UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K/A
(Amendment No. 2)

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

For the fiscal year ended December 31, 2004

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

For the transition period from       to      

Commission file number 1-4879

DIEBOLD, INCORPORATED

(Exact name of Registrant as specified in its charter)

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Common Shares $1.25 Par Value		Name of each exchange on which registered: New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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  Ö No      

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

     Yes [Ö] No [ ]

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2004, the last business day of the Registrant’s most recently completed second fiscal quarter. The aggregate market value was computed by using the closing price on the New York Stock Exchange on June 30, 2004 of $52.87 per share.

Common Shares, Par Value $1.25 per Share		$3,736,909,757

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

Class Common Shares $1.25 Par Value		Outstanding at February 25, 2005 71,702,456 Shares

 

 

EXPLANATORY NOTE
(Dollars in thousands)

The Consolidated Financial Statements have been restated in order to reflect certain adjustments to the company’s financial statements previously reported on Form 10-K for the annual period ended December 31, 2004 to amend and restate financial statements and other financial information for the years 2004, 2003 and 2002 and financial information for the year 2001 and 2000, and for each of the quarters in the year 2004 and 2003 with respect to a reconciliation issue in its North America sales commission accrual account. All amounts are before tax unless otherwise noted. A detailed analysis of this reconciliation has been performed and the company has determined that the commission account was under-accrued by approximately $13,200 at December 31, 2004 and approximately $11,400 at March 31, 2005. First quarter 2005 commission expense was overstated by approximately $1,800. Commission expense was understated by approximately $300, $2,700 and $1,500 in 2004, 2003 and 2002, respectively. The remaining approximately $8,700 understatement of commission expense was related to periods prior to fiscal year 2002.

This amendment No. 2 to the Diebold, Incorporated Annual Report on Form 10-K for the year ended December 31, 2004 (the “Form 10-K/A”) includes restated Consolidated Financial Statements as of December 31, 2004 and for each year of the three year period then ended. The accompanying restated Consolidated Financial Statements, including the notes thereto, have been revised to reflect restatement adjustments.

The following table summarizes the restatement effects on the company’s Consolidated Balance Sheets and Consolidated Statements of Income as of December 31, 2004 and 2003 and the years ended 2004, 2003 and 2002, and for each of the quarters in the years 2004 and 2003.

		2004				2003
Effect on Consolidated Balance Sheets		Increase/(Decrease)				Increase/(Decrease)
Estimated income taxes		$	(1,642	)		$	(1,548	)
Other current liabilities			13,209				12,955
Total current liabilities			11,567				11,407
Retained earnings			(11,567	)			(11,407	)

		2004				2003				2002
Effect on Consolidated Statements of Income		Increase/(Decrease)				Increase/(Decrease)				Increase/(Decrease)
Service cost of sales		$	643			$	(177	)		$	1,236
Gross profit			(643	)			177				(1,236	)
Selling and administrative expense			(389	)			2,860				263
Operating profit			(254	)			(2,683	)			(1,499	)
Income before taxes			(254	)			(2,683	)			(1,499	)
Taxes on income			(94	)			(993	)			(555	)
Net income			(160	)			(1,690	)			(944	)
Earnings per share:
Basic		$	—			$	(0.02	)		$	(0.02	)
Diluted			(0.01	)			(0.03	)			(0.01	)

		First quarter				Second Quarter				Third Quarter				Fourth Quarter
Effect on 2004 Quarterly Information		Increase/(Decrease)				Increase/(Decrease)				Increase/(Decrease)				Increase/(Decrease)
(Unaudited)
Balance Sheets
Other current liabilities		$	11,454			$	11,494			$	11,535			$	11,567
Retained earnings			(11,454	)			(11,494	)			(11,535	)			(11,567	)
Income Statements
Service cost of sales		$	148			$	152			$	165			$	178
Gross profit			(148	)			(152	)			(165	)			(178	)
Selling and administrative expense			(73	)			(89	)			(100	)			(127	)
Operating profit			(75	)			(63	)			(65	)			(51	)
Income before taxes			(75	)			(63	)			(65	)			(51	)
Taxes on income			(28	)			(23	)			(24	)			(19	)
Net income			(47	)			(40	)			(41	)			(32	)
Earnings per share:
Basic		$	—			$	(0.01	)		$	(0.01	)		$	—
Diluted		$	—			$	—			$	—			$	—

		First quarter				Second Quarter				Third Quarter				Fourth Quarter
Effect on 2003 Quarterly Information		Increase/(Decrease)				Increase/(Decrease)				Increase/(Decrease)				Increase/(Decrease)
(Unaudited)
Balance Sheets
Other current liabilities		$	9,982			$	10,329			$	10,816			$	11,407
Retained earnings			(9,982	)			(10,329	)			(10,816	)			(11,407	)
Income Statements
Service cost of sales		$	(40	)		$	(44	)		$	(45	)		$	(48	)
Gross profit			40				44				45				48
Selling and administrative expense			461				595				818				986
Operating profit			(421	)			(551	)			(773	)			(938	)
Income before taxes			(421	)			(551	)			(773	)			(938	)
Taxes on income			(156	)			(204	)			(286	)			(347	)
Net income			(265	)			(347	)			(487	)			(591	)
Earnings per share:
Basic		$	—			$	—			$	(0.01	)		$	(0.01	)
Diluted		$	(0.01	)		$	(0.01	)		$	(0.01	)		$	(0.01	)

The restatement had no effect on net cash provided by operating activities as the change in net income for the restated periods presented was offset entirely by the change in certain other assets and liabilities for the same periods.

