As used in this discussion and analysis, the words "we," "us," "our" and the "Company" are used to refer to Flushing Financial Corporation and our consolidated subsidiaries, including Flushing Savings Bank, FSB (the "Savings Bank") and Flushing Commercial Bank (the "Commercial Bank"), collectively, the "Banks."

General

We are a Delaware corporation organized in May 1994 at the direction of the Savings Bank. The Savings Bank was organized in 1929 as a New York State chartered mutual savings bank. In 1994, the Savings Bank converted to a federally chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank, FSB. The Savings Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank in 1995. As a federal savings bank, the Savings Bank's primary regulator is the Office of Thrift Supervision ("OTS"). The Banks' deposits are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation ("FDIC"). The Savings Bank owns four subsidiaries: Flushing Commercial Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc.

Flushing Financial Corporation also owns Flushing Financial Capital Trust II, Flushing Financial Capital Trust III, and Flushing Financial Capital Trust IV (the "Trusts"), special purpose business trusts formed during 2007 to issue a total of $60.0 million of capital securities, and $1.9 million of common securities (which are the only voting securities). Flushing Financial Corporation owns 100% of the common securities of the Trusts. The Trusts used the proceeds from the issuance of these securities to purchase junior subordinated debentures from Flushing Financial Corporation. Flushing Financial Corporation previously owned Flushing Financial Capital Trust I ("Trust I"), which was a special purpose business trust formed in 2002 similar to the Trusts discussed above. Trust I called its outstanding capital securities during July 2007, and was then liquidated. In accordance with the requirements of FASB Interpretation No. 46R, the Trusts and Trust I are not included in our consolidated financial statements.

The following discussion of financial condition and results of operations includes the collective results of the Flushing Financial Corporation and its subsidiaries (collectively, the "Company"), but reflects principally the Savings Bank's activities. Management views the Company as operating as a single unit, a community savings bank. Therefore, segment information is not provided.

On June 30, 2006, we acquired all of the outstanding common stock of Atlantic Liberty Financial Corporation ("Atlantic Liberty"), the parent holding company for Atlantic Liberty Savings, F.A., based in Brooklyn, New York. The aggregate purchase price was $42.5 million, which consisted of $14.7 million of cash, common stock valued at $26.6 million, and $1.3 million assigned to the fair value of Atlantic Liberty's outstanding stock options. Under the terms of the Agreement and Plan of Merger, dated December 20, 2005, Atlantic Liberty's shareholders received $24.00 in cash, 1.43 Company shares per Atlantic Liberty share owned, or a combination thereof, subject to aggregate allocation to all Atlantic Liberty's shareholders of 65% stock / 35% cash. In connection with the merger, we issued 1.6 million shares of common stock, the value of which was determined based on the closing price of our common stock on the announcement date of December 21, 2005, and two days prior to and after the announcement date. We acquired two branches in prime areas of Brooklyn, New York, with $186.9 million in assets, $116.2 million in net loans and assumed $106.8 million in deposits.

On November 27, 2006, we launched a new internet branch, iGObanking.com®, a division of the Savings Bank. iGObanking.com® provides access to markets outside our geographic locations.

During 2007, the Savings Bank formed a wholly owned subsidiary, Flushing Commercial Bank, a New York State chartered commercial bank, for the limited purpose of providing banking services to public entities including counties, cities, towns, villages, school districts, libraries, fire districts and the various courts throughout the New York metropolitan area. The Commercial Bank was formed in response to New York State law, which requires that municipal deposits and state funds must be deposited into a bank or trust company as defined in New York State law. The Savings Bank is not considered an eligible bank or trust company for this purpose.

On December 19, 2008 we entered into a Letter Agreement (including the Securities Purchase Agreement - Standard Terms incorporated by reference therein, the "Purchase Agreement") with the U.S. Treasury pursuant to which we issued and sold to the U.S. Treasury (i) 70,000 shares of the our Fixed Rate Cumulative Perpetual Preferred Stock Series B having a liquidation preference of $1,000 per share (the "Series B Preferred Stock"), and (ii) a ten-year warrant (the "Warrant") to purchase up to 751,611 shares of the our common stock, par value $0.01 per share, at an initial price of $13.97 per share, for an aggregate purchase price of $70.0 million in cash. The Series B Preferred Stock qualifies as Tier I capital under the risk-based capital guidelines of the OTS ("Tier 1 Capital") and will pay cumulative dividends at a rate of 5% per annum for the first five years following issuance, and 9% per annum thereafter. Dividends are payable on the Series B Preferred Stock quarterly and are payable on February 15, May 15, August 15 and November 15 of each

year. If we fail to pay a total of six dividend payments on the Series B Preferred Stock, whether or not consecutive, holders of the Series B Preferred Stock will have the right to elect two directors to our board of directors until we have paid all such dividends that we had failed to pay. The Series B Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation and winding up of the Company. The Warrant expires ten years from the issuance date and is immediately exercisable and transferable. The Purchase Agreement contains limitations on the payment of dividends on and the repurchase of the Common Stock and certain preferred stock. The Purchase Agreement also requires that, until such time as the U.S. Treasury ceases to own any securities acquired from us thereunder, we will take all necessary action to ensure that benefit plans with respect to senior executive officers comply with Section 111(b) of EESA as implemented by any guidance or regulation under Section 111(b) of EESA that has been issued and is in effect as of the date of issuance of the Series B Preferred Stock and the Warrant and not adopt any benefit plans with respect to, or which cover, senior executive officers that do not comply with EESA. Our senior executive officers have consented to the foregoing.

