(Mark One)

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

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

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KIMBALL INTERNATIONAL, INC.
FORM 10-Q
INDEX

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

KIMBALL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except for Share Data)

KIMBALL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except for Per Share Data)

See Notes to Condensed Consolidated Financial Statements                                  4

KIMBALL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Kimball International, Inc. (the "Company") have been prepared in accordance with the instructions to Form 10-Q.  As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading. All significant intercompany transactions and balances have been eliminated. Management believes the financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial statements for the interim periods. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K.

In SeptemberThe Company has classified several operations as discontinued.  During the quarter ended December 31, 2005, the Company committed to a plan to sellexit an operation that manufactures polyurethane and polyester molded components for use in the recreational vehicle, signage and residential furniture industries.  Also during the quarter, the Company completed the sale of a fixed-wall furniture systems operation and a forest products hardwood lumber operation.  In fiscal year 2005, the Company exited the residential furniture market which was part of the branded furniture product line and also discontinued its veneer slicing operations.  All of this activity was inis applicable to the Furniture and Cabinets segment.  In accordance with Financial Accounting Standards Board (FASB) Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the accompanying Condensed Consolidated Financial Statements and notes have been restated to reflect the results of these operations as discontinued operations.  See Note 8-Discontinued Operations of Notes to Condensed Consolidated Financial Statements for further discussion of these discontinued operations.

Certain prior year information has been reclassified to conform to the current year presentation.  Based on accounting interpretations, the Company changed its classifications of investments in auction rate securities, previously classified as cash and cash equivalents, to short-term investments for the prior period presented in the accompanying Condensed Consolidated Statement of Cash Flows.  Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days.  Auction rate securities have interest rate resets through a modified Dutch auction, at predetermined short-term intervals, usually every 1, 7, 28 or 35 days.  The Company had historically classified auction rate securities as cash and cash equivalents if the period between the interest rate resets was 90 days or less, which was based on our ability to either liquidate our holdings or roll our investments over to the next reset period.  The Company has made adjustments to the accompanying Condensed Consolidated Statement of Cash Flows to reflect the gross purchases and sales of these securities as investing activities.  These reclassifications had no impact on the results of operations of the Company.

The Company also changed its classification of gains and losses on sales of property and equipment, previously shown in non-operating income, to selling, general and administrative expense for each of the periods presented in the accompanying Condensed Consolidated Statements of Income.

Amounts reclassified in the three and six-month periods ended December 31, 2004 were gains of, in millions, $0 and $0.5, respectively.  In the three and six months ended December 31, 2005, the Company recognized, in millions, $1.0 and $1.2, respectively, of gains on the sale of property and equipment as selling, general and administrative expense.

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Stock-Based Compensation

As described in Note 7-Stock Compensation Plans of Notes to Condensed Consolidated Financial Statements, the Company maintains a stock-based employee compensation planplans which allowsallow for the issuance of restricted stock, restricted share units, unrestricted share grants, incentive stock options, nonqualified stock options, performance shares, performance units and stock appreciation rights for grant to officers and other key employees of the Company, and to members of the Board of Directors who are not employees.  Prior to fiscal year 2006, the Company accounted for the planplans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations (APB 25). Accordingly, because all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of the grant, no expense related to employee stock options was recognized. However, expense related to other share-based awards such as restricted share units and performance shares had been recognized in the income statement under APB 25.  Effective July 1, 2005, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment (FAS 123(R)).  Under the modified prospective method of adoption selected by the Company, compensation expense related to stock options is recognized beginning in fiscal year 2006, but compensation cost in fiscal year 2005 related to stock options continues to be disclosed on a pro forma basis only.  Also duringAdditionally, as of the current quarter, in accordance with the modified prospective transition method,effective date, the Company eliminated its balance of Deferred Stock-Based Compensation, which represented unrecognized compensation cost for restricted share unit awards, and reclassified it to Treasury Stock and Additional Paid-In Capital.Capital, in accordance with the modified prospective transition method.  Financial statements for prior periods have not been restated.

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FAS 123(R) requires that forfeitures be estimated over the vesting period of an award, rather than being recognized as a reduction of compensation expense when the forfeiture actually occurs.  FAS 123(R) also requires that liability awards be revalued to fair value, which, upon the adoption of FAS 123(R), had the effect of a reduction of a liability for outstanding stock appreciation rights.  The impact of the revaluation of stock appreciation rights and the use of the estimated forfeiture method for prior periods has been presented on the Condensed Consolidated Statements of Income as a Cumulative Effect of Change in Accounting Principle, as required by FAS 123(R).  The cumulative effect recorded in the first quarter of fiscal year 2006 totaled $299,000$0.3 million of income, net of taxes.  The earnings per share impact can be found in Exhibit 11- Computation of Earnings per Share.

The Company's stock-based compensation plans allow early vesting when an employee reaches retirement age and ceases continuous service.  Under FAS 123(R), awards granted after June 30, 2005 require acceleration of compensation expense through an employee's retirement age, whether or not the employee is expected to cease continuous service on that date.  For awards granted on or before June 30, 2005, the Company accelerates compensation expense only in cases where a retirement eligible employee is expected to cease continuous service prior to an award's vesting date.  If the new provisions of FAS 123(R) had been in effect for awards prior to June 30, 2005, compensation expense including the pro forma effect of stock options, net of tax, would have been $0.2 million and $0.1 million higher during the quarterssix months ended September 30,December 31, 2005 and 2004, respectively.  There would have been an immaterial difference in compensation expense during the three months ended December 31, 2005 and 2004.

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The following table illustrates the effect on income from continuing operations and earnings per share from continuing operations if the Company had applied the fair value recognition provisions to stock-based employee compensation in fiscal year 2005.

	ThreeThree Months Ended September 30,December 31, 2004
(Amounts in Thousands, Except for Per Share Data)
Income from Continuing Operations, as reported	$ 6,203
Add: Stock-based employee compensation expense included in reported income, net of related tax effects	289
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	429
Pro Forma Income from Continuing Operations	$ 6,063
Earnings Per Share:
As reported:
Basic Earnings Per Share from Continuing Operations:
Class A	$0.16
Class B	$0.16
Diluted Earnings Per Share from Continuing Operations:
Class A	$0.16
Class B	$0.16
Pro Forma:
Basic Earnings Per Share from Continuing Operations:
Class A	$0.16
Class B	$0.16
Diluted Earnings Per Share from Continuing Operations:
Class A	$0.15
Class B	$0.16	Six Months Ended December 31, 2004

(Amounts in Thousands, Except for Per Share Data)
Income from Continuing Operations, as reported	$ 7,519		$13,470
Add: Stock-based employee compensation expense included in reported income, net of related tax effects	433		722
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	539		968
Pro Forma Income from Continuing Operations	$ 7,413		$13,224
Earnings Per Share:
As reported:
Basic Earnings Per Share from Continuing Operations:
Class A	$0.19		$0.35
Class B	$0.20		$0.36
Diluted Earnings Per Share from Continuing Operations:
Class A	$0.19		$0.34
Class B	$0.20		$0.35
Pro Forma:
Basic Earnings Per Share from Continuing Operations:
Class A	$0.19		$0.34
Class B	$0.20		$0.35
Diluted Earnings Per Share from Continuing Operations:
Class A	$0.19		$0.34
Class B	$0.19		$0.35

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Pre-Production Costs and Tooling

Pre-production design and development costs related to long-term supply arrangements in which a customer contractually guarantees reimbursement are capitalized.  Pre-production design and development costs are expensed as incurred if no contractual guarantees are provided.  The Company had an immaterial amount of pre-production costs which are recoverable from customers capitalized as of September 30, 2005, and no pre-production costs capitalized as of June 30, 2005.

The Company capitalizes the cost of tooling which it owns or which it has a noncancelable right to use during a supply arrangement.  As of September 30,both December 31, 2005 and June 30, 2005, respectively, the Company had $3.4 million and $3.0 million of Company-owned tooling costs capitalized, and $0.5 million and $0.8 millioncapitalized.  The Company had an immaterial amount of customer-owned tooling costs capitalized.capitalized as of December 31, 2005, and had $0.8 million capitalized as of June 30, 2005.

Effective Tax Rate

In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on our expected annual income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate.  Unusual or infrequently occurring items are separately recognized in the quarter in which they occur.  See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for more information on the Company's effective tax rate.

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New Accounting Standards

In December 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Statement of Position (SOP) 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit Risk.  This FSP provides guidance on terms of loans that may give rise to a concentration of credit risk, and disclosures and other accounting considerations required for concentration of credit risks.  The FSP is effective for the Company in the second quarter of fiscal year 2006.  The Company has provided disclosures related to concentration of credit risks.  The adoption of this FSP did not have a material impact on the Company's financial position, results of operations or cash flows.

In November 2005, the FASB issued FSP Financial Accounting Standard

(FAS) 115-1 and FAS 124-1, the Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.  This FSP provides guidance on determining if an investment is considered to be impaired, if the impairment is other-than-temporary, and the measurement of impairment losses.  It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments.  The FSP is effective for the Company beginning in the third quarter of fiscal year 2006.  The Company is currently accounting for investments in accordance with this guidance, and therefore, the adoption of this FSP will not have a material impact on the Company's financial position, results of operations or cash flows.

In October 2005, the FASB issued FSP FAS 123(R)-2, Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R), which provides clarification of the concept of mutual understanding between employer and employee with respect to the grant date of a share-based payment award.  This FSP provides that a mutual understanding of the key terms and conditions of an award shall be presumed to exist at the date the award is approved in accordance with the relevant corporate governance requirements if the recipient does not have the ability to negotiate the key terms and conditions of the award and those key terms and conditions will be communicated to the individual recipient within a relatively short time period from the date of approval.  This guidance became effective for the Company in the second quarter of fiscal year 2006.  The adoption of this FSP did not have a material impact on the Company's financial position, results of operations or cash flows.

In September 2005, the FASB ratified the Emerging Issues Task Force (EITF) consensus on Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty (EITF 04-13).  EITF 04-13 generally requires exchanges of inventory within the same line of business to be recognized at the carrying value of the inventory transferred, except in cases where finished goods inventory is exchanged for raw material or work-in-process inventory.  EITF 04-13 is effective for the Company beginning in the fourth quarter of fiscal year 2006. The Company does not believe that the adoption of EITF 04-13 will have a material effect on its financial position, results of operations or cash flows.