Refer to Note 1(a), “Restatement”, to the Consolidated Financial Statements for further information on the restatement impact for each of the years ended December 31, 2004, 2003 and 2002 and the quarterly periods in 2004 and 2003, including discussion on the nature of the restatement adjustments. All referenced amounts in this Form 10-K/A for prior periods and prior period comparisons reflect the balances and amounts on a restated basis, as applicable.

This Form 10-K/A amends and restates in their entirety the “Documents Incorporated by Reference” section, Item 1 of Part I, Items 6, 7, 8 and 9A of Part II and Item 15 of Part IV of the original Form 10-K filed with the SEC on March 8, 2005, as amended by amendment No. 1 on Form 10-K/A filed with the SEC on April 25, 2005, and no other information included in the original 10-K, as amended, is amended hereby.

This Amendment No. 2 continues to speak as of the date of the filing of the original Form 10-K, as amended, and the company has not updated the disclosures contained herein to reflect any events that occurred at a later date.

DOCUMENTS INCORPORATED BY REFERENCE

Listed hereunder are the documents, portions of which are incorporated by reference, and the parts of this Form 10-K into which such portions are incorporated:

PART I.

ITEM 1. BUSINESS.
(Dollars in thousands)

(a) General Development of Business

The company was incorporated under the laws of the state of Ohio in August, 1876, succeeding a proprietorship established in 1859 and is engaged primarily in the sale, manufacture, installation and service of automated self-service transaction systems, electronic and physical security products, election systems and software. The company specializes in technology that empowers people worldwide to access services when, where and how they may choose. In 2002, the company acquired Diebold Election Systems, Inc. (DESI), a manufacturer and supplier of elections systems and support, to mark its launch into the election systems market.

Additional information regarding developments in the company’s business can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this Form 10-K/A.

(b) Financial Information about Segments

The company’s segments comprise its three main sales channels: Diebold North America (DNA), Diebold International (DI) and Election Systems. The DNA segment sells financial and retail systems, and also services financial, retail and medical systems in the United States and Canada. The DI segment sells and services financial and retail systems over the remainder of the globe. The Election Systems segment includes the operating results of DESI beginning in 2002 and the voting related business in Brazil.

Segment financial information can be found in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Form 10-K/A.

(c) Narrative Description of Business

The company develops, manufactures, sells and services self-service transaction systems, electronic and physical security systems, software and various products used to equip bank facilities and electronic voting terminals. The company’s primary customers include banks and financial institutions, as well as colleges and universities, public libraries, government agencies, utilities and various retail outlets. Sales of systems and equipment are made directly to customers by the company’s sales personnel and by manufacturer’s representatives and distributors globally. The sales/support organization works closely with customers and their consultants to analyze and fulfill the customers’ needs. In 2004, 2003 and 2002, the company’s sales and services of financial systems and equipment and security solutions accounted for more than 94 percent of consolidated net sales.

Product Groups
Self-Service Products
The company offers an integrated line of self-service banking products and Automated Teller Machines (ATMs). The company is a leading global supplier of ATMs, and holds the leading market position in many countries around the world.

Physical Security and Facility Products
The 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.

Election Systems
The company, through its wholly owned subsidiaries DESI and Diebold Procomp, is one of the largest electronic voting system providers in the world.

Integrated Security Solutions
Diebold 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.

Software Solutions and Services
The company offers software solutions consisting of multiple applications that process events and transactions. These solutions are delivered on the appropriate platform allowing the company to meet customer requirements while adding new functionality in a cost-effective manner.

The company also provides professional services to assist in the implementation of software solutions. These services include communication network review, systems integration, custom software and project management that encompass all facets of a successful financial self-service implementation.

Operations
The principal raw materials used by the company are steel, copper, brass, lumber and plastics, which are purchased from various major suppliers. Electronic parts and components are also procured from various suppliers. These materials and components are generally available in quantity at this time.

The company had no customers that accounted for more than 10 percent of total net sales in 2004, 2003 and 2002.

The company’s operating results and the amount and timing of revenue are affected by numerous factors including production schedules, customer priorities, sales volume and sales mix. During the past several years, the company has dramatically changed the focus of its self-service business to that of a total solutions approach. The value of unfilled orders is not as meaningful an indicator of future revenues due to the significant portion of revenues derived from the company’s growing service-based business, for which order information is not available. Therefore, the company believes that backlog information is not material to an understanding of its business and does not disclose backlog information.

The company carries working capital mainly related to accounts receivable and inventories. Inventories, generally, are only manufactured as orders are received from customers. The company’s normal and customary payment terms are net 30 days from date of invoice. The company generally does not offer extended payment terms. The company’s government customers represent a small portion of the company’s

business. Typically, the company’s contracts with its government customers do not contain fiscal funding clauses. In the event that such a clause exists, revenue would not be recognizable until the funding clause was satisfied. 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 refunds or return rights affecting the revenue recognized for the delivered elements. Historically, the company has not experienced any such contract uncertainties or contingencies.

