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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

OR

DIEBOLD, INCORPORATED

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

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

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  [ü] 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 an endment to this Form 10-K. [ü]

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 [ü] 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, 2003, 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, 2003 of $43.25 per share.

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

Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE

(1)  PROXY STATEMENT FOR 2004 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 22, 2004

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PART I.

ITEM 1. BUSINESS.
(Dollars in thousands)

(a) General Development

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. In 2003, the company made several small but strategic acquisitions, mainly in the security systems and services market.

All of the acquisitions are accounted for as purchase business combinations and, accordingly, the purchase price has been allocated to identifiable tangible and intangible assets acquired and liabilities assumed for each acquisition, based upon their respective fair values, with the excess allocated to goodwill.

The company paid a combination of $4,840 in company stock and $10,611, net of cash acquired, in 2003 for the following:

	•		In November 2003, the company acquired Licent Information Technology (LIT), its sales and service distributor in Taiwan since 1999. LIT was integrated within the operations of the company’s Diebold Pacific Limited branch office in Taiwan.
	•		In September 2003, the company acquired Cardinal Brothers Manufacturing & Operations, Pty. Ltd. Based in Victoria, Australia, Cardinal had been the company’s business partner since 1999 in manufacturing the rising screen technology for financial institutions and government authorities. This acquisition was integrated into Diebold Australia, the company’s wholly owned subsidiary.
	•		In September 2003, the company acquired Vangren Technology, Pty. Ltd. Based in Melbourne, Australia, Vangren specializes in the sales, service and installation of electronic security solutions throughout Australia and New Zealand. Upon acquisition, Vangren became a wholly owned subsidiary of Diebold Australia, Pty. Ltd.
	•		In June 2003, the company acquired QSI Security, Inc., a specialized integrator and installer of security equipment to customers based in the northeastern region of the United States. This acquisition has been integrated into the company’s Diebold North America security solutions group.
	•		In May 2003, the company acquired the remaining 50 percent equity of Diebold HMA Private Ltd., held by HMA Data Systems Private Ltd., headquartered in Chennai, India. After the acquisition, this joint-venture sales and service organization became a wholly owned subsidiary of the company and the headquarters was moved to Mumbai, India.
	•		In January 2003, the company acquired Data Information Management Systems, Inc. (DIMS), one of the largest voter registration systems companies in the United States. DIMS was integrated within DESI.

The results of these acquisitions were included in the operating results of the company for the year ended December 31, 2003 and are not material.

(b)  Financial Information about Operating Segments

The company’s segments are comprised of its three main sales channels: Diebold North America (DNA), Diebold International (DI) and Election Systems and Other. 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 and Other segment includes the operating results of DESI beginning in 2002, as well as corporate administrative costs. Also included in this segment are the results of the MedSelect business, which was sold in July 2001 as a part of the company’s realignment plan. A reconciliation of segment customer revenues to Consolidated Net Sales and of segment operating contribution to Consolidated Operating Profit is contained in Note 17 to the Consolidated Financial Statements.

(c) 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 to global financial and commercial markets and electronic voting terminals and solutions to the government. The company’s primary customers include banks and financial institutions, as well as hospitals, 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. The sales/support organization works closely with customers and their consultants to analyze and fulfill the customers’ needs. In 2003, 2002 and 2001, the

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ITEM 1. BUSINESS. - (continued)

company’s sales and services of financial systems and equipment and security solutions accounted for more than 90 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 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, retail and commercial customers. These solutions provide the company’s customers a single-source solution to their electronic security needs.

Campus Card Systems

The company’s multi-application campus ID system is a single card system that allows students to use their identification cards for a variety of activities, including purchases at the bookstore, cafeteria, etc.; vending, such as laundry and snack/beverage machines; and access to facilities, which could include dormitories, laboratories and admittance to sporting events. The system has also been installed in corporate campus environments, public libraries and sports stadiums.

Software Solutions and Services

Diebold 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 implementation.

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 2003, 2002 and 2001.

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.

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.

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ITEM 1. BUSINESS. - (continued)

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

The company owns United States and international patents, trademarks and licenses relating to certain products. 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.

