UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

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SCHEDULE 14A

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Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No.    )

Filed by the Registrant   x
Filed by a Party other than the Registrant   o

Check the appropriate box:

o	Preliminary Proxy Statement
o	Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x	Definitive Proxy Statement
o	Definitive Additional Materials
o	Soliciting Material Pursuant to §.240.14a-12

FLEXSTEEL INDUSTRIES, INC.
(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

x

No fee required.

o

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

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Title of each class of securities to which transaction applies:

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Aggregate number of securities to which transaction applies:

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Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

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Proposed maximum aggregate value of transaction:

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Total fee paid:

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o

Fee paid previously with preliminary materials:

o

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

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Amount previously paid:

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Form, Schedule or Registration Statement No.:

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Filing Party:

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Date Filed:

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FLEXSTEEL INDUSTRIES, INC.

P.O. Box 877
Dubuque, Iowa 52004-0877

November 1, 2007

Office of the Chairman of the Board

Dear Shareholder:

You are cordially invited to attend the Annual Shareholders’ Meeting on Monday, December 10, 2007, at 2:00 p.m. We sincerely want you to come, and we welcome this opportunity to meet with those of you who find it convenient to attend.

Time will be provided for shareholder questions regarding the affairs of the Company and for discussion of the business to be considered at the meeting as explained in the notice and proxy statement which follow. Directors and other Company executives expect to be available to talk individually with shareholders after the meeting. No admission tickets or other credentials are currently required for attendance at the meeting, but we may request to see some identification to establish that you are a shareholder of the Company.

The formal notice of the meeting and proxy statement follow. I hope that after reading them you will sign, date and mail the proxy card, whether you plan to attend in person or not, to assure that your shares will be represented.

Sincerely,

L. Bruce Boylen
Chairman of the Board

IMPORTANT

WHETHER YOU OWN ONE SHARE OR MANY, EACH SHAREHOLDER IS URGED TO VOTE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.

 

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FLEXSTEEL INDUSTRIES, INC.

P.O. Box 877
Dubuque, Iowa 52004-0877

November 1, 2007

Dear Shareholder,

The New York Stock Exchange, NYSE Arca, NASDAQ and the American Stock Exchange have all recently adopted rule changes which mandate that all listed companies become eligible to participate in the Direct Registration System (“DRS”) before December 31, 2007.

We are pleased to announce our participation in the DRS, effective November 21, 2007, via our stock transfer agent, Wells Fargo Shareowner Services. This system now allows us to issue shares of common stock to our registered certificate holders in book-entry form.

Book-entry shares owned in this manner provide shareholders with more convenient, safe and cost effective means of share ownership which includes the following features:

	•	Shares held in book-entry form cannot be lost, stolen or misplaced, eliminating the risk and costs related to safekeeping, delivering or replacing stock certificates
	•	In addition, after November 21st you will be able to request electronic movement of your book-entry shares between your account at our Transfer Agent, Wells Fargo Shareowner Services, and your account at your Broker/Dealer
	•	Finally, you may eliminate the responsibility of safekeeping the certificates you are currently holding. You may convert them to book-entry shares at anytime. To do this on or after the November 21, 2007 effective date, please follow the instructions below:

°  Do not sign your certificates (you are only converting them into book-entry form in your account, not requesting a transfer)

°  Mail your certificate(s) with an instruction letter requesting to convert your shares into book-entry form to:

Overnight Mail:
Wells Fargo Shareowner Services
161 North Concord Exchange
South St. Paul, MN 55075

By Regular Mail:
Wells Fargo Shareowner Services
PO Box 64854
St. Paul, MN 55164-0854

°  We recommend that you send your package by traceable mail and insure it for 2% of the current market value of the shares.

 

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No action is required by you unless you choose to deposit your certificated shares into book-entry.

All future transactions will be credited to book-entry. A Direct Registration Statement reflecting any DRS transactions processed for your account will be delivered to your address. Certificates will only be issued upon request.

Any questions you may have regarding DRS may be directed to Wells Fargo Shareowner Services at the above address or by contacting a Shareowner Relations Representative at 1-800-468-9716.

Sincerely,

Timothy E. Hall
Secretary

 

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FLEXSTEEL INDUSTRIES, INC.

P.O. Box 877
Dubuque, Iowa 52004-0877

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held December 10, 2007

TO THE SHAREHOLDERS:

The Annual Meeting of Shareholders of Flexsteel Industries, Inc. will be held at the Hilton Minneapolis, 1001 Marquette Avenue, Minneapolis, Minnesota 55403, on Monday, December 10, 2007 at 2:00 p.m. for the following purposes:

	1.	To elect three (3) Class III Directors to serve until the year 2010 Annual Meeting and until their successors have been elected and qualified or until their earlier resignation, removal or termination (Proposal I).
	2.	To consider and act upon a proposal to approve the 2007 Long-Term Management Incentive Compensation Plan, together with the reservation of 500,000 shares of common stock for issuance under the 2007 plan (Proposal II).
	3.	To transact such other business as may properly come before the meeting or any adjournments or postponements of the meeting.

October 17, 2007 has been fixed as the record date for the determination of common shareholders entitled to notice of and to vote at the meeting. Only holders of record at the close of business on that date will be entitled to vote at the meeting or any adjournments or postponements of the meeting.

Whether or not you plan to attend the meeting, please mark, date and sign the accompanying proxy and return it promptly in the enclosed envelope which requires no additional postage if mailed in the United States. If you attend the meeting, you may vote your shares in person even though you have previously signed and returned your proxy. Voting by ballot at the meeting cancels any proxy previously returned.

BY ORDER OF THE BOARD OF DIRECTORS

TIMOTHY E. HALL
Secretary

November 1, 2007

 

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FLEXSTEEL INDUSTRIES, INC.

P.O. Box 877
Dubuque, Iowa 52004-0877

PROXY STATEMENT
Annual Meeting of Shareholders to be Held

December 10, 2007

This proxy statement and the accompanying proxy is solicited on behalf of the Board of Directors, referred to as the Board, of Flexsteel Industries, Inc., referred to as the Company or Flexsteel, to be used at the Annual Meeting of Shareholders to be held on Monday, December 10, 2007, and any adjournments or postponements of the meeting, for the purposes set forth in the notice of meeting accompanying this proxy statement.

The mailing address of the corporate office and principal executive office of the Company is P.O. Box 877, Dubuque, IA 52004-0877. The approximate date on which this proxy statement and accompanying proxy card are first being mailed to shareholders is November 1, 2007.

PROXIES AND VOTING

Each shareholder who signs and returns a proxy in the form enclosed with this proxy statement has the unconditional right to revoke the proxy at any time prior to its use at the meeting. A shareholder can change his or her proxy or vote in one of three ways:

	•	send a signed notice of revocation to our Secretary to revoke the previously given proxy;
	•	send a completed proxy card bearing a later date than the previously given proxy to our Secretary indicating the change in your vote; or
	•	attend the meeting and vote in person, which will automatically cancel any proxy previously given, or the shareholder may revoke his or her proxy in person, but a shareholder’s attendance at the meeting alone will not revoke any proxy that the shareholder has previously given.

If a shareholder chooses either of the first two methods, the shareholder must take the described action no later than the beginning of the meeting. Once voting on a particular matter is completed at the meeting, a shareholder will not be able to revoke his or her

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proxy or to change his or her vote as to that matter. Unless a shareholder’s proxy is so revoked or changed, the shares of common stock represented by each proxy received by the Company will be voted at the meeting and at any adjournments or postponements of the meeting. If a shareholder’s shares of common stock are held in street name by a broker, bank or other financial institution, such shareholder must contact them to change his or her vote. Execution of the proxy will in no way affect a shareholder’s right to attend the meeting and vote in person. If a shareholder specifies how the proxy is to be voted on any business to come before the meeting, it will be voted in accordance with such specification. If no specification is made, it will be voted FOR the election of Jeffrey T. Bertsch, Lynn J. Davis and Eric S. Rangen as Class III Directors (Proposal I) and FOR the approval of the 2007 Long-Term Management Incentive Compensation Plan, together with the reservation of 500,000 shares of common stock for issuance under the 2007 plan (Proposal II). Each of the above named director nominees have been previously elected by the shareholders.

As of the close of business on October 17, 2007, the record date for determining shareholders entitled to notice of, and to vote at, the meeting, the Company had 6,572,464 outstanding shares of common stock, par value $1.00 per share, which is the only class of the Company’s capital stock entitled to vote at the meeting. Each share of common stock issued and outstanding as of the record date is entitled to one vote upon each matter to be presented at the meeting, and cumulative voting for directors is not permitted. A quorum, consisting of a majority of the outstanding shares of common stock entitled to vote at the meeting, must be present in person or represented by proxy before action may be taken at the meeting.

Votes cast by proxy or in person will be counted by the inspector of election appointed for the meeting who will be present at the meeting. The affirmative vote of a plurality of the shares of common stock present in person or represented by proxy at the meeting is required for the election of the director nominees named in this proxy statement. Adoption of the proposal to approve the 2007 Long-Term Management Incentive Compensation Plan requires the affirmative vote of a majority of the shares of common stock present in person or represented by proxy at the meeting. The inspector of election will treat abstentions as shares that are present and entitled to vote for purposes of determining a quorum, but abstentions and broker non-votes shall not be counted as votes for or against the proposal being voted on.

While the Board knows of no other matter to be presented at the meeting or any adjournment or postponement of the meeting, all proxies returned to the Company will be voted on any such matter in accordance with the judgment of the proxies.

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EXPENSE OF SOLICITATION

The cost of the solicitation of proxies on behalf of the Board will be paid by the Company. Solicitation of proxies will be principally by mail. In addition, the officers or employees of the Company and others may solicit proxies, either personally, by telephone, by special letter, or by other forms of communication. The Company will also make arrangements with banks, brokerage houses and other custodians, nominees and fiduciaries to send proxies and proxy material to their principals and will reimburse them for reasonable expenses in so doing. Officers and employees of the Company will not receive additional compensation in connection with the solicitation of proxies.

PROPOSAL I

ELECTION OF DIRECTORS

Our Restated Articles of Incorporation, as amended, permit the election of 13 Directors. The Board currently consists of ten persons divided into three classes. At this time, the Board has determined to maintain the size of the Board at ten members. At each Annual Meeting the terms of one class of Directors expire and persons are elected to that class for terms of three years or until their respective successors are duly qualified and elected or until their earlier resignation, removal or termination.

The Board has nominated, based on the recommendation of the Nominating and Compensation Committee, Jeffrey T. Bertsch, Lynn J. Davis and Eric S. Rangen for election as Class III Directors of the Company. The Class III Directors’ next term expires at the time of the year 2010 Annual Meeting and until their respective successors have been elected and qualified or until their earlier resignation, removal or termination. It is the intention of the proxies named herein to vote FOR these nominees unless otherwise directed in the proxy. All of the nominees have been previously elected by the shareholders.

All nominees named above have consented to serve as Directors if elected. In the event that any of the nominees should fail to stand for election, the persons named as proxy in the enclosed form of proxy intend to vote for substitute nominees as may be selected by the Board. The proxies cannot be voted for a greater number of persons than the number of nominees named in this proxy statement.