Note 2. Inventories

Inventory components of the Company are as follows:

	September 30,		June 30,	December 31,		June 30,
	2005		2005	2005		2005
(Amounts in Thousands)
Finished Products	$23,151		$30,525	$23,059		$30,525
Work-in-Process	7,117		13,969	6,278		13,969
Raw Materials	42,910		43,037	46,097		43,037
Total Inventory	$73,178		$87,531	$75,434		$87,531

For interim reporting, LIFO inventories are computed based on year-to-date quantities and interim changes in price levels. Changes in quantities and price levels are reflected in the interim financial statements in the period in which they occur.

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Note 3. Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period except those resulting from investments by, and distributions to, Share Owners. Comprehensive income, shown net of tax if applicable, for the three monthsand six-month periods ended September 30,December 31, 2005 and 2004 is as follows:

		Three Months Ended		Six Months Ended
		September 30,December 31,		December 31,

	2005		2004	2005		2004		2005		2004
(Amounts in Thousands)
Net Income (Loss)	$ (6,563)		$ 5,015	$  4,234		$ 6,116		$ (2,329)		$11,131
Change in Unrealized Gains/Losses on Securities [1]	(74)		101	(42)		(99)		(116)		2
Change in Gains/Losses on Derivatives [2]	158		262	99		1,079		257		1,341
Foreign Currency Translation Adjustment	(5)		(1)	9		16		4		15
Comprehensive Income (Loss)	$ (6,484)		$ 5,377	$  4,300		$ 7,112		$ (2,184)		$12,489

[1] Net of tax expense/(benefit), in thousands, of ($50)27) and $66($66) for the three months ended September 30,December 31, 2005 and 2004, respectively, and ($77) and $0 for the six months ended December 31, 2005 and 2004, respectively.

[2] Net of tax expense/(benefit),expense, in thousands, of $43$22 and $61$257 for three months ended September 30,December 31, 2005 and 2004, respectively, and $65 and $318 for the six months ended December 31, 2005 and 2004, respectively.  The Company's use of derivatives is generally limited to forward purchases of foreign currency designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in forecasted transactions denominated in a foreign currency.

Note 4. Segment Information

Management organizes the Company into segments based upon differences in products and services offered in each segment. The Furniture and Cabinets segment provides furniture for the office and hospitality industries, sold under the Company's family of brand names. The Furniture and Cabinets segment also provides engineering and manufacturing services which utilize common production and support capabilities on a contract basis to customers in the office furniture and residential furniture and cabinets office furniture, and retail infrastructure industries. The Electronic Contract Assemblies segment provides engineering and manufacturing services which utilize common production and support capabilities to a variety of industries globally. The Company's focus is on electronic assemblies that have high durability requirements and are sold on a contract basis and produced to customers' specifications. The Company currently sells primarily to customers in the transportation,automotive, industrial controls and medical industries. Intersegment sales are insignificant.

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Unallocated corporate assets include cash and cash equivalents, short-term investments and other assets not allocated to segments. Unallocated corporate income from continuing operations consists of income not allocated to segments for purposes of evaluating segment performance and includes income from corporate investments and other non-operational items. The basis of segmentation and accounting policies of the segments are consistent with those as disclosed in the Company's Annual Report on Form 10-K for the year ended June 30, 2005.

		At or For the
		Three Months Ended
	September 30,Six Months Ended
		December 31,		December 31,

	2005		2004		2005		2004		2005		2004
(Amounts in Thousands)
Net Sales:
Furniture and Cabinets	$162,441		$153,974		$169,343		$159,876		$328,562		$310,884
Electronic Contract Assemblies	107,960		107,874		104,562		112,590		212,522		220,464
Unallocated Corporate and Eliminations	225		77		29		220		254		297
Consolidated	$270,626		$261,925		$273,934		$272,686		$541,338		$531,645
Income (Loss) from Continuing Operations:
Income from Continuing Operations:
Furniture and Cabinets	$  (1,252)		$    2,444		$    2,518		$    1,702		$       993		$    3,894
Electronic Contract Assemblies	819		2,819		1,141		4,701		1,960		7,520
Unallocated Corporate and Eliminations	550		940		1,467		1,116		2,017		2,056
Consolidated	$       117	[1]	$    6,203	[2]	$     5,126	[1]	$    7,519	[2]	$    4,970	[1]	$   13,470	[2]
Total Assets:
Furniture and Cabinets	$284,277		$315,706		$249,016		$302,592
Electronic Contract Assemblies	210,657		201,745		204,698		222,917
Unallocated Corporate and Eliminations	93,088		98,212		129,098		89,491
Consolidated	$588,022		$615,663		$582,812	[3]	$615,000

[1] Income (Loss) from Continuing Operations includes after-tax restructuring charges, in thousands, of $2,949$1,653 and $4,602 in the three and six months ended September 30,December 31, 2005, respectively, all recorded in the Furniture and Cabinets segment.  See Note 5 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion.

[2] Income from Continuing Operations includes after-tax restructuring charges, in thousands, of $0 and $193 in the three and six months ended September 30, 2004.December 31, 2004, respectively.  On a segment basis, in the three and six months ended September 30,December 31, 2004, the Furniture and Cabinets segment recorded, in thousands, $0 and $179 of after-tax restructuring charges, and Unallocated Corporate recorded, in thousands, $0 and $14 of after-tax restructuring charges.charges, respectively.  See Note 5 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements for further discussion.

10[3] Significant reductions in Furniture and Cabinets segment assets were the result of sales of a forest products hardwood lumber business and a fixed-wall furniture systems business, and the exit of a manufacturing facility located in Mexicali, Mexico.  Unallocated corporate assets increased primarily as a result of proceeds from the sale of non-core business units.

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Sales by Product Line

The Furniture and Cabinets segment produces and sells a variety of similar products and services. Net sales to external customers by product line within the Furniture and Cabinets segment were as follows:

	Three Months Ended		Six Months Ended
	December 31,		December 31,

	2005		2004		2005		2004
(Amounts in Thousands)
Net Sales:
Furniture and Cabinets
Branded Furniture	$146,650		$130,840		$284,574		$257,662
Contract Private Label Products	22,693		29,036		43,988		53,222
Total	$169,343		$159,876		$328,562		$310,884

Note 5. Restructuring Expense

During the first quarter of fiscal year 2006, the Company announced a plan to sharpen its focus on primary markets within the Furniture and Cabinets segment.  Administrative,Actions under the plan include consolidation of administrative, marketing and business development functions will be consolidated to better serve the segment's primary markets.  To simplify and standardize business processes, a portion of the Company's Enterprise Resource Planning (ERP) software will beis being redesigned during approximately the next three years, and accelerated amortization, employee severance and other consolidation costs will be recognized during this period.  CapitalizedDuring the first quarter of fiscal year 2006, capitalized software costs related to the ERP software that was not yet placed in service were abandoned and impairment charges of $3.5 million were recorded in accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.recognized as impaired.  Restructuring charges recorded in the current quarter were primarily related to this impairment of ERP software impairment, accelerated amortization and employee severance are recorded on the Restructuring Expense line item of the Company's Condensed Consolidated Financial Statements of Income.  The plan also includesincluded the sale of a forest products hardwood lumber business and a business unit which produced fixed-wall furniture systems.  The Company estimates total pre-tax charges under the plan to be approximately $18.2 to $20.7 million, including software impairment of $3.5 million, acceleration of software amortization of $2.2 million, employee severance costs of $1.0 million, fixed asset impairment and other restructuring costs of $0.5 million, and a loss on the sale of business units of $11.0 to $13.5 million.  These business units are classified as held for sale as of September 30, 2005 and are reported as discontinued operations.  The estimated impairment charges and lossesLosses on the sale of these business units are presented on the Discontinued Operations line item on the Company's Condensed Consolidated Statements of Income.  See Note 8-Discontinued Operations of Notes to Condensed Consolidated Financial Statements for further discussion of these discontinued operations.  The Company estimates total pre-tax charges under the plan to be approximately $18.4 million, including a loss on the sale of business operations of $10.4 million which was recorded as discontinued operations and restructuring charges for software impairment of $3.5 million, acceleration of software amortization of $2.2 million, employee severance costs of $1.8 million, and fixed asset impairment and other restructuring costs of $0.5 million.

During the fourth quarter of fiscal year 2005, the Company announced a plan to consolidate its Mexican contract furniture and cabinets operations into one facility located in Juarez, Mexico, resulting in the closure of its manufacturing facility in Mexicali, Mexico.  The plan includes lease charges, severance and other employee costs, equipment relocation costs, asset impairment and other miscellaneous consolidation costs.  The Company estimatesCompany's total pre-tax restructuring charges under the plan willare expected to approximate $4.4 million.  Activities outlined in this restructuring plan which began in the fourth quarter of fiscal year 2005 and are expected to be substantially complete by December 31, 2005.and will be finalized during the third quarter of this fiscal year.

During the second quarter of fiscal year 2003, the Company announced incremental cost scaling actions to more closely align its operating capacities and capabilities with reduced demand levels related to the prolonged nature of the global economic slowdown in many of the Company's markets and the resulting continuation of underutilized manufacturing capacity. The actions included the consolidation of capabilities and operations, selling and/or exiting redundant facilities, aligning personnel costs and adjusting associated assets to their current fair values.  Activities outlined in this restructuring plan began in the second quarter of fiscal year 2003 and were completed in the first quarter of fiscal year 2005.  Total costs of these completed plans were within initial management estimates.

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The Company accounts for restructuring costs in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  Restructuring charges are included in the Restructuring Expense line item on the Company's Condensed Consolidated Statements of Income.

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Fiscal Year 2006 Charges

As a result of the fiscal year 2005 and 2006 restructuring plans, the Company recognized consolidated pre-tax restructuring expense of $4.8$2.6 million and $7.4 million in the three and six months ended September 30,December 31, 2005, respectively, within the Furniture and Cabinets segment.  Included in the restructuring charge for the three and six months ended December 31, 2005, respectively, is $0.9$0.1 million and $1.0 million for employee transition costs, $3.7$1.3 million and $5.0 million for asset impairment and $0.2$1.2 million and $1.4 million for plant closure and other costs.