The company charged to expense $60,451 in 2003, $56,693 in 2002, and $58,321 in 2001, respectively, for research, development and engineering costs.

Compliance by the company with federal, state and local environmental protection laws during 2003 had no material effect upon capital expenditures, earnings or the competitive position of the company and its subsidiaries. A number of individuals and groups have raised challenges recently in the media and elsewhere regarding the reliability and security of the automated election tabulation products and services provided by DESI. The parties making these challenges oppose the use of technology in the electoral process generally and, specifically, have taken actions to publicize what they view as significant flaws in DESI’s election management software and firmware. Among other efforts, these parties have established web sites and web logs devoted to disseminating information damaging to DESI’s reputation and its products. They have filed a number of open-records act requests in various states for copies of contracts with DESI and/or DESI’s software. They have also posted on the internet portions of DESI’s software source code and private communications among DESI’s programmers, which were originally obtained by a hacker from an internal FTP site maintained by DESI. These efforts have affected DESI’s customer relations. In 2003, two of DESI’s customers required technical reviews of DESI’s software by third-party consultants and required changes to DESI’s software to remedy issues revealed in the review, which DESI has implemented or is in the process of implementing. 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 DESI’s products. In California, questions have been raised as to whether DESI products used in past elections were certified at the time of use. Although the Company cannot predict the ultimate impact the challenges on DESI’s products and services or changes in the law will have on DESI, they are likely to increase DESI’s costs of providing such products and services, which may adversely affect DESI’s sales. However, the company is expecting that election systems net sales will grow significantly in 2004 with a significant contract expected to close internationally as well as several contracts in the U.S. This industry continues to evolve. Funding is being provided by the government and utilized by the states; however, the guidelines and rules governing the tabulation software and hardware have not yet been established. As a result, various states and industry experts interpret the election process differently.

The total number of employees employed by the company at December 31, 2003 was 13,401 compared with 13,072 at the end of the preceding year. Diebold’s service staff is one of the financial industry’s largest, with more than 4,500 professionals in 600 locations worldwide.

Our 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 our 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 International and U.S. Operations and Export Sales

Sales to customers outside the United States in relation to total consolidated net sales was $778,608 or 36.9 percent in 2003, $719,231 or 37.1 percent in 2002 and $761,352 or 43.3 percent in 2001.

Property, plant and equipment, at cost, located in the United States totaled $391,104, $358,277 and $317,832 as of December 31, 2003, 2002 and 2001, respectively, and property, plant and equipment, at cost, located outside the United States totaled $156,754, 103,856 and $95,221 as of December 31, 2003, 2002 and 2001, 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.

ITEM 2. PROPERTIES.

The company’s corporate offices are located in North Canton, Ohio. It owns manufacturing facilities in Canton and Newark, Ohio; Lynchburg and Danville, Virginia; Lexington, North Carolina; and Sumter, South Carolina, and leases a manufacturing facility in Cypress, California. The company also has manufacturing facilities in Argentina, Belgium, Brazil, China, France and India. The company has selling, service and administrative offices in the following locations: throughout the United States, and in Argentina, Australia, Austria, Barbados, Belgium, Brazil, China, Colombia, Ecuador, France, Germany, Hong Kong, Hungary, Indonesia, Italy, Mexico, Paraguay, Peru, Philippines, Portugal, Poland, Romania, Russia, Singapore, South Africa, Spain, Taiwan, Thailand, Turkey, the United Arab Emirates, the

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ITEM 2. PROPERTIES. (concluded)

United Kingdom, and Uruguay. The company leases a majority of the selling, service and administrative offices under operating lease agreements.

The company owns an office facility in Hamilton, Ohio. The company considers that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the company’s business.

ITEM 3. LEGAL PROCEEDINGS. (Dollars in thousands)

At December 31, 2003, the company was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the company’s financial position, results of operations or cash flow. In management’s opinion, the financial statements would not be materially affected by the outcome of any present legal proceedings, commitments, or asserted claims.