The Board recommends a vote for its Director nominees named in this proxy statement. Proxies solicited by the Board will be so voted unless shareholders specify otherwise in their proxies.

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(1)	Member of Audit and Ethics Committee
(2)	Member of Nominating and Compensation Committee

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The Nominating and Compensation Committee of the Board of Directors, referred to as the Committee, is responsible for establishing our policy for compensating executive officers. The Committee is comprised of independent directors as defined in The Nasdaq Stock Market listing standards. The Committee also has oversight responsibility of our annual incentive plans, stock option plans, long-term incentive plans and other benefit plans for our executive officers.

Compensation Philosophy and Objectives — Our overall compensation philosophy is that compensation levels should be adequate to attract and retain highly-qualified executives without being unreasonable or excessive relative to market practice. See “Corporate Governance – Committees of the Board – Nominating and Compensation Committee” for a more detailed discussion of our compensation philosophy and practices. See “Performance-based Compensation,” “Annual Incentive” and “Long-Term Incentives” below for further discussions of performance-based compensation. While a portion of our executives’ compensation fluctuates with annual results, the total compensation program is structured to include long-term performance awards to motivate our executives to work for sustained growth in shareholder value.

Performance-based Compensation — We have historically provided performance-based compensation through the use of both annual and long-term incentives. See “Annual Incentive” below for a discussion of our annual performance-based compensation. Long-term incentive awards have historically been based on a three-year

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average of return on equity, adjusted for infrequent or non-recurring items. The beginning of each fiscal year marked the start of another three-year performance period.

During the past fiscal year, the Committee reviewed the structure of our existing long-term management incentive compensation plan with the assistance of the independent consulting firm of Mercer Human Resources Consulting, referred to as Mercer. Based on this review, the Committee recommended to our Board of Directors that it adopt a new form of long-term management incentive plan because our current shareholder approved management incentive plan has not resulted in the pay-out of significant incentive compensation in prior years and has not created a positive influence for our executives. The plan recommended by the Committee incorporates different corporate performance measures from those included in the current plan to better incent our executives to grow shareholder value. Based upon the recommendation of the Committee, our Board of Directors adopted, and has submitted to a vote of our shareholders at the 2007 Annual Meeting, the proposed 2007 Long-Term Management Incentive Compensation Plan, referred to as the 2007 plan. See “Proposal II – Approval of 2007 Long-Term Management Incentive Compensation Plan” for a more complete discussion of the terms and conditions of the 2007 plan.

Components of Executive Compensation — The principal components of our executive compensation program have historically included base salaries, annual cash bonuses, and long-term incentives using our common stock. Beginning with fiscal 2008, long-term incentives will use a combination of our common stock and cash. The change to long-term compensation that includes a combination of our common stock and cash was made to allow the executive to utilize the cash portion of the award to pay income taxes on the total amount awarded under the plan.

Base Salary — An individual executive’s base salary is based upon the executive’s level of responsibility, cumulative knowledge and experience, past individual performance, contributions to past corporate performance, and competitive rates of pay. The Committee reviews each executive officer’s salary annually and makes adjustments, as appropriate, based on the Chief Executive Officer’s recommendation and in light of any change in the executive’s responsibility, changes in competitive salary levels, and the executive’s past performance.

The base salary of Ronald Klosterman, our Chief Executive Officer since December 31, 2006, increased by $83,000 or 28% in fiscal 2007 as compared to fiscal 2006 in recognition of his promotion to Chief Executive Officer from his prior positions of President and Chief Operating Officer. Similarly, the base salary of Timothy E. Hall, our

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Chief Financial Officer, Vice President-Finance and Secretary, increased by $42,000 or 30% in fiscal 2007 as compared to fiscal 2006 in recognition of a full year in the position of Chief Financial Officer, a position that he was promoted to in June 2005, and to bring his base salary more in line with the salaries of other chief financial officers in the companies surveyed by Mercer. The base salaries of our other named executive officers (K. Bruce Lauritsen, our Chief Executive Officer through December 30, 2006, Donald D. Dreher, our Senior Vice President, and the President and Chief Executive Officer of DMI Furniture, Inc., James R. Richardson, Senior Vice President of Sales and Marketing, and Thomas D. Burkart, our Senior Vice President Vehicle Seating) increased in fiscal 2007 as compared to fiscal 2006 based on annual merit increases in executive base salaries as follows:

The Committee and we believe that the base salaries of the named executive officers for fiscal 2007 were at acceptable market rates as they were generally near the median of the base salary levels of comparable executives in the companies surveyed by Mercer.

Annual Incentive — The purpose of our annual incentive program is to provide a direct monetary incentive to our executive officers to achieve company objectives for the year. For this reason, our annual incentive program is structured as an annual cash bonus tied to the achievement of corporate performance objectives during the year. Historically, the Committee has used a 12% return on equity adjusted for infrequent or non-recurring items as the target measure from which minimum and maximum levels were determined. Corresponding incentive award levels, expressed as a percentage of the executive’s salary ranging from 40% to 50%, also were based primarily on an individual’s responsibility level. If minimum performance levels are not met, no bonus award is made. After the completion of the year, the Committee ratifies cash bonuses as awarded based principally on the extent to which targets have been achieved. For fiscal year 2007, the Committee set performance objectives, which varied, for each executive based on the executive’s areas of responsibility. The Committee also reviewed our Chief Executive Officer’s recommendations on the appropriate performance objectives to use for each executive. The fiscal year 2007 performance objectives, including weighting for each objective, for our named executive officers were as follows:

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	•	60% consolidated net income, 20% consolidated net sales and 20% consolidated free cash flow for each of K. Bruce Lauritsen, Ronald J. Klosterman and Timothy E. Hall;
	•	10% consolidated net income, and 90% related to individual goals under his areas of responsibility for Donald D. Dreher;
	•	10% consolidated net income, 10% consolidated free cash flow, and 80% related to individual goals under their respective areas of responsibility for James R. Richardson and Thomas D. Burkart.

Under the terms of Mr. Dreher’s current employment agreement, he is entitled to an annual bonus of not less than $50,000. The Committee has full discretion to increase awards earned under the annual incentive program and elected to increase the award payable to Ronald J. Klosterman, Timothy E. Hall and Thomas D. Burkart to better reflect their fiscal year 2007 performance. Annual cash bonuses made to named executive officers for fiscal year 2007 for achievement of performance objectives are reflected in the column titled “Non-Equity Incentive Plan Compensation” of the Summary Compensation Table on page 12.

Long-Term Incentives — Our long-term incentive compensation program involves the use of stock under two types of awards: long-term incentive awards tied to achievement of corporate performance goals and stock options. Both types of awards are intended to focus executives’ attention on the achievement of our long- term performance objectives to align the executive officers’ interests with those of shareholders. The level of award opportunities, as combined under both plans, are intended to be consistent with typical levels of comparable companies identified by the compensation consultant and reflect the Committee’s assessment of an individual’s level of responsibility and performance.

Long-term incentive awards have been paid under the current shareholder approved management incentive plan. Historically, awards have given executives the opportunity to earn shares of our common stock if the three-year average return on equity objectives is achieved. Two-thirds of any earned shares are subject to forfeiture provisions tied to the executive’s continued service with us. This provision is intended to enhance our ability to retain key executives and provide a long-term performance focus. None of our named executive officers earned shares under the long-term incentive compensation program for fiscal 2007. Under the 2007 plan, different corporate performance measures may be used in the discretion of the Committee. As with annual incentives, various levels of performance goals and corresponding compensation amounts are established by the Committee at the beginning of each performance period taking into consideration the

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Chief Executive Officer’s recommendations. No awards are earned if a minimum level is not achieved. The Committee has discretion to adjust any awards earned under the 2007 plan.

The Committee has selected our consolidated operating results for organic net sales growth and fully-diluted earnings per share, as defined in the 2007 plan, for the two-year transitional performance period beginning July 1, 2008 and ending on June 30, 2009 and the three-year performance period beginning on July 1, 2008 and ending on June 30, 2010. These two performance measures were selected as being most relevant to reflecting our corporate performance at this time. In particular, we believe that our organic net sales growth measure is an indication of a growing and dynamic organization that reflects information presented in our strategic plan while our fully-diluted earnings per share measure is broadly accepted as a relevant measure of the overall quality of an investment in us and our performance. The Committee has also specified that payouts for awards earned under the 2008-2009 and 2008-2010 performance periods will be 60% stock and 40% cash.

Stock options, as awarded under shareholder-approved plans, give executives the opportunity to purchase our common stock for a term not to exceed ten years and at a price of no less than the closing sale price of our common stock on the date of grant. Executives benefit from stock options only to the extent stock price appreciates after the grant of the option. The Committee recognizes that each executive officer, rather than the Committee, decides whether or not to exercise an option at any given time. For this reason, the Committee’s decision to grant a stock option to an executive officer does not take into account any gains realized by the executive officer due to a decision to exercise a pre-existing option in any given year. Historically, stock options are immediately exercisable and have not been subject to vesting over time. Given this company tradition and the long tenure of our executives, the Committee has no current plans to impose a vesting schedule on future grants of stock options. The Committee has not repriced stock options or replaced stock options that are underwater in the past and does not intend to engage in either practice in the future. Stock options are granted at the Committee’s regularly scheduled meeting held in December of each year, based on recommendations from the Chief Executive Officer. Most Committee meetings are scheduled a year in advance. We make scheduling decisions for Committee meetings without regard to anticipated earnings or other major announcements. The Committee will consider granting stock options to newly hired executives on a case-by-case basis. The aggregate grant date fair value of stock options granted to our named executive officers during fiscal year 2007, computed in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standard No. 123(R) (“FAS 123(R)”), is reflected in the column

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titled “Option Awards” in the Summary Compensation Table on page 12 and in the column titled “Grant Date Fair Value of Stock and Stock Option Awards” in the Grants of Plan-Based Award table on page 15.

Employee Benefits — We offer core employee benefits on a non-discriminatory basis to all of our full-time employees, including our executives, in order to provide our workforce with a reasonable level of financial support in the event of illness, injury or retirement and to be competitive in the marketplace. These non-discriminatory benefits include:

	•	medical coverages;
	•	disability coverage;
	•	paid sick leave;
	•	life insurance;
	•	paid vacation leave;
	•	matching contribution paid to 401(k) savings plan; and
	•	retirement plan contribution.

The cost of both employee and post-employment benefits listed above is partially borne by each employee, including each executive officer.

Post-Termination Benefits — Donald D. Dreher, our Senior Vice President, and President and Chief Executive Officer of DMI Furniture, Inc., has post-termination benefits under his employment agreement dated October 1, 2006 which are described under “Executive Compensation – Potential Payments Upon Termination or Change-In-Control” below. We provided these benefits to Mr. Dreher as it was a condition to his agreement to continue employment with us. We do not provide any special termination or change-in-control benefits to our other executive officers.

Nonqualified Deferred Compensation and Senior Officer Supplemental Retirement Plan Benefits — We offer a voluntary deferred compensation plan, and a senior officer supplemental retirement plan to our executive officers, other than Donald D. Dreher (who receives the benefits required by his employment agreement), to provide additional compensation to them on a post-employment basis. We believe these additional benefits motivate our executive officers to exert their best efforts in the performance of their jobs. See the discussions following the Summary Compensation Table on page 12 and the Nonqualified Deferred Compensation table on page 19 for a description of our deferred compensation and retirement plan benefits offered to our executive officers.

