UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2010

OR

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

For the transition period from ........ to .......

Commission file number 1-4879

Diebold, Incorporated

(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ    No  o

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

Large Accelerated Filer   þ		Accelerated Filer   o		Non-Accelerated Filer   o		Smaller Reporting Company   o
				(Do not check if a smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $1.25 Par Value – 65,679,549 shares as of October 29, 2010

DIEBOLD, INCORPORATED AND SUBSIDIARIES

PART I – FINANCIAL INFORMATION			3
ITEM 1:   FINANCIAL STATEMENTS			3
CONDENSED CONSOLIDATED BALANCE SHEETS – September 30, 2010 (Unaudited) and December 31, 2009			3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) – Three and Nine Months Ended September 30, 2010 and 2009			4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) – Nine Months Ended September 30, 2010 and 2009			5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)			6
ITEM 2:   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			26
ITEM 3:   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			42
ITEM 4:   CONTROLS AND PROCEDURES			43
PART II – OTHER INFORMATION			45
ITEM 1:   LEGAL PROCEEDINGS			45
ITEM 1A: RISK FACTORS			47
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			47
ITEM 3: DEFAULTS UPON SENIOR SECURITIES			47
ITEM 4: [REMOVED AND RESERVED]			47
ITEM 5: OTHER INFORMATION			47
ITEM 6: EXHIBITS			48
SIGNATURES			51
EXHIBIT INDEX			52
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

DIEBOLD, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

		September 30,				December 31,
		2010				2009
ASSETS		(Unaudited)
Current assets
Cash and cash equivalents		$	239,823			$	328,426
Short-term investments			195,454				177,442
Trade receivables, less allowances for doubtful accounts of $24,975 and $26,648, respectively			434,910				330,982
Inventories			484,829				448,243
Deferred income taxes			86,431				84,950
Prepaid expenses			29,295				36,874
Refundable income taxes			19,438				93,907
Other current assets			122,915				87,261
Total current assets			1,613,095				1,588,085
Securities and other investments			74,242				73,989
Property, plant and equipment, at cost			633,507				613,377
Less accumulated depreciation and amortization			432,384				408,557
Property, plant and equipment, net			201,123				204,820
Deferred income taxes			34,667				32,834
Goodwill			447,376				450,937
Other assets			219,839				204,200
Total assets		$	2,590,342			$	2,554,865
LIABILITIES AND EQUITY
Current liabilities
Notes payable		$	611			$	16,915
Accounts payable			176,689				147,496
Deferred revenue			165,879				198,989
Other current liabilities			335,241				379,691
Total current liabilities			678,420				743,091
Long-term debt			607,781				553,008
Pensions and other benefits			76,871				90,021
Postretirement and other benefits			23,353				29,174
Deferred income taxes			44,836				45,060
Other long-term liabilities			25,560				22,485
Commitments and contingencies			-				-
Equity
Diebold, Incorporated shareholders’ equity
Preferred shares, no par value, 1,000,000 authorized shares, none issued			-				-
Common shares, 125,000,000 authorized shares, 76,307,156 and 76,093,101 issued shares, 65,690,022 and 66,327,627 outstanding shares, respectively			95,384				95,116
Additional capital			305,778				290,689
Retained earnings			1,057,219				1,011,448
Treasury shares, at cost, 10,617,134 and 9,765,474 shares, respectively			(434,939	)			(410,153	)
Accumulated other comprehensive income			82,970				59,279
Total Diebold, Incorporated shareholders’ equity			1,106,412				1,046,379
Noncontrolling interests			27,109				25,647
Total equity			1,133,521				1,072,026
Total liabilities and equity		$	2,590,342			$	2,554,865

See accompanying notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net sales
Products		$	371,596			$	279,205			$	928,225			$	903,013
Services			377,024				366,017				1,104,574				1,090,356
			748,620				645,222				2,032,799				1,993,369
Cost of sales
Products			279,742				219,570				693,761				689,139
Services			274,984				273,443				808,990				830,784
			554,726				493,013				1,502,751				1,519,923
Gross profit			193,894				152,209				530,048				473,446
Selling and administrative expense			119,425				103,624				329,193				300,989
Research, development and engineering expense			19,090				17,415				53,940				50,203
Impairment of assets			3,000				-				7,096				-
			141,515				121,039				390,229				351,192
Operating profit			52,379				31,170				139,819				122,254
Other income (expense)
Investment income			10,487				8,344				23,976				21,171
Interest expense			(9,631	)			(8,223	)			(27,987	)			(25,968	)
Foreign exchange gain (loss), net			5,428				(1,260	)			234				(3,058	)
Miscellaneous, net			1,915				(709	)			4,016				(24,095	)
Income from continuing operations before taxes			60,578				29,322				140,058				90,304
Taxes on income			15,144				4,085				38,359				20,957
Income from continuing operations			45,434				25,237				101,699				69,347
Income (loss) from discontinued operations, net of tax			2,043				(203	)			390				(8,842	)
Loss on sale of discontinued operations, net of tax			-				(31,438	)			-				(31,438	)
Net income (loss)			47,477				(6,404	)			102,089				29,067
Net income attributable to noncontrolling interests			1,372				751				2,329				4,144
Net income (loss) attributable to Diebold, Incorporated		$	46,105			$	(7,155	)		$	99,760			$	24,923
Basic weighted-average shares outstanding			65,705				66,279				65,982				66,236
Diluted weighted-average shares outstanding			66,421				66,951				66,569				66,810
Basic earnings per share
Net income from continuing operations		$	0.67			$	0.37			$	1.50			$	0.99
Income (loss) from discontinued operations			0.03				(0.48	)			0.01				(0.61	)
Net income (loss) attributable to Diebold, Incorporated		$	0.70			$	(0.11	)		$	1.51			$	0.38
Diluted earnings per share
Net income from continuing operations		$	0.66			$	0.37			$	1.49			$	0.98
Income (loss) from discontinued operations			0.03				(0.48	)			0.01				(0.61	)
Net income (loss) attributable to Diebold, Incorporated		$	0.69			$	(0.11	)		$	1.50			$	0.37
Amounts attributable to Diebold, Incorporated
Income from continuing operations, net of tax		$	44,062			$	24,486			$	99,370			$	65,203
Income (loss) from discontinued operations, net of tax			2,043				(31,641	)			390				(40,280	)
Net income (loss) attributable to Diebold, Incorporated		$	46,105			$	(7,155	)		$	99,760			$	24,923