During 2002, the company accepted an offer by the IRS to settle its previously disclosed dispute on a claim concerning the deductibility of interest on corporate-owned life insurance from 1990 to 1998. This resulted in a 2002 after-tax charge of $26,494. As of December 31, 2002, the company paid approximately $34,000 related to this claim and received a refund of approximately $8,300 in 2003. No other years after 1998 are subject to this claim. Of the $26,494, net of tax charge, $14,972 ($10,454, net of tax) was charged to interest expense and $16,040 was charged to taxes on income.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

PART II.

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The common shares of the company are listed on the New York Stock Exchange with a symbol of DBD. The price ranges of common shares for the company are as follows:

There were 70,765 shareholders at December 31, 2003, which includes an estimated number of shareholders who have shares held for their accounts by banks, brokers, trustees for benefit plans and the agent for the dividend reinvestment plan.

On the basis of amounts paid and declared, the annualized quarterly dividends per share were $0.68, $0.66, and $0.64 in 2003, 2002 and 2001, respectively.

Equity Compensation Plan Information

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ITEM 6. SELECTED FINANCIAL DATA. (Dollars in thousands, except per share amounts)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Dollars in thousands, except share and per share amounts)

OVERVIEW

The table below presents the changes in comparative financial data from 2001 to 2003. 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.

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More than 140 years ago, Diebold went into the business of making strong, reliable safes. Today, Diebold, Incorporated 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 product 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. 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. Significant growth in product revenues in 2003 and 2002 was attributable to favorable reaction by the financial sector to this new generation of financial self-service solutions.

The company faces a variety of challenges and opportunities in responding to customer needs, most notably within the election systems market. During 2003, challenges were raised about the reliability and security of the company’s election systems products and services. The company has responded to these challenges by upgrading its election products and services. Orders for election systems in 2003 were comparable with 2002.

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; and
	•		the company’s strong financial position and its ability to successfully integrate acquisitions.

In addition to the business drivers above, as a global operation, the company is exposed to risks which 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, including Brazil;
	•		acceptance of the company’s product and technology introductions in the marketplace;
	•		unanticipated litigation, claims or assessments;
	•		challenges raised about reliability and security of the company’s election systems products and services and changes in the laws regarding such products and services;
	•		ability to reduce costs and expenses and improve internal operating efficiencies;
	•		variation in consumer demand for self-service technologies, 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 historical information and all available information to make these estimates and assumptions. Actual amounts could differ from these estimates and different amounts could be reported using different assumptions and estimates.

The company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. Management believes that of its significant accounting policies, its policies concerning revenue recognition, allowance for bad debts, 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 enters into contracts to sell its products and services. Revenue is recognized on financial self-service and security product sales in accordance with the terms of the contract, contingent upon customer acceptance and transferring risk of loss. Service revenue is recognized when earned, which is defined as when the work is completed or in the case of service contracts, ratably over the contract period. Election systems contracts contain multiple deliverable elements and custom terms and conditions. The company recognizes revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. Some contracts may contain discounts

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and, as such, revenue is recognized using the relative fair value method of allocation of revenue to the product and service components of contracts.

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

Inventories are valued at lower of cost or market. The company regularly reviews the inventory quantities on hand, identifies any slow-moving or obsolete inventories and writes inventory down to its net realizable value. Historically, inventory adjustments have not been material. However, in 2001, a special charge of $31,404 was recorded to reflect discontinued products written down as a result of a rebalancing of the company’s global manufacturing strategy. The company’s inventories are not highly susceptible to obsolescence given the current product mix; however, new technologies and competition in certain product markets could change future assumptions relating to excess and obsolete inventory.

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, and Europe, Middle East and Africa (EMEA). Fair values of reporting units and the related implied fair values of their respective goodwill were established using discounted cash flows. When available and as appropriate, comparative market multiples were used to corroborate results of the discounted cash flows. The company’s fair value model uses inputs such as estimated future segment performance and other significant estimates. 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

The postretirement benefit obligation was determined by application of the terms of medical and life insurance plans together with relevant actuarial assumptions and healthcare cost trend rates. For 2004, medical cost trend rates were projected at 7.85 percent and prescription drug cost trend rates were projected at 12.45 percent, with both cost trend rate assumptions gradually declining to 4.75 percent by 2009 and remaining at that level thereafter.