Perquisites — We offer the following perquisites to our executive officers:

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car allowance or use of a company-provided car;

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	•	country club dues;
	•	tax planning services;
	•	supplemental health insurance; and
	•	furniture program.

These perquisites are provided to retain superior executives for key positions, to assist their business development efforts and to remain competitive in the marketplace. Mr. Dreher’s current employment agreement provides that we provide him with life insurance; health, disability and travel accident insurance consistent with DMI Furniture, Inc’s coverage; automobile allowance; reimbursement for certain medical care expenses; personal tax and financial planning expense allowance; and country club dues. The value of the perquisites provided to our named executive officers is set forth in the column titled “All other compensation” of the Summary Compensation Table on page 12.

Tax and Accounting Implications — As part of its role, the Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1,000,000 that is paid to certain individuals. We believe that the compensation paid to our executive officers are generally fully deductible for federal income tax purposes. However, in certain situations, the Committee may approve compensation that will not meet these requirements in order to ensure competitive levels of total compensation for our executive officers. For fiscal 2007, the current levels of compensation for our executive officers were less than the $1,000,000 level of non-deductibility.

Compensation Committee Report

The Nominating and Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this proxy statement with management. Based on the review and discussions with management with respect to the Compensation Discussion and Analysis, the Nominating and Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

The foregoing report is provided by the following directors, who constitute the Nominating and Compensation Committee:

Robert E. Deignan Chair

Mary C. Bottie

Lynn J. Davis

Thomas E. Holloran

Eric S. Rangen

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Summary Compensation Table

The following table sets forth the cash and non-cash compensation for the last fiscal year awarded to or earned by (i) each individual that served as our Chief Executive Officer during our fiscal year ended June 30, 2007, referred to as fiscal 2007; (ii) each individual that served as our Chief Financial Officer during fiscal 2007; and (iii) our three most highly compensated individuals who served as executive officers of Flexsteel other than our Chief Executive Officers and Chief Financial Officer at the end of fiscal 2007. The Chief Executive Officers, the Chief Financial Officer and the other executive officers named below are collectively referred to in this proxy statement as the named executive officers.

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(1)	Mr. Lauritsen ceased serving as Chief Executive Officer on December 31, 2006, and he passed away on May 20, 2007.

(2)	Mr. Klosterman has served as Chief Executive Officer since December 31, 2006.

(3)	The amounts shown represent the aggregate grant date fair value computed in accordance with FAS 123(R).

(4)	The amounts shown represent the amounts earned under our annual incentive program.

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(5)

Includes for the named executive officer indicated amounts paid or accrued for the following perquisites and personal benefits: car allowance or company-provided car, tax planning services, country club dues, supplemental health insurance, furniture program, company retirement plan contributions and matching contributions to our 401(k) plan. The amount of our contribution to the senior officer supplemental retirement plan is included in the Nonqualified Deferred Compensation table as the line titled “Supplemental Plan” in the column titled “Registrant Contributions in Last FY” on page 19.

(6)	Includes for the named executive officer indicated amounts paid for the following perquisites and personal benefits: car allowance or company-provided car, tax planning services, country club dues, and matching contributions to our 401(k) plan.

We offer the following retirement plan benefits to our executive officers, other than Donald D. Dreher (who receives the benefits required by his employment agreement):

•   Retirement Savings Plans.   We maintain the Flexsteel Industries, Inc. Salaried Employees Retirement and 401(k) Plan, referred to as the Retirement Plan, a qualified plan available generally to all salaried employees. The Retirement Plan provides that we can make discretionary contributions, on a non-discriminatory basis, under the Retirement Plan. There was no discretionary contribution during fiscal 2007. The Retirement Plan also provides for each participant to make elective contributions up to 50% of base salary and annual cash bonus (pay), subject to Internal Revenue Code limits, which are matched by us at 25% of the first 4% of pay contributed by the participant. In addition, the Retirement Plan requires that we contribute 4% of pay up to the Social Security base and 6% of pay in excess of the Social Security base on behalf of each participant in the plan. The amount of these matching contributions and other required company contributions is shown in the Summary Compensation Table in the column titled “All other compensation” on page 12.

•   Nonqualified Voluntary Deferred Compensation and Senior Officer Supplemental Retirement Plans.   

Voluntary Deferred Compensation – We maintain the Flexsteel Industries, Inc. Voluntary Deferred Compensation Plan, referred to as the Voluntary Plan, which allows our executive officers the opportunity to voluntarily defer, based on annual elections, 10% to 30% of their base salary, 10% to 100% of annual incentive compensation and 33% to 100% of the their long-term incentive compensation. We offer this opportunity to our executive officers to assist them in income tax and estate planning purposes. The executive officer may elect an earnings credit based on the prime interest rate effective on January 1 of each calendar year, the annual return of the S&P 500 Index as of the end of the calendar year, or a combination of the two. Distributions are made upon the earliest of

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the participant’s death, disability, or the date which is six months after the date of the executive’s separation of service. The Voluntary Plan does not permit us to make contributions.

Senior Officer Supplemental Retirement Plan – We maintain supplemental retirement plans, collectively referred to as the Supplemental Plan, which provide for additional annual defined contributions toward retirement benefits to our senior executive officers. The additional contribution is stipulated in the executive’s individual agreements or in the document governing the arrangements. The combined annual contribution rate for fiscal 2007 for the named executive officers were as follows:

Earnings are credited to the accumulated contributions based on the investment return of assets we designate for this obligation. The amount of the contribution for each named executive officer is reported in the Summary Compensation Table in the column titled “All other compensation”. Distributions begin when the executive attains age 65 and retires or in some cases when the executive terminates employment. Distributions are paid in installments or lump sums as elected by the executive. Under the Supplemental Plan our named executive officers are entitled to monthly payments of $5,000 until they reach or would have reached age 65 upon termination of employment due to death or disability.

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Grants of Plan-Based Award

The following table sets forth certain information relating to non-equity and equity incentive plan awards granted to our named executive officers as of June 30, 2007. For purposes of the table below, we refer to our fiscal 2008 annual incentive plan as FY08 AIP, our transitional two-year performance period for fiscal years 2008 and 2009 under our long-term incentive compensation program as FY08–09 LTIP and our three-year performance period for fiscal years 2008, 2009 and 2010 under our long-term incentive compensation program as FY08–10 LTIP. There is no way of knowing at this time what our actual performance will be or what the actual award payout will be under the non-equity and equity incentive plans.

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The following discussion is to provide an understanding of the information presented in the table above. For more detailed information see the Annual Incentive discussion on page 7 and the Long-term Incentives discussion on page 8.

The percentage of compensation to be earned under the annual and long-term incentive plans are consistent with those offered historically by us with at target compensation of 40% of base salary, with the exception of Ronald J. Klosterman and Donald D. Dreher. Mr. Klosterman’s at target compensation percentage is 50% due to his position and responsibilities. Mr. Dreher’s employment agreement states that the at target percentage is 75% of base compensation. The at threshold compensation percentage is 14% of base compensation, with the exception of Mr. Klosterman whose at threshold percentage is 17.5% of base compensation due to the reasons listed above. Mr. Dreher’s minimum award is $50,000 per his employment agreement. The maximum percentage that can be achieved is 64% of base compensation, with the exception of Ronald J. Klosterman and Donald D. Dreher. Mr. Klosterman’s percentage is 80% of base compensation due to his position and Mr. Dreher’s percentage is 120% of base compensation per his employment agreement. The Nominating and Compensation Committee and management set the performance targets at the higher-end of our expected performance.

The Grant Date Fair Value of Stock and Option Awards shown in the table above were determined in accordance with FAS 123(R) and are included in the Summary Compensation Table on page 12 in the column titled “Option Awards”.

There were no awards made to K. Bruce Lauritsen for fiscal year 2007 as he passed away on May 20, 2007.

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Outstanding Equity Awards at Fiscal Year-End

The following table sets forth certain information relating to equity awards outstanding at June 30, 2007 for each of our named executive officers.

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(1)	All option awards are fully vested as of the date of grant.

(2)	Mr. Lauritsen passed away on May 20, 2007, and his estate currently has the rights to exercise these options. Under the terms of the stock option plans, the options must be exercised within two years of Mr. Lauritsen’s death.

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Nonqualified Deferred Compensation

The following information sets forth certain information relating to nonqualified deferred compensation as of June 30, 2007 for our named executive officers.

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(1)	These amounts are included in the column titled “All other compensation” of the Summary Compensation Table on page 12.

For a description of the Supplemental Plan and Voluntary Plan, see the discussion following the Summary Compensation Table beginning on page 12. We are not permitted to make contributions to the Voluntary Plan nor are our executives permitted to make contributions to the Supplemental Plan.

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Potential Payments Upon Termination or Change-In Control

Donald D. Dreher, our Senior Vice President, and President and Chief Executive Officer of DMI Furniture, Inc., is the only named executive officer entitled to receive post-termination benefits upon termination of employment as provided under his employment agreement described below. None of our named executive officers are entitled to change-in-control benefits. Our named executive officers are entitled to monthly payments of $5,000 until they reach or would have reached age 65 upon termination of employment due to death or disability. Other than the foregoing, our named executive officers do not receive any benefits or payments upon termination of employment with us.

Employment Agreement for Donald D. Dreher.    On October 1, 2006, we entered into an employment agreement with Donald D. Dreher, a Senior Vice President of Flexsteel and Chief Executive Officer and President of DMI Furniture, Inc. The employment agreement is effective through December 31, 2009, unless terminated prior to that time as provided in the employment agreement. We have the right to terminate the employment agreement upon 30 days advance notice without cause and can terminate the employment agreement for cause (as defined in the employment agreement) upon 120 days advance notice. Under the terms of the employment agreement, Mr. Dreher is entitled to a base annual salary of $354,300 and an annual bonus, subject to achieving annual performance levels established by our Board, of not less than $50,000. Mr. Dreher’s employment agreement also provides that we provide him with life insurance; health, disability and travel accident insurance consistent with DMI Furniture, Inc’s coverage; automobile allowance; reimbursement for certain medical care expenses; personal tax and financial planning expense allowance; and country club dues. If Mr. Dreher becomes disabled, his fringe benefits continue through December 31, 2009. If the employment agreement is terminated without cause prior to December 31, 2009, Mr. Dreher is entitled to payment in one lump sum of the balance of his base salary through December 31, 2009 so long as he agrees to comply with the noncompete provisions of the employment agreement. The employment agreement also contains a 24-month post-termination noncompete provision and a non-solicitation and confidentiality provisions. Assuming Mr. Dreher was terminated without cause effective June 30, 2007, he would have been entitled to an estimated lump sum cash severance payment in the aggregate amount of approximately $550,000. If he had been terminated due to disability effective June 30, 2007, Mr. Dreher would have been entitled to the continuation of all of his fringe benefits through December 31, 2009 with an estimated present value of approximately $26,000. The foregoing amounts are estimates of the amounts that would have been paid out to Mr. Dreher upon his termination of employment. The actual amounts to be paid out can only be determined at the time Mr. Dreher in fact terminates employment with us.