See accompanying notes to condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

		Nine Months Ended
		September 30,
		2010				2009
Cash flow from operating activities:
Net income		$	102,089			$	29,067
Adjustments to reconcile net income to cash provided by operating activities:
Loss on sale of discontinued operations			-				31,438
Depreciation and amortization			59,242				55,183
Share-based compensation			9,424				8,898
Excess tax benefits from share-based compensation			(295	)			(254	)
Deferred income taxes			(3,962	)			(1,159	)
Devaluation of Venezuelan balance sheet			5,148				-
Impairment of assets			7,096				-
Gain on sale of assets, net			(511	)			-
Equity in earnings of an investee			(2,106	)			(1,720	)
Cash (used in) provided by changes in certain assets and liabilities:
Trade receivables			(99,647	)			88,697
Inventories			(37,213	)			28,538
Prepaid expenses			7,845				1,128
Refundable income taxes			74,468				2,167
Other current assets			(26,363	)			23,180
Accounts payable			28,977				(69,793	)
Deferred revenue			(28,777	)			(10,751	)
Certain other assets and liabilities			(44,342	)			(63,616	)
Net cash provided by operating activities			51,073				121,003
Cash flow from investing activities:
Proceeds from sale of discontinued operations			1,815				7,856
Payments for acquisitions, net of cash acquired			-				(5,364	)
Proceeds from maturities of investments			254,570				130,969
Proceeds from sale of investments			35,624				-
Payments for purchases of investments			(303,745	)			(157,034	)
Proceeds from sale of fixed assets			749				113
Capital expenditures			(37,991	)			(28,414	)
Purchases of finance receivables			(18,939	)			-
Increase in certain other assets			(17,614	)			(22,539	)
Net cash used in investing activities			(85,531	)			(74,413	)
Cash flow from financing activities:
Dividends paid			(53,989	)			(52,077	)
Debt borrowings			371,390				220,284
Debt repayments			(345,003	)			(253,232	)
Distribution of affiliates’ earnings to noncontrolling interest holders			(1,226	)			(539	)
Excess tax benefits from share-based compensation			295				254
Issuance of common shares			1,750				-
Repurchase of common shares			(23,431	)			-
Withholding taxes paid for employees’ share-based compensation			(1,355	)			(1,879	)
Net cash used in financing activities			(51,569	)			(87,189	)
Effect of exchange rate changes on cash and cash equivalents			(2,576	)			1,921
Decrease in cash and cash equivalents			(88,603	)			(38,678	)
Cash and cash equivalents at the beginning of the period			328,426				241,436
Cash and cash equivalents at the end of the period		$	239,823			$	202,758
Significant noncash items:
Finance receivables acquired		$	33,843			$	-
Liabilities assumed related to acquisition of finance receivables			20,861				-

See accompanying notes to condensed consolidated financial statements

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010

NOTE 1:   CONSOLIDATED FINANCIAL STATEMENTS

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

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s annual report on Form 10-K for the year ended December 31, 2009. In addition, some of the Company’s statements in this quarterly report on Form 10-Q may involve risks and uncertainties that could significantly impact expected future results. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of results to be expected for the full year.

The Company has reclassified the presentation of certain prior-year information to conform to the current presentation. As discussed in Note 15, effective in the first quarter of 2010, the Company began management of its businesses on a geographic basis, changing from the previous model of sales channel segments. In order to align the Company’s external reporting of its financial results with this organizational change, the Company has modified its segment reporting and has reclassified prior period segment information to conform to the current period presentation of its segment information.

The Company’s Venezuelan operations consist of a fifty-percent owned subsidiary, which is consolidated. On January 8, 2010, the Venezuelan government announced the devaluation of its currency, the bolivar, and the establishment of a two-tier exchange structure. Subsequently, during May 2010, the Venezuelan government seized control of the parallel market, thereby creating a new government-controlled rate. Transitioning from the parallel rate to the new government-controlled rate did not have a material impact on the Company’s condensed consolidated financial statements. In the future, if the Company converts bolivares at a rate other than the new government-controlled rate, the Company may realize additional gains or losses that would be recorded in the statement of income.

The Company continues to work to remediate a control weakness in the area of application of accounting policies specific to multiple-deliverable arrangements. As part of remediation, during the third quarter of 2010, the Company recorded an out-of-period adjustment to defer revenue previously recognized that was not in accordance with GAAP. The immaterial out-of-period adjustment was recorded within the Company’s operations in China, included in the Diebold International (DI) reporting segment. The adjustment decreased revenue related to multiple-deliverable contracts that included revenue which was contingent upon the installation of the equipment. This deferred revenue will be recognized upon completion of installation. The out-of-period adjustment for the three and nine months ended September 30, 2010 represents a decrease in revenue of $18,688 and $19,822, respectively and a decrease to operating profit of $5,270 and $5,753, respectively.

The Company’s significant accounting policies as reported in the Company’s annual report on Form 10-K for the year ended December 31, 2009 were amended in the first quarter of 2010 upon the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13), and FASB ASU 2009-14, Certain Arrangements That Include Software Elements (ASU 2009-14). On January 1, 2010, the Company elected to early adopt ASU 2009-13 and ASU 2009-14, which did not have a material impact on the Company’s condensed consolidated financial statements. However, the adoption of ASU 2009-13 and ASU 2009-14 modifies the Company’s previously disclosed revenue recognition policy, which is presented below as revised. ASU 2009-14 amends software revenue recognition guidance in FASB Accounting Standards Codification (ASC) 985-605 Software — Revenue Recognition (ASC 985-605), to exclude from its scope the Company’s tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. ASU 2009-13 modifies the requirements that must be met for the Company to recognize revenue from the sale of a delivered item that is part of a multiple-deliverable arrangement when other items have not yet been delivered. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable in a multiple-deliverable arrangement. The selling price must be based on vendor specific objective evidence (VSOE), if available, or third-party evidence (TPE), if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available. Also, the residual method of allocating arrangement consideration has been eliminated. ASU 2009-13 and ASU 2009-14 were applied on a prospective basis for revenue arrangements entered into or materially modified after adoption. There were no changes to the Company’s units of accounting within its multiple-deliverable arrangements, how the Company allocates arrangement consideration or in the pattern or timing of revenue recognition as a result of the adoption of these updates.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