Annually, the company analyzes its key assumptions related to its pension plans. Key assumptions include the long-term rate of return on plan assets, the discount rate and the compensation levels. Such factors as financial market performance and actual compensation levels are considered when analyzing the key assumptions. The company’s key assumptions related to its pension plans for 2004 are as follows: long-term rate of return on plan assets of 8.50 percent; discount rate of 6.25 percent; and, compensation level increase of 3.00 percent.

Based on the above assumptions, the company expects pension expense to increase by approximately $4,000 in 2004, increasing from approximately $1,000 in 2003 to approximately $5,000 in 2004. Changes in any of the aforementioned assumptions could result in changes in the related retirement benefit cost and obligation.

Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:

The company’s pension plans remain adequately funded and the company is not required to make any additional contributions in 2004. Pension expense excludes retiree medical expense, which is also included in operating expenses and was approximately $2,800 in 2003. Retiree medical expense is expected to be approximately $3,000 in 2004.

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 9 to the Consolidated Financial Statements regarding information on outstanding and available credit facilities and bonds. Refer to Note 13 for the company’s future

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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, acquisitions, investments in facilities or equipment, and purchase of company stock.

During 2003, the company generated $209,899 in cash from operating activities, an increase of $46,398, or 28.4 percent from 2002. 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, 2003 cash flows from operations were positively affected by the $15,402 increase in accounts payable compared with a decrease of $31,698 in 2002. This change was the result of the timing of purchases and payments with suppliers. In addition, the change in certain other assets and liabilities positively affected cash flows from operations and was primarily the result of an increase in estimated income taxes payable. The significant increase in accounts receivable of $128,929 in 2003 compared with prior year partially offset these increases in operating cash flow. An increase in product sales in December 2003 versus December 2002 of $68,278 and the delay in collecting the Maryland election systems contract of approximately $31,000 contributed to the increase in accounts receivable. Days sales outstanding (DSO) was 73 days at December 31, 2003 compared with 68 days at December 31, 2002. The increase in DSO was due to the Maryland election systems contract. Another negative effect on operating cash flows was a $10,541 increase in inventory in 2003 as the company prepared to meet orders in 2004 compared with a decrease in inventory of $4,688 in 2002.

The company used $82,075 for investing activities in 2003, an increase of $75,225 over 2002. The increase over the prior year was the result of higher capital and rotables expenditures, which increased by $22,482 and an increase in certain other assets. Certain other assets increased primarily due to a reduction in securitization activity versus 2002. The decrease in the level of securitization resulted in a higher lease receivable balance in 2003. In addition, the company paid $10,611 for acquisitions in Asia-Pacific and the United States. Finally, the sale of a long-term investment in 2003 resulted in a net reduction of cash used for investing activities.

The company used $119,934 for financing activities in 2003, an increase of $43,456 or 56.8 percent over 2002. The overall increase in 2003 was primarily due to the increased paydown of notes payable and the increase in required repayments on the securitization facility compared with 2002 activity. During 2003, the company returned $49,242 to shareholders in the form of cash dividends, paid down notes payable by $54,829 and repurchased $12,371 of treasury shares. In addition, the level of securitizations of lease receivables continued to decline in 2003, which resulted in a decrease in the pool of securitized lease receivables, as well as less proceeds and retained interest. The decline in securitizations resulted in net repayments of $23,252 on the related 364-day facility agreement in 2003. Partially offsetting the above were cash inflows of $20,119 for the issuance of common stock pursuant to the company’s equity incentive compensation programs. Stock option exercises were higher in 2003 due to the overall performance of the company’s stock as well as the payout of accelerated and vested shares related to the death of an executive in 2003. In an effort to more directly link associate rewards to corporate performance, the company plans to grant restricted stock units in 2004, which are expensed ratably over their vesting period, in lieu of stock options, which currently do not result in any expense, to a select group of key associates. Granting restricted stock units in 2004 is expected to negatively affect earnings per share by approximately $.01.

The following table summarizes the company’s approximate obligations and commitments to make future payments under contractual obligations as of December 31, 2003:

In 2001, the company entered into a securitization agreement, which involved the sale of a pool of its lease receivables to a wholly owned, unconsolidated, qualified special purpose subsidiary, DCC Funding LLC (DCCF). The securitized pool of lease receivables was $40,619 and $71,076 at December 31, 2003 and 2002, which is not recorded on the company’s Consolidated Balance Sheets. The pool of receivables represents collateral for the 364-day facility agreement that funds the securitization. The balance of the 364-day facility agreement was $37,639 and $60,891 at December 31, 2003 and 2002, respectively.