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DIRECTOR COMPENSATION

The following table sets forth the cash and non-cash compensation for fiscal 2007 awarded to or earned by each of our directors who is not also a named executive officer.

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(1)

Each Director who is not employed by us is paid a retainer at the rate of $12,000 per year. In addition, each is paid a fee of $3,000 for each Board meeting each attends. The Chairman of the Board is paid a retainer of $20,800 per year and a fee of $5,200 for each Board meeting attended. For attending a committee meeting or a meeting of independent directors each is paid a fee of $1,300. The Chairman of each Committee is paid $1,500 for each meeting attended. We pay no additional remuneration to our employees who are Directors.

(2)

The amounts shown represent the aggregate grant date fair value computed in accordance with FAS 123(R). Each Director who is not employed by us receives on the first business day after each annual meeting a non-discretionary, non-qualified stock option grant for 2,500 shares valued at fair market value on the date of grant, exercisable for 10 years. Each person who becomes for the first time a non-employee member of the Board, including by reason of election, appointment or lapse of three (3) years since employment by us, will receive an immediate one-time option grant for 2,500 shares.

(3)	We have a long-standing agreement with Thomas E. Holloran pursuant to which we will pay to him, or his beneficiaries, $20,000 after he ceases to be a Director as additional compensation in recognition of Director services rendered.

CORPORATE GOVERNANCE

Board of Directors

Our Board of Directors is currently comprised of the ten members identified under Proposal 1 (Election of Directors). The Board of Directors has not appointed, or nominated for election at the 2007 annual meeting of shareholders, a person to fill the vacancy on the Board of Directors resulting from the death of Mr. Lauritsen in May 2007. During the fiscal year ended June 30, 2007, four meetings of the Board were held. All of the directors of the Company attended no less than 75% of the meetings of the Board and

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the committees on which they served. The Company does not have a formal policy regarding attendance by Board members at the Company’s annual meetings, but the Board encourages all its members to attend the annual meeting of shareholders. All members of the Board of Directors attended the prior year’s annual meeting.

The Board has determined that the following directors, which constitute a majority of the Board of Directors, are independent directors as defined by The Nasdaq Stock Market LLC listing standards: Mary C. Bottie, L. Bruce Boylen, Lynn J. Davis, Robert E. Deignan, Thomas E. Holloran and Eric S. Rangen. The independent directors meet periodically in executive session without the Chief Executive Officer or other management directors present. The Chairman of the Audit and Ethics Committee presides at these meetings.

Ability of Shareholders to Communicate with the Board of Directors

The Board has provided the means by which shareholders may send communications to the Board or to individual members of the Board. Such communications, whether by letter, email or telephone should be directed to the Secretary of the Company who will forward them to the intended recipients. However, unsolicited advertisements or invitations to conferences or promotional material, in the discretion of the Secretary, may not be forwarded to the directors.

Committees of the Board

Our Board of Directors has established two standing committees of the Board. The names of the committees and the principal duties are as follows:

Audit and Ethics Committee — Confers with the independent registered public accounting firm on various matters, including the scope and results of the audit; authorizes special reviews or audits; reviews internal auditing procedures and the adequacy of internal controls; and reviews policies and practices respecting compliance with laws, conflicts of interest and ethical standards of the Company. The Committee held four meetings during the fiscal year ended June 30, 2007. The Committee members are Thomas E. Holloran, Mary C. Bottie, Lynn J. Davis, Robert E. Deignan and Eric S. Rangen. The Board has adopted a written charter for the Audit and Ethics Committee. The Board believes all Audit and Ethics Committee members are independent as defined by The Nasdaq Stock Market LLC listing standards. The Board has determined that at least one member of the Audit and Ethics Committee qualifies as an “audit committee financial expert” within the meaning of the Securities Exchange Act of 1934, as amended, referred to as the 1934 Act, and has designated Eric S. Rangen as the audit committee financial expert.

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Nominating and Compensation Committee — Makes recommendations regarding Board compensation, reviews performance and compensation of all executive officers, determines stock option grants, and advises regarding employee benefit plans. Reviews timely proposed nominations received from any source including nominations by shareholders and makes recommendations to the Board regarding all director nominees.

The Board has adopted a written charter for the Nominating and Compensation Committee. The Board believes all Nominating and Compensation Committee members are independent as defined by The Nasdaq Stock Market LLC listing standards. The Committee held three meetings during the fiscal year ended June 30, 2007. The Committee members are Robert E. Deignan, Mary C. Bottie, Lynn J. Davis, Thomas E. Holloran and Eric S. Rangen.

Executive Compensation Objectives — The fundamental objective of our executive compensation program is to support the achievement of our business objectives while creating shareholder value. We and the Nominating and Compensation Committee believe that executive compensation policy and practice should be designed to achieve the following objectives:

	•	Align the executives’ interest with our shareholders by providing a significant portion of compensation in our common stock.
	•	Provide an incentive to executives to improve our financial performance by tying a meaningful portion of compensation to the achievement of corporate financial objectives.
	•	Enable us to attract and retain key executives whose skills and capabilities are needed for our continued growth and success by offering competitive total compensation opportunities and providing attractive career opportunities.

Competitive Positioning; Compensation Consultant — The Nominating and Compensation Committee typically reviews executive compensation levels on an annual basis to ensure that we will be able to attract and retain the caliber of executives needed to run our business and that pay for executives is reasonable and appropriate relative to market practice. In making these evaluations, the Nominating and Compensation Committee annually reviews the result of surveys of executive salary and annual bonus levels among durable goods manufacturers of comparable size. The Committee periodically completes an in-depth analysis of salary, annual bonus, and long-term incentive opportunities among specific competitors assisted by an independent compensation consulting firm. The surveyed companies are included in the Household Furniture Index

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used as the peer group for purposes of our stock performance graph. The most recent survey was completed for the Nominating and Compensation Committee in fiscal 2006 with the assistance of the independent consulting firm of Mercer Human Resources Consulting, referred to as Mercer. Mercer was engaged by the Nominating and Compensation Committee. In addition, the Nominating and Compensation Committee worked with Mercer to develop the proposed 2007 plan during fiscal 2007. While the pay of an individual executive may vary, our policy is to target aggregate compensation for executive officers at average competitive levels, provided there is commensurate performance by the executive.

Role of Executives in Establishing Compensation — Our Chief Executive Officer plays an integral role in recommending compensation for executive officers. Our Chief Executive Officer participates in Nominating and Compensation Committee meetings to provide background information on our business, financial and operational objectives, and his evaluation of, and compensation recommendations for, the executive officers in light of their contributions to achieving our business, financial and operational objectives. Our Chief Executive Officer annually reviews the performance of each executive officer. The conclusions reached and compensation recommendations based on these reviews, including salary adjustments, cash bonuses and long-term performance-based compensation, are presented to the Nominating and Compensation Committee. Nominating and Compensation Committee members also develop their own opinions on the annual performance of our named executive officers based on their interactions with them at quarterly Board meetings. The Nominating and Compensation Committee has the discretion to modify any of the Chief Executive Officer’s recommendations. As required by the listing standards of The NASDAQ Stock Market LLC, our Chief Executive Officer does not participate in deliberations concerning, or vote on, the compensation arrangements for himself.

Stock Option Granting Policy — At the Nominating and Compensation Committee’s quarterly meeting in June 2007, the Nominating and Compensation Committee formalized its stock option granting practices by adopting a policy for the grant of stock options. The policy reflects the Nominating and Compensation Committee’s long-standing approach to stock option grants described above. In addition, the policy provides, among other things, that all grants of stock options must be approved by the Nominating and Compensation Committee at in person or telephonic meetings generally on an annual basis; stock options may not be granted to a current director, officer or employee during any quarterly or other blackout period as defined in our insider trading policy; the grant date for each option will be the date of the Nominating and Compensation Committee meeting at which action was taken to approve the stock option; the exercise price for the stock option will

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be equal to the last sale price per share of our common stock as reported on The Nasdaq Stock Market LLC on the grant date; specifies procedures for granting stock options to newly hired executives; and that any program, plan or practice to time or select the grant dates of stock options in coordination with the release by us of material non-public information is prohibited.

Nomination Matters — The Nominating and Compensation Committee will consider each candidate’s general business and industry experience, his or her ability to act on behalf of shareholders, overall Board diversity, potential concerns regarding independence or conflicts of interest and other factors relevant in evaluating Board nominees. If the Nominating and Compensation Committee approves a candidate for further review following an initial screening, the Nominating and Compensation Committee will establish an interview process for the candidate. Generally, the candidate will meet with the members of the Nominating and Compensation Committee, along with our Chief Executive Officer.  Contemporaneously with the interview process, the Nominating and Compensation Committee will conduct a comprehensive conflicts-of-interest assessment of the candidate.  The Nominating and Compensation Committee will consider reports of the interviews and the conflicts-of-interest assessment to determine whether to recommend the candidate to the full Board of Directors.  The Nominating and Compensation Committee will also take into consideration the candidate’s personal attributes, including, without limitation, personal integrity, loyalty to us and concern for our success and welfare, willingness to apply sound and independent business judgment, awareness of a director’s vital part in good corporate citizenship and image, time available for meetings and consultation on Company matters and willingness to assume broad, fiduciary responsibility. 

Recommendations for candidates to be considered for election to the Board at our annual shareholder meetings may be submitted to the Nominating and Compensation Committee by our shareholders. Candidates recommended by our shareholders will be considered under the same standards as candidates that are identified by the Nominating and Compensation Committee.  Nominations by shareholders must be received by the Secretary of the Company at least 18 days before the annual meeting and set forth nominee information as required by the Company’s 1983 Restated Articles of Incorporation, as amended, which are available upon request to the Secretary of the Company. To enable the committee to evaluate the candidate’s qualifications, shareholder recommendations must include the following information:

•

The name, age, business address and if known, residence address of each nominee proposed in such notice;

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	•	The principal occupation or employment of each such nominee; and
	•	The number of shares of stock of the Company, which are beneficially owned by each such nominee.

Committee Charters — Subject to applicable law and regulatory requirements, the Board may establish additional or different committees from time to time. The charters of the Audit and Ethics Committee and Nominating and Compensation Committee are available at www.flexsteel.com. The charter of the Audit and Ethics Committee was attached to our proxy statement for the 2006 annual meeting of shareholders as Appendix A. The Audit and Ethics Committee charter was adopted by the Board on December 7, 2003 and was most recently re-approved by the Audit and Ethics Committee on June 4, 2007. The Nominating and Compensation Committee charter was adopted by the Board on September 13, 2004 and was amended and restated by the Board on June 4, 2007. A copy of the amended and restated charter of the Nominating and Compensation Committee is attached to this proxy statement as Appendix A.

Audit and Ethics Committee Report

The Audit and Ethics Committee has reviewed and discussed the audited financial statements with management. The Audit and Ethics Committee has discussed with Deloitte & Touche LLP, the Company’s independent registered public accounting firm, the matters required to be discussed by Public Company Accounting Oversight Board (PCAOB) AU 380, “Communication with Audit Committees”, as may be modified or supplemented. The Audit and Ethics Committee has received the written disclosures and the letter from Deloitte & Touche LLP required by Independence Standards Board Standard No. 1, as may be modified or supplemented, and has discussed with Deloitte & Touche LLP, the firm’s independence. Based on the review and discussions referred to above in this report, the Audit and Ethics Committee recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the last fiscal year for filing with the SEC.