Revenue Recognition The Company’s revenue recognition policy is consistent with the requirements of FASB ASC 605, Revenue Recognition (ASC 605). 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 approved by the customer via delivery or installation acceptance; the sales price is fixed or determinable within the contract; and collectability is probable. For product sales, the Company determines that the earnings process is complete when title, risk of loss and the right to use equipment has transferred to the customer. Within the North America business segment, this occurs upon customer acceptance. Where the Company is contractually responsible for installation, customer acceptance occurs upon completion of the installation of all items at a job site and the Company’s demonstration that the items are in operable condition. Where the Company is not contractually responsible for installation, revenue recognition of these items is upon shipment or delivery to a customer location depending on the terms in the contract. Within the international business segment, customer acceptance is upon the earlier of delivery or completion of the installation depending on the terms in the contract with the customer. The Company has the following revenue streams related to sales to its customers:

Financial Self-Service Product & Integrated Services Revenue Financial self-service products pertain to automated teller machines (ATMs). Included with the ATM is a software component and a non-software component that function together to deliver the ATM’s essential functionality. The Company also provides service contracts on ATMs. Service contracts typically cover a 12-month period and can begin at any given month after the warranty period expires. The service provided under warranty is limited as compared to those offered under service contracts. Further, warranty is not considered a separate deliverable of the sale. The Company’s warranty covers only replacement of defective 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. Outsourced and managed services include remote monitoring, trouble-shooting for self-service customers, training, transaction processing, currency management, maintenance services and full support via person to person or online communication.

Revenue is recognized in accordance with ASC 605, the application of which requires judgment including the determination of whether an arrangement includes multiple deliverables. For stand-alone sales of service contracts, revenue is recognized ratably over the life of the contract period. In contracts that involve multiple-deliverable arrangements, product maintenance services are typically accounted for under FASB ASC 605-20, Separately Priced Extended Warranty and Product Maintenance Contracts (ASC 605-20). Amounts deferred for undelivered items are determined based upon the selling price of the deliverables as prescribed in FASB ASC 605-25, Revenue Recognition — Multiple-Element Arrangements (ASC 605-25). The Company determines the selling price of deliverables within a multiple-deliverable arrangement based on VSOE (price when sold on stand-alone basis) or the estimated selling price where VSOE is not established for undelivered items. Total arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. There have been no material changes to these estimates for the periods presented and the Company believes that these estimates generally should not be subject to significant changes in the future. However, changes to deliverables in future arrangements and the ability to establish the selling price could materially impact the amount of earned or deferred revenue.

Electronic Security Products & Integrated Services Revenue The Company provides global product 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 ASC 605. 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 deliverables, product maintenance services are typically accounted for under ASC 605-20. Amounts deferred for undelivered items are based upon the selling price of the deliverables as prescribed in ASC 605-25. The Company determines the selling price of deliverables within a multiple-deliverable arrangement based on the price charged when each deliverable is sold separately or estimated selling price. Total arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. There have been no material changes to these estimates for the periods presented and the Company believes that these estimates generally

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

should not be subject to significant changes in the future. However, changes to deliverables in future arrangements and the ability to establish the selling price could materially impact the amount of earned or deferred revenue.

Physical Security & Facility Revenue The Company designs and manufactures several of its physical security and facility products. These consist of 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 revenue recognition requirements of ASC 605 have been met.

Election and Lottery Systems Revenue The Company offers election and lottery systems product solutions and support to the government in Brazil. Election systems revenue consists of election equipment, networking, tabulation and diagnostic software development, training, support and maintenance. Lottery systems revenue consists of lottery equipment. The election and lottery equipment components are included in product revenue. The software development, training, support and maintenance components are included in service revenue. The election and lottery systems contracts can contain multiple deliverables and custom terms and conditions. For contracts that do not contain multiple deliverables, revenue is recognized upon customer acceptance. In contracts that involve multiple deliverables, amounts deferred for undelivered items are based upon the selling price of the deliverables as prescribed in ASC 605-25. The Company determines the selling price of deliverables within a multiple-deliverable arrangement based on the estimated selling price. Total arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. There have been no material changes to these estimates for the periods presented and the Company believes that these estimates generally should not be subject to significant changes in the future. However, changes to deliverables in future arrangements and the ability to establish the selling price could materially impact the amount of earned or deferred revenue.

Software Solutions & Service Revenue The Company offers software solutions consisting of multiple applications that process events and transactions (networking software) along with the related server. Sales of networking software represent software solutions to customers that allow them to network various different vendors’ ATMs onto one network and revenue is recognized in accordance with ASC 985-605. Included within service revenue is revenue from software support agreements, which are typically 12 months in duration and pertain to networking software. For stand-alone sales of software support, revenue is recognized ratably over the life of the contract period. In contracts that involve multiple deliverables, amounts deferred for support are based upon VSOE of the value of the deliverables as prescribed in ASC 985-605, which requires judgment about whether the deliverables can be divided into more than one unit of accounting and whether the separate units of accounting have value to the customer on a stand-alone basis. There have been no material changes to these deliverables for the periods presented. However, changes to deliverables in future arrangements and the ability to establish VSOE could affect the timing of revenue recognition.

Recently Adopted Accounting Guidance

In May 2010, the FASB issued ASU 2010-19, Foreign Currency Issues: Multiple Foreign Currency Exchange Rates (ASU 2010-19). ASU 2010-19 is effective as of the announcement date of March 18, 2010. ASU 2010-19 provides the Securities and Exchange Commission (SEC) staff’s views on certain foreign currency issues related to investments in Venezuela. These issues relate to Venezuela’s highly inflationary status. The adoption of the provisions of ASU 2010-19 did not have a material impact on the Company’s condensed consolidated financial statements.

On January 1, 2010, the Company adopted ASU 2009-13 and ASU 2009-14, as noted above.