Competition
All phases of the company’s business are highly competitive; some products being in competition directly with similar products and others competing with alternative products having similar uses or producing similar results. The company believes, based upon outside independent industry surveys, that it is a leading manufacturer of self-service systems in the United States and is also a market leader internationally. In the area of automated transaction systems, the company competes primarily with NCR Corporation, Wincor-Nixdorf, Triton, Dassault, Fujitsu, Itautec and Tidel. In serving the security products market for the financial services industry, the company competes primarily with ADT. Of these, some compete in only one or two product lines, while others sell a broader spectrum of products competing with the company. However, the unavailability of comparative sales information and the large variety of individual products make it difficult to give reasonable estimates of the company’s competitive ranking in or share of the market in its security product fields of activity. Many smaller manufacturers of safes, surveillance cameras, alarm systems and remote drive-up equipment are found in the market.

In the rapidly growing election systems market, the company is emerging as the leader in providing product solutions and support for the United States and internationally. Competition in this market is from smaller, privately held niche companies.

Patents, Trademarks, Licenses
The company owns patents, trademarks and licenses relating to certain products in the United States and internationally. While the company regards these as items of importance, it does not deem its business as a whole, or any industry segment, to be materially dependent upon any one item or group of items.

Research, Development & Engineering
The company charged to expense $60,015 in 2004, $60,353 in 2003, and $57,490 in 2002, respectively, for research, development and engineering costs.

Legal
Compliance by the company with federal, state and local environmental protection laws during 2004 had no material effect upon capital expenditures, earnings or the competitive position of the company and its subsidiaries.

The election systems business continued to be a challenge for the company, as lower revenue and the settlement of the civil action in California with the State of California and Alameda County had a significant negative impact on margin and earnings per share. 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 the company’s customer relations with its election systems customers. Also, the election systems market continues to evolve. Funding is being provided by the federal government and utilized by the states; however, the guidelines and rules governing the election software and hardware have not yet been fully established. As a result, various states and industry experts are interpreting the election requirements differently. Recent changes in the laws under which election-related products must be certified by a number of states have lengthened the certification process and, in some cases, required changes to the company’s products. For example, some states are requiring paper receipt printers, and the state of Ohio has decided to adopt mostly optical scan rather than touch screen technology.

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 because they 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 it. The delay in orders resulted in higher inventory levels of approximately $32 million and lower voting sales in the range of approximately $65 million to $75 million in 2004. As a result of the positive performance of the company’s voting equipment, as well as the performance of electronic voting systems in general, in the past presidential election and the Help America Vote Act (HAVA) requirement that jurisdictions must have HAVA-compliant equipment installed by January 1, 2006, the company expects to recover a significant portion of the delayed sales in 2005, as well as participate in new jurisdiction decisions to purchase voting equipment in 2005. Despite these expectations, future delays or increase 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 total number of employees employed by the company at December 31, 2004 was 14,376 compared with 13,401 at the end of the preceding year. Diebold’s service staff is one of the financial industry’s largest, with professionals in more than 600 locations worldwide.

Additional information regarding the company’s sales, results of operations, liquidity and capital resources is discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this form 10-K/A.

The company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are available, free of charge, on or through its website, www.diebold.com, as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Additionally, these reports can be furnished free of charge to shareholders upon written request to Diebold Global Communication at the corporate address, or call +1 330 490-3790 or [800] 766-5859.

(d) Financial Information about Geographic Areas

Sales to customers outside the United States in relation to total consolidated net sales were $935,769 or 39.3 percent in 2004, $778,608 or 36.9 percent in 2003 and $719,231 or 37.1 percent in 2002.

Property, plant and equipment, at cost, located in the United States totaled $427,464, $392,128 and $355,681 as of December 31, 2004, 2003 and 2002, respectively, and property, plant and equipment, at cost, located outside the United States totaled $186,650, $155,730 and $106,452 as of December 31, 2004, 2003 and 2002, respectively.

The company’s non-U.S. operations are subject to normal international business risks not generally applicable to domestic business. These risks include currency fluctuation, new and different legal and regulatory requirements in local jurisdictions, political and economic changes and disruptions, tariffs or other barriers, potentially adverse tax consequences and difficulties in staffing and managing foreign operations.

Additional information regarding the company’s international operations is included in Note 16 to the Consolidated Financial Statements contained in Item 8 of Part II of this Form 10-K/A.

PART II.

ITEM 6.SELECTED FINANCIAL DATA.

(Dollars in thousands, except per share amounts)

		2004				2003				2002				2001				2000
Net sales		$	2,380,910			$	2,109,673			$	1,940,163			$	1,760,297			$	1,743,608
Net income (restated)			183,797				173,086				98,210				67,448				137,035
Basic earnings per share (restated)			2.55				2.39				1.36				0.94				1.92
Diluted earnings per share (restated)			2.53				2.37				1.36				0.94				1.92
Total assets			2,135,552				1,900,502				1,625,081				1,621,083				1,585,427
Other long-term liabilities (Note A)			31,324				47,617				36,475				20,800				20,800
Cash dividends paid per common share			0.74				0.68				0.66				0.64				0.62

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

(Dollars in thousands, except share and per share amounts)

Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in this Item 7 has been restated to reflect certain adjustments to the company’s Consolidated Financial Statements previously reported in the Annual Report on Form 10-K for the year ended December 31, 2004 . Refer to Note 1(a), “Restatement”, to the Consolidated Financial Statements for further information on the restatement.