Fiscal Year 2005 Charges

As a result of the fiscal year 2003 restructuring plan, the Company recognized consolidated pre-tax restructuring expense of $0.0 and $0.3 million in the three and six months ended September 30,December 31, 2004, respectively, primarily within the Furniture and Cabinets segment. Included in the restructuring charge is $0.1 million for asset impairment and $0.2 million for plant closure and other exit costs.

Reserves

At September 30,December 31, 2005, a total of $0.9$0.4 million of restructuring liabilities related to the fiscal year 2005 and 2006 restructuring plans remained on the Condensed Consolidated Balance Sheet as shown below.  The restructuring charge, utilization and cash paid, and ending reserve balances at September 30,December 31, 2005 were as follows:

	Transition and Other Employee Costs		Asset Impairment		Plant Closure and Other Exit Costs		Total	Transition and Other Employee Costs		Asset Impairment		Plant Closure and Other Exit Costs		Total
(Amounts in Thousands)
Accrued Restructuring at June 30, 2005	$      53		$     --		$   --		$     53	$     53		$     --		$    --		$     53
Amounts Charged - Cash	857		--		220		1,077	1,020		--		1,380		2,400
Amounts Charged - Non-Cash	--		3,694		--		3,694	--		4,998		--		4,998
Subtotal	857		3,694		220		4,771	1,020		4,998		1,380		7,398
Amounts Utilized / Cash Paid	(52)		(3,694)		(220)		(3,966)	(924)		(4,998)		(1,173)		(7,095)
Amounts Adjusted	--		--		--		--	--		--		--		--
Accrued Restructuring at September 30, 2005	$   858		$     --		$   --		$  858
Accrued Restructuring at December 31, 2005								$   149		$     --		$  207		$  356

In total, the Company has recognized pre-tax restructuring charges of $3.7$3.9 million and pre-tax losses on sales of discontinued operations of $10.4 million related to the restructuring plan announced in fiscal year 2006 and pre-tax charges of $1.2$3.6 million related to the restructuring plan announced in fiscal year 2005.

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Note 6. Guarantees and Product Warranties

As of September 30,December 31, 2005, the Company had guarantees issued which are contingent on the future performance of another entity. The guarantees include customer lease financing with recourse whereby the Company may become liable to a third party leasing company if the customer defaults on its lease, guarantees of third party dealer facility leases and bank loans whereby the Company may become liable if the dealer defaults on a lease or bank loan, and guarantees associated with subleases whereby the Company may be responsible for lease commitments if the sublessee defaults. At the inception of a guarantee, the Company recognizes a liability for obligations the Company may incur if specified triggering events or conditions occur. The liability is recorded at fair value which is estimated based on various factors including risk that the Company may have to perform under a guarantee, and ability to recover against payments made on a guarantee. The maximum potential liability and carrying amount recorded for these guarantees is immaterial to the Company's financial position.

The Company estimates product warranty liability at the time of sale based on historical repair cost trends in conjunction with the length of the warranty offered. Management may refine the warranty liability in cases where specific warranty issues become known.

Changes in the product warranty accrual for the threesix months ended September 30,December 31, 2005 and 2004 were as follows:

	SixThree Months Ended September 30,December 31,

(Amounts in Thousands)	2005		2004	2005		2004
Product Warranty Liability at the beginning of the period	$ 3,653		$ 3,578	$ 3,653		$ 3,578
Accrual for warranties issued	123		267	484		668
Accruals related to pre-existing warranties (including changes in estimates)	41		70
Accruals (reductions) related to pre-existing warranties (including changes in estimates)				(496)		84
Settlements made (in cash or in kind)	(554)		(409)	(1,029)		(732)
Product Warranty Liability at the end of the period	$ 3,263		$ 3,506	$ 2,612		$ 3,598

Note 7. Stock Compensation Plans

On August 19, 2003, the Board of Directors adopted the 2003 Stock Option and Incentive Plan (the "2003 Plan"), which was approved by the Company's Share Owners on October 21, 2003.  Under the 2003 Plan, 2,500,000 shares of Common Stock were reserved for restricted stock, restricted share units, unrestricted share grants, incentive stock options, nonqualified stock options, performance shares, performance units and stock appreciation rights for grant to officers and other key employees of the Company, and to members of the Board of Directors who are not employees.  The 2003 Plan is a 10 year plan.  The Company also has stock options outstanding under two former stock incentive plans, which are described below.  The pre-tax compensation cost that was charged against income for all of the plans was $0.7$1.0 million and $1.7 million for the quarterthree and six months ended September 30, 2005.December 31, 2005, respectively.  The total income tax benefit recognized in the income statement for stock compensation arrangements was $0.3$0.4 million and $0.7 million for the quarterthree and six months ended September 30, 2005.December 31, 2005, respectively.  These compensation expense and tax benefit amounts exclude the impact of the Cumulative Effect of a Change in Accounting Principle, as described in Note 1-Summany of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.  The Company generally uses treasury shares to satisfy option exercises and share unit conversions.

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Performance Shares

The Company awards performance shares to officers and other key employees under the 2003 Plan.  Under these awards, a number of shares iswill be granted to each participant based upon the attainment of the applicable bonus percentage calculated under the Company's profit sharing incentive bonus plan as applied to a total potential share award made and approved by the Compensation Committee. Performance shares vest at the end of the fiscal year in which the performance measurement period is complete, and are issued as Class A and Class B common shares shortly after vesting.  Certain outstanding performance shares awarded during the quarter are applicable to performance measurement periods in future fiscal years.  The contractual life of performance shares ranges from one to five years.  If a participant is not employed by the Company on the date of issuance, the performance share award is forfeited, except in the case of death, retirement at age 62 or older, or total permanent disability.  A portion of a participant's performance shares may be forfeited due to a change in officer status or a change in committee assignment.eligibility. 

A summary of performance share activity under the 2003 Plan as of September 30,during the six months ended December 31, 2005 is presented below:

	Number of Shares	Weighted Average Grant Date Fair Value	Number of Shares	Weighted Average Grant Date Fair Value
Performance shares outstanding at July 1, 2005	--	$      --	--	$      --
Granted	500,317	12.24	509,184	12.22
Vested	--	--	--	--
Forfeited	(5,500)	12.24	(16,715)	12.24
Performance shares outstanding at September 30, 2005	494,817	$12.24
Performance shares outstanding at December 31, 2005			492,469	$12.22

As of September 30,December 31, 2005, there was approximately $3.2$3.3 million of unrecognized compensation cost related to performance shares, based on the latest estimated attainment of performance goals.  That cost is expected to be recognized over a weighted-average period of 4.03.9 years.  No performance shares vested during the quarter ending September 30,three and six months ended December 31, 2005.  The fair value of performance shares is based on the stock price at the date of award, reduced by the present value of dividends normally paid over the vesting period which are not payable on outstanding performance share awards.

Restricted Share Units

Nonvested Restricted Share Units (RSU) awarded to officers and other key employees are currently outstanding under the 2003 Plan. RSUs vest five years after the date of award.  Upon vesting, the outstanding number of RSUs and the value of dividends accumulated over the vesting period are converted to shares of Class A and Class B common stock.  If the employment of a holder of an RSU terminates for any reason other than death, retirement at age 62 or older, or total permanent disability before the RSU has vested, the RSU will be forfeited. If employment terminates due to one of those reasons, the RSU will become fully vested and payable.

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A summary of RSU activity under the 2003 Plan as of September 30,during the six months ended December 31, 2005 is presented below:

	Number of Share Units	Weighted Average Grant Date Fair Value	Number of Share Units	Weighted Average Grant Date Fair Value
Restricted Share Units outstanding at July 1, 2005	614,375	$15.77	614,375	$15.77
Granted	--	--	--	--
Vested	--	--	--	--
Forfeited	(7,400)	15.78	(35,050)	15.87
Restricted Share Units outstanding at September 30, 2005	606,975	$15.77
Restricted Share Units outstanding at December 31, 2005			579,325	$15.76

As of September 30,December 31, 2005, there was approximately $6.1$4.8 million of unrecognized compensation cost related to nonvested RSU compensation arrangements awarded under the 2003 Plan.  That cost is expected to be recognized over a weighted-average period of 3.83.6 years.  No RSUs vested during the quarterthree and six months ended September 30,December 31, 2005.  The fair value of RSU awards is based on the stock price at the date of award.

14Unrestricted Share Grants

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Under the 2003 Plan, unrestricted shares may be granted to participants as consideration for service to the Company.  Unrestricted share grants do not have vesting periods, holding periods, restrictions on sale or other restrictions.  The fair value of unrestricted shares is based on the stock price at the date of the award.  During both the three and six months ended December 31, 2005, the Company granted a total of 18,501 unrestricted shares of Class B common stock at an average grant date fair value of $11.22.  These shares were issued to members of the Board of Directors as compensation for director's fees, as a result of directors' elections to receive unrestricted shares in lieu of cash payment.

Stock Options

The Company has stock options outstanding under two former stock incentive plans.  The 1996 Stock Incentive Program, which was approved by the Company's Share Owners on October 22, 1996, allowed the issuance of incentive stock options, nonqualified stock options, stock appreciation rights, and performance share awards to officers and other key employees of the Company, and to members of the Board of Directors who are not employees.  The 1996 Stock Incentive Program will continue to have options outstanding through fiscal year 2013.  The 1996 Directors' Stock Compensation and Option Plan, available to all members of the Board of Directors, was approved by the Company's Share Owners on October 22, 1996.  Under terms of that plan, Directors electing to receive all, or a portion, of their fees in the form of Company stock were also granted a number of stock options equal to 50% of the number of shares received for compensation of fees. The Directors' Stock Compensation and Option Plan will continue to have options outstanding through fiscal year 2009.  No shares remain available for issuance under the Company's prior stock option plans.

There were no stock option grants awarded or exercised during the quarterthree and six months ended September 30,December 31, 2005.  The fair value of each outstanding option award was estimated on the date of grant using a Black Scholes valuation model.  Assumptions used in the model for the prior year grants are described in the Company's Annual Report on Form 10-K for the year ended June 30, 2005.  Options granted under the plans generally are exercisable from six months to five years after the date of grant and expire five to ten years after the date of grant.  Stock options are forfeited when employment terminates, except in case of retirement at age 62 or older, death or permanent disability.

