The company also reported net income of $46.5 million during the third quarter of 2008, compared to net income of $28.1 million in the comparable period in 2007, an increase of 65.2 percent. Earnings for the third quarter of 2008 were $.70 per share, compared to $.42 per share in the third quarter of 2007, an increase of 66.7 percent.

The third quarter 2008 results included restructuring charges of $.17 per share, compared to $.01 per share in the third quarter of 2007. These restructuring charges related primarily to severance and reorganization costs from the previously announced reduction in the company's global workforce. In addition, the company also incurred $.29 per share in non-routine expenses in the third quarter 2008, compared to $.04 per share in the third quarter 2007. These non-routine expenses primarily consisted of legal, audit and consultation fees related to the completion of the internal review of other accounting items, the restatement of financial statements and the ongoing Securities and Exchange Commission (SEC) and U.S. Department of Justice (DOJ) investigations, as well as other advisory fees. Of the $.29 per share in non- routine expenses in the third quarter of 2008, $.16 per share was related to a fee owed to financial advisor Goldman Sachs as a result of the withdrawal of the unsolicited takeover bid from United Technologies Corp. Excluding these restructuring charges and non-routine expenses, diluted earnings per share in the third quarter of 2008 would have been $1.16 versus $.47 in the third quarter 2007, an increase of 146.8 percent.

Cash from operating activities in the third quarter of 2008 was $56.3 million, compared to a cash use from operating activities of $24.4 million in the third quarter of 2007. Free cash flow during the third quarter of 2008 was $43.4 million, compared to free cash use of $34.7 million during the third quarter of 2007.

Management commentary

"I am very pleased with the strong results we generated in the third quarter. We continue to make solid progress on our key initiatives to reduce costs and improve profitability, and this is reflected in our results," said Thomas W. Swidarski, Diebold president and chief executive officer. "While the quarter was very strong, it benefited from 2008 Brazilian election revenue, a business opportunity which historically occurs every other year.

"Also, we benefited from a large order in China, in which revenue was expected to be recognized during the fourth quarter but occurred during the third quarter due to customer acceptance occurring sooner than planned. Including this order, we anticipate revenue in China will increase more than 20 percent in the full-year 2008.

"In addition to the unique events that occurred during the quarter, we executed our business plans very effectively. As a result of our strong performance, we are again raising our full-year earnings guidance," Swidarski continued. "While this guidance reflects an exceptional year, it does result in fourth-quarter earnings expectations that are lower than what we historically realize. As we have communicated in prior quarters, our typical earnings seasonality has been affected by purchases in China coming early in the year in 2008, rather than being concentrated in the fourth quarter. We anticipate our more historical earnings seasonality returning in 2009."

Swidarski concluded, "Clearly, since our last earnings announcement on August 11, we have witnessed unprecedented change in the financial services industry -- both in the United States and internationally. In the United States, the federal government's Troubled Asset Recovery Program is reshaping the financial landscape almost daily. While our orders and backlog remain very strong, these day-to-day changes in our core industry make it difficult to assess the impact on 2009 financial results. Given this uncertainty, we are further accelerating our efforts to reduce costs, increase operational efficiencies and improve productivity. We expect to be in a better position to provide insight to 2009 financial expectations in our year-end earnings announcement."

Third Quarter Orders (constant currency)

Total product and services orders for financial self-service and security were up into the low double-digit range compared to the prior-year period. Financial self-service orders increased in excess of 20 percent, with double-digit growth in each of the geographic regions. Security orders, however, decreased in the low double-digit range as new bank branch construction and retail store openings remain weak in the United States.

Revenue

Total revenue for the 2008 third quarter was up 20.2 percent. Financial self-service products and services revenue increased 18.3 percent over the prior period, while total security revenue decreased 6.4 percent. During the quarter, election systems revenue in Brazil was $58.6 million, representing more than 85 percent of the increase in total election systems revenue. Of the 20.2 percent increase in total revenue, the net positive currency impact was 3.4 percentage points.

Gross Margin

Total gross margin for the quarter was 26.2 percent, compared to 23.9 percent in the third quarter of 2007. These gross margins included restructuring charges of $10.7 million in the third quarter of 2008 and $1.0 million in the third quarter of 2007.

Product gross margin was 27.9 percent in the quarter, compared to 26.5 percent in the third quarter 2007. Included in product gross margins were restructuring charges of $8.4 million in the third quarter of 2008 and $0.8 million in the third quarter of 2007. Despite the higher restructuring charges, product gross margin improved during the period. The gross profit associated with the Brazil voting business positively impacted product gross margin in the quarter by 2.2 percentage points. In addition, gross profit margin was negatively impacted by higher restructuring expenses, increased commodity costs, unfavorable security product revenue mix and lower overall volume in the security business. This negative impact was partially offset by the company's ongoing cost-reduction efforts and a higher mix of revenue from China. The China revenue included the large order in which revenue was expected to be recognized during the fourth quarter but occurred during the third quarter.