OVERVIEW

The table below presents the changes in comparative financial data from 2002 to 2004. 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.

		2004 (restated)												2003 (restated)												2002 (restated)
						Percentage				Percentage								Percentage				Percentage								Percentage
						of Net				Increase								of Net				Increase								of Net
		Amount				Sales				(Decrease)				Amount				Sales				(Decrease)				Amount				Sales
Net sales
Products		$	1,170,492				49.2				14.6			$	1,021,386				48.4				11.1			$	919,127				47.4
Services			1,210,418				50.8				11.2				1,088,287				51.6				6.6				1,021,036				52.6
			2,380,910				100.0				12.9				2,109,673				100.0				8.7				1,940,163				100.0
Cost of sales
Products			796,721				68.1				17.2				679,864				66.6				9.8				618,999				67.4
Services			906,448				74.9				12.8				803,936				73.9				8.2				743,202				72.8
			1,703,169				71.5				14.8				1,483,800				70.3				8.9				1,362,201				70.2
Gross profit			677,741				28.5				8.3				625,873				29.7				8.3				577,962				29.8
Selling and administrative expense			341,006				14.3				9.7				310,846				14.7				10.0				282,648				14.6
Research, development and engineering expense			60,015				2.5				(0.6	)			60,353				2.9				5.0				57,490				3.0
			401,021				16.8				8.0				371,199				17.6				9.1				340,138				17.5
Operating profit			276,720				11.6				8.7				254,674				12.1				7.1				237,824				12.3
Other income (expense) net			(313	)			0.0				(104.3	)			7,213				0.4				147.7				(15,118	)			(0.8	)
Minority interest			(7,718	)			(0.3	)			2.3				(7,547	)			(0.4	)			33.5				(5,654	)			(0.3	)
Income before taxes			268,689				11.3				5.6				254,340				12.1				17.2				217,052				11.2
Taxes on income			84,892				3.6				4.5				81,254				3.9				(5.2	)			85,695				4.4
Income before cumulative effect of a change in accounting principle			183,797				7.7				6.2				173,086				8.2				31.8				131,357				6.8
Cumulative effect of a change in accounting principle, net of tax			—				—				—				—				—				—				33,147				1.7
Net income		$	183,797				7.7				6.2			$	173,086				8.2				76.2			$	98,210				5.1

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, education 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. The new line 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. The new award-winning generation of financial self-service solutions was developed to deter or discourage ATM fraud. 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 the only vendor to protect 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, significant 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 a couple of strategic domestic acquisitions during 2004, which increased its presence in the security market.

The election systems business continued to be a challenge for the company, as lower revenue and the settlement of the civil action in California with the state of California and Alameda County had a significant negative impact on margin and earnings per share. 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. Also, the election systems market continues to evolve. Funding is being provided by the federal government and utilized by the states; however, the guidelines and rules governing the election software and hardware have not yet been fully established. As a result, various states and industry experts are interpreting the election requirements differently. Recent changes in the laws under which election-related products must be certified by a number of states have lengthened the certification process and, in some cases, required changes to the company’s products. For example, some states are requiring paper receipt printers, and the state of Ohio has decided to adopt mostly optical scan rather than touch screen technology.

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. 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. The delay in orders resulted in higher inventory levels of approximately $32 million and lower voting sales in the range of approximately $65 million to $75 million in 2004. As a result of the positive performance of the company’s voting equipment, as well as the performance of electronic voting systems in general, in the past presidential election and the Help America Vote Act (HAVA) requirement that jurisdictions must have HAVA-compliant equipment installed by January 1, 2006, the company expects to recover a significant portion of the delayed sales in 2005, as well as participate in new jurisdiction decisions to purchase voting equipment in 2005. Despite these expectations, future delays or increase 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;
	•		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;
	•		ability to reduce costs and expenses and improve internal operating efficiencies;
	•		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; and
	•		potential security violations to the company’s information technology systems.

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 these 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 all available information, including historical, 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, inventories, goodwill, and pensions and postretirement benefits are the most critical because they are affected significantly by judgments, assumptions and estimates. Additional information regarding these policies is included below.

Revenue Recognition
The company’s 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 Risk
The 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.

Inventories
Domestic 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.

Goodwill
Effective January 1, 2002, the 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 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 Benefits
Annual net periodic expense and benefit liabilities under the company’s defined benefit plans are determined on an actuarial basis. Assumptions used in the actuarial calculations have a significant impact on plan obligations and expense. Annually, management and the investment committee of the Board of Directors review the actual experience compared with the more significant assumptions used and makes 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 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. 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-Point			One-Percentage-Point
		Increase			Decrease
Effect on total of service and interest cost	$	86		$	(77	)
Effect on postretirement benefit obligation		1,424			(1,273	)

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 5 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 increase by $3,836 in 2005, increasing from $4,664 in 2004 to approximately $8,500 in 2005. 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, and the company is not required to make any additional contributions in 2005. Pension expense excludes retiree medical expense, which is also included in operating expenses and was approximately $1,400 and $1,800 in 2004 and 2003, 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 below 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.