The Company also has an immaterial number of stock appreciation rights outstanding under the former 1996 Stock Incentive Program.  As valued by the Black Scholes valuation model, these awards had no value as of September 30,December 31, 2005.

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A summary of stock option activity under the two former plans as of September 30,during the six months ended December 31, 2005 is presented below:

	Number of Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)	Number of Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Options outstanding at July 1, 2005	2,317,400	$15.84			2,317,400	$15.84
Granted	--				--
Exercised	--				--
Forfeited	(104,375)	16.73			(154,227)	16.18
Expired	(248,837)	16.40			(256,573)	16.37
Options outstanding at September 30, 2005	1,964,188	$15.73	5.7 years	$2
Options outstanding at December 31, 2005					1,906,600	$15.75	5.5 years	$0
Options exercisable at September 30, 2005	1,296,260	$16.06	5.0 years	$2
Options exercisable at December 31, 2005					1,266,731	$16.09	4.8 years	$0

Note 8. Discontinued Operations

On September 15, 2005, in conjunction with its restructuring plan to sharpen its focus on primary markets within the Furniture and Cabinets segment, the Company approved plans to sell the operations of a forest products hardwood lumber business and a business which producesproduced and sellssold fixed-wall furniture systems and will no longer have continuing involvement in these businesses.  Estimated amounts presented asAdditionally on November 8, 2005, the Company approved a loss on disposal of discontinued operations include impairment charges taken asplan to exit a result of negotiations prior tonon-core business that manufactures polyurethane and polyester molded components for use in the actual sale of the hardwood lumber businessrecreational vehicle, signage and the fixed-wallresidential furniture business.  Subsequently, onindustries. 

On October 14, 2005, the Company completed the sale of the fixed-wall furniture systems business.business, which included primarily the sale of property and equipment, inventory, accounts receivable and product rights.  The purchase price totaled $1.2 million, of which $0.3 million was received at closing and $0.9 million is a note receivable.  The sale resulted in a net loss of $1.4 million, which was recorded as a $1.3 million estimated impairment loss on disposal of thesein discontinued operations will be adjusted induring the periodfirst quarter ended September 30, 2005, and was increased by $0.1 million during the sales are finalized.second quarter ended December 31, 2005 when the sale was completed.  The estimated loss on disposal of the fixed-wall furniture business includesincluded an after-tax goodwill impairment loss, in thousands, of $261 recognized in the Furniture and Cabinet segment.segment during the quarter ended September 30, 2005.  The goodwill impairment loss was based upon the cessation of cash flows related to the fixed-wall furniture systems business.  The Company's balance of goodwill related to continuing operations, in thousands, as of September 30,December 31, 2005 was $1,733 compared to $2,166 as of June 30, 2005. 

15On November 30, 2005, the Company completed the sale of the forest products hardwood lumber business to Indiana Hardwoods, Inc., which included primarily the sale of property and equipment, inventory, accounts receivable and timber assets.  The president and owner of Indiana Hardwoods, Inc. is Barry L. Cook, who was formerly employed by the Company as a Vice President of Kimball International, Inc. and had responsibility for this hardwoods lumber operation.  The transaction prices were negotiated between the Company and Indiana Hardwoods, Inc.  The Company also considered offers from other interested outside parties, but ultimately determined that it was in the Company's best interest financially to sell this operation to Indiana Hardwoods, Inc.  The purchase price totaled $25.5 million, of which $23.5 million was received at closing and $2.0 million is a note receivable.  The terms of the note receivable require monthly payments of interest for a three-year period, with the principal coming due after the three-year period.  The note is subordinate to the purchaser's bank loan.  If the purchaser is not in compliance with bank loan covenants or does not maintain sufficient cash flows, the principal payment on the note receivable may be delayed beyond three years.  The sale resulted in a net loss of $4.8 million, which was recorded as a $5.1 million estimated impairment loss in discontinued operations during the first quarter ended September 30, 2005, and was reduced by $0.3 million during the second quarter ended December 31, 2005 when the sale was completed.  The Company has no ongoing commitments resulting from the sales agreement.

The Company has notes receivable outstanding for the sale of the hardwoods lumber business and the final working capital adjustment on the sale of the fixed-wall furniture systems business, per the terms of the sales agreements.  The notes may represent a concentration of credit risk.  The Company maintains a provision for potential credit losses based on expected collectibility of these notes, which the Company believes is adequate.

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On November 8, 2005, as part of continued efforts to tighten its focus on primary markets, the Company approved a plan to exit a non-core business that manufactures polyurethane and polyester molded components for use in the recreational vehicle, signage and residential furniture industries.  The exit plan includes primarily the sale of inventories and machinery and equipment.  The Company will not have significant continuing cash flows or continuing involvement with this business.  After-tax impairment charges of $1.1 million have been recognized as a result of negotiations through December 31, 2005.  Subsequently, on January 20, 2006, the Company completed the sale of this business. 

On January 17, 2005, the Company announced its decision to exit the branded residential furniture business, which was part of the branded furniture product line within the Furniture and Cabinets segment.  The exit plan included discontinuing procurement of branded residential furniture, ending marketing and dealer activities, and selling remaining inventories.  The branded residential furniture operation had no long-lived assets.  As of September 30, 2005,assets, and all branded residential furniture inventory hadhas been sold.

On October 12, 2004, the Company announced a plan to exit its veneer slicing operation, which is part of the forest products product line within the Furniture and Cabinets segment.  The plan included the sale of veneer slicing machinery, equipment and remaining veneer inventories.  During the quarter ended December 31, 2004, veneer slicing and warehousing operations ceased and all inventory and assets were sold in fiscal year 2005.

In accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, these businesses have been classified as discontinued operations, and their operating results and losses on disposal are presented on the Loss from Discontinued Operations, Net of Tax line onof the Condensed Consolidated Statements of Income.  Assets of the polyurethane business that were held for sale as of September 30, 2005 are presented on a separate line of the Condensed Consolidated Balance Sheet.

Operating results and the estimated losslosses on salesales of the discontinued operations were as follows:

	Three Months Ended
	September 30,
(Amounts in Thousands)	2005		2004
Net Sales of Discontinued Operations	$   14,758		$ 23,089
Operating Loss of Discontinued Operations	$      (927)		$  (1,975)
Benefit (Provision) for Income Taxes	368		787
Loss from Operations of Discontinued Operations, Net of Tax	$      (559)		$ (1,188)
Loss on Disposal of Discontinued Operations	$ (10,677)		$          --
Benefit (Provision) for Income Taxes	4,257		--
Loss on Disposal of Discontinued Operations, Net of Tax	$   (6,420)		$          --
Income (Loss) from Discontinued Operations, Net of Tax	$   (6,979)		$  (1,188)

	Three Months Ended			Six Months Ended
	December 31,			December 31,
(Amounts in Thousands)	2005		2004	2005		2004
Net Sales of Discontinued Operations	$ 10,639		$  27,567	$   28,619		$ 53,622
Operating Income (Loss) of Discontinued Operations	$        12		$  (2,873)	$      (462)		$  (4,429)
Benefit for Income Taxes	24		1,157	212		1,777
Income (Loss) from Operations of Discontinued Operations, Net of Tax	$        36		$   (1,716)	$      (250)		$ (2,652)
Gain (Loss) on Disposal of Discontinued Operations	$  (1,544)		$       520	$ (12,221)		$      520
Benefit (Provision) for Income Taxes	616		(207)	4,873		(207)
Gain (Loss) on Disposal of Discontinued Operations, Net of Tax	$     (928)		$       313	$   (7,348)		$      313
Loss from Discontinued Operations, Net of Tax	$     (892)		$  (1,403)	$   (7,598)		$ (2,339)

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Note 9.  Assets Held for Sale

During the quarter ended September 30,December 31, 2005, several assets were classified as held for sale, including assets related to discontinued operations and other assets which met the criteria to be classified as held for sale.  The discontinued operations'operation's assets are held in the Furniture and Cabinets segment, and include property and equipment timber rights, receivables,and inventory and other assets related to the businessespolyurethane business held for sale.  Other assets held for sale consist of property and equipment held as corporate assets, including an idle manufacturing facility an administrative office and an aircraft.

Major classes of assets heldAssets Held for saleSale consisted of the following:

(Amounts in Thousands)	September 30,December 31, 2005	June 30, 2005
Current assets	$16,062     343	$ --
Property and equipment	14,552	--
Other long-term assets	5,1989,768	--
Total assets held for sale	$35,81210,111	$ --

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS OVERVIEW

Kimball International, Inc. provides a vast arrayvariety of products from its two business segments: the Furniture and Cabinets segment and the Electronic Contract Assemblies segment. The Furniture and Cabinets segment provides furniture for the office and hospitality industries, sold under the Company's family of brand names. The Furniture and Cabinets segment also provides engineering and manufacturing services which utilize common production and support capabilities on a contract basis to customers in the office furniture and residential furniture and cabinets office furniture, and retail infrastructure industries. The Electronic Contract Assemblies segment provides engineering and manufacturing services which utilize common production and support capabilities to a variety of industries globally.

Management currently considers the following events, trends and uncertainties to be most important to understanding its financial condition and operating performance:

• Globalization continues to reshape not only the industries in which the Company operates but also its key customers.

• Competitive pricing continues to put pressure on the Company's operating margins, in both segments, especially for suppliers of electronic contract assemblies to customers in the transportationautomotive industry.
  Within the Furniture and Cabinets segment, pricing remains competitive on select projects.

• Increased costsResults continue to be hindered by manufacturing inefficiencies at select operations.

• Growth in the office furniture industry continues according to the Business and Institutional Furniture Manufacturer's Association (BIFMA International).

• Costs of several key components used in Furniture and Cabinets segment products, primarily commodities such as steel and wood composite sheet stock, are a continuous challenge.  In turn, the Company has increased prices of certain end products which have been impacted by the commodity cost increases.
  

• Results continue to be hindered by manufacturing inefficiencies at select operations.
  

• As end markets dictate, the Company is continually assessing excess capacity and developing plans to better utilize manufacturing operations including shifting manufacturing capacity to lower cost venues as necessary.
  

• In the first quarter of fiscal year 2006, the Company announced plans to sell a forest products hardwood lumber business unit and a business unit which produces and sells fixed-wall furniture systems. These decisions are part of a plan to sharpen focus in the Furniture and Cabinets segment to better serve primary markets.