This report has been prepared by members of the Audit and Ethics Committee. Members of this Committee are:

Thomas E. Holloran Chair

Mary C. Bottie

Lynn J. Davis

Robert E. Deignan

Eric S. Rangen

Compensation Committee Interlocks and Insider Participation

The current members of the Company’s Nominating and Compensation Committee are Robert E. Deignan, Chairman, Mary C. Bottie, Lynn J. Davis, Thomas E. Holloran and

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Eric S. Rangen, none of whom is, or has been, an officer or employee of the Company. No executive officer of the Company served as a director of another entity that had an executive officer serving on the Company’s compensation committee. No executive officer of the Company served as a member of the compensation committee of another entity which had an executive officer who served as a director of the Company.

Code of Ethics

The Company has had a written code of ethics titled Guidelines for Business Conduct for many years. The code of ethics applies to the Company’s directors and employees including the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer. The code of ethics includes guidelines relating to the ethical handling of actual or potential conflicts of interest, compliance with laws, accurate financial reporting, and procedures for promoting compliance with, and reporting violations of, the code of ethics. The code of ethics is available on the Company’s website at www.flexsteel.com. The Company intends to post any amendments to or waivers of its code of ethics (to the extent applicable to the Company’s Chief Executive Officer, Chief Financial Officer or Principal Accounting Officer) at this location on its website.

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OWNERSHIP OF STOCK BY
DIRECTORS AND EXECUTIVE OFFICERS

The table below sets forth the shares of the Company’s common stock beneficially owned by the Company’s directors, the named executive officers, and by all directors and executive officers as a group as of September 18, 2007. Unless otherwise indicated, to the best knowledge of the Company, all persons named in the table have sole voting and investment power with respect to the shares shown.

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(1)	Includes the following number of shares which may be acquired by exercise of stock options: J.T. Bertsch – 62,000; M.C. Bottie – 7,500; L.B. Boylen – 16,000; P.M. Crahan – 53,000;

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L.J. Davis – 7,500; R.E. Deignan – 10,000; T.E. Holloran – 16,000; R. J. Klosterman – 54,250; K.B. Lauritsen – 82,000; E.S. Rangen – 12,000; J.R. Richardson – 53,750; T.D. Burkart – 43,000; D.D. Dreher – 38,750; T.E. Hall – 26,500.

(2)	Includes shares, if any, owned beneficially by their respective spouses.

(3)

Does not include 186,138 shares held in irrevocable trusts for which trusts American Trust & Savings Bank serves as sole trustee. Under the Terms of Trust, J. T. Bertsch has a possible contingent interest in each trust. J. T. Bertsch disclaims beneficial ownership in the shares held by each such trust.

(4)	Includes 180,763 shares held in the Irrevocable Arthur D. Richardson Trust for which J.R. Richardson serves as co-trustee and over which shares J.R. Richardson has the rights of voting and disposition.

(5)	Includes the following number of shares deferred pursuant to election to participate in the Company’s Voluntary Deferred Compensation Plan: J.T. Bertsch – 9,769; P.M. Crahan – 12,049; K.B. Lauritsen – 20,911; J.R. Richardson – 15,049.

(6)

Shares of the Company’s common stock not outstanding but deemed beneficially owned because the respective person or group has the right to acquire the shares as of September 18, 2007, or within 60 days of such date, are treated as outstanding for purposes of calculating the percentage of common stock outstanding for such person or group.

OWNERSHIP OF STOCK BY
CERTAIN BENEFICIAL OWNERS

To the best knowledge of the Company, no person owns beneficially 5% or more of the outstanding common stock of the Company as of September 18, 2007 except as is set forth below.

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(1)	To the best knowledge of the Company, no beneficial owner named above has the right to acquire beneficial ownership in additional shares, except as disclosed in footnotes (1) and (5) of Ownership of Stock by Directors and Executive Officers.

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(2)	Does not include 186,138 shares held in irrevocable trusts as disclosed in footnote (3) of Ownership of Stock by Directors and Executive Officers.

(3)	Includes 180,763 shares held in the Irrevocable Arthur D. Richardson Trust for which J.R. Richardson serves as co-trustee and over which shares J.R. Richardson has the rights of voting and disposition.

(4)

Shares of the Company’s common stock not outstanding but deemed beneficially owned because the respective person or group has the right to acquire the shares as of September 18, 2007, or within 60 days of such date, are treated as outstanding for purposes of calculating the percentage of common stock outstanding for such person or group.

EXECUTIVE OFFICERS

The executive officers of the Company, their ages, positions (in each case as of June 30, 2007), and the month and year they were first elected or appointed an officer of the registrant, are as follows:

Each named executive officer has held the same office or an executive or management position with the Company for at least five years except Mr. Dreher who has served as President and CEO of DMI Furniture, Inc. from 1986 to present.

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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Deloitte & Touche LLP served as the Company’s independent registered public accounting firm for the fiscal year ended June 30, 2007. Representatives of Deloitte & Touche LLP are expected to be present at the annual meeting and will be available to respond to appropriate questions from shareholders. They will also have an opportunity to make a statement at the annual meeting if they desire to do so.

Pre-Approval of Audit and Non-Audit Services

The Audit and Ethics Committee’s policy is to preapprove both the type of audit and non-audit services to be provided by Deloitte & Touche LLP and the estimated fees related to these services. Professional services provided during the fiscal year ended June 30, 2007 were reviewed by the Audit and Ethics Committee and the possible effect on the firm’s independence was considered. The Audit and Ethics Committee has considered and found the provision of services for non-audit services compatible with maintaining Deloitte & Touche LLP’s independence.

Audit and Non-Audit Fees

The following table presents fees for professional audit and other services rendered by Deloitte & Touche LLP during the last two fiscal years.

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PROPOSAL II

APPROVAL OF 2007 LONG-TERM MANAGEMENT
INCENTIVE COMPENSATION PLAN

During fiscal 2007, the Nominating and Compensation Committee reviewed the structure of our existing long-term management incentive compensation plan with the assistance of Mercer Human Resource Consulting, an independent compensation consulting firm. Based on this review, the Nominating and Compensation Committee recommended to our Board of Directors that it adopt a new form of long-term management incentive compensation plan because our current shareholder approved management incentive compensation plan has not resulted in the pay-out of significant incentive compensation in prior years and has not created a positive influence for our executives. The plan recommended by the Nominating and Compensation Committee incorporates different corporate performance measures from those included in the current plan to better motivate our executives to grow shareholder value.

Based upon the recommendation of the Nominating and Compensation Committee, our Board of Directors adopted on June 4, 2007, and has submitted to a vote of our shareholders at the 2007 Annual Shareholders’ Meeting, the 2007 Long-Term Management Incentive Compensation Plan, referred to as the 2007 plan. The following is a brief but not comprehensive summary of the 2007 plan. The complete text of the 2007 plan is attached as Appendix B and reference is made to Appendix B for a complete statement of the provisions of the 2007 plan. The 2007 plan will be administered by the Nominating and Compensation Committee. The Plan will terminate by action of the Board or the Nominating and Compensation Committee, or ten years from its effective date. Any awards granted prior to the termination of the 2007 plan will continue to be effect in accordance with the terms of the 2007 plan.

Officers and key employees, a group consisting of approximately 10 persons, are eligible to participate in the 2007 plan as determined in the sole discretion of the Nominating and Compensation Committee. At the recommendation of the Nominating and Compensation Committee, the Board of Directors has reserved 500,000 shares of common stock for issuance under the 2007 plan. It is expected that participants will be selected on the basis of demonstrated ability to contribute substantially to the effective management of the Company. To be eligible for an award under the 2007 plan for a given performance period, a participant must remain in the Company’s employment for the entire performance period and through the date of payout. A newly hired employee eligible to participate in the 2007 plan will be eligible to receive a pro-rated award if the individual

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starts employment with the Company at or prior to the first day of the second year of the performance period. No award may be granted if employment is less than 24 months of a performance period. An employee promoted into eligibility for an award during a performance period is eligible for an award under the 2007 plan if the promotion becomes effective at or prior to the first day of the second year of the performance period. No award may be granted if the promotion becomes effective less than 24 months prior to the end of the performance period.

If a participant terminates employment with the Company due to death, disability or retirement, the participant will receive pro-rated awards for all active performance periods based on actual performance as of the nearest calculable date. In the event of retirement, any awards will be contingent upon required severance agreements. All awards not yet paid under the 2007 plan will be canceled for a participant who terminates employment with the Company as a result of a voluntary termination, an involuntary termination without cause, or a termination for cause, in each case as defined in the 2007 plan, or certain resignations specified in the 2007 plan. The participant will have no further rights or interests in a canceled award or payments.

Under the terms of the proposed 2007 plan, long-term incentive awards will be based on one or more of the performance measures specified in the 2007 plan for each performance period. For the two-year transitional performance period beginning July 1, 2008 and ending June 30, 2009 and the three-year performance period beginning on July 1, 2008 and ending on June 30, 2010, the Nominating and Compensation Committee has selected our consolidated operating results for organic net sales growth and fully-diluted earnings per share. Organic net sales is defined as gross sales less returns, allowances for damaged or missing goods, and any discounts allowed, and the exclusion of non-organic effects of takeovers, mergers or acquisitions. Fully-diluted earnings per share is defined as the Company’s net income for the period, excluding unusual or infrequent events, divided by average common shares outstanding for the period with the average common shares outstanding denominator includes the exercise of all convertible securities. These two performance measures were selected as being most relevant to reflecting our corporate performance at this time. In particular, we believe that our organic net sales growth measure is an indication of a growing and dynamic organization that reflects information presented in our strategic plan while our fully-diluted earnings per share measure is broadly accepted as a relevant measure of the overall quality of an investment in us and our performance.

The Nominating and Compensation Committee can modify the measures it has selected for the two-year transitional and three-year performance periods described above

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for future performance periods or substitute new measures for new performance periods. The 2007 plan provides that the new measures can be one or more or a combination of the following consolidated (company-wide) or subsidiary, division or operating unit financial measures: (1) pre-tax or after-tax income (before or after allocation of corporate overhead and bonus), (2) net income (before or after taxes), (3) reduction in expenses, (4) pre-tax or after-tax operating income, (5) earnings (including earnings before taxes, earnings before interest and taxes, or earnings before interest, taxes, depreciation and amortization, (6) gross revenue, (7) working capital, (8) profit margin or gross profits, (9) share price, (10) cash flow or cash flow per share (before or after dividends), (11) cash flow return on investment, (12) return on capital (including return on total capital or return on invested capital, (13) return on assets or net assets, (14) market share, (15) pre-tax or after-tax earnings per share, (16) pre-tax or after-tax operating earnings per share, (17) total stockholder return, (18) growth measures, including revenue growth, as compared with a peer group or other benchmark, (19) economic value-added models or equivalent metrics, (20) comparisons with various stock market indices, (21) improvement in or attainment of expense levels or working capital levels, (22) operating margins, gross margins or cash margins, (23) year-end cash, (24) debt reductions, (25) stockholder equity, (26) regulatory achievements, (27) implementation, completion or attainment of measurable objective with respect to research, development, products or projects, production volume levels, acquisitions and divestitures and recruiting and maintaining personnel, (28) customer satisfaction, (29) operating efficiency, productivity rations, or (30) strategic business criteria, consisting of one or more objectives based on meeting specified revenue, market penetration, geographic business expansion goals (including accomplishing regulatory approval for projects), cost or cost savings targets, accomplishing critical milestones for projects, and goals relating to acquisitions or divestitures, in each case before or after such objective income and expense allocations or adjustments as the Nominating and Compensation Committee may specify within the applicable performance period.