During 2004, the company generated $232,648 in cash from operating activities, an increase of $29,137, or 14.3 percent from 2003. Cash flows from operating activities are generated primarily from operating income and controlling the components of working capital. Along with the increase in operating income, 2004 cash flows from operations were positively affected by the $2,293 decrease in accounts receivable compared with an increase of $128,929 in 2003. Total sales increased by $271,237 in 2004 versus 2003, while days sales outstanding (DSO) improved 10 days over the same time period. DSO was 63 days at December 31, 2004 compared with 73 days at December 31, 2003. The improvement in DSO was due to a new “order-to-cash” process implemented during 2004. This order-to-cash process enabled a faster turnaround time in the collection of payments, resulting in a reduction of past due receivables by 49.0 percent and a reduction of write-offs by 56.0 percent. Included in the December 31, 2004 trade receivables were amounts due from San Diego and San Joaquin counties in California totaling approximately $32,000 related to the election systems business. The company anticipates collection of these receivables in the fourth quarter of 2005. The increase in inventories negatively affected cash flows from operations by $52,430 in 2004 as compared to an increase of $10,541 in 2003. The increase in inventories was due to the impact of transitioning to the new Opteva product solution and the phaseout of legacy products, as well as anticipated strong first quarter 2005 orders. The increase in demand was due to the success of the Opteva product line. In addition, the change in certain other assets and liabilities negatively affected cash flows from operations by $23,123 (as restated) as compared with a positive impact of $55,866 (as restated) in 2003. The change was primarily the result of a decrease in estimated income taxes payable due to the timing of tax payments, which negatively impacted cash flow by $31,876 in 2004 compared to a positive impact of $37,375 in 2003.

The company used $184,312 for investing activities in 2004, an increase of $78,403 or 74.0 percent over 2003. The increase over the prior year was the result of higher acquisition investments, which increased by $51,613, moving from $10,611 in 2003 to $62,224 in 2004. The company’s acquisitions in 2004 were in operations in the security market within the United States. In addition to increased acquisition activity, the company had a net increase in investment purchases of $27,739 as compared with net cash proceeds of $25,665 in 2003.

The company used $37,571 for financing activities in 2004, a decrease of $52,141 or 58.1 percent over 2003. The overall decrease in 2004 was primarily due to increased net notes payable borrowings of $79,688 in 2004 as compared with net repayments of $54,829 in 2003. The positive impact of the change in notes payable borrowings was offset by an increase in stock repurchases of $71,897 in 2004 as compared with $2,739 in 2003. In addition, the company paid cash dividends of $53,240 in 2004, an increase of $3,998 or 8.1 percent versus 2003.

The following table summarizes the company’s approximate obligations and commitments to make future payments under contractual obligations as of December 31, 2004:

						Payment due by period
						Less than 1												More than 5
		Total				year				1-3 years				3-5 years				years
Operating lease obligations		$	185,114			$	53,046			$	76,436			$	39,287			$	16,345
Industrial development revenue bonds			13,300				—				—				—				13,300
Financing arrangement			11,381				4,357				7,024				—				—
Notes payable			289,510				289,510				—				—				—
		$	499,305			$	346,913			$	83,460			$	39,287			$	29,645

RESULTS OF OPERATIONS

2004 Comparison with 2003

Net Sales
Net sales for 2004 totaled $2,380,910 and were $271,237 or 12.9 percent higher than net sales for 2003. In 2004, the company achieved growth in all sales categories, except election systems. Financial self-service product revenue increased by $132,751 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 $25,273 and Brazil of $9,556. Opteva orders increased $252,463 in 2004 as compared with 2003. Security product revenue increased by $35,780 or 14.1 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 $112,856 or 10.5 percent over 2003 as the company continued to expand its service customer base through increased market share and acquisitions. In 2005, the company expects the net sales growth trends to continue for both financial self-service and security solutions. Financial self-service revenue will benefit from continued customer acceptance of the Opteva product line. In order to sell Opteva products to banks in Western Europe, each bank must certify the product for use on its network. The company anticipates in 2005 increased certifications of Opteva from banks in Western Europe. Security solutions revenue will benefit from an expansion of security product offerings and a strong presence within the security markets.

Election systems 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 is due to the challenges discussed earlier and because 2004 was a presidential election year, the company believes that prospective purchases of voting equipment and services by certain government entities was delayed in 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.

Gross Profit
Gross profit for 2004 totaled $677,741 (as restated), and was $51,868 or 8.3 percent higher than gross profit (as restated) in 2003. Product gross margin was 31.9 percent in 2004 compared with 33.4 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. In order to compensate for margin weaknesses in Europe, the company plans in 2005 to realign production capacity and streamline its operations and infrastructure in Western Europe. The company anticipates restructuring charges in the range of $.08 to $.11 in 2005 as a result of these actions in Europe. Additionally, in 2005, the company expects increased demand for Opteva products, which carry a higher margin, will help offset the negative effects of pricing pressures to gross margin. The election systems business adversely affected product margins by 0.4 percentage points as a result of lower revenue on fixed costs. Service gross margin in 2004 decreased to 25.1 percent (as restated) compared with 26.1 percent (as restated) in 2003. This decline was a result of continued pricing pressures and increased fuel costs. In the United States, service 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 Expenses
Total operating expenses as a percentage of net sales improved significantly, moving from 17.6 percent (as restated) in 2003 to 16.8 percent (as restated) 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, limiting base compensation increases and implementing a corporatewide 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.

