Basic earnings per share *
Income from continuing operations	$	0.39	$	0.40		$	0.44	$	0.59	$	0.19	$	0.66	$	0.15	$	0.87
Income from discontinued operations	$	0.00	$	0.00		$	0.01	$	0.01	$	0.18	$	0.01	$	0.00	$	0.01
Net income	$	0.39	$	0.40		$	0.45	$	0.60	$	0.37	$	0.67	$	0.15	$	0.88
Diluted earnings per share *
Income from continuing operations	$	0.38	$	0.40		$	0.44	$	0.59	$	0.19	$	0.66	$	0.15	$	0.86
Income from discontinued operations	$	0.00	$	0.00		$	0.01	$	0.01	$	0.18	$	0.01	$	0.00	$	0.01
Net income	$	0.38	$	0.40		$	0.45	$	0.60	$	0.37	$	0.67	$	0.15	$	0.87

* The sums of the quarterly figures may not equal annual figures due to rounding or differences in the weighted-average number of shares outstanding during the respective periods. See Note 22 to Consolidated Financial Statements and 6-Year Summary 2005-2000.

Diebold AR2005    P 49

2005–2000 SELECTED FINANCIAL DATA
Diebold, Incorporated and Subsidiaries
(In thousands, except per share amounts and ratios)

	2005			2004			2003			2002			2001			2000
Net sales	$	2,587,049		$	2,357,108		$	2,086,431		$	1,918,837		$	1,739,703		$	1,726,365
Cost of sales		1,961,567			1,688,212			1,469,628			1,350,338			1,230,178			1,161,160
Gross profit		625,482			668,896			616,803			568,499			509,525			565,205
Selling and administrative expense		403,804			336,657			306,333			278,351			273,542			276,992
Research, development and engineering expense		60,409			58,759			58,678			54,910			55,796			58,403
Operating profit		161,269			273,480			251,792			235,238			137,919			229,810
Other income (expense), net		(16,189	)		(313	)		7,213			(15,110	)		(34,173	)		(21,558	)
Minority interest		(6,829	)		(7,718	)		(7,547	)		(5,654	)		(4,897	)		(3,040	)
Income from continuing operations before taxes and cumulative effect of change in accounting principles		138,251			265,449			251,458			214,474			98,849			205,212
Taxes on income		55,347			83,640			80,188			84,563			32,514			68,323
Income from continuing operations before discontinued operations, cumulative effect of change in accounting principle and realignment and other charges, net of tax		82,904			181,809			171,270			129,911			66,335			136,889
Income from discontinued operations, net of tax		13,842			1,988			1,816			1,446			1,113			146
Net income (GAAP) before effect of change in accounting principle and realignment and other charges, net of tax		96,746			183,797			173,086			131,357			67,448			137,035
Cumulative effect of change in accounting principle — net of tax (Note B)		—			—			—			33,147			—			—
*Net income (Non GAAP) before realignment and other charges, net of tax		96,746			183,797			173,086			98,210			67,448			137,035
Realignment and other charges, net of tax (Note A)		36,193			—			—			—			73,628			—
Net Income		132,939			183,797			173,086			98,210			141,076			137,035
Diluted earnings per share:
Income from continuing operations		1.17			2.50			2.35			1.80			0.92			1.92
Income from discontinued operations		0.19			0.03			0.02			0.02			0.02			—
Net income (GAAP)		1.36			2.53			2.37			1.82			0.94			1.92
Realignment and other charges, net of tax (Note A)		0.51			—			—			—			1.03			—
Cumulative effect of change in accounting principle, net of tax (Note B)		—			—			—			0.46			—			—
COLI settlement charge, net of tax (Note C)		—			—			—			0.37			—			—
*Net income (Non GAAP) before realignment and other charges, cumulative effect of change in accounting principles, net of tax		1.87			2.53			2.37			2.65			1.97			1.92

Diebold AR2005    P 50

	2005		2004		2003		2002		2001		2000
Dividend and Common Share Data
Basic weighted-average shares outstanding(Note D)	$	70,577	$	72,000	$	72,417	$	71,984	$	71,524	$	71,296
Diluted weighted-average shares outstanding(Note D)		70,966		72,534		72,924		72,297		71,783		71,479
Common dividends paid	$	57,770	$	53,240	$	49,242	$	47,528	$	45,774	$	44,271
Common dividends paid per share(Note D)		0.82		0.74		0.68		0.66		0.64		0.62
Year-End Financial Position
Current assets	$	1,427,880	$	1,234,632	$	1,105,159	$	924,888	$	921,596	$	804,363
Current liabilities		580,031		740,190		619,218		571,868		635,961		576,120
Net working capital		847,849		494,442		485,941		353,020		285,635		228,243
Property, plant and equipment, net		276,966		268,090		253,155		219,633		190,198		174,946
Total assets		2,353,193		2,135,552		1,900,502		1,625,081		1,621,083		1,585,427
Shareholders’ equity		1,152,849		1,248,908		1,136,831		931,106		894,337		926,738
Shareholders’ equity per share(Note E)		16.78		17.44		15.65		12.91		12.53		12.95
Ratios
Pretax profit as a percentage of net sales (%)		5.3		11.3		12.1		11.1		5.7		11.9
Current ratio		2.4 to 1		1.7 to 1		1.8 to 1		1.6 to 1		1.5 to 1		1.4 to 1
Other Data
Capital and rotable expenditures	$	62,605	$	61,238	$	72,820	$	50,338	$	65,484	$	42,694
Depreciation		49,877		53,439		49,653		42,124		45,453		35,901