The measures used in setting performance goals under the 2007 plan will be determined in accordance with U.S. GAAP and in a manner consistent with the methods used for the Company’s audited financial statements. The Nominating and Compensation Committee has the discretion to exclude the following effects from performance calculations made under the 2007 plan: effects of extraordinary, unusual, special or one-time events; effects of legal, accounting or regulatory changes; effects of events that are outside of management’s control; effects of events that are not reflective of a decision made (or area overseen) by management; effects of “preventive” measures taken by management; effects from the disposal of a business segment; or effects of tax adjustments.

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Within the “applicable period” of each three-year performance period, the Nominating and Compensation Committee establishes a target number of shares of our common stock that each executive can earn subject to our achievement over the three-year performance period of threshold, target and excellent levels of the selected corporate performance measures. Threshold and excellent levels will be expressed as a multiple of the target level. The Nominating and Compensation Committee will also establish the weighting of each corporate performance measure for purposes of the performance calculations with the “applicable period” of each performance period. The “applicable period” of a performance period is the period starting on or before the first day of the performance period and ending no later than the earlier of (a) the 90^th day of the performance period or (b) the date on which 25 percent of the performance period has been completed. The target number of shares will differ for each executive based on the executive’s current level of responsibility, past performance and recommendations of our Chief Executive Officer. As with the current plan, the beginning of each fiscal year triggers the start of another three-year performance period. This plan structure results in three active performance periods being in place at any given time.

Awards will be paid to participants as soon as practicable after the end of a three-year performance period and verification of results. It is expected that payouts will typically occur within 75 days of the end of a performance period. No amounts earned under the 2007 plan will require additional criteria to complete the earning process. Performance shares will be valued using the closing share price of the Company’s common stock on the ending date of the performance period. The Company may deduct from all net amounts paid under the 2007 plan any federal, state or local taxes required by law to be withheld from such payments.

A participant’s awards will become immediately vested and will pay out assuming target performance for all active performance periods upon the occurrence of a change of control of the Company (as defined in the 2007 plan). The Nominating and Compensation Committee may amend or discontinue the 2007 plan at any time without prior notification to participants, but no amendment to the 2007 plan may adversely affect an outstanding award.

The closing sale price of our common stock on October 17, 2007 as reported by The NASDAQ Global Market was $14.19 per share.

The affirmative vote of the holders of a majority of the outstanding shares of common stock present in person or represented by proxy and entitled to vote at the meeting will be required for approval of the Plan.

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The Board recommends a vote FOR the proposal to approve the 2007 Long-Term Management Incentive Compensation Plan, together with the reservation of 500,000 shares of common stock for issuance under the 2007 plan. Unless otherwise specified, the proxies solicited by the Board will be voted FOR the proposal.

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes information as of June 30, 2007 about the Company’s equity compensation plans, including the Company’s stock option plans and management incentive plan. All of these plans have been approved by shareholders.

INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS

Management Directors’ Interests in Financial Institutions

Jeffrey T. Bertsch, an executive officer and director of the Company, is a director of American Trust and Savings Bank where the Company maintains a $4.0 million line of credit, cumulative letter of credit facilities of $5.1 million and where its routine daily banking transactions are processed. The Company receives no special services or pricing on the services performed by this bank due to the directorship of Mr. Bertsch. At June 30, 2007, $0.7 million was outstanding on the line of credit at the prime rate minus 1%. It is expected that the Company’s relationship with this bank will continue in the future.

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Review and Approval of Related Party Transactions

Policy

The Audit and Ethics Committee is responsible for reviewing and approving (with the concurrence of a majority of the disinterested members of the Board of Directors) any related party and affiliated party transactions as provided in the Audit and Ethics Committee Charter adopted by the Board of Directors of the Company on December 7, 2003. In addition, Section 4350(h) of the rules of The Nasdaq Stock Market LLC provide that all related party transactions must be reviewed for conflicts of interest by the Audit and Ethics Committee. In accordance with policies adopted by the Audit and Ethics Committee, the following transactions must be presented to the Audit and Ethics Committee for its review and approval:

	1.	Any transaction in which (i) the amount involved exceeds $120,000, (ii) the Company was or is to be a participant (within the meaning of Regulation S-K, Item 404(a)), and (iii) a related person (as defined in Regulation S-K, Item 404(a)) has or will have a direct or indirect material interest (within the meaning of Regulation S-K, Item 404(a)).
	2.	Any contract or other transaction between the Company and one or more directors of the Company, or between the Company and an organization in or of which one or more directors of the Company are directors, officers, or legal representatives or have a material financial interest within the meaning of Minnesota Statutes, Section 302A.255.

Procedure

In addition to the Company’s Board of Directors complying with the requirements of Minnesota Statutes, Section 302A.255 with respect to any proposed transaction with a potential director’s conflict of interest, all proposed transactions covered by the policy must be approved in advance by a majority of the members of the Audit and Ethics Committee. If a proposed transaction covered by the policy involves a member of the Audit and Ethics Committee, such member may not participate in the Audit and Ethics Committee’s deliberations concerning, or vote on, such proposed transaction.

Prior to approving any proposed transaction covered by the policy, the following information concerning the proposed transaction will be fully disclosed to the Audit and Ethics Committee:

1.

The names of all parties and participants involved in the proposed transaction, including the relationship of all such parties and participants to the Company and any of its subsidiaries.

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	2.	The basis on which the related person is deemed to be a related person within the meaning of Regulation S-K, Item 404(a), if applicable.
	3.	The material facts and terms of the proposed transaction.
	4.	The material facts as to the interest of the related person in the proposed transaction.
	5.	Any other information that the Audit and Ethics Committee requests concerning the proposed transaction.

The Audit and Ethics Committee may require that all or any part of such information be provided to it in writing.

The Audit and Ethics Committee may approve only those transactions covered by the policy that a majority of the members of the Audit and Ethics Committee in good faith determine to be (i) fair and reasonable to the Company, (ii) on terms no less favorable than could be obtained by the Company if the proposed transaction did not involve a director or the related person, as the case may be, and (iii) in the best interests of the Company.

PROPOSALS BY SHAREHOLDERS

Shareholders wishing to have a proposal considered for inclusion in the Company’s proxy statement for the 2008 annual meeting must submit the proposal in writing and direct it to the Secretary of the Company at the address shown in this proxy statement. The Company must receive it no later than June 30, 2008. The proposal must be in accordance with the provisions of Rule 14a-8 promulgated by the SEC under the 1934 Act. It is suggested the proposal be submitted by certified mail, return receipt requested. Shareholders who intend to present a proposal at the 2008 annual meeting without including such proposal in the Company’s proxy statement must provide the Company notice of such proposal no later than September 16, 2008. The Company reserves the right to reject, rule out of order, or take other appropriate action with respect to any proposal that does not comply with these and other applicable requirements.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC.

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Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.

Based on the Section 16(a) forms furnished to us and other information, we believe that all officers, directors and greater than ten percent shareholders met all applicable filing requirements under Section 16(a) during Fiscal 2007.

OTHER MATTERS

The percentage total number of the outstanding shares represented at each of the last three years shareholders’ annual meetings was as follows: 2004 – 91.1%; 2005 – 85.0%; 2006 - 86.6%.

Upon written request the Company will provide, without charge, a copy of its annual report on Form 10-K without certain exhibits for the year ended June 30, 2007. Requests should be directed to the Secretary of the Company at P.O. Box 877, Dubuque, Iowa 52004-0977.

The Board does not know of any other matter which may come before the meeting. However, should any other matter properly come before the meeting, the persons named in the proxy card will vote in accordance with their judgment upon such matters unless a contrary direction is indicated by lining or crossing out the authority on the proxy card.

If any matters properly come before the 2008 annual meeting, but the Company did not receive notice of it prior to September 16, 2008, the persons named in our proxy card for that annual meeting will have the discretion to vote the proxies on such matters in accordance with their best judgment.

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Shareholders are urged to vote, date, sign and return the proxy card in the enclosed envelope to which no postage need be affixed if mailed in the United States. Prompt response is helpful and your cooperation will be appreciated.

BY ORDER OF THE BOARD OF DIRECTORS

TIMOTHY E. HALL
Secretary

Dated:

November 1, 2007 Dubuque, Iowa

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APPENDIX A

FLEXSTEEL INDUSTRIES, INC.
AMENDED AND RESTATED
NOMINATING AND COMPENSATION COMMITTEE CHARTER

PURPOSE

The Nominating and Compensation Committee (the “Committee”) is established by and amongst the Board of Directors (“Board” or “Board of Directors”) of Flexsteel Industries, Inc. (the “Company”) for the primary purpose of assisting the Board in the oversight of:

	•	identifying individuals qualified to become Board members;
	•	recommending director nominees for election at the next annual meeting of shareholders;
	•	evaluating executive officer compensation plans, policies and programs;
	•	review benefit plans for the Company’s officers and employees; and
	•	providing an annual report on executive compensation for inclusion in the Company’s proxy statement.

The Committee has the authority to retain search firms, other advisors and legal counsel, as the Committee shall deem appropriate in identifying director candidates.

The Committee has the authority to obtain advice and assistance from outside legal, accounting, or other advisors as deemed appropriate to perform its duties and responsibilities.

The Committee has the authority to retain compensation consultants as the Committee may deem appropriate to assist in the evaluation of the compensation and benefits of the Company’s CEO and other officers.

The Committee will have the authority to approve the fees and other retention terms of any search firm, compensation consultant or other outside advisor, including legal and accounting advisors (collectively, the “Advisors”), retained by the Committee. The Company will provide appropriate funding, as determined by the Committee, for payment of fees and costs to any Advisors hired by the Committee.

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The Committee will primarily fulfill its responsibilities by carrying out the activities enumerated in this Charter. The Committee will report regularly to the Board of Directors regarding the execution of its duties and responsibilities.

COMPOSITION AND MEETINGS

The Committee shall be comprised of three or more directors as determined by the Board, each of whom shall be independent directors (as defined by all applicable rules and regulations), and free from any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Committee. Committee members will serve until their resignation, retirement, removal by the Board or until their successors are duly appointed and qualified. Committee members may be removed by the Board in its sole discretion for any reason or no reason. The Board may fill any vacancy on the Committee. The chair of the Committee will be designated by the full Board or, if it does not do so, the Committee members will elect a chair by the affirmative vote of a majority of the Committee’s members. The Committee shall have the authority to delegate any of its responsibilities to subcommittees as the Committee may deem appropriate, provided that the subcommittees are composed entirely of independent directors as provided above.