Overview

Our principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from ongoing operations and borrowings, primarily in (1) originations and purchases of one-to-four family (focusing on mixed-use properties - properties that contain both residential dwelling units and commercial units), multi-family residential and commercial real estate mortgage loans; (2) construction loans, primarily for residential properties; (3) Small Business Administration ("SBA") loans and other small business loans; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-income securities and other marketable securities. We also originate certain other consumer loans.

Our results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets and the cost of our interest-bearing liabilities. Net interest income is the result of our interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. We also generate non-interest income from loan fees, service charges on deposit accounts, mortgage servicing fees, and other fees, income earned on Bank Owned Life Insurance ("BOLI"), dividends on Federal Home Bank of New York ("FHLB-NY") stock and net gains and losses on sales of securities and loans. Our operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. Our results of operations also can be significantly affected by our periodic provision for loan losses and specific provision for losses on real estate owned.

Management Strategy. Our strategy is to continue our focus on being an institution serving consumers, businesses, and governmental units in our local markets. In furtherance of this objective, we intend to: (1) continue our emphasis on the origination of multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans, (2) transition from a traditional thrift to a more 'commercial-like' banking institution, (3) increase our commitment to the multi-cultural marketplace, with a particular focus on the Asian community in Queens, (4) maintain asset quality, (5) manage deposit growth and maintain a low cost of funds, utilizing the internet to grow deposits, (6) cross sell to lending and deposit customers, (7) actively pursue deposits from local area government units, (8) manage interest rate risk, (9) explore new business opportunities, and (10) manage capital. There can be no assurance that we will be able to effectively implement this strategy. The Company's strategy is subject to change by the Board of Directors.

Multi-Family Residential, Commercial Real Estate and One-to-Four Family Lending. In recent years, we have emphasized the origination of higher-yielding multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans. We expect to continue this emphasis on higher-yielding mortgage loan products.

The following table shows loan originations and purchases during 2008, and loan balances as of December 31, 2008.

                                          Loan            Loan Balances
                                    Originations and      December 31,       Percent of
                                        Purchases             2008           Gross Loans
                                    -----------------    ---------------    -------------
                                                   (Dollars in thousands)
Multi-family residential            $         153,023    $       999,185            33.81 %
Commercial real estate                        182,357            752,120            25.46
One-to-four family - mixed-use
property                                      118,270            751,952            25.45
One-to-four family - residential              119,622            238,711             8.08
Co-operative apartment                            800              6,566             0.22
Construction                                   30,673            103,626             3.51
Small Business Administration                  10,303             19,671             0.67
Taxi Medallion                                  7,101             12,979             0.44
Commercial Business and Other                  45,451             69,759             2.36
                                    -- --------------    -- ------------    -- ----------
Total                               $         667,600    $     2,954,569           100.00 %
                                    -- --------------    -- ------------    -- ----------

Our increased emphasis on multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans has increased the overall level of credit risk inherent in our loan portfolio. The greater risk associated with multi-family, commercial real estate and one-to-four family mixed-use property mortgage loans could require us to increase our provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained. To date, we have not experienced significant losses in our multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loan portfolios, though we have increased our provisions for loan losses based on our evaluation of losses inherent in the loan portfolio, which have increased due to the national and local economic downturn in 2008.

Transition to a More 'Commercial-like' Banking Institution. We established a business banking unit during 2006 staffed with a team of experienced commercial bankers. We have developed a complement of deposit, loan and cash management products to support this initiative, and expanded these product offerings during 2007. The business banking unit is responsible for building business relationships in order to obtain lower-costing deposits, generate fee income, and originate commercial business loans. Building these business relationships could provide us with a lower-costing source of funds and higher-yielding adjustable-rate loans, which would help us manage our interest-rate risk. Commercial business loans are generally viewed as having a higher risk than real estate loans, and could require us to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained. To date, we have not experienced significant losses in our commercial business loan portfolio, and have determined that, at this time, additional provisions are not required.

Increase Our Commitment to the Multi-Cultural Marketplace, with a Particular Focus on the Asian Community in Queens. We serve many diverse communities in the metropolitan area. Branches are staffed with employees from their local neighborhoods who speak over 35 different languages, enabling residents of these neighborhoods to speak to our banking specialists in the language they are familiar with and the customs they are used to. We are active in many community organizations. We have an Asian Advisory Board to help broaden our link to the community by providing guidance and fostering awareness of our active role in the local community.

Maintain Asset Quality. By adherence to our strict underwriting standards, we have been able to minimize net losses from impaired loans with net charge-offs of $1.2 million and $0.4 million for the years ended December 31, 2008 and 2007, respectively. We seek to maintain our loans in performing status through, among other things, strict collection efforts, and consistently monitoring non-performing assets in an effort to return them