Taxes on Income
The effective tax rate was 31.6 percent (as restated) in 2004 as compared with 32.0 percent (as restated) 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 Income
Net income for 2004 was $183,797 (as restated) and increased $10,711 or 6.2 percent over net income (as restated) 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
Diebold North America (DNA) 2004 net sales of $1,423,625 increased $166,726 or 13.3 percent over 2003 net sales of $1,256,899. 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. Diebold International (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 is expected to receive key customer certifications in Europe in early 2005. Election Systems (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 (as restated) in 2004 increased by $44,755 or 25.0 percent compared with 2003 operating profit (as restated) 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 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.

2003 Comparison with 2002

Net Sales
Net sales for 2003 totaled $2,109,673 and were $169,510 or 8.7 percent higher than net sales for 2002. The company realized increases in 2003 within both the financial self-service and security product and service categories compared with 2002 results. Financial self-service product revenue increased by $64,713 or 10.5 percent over 2002, primarily due to the introduction of the new Opteva financial self-service product line and the positive currency effects in EMEA and Brazil. Strong customer acceptance of the new Opteva product line during 2003 helped the company gain global market share during the year. Security product revenue increased by $55,478 or 28.1 percent over 2002, which was attributed to increases in the retail, government and financial security markets as a result of growth in the market, increased market share and the addition of several strategic acquisitions during 2003. Total service revenue for financial self-service and security solutions increased $60,141 or 5.9 percent over 2002 as the company continued to expand its service customer base.

Election systems net sales of $100,182 decreased by $10,822 or 9.7 percent over 2002 and partially offset the increases in financial self-service net sales noted above. Diebold Election Systems, Inc. (DESI) remained the leader in the election systems market despite the fact that 2003 orders were slower than anticipated. The election systems market continued to evolve. Funding is being provided by the federal government and utilized by the states; however, the guidelines and rules governing the election software and hardware had not yet been fully established. As a result, various states and industry experts were interpreting the election requirements differently.

Gross Profit
Gross profit for 2003 totaled $625,873 (as restated), and was $47,911 or 8.3 percent higher than gross profit (as restated) in 2002. Product gross margin was 33.4 percent in 2003 compared with 32.7 percent in 2002. Improved international financial self-service and election systems gross margins helped drive the improvement in total product gross margins. Service gross margin in 2003 decreased to 26.1 percent (as restated) compared with 27.2 percent (as restated) in 2002. Increased pricing pressure in North America and Europe as well as a higher mix of installation revenue, which carries lower margins, has contributed to the decrease in service gross margin.

Operating Expenses
Total operating expenses (as restated) were 17.6 percent of net sales, which was consistent with 2002 operating expenses (as restated). The improved leveraging of operating expenses was achieved due to aggressive cost controls on personnel costs, offset by the adverse impact of $5,324 from higher pension expense.

Other Income (Expense)
Investment income in 2003 increased $4,433 or 51.8 percent compared with 2002 investment income, due to net gains realized from sales and maturities of investments in 2003. Interest expense in 2003 decreased $17,328 or 65.0 percent compared with 2002. The decrease in interest expense was primarily due to the $14,972 interest expense charge resulting from the 2002 settlement of the IRS dispute regarding the deductibility of interest on debt related to COLI. Refer to Note 13 to the Consolidated Financial Statements for further details of the COLI settlement. In addition, the decrease in overall borrowing levels and interest rates also favorably affected interest expense year over year.

Taxes on Income
The effective tax rate was 32.0 percent (as restated) in 2003 as compared with 39.5 percent (as restated) in 2002. The higher tax rate in 2002 was a direct result of the COLI settlement, which represented 7.5 percent of the 2002 effective tax rate. 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 Income
Net income for 2003 was $173,086 (as restated) and increased $74,876 or 76.2 percent over net income (as restated) for 2002. Included in net income for 2002 were the impact of the goodwill write-off of $33,147, net of tax, which was recorded as a cumulative effect of a change in accounting principle, and the effect of the COLI settlement of $26,494, net of tax. Refer to Note 13 to the Consolidated Financial Statements for further details of the COLI settlement.

Segment Revenue and Operating Profit Summary
DNA 2003 net sales of $1,256,899 increased $132,017 or 11.7 percent over 2002 net sales of $1,124,882. The increase in DNA net sales was due to increased product and service revenue from gains in market share and the successful introduction of the Opteva financial self-service product line. DI 2003 net sales of $752,592 increased by $48,315 or 6.9 percent compared with 2002 net sales of $704,277. The increase in DI net sales was primarily attributed to strong Asia-Pacific revenue growth of $37,262 or 26.5 percent, and higher revenue from EMEA of $37,873 or 13.4 percent (all of which was due to positive currency impact). These gains were partially offset by a decrease in Latin America. ES 2003 net sales of $100,182 decreased by $10,822 or 9.7 percent compared with 2002 net sales of $111,004 due to election systems orders that were slower than expected.

DNA operating profit (as restated) in 2003 increased by $8,870 or 5.2 percent compared with 2002 operating profit (as restated). The increase was primarily due to increased sales and efficiencies gained from various internal cost control initiatives, which was partially offset by higher pension costs in 2003. DI operating profit in 2003 increased by $9,654 or 16.1 percent compared with 2002. The increase was primarily due to gains in Asia-Pacific. The $1,674 or 21.5 percent decrease in ES operating profit was a result of lower sales to absorb fixed costs.