The Committee shall meet at least two times annually, or more frequently as determined by the Committee or the Board. The chair of the Committee will preside at each meeting and, in consultation with the other members of the Committee, will set the frequency and length of each meeting and the agenda of items to be addressed at each meeting. The Committee will prepare minutes of each meeting, which will be provided to all Committee members and the full Board at the next regularly scheduled meeting of the Committee or the Board, as applicable. In addition, the Committee will make regular reports to the Board and will propose any necessary action to the Board. The Committee may request that any directors, officers or employees of the Company, or other persons whose advice and counsel are sought by the Committee, attend any meetings of the Committee to provide such pertinent information as the Committee may request.

RESPONSIBILITIES AND DUTIES

To fulfill its responsibilities and duties, the Committee shall:

A.	Nominations

1.

Review the qualification of candidates for director identified by the Committee or suggested by Board members, stockholders, management and others.

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	2.	Consider the performance of incumbent directors and other relevant factors in determining whether to nominate directors for re-election.
	3.	Recommend to the Board a slate of nominees for election or re-election to the Board at each annual meeting of shareholders.
	4.	Recommend to the Board candidates to be appointed or elected to the Board as necessary to fill vacancies.

B.	Compensation

	1.	Review and approve corporate goals and objectives, relevant to CEO and other executive officers’ compensation; including annual performance objectives.
	2.	Review and approve all compensation arrangements between the Company and its named executive officers. The Company’s CEO may be present at the meeting deliberations on these matters, but is not allowed to vote on these matters.
	3.	Evaluate the performance of the CEO and other executive officers against the corporate goals and objectives and determine appropriate compensation levels for the CEO based on such evaluations. The Company’s CEO may not be present during deliberations or votes on these matters.
	4.	Periodically review the executive compensation programs and make recommendations to the Board of Directors with respect to new or modified plans, including incentive compensation and equity-based compensation.
	5.	Review, approve and administer all equity based compensation plans and grant stock awards or stock options under such plans.
	6.	Review and approve benefit plans of the Company’s executives, other officers and other employees.
	7.	Prepare and publish an annual compensation committee report for inclusion in the Company’s proxy statement in accordance with applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and The NASDAQ Stock Market, LLC (“NASDAQ”)and any other report or disclosure required to be prepared by the Committee pursuant to the rules of the SEC and NASDAQ for inclusion in the Company’s annual shareholder meeting proxy statement or other SEC filing.
	8.	Review and discuss the Compensation Discussion and Analysis required by SEC rules for inclusion in the Company’s annual shareholder meeting proxy statement,

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		Annual Report on Form 10-K or information statement, as the case may be, and based on such review and discussion determine whether or not to recommend to the Board that such Compensation Discussion and Analysis be included in such filing.
	9.	Review the adequacy of this Charter on an annual basis and recommend any proposed changes to the Board for approval.

The Committee shall perform any other activities consistent with this Charter, the Company’s by-laws and governing law, as the Committee or the Board deems necessary or appropriate.

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APPENDIX B

FLEXSTEEL INDUSTRIES, INC.
2007 LONG-TERM MANAGEMENT INCENTIVE COMPENSATION PLAN

 

Objective — The Long-term Management Incentive Compensation Plan (“the Plan”) is intended to attract, retain, and reward key management employees of Flexsteel Industries, Inc. and its subsidiaries (“the Company”) and to promote long-term value creation for the Company. The plan is designed to:

	•	Support the Company’s strategic business initiatives;
	•	Contribute to competitive compensation opportunities;
	•	Tie executive rewards to value creation for the Company and its shareholders; and
	•	Focus management’s collective attention on the long-term performance of the Company.

Definitions — Certain terms are defined in Attachment A for the purposes of the Plan.

Administration — The Plan shall be administered by the Nominating & Compensation Committee of the Board of Directors (the “Committee”). The Committee will select one of its members to act as its Chairman and will make such rules and regulations for its operation, as it deems appropriate. A majority of the Committee shall constitute a quorum and the act of a majority of the members of the Committee present at a meeting at which a quorum is present will constitute an act of the Committee.

The Committee has discretion to (i) interpret the Plan; (ii) prescribe, amend, and rescind any rules and regulations necessary or appropriate for the administration of the Plan; and (iii) make such other determinations and take such other action as it deems necessary or advisable. Without limiting the generality of the foregoing sentence, the Committee may, in its sole discretion (but in a uniform and consistent manner), treat all or any portion of any period during which a holder is on military leave or on an approved leave of absence (as defined by the Committee) from the Company as a period of employment of such holder by the Company for the purpose of this plan. Any interpretation, determination, or other action made or taken by the Committee shall be final, binding, and conclusive on all interested parties.

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Members of the Committee who are employees of the Company shall have no vote on any matter relating to the Plan that comes before the Committee.

Term of the Plan — The Plan will be considered in effect from the effective date established when the Plan is approved by the Board of Directors of the Company (the “Board”). The Plan will terminate by action of the Board or Committee, or ten years from the effective date. Awards granted hereunder, prior to the Plan’s termination, will continue to be effective in accordance with the terms and conditions of the Plan and any applicable Notification of Award.

Eligibility — The officers and other key employees of the Company are eligible to participate as determined by the Committee. Eligibility under the Plan or participation in the Plan is not a guarantee of employment. To be eligible for a full Award under the Plan for a given Performance Period, a Participant must remain in the Company’s employ for the entire Performance Period and through the date of payout. For individuals that are not eligible under the Plan at the onset of a given Performance Period, the following guidelines apply:

1.

Newly-hired Employee

At the sole discretion of the Committee, a newly hired employee shall be eligible to receive a pro-rated Award if the individual commences employment with the Company at or prior to the first day of the second year of the Performance Period (i.e., minimum twenty-four months of employment for the Performance Period). No Award shall be granted if employment is less than twenty-four months of a Performance Period.

2.

Mid-period Promotion

At the sole discretion of the Committee, an employee who is promoted into eligibility during an active Performance Period shall be eligible if the promotion becomes effective at or prior to the first day of the second year of the Performance Period (i.e., promotion becomes effective a minimum of twenty-four months prior to the end of the Performance Period). No Award shall be granted if the promotion becomes effective less than twenty-four months prior to the end of a Performance Period.

Termination of Service — In the event a Participant separates from service to the Company, Awards made to the Participant will be treated as follows:

1.

Retirement, Death, Disability

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A Participant who retires, dies, or experiences Disability will receive pro-rated Awards for all active Performance Periods based on actual performance as of the nearest calculable date. In the event of Retirement, any Awards will be contingent upon required severance agreements.

2.

Other Termination

All notice of Awards not yet paid under the Plan will be canceled for a Participant who separates from the Company under Voluntary Termination of Service; Involuntary Termination of Service, not for Cause; Termination of Service for Cause; or resignation where such resignation is determined by the Committee to be in anticipation of or related to a possible Termination of Service for Cause. The employee will have no further right or interest under this Plan with respect to any Awards or payments, and the Company will have no further obligation with respect thereto.

Incentive Opportunity — At the start of the Performance Period, Participants will receive notice of a target number of Performance Shares (the Committee, in its sole discretion, will annually review and establish target grants for all Participants) and the performance measures and goals. At the end of the Performance Period, a Participant may earn a number of Performance Shares equal to the target, or a number greater or lesser than the target (including zero), subject to established threshold, target and excellent levels of performance as established by the Committee. The value of each Performance Share is pegged to the value of the Company stock. Any declared stock dividends or stock splits will adjust the number of Performance Shares associated with each level of performance, accordingly.

In general, the Committee will establish a target number of Performance Shares by Participant by determining a desired target dollar grant value and dividing the figure by the Company stock price at the time of grant. Threshold and maximum levels of Performance Shares will represent multiples of target (e.g., 0.25x at threshold and 2.00x at excellent). A Participant’s incentive opportunities for each Performance Period will be set forth in the Notification of Award.

Performance Measurement Periods — The measurement period for all Performance Periods under the Plan will be three years, commencing with the Company’s fiscal year on July 1 and ending on June 30. The Committee, in its sole discretion, may allow for transitional Performance Periods under the Plan with different duration than defined in the foregoing sentence. Each year, a new Performance Period will commence such that, when fully implemented, there will be three overlapping, active Performance Periods at any given time.

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Performance Measures and Goals — Performance goals under the Plan will be based on the following two measures:

1.

Organic Net Sales Growth (consolidated results of the Company) – The Company believes that Organic Net Sales Growth is an indication of a growing and dynamic organization. The Company also believes that Organic Net Sales Growth is reflective of the information presented in the strategic plan prepared by the Company.

For purposes of incentive calculations under the Plan, Organic Net Sales will be defined as gross sales less returns, allowances for damaged or missing goods, and any discounts allowed, as well as the exclusion of non-organic effects of takeovers, mergers, or acquisitions.

2.

Fully-diluted Earnings per Share (consolidated results of the Company) – The Company believes that Fully-diluted Earnings per Share can be consistently measured, is understandable by Participants, and can be readily communicated. The Company also believes that its shareholders accept this measure broadly as a relevant measure of the overall quality of their investment in the Company, and therefore the Company’s performance.

For the purposes of performance measurement under the Plan, fully-diluted earnings per share will be defined as the Company’s Net Income for the period divided by Average Common Shares Outstanding for the period, where the Average Common Shares Outstanding denominator contemplates the exercise of all convertible securities. For the purposes of the Plan, convertible securities are all outstanding convertible preferred shares, convertible debentures, stock options (primarily employee-based), and warrants.

The Committee may modify the definition of either measure and/or substitute new measures for new Performance Periods. These new measures can be one or more of the following consolidated (company-wide) or subsidiary, division or operating unit financial measures: (1) pre-tax or after-tax income (before or after allocation of corporate overhead and bonus), (2) net income (before or after taxes), (3) reduction in expenses, (4) pre-tax or after-tax operating income, (5) earnings (including earnings before taxes, earnings before interest and taxes, or earnings before interest, taxes, depreciation and amortization, (6) gross revenue, (7) working capital, (8) profit margin or gross profits, (9) share price, (10) cash flow or cash flow per share (before or after dividends), (11) cash flow return on investment, (12) return on capital (including return on total capital or return on invested capital), (13) return on assets or net assets, (14) market share, (15) pre-tax or after-tax

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earnings per share, (16) pre-tax or after-tax operating earnings per share, (17) total stockholder return, (18) growth measures, including revenue growth, as compared with a peer group or other benchmark, (19) economic value-added models or equivalent metrics, (20) comparisons with various stock market indices, (21) improvement in or attainment of expense levels or working capital levels, (22) operating margins, gross margins or cash margins, (23) year-end cash, (24) debt reductions, (25) stockholder equity, (26) regulatory achievements, (27) implementation, completion or attainment of measurable objective with respect to research, development, products or projects, production volume levels, acquisitions and divestitures and recruiting and maintaining personnel, (28) customer satisfaction, (29) operating efficiency, productivity ratios, (30) strategic business criteria, consisting of one or more objectives based on meeting specified revenue, market penetration, geographic business expansion goals (including accomplishing regulatory approval for projects), cost or cost savings targets, accomplishing critical milestones for projects, and goals relating to acquisitions or divestitures, or any combination thereof (in each case before or after such objective income and expense allocations or adjustments as the Committee may specify within the applicable period).