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• As part of a recently announced restructuring plan, business processes within the Furniture and Cabinets segment are being simplified and standardized, and various business functions are being consolidated thus allowing the Company to focus on growing primary markets and increasing profitability. The Company will spend additional capital and incur incremental consolidation costs before fully realizing the benefits of these actions.
  

• The nature of the contract electronics manufacturing industry is such that the start-up of new programs to replace departing customers or expiring programs occurs frequently and the new programs often carry lower margins. The success of the Electronics segment is dependent on the successful replacement of such customers or programs. Such changes usually occur gradually over time as old programs phase out of production while newer programs ramp up.
  

• Some of the Company's component parts are used in completed assemblies in vehicles produced by U.S. automotive manufacturers.  Some of these U.S. automotive companies have recently announced restructuring activities.

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• The Company's net cash position from an aggregate of cash, cash equivalents, and short-term investments, less short-term borrowings totaled $109$141 million at September 30,December 31, 2005, and the Company continued to generate positive operating cash flow in fiscal year 2006.

• The increasingly competitive marketplace mandates that the Company continually re-evaluate its business models.

• The regulatory and business environment for U.S. public companies requires that the Company continually evaluate and enhance its practices in the areas of corporate governance and management practices.

• The Company's employees - throughout its business operations - are an integral part of the Company's ability to fund operations.compete successfully, and the stability of its management team is critical to long-term share owner value.

To address these and other trends and events, the Company has taken, or continues to consider and take, the following actions or issues:

• As end markets dictate, the Company is continually assessing excess capacity and developing plans to better utilize manufacturing operations, including shifting manufacturing capacity to lower cost venues as necessary.

• The Company has aggressively moved to increase prices of end products that have been impacted by changes in commodity costs.

• As part of its previously announced plan to sharpen the focus of the Furniture and Cabinets segment to its primary markets, during the second quarter of fiscal year 2006, the Company sold a forest products hardware lumber business unit and a business unit which produced and sold fixed-wall furniture systems. The Company also approved during the second quarter a plan to sell an operation that manufactures polyurethane and polyester molded components for use in the recreational vehicle, signage and residential furniture industries and completed the sale in January 2006.

• As part of a restructuring plan announced in September 2005, the business processes within the Furniture and Cabinets segment are being simplified and standardized and business functions are being consolidated. The Company expects to make additional capital expenditures and incur incremental consolidation costs before fully realizing the additional benefits.

• The Company continues to evaluate the most effective uses of the excess cash that its operations continue to generate, including acquisition opportunities and other uses.

• The Company has taken a number of steps to conform its corporate governance to evolving national and industry-wide best practices among U.S. public companies, not only to comply with new legal requirements, but also to enhance the decision-making process of the Board of Directors.

• Taking into account such best practices and the ongoing evolution of the Company from a family-owned enterprise to a public company with an increasing number of unaffiliated shareholders, the Board of Directors elected in January 2006 to opt in to certain provisions of Indiana corporate law.

• The Company continues to evaluate means to preserve the value of its experienced employees and management team and further align their interests with those of the shareholders.

The preceding statements could be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties including, but not limited to, a significant change in economic conditions, loss of key customers or suppliers, or similar unforeseen events.

Restructuring
During the first quarter of fiscal year 2006, the Company announced a restructuring plan to sharpen its focus on primary markets within the Furniture and Cabinets segment. Administrative, marketing and business development functions will beare being consolidated to better serve the segment's primary markets. To simplify and standardize business processes, a portion of the Company's Enterprise Resource Planning (ERP) software will beis being redesigned during approximately the next three years, and anticipated expenses include accelerated amortization, employee severance and other consolidation costs will be recognized during this period. Restructuring charges recorded in the current quarter were primarily related to impairment of ERP software.

costs.

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During the fourth quarter of fiscal year 2005, the Company announced a restructuring plan to consolidate its Mexican furniture and cabinets operations into one facility located in Juarez, Mexico resulting in the closure of its manufacturing facility in Mexicali, Mexico. The plan includes lease charges, severance and other employee costs, equipment relocation costs, asset impairment and other miscellaneous consolidation costs. The decision to consolidate the operations iswas a result of excess capacity. The consolidation and exit activities are expectedsubstantially complete and will be finalized during the third quarter of this fiscal year.

Restructuring charges recorded in the second quarter of fiscal year 2006 were primarily related to be complete by December 31, 2005.the consolidation of two Mexican furniture manufacturing operations into one location.

During the second quarter of fiscal year 2003, the Company's Board of Directors approved a restructuring plan comprised of incremental cost scaling actions to more closely align the Company's operating capacities and capabilities with reduced demand levels related to the prolonged nature of the global economic slowdown in many of the Company's markets and the resulting continuation of underutilized manufacturing capacity within both of the Company's segments. The Company has successfully executed these restructuring activities, and the final restructuring expenses pursuant to this plan were recorded in the first quarter of fiscal year 2005.  Total costs of these completed plans were within initial management estimates.

The restructuring plans are discussed in further detail in Note 5 - Restructuring Expense of Notes to Condensed Consolidated Financial Statements.

Discontinued Operations

During the first quarter of fiscal year 2006, the Company committed to plans to sell a forest products hardwood lumber business unit and a business unit which producesproduced and sellssold fixed-wall furniture systems. Both business units were part of the Furniture and Cabinets segment, and both sales were completed during the current fiscal year second quarter. During the second quarter of fiscal year 2006, the Company also committed to a plan to sell an operation that manufactures polyurethane and polyester molded components for use in the recreational vehicle, signage and residential furniture industries. This business unit was part of the Furniture and Cabinets segment and was classified as held for sale as of September 30,December 31, 2005. Subsequently, on October 14, 2005,January 20, 2006, the Company completed the sale of the fixed-wall furniture systems operation. An estimated loss on disposal of these two business units was recorded during the current quarter and will be adjusted in the period when the sales are finalized.this business.  During fiscal year 2005, the Company exited the branded residential furniture business which was part of the branded furniture product line within the Furniture and Cabinets segment. Also during fiscal year 2005, the Company exited a veneer slicing operation. The cessation of these non-core operations does not impact any of the remaining operations of the Company. The results of the above mentioned operations are reported as discontinued operations in the Company's Condensed Consolidated Financial Statements and all prior periods have been restated.

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(See Note 8 - Discontinued Operations of Notes to Condensed Consolidated Financial Statements for more information on the discontinued operations.)

Financial results of the discontinued operations were as follows:

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Related Party Disclosure
During the second quarter of fiscal year 2006, the Company's forest products hardwood lumber operation which has been accounted for as a discontinued operation was sold to Indiana Hardwoods, Inc.  Barry L. Cook, President of Indiana Hardwoods, Inc., was formerly employed by the Company as a Vice President of Kimball International, Inc. and had responsibility for this hardwoods lumber operation.  The transaction prices were negotiated between the Company and Indiana Hardwoods, Inc.  The Company also considered offers from other interested outside parties, but ultimately determined that it was in the Company's best interest financially to sell this operation to Indiana Hardwoods, Inc.  The purchase price totaled $25.5 million, of which $23.5 million was received at closing and $2.0 million is a note receivable.  The Company has no ongoing commitments resulting from the sales agreement.

Adoption of FASB Statement No. 123(R), Share-Based Payment
The Company maintains a stock-based employee compensation plan.plans. Prior to fiscal year 2006, the Company accounted for the planplans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations (APB 25). Accordingly, because all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of the grant, no expense related to employee stock options was recognized in income. However, expense related to other share-based awards such as restricted share units (RSUs) and performance shares had been recognized in the income statement under APB 25. Effective July 1, 2005, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment (FAS 123(R)). Under the modified prospective method of adoption selected by the Company, compensation expense related to stock options is recognized beginning in fiscal year 2006, but compensation cost in fiscal year 2005 related to stock options continues to be disclosed on a pro forma basis only in Note 1-Summary of Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements. Results for prior years have not been restated.

The current quarterAfter-tax stock option after-tax expense recognized during the three and six-month periods ended December 31, 2005 totaled, $0.1 million.in thousands, $33 and $125, respectively. The Company estimates after-tax expense for previously issued stock options will be, in thousands, approximately $0.3 million$200 for the remainder of fiscal year 2006, $0.4 million$400 for fiscal year 2007, and $0.1 million$100 for fiscal year 2008, assuming a constant estimated forfeiture rate.

As of September 30,December 31, 2005, there was approximately $3.2$3.3 million of unrecognized compensation cost related to performance shares, based on the latest estimated attainment of performance goals. That cost is expected to be recognized over a weighted-average period of 4.03.9 years. As of September 30,December 31, 2005, there was approximately $6.1$4.8 million of unrecognized compensation cost related to nonvested RSU compensation arrangements awarded under the Plan. That cost is expected to be recognized over a weighted-average period of 3.83.6 years.

FAS 123(R) requires that forfeitures be estimated over the vesting period of an award, rather than being recognized as a reduction of compensation expense when the forfeiture actually occurs. FAS 123(R) also requires that liability awards be revalued to fair value, which, upon the adoption of FAS 123(R), had the effect of a reduction of a liability for outstanding stock appreciation rights. The impact of the revaluation of the stock appreciation rights and the use of the estimated forfeiture method for prior periods has been presented on the Condensed Consolidated Income Statements as a Cumulative Effect of a Change in Accounting Principle, as required by FAS 123(R). The cumulative effect totaled $0.3 million of income, net of taxes.taxes, and was recognized in the first quarter of the current fiscal year.

During the current quarter,fiscal year, the Company shifted from issuingawarding RSUs, which vest based solely on the passage of time, as a management retention vehicle, to the issuanceawards of performance shares. The Company has not awarded stock options since fiscal year 2004.

(See Note 7 - Stock Compensation Plans of Notes to Condensed Consolidated Financial Statements for more information.)

The following discussions are based on income from continuing operations and therefore exclude all income statement activity of the discontinued operations and the cumulative effect of the accounting change.