On January 1, 2010, the Company adopted FASB ASU 2010-06, Fair Value Measurements and Disclosures (ASU 2010-06). ASU 2010-06 updates FASB ASC 820, Fair Value Measurements. ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. On January 1, 2010, the Company early adopted ASU 2010-06 related to the reconciliation of level 3 fair value measurements, requiring information about purchases, sales, issuances and settlements to be presented separately. There was no material impact on the Company’s condensed consolidated financial statements related to the adoption of this guidance.

On January 1, 2010, the Company adopted updated guidance included in FASB ASC 860-10, Transfers and Servicing — Overall. This guidance requires additional disclosures about the transfer and de-recognition of financial assets and eliminates the concept of qualifying special-purpose entities. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

On January 1, 2010, the Company adopted updated guidance included in FASB ASC 810, Consolidation (ASC 810), related to the consolidation of variable interest entities. This guidance requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. In addition, this updated guidance amends the quantitative approach for determining the primary beneficiary of a variable interest entity. ASC 810 amends certain guidance for determining whether an entity is a variable interest entity and adds additional reconsideration events for determining whether an entity is a variable interest entity. Further, this guidance requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

NOTE 2: EARNINGS PER SHARE

Basic and diluted earnings per share are calculated in accordance with FASB ASC 260, Earnings Per Share. Under this guidance, unvested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities and the two-class method of computing earnings per share is required for all periods presented.

The Company’s participating securities include restricted stock units, deferred shares and shares that were vested, but deferred by the employee. The Company has calculated basic and diluted earnings per share under both the treasury stock method and the two-class method. For the three and nine months ended September 30, 2010 and 2009, there was no impact in the per share amounts calculated under the two methods, therefore the treasury stock method is disclosed below. The following data shows the amounts used in computing earnings per share under the treasury stock method and the effect on the weighted-average number of shares of dilutive potential common stock:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Numerator:
Income used in basic and diluted earnings per share:
Income from continuing operations, net of tax		$	44,062			$	24,486			$	99,370			$	65,203
Income (loss) from discontinued operations, net of tax			2,043				(31,641)				390				(40,280)
Net income (loss) attributable to Diebold, Incorporated		$	46,105			$	(7,155)			$	99,760			$	24,923
Denominator (in thousands):
Weighted-average number of common shares used in basic earnings per share			65,705				66,279				65,982				66,236
Effect of dilutive shares			716				672				587				574
Weighted-average number of shares used in diluted earnings per share			66,421				66,951				66,569				66,810
Basic earnings per share:
Income from continuing operations, net of tax		$	0.67			$	0.37			$	1.50			$	0.99
Income (loss) from discontinued operations, net of tax			0.03				(0.48)				0.01				(0.61)
Net income (loss) attributable to Diebold, Incorporated		$	0.70			$	(0.11)			$	1.51			$	0.38
Diluted earnings per share:
Income from continuing operations, net of tax		$	0.66			$	0.37			$	1.49			$	0.98
Income (loss) from discontinued operations, net of tax			0.03				(0.48)				0.01				(0.61)
Net income (loss) attributable to Diebold, Incorporated		$	0.69			$	(0.11)			$	1.50			$	0.37
Anti-dilutive shares (in thousands):
Anti-dilutive shares not used in calculating diluted weighted-average shares			2,160				2,146				2,047				2,372

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

NOTE 3: OTHER COMPREHENSIVE INCOME (LOSS)

The Company displays accumulated other comprehensive income separately from retained earnings and additional capital in the condensed consolidated balance sheets. Items recorded as other comprehensive income (loss) include adjustments made for foreign currency translation under FASB ASC 830, Foreign Currency Matters, pension adjustments, net of tax under FASB ASC 715, Compensation — Retirement Benefits, hedging activities under FASB ASC 815, Derivatives and Hedging and unrealized gains and losses on available-for-sale securities under FASB ASC 320, Investments.

The following table provides a reconciliation of total shareholders’ equity attributable to Diebold, Incorporated and the noncontrolling interests for the three months ended September 30, 2010:

						Total Diebold,
						Incorporated					Noncontrolling
		Total Equity				Shareholders’ Equity					Interests
Balance as of July 1, 2010		$	1,046,818			$	1,020,237			$	26,581
Net income			47,477				46,105				1,372
Other comprehensive income (loss):
Foreign currency hedges and translation			57,964				57,591				373
Interest rate hedges			(227)				(227)				—
Pensions and other postretirement benefits			1,501				1,501				—
Unrealized loss, net on available-for-sale securities			(1,262)				(1,262)				—
Comprehensive income			105,453				103,708				1,745
Common shares			57				57				—
Additional capital			3,981				3,981				—
Treasury shares			(3,658)				(3,658)				—
Dividends declared			(17,913)				(17,913)				—
Distribution to noncontrolling interest holders			(1,217)				—				(1,217)
Balance as of September 30, 2010		$	1,133,521			$	1,106,412			$	27,109

The following table provides a reconciliation of total shareholders’ equity attributable to Diebold, Incorporated and the noncontrolling interests for the three months ended September 30, 2009:

						Total Diebold,
						Incorporated					Noncontrolling
		Total Equity				Shareholders’ Equity					Interests
Balance as of July 1, 2009		$	1,026,342			$	1,002,880			$	23,462
Net (loss) income			(6,404)				(7,155)				751
Other comprehensive income (loss):
Foreign currency hedges and translation			47,784				48,988				(1,204)
Interest rate hedges			(427)				(427)				—
Pensions and other postretirement benefits			1,170				1,170				—
Comprehensive income (loss)			42,123				42,576				(453)
Common shares			65				65				—
Additional capital			3,889				3,889				—
Treasury shares			(41)				(41)				—
Dividends declared			(17,364)				(17,364)				—
Balance as of September 30, 2009		$	1,055,014			$	1,032,005			$	23,009

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

The following table provides a reconciliation of total shareholders’ equity attributable to Diebold, Incorporated and the noncontrolling interests for the nine months ended September 30, 2010:

						Total Diebold,
						Incorporated				Noncontrolling
		Total Equity				Shareholders’ Equity				Interests
Balance as of January 1, 2010		$	1,072,026			$	1,046,379			$	25,647
Net income			102,089				99,760				2,329
Other comprehensive income (loss):
Foreign currency hedges and translation			21,505				21,146				359
Interest rate hedges			(1,047	)			(1,047	)			-
Pensions and other postretirement benefits			4,199				4,199				-
Unrealized loss, net on available-for-sale securities			(607	)			(607	)			-
Comprehensive income			126,139				123,451				2,688
Common shares			268				268				-
Additional capital			15,089				15,089				-
Treasury shares			(24,786	)			(24,786	)			-
Dividends declared			(53,989	)			(53,989	)			-
Distribution to noncontrolling interest holders			(1,226	)			-				(1,226	)
Balance as of September 30, 2010		$	1,133,521			$	1,106,412			$	27,109

The following table provides a reconciliation of total shareholders’ equity attributable to Diebold, Incorporated and the noncontrolling interests for the nine months ended September 30, 2009:

						Total Diebold,
						Incorporated				Noncontrolling
		Total Equity				Shareholders’ Equity				Interests
Balance as of January 1, 2009		$	964,258			$	946,601			$	17,657
Net income			29,067				24,923				4,144
Other comprehensive income:
Foreign currency hedges and translation			101,386				99,639				1,747
Interest rate hedges			1,296				1,296				-
Pensions and other postretirement benefits			2,965				2,965				-
Comprehensive income			134,714				128,823				5,891
Common shares			337				337				-
Additional capital			10,200				10,200				-
Treasury shares			(1,879	)			(1,879	)			-
Dividends declared			(52,077	)			(52,077	)			-
Distribution to noncontrolling interest holders			(539	)			-				(539	)
Balance as of September 30, 2009		$	1,055,014			$	1,032,005			$	23,009

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

NOTE 4: SHARE-BASED COMPENSATION

The Company’s share-based compensation payments to employees are recognized in the statement of income based on their grant-date fair values during the period in which the employee is required to provide services in exchange for the award. Share-based compensation is recognized as a component of selling and administrative expense. Total share-based compensation expense for the three and nine months ended September 30, 2010 was $3,155 and $9,520, respectively. Total share-based compensation expense for the three and nine months ended September 30, 2009 was $2,841 and $8,898, respectively.

Options outstanding and exercisable as of September 30, 2010 under the Company’s 1991 Equity and Performance Incentive Plan (as Amended and Restated as of April 13, 2009) and changes during the nine months ended September 30, 2010, were as follows:

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Contractual				Intrinsic
		Shares				Price				Term				Value (1)
		(in thousands)				(per share)				(in years)
Outstanding at January 1, 2010			3,103			$	37.84
Expired or forfeited			(239)				41.91
Exercised			(67)				26.00
Granted			411				27.88
Outstanding at September 30, 2010			3,208			$	36.51				5			$	5,927
Options exercisable at September 30, 2010			2,207			$	40.25				4			$	1,851

(1)

The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the closing price of the Company’s common shares on the last trading day of the third quarter of 2010 and the exercise price, multiplied by the number of “in-the-money” options) that would have been received by the option holders had all option holders exercised their options on September 30, 2010. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common shares.

Unvested performance shares are based on a maximum potential payout. Actual shares granted at the end of the performance period may be less than the maximum potential payout level depending on achievement of performance share objectives. The following tables summarize information on unvested restricted stock units (RSUs), performance shares and deferred shares for the nine months ended September 30, 2010:

		Number of				Weighted-Average
		Shares				Grant-Date Fair Value
		(in thousands)
RSUs:
Unvested at January 1, 2010			470			$	32.64
Forfeited			(33)				36.66
Vested			(88)				45.19
Granted			249				27.16
Unvested at September 30, 2010			598			$	29.04
Performance Shares:
Unvested at January 1, 2010			719			$	36.70
Forfeited			(162)				57.16
Vested			(52)				58.65
Granted			237				35.89
Unvested at September 30, 2010			742			$	31.15
Director Deferred Shares:
Oustanding at January 1, 2010			65			$	34.15
Granted			25				33.28
Outstanding at September 30, 2010			90			$	33.91

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

NOTE 5: INCOME TAXES

The effective tax rate on continuing operations for the three months ended September 30, 2010 was 25.0 percent compared to 13.9 percent for the same period of 2009. The effective tax rate on continuing operations for the nine months ended September 30, 2010 was 27.4 percent compared to 23.2 percent for the same period of 2009. The 11.1 and 4.2 percentage point increase in the effective tax rate for the three and nine months ended September 30, 2010, respectively, was due to a higher percentage of income generated in regions with higher statutory tax rates, certain foreign income subject to tax in the United States. and tax benefits in 2009 related to the U.S. research and development credit and certain look-through rules that expired in 2010.

As previously noted, the tax rates for the three months and nine months ended September 30, 2009 included benefits related to the U.S. research and development credit and certain “look-through” rules related to foreign corporations, which expired on December 31, 2009. These benefits are not incorporated into the Company’s 2010 results as they have not been extended by the U.S. Congress.

Additionally, in March 2010, the Patient Protection and Affordable Care Act as well as the Health Care and Education Reconciliation Act of 2010 (the Acts) were signed into law. Beginning in 2013, the Acts eliminate the tax deduction of retiree prescription drug expenses that are reimbursed under Medicare Part D. The resulting deferred tax charge of $339 from enactment of the Acts was recognized in the results for the nine months ended September 30, 2010.

NOTE 6: INVESTMENTS

The Company’s investments, primarily in Brazil, consist of certificates of deposit and U.S. dollar indexed bond funds, which are classified as available-for-sale and stated at fair value based upon quoted market prices and net asset values, respectively. Unrealized gains and losses are recorded in other comprehensive income. Realized gains and losses are recognized in investment income. Realized gains, net from the sale of securities for the nine months ended September 30, 2010 were $33. Proceeds from the sale of available-for-sale securities were $35,624 during the nine months ended September 30, 2010.

The Company has deferred compensation plans that enable certain employees to defer receipt of a portion of their cash or share-based compensation and non-employee directors to defer receipt of director fees at the participants’ discretion. For deferred cash-based compensation, the Company established a rabbi trust which is recorded at fair value of the underlying securities within securities and other investments. The related deferred compensation liability is recorded at fair value within other long-term liabilities. Realized and unrealized gains and losses on marketable securities in the rabbi trust are recognized in investment income.