*	The company believes excluding these items provides meaningful insight into the ongoing performance of its operations and facilitates comparisons of the company’s operating results.
Note A —	In 2005, the company recorded realignment charges of $0.37 per diluted share, a gain of $0.18 per diluted share from the sale of a discontinued business, and $0.32 per diluted share in other charges related to manufacturing startup and related issues and accounts receivable reserves for our elections system business and reserves against deferred tax assets. In 2001, the company recorded realignment and other charges of $1.03 per diluted share.
Note B —	In 2002, amounts include a one-time charge of $0.46 per diluted share resulting from the adoption of SFAS No. 142,Goodwill and Other Intangible Assets.
Note C —	In 2002, the company settled a dispute with the IRS on a claim concerning the deductibility of corporate-owned life insurance from 1990 to 1998. This resulted in an after-tax charge of $0.37 per diluted share.
Note D —	After adjustment for stock splits.
Note E —	Based on shares outstanding at year-end adjusted for stock splits.

Diebold AR2005    P 51

DIRECTORS

Louis V. Bockius III^2,3
Retired Chairman,
Bocko Incorporated
North Canton, Ohio
[Plastic Injection Molding]
Director since 1978

Christopher M. Connor¹
Chairman, President and
Chief Executive Officer,
The Sherwin-Williams
Company
Cleveland, Ohio
[Manufacturer of
Paint and Coatings]
Director since 2002

Phillip R. Cox^1,4
President and
Chief Executive Officer,
Cox Financial Corporation
[Financial Planning and Wealth
Management Services]
Cincinnati, Ohio
Director since 2005

Richard L. Crandall^2,3,4,5
Managing Partner,
Aspen Partners, LLC
Aspen, Colorado
[Private Equity]
Director since 1996

Gale S. Fitzgerald^1,3,5
Director,
TranSpend, Inc.
Miami, Florida
[Total Spend Optimization]
Director since 1999

Phillip B. Lassiter^1,3
Non-executive Chairman
of the Board,
Ambac Financial Group, Inc.
New York, New York
[Financial Guarantee Insurance
Holding Company]
Director since 1995

John N. Lauer^1,3
Non-executive Chairman of
the Board,
Diebold, Incorporated
Canton, Ohio
Retired Chairman of
the Board,
Oglebay Norton Co.
Cleveland, Ohio
[Industrial Minerals]
Director since 1992

William F. Massy^2,4,5
President,
The Jackson Hole
Higher Education Group, Inc.
Jackson Hole, Wyoming
Professor of Education and
Business Administration,
Emeritus, Stanford University,
Stanford, California [Education]
Director since 1984

Eric J. Roorda^2,4
Former Chairman,
Procomp Amazonia
Indústria Eletronica, S.A.
São Paulo, Brazil
[Banking and Electoral
Automation; subsidiary
of Diebold]
Director since 2001

Thomas W. Swidarski
President and
Chief Executive Officer,
Diebold, Incorporated
Canton, Ohio
Director since 2005

Henry D. G. Wallace^2,4
Former Group Vice President
and Chief Financial Officer,
Ford Motor Company
Detroit, Michigan
[Automotive Industry]
Director since 2003

Alan J. Weber^2,4,5
Retired Chairman
and Chief Executive Officer,
U.S. Trust Corporation
New York, New York
[Financial Services Business]
Director since 2005

OFFICERS

Thomas W. Swidarski
President and
Chief Executive Officer

Kevin J. Krakora
Vice President and
Chief Financial Officer

David Bucci
Senior Vice President,
Customer Solutions Group

James L. M. Chen
Vice President and
Managing Director,
Asia Pacific

John M. Crowther
Vice President and
Chief Information Officer

Warren W. Dettinger
Vice President,
General Counsel and
Secretary

Michael J. Hillock
President,
International

Michael R. Moore
Vice President and
Corporate Controller

Dennis M. Moriarty
Vice President,
Global Security Division

William E. Rosenberg
Vice President,
Corporate Development

Sheila M. Rutt
Vice President,
Chief Human Resources
Officer

Robert J. Warren
Vice President and Treasurer

1 Member of the Compensation Committee
2 Member of the Audit Committee
3 Member of the Board Governance Committee
4 Member of the Investment Committee
5 Member of IT Committee

Diebold AR2005    P 52