Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.

(a)  On August 26, 2008, the Chief Executive Officer (“CEO”), the Chief Financial Officer (“CFO”) and the Audit Committee of the Board of Directors (“Audit Committee”) of Flexsteel Industries, Inc. (“the Company”) determined that the Company’s previously filed consolidated financial statements and other financial information and the related reports of its independent registered public accounting firm on Form 10-K for the fiscal years ended June 30, 2007, 2006, 2005 and 2004 and our quarterly reports on Form 10-Q for the previously mentioned fiscal years and the quarters ended March 31, 2008, December 31, 2007 and September 30, 2007 can no longer be relied upon and should be restated due to errors in the consolidated financial statements. The Audit Committee has discussed the matters disclosed herein with respect to non-reliance on, and the correction of, the Company’s previously issued consolidated financial statements with the Company’s management, other members of the Board of Directors and the Company’s independent registered public accounting firm. The Board of Directors concurred with the Audit Committee’s non-reliance determination.

Background of the Error Correction

During the 2008 fiscal year-end closing process the Company identified unsupported reconciling amounts that reduced the accounts payable balances at a material consolidated subsidiary. After completing analysis of these unsupported reconciling amounts, it was determined that they principally related to the historical accounting at the subsidiary for the capitalization of inventory costs and the clearing of accruals from the accounts payable relating to transactions occurring in fiscal years 2004 and 2005. The historical subsidiary inventory standard costing system, established prior to the warehousing of inventory in China, did not appropriately differentiate the costing of inventory balances warehoused in China versus the United States. The warehoused inventories in China inappropriately included freight-in costs for shipments to the United States that had not been incurred. During fiscal year 2006, the Company modified the subsidiary’s inventory costing process which rectified the costing error in inventory on a prospective basis but resulted in the reclassification of the historical error in inventory freight costs as a reduction to accounts payable with the erroneous belief that the reduction to accounts payable would offset future freight invoices. As a result of this error, the $2.287 million reduction within accounts payable remained until identified during the fiscal year 2008 closing process.

Material Weaknesses in Internal Control over Financial Reporting

As a result of the determination to correct the Company’s consolidated financial statements and in connection with management’s annual assessment of internal controls over financial reporting for the fiscal year ended June 30, 2008, the Company’s CEO and CFO undertook an evaluation of the effectiveness of the Company’s internal control over financial reporting. As a result of their assessment, the Company’s CEO and CFO identified a material weakness in the Company’s internal control over financial reporting. The material weakness is related to the design and operating effectiveness of controls over the Company’s material consolidated subsidiary’s monthly reconciliation of accounts payable records to the general ledger. Specifically, the subsidiary maintained an overly complex accounts payable account structure, which when combined with the processing of a large volume of transactions led to the subsidiary’s inability to perform adequate review procedures to timely identify reconciling amounts and the related reversals. This deficiency obscured the existence of unsupported reconciling amounts resulting in the untimely identification of the errors in the restatement discussed below.

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