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Financial Overview - Consolidated

FirstSecond quarter fiscal year 2006 net sales of $270.6$273.9 million increased 3%slightly from fiscal year 2005 firstsecond quarter net sales of $261.9$272.7 million as a net sales increasedincrease within the Furniture and Cabinets segment andmore than offset a net sales decrease within the Electronic Contract Assemblies segment sales remained relatively flat. Firstsegment. Second quarter fiscal year 2006 consolidated income from continuing operations was $0.1$5.1 million, which is less than $0.01or $0.14 per Class B diluted share, and includes $2.9$1.7 million, or $0.08$0.04 per Class B diluted share, of after-tax restructuring costs primarily related to the consolidation of two Mexican furniture manufacturing operations into one location. The prior fiscal year second quarter consolidated income from continuing operations was $7.5 million, or $0.20 per Class B diluted share.

Net sales for the six-month period ended December 31, 2005 of $541.3 million were up 2% from the same period of the prior year as a net sales increase in the Furniture and Cabinets segment was greater than the net sales decrease in the Electronic Contract Assemblies segment. Current fiscal year-to-date income from continuing operations for the period ended December 31, 2005 totaled $5.0 million, or $0.13 per Class B diluted share, inclusive of $4.6 million, or $0.12 per Class B diluted share, of after-tax restructuring costs. The prior fiscal year first quarter consolidated incomeThese restructuring charges were within the Furniture and Cabinets segment and primarily related to exit costs to consolidate two Mexican furniture manufacturing operations into one location and impairment of integrated ERP software related to consolidation of various business functions. Income from continuing operations was $6.2for the year-to-date period ended December 31, 2004 totaled $13.5 million, or $0.16$0.35 per Class B diluted share, inclusive of $0.2 million, or $0.01 per Class B diluted share, of after-tax restructuring costs. The current year restructuring charges were within the Furniture and Cabinets segment and primarily relate to impairment of integrated ERP software and exit costs related to the consolidation of two Mexican operations into one facility.

The Company experienced a decline in consolidated gross margin as a percent of sales for the firstsecond quarter and year-to-date period of fiscal year 2006 when compared to the prior fiscal year first quarter. Increased freight costs, higher employee benefit expenses, increased costs for workers compensation claims, as well as a sales mix shiftsame periods. When compared to the prior fiscal year second quarter, margin declines within the Electronic Contract Assemblies segment to lower margin products all contributed to thewere partially offset by an improvement in gross margin percent decline. Price increases to customers on select products in the Furniture and Cabinets segment in addition to a sales mix shift toward the Furniture and lower new product introduction costs within the Electronic Contract AssembliesCabinets segment partially mitigated thewhich carries a higher gross margin as a percent decline.of sales than the Electronics segment. Consolidated Selling, General and Administrative (SG&A) expenses increaseddecreased in both absolute dollars and as a percent of net sales from the prior fiscal year firstsecond quarter due to higher branded furniture marketing programslower selling and personnelproduct warranty costs within the Furniture and Cabinets segment, offset in part by lower Electronic Contract Assemblies segment SG&A expenses. Consolidated other income of $1.5 million was also lower in the current fiscal year first quarter as the prior year first quarter other income of $3.1 million included favorable foreign currency effects and a gaingains on the sale of an idled manufacturing facility and an administrative office building.  The SG&A improvement was partially offset by higher incentive compensation costs.  SG&A expenses in the 2006 fiscal year-to-date period increased in absolute dollars, but decreased slightly as a percent of net sales from the prior fiscal year-to-date period.  Second quarter fiscal year 2006 consolidated other income of $2.1 million was lower than the prior year second quarter other income of $2.7 million.  Current fiscal year-to-date other income of $3.5 million was lower than the prior fiscal year-to-date other income of $5.3 million. Both the second quarter and year-to-date declines in other income were due to smaller positive currency fluctuations compared to the prior year same periods.

As a result of a reduction inThe effective income tax accruals coupled withrate for the Company's small pre-tax loss in the current quarter, the Company recorded an overall income tax benefit greater than the pre-tax loss.  The prior year first quarter tax rate benefitedthree and six-month periods ended December 31, 2005 increased 9.6 and 3.1 percentage points, respectively, from the positive tax effectsame periods of the Company's foreign operationsprior fiscal year as a greater portion of priorcurrent year first quarterconsolidated income was generated by foreigndomestic operations which have a lowerhigher effective tax rate than the Company's domesticforeign facilities.

The Company changed its classification of gains and losses on sales of property and equipment, previously shown in non-operating income, to selling, general and administrative expense for each of the periods presented in the accompanying Condensed Consolidated Statements of Income.Amounts reclassified in the three and six-month periods ended December 31, 2004 were, in millions, $0 and $0.5, respectively.  In the three and six months ended December 31, 2005, the Company recognized, in millions, $1.0 and $1.2, respectively, of gains on the sale of property and equipment as selling, general and administrative expense.

Comparing the balances as of December 31, 2005 to June 30, 2005, the decline in the Company's property and equipment net of accumulated depreciation was primarily related to the sale of discontinued operations and the reclassification of other property and equipment to assets held for sale.  The decline in the deferred income taxes and other line on the Condensed Consolidated Balance Sheets was primarily due to changes in deferred taxes related to the reclassification of certain property and equipment to assets held for sale, the accelerated depreciation and asset impairment related to the discontinued operation and restructuring activities, and the impact of temporary differences between the financial statement carrying amount and tax base of other fixed assets.

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Results of Operations by Segment - Three and Six Months Ended September 30,December 31, 2005 Compared to Three and Six Months Ended September 30,December 31, 2004

Furniture and Cabinets Segment

The Furniture and Cabinets segment provides furniture for a variety of industries, sold under the Company's family of brand names and on a contract basis. The Company's production flexibility allows it to utilize portions of the available production capacity created by lower volumes within these product lines to support and balance increased production schedules of other product lines within this segment.

FirstSecond quarter fiscal year 2006 net sales of $162.4$169.3 million increased 5%6% in the Furniture and Cabinets segment when compared to fiscal year 2005 firstsecond quarter net sales of $154.0$159.9 million due to higher net sales in the branded furniture product line which more than offset decreased sales of contract private label products. Six-month net sales for fiscal year 2006 increased 6% when compared to six-month net sales for fiscal year 2005 as a net sales increase in the branded furniture product line more than offset the net sales decrease in the contract private label products. At September 30,December 31, 2005, open orders for the Furniture and Cabinets segment increased 16%8% from open orders at September 30,December 31, 2004.

FirstSecond quarter fiscal year 2006 net sales of the Company's branded furniture products, which include office and hospitality furniture, totaled $137.9$146.7 million as compared to net sales of $126.8$130.8 million for the firstsecond quarter last fiscal year as sales of both hospitality and office furniture increased. The office furniture net sales increase was driven by both volume and price increases on select office furniture products. The hospitality furniture increase was driven by higher sales of the standard product offerings. Fiscal 2006 year-to-date net sales of branded furniture products increased 10% when compared to six-month net sales for fiscal year 2005 as sales of both hospitality and office furniture increased. Branded furniture products open orders at September 30,December 31, 2005 were 8%13% higher than September 30,December 31, 2004 on both higher office furniture and hospitality furniture open orders.

Net sales of contract private label products, which include office furniture and residential furniture such as large-screen projection television cabinets, office furniture,decreased 22% and retail infrastructure, decreased 10% to $24.5 million17%, respectively, in the currentsecond quarter and first half of fiscal year 2006, compared to $27.2 million in the prior fiscal year first quartersame periods primarily due to lower current quarterdecreased sales of residential furniture such as large-screen projection television cabinets.furniture. At September 30,December 31, 2005, open orders for contract private label products were 91% higher19% lower than open orders at September 30, 2004 due to an unusually small amount of open orders at September 30, 2004 because of the timing of orders received.December 31, 2004.

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In the firstSecond quarter of fiscal year 2006 income from continuing operations in the Furniture and Cabinets segment incurred a loss of $1.3improved to $2.5 million, from continuing operations which included $2.9$1.7 million of after-tax restructuring charges, compared to income from continuing operations of $2.4$1.7 million in the firstsecond quarter of fiscal year 2005 which included $0.2 million of after-tax restructuring charges.2005. The current year first quarter after-tax restructuring charges of $2.9$1.7 million were primarily related to the restructuring plan to consolidate administrative, marketing and business development functions within this segment. The restructuring costs include software impairment charges as the Company simplifies and standardizes business processes which will require a redesign effort of its current ERP solution and employee transition benefits. The Company also incurred restructuring costs in the current quarter related to the plan that was announced in the prior fiscal year to consolidate two Mexican furniture manufacturing operations into one location. When compared toGross margin as a percent of sales in this segment improved over the prior fiscal year firstsecond quarter the current quarter earnings were hindered by increased employee benefit expenses, higher workers compensation expense, higher freight costs resulting from the rising fuel prices, additional costs for marketing programs and excess capacity costs. Priceprimarily due to price increases on select branded furniture products, helped to partially offsetleverage from the higher costs. In addition,sales volumes, and improved labor efficiencies. Gross margin was somewhat hindered by inefficiencies associated with the current quarter results were positively impacted byfacility consolidation activities in Mexico. Partially offsetting the exitimprovement in margins, SG&A costs increased in absolute dollars but decreased as a percent of underperforming manufacturing facilities related to the fiscal year 2003 restructuring plan which was completedsales in the firstsecond quarter of fiscal year 2005.2006 when compared to last year as higher employee benefit and incentive compensation costs were partially offset by lower warranty expenses. For the six-month period ended December 31, 2005, the Furniture and Cabinets segment recorded income from continuing operations of $1.0 million, inclusive of after-tax restructuring charges of $4.6 million, a decline from the prior year same period income from continuing operations of $3.9 million, inclusive of after-tax restructuring charges of $0.2 million.

Risk factors within this segment include, but are not limited to, general economic and market conditions, successful execution of restructuring plans, increased global competition, supply chain cost pressures and relationships with strategic customers and product distributors. Additional risk factors that could have an effect on the Company's performance are contained in the Company's Form 10-K filing for the period ended June 30, 2005.

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Electronic Contract Assemblies Segment

Electronic Contract Assemblies segment net sales of $108.0$104.6 million for the firstsecond quarter of fiscal year 2006 approximateddecreased from net sales of $107.9$112.6 million for the prior fiscal year firstsecond quarter. New product introductions generated revenues in the current year firstsecond quarter that only partially replaced expiring programs. Current fiscal year firstsecond quarter electronic contract assembly sales to customers in the transportationautomotive and medical industries were lower than the prior fiscal year second quarter, while sales to customers in the industrial controls industry were higher. Net sales for the six-month period ended December 31, 2005 of $212.5 million decreased 4% from the prior year same period net sales of $220.5 million. Current fiscal year-to-date electronic contract assembly sales to customers in the automotive industry were lower than the prior fiscal year first quarter,year-to-date, while sales to customers in the medicalindustrial controls and industrial controlsmedical industries were higher.