Service gross margin in the quarter was 24.4 percent, compared to 21.4 percent in the third quarter of 2007. Included in service gross margins were restructuring charges of $2.3 million in the third quarter of 2008 and $0.2 million in the third quarter of 2007. The year-over-year improvement in service margin was driven by better product quality, improved international margins as a result of previous restructuring actions, and continued gains in productivity and efficiency, partially offset by higher restructuring charges.

Operating Expense

Operating expenses as a percentage of revenue in the third quarter of 2008 were 18.9 percent, compared to 18.4 percent in the third quarter of 2007. Included in the third quarter 2008 operating expenses were restructuring charges of $3.8 million and non-routine expenses of $24.7 million. This compares to $0.2 million in restructuring charges and $3.3 million in non-routine expenses in the third quarter of 2007. The third quarter 2008 non-routine expenses included a $13.5 million fee owed to financial advisor Goldman Sachs as a result of the withdrawal of the unsolicited takeover bid from United Technologies Corp.

Net Income

The company reported net income of $46.5 million in the third quarter 2008, or 5.2 percent of revenue, compared to net income of $28.1 million in the third quarter 2007, or 3.8 percent of revenue. The increase in net income was a result of higher gross profits and a lower effective tax rate, partially offset by higher operating expense levels. The third quarter 2008 effective tax rate was positively affected by a $3.7 million discrete benefit related to a China technology tax credit.

On a net of tax basis, the fee to Goldman Sachs adversely impacted net income by $10.6 million, while restructuring charges adversely impacted net income by $11.4 million in the third quarter of 2008 and by $0.9 million in the third quarter of 2007. Finally, other non-routine expenses, net of tax, were $8.8 million in the third quarter of 2008 and $2.4 million in the third quarter of 2007.

Net Debt and Cash Flow

The company's net debt* was $378.4 million at September 30, 2008 compared to $389.9 million at September 30, 2007, a decrease of $11.5 million over the last 12 months.

Net cash provided by operating activities increased $24.0 million, moving from $37.8 million in the nine months ended September 30, 2007 to $61.8 million in the nine months ended September 30, 2008. The primary reason for this increase was higher net income and a net increase in certain other assets/liabilities, partially offset by an increase in trade receivable balances. The net increase in certain other assets/liabilities was primarily due to collection of refundable income taxes, increases in the accruals for non-routine expenses, and increases in warranty reserves and VAT taxes as a result of increased product revenue. The increase in trade receivables was due to significantly higher revenue levels. Days sales outstanding (DSO) was 52 days at September 30, 2008 compared to 61 days at September 30, 2007, while inventory turns moved to 4.2 turns at September 30, 2008 from 3.7 turns at September 30, 2007. As a result of the change in net cash provided by operating activities, free cash flow increased by $25.7 million, moving to $29.2 million at September 30, 2008 from $3.5 million at September 30, 2007.

Restructuring charges

The company incurred third quarter 2008 restructuring charges totaling $14.5 million, or $.17 per share. These charges were primarily related to severance costs from the previously announced ongoing reduction in the company's global workforce, which is on track to be completed by the end of 2008. Cash payments related to restructuring in the third quarter of 2008 were $6.0 million. Taking into consideration the previously announced manufacturing and supply chain restructuring and the global workforce reduction, Diebold expects full-year restructuring charges to be in the range of $40 million to $45 million, or $.50 per share to $.56 per share. While the majority of the anticipated 2008 restructuring charges are ultimately expected to result in cash payments, the company cannot currently predict the timing of these payments.

Non-routine expenses

The company incurred third quarter 2008 non-routine expenses totaling $24.7 million, or $.29 per share, compared to $3.3 million, or $.04 per share in the third quarter of 2007. These expenses primarily consisted of legal, audit and consultation fees related to the previously announced internal review of other accounting items, restatement of financial statements and the ongoing government investigations, as well as other advisory fees. Diebold estimates these non-routine expenses for the full year will be in the range of $45 million to $47 million, or $.53 per share to $.55 per share. Cash payments related to these non-routine expenses in the third quarter of 2008 were $8.2 million, compared to $0.8 million in the third quarter of 2007.

Full-year 2008 outlook

The following statements are based on current expectations. These statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of any future mergers, acquisitions, disposals or other business combinations.