Performance goals may be expressed on an absolute and/or relative basis, may be based on or otherwise employ comparisons based on current internal targets, the past performance of the Company (including the performance of one or more subsidiaries, divisions and/or operating units) and/or the past or current performance of other companies, and in the case of earnings-based measures, may use or employ comparisons relating to capital (including, but not limited to, the cost of capital), stockholders’ equity and/or shares outstanding, or to assets or net assets. In all cases, the performance goals shall be such that they satisfy any applicable requirements under Treas. Reg. Sec. 1.162-27(e)(2) (as amended from time to time), that the achievement of such goals be “substantially uncertain” at the time that they are established, and that the award opportunity be defined in such a way that a third party with knowledge of the relevant facts could determine whether and to what extent the performance goal has been met, and, subject to the Committee’s right to apply negative discretion (within the meaning of Treas. Reg. Sec. 1.162-27(d)(iii)), the amount of the Award payable as a result of such performance.

To the extent applicable, the measures used in setting performance goals set under the Plan for any given performance period shall be determined in accordance with GAAP and in a manner consistent with the methods used the Company’s audited financial statements. The Committee, in its sole discretion, may exclude the following from performance calculations under the Plan: effects of extraordinary, unusual, special, or one-time events; effects of legal, accounting, or regulatory changes; effects of events that are outside of

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management’s control; effects of events that are not reflective of a decision made (or area overseen) by management; effects of “preventive” measures taken by management; effects from the disposal of a business segment; or effects of tax adjustments.

For these purposes, the “applicable period” with respect to any Performance Period is the period commencing on or before the first day of the Performance Period and ending no later than the earlier of (a) the 90th day of the Performance Period, or (b) the date on which 25 percent of the Performance Period has been completed. For each Performance Period, the Committee will, in its sole discretion and within the applicable period, establish the goals (i.e., Threshold, Target, and Excellent) associated with each performance measure and determine the weighting of each measure for the purposes of incentive calculations under the Plan.

Award Payout — Awards will be paid to Participants as soon as practicable following the end of the Performance Period and verification of results (typically within 75 days of the end of the Performance Period). No amounts earned under the Plan will require additional criteria (e.g., the passage of time) to complete the earning process. Performance shares will be valued using the closing share price on the ending date of the Performance Period.

At the sole discretion of the Committee, Awards will be made using a mix of shares and cash. The cash portion of the payout will not exceed 50% of a Participant’s total Award value as calculated at the end of the Performance Period.

Payment under the Plan is subject to compliance by the Participant with any written agreement between the Participant and the Company, including an employment agreement, non-compete agreement, or other agreement relating to confidential information. If the Participant breaches any such agreement, he/she shall immediately forfeit his/her right to receive any unpaid amounts earned under the Plan.

The Company has the right to deduct from all net amounts paid under the Plan any federal, state, or local taxes required by law to be withheld with respect to such payments.

Miscellaneous Provisions

	1.	Notwithstanding anything to the contrary in a Notification of Award under the Plan, a Participant’s Awards will become immediately vested and will pay out assuming target performance for all active Performance Periods upon the occurrence of a Change of Control.
	2.	The Plan may be amended or discontinued by the Committee at any time without prior notification to Participants. However, no amendment may adversely affect an outstanding Award made under the Plan.

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	3.	The Committee maintains sole discretion to adjust Awards.
	4.	The Committee will, to the extent permitted by law, have the sole and absolute authority to make retroactive adjustments to any Awards paid to Participants where the payment was predicated upon the achievement of erroneous financial or strategic business results, or where the Participant engaged in intentional misconduct that increased his/ her incentive income. Where applicable, the Company will seek to recover any amount determined to have been inappropriately received by a Participant under the Plan.
	5.	The Committee may obtain such agreements or undertakings, if any, as the Committee may deem necessary or advisable to assure compliance with any law or regulation of any governmental authority. The Plan and any Award made hereunder shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any government or regulatory agency as may be required.
	6.	No member of the Board or Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan. All members of the Board or Committee, and each and any officer or employee of the Company acting on their behalf will, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination, or interpretation.
	7.	The interests of Participants under the Plan are not subject to claims, indebtedness, attachment, execution, garnishment, or other legal or equitable process. Participant interests under the Plan may not be transferred or assigned, other than by will or by the laws of descent and distribution. If the Participant attempts to alienate, assign, pledge, hypothecate, or otherwise dispose of Awards or other rights under the Plan, except as provided for in this Plan or in an Notification of Award pursuant to this Plan, or in the event of any levy, attachment, execution, or similar process upon the right or interest conferred by this Plan or the Notification of Award, the Board may terminate the Participant’s Award by notice to him/ her, and it shall thereupon become null and void.
	8.	Under the terms of the Plan, the Company and the Participants agree to arbitrate any issue, misunderstanding, disagreement, or dispute in connection with the terms of the Plan in accordance with the rules of the American Arbitration Association. Any and all costs associated with the Participants’ enforcement of the provisions of the Plan through arbitration shall be borne by the Company.

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Attachment A

	1.	“Award” means a grant or Performance Shares made under the Plan.
	2.	“Cause” means (i) serious, willful misconduct with respect to the Participant’s duties as an Employee of the Company; (ii) engaging in any competitive behavior defined below; (iii) the Participant’s indictment for a felony; (iv) the Participant’s commission of fraud, embezzlement, theft, or other act involving dishonesty, or a crime constituting moral turpitude, in any case, whether or not involving the Company, that, in the opinion of the Company, renders the Participant’s continued employment harmful to the Company; or (v) substance abuse on the part of the Participant; (vi) the Participant acting in bad faith relative to the Company’s business interests.
		For purposes of this Plan, a Participant shall be deemed to engage in competitive behavior if he/ she (a) directly or indirectly, without the consent of the Company, solicits or provides any services such as those provided by the Company for anyone (i) who is a customer or client of the Company; or, (ii) who is a prospective customer or client of the Company with whom the Company has discussed possible business relationships; (b) requests, induces, or attempts to influence any distributor or supplier of goods or services to the Company to curtail or cancel any business they may transact with the Company; or (c) requests, induces, or attempts to influence, any client or customer of the Company whom he/ she has done business with, or potential client or customer whom he/ she has been in contact with, to curtail or cancel any business they may transact with the Company.
	3.	“Change of Control” means any of the following: (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation; (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; (iii) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; (iv) any individual, entity, or group acquires 50% or more of the outstanding Common Stock of the Company or of the combined voting power of the outstanding voting securities of the Company; or (v) the individuals who, as of January 1, 2007, are members of the Board (“the Incumbent Board”) cease to constitute a majority of the Board; provided, however, that if the election or appointment of any new director is

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		approved by at least two-thirds of the Incumbent Board, such new director shall, for purposes of the Plan, thereafter be considered a member of the Incumbent Board.
	4.	“Code” means the Internal Revenue Code of 1986, as amended.
	5.	“Disability” means except as otherwise provided by the Committee, the Participant shall be considered to have a “Disability” during the period in which the Participant is unable, by reason of a medically determinable physical or mental impairment, to engage in any substantial gainful activity, which condition, in the opinion of a physician approved by the Committee, is expected to have a duration of not less than 120 consecutive days.
	6.	“Employee” refers to any person who is employed by the Company, is on the Company’s payroll, and whose wages are subject to withholding under the Federal Insurance Contributions Act, codified in Code § 3121.
	7.	“Involuntary Termination” means: (i) without the Participant’s express written consent, a comprehensive and substantial reduction in all or most of the Participant’s primary duties, authority, and responsibilities compared to the Participant’s duties, authority, and responsibilities immediately prior to such reduction; (ii) without the Participant’s express written consent, a significant reduction in the Participant’s base salary compared to the Participant’s base salary in effect immediately prior to such reduction; provided, however, that a reduction in the Participant’s base salary of less than twenty percent (20%) or a reduction in the Participant’s base salary that is part of an overall reduction in compensation also applied to other executives of the Company as a result of decreased business performance by the Company or one of its business units, shall not constitute an Involuntary Termination; or (iii) any purported termination of the Participant by the Company that is not effected for Disability or Cause.
	8.	“Notification of Award” means a written agreement between a Participant and the Company, which sets out the terms of the grant of Performance Shares under the plan.
	9.	“Participant” shall mean an Employee of the Company to whom a Notification of Award is given under this Plan.
	10.	“Performance Period” means the three-year period as specified in the Notification of Award.
	11.	“Performance Share” refers to the Award instrument under the Plan.

B-9

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	12.	“Retirement” means a Participant’s date of termination which is designated by the Committee as a “Retirement” for purposes of the Plan or, if applicable, a Participant’s date of termination after the normal retirement date specified in a plan maintained by the Company under which the Participant is covered, and which is qualified under section 401(a) of the Code.
	13.	“Termination of Service” occurs when a Participant shall cease to serve as an Employee of the Company, for any reason.
	14.	“Voluntary Termination” shall mean any termination of the employment hereunder, otherwise than as a result of death or Disability, termination for Cause, or Involuntary Termination will be deemed to be a Voluntary Termination.

B-10

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FLEXSTEEL INDUSTRIES, INC. P.O. BOX 877 DUBUQUE, IOWA 52004-0877	THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD DECEMBER 10, 2007

        The undersigned, a shareholder of Flexsteel Industries, Inc., hereby appoints Timothy E. Hall and Eric S. Rangen, and each of them, as proxies, with full power of substitution, to vote on behalf of the undersigned the same number of shares which the undersigned is then entitled to vote at the Annual Meeting of the Shareholders of Flexsteel Industries, Inc., to be held on Monday, December 10, 2007 at 2:00 P.M. at the Hilton Minneapolis, 1001 Marquette Avenue, Minneapolis, Minnesota 55403, and at any adjournments or postponements thereof as follows:

        The Board of Directors recommends a vote FOR:

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 Proposal No. 1 — Election of three (3) Class III Directors (Term will Expire at the 2010 Annual Meeting):

Jeffrey T. Bertsch (Class III)

Lynn J. Davis (Class III)

Eric S. Rangen (Class III)

o	FOR all Nominees (Except as marked to		o	WITHHELD from all Nominees	o	WITHHELD from the following only: (Write name(s) below)
	the contrary)

Proposal No. 2 — Approval of the 2007 Long Term Management Incentive Compensation Plan, together with the reservation of 500,000 shares of common stock for issuance under the 2007 plan:

o

FOR

o

AGAINST

o

ABSTAIN

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In their discretion to vote upon such other business as may properly come before the meeting, or any adjournments or postponements thereof, UNLESS THE SHAREHOLDER LINES OR CROSSES OUT THIS AUTHORITY.

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(Important: continued, and to be signed and dated, on the reverse side)

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(Continued from other side)

The Undersigned hereby revokes any proxy or proxies to vote such shares heretofore given.

PLEASE VOTE, DATE, SIGN, AND RETURN IN THE ENCLOSED ENVELOPE.

	Dated		, 2007.
	(Signature)
	Signature of shareholder shall correspond exactly with the name appearing hereon. If a joint account, each owner must sign. When signing as attorney, executor, administrator, trustee, guardian or corporate official, give your full title as such.

This proxy when properly executed will be voted in the manner directed hereon by the above-signed shareholder. If no direction is given, this proxy will be voted FOR Proposals 1 and 2, and the grant of authority to vote upon such other business as may properly come before the meeting or any adjournments or postponements thereof will not be crossed out.

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