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

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FAS No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act), which supercedes FSP FAS No. 106-1, to provide guidance on accounting for the effects of the Act. The Act introduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The FSP provides guidance on measuring the accumulated postretirement benefit obligation (APBO) and net periodic postretirement benefit cost, and the effects of the Act on the APBO. In addition, the FSP addresses accounting for plan amendments and requires certain disclosures about the Act and its effects on the financial statements. This FSP is effective for the first interim or annual period beginning after June 15, 2004 for public entities, however; the company elected earlier application. Refer to the required measurements and disclosures in Note 11 to the Consolidated Financial Statements.

In November 2004, the 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, has elected to early adopt the statement as of January 1, 2005, because the company’s policies are already consistent with SFAS No. 151 related to such inventory costs. As such, adoption of the standard will not affect the 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.

SFAS No. 123(R) must be adopted effective January 1, 2006. Early adoption is permitted in periods in which financial statements have not yet been issued. The company intends to adopt SFAS No. 123(R) in the first quarter of 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 impact of adoption of SFAS No. 123(R) on 2005 net income and earnings per share has not yet been determined. However, 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. The company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options).

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets
At December 31,
(In thousands, except share and per share amounts)

		2004 (restated)				2003 (restated)
ASSETS
Current assets
Cash and cash equivalents		$	184,045			$	169,951
Short-term investments			31,654				6,150
Trade receivables less allowances of $10,176 for 2004 and $8,713 for 2003			583,658				558,161
Inventories			322,293				262,039
Deferred income taxes			32,101				42,441
Prepaid expenses			22,892				15,780
Other current assets			57,989				50,637
Total current assets			1,234,632				1,105,159
Securities and other investments			52,248				47,386
Property, plant and equipment, at cost			614,114				547,858
Less accumulated depreciation and amortization			346,024				294,703
			268,090				253,155
Deferred income taxes			—				7,024
Goodwill			412,625				331,646
Other assets			167,957				156,132
		$	2,135,552			$	1,900,502
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable		$	289,510			$	190,172
Accounts payable			140,324				115,133
Estimated income taxes			14,781				46,751
Deferred income			92,862				87,881
Other current liabilities			202,713				179,281
Total current liabilities			740,190				619,218
Pensions and other benefits			41,109				37,815
Postretirement and other benefits			36,910				38,668
Deferred income taxes			11,579				—
Other long-term liabilities			31,324				47,617
Minority interest			25,532				20,353
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 74,233,384 and 73,795,416 shares, respectively outstanding 71,592,293 and 72,649,795 shares, respectively			92,792				92,244
Additional capital			179,259				159,610
Retained earnings			1,101,492				970,935
Treasury shares, at cost (2,641,091 and 1,145,621 shares, respectively)			(113,687	)			(42,562	)
Accumulated other comprehensive loss			(10,738	)			(43,055	)
Other			(210	)			(341	)
Total shareholders’ equity			1,248,908				1,136,831
		$	2,135,552			$	1,900,502

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Income
Years Ended December 31,
(In thousands, except per share amounts)

		2004				2003				2002
		(restated)				(restated)				(restated)
Net sales
Products		$	1,170,492			$	1,021,386			$	919,127
Services			1,210,418				1,088,287				1,021,036
			2,380,910				2,109,673				1,940,163
Cost of sales
Products			796,721				679,864				618,999
Services			906,448				803,936				743,202
			1,703,169				1,483,800				1,362,201
Gross profit			677,741				625,873				577,962
Selling and administrative expense			341,006				310,846				282,648
Research, development and engineering expense			60,015				60,353				57,490
			401,021				371,199				340,138
Operating profit			276,720				254,674				237,824
Other income (expense)
Investment income			12,299				12,996				8,563
Interest expense			(10,657	)			(9,351	)			(26,679	)
Miscellaneous, net			(1,955	)			3,568				2,998
Minority interest			(7,718	)			(7,547	)			(5,654	)
Income before taxes			268,689				254,340				217,052
Taxes on income			84,892				81,254				85,695
Net income before cumulative effect of a change in accounting principle			183,797				173,086				131,357
Cumulative effect of a change in accounting principle, net of tax			—				—				33,147
Net income		$	183,797			$	173,086			$	98,210
Basic weighted-average number of shares			72,000				72,417				71,984
Diluted weighted-average number of shares			72,534				72,924				72,297
Basic earnings per share:
Income before cumulative effect of a change in accounting principle, net of taxes		$	2.55			$	2.39			$	1.82
Cumulative effect of a change in accounting principle, net of taxes		$	—			$	—			$	(0.46	)
Net income		$	2.55			$	2.39			$	1.36
Diluted earnings per share:
Income before cumulative effect of a change in accounting principle, net of taxes		$	2.53			$	2.37			$	1.82
Cumulative effect of a change in accounting principle, net of taxes		$	—			$	—			$	(0.46	)
Net income		$	2.53			$	2.37			$	1.36