The Company’s investments, excluding cash surrender value of insurance contracts of $66,299 and $65,489 as of September 30, 2010 and December 31, 2009, respectively, consist of the following:

						Unrealized
		Cost Basis				Loss				Fair Value
As of September 30, 2010
Short-term investments:
Certificates of deposit		$	183,561			$	-			$	183,561
U.S. dollar indexed bond funds			12,500				(607	)			11,893
		$	196,061			$	(607	)		$	195,454
Long-term investments:
Assets held in a rabbi trust		$	8,363			$	(421	)		$	7,942
As of December 31, 2009
Short-term investments:
Certificates of deposit		$	157,216			$	-			$	157,216
U.S. dollar indexed bond funds			20,226				-				20,226
		$	177,442			$	-			$	177,442
Long-term investments:
Assets held in a rabbi trust		$	9,400			$	(900	)		$	8,500

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

NOTE 7: INVENTORIES

Major classes of inventories are summarized as follows:

		September 30, 2010				December 31, 2009
Finished goods		$	216,449			$	196,110
Service parts			168,094				168,281
Raw materials and work in process			100,286				83,852
Total inventories		$	484,829			$	448,243

NOTE 8: OTHER ASSETS

Included in other assets are net capitalized software development costs of $57,193 and $57,143 as of September 30, 2010 and December 31, 2009, respectively. Amortization expense on capitalized software of $4,562 and $12,492 was included in product cost of sales for the three and nine months ended September 30, 2010, respectively and $4,288 and $12,536 for the three and nine months ended September 30, 2009, respectively. Other long-term assets also consist of patents, trademarks and other intangible assets. Where applicable, other assets are stated at cost and, if applicable, are amortized ratably over the relevant contract period or the estimated life of the assets. Fees to renew or extend the term of the Company’s intangible assets are expensed when incurred. Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset group, an impairment loss may be recognized at that time to reduce the asset to its fair value in accordance with FASB ASC 360, Property, Plant and Equipment.

In the third quarter of 2010, the Company recorded a $3,000 other-than-temporary impairment within Diebold North America (DNA) continuing operations related to a cost method investment. The Company determined this investment was fully impaired as of September 30, 2010 due to a decline in fair value.

In the second quarter of 2010, the Company recorded a $4,096 intangible asset impairment within DNA continuing operations related to the 2004 acquisition of TFE Technology Holdings, a maintenance provider of network and hardware service solutions to federal and state government agencies and commercial firms. The impairment was a result of negative cash flows which were projected to persist related to this business due to non-renewal of certain contracts. Based on an analysis of the discounted and undiscounted future cash flows related to this business, the Company determined these customer contract intangible assets were fully impaired as of June 30, 2010.

Investment in Affiliate Investment in the Company’s non-consolidated affiliate is accounted for under the equity method and consists of a 50 percent ownership in Shanghai Diebold King Safe Company, Ltd. The balance of this investment as of September 30, 2010 and December 31, 2009 was $11,242 and $11,308, respectively, and fluctuated based on equity earnings and dividends. Equity earnings from the non-consolidated affiliate are included in miscellaneous, net in the condensed consolidated statements of income and were $680 and $2,106 for the three and nine months ended September 30, 2010, respectively, and $447 and $1,720 for the three and nine months ended September 30, 2009, respectively. The non-consolidated affiliate declared dividends of $2,172 for both the three and nine months ended September 30, 2010.

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

NOTE 9: DEBT

Outstanding debt balances were as follows:

		September 30, 2010				December 31, 2009
Notes payable - current:
Uncommitted lines of credit		$	611			$	16,915
Long-term debt:
Credit facility		$	293,050			$	240,000
Senior notes			300,000				300,000
Industrial development revenue bonds			11,900				11,900
Other			2,831				1,108
		$	607,781			$	553,008

As of September 30, 2010, the Company had various international short-term uncommitted lines of credit with borrowing limits of $67,973. The weighted-average interest rate on outstanding borrowings on these lines of credit as of September 30, 2010 and December 31, 2009 was 14.00 and 9.15 percent, respectively. Short-term uncommitted lines mature in less than one year. The amount available under the short-term uncommitted lines at September 30, 2010 was $67,362.

In October 2009, the Company entered into a three-year credit facility. As of September 30, 2010, the Company had borrowing limits under this facility totaling $502,240 ($400,000 and €75,000, translated). Under the terms of the credit facility agreement, the Company has the ability, subject to various approvals, to increase the borrowing limits by $200,000 and €37,500, respectively. Up to $30,000 and €15,000 of the revolving credit facility is available under a swing line subfacility. The weighted-average interest rate on outstanding credit facility borrowings as of September 30, 2010 and December 31, 2009 was 2.72 and 2.63 percent, respectively, which is variable based on the London Interbank Offered Rate (LIBOR). The amount available under the credit facility as of September 30, 2010 was $209,190.

In March 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. Additionally, the Company entered into a derivative transaction to hedge interest rate risk on $200,000 of the senior notes, which was treated as a cash flow hedge. This reduced the effective interest rate by 14 basis points from 5.50 to 5.36 percent.

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. The bonds were issued with a 20-year original term and are scheduled to mature in 2017. Each industrial development revenue bond carries a variable interest rate, which is reset weekly by the remarketing agents. The weighted-average interest rate on the bonds was 0.57 and 0.80 percent as of September 30, 2010 and December 31, 2009, respectively.

The Company’s financing agreements contain various restrictive financial covenants, including net debt to capitalization and net interest coverage ratios. As of September 30, 2010, the Company was in compliance with the financial covenants in its debt agreements.

NOTE 10: BENEFIT PLANS

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

In addition to providing pension benefits, the Company provides healthcare 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

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

existing retirees or for employees who may become eligible for these benefits in the future. There are no plan assets and the Company funds the benefits as the claims are paid.