RESULTS OF OPERATIONS

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 to 2002 results. Financial self-service product revenue increased by $63,345 or 9.2 percent over 2002, primarily due to the introduction of the new Opteva financial self-service product line

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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 primarily 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 $61,509 or 6.5 percent over 2002 as the company continued to expand its service customer base. For 2004, the company expects the net sales growth trends to continue for both financial self-service and security solutions as a result of continued customer acceptance of the Opteva product line and expansion of security product offerings and presence within the market.

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) remains the leader in the election systems market despite the fact that 2003 orders were slower than anticipated. 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. Although the company cannot predict what changes in the law could occur, any changes are likely to increase DESI’s costs of providing such products and services and may adversely affect DESI’s sales. However, the company is expecting that election systems net sales will grow significantly in 2004, with an approximately $37,000 contract expected to close in Brazil as well as several domestic contracts totaling approximately $105,000.

Gross Profit

Gross profit for 2003 totaled $627,141, and was $47,521 or 8.2 percent higher than gross profit in 2002. Product gross margin was 32.5 percent in 2003 compared with 31.7 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 26.7 percent compared with 28.0 percent 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 were 17.3 percent of net sales, down slightly from 17.4 percent in 2002. The improved leveraging of operating expenses was achieved due to aggressive cost controls on personnel costs, despite the adverse impact of $5,324 from higher pension expense.

Other Income (Expense)

Investment income in 2003 increased $2,894 or 37.5 percent compared with 2002 investment income, due to net gains realized from sales and maturities of investments in 2003.

Interest expense in 2003 decreased $17,394 or 65.2 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 14 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 in 2003 as compared with 39.5 percent 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 14 to the Consolidated Financial Statements.

Net Income

Net income for 2003 was $174,776 and increased $75,622 or 76.3 percent over net income 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 14 to the Consolidated Financial Statements for further details of the COLI settlement.

Segment Revenue and Operating Profit Summary

Diebold North America (DNA) 2003 net sales of $1,256,679 increased $131,998 or 11.7 percent over 2002 net sales of $1,124,681. 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. Diebold International (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. Election Systems (ES) & Other 2003 net sales of $100,402 decreased by $10,803 or 9.7 percent compared with 2002 net sales of $111,205 due to election systems orders that were slower than expected.

DNA operating profit in 2003 increased by $16,257 or 8.4 percent compared with 2002. The increase was primarily due to increased sales and efficiencies gained from various internal cost control initiatives. DI operating profit in 2003 increased by $10,264 or 14.6 percent compared with 2002. The increase was primarily due to gains in Asia-Pacific. The $4,842 or 22.3 percent increase in ES & Other operating

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loss was a result of higher pension expense in 2003. In addition to election systems, the ES & Other segment includes corporate administration costs.

Refer to Note 17 to the Consolidated Financial Statements for further details of segment revenue and operating profit.

2002 Comparison with 2001

Net Sales

Net sales for 2002 were $1,940,163, and were $179,866 or 10.2 percent higher than net sales for 2001 of $1,760,297. The increase resulted primarily from growth in the U.S. election systems business resulting from the 2002 DESI acquisition. The remaining increase was due to growth in the security business, which was partially offset by a negative foreign currency exchange impact primarily from the devaluation of the Brazilian real and 2001 nonrecurring revenue related to the InnoVentry and MedSelect businesses. InnoVentry was engaged in the development and deployment of self-service check cashing technology. MedSelect, a wholly owned subsidiary, was a supplier of inventory control solutions to the medical industry. Total financial self-service revenue decreased by $7,814 or 0.1 percent from 2001. Total security revenue increased by $97,535 or 29.2 percent versus 2001 primarily due to strategic growth in the financial market.