Electronic Contract Assemblies segment firstsecond quarter fiscal year 2006 income from continuing operations totaled $0.8$1.1 million, which is a decrease from the prior fiscal year firstsecond quarter income from continuing operations of $2.8$4.7 million. Electronic Contract Assemblies segment gross margin as a percent of sales decreased in the firstsecond quarter of fiscal year 2006 compared to the prior fiscal year firstsecond quarter in part due to the lower sales volumes, tighter margins on products resulting from competitive pricing pressures, higher depreciation costs and a sales mix shift among various products to those with lower margins. In addition, production labor costs did not decrease in proportion to the volume decline. Lower new product introduction costs in the current quarter partially offset the gross margin decline. Operating results were also impacted by higher employee benefit expenses in the current quarter.quarter which were more than offset by lower incentive compensation costs. In addition, the prior fiscal year firstyear-over-year second quarter earnings were positivelycomparison was negatively impacted by lowerprior year favorable foreign currency fluctuations and higher taxes as a greater portion of income was generated during thatthe current quarter by foreigndomestic operations which have a lowerhigher effective tax rate than the Company's domesticforeign facilities. The prior fiscal year first quarter otherFor the six-month period ended December 31, 2005, this segment recorded income was also higher in part due to positive currency fluctuations.

from continuing operations of $2.0 million, a decline from income from continuing operations of $7.5 million for the six-month period ended December 31, 2004.

Included in this segment are sales to TRW Automotive, Inc., a full-service automotive supplier, which accounted for the following portions of consolidated net sales and Electronic Contract Assemblies segment net sales:

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The increased percentages of segment and consolidated net sales were a result of increased sales to TRW Automotive, Inc. coupled with lower total Electronics segment net sales. The increased TRW Automotive, Inc. sales of certain braking products and electronic power steering products to TRW Automotive, Inc. which were partially offset by other TRW Automotive, Inc. braking products reaching end of life. TRW Automotive, Inc. sells complete braking assemblies, in part manufactured by the Company, to several major automotive companies, most with multiple braking assembly programs that span multiple vehicle platforms, which partially mitigates the Company's exposure to this customer. The Company also continues to focus on diversification of the Electronic Contract Assemblies segment customer base.

The nature of the contract electronics manufacturing industry is such that the start-up of new customers and new programs to replace expiring programs occurs frequently. New customer and program start-ups generally cause losses early in the life of a program, which are generally recovered as the program matures and becomes established. This segment continues to experience margin pressures related to an overall excess capacity position in the electronics subcontracting services market. New business awards for projects in the transportationautomotive industry are extremely competitive.

Risk factors within this segment include, but are not limited to, general economic and market conditions, increased globalization, competitive pricing, foreign currency exchange rate fluctuations, rapid technological changes, component availability, the contract nature of this industry, and the importance of sales to large customers. The continuing success of this segment is dependent upon its ability to replace expiring customers/programs with new customers/programs. Additional risk factors that could have an effect on the Company's performance are contained in the Company's Form 10-K filing for the period ended June 30, 2005.

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Liquidity and Capital Resources

The Company's net cash position from an aggregate of cash, cash equivalents, and short-term investments less short-term borrowings decreasedincreased from $115 million at June 30, 2005 to $109$141 million at September 30,December 31, 2005. Based on accounting interpretations, the Company changed its classification of investments in municipal bond auction rate securities, previously classified as cash and cash equivalents, to short-term investments for the prior period presented in the accompanying Condensed Consolidated Statement of Cash Flows. Auction rate securities are variable rate municipal bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days. Auction rate securities have interest rate resets through a modified Dutch auction, at predetermined short-term intervals, usually every 1, 7, 28 or 35 days. The Company had historically classified auction rate securities as cash and cash equivalents if the period between the interest rate resets was 90 days or less, which was based on our ability to either liquidate our holding or roll our investments over to the next reset period.

Working capital at September 30,December 31, 2005 was $221$225 million compared to working capital of $204 million at June 30, 2005. The September 30,December 31, 2005 current assets included $36$10 million of assets held for sale of which $20 million wasmost were previously included in long-term assets. The current ratio was 2.5 at December 31, 2005 and 2.4 at both September 30, 2005 and June 30, 2005.

The Company's internal measure of Accounts Receivableaccounts receivable performance, also referred to as Days Sales Outstanding (DSO) for the first half of fiscal quarter ended September 30, 2005year 2006 improved to 41.843.3 from 44.745.9 for the same period of fiscal year 2005. The Company defines DSO as the average of monthly accounts and notes receivable divided by one day's net sales. The Company's Production Days Supply on Hand (PDSOH) of inventory measure for the first half of fiscal quarter ended September 30, 2005year 2006 decreased to 46.744.7 from 58.156.5 for the same period of fiscal year 2005 primarily due to reduced inventory levels associated with the discontinued operations. The Company defines PDSOH as the average of the monthly gross inventory divided by one day's cost of sales.

Operating activities generated $8$22 million of cash flow in the first threesix months of fiscal year 2006 compared to $10 million inwhich was flat with the same period of fiscal year 2005. The Company reinvested $8$13 million into capital investments for the future, comprised primarily of manufacturing equipment. During the first quarter of the current quarter,fiscal year, the Company announced its intentions to invest in building an electronics manufacturing facility in Nanjing, China in fiscal year 2006. The Company also expects to continue to invest in resources for leveraging new and improved enterprise-wide information technology systems and solutions. First quarter fiscalFiscal year 2006 investing cash flow activities included $24 million in proceeds received from the sale of discontinued operations. Fiscal year 2006 financing cash flow activities included $6$12 million in dividend payments, which remained flat with the prior year first quarter.six months ended December 31, 2004.

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The Company's $75 million revolving credit facility allows for both issuances of letters of credit and cash borrowings. At September 30,December 31, 2005, the Company had $2.2$2.1 million of short-term borrowings outstanding under a separate foreign credit facility which is backed by the $75 million revolving credit facility. The Company issued an additional $1.9$3.8 million in letters of credit against the revolving credit facility, which reduces total availability to borrow to $70.9$69.1 million at September 30,December 31, 2005. At June 30, 2005, the Company had $2.2 million of short-term borrowings outstanding.  On December 7, 2005, the credit facility was amended for an administrative item that was immaterial.

The $75 million revolving credit facility also provides an option to increase the amount available for borrowing to $125 million at the Company's request, subject to participating banks' consent. The credit facility requires the Company to comply with certain debt covenants including debt-to-total capitalization, interest coverage ratio, minimum net worth, and other terms and conditions. The Company was in compliance with these covenants at September 30,December 31, 2005.

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The Company believes its principal sources of liquidity from available funds on hand, cash generated from operations and the availability of borrowing under the Company's revolving credit facility will be sufficient in fiscal year 2006 for working capital needs and for funding investments in the Company's future, including potential acquisitions. The Company's primary source of funds is its ability to generate cash from operations to meet its liquidity obligations, which could be affected by factors such as a decline in demand for the Company's products, loss of key contract customers, the ability of the Company to generate profits, and other unforeseen circumstances. The Company's secondary source of funds is its revolving credit facility, which is contingent on complying with certain debt covenants. The Company does not expect the covenants to limit or restrict its ability to borrow on the facility in fiscal year 2006. The Company anticipates maintaining a strong liquidity position for the next 12 months.

The preceding statements are forward-looking statements under the Private Securities Litigation Reform Act of 1995 where factors could cause actual results to differ materially from forward-looking statements.

Contractual Obligations

Compared to the contractual obligations disclosure in the Company's Form 10-K filing for the period ended June 30, 2005, there have been no material changes to the aggregate contractual obligations of the Company outside the ordinary course of business.

Off-Balance Sheet Arrangements

Other than operating leases entered into in the normal course of business, the Company's off-balance sheet arrangements are limited to guarantees which are contingent on the future performance of another entity. However, these arrangements do not have a material current effect and are not reasonably likely to have a material future effect on the Company's financial condition, results of operations, liquidity, capital expenditures or capital resources. The Company does not have material exposures to trading activities of non-exchange traded contracts or material transactions with related parties. The preceding statements are forward-looking statements under the Private Securities Litigation Reform Act of 1995, where factors could cause actual results to differ materially from forward-looking statements.

Critical Accounting Policies

The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes. Actual results could differ from these estimates and assumptions. Management uses its best judgment in the assumptions used to value these estimates, which are based on current facts and circumstances, prior experience, and other assumptions that are believed to be reasonable. The Company's management overlays a fundamental philosophy of valuing its assets and liabilities in an appropriately conservative manner. Management believes the following critical accounting policies reflect the more significant judgments and estimates used in preparation of the Company's consolidated financial statements and are the policies that are most critical in the portrayal of the Company's financial position and results of operations. Management has discussed these critical accounting policies and estimates with the Audit Committee of the Company's Board of Directors and with the Company's independent registered public accounting firm.

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Revenue recognition - The Company recognizes revenue when title and risk transfer to the customer, which under the terms and conditions of the sale may occur either at the time of shipment or when the product is delivered to the customer. Service revenue is recognized as services are rendered. Shipping and handling fees billed to customers are recorded as sales while the related shipping and handling costs are included in cost of goods sold. Guidelines regarding revenue recognition are strictly adhered to and volatility resulting from estimates or judgment is minimal.

• Allowance for sales returns - At the time revenue is recognized certain provisions may also be recorded, including returns and allowances, which involve estimates based on current discussions with applicable customers, historical experience with a particular customer and/or product, and other relevant factors. As such, these factors may change over time causing the provisions to be adjusted accordingly. At September 30December 31 and June 30, 2005, the reserve for returns and allowances was $2.3$2.5 million and $2.2 million, respectively. Over the past two years, the returns and allowances reserve has been approximately 2% of gross trade receivables.
  