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Shareholders’ Equity (Restated)
(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, 2002			72,195,600			$	90,245			$	103,390			$	796,409			$	(28,724	)						$	(60,446	)		$	(6,537	)		$	894,337
Net income															98,210							$	98,210												98,210
Translation adjustment																							(39,291	)											(39,291	)
Pensions																							(3,012	)											(3,012	)
Unrealized gain on investment securities																							336												336
Other comprehensive loss																							(41,967	)			(41,967	)
Comprehensive income																						$	56,243
Stock options exercised			199,406				249				5,668																								5,917
Restricted shares			29,330				37				1,035																				924				1,996
Performance shares			48,813				61				1,725																								1,786
Global acquisition			516,343				645				19,177																								19,822
Dividends declared and paid															(47,528	)																			(47,528	)
Treasury shares																			(1,467	)															(1,467	)
Balance, December 31, 2002			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

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Cash Flows

Years ended December 31,
(In thousands)

		2004 (restated)				2003 (restated)				2002 (restated)
Cash flow from operating activities:
Net income		$	183,797			$	173,086			$	98,210
Adjustments to reconcile net income to cash provided by operating activities:
Minority share of income			7,718				7,547				5,654
Depreciation and amortization			74,983				68,698				60,872
Deferred income taxes			28,486				(10,166	)			12,980
Loss on sale of assets, net			412				540				1,168
Cumulative effect of accounting change			—				—				38,859
Cash provided (used) by changes in certain assets and liabilities:
Trade receivables			2,293				(128,929	)			(8,596	)
Inventories			(52,430	)			(10,541	)			4,688
Prepaid expenses			(6,402	)			1,585				(3,638	)
Other current assets			(407	)			30,423				24,088
Accounts payable			17,321				15,402				(31,698	)
Certain other assets and liabilities			(23,123	)			55,866				7,726
Net cash provided by operating activities			232,648				203,511				210,313
Cash flow from investing activities:
Payments for acquisitions, net of cash acquired			(62,224	)			(10,611	)			(3,682	)
Proceeds from maturities of investments			12,418				51,134				68,752
Proceeds from sales of investments			—				31,505				5,751
Payments for purchases of investments			(40,157	)			(56,974	)			(35,033	)
Capital expenditures			(50,200	)			(48,262	)			(37,593	)
Rotable spares expenditures			(11,038	)			(24,558	)			(12,745	)
Increase in certain other assets			(33,111	)			(48,143	)			(44,659	)
Net cash used by investing activities			(184,312	)			(105,909	)			(59,209	)
Cash flow from financing activities:
Dividends paid			(53,240	)			(49,242	)			(47,528	)
Notes payable borrowings			917,632				447,324				599,513
Notes payable repayments			(837,944	)			(502,153	)			(627,127	)
Distribution of affiliates’ earnings to minority interest holder			(540	)			(359	)			(151	)
Issuance of common shares			8,418				17,457				4,362
Repurchase of common shares			(71,897	)			(2,739	)			—
Net cash used by financing activities			(37,571	)			(89,712	)			(70,931	)
Effect of exchange rate changes on cash			3,329				6,615				1,505
Increase in cash and cash equivalents			14,094				14,505				81,678
Cash and cash equivalents at the beginning of the year			169,951				155,446				73,768
Cash and cash equivalents at the end of the year		$	184,045			$	169,951			$	155,446
Cash paid for:
Income taxes		$	85,893			$	40,944			$	50,083
Short-term interest			8,776				5,400				7,455
Long-term interest			176				188				356
Significant noncash items:
Issuance of treasury shares for NCI acquisition		$	4,567			$	—			$	—
Issuance of common shares for DIMS acquisition			—				4,840				—
Issuance of common shares for DESI acquisition			—				—				19,822
Financing arrangement to purchase fixed assets			—				—				24,862

See accompanying Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts and as noted)

NOTE 1(a): RESTATEMENT

The Consolidated Financial Statements have been restated in order to reflect certain adjustments to the company’s financial statements previously reported on Form 10-K for the annual period ended December 31, 2004 to amend and restate financial statements and other financial information for the years 2004, 2003 and 2002 and financial information for the year 2001 and 2000, and for each of the quarters in the year 2004 and 2003 with respect to a reconciliation issue in its North America sales commission accrual account. All amounts are before tax unless otherwise noted. A detailed analysis of this reconciliation has been performed and the company has determined that the commission account was under-accrued by approximately $13,200 at December 31, 2004 and approximately $11,400 at March 31, 2005. First quarter 2005 commission expense was overstated by approximately $1,800. Commission expense was understated by approximately $300, $2,700 and $1,500 in 2004, 2003 and 2002, respectively. The remaining approximately $8,700 understatement of commission expense was related to periods prior to fiscal year 2002.

The effects of restatement on the company’s Consolidated Balance Sheets and Consolidated Statements of Income as of December 31, 2004 and 2003 and the years ended 2004, 2003, and 2002, and for each of the quarters in the years 2004 and 2003 follow:

		2004								2003
		As								As
		previously				As				previously				As
Consolidated Balance Sheets		reported				restated				reported				restated
Estimated income taxes		$	16,423			$	14,781			$	48,299			$	46,751
Other current liabilities			189,504				202,713				166,326				179,281
Total current liabilities			728,623				740,190				607,811				619,218
Retained earnings			1,113,059				1,101,492				982,342				970,935
Total shareholders’ equity			1,260,475				1,248,908				1,148,238				1,136,831