The following table sets forth the net periodic benefit cost for the Company’s defined benefit pension plans and other benefits:

		Three Months Ended
		September 30,
		2010				2009				2010				2009
		Pension Benefits								Other Benefits
Components of net periodic benefit cost
Service cost		$	2,500			$	2,726			$	-			$	-
Interest cost			7,680				7,236				249				282
Expected return on plan assets			(9,604)				(9,244)				-				-
Amortization of prior service cost			48				68				(130	)			(130	)
Recognized net actuarial loss			1,512				1,122				71				110
Net periodic pension benefit cost		$	2,136			$	1,908			$	190			$	262
		Nine Months Ended
		September 30,
		2010				2009				2010				2009
		Pension Benefits								Other Benefits
Components of net periodic benefit cost
Service cost		$	7,498			$	8,177			$	-			$	-
Interest cost			23,042				21,710				745				845
Expected return on plan assets			(28,810)				(27,730)				-				-
Amortization of prior service cost			145				203				(388	)			(388	)
Recognized net actuarial loss			4,229				2,819				213				331
Net periodic pension benefit cost		$	6,104			$	5,179			$	570			$	788

Cash Flows

There have been no significant changes to the 2010 plan year contribution amounts previously disclosed. For the nine months ended September 30, 2010 and 2009, contributions of $14,673 and $16,978, respectively, were made to the qualified and non-qualified pension plans.

In addition to the qualified and non-qualified pension plans, union employees in one of the Company’s U.S. manufacturing facilities participated in the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers-Communications Workers of America (IUE-CWA) multi-employer pension fund. This facility was closed in 2008 which triggered a withdrawal liability from the pension fund. The withdrawal liability was settled for $5,632 and was paid in the second quarter of 2010.

NOTE 11: GUARANTEES AND PRODUCT WARRANTIES

In September 2009, the Company sold its U.S. election systems business. The related sale agreement contained shared liability clauses pursuant to which the Company agreed to indemnify the purchaser for 70 percent of any adverse consequences to the purchaser arising out of certain defined potential litigation or obligations. As of September 30, 2010, there were no material adverse consequences related to these shared liability indemnifications. The Company’s maximum exposure under the shared liability indemnifications is $8,000.

In 1997, industrial development revenue bonds were issued on behalf of the Company. The Company guaranteed the payments of principal and interest on the bonds (refer to note 9) by obtaining letters of credit. The carrying value of the bonds was $11,900 as of September 30, 2010 and December 31, 2009.

The Company provides its global operations guarantees and standby letters of credit through various financial institutions to suppliers, customers, regulatory agencies and insurance providers. If the Company is not able to make payment or fulfill contractual obligations, the suppliers, customers, regulatory agencies and insurance providers may draw on the pertinent bank. At September 30, 2010, the maximum future payment obligations related to these various guarantees totaled $70,036, of which $23,202 represented standby

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

letters of credit to insurance providers, and no associated liability was recorded. At December 31, 2009, the maximum future payment obligations relative to these various guarantees totaled $53,419, of which $22,628 represented standby letters of credit to insurance providers, and no associated liability was recorded.

The Company provides its customers a 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:

		2010				2009
Balance at January 1		$	62,673			$	43,009
Current period accruals (a)			50,409				50,186
Current period settlements			(41,343)				(34,941)
Balance at September 30		$	71,739			$	58,254

(a) includes the impact of foreign exchange rate fluctuations

NOTE 12: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses derivatives to mitigate the economic consequences associated with the fluctuations in currencies and interest rates. The Company records all derivative instruments on the balance sheet at fair value and the changes in the fair value are recognized in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows derivative gains and losses to be reflected in the statement of income or other comprehensive income together with the hedged exposure, and requires that the Company formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. Gains or losses associated with ineffectiveness must be reported currently in earnings. The Company does not enter into any speculative positions with regard to derivative instruments.

The Company periodically evaluates its monetary asset and liability positions denominated in foreign currencies. The impact of the Company and the counterparties’ credit risk on the fair value of the contracts is considered as well as the ability of each party to execute its obligations under the contract. The Company uses investment grade financial counterparties in these transactions and believes that the resulting credit risk under these hedging strategies is not significant.

FOREIGN EXCHANGE

Non-Designated Hedges A substantial portion of the Company’s operations and revenues are international. As a result, changes in foreign exchange rates can create substantial foreign exchange gains and losses from the revaluation of non-functional currency monetary assets and liabilities. The Company’s policy allows the use of foreign exchange forward contracts with maturities of up to 24 months to mitigate the impact of currency fluctuations on those foreign currency asset and liability balances. The Company elected not to apply hedge accounting to its foreign exchange forward contracts. Thus, spot-based gains/losses offset revaluation gains/losses within foreign exchange loss, net and forward-based gains/losses represent interest expense. For the three and nine months ended September 30, 2010, there were 229 and 636 non-designated foreign exchange contracts that settled, respectively. As of September 30, 2010, there were 54 non-designated foreign exchange contracts outstanding, primarily euro, British pound and Swiss franc, totaling $507,731, which represents the absolute value of notional amounts.

Net Investment Hedges The Company has international subsidiaries with assets in excess of liabilities that generate cumulative translation adjustments within other comprehensive income. During 2009, the Company used derivatives to manage potential adverse changes in value of its net investments in Brazil. The Company used the forward to forward method for its quarterly retrospective and prospective assessments of hedge effectiveness. No ineffectiveness results if the notional amount of the derivative matches the portion of the net investment designated as being hedged because the Company uses derivative instruments with underlying exchange rates consistent with its functional currency and the functional currency of the hedged net investment. Changes in value that are deemed effective are accumulated in other comprehensive income where they will remain until they are reclassified to income together with the gain or loss on the entire investment upon substantial liquidation of the subsidiary.

INTEREST RATE

Cash Flow Hedges The Company has variable rate debt and is subject to fluctuations in interest related cash flows due to changes in market interest rates. The Company’s policy allows derivative instruments designated as cash flow hedges which fix a portion of

DIEBOLD, INCORPORATED AND SUBSIDIARIES
FORM 10-Q as of September 30, 2010
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)

future variable-rate interest expense. The Company has executed two pay-fixed receive-variable interest rate swaps, with a total notional amount of $50,000, to hedge against changes in the LIBOR benchmark interest rate on a portion of the Company’s LIBOR-based borrowings. In October 2009, the Company used borrowings of approximately $205,000 and €50,300 under its new credit facility to repay all amounts outstanding under (and terminated) the prior credit facility. While the LIBOR-based cash flows designated in the original hedge relationships remain probable of occurring, the Company elected to de-designate the original cash flow hedging relationships and designated new hedging relationships in conjunction with entering into its new credit facility.