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• Allowance for doubtful accounts - Allowance for doubtful accounts is generally based on a percentage of aged accounts receivable, where the percentage increases as the accounts receivable become older. However, management judgment is utilized in the final determination of the allowance based on several factors including specific analysis of a customer's credit worthiness, changes in a customer's payment history, historical bad debt experience, and general economic and market trends. The allowance for doubtful accounts at September 30December 31 and June 30, 2005 was $1.8$1.7 million and $1.9 million, respectively, and over the past two years, this reserve has trended between approximately 1% and 4%3% of gross trade accounts receivable.

Excess and obsolete inventory- Inventories were valued using the lower of last-in, first-out (LIFO) cost or market value for approximately 40%34% and 50% of consolidated inventories at September 30December 31 and June 30, 2005, respectively, including approximately 80%79% and 86% of the Furniture and Cabinets segment inventories at September 30December 31 and June 30, 2005, respectively. The remaining inventories are valued at lower of first-in, first-out (FIFO) cost or market value. Inventories recorded on the Company's balance sheet are adjusted for excess and obsolete inventory. In general, the Company purchases materials and finished goods for contract-based business from customer orders and projections, primarily in the case of long lead time items, and has a general philosophy to only purchase materials to the extent covered by a written commitment from its customers. However, there are times when inventory is purchased beyond customer commitments due to minimum lot sizes and inventory lead time requirements, or where component allocation or other procurement issues may exist. Evaluation of excess inventory includes such factors as anticipated usage, inventory turnover, inventory levels, and product demand levels. Factors considered when evaluating inventory obsolescence include the age of on-hand inventory and reduction in value due to damage, use as showroom samples, design changes or cessation of product lines.

Self-insurance reserves - The Company is self-insured up to certain limits for auto and general liability, workers' compensation and certain employee health benefits including medical, short-term disability and dental with the related liabilities included in the accompanying financial statements. The Company's policy is to estimate reserves based upon a number of factors including known claims, estimated incurred but not reported claims and actuarial analyses, which are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as increased medical costs and changes in actual experience could cause these estimates to change and reserve levels to be adjusted accordingly. At September 30both December 31 and June 30, 2005, the Company's accrued liabilities for self-insurance exposure were $7.5 million and $8.0 million, respectively, excluding immaterial amounts held in a voluntary employees' beneficiary association (VEBA) trust.

Income taxes- Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. The Company evaluates the recoverability of its deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize its deferred tax assets. If recovery is not likely, the Company provides a valuation allowance based on its best estimate of future taxable income in the various taxing jurisdictions and the amount of deferred taxes ultimately realizable. Future events could change management's assessment. In addition, the Company operates within multiple taxing jurisdictions and is subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. However, the Company believes it has made adequate provision for income taxes for all years that are subject to audit. As tax periods are closed, the provision is adjusted accordingly.

24

New Accounting StandardStandards

In December 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Statement of Position (SOP) 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit Risk. This FSP provides guidance on terms of loans that may give rise to a concentration of credit risk, and disclosures and other accounting considerations required for concentration of credit risks. The FSP is effective for the Company in the second quarter of fiscal year 2006. The Company has provided disclosures related to concentration of credit risks. The adoption of this FSP did not have a material impact on the Company's financial position, results of operations or cash flows.

In November 2005, the FASB issued FSP Financial Accounting Standard (FAS) 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP provides guidance on determining if an investment is considered to be impaired, if the impairment is other-than-temporary, and the measurement of impairment losses. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP is effective for the Company beginning in the third quarter of fiscal year 2006. The Company is currently accounting for investments in accordance with this guidance, and therefore, the adoption of this FSP will not have a material impact on the Company's financial position, results of operations or cash flows.

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In October 2005, the FASB issued FSP FAS 123(R)-2, Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R), which provides clarification of the concept of mutual understanding between employer and employee with respect to the grant date of a share-based payment award. This FSP provides that a mutual understanding of the key terms and conditions of an award shall be presumed to exist at the date the award is approved in accordance with the relevant corporate governance requirements if the recipient does not have the ability to negotiate the key terms and conditions of the award and those key terms and conditions will be communicated to the individual recipient within a relatively short time period from the date of approval. This guidance became effective for the Company in the second quarter of fiscal year 2006. The adoption of this FSP did not have a material impact on the Company's financial position, results of operations or cash flows.

In September 2005, the FASB ratified the Emerging Issues Task Force (EITF) consensus on Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty (EITF 04-13). EITF 04-13 generally requires exchanges of inventory within the same line of business to be recognized at the carrying value of the inventory transferred, except in cases where finished goods inventory is exchanged for raw material or work-in-process inventory. EITF 04-13 is effective for the Company beginning in the fourth quarter of fiscal year 2006. The Company does not believe that the adoption of EITF 04-13 will have a material effect on its financial position, results of operations or cash flows.

Forward-Looking Statements

Certain statements contained within this document are considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of words such as "believes", "estimates", "projects", "expects", "anticipates" and similar expressions. These forward-looking statements are subject to risks and uncertainties including, but not limited to, general economic conditions, significant volume reductions from key contract customers, loss of key customers or suppliers within specific industries, availability or cost of raw materials, increased competitive pricing pressures reflecting excess industry capacities, foreign currency exchange rate fluctuations or similar unforeseen events. Additional cautionary statements regarding other risk factors that could have an effect on the future performance of the Company are contained in the Company's Form 10-K filing for the period ended June 30, 2005.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risks from the information disclosed in Item 7A "Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the year ended June 30, 2005.

Item 4.  Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed as of September 30,December 31, 2005, the Chief Executive Officer and Chief Financial Officer of the Company concluded, based upon their best judgment, that the Company's disclosure controls and procedures were effective.

(b) Changes in internal control over financial reporting.

There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30,December 31, 2005 that have materially affected, or that are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents a summary of share repurchases made by the Company:

The share repurchase program previously authorized by the Board of Directors was announced on August 5, 2004.  The program allows for the repurchase of up to 2 million of any combination of Class A or Class B shares and will remain in effect until all shares authorized have been repurchased.

26Item 4.  Submission of Matters to a Vote of Security Holders

The Company's Annual Meeting of Share Owners was held on October 18, 2005.  The Board of Directors was elected in its entirety, based on the following election results:
Nominees as Directors by Holders of Class A Common Stock	Votes For*	Votes Withheld
Douglas A. Habig	12,322,055	39,463
James C. Thyen	12,322,055	39,463
John B. Habig	12,322,055	39,463
Ronald J. Thyen	12,322,055	39,463
Christine M. Vujovich	12,316,983	44,535
John T. Thyen	12,322,055	39,463
Polly B. Kawalek	12,316,983	44,535
Harry W. Bowman	12,316,983	44,535
Geoffrey L. Stringer	12,316,983	44,535
Gary P. Critser	12,322,055	39,463

	Broker non-votes totaled 750 for each of the above nominees as Directors.
	*Votes for nominees as Directors by holders of Class A Common Stock represented 91% of the total 13,495,331 Class A shares outstanding and eligible to vote.

Nominee as Director by Holders of Class B Common Stock	Votes For*	Votes Withheld
Dr. Jack R. Wentworth	21,178,108	1,078,606
Broker non-votes totaled 731,601 for the above nominee as Director.
*Votes for nominee as Director by holders of Class B Common Stock represented 86% of the total 24,656,980 Class B shares outstanding and eligible to vote.

The 2005 Profit Sharing Incentive Bonus Plan was approved by holders of Class A Common Stock, based on the following voting results:
Votes For*: 12,039,760	Votes Against: 58,661	Abstentions: 155,080

Broker non-votes totaled 108,767 for the above proposal. *Votes for the 2005 Profit Sharing Incentive Bonus Plan by holders of Class A Common Stock represented 89% of the total 13,495,331 Class A shares outstanding and eligible to vote.

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Item 5. Other Information

In lieu of filing a Form 8-K under Item 5.03, "Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year," the Company is providing the following disclosure in this Form 10-Q as the Form 10-Q is being filed within the four business day reporting requirement for the event.

Effective January 31, 2006, the Board of Directors of the Company amended Article XV: Regulation of Shareholders, Sections 1 and 2, of the By-laws of the Company. A copy of the Restated By-laws of the Company, as amended, is attached to this Form 10-Q as Exhibit 3(b) and is incorporated by reference herein.

Section 1 of Article XV of the Company's By-laws previously contained the Company's election not to be governed by Chapter 42 of the Indiana Business Corporation Law. The amendment changed that election such that, effective January 31, 2006, the Company will be governed by the provisions of Chapter 42 of the Indiana Business Corporation Law, which is the Control Share Acquisitions Statute. In addition, the amendment to the By-laws added a provision that any or all control shares acquired in a control share acquisition will be subject to redemption by the Company if either (a) no acquiring person statement has been filed in accordance with IC 23-1-42-6 or (b) the control shares are not accorded full voting rights by the Company's shareholders as provided in IC 23-1-42-9.

Section 2 of Article XV of the Company's By-laws was amended to rescind a prior election not to be governed by Chapter 43 of the Indiana Business Corporation Law. The amendment provides that, effective January 31, 2006, the Company will be governed by the provisions of Chapter 43 of the Indiana Business Corporation Law, which is the Business Combinations Statute.

Item 6.  Exhibits

    Exhibits (numbered in accordance with Item 601 of Regulation S-K)

(3(a))  Amended and restated Articles of Incorporation of the Company (Incorporated by reference to the Company's Form 10-K for the year ended June 30, 2002)

(3(b))  Restated By-laws of the Company (Incorporated by reference to Exhibit 3(ii) in the Company's Form 8-K filed October 18, 2005)

(10(a))  FormCredit Agreement, dated as of Annual Performance Share Award,May 20, 2004, among the Company, the Lenders and Bank One, NA, and First Amendment to Credit Agreement, dated as amended on Septemberof December 7, 2005, by and among the Company, the Lenders Party Thereto and JPMorgan Chase Bank

(10(b))  FormSummary of Long Term Performance Share Award (Incorporated by reference to Exhibit 10.1 in the Company's Form 8-K/A filed  September 7, 2005)

(10(c))  Description of the Company's 2005 Profit Sharing Incentive Bonus Plan (Incorporated by reference to Exhibit 10.1 in the Company's Form 8-K filed October 18, 2005)Director and Named Executive Officer Compensation

(11)  Computation of Earnings Per Share

(31.1) Certification filed by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(31.2) Certification filed by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(32.1)  Certification furnished by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(32.2)  Certification furnished by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

2731

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereto duly authorized.

2832

Kimball International, Inc.
Exhibit Index

2933