Gross Profit

Gross profit for 2002 totaled $579,620 and was $61,326 or 11.8 percent higher than gross profit for 2001. Gross profit in 2001 of $518,294, was negatively affected by special charges of $31,404. Product gross margin in 2002 was 31.7 percent compared to 31.1 percent in 2001, which included a $31,404 write-down of inventory. Higher security and election systems sales in 2002, which carry lower product gross margins, negatively affected product gross margin. The change in product mix was partially offset by the $31,404 write down of inventory in 2001, which did not recur in 2002. Service gross margin in 2002 increased to 28.0 percent compared with 27.6 percent in 2001. This improvement in service gross margin was realized on a global basis.

Operating Expenses

Total operating expenses were 17.4 percent of net sales, down from 21.6 percent in 2001. Operating expenses in 2001 were negatively affected by the realignment, MedSelect and other charges of $58,490. The net decrease in operating expenses as a percentage of net sales was primarily due to efficiencies gained from various internal initiatives.

Realignment, Special and Other Charges

During 2002, the company accepted an offer by the IRS to settle its previously disclosed dispute on a claim concerning the deductibility of interest on corporate-owned life insurance from 1990 to 1998. This resulted in a 2002 after-tax charge of $26,494. In 2002, the company paid approximately $34,000 related to this claim and received a refund of approximately $8,300 in 2003. No other years after 1998 are subject to this claim. Of the $26,494, net of tax charge, $14,972 ($10,454, net of tax) was charged to interest expense and $16,040 was charged to taxes on income in 2002.

During 2001, the company recognized a pretax charge of $109,893 ($73,628 after tax or $1.03 per diluted share) for expenses related to a corporate-wide realignment program, as well as other charges. Components of the charge were as follows: a special charge of $31,404 against cost of sales related to discontinued products that resulted from a rebalancing of the company’s global manufacturing strategy; realignment charges of $42,269 resulting from staff reductions, the closing of various facilities, the exiting of certain product lines, including the sale of MedSelect and actions taken to further integrate the company’s European operations; $29,861 in losses incurred in the write-off of the InnoVentry investment and related receivables; and $6,360 in other charges included in selling and administrative expense.

Other Income (Expense)

Investment income in 2002 increased by $15,414 or 200.2 percent compared with 2001. Investment income in 2001 included the effect of the InnoVentry write-off of $20,000. Year over year, investment income was negatively affected by lower interest rates and a lower investment portfolio.

Interest expense in 2002 increased by $14,011 or 110.6 percent compared with 2001. The increase over 2001 was primarily the result of a $14,972 interest expense charge, which resulted from the settlement in 2002 of the dispute with the IRS regarding the deductibility of interest on debt related to COLI. Refer to Note 14 to the Consolidated Financial Statement for further details of the COLI settlement. The decrease in interest rates during 2002 and 2001 favorably affected interest expense year over year.

Miscellaneous, net changed $15,806 or 114.5 percent compared with 2001. The majority of the change was due to goodwill amortization. Goodwill amortization expense was zero for 2002 as the company adopted SFAS No. 142. Goodwill amortization expense was $15,354 in 2001.

Taxes on Income

The effective tax rate was 39.5 percent in 2002 as compared with 33.0 percent in 2001. The increased 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 14 to the Consolidated Financial Statements.

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Net Income

Net income for 2002 was $99,154 and increased $32,261 or 48.2 percent over net income for 2001. Included in net income for 2002 were the effect 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. Included in net income for 2001 was the effect of the corporate-wide realignment program including other charges of $73,628, net of tax.

Segment Revenue and Operating Profit Summary

DNA 2002 net sales of $1,124,681 increased $116,181 or 11.5 percent over 2001 net sales of $1,008,500. The increase in DNA net sales was due to increased service revenue from gains in market share. DI 2002 net sales of $704,277 decreased by $36,392 or 4.9 percent compared with 2001 net sales of $740,669. The decrease in DI net sales was primarily attributable to nonrecurring 2001 euro conversion revenue of $20,325 in EMEA as well as the devaluation of the Brazilian real year over year, partially offset by strong Asia-Pacific revenue growth of $30,176 or 27.3 percent. ES & Other 2002 net sales of $111,205 increased by $100,077 or 899.3 percent compared wiht 2001 net sales of $11,128. The increase in ES & Other net sales was due to the growth in the U.S. election systems business resulting from the 2002 acquisition of DESI. In addition to election systems, the ES & Other segment includes corporate administration costs.

DNA operating profit in 2002 increased by $36,026 or 23.0 percent compared with 2001. The increase was primarily due to efficiencies gained from various internal initiatives. DI operating profit in 2002 increased by $2,278 or 3.3 percent compared with 2001. The increase was primarily attributable to gains in Asia-Pacific, partially offset due to the devaluation of the Brazilian real and the negative impact to EMEA from a weak economic environment and nonrecurring euro conversion revenues in 2001. The significant 2001 operating loss in the ES & Other segment was due to special charges and realignment expense of $89,893.

Refer to Note 17 to the Consolidated Financial Statements for further details of segment revenue and operating profit.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which addresses consolidation by business enterprises of variable interest entities (VIEs) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. The company has one VIE, which is a qualified special purpose subsidiary, DCC Funding LLC as discussed in Note 2 of the Consolidated Financial Statements. This VIE was created in March of 2001 and as a result, VIE’s created prior to February 1, 2003 may be accounted for under the original or revised interpretation’s provisions. The company is accounting for DCCF under the original interpretation. Therefore, FIN 46 and the Revised Interpretations do not have an effect on the company’s financial position, operations or cashflows.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies accounting for derivative instruments and hedging activities under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 provides guidance relating to decisions made (a) as part of the Derivatives Implementation Group process, (b) in connection with other FASB projects dealing with financial instruments and (c) regarding implementation issues raised in the application of the definition of a derivative and the characteristics of a derivative that contains financing components. SFAS No. 149 is effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. The application of this Statement does not have an effect on the company’s financial position, operations or cashflows.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments and Characteristics of both Liabilities and Equity, which requires freestanding financial instruments such as mandatorily redeemable shares, forward purchase contracts and written put options to be reported as liabilities by their issuers as well as related new disclosure requirements. The provisions of SFAS No. 150 are effective for instruments entered into or modified after May 31, 2003 and pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The application of this Statement does not have an effect on the company’s financial position, operations or cashflows.

In November 2002, the EITF issued a final consensus on EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. EITF Issue No. 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. Companies may also elect to apply the provisions of EITF Issue No. 00-21 to existing arrangements and record the income statement impact as the cumulative effect of a change in accounting principle. The company has adopted EITF Issue No. 00-21 prospectively for contracts beginning after June 30, 2003.

In December 2003, the SEC issued Staff Accounting Bulletin No. 104, Revenue Recognition, which clarifies existing SEC guidance regarding revenues for contracts that contain multiple deliverables to make it consistent with EITF Issue No. 00-21. The adoption of SAB 104 did not have a material effect on the company’s company’s financial position, operations or cashflows.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The company is exposed to foreign currency exchange rate risk inherent in its international operations denominated in currencies other than the U.S. dollar. A hypothetical 10 percent unfavorable movement in the applicable foreign exchange rates would have resulted in a decrease in 2003 year-to-date operating profit of approximately $7,800. The sensitivity model assumes an instantaneous, parallel shift in the foreign currency exchange rates. Exchange rates rarely move in the same direction. The assumption that exchange rates change in an instantaneous or parallel fashion may overstate the impact of changing exchange rates on amounts denominated in a foreign currency.

The company’s risk management strategy uses derivative financial instruments such as forwards to hedge certain foreign currency exposures. The intent is to offset gains and losses that occur on the underlying exposures, with gains and losses on the derivative contracts hedging these exposures. The company does not enter into derivatives for trading purposes.

The company manages interest rate risk with the use of variable rate borrowings under its committed and uncommitted credit facilities and interest rate swaps. Variable rate borrowings under the credit facilities totaled $190,172 at December 31, 2003. A one percent increase or decrease in interest rates would have resulted in an increase or decrease in interest expense of approximately $1,900. The company had no derivative contracts hedging interest rate risk as of December 31, 2003.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Refer to pages 15 through 39.

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

See accompanying Notes to Consolidated Financial Statements.

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

See accompanying Notes to Consolidated Financial Statements.

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Consolidated Statements of Shareholders’ Equity
(In thousands, except share amounts)