The Company’s monthly retrospective assessment of hedge effectiveness to determine whether the hedging relationship continues to qualify for hedge accounting is performed using regression analysis. The Company’s monthly prospective assessment of hedge effectiveness to measure the extent to which exact offset is not achieved is performed by comparing the cumulative change in the fair value of the interest rate swaps to the cumulative change in the fair value of the hypothetical interest rate swaps with critical terms that match the LIBOR-based borrowings. When computing cumulative changes in fair values, the Company computes the difference between the current fair value and the sum of all future discounted cash flows projected at designation that are not yet paid or accrued as of the current valuation date in order to isolate changes in fair value primarily attributable to changes in interest rates. Changes in value that are deemed effective are accumulated in other comprehensive income and reclassified to interest expense when the hedged interest is accrued. For the three and nine months ended September 30, 2010, the Company recognized net losses of $228 and $307 representing the change in fair value of the interest rate swap that was deemed ineffective. To the extent that it becomes probable that the Company’s variable rate borrowings will not occur, the gains or losses on the related cash flow hedges will be reclassified from other comprehensive income to interest expense.

In December 2005 and January 2006, the Company executed cash flow hedges by entering into receive-variable and pay-fixed interest rate swaps, with a total notional amount of $200,000, related to the senior notes issuance in March 2006. Amounts previously recorded in other comprehensive income related to the pre-issuance cash flow hedges will continue to be reclassified to income on a straight-line basis through February 2016.

The following table summarizes the fair value of derivative instruments designated and not designated as hedging instruments and their respective balance sheet location:

		September 30, 2010				December 31, 2009				Balance Sheet Location (1)
Derivatives designated as hedging instruments
Liability derivatives:
Interest rate contracts		$	(1,348	)		$	(2,122	)		Other current liabilities
Interest rate contracts			(3,137	)			(1,277	)		Other long-term liabilities
Total liability derivatives			(4,485	)			(3,399	)
Total derivatives designated		$	(4,485	)		$	(3,399	)
Derivatives not designated as hedging instruments
Asset derivatives:
Foreign exchange contracts		$	2,537			$	1,047			Other current assets
Foreign exchange contracts			1,100				399			Other current liabilities
Total asset derivatives			3,637				1,446
Liability derivatives:
Foreign exchange contracts			(999	)			(560	)		Other current assets
Foreign exchange contracts			(3,858	)			(2,171	)		Other current liabilities
Total liability derivatives			(4,857	)			(2,731	)
Total derivatives not designated		$	(1,220	)		$	(1,285	)
Total derivatives		$	(5,705	)		$	(4,684	)

The following tables summarize the gain (loss) recognized on designated derivative instruments:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Interest rate contracts
(Loss) gain recognized in OCI (effective portion)		$	(127	)		$	(419	)		$	(778	)		$	1,090
Gain (loss) reclassified from accumulated OCI (effective portion)			100				8				269				(206	)
Loss recognized in income (ineffective portion)			(228	)			-				(307	)			-
Foreign exchange contracts
Loss recognized in OCI (effective portion)			-				(2,051	)			-				(4,533	)

Gains and losses related to interest rate contracts that are reclassified from accumulated OCI are recorded in interest expense on the statement of income. The Company anticipates reclassifying $1,019 from other comprehensive income to interest expense within the next 12 months.

The following table summarizes the gain (loss) recognized on non-designated derivative instruments:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009				Income Statement Location
Foreign exchange contracts		$	(1,805	)		$	(2,250	)		$	(4,864	)		$	(7,445	)		Interest expense
Foreign exchange contracts			(12,285	)			366				9,870				(17,622	)		Foreign exchange gain (loss), net
Total		$	(14,090	)		$	(1,884	)		$	5,006			$	(25,067	)

Restructuring Charges

The following table summarizes the impact of the Company’s restructuring charges (benefits) on the condensed consolidated statements of income:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Cost of sales - products		$	305			$	700			$	787			$	3,104
Cost of sales - services			35				536				(175	)			3,936
Selling and administrative expense			100				411				2,336				3,086
Research, development and engineering expense			43				125				(155	)			102
Total		$	483			$	1,772			$	2,793			$	10,228

The following table summarizes the Company’s restructuring charges (benefits) within continuing operations for its DNA and DI reporting segments:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
DNA
Severance		$	352			$	583			$	2,235			$	2,777
Other (1)			(98	)			774				(215	)			2,908
DI
Severance			178				187				556				3,900
Other (2)			51				228				217				643
Total		$	483			$	1,772			$	2,793			$	10,228

Net restructuring charges of $2,354 and $4,098 for the nine months ended September 30, 2010 and 2009, respectively, related to reductions in the Company’s global workforce, including realignment of the organization and resources to better support opportunities in emerging growth markets and consolidation of certain international facilities in efforts to optimize overall operational performance. In December 2009, the Company began to implement a workforce reduction of 350 employees, which primarily affects its Canton, Ohio area facilities. The Company expects to complete this workforce reduction no later than the end of 2010.

Net restructuring charges of $408 and $2,859 for the nine months ended September 30, 2010 and 2009, respectively, related to the Company’s strategic global manufacturing realignment plans. The Company’s global manufacturing realignment plans include the closure of its manufacturing facilities in Newark, Ohio and Cassis, France in 2008 and 2006, respectively as well as the movement of Opteva product manufacturing out of Lexington, North Carolina in 2009. The Company believes these plans are substantially complete. Security manufacturing operations continue in the Lexington facility. Restructuring charges in 2010 were primarily the result of legal and professional fees related to these plans. These charges were partially offset by benefits related to a pension obligation which was settled in the first quarter of 2010 (refer to note 10) and a gain on the sale of assets.

Other restructuring charges were $31 and $3,271 for the nine months ended September 30, 2010 and 2009, respectively. The 2009 costs were primarily related to employee severance costs in connection with the Company’s sale of a manufacturing facility in Argentina.

The following table summarizes the Company’s cumulative total restructuring costs for the significant plans:

						Global
		Workforce				Manufacturing
		Reductions				Realignment
Costs incurred to date:
DNA		$	20,441			$	12,430
DI			19,743				24,767
Total costs incurred to date		$	40,184			$	37,197
Remaining costs:
DNA		$	250			$	62
DI			250				410
Remaining costs as of September 30, 2010		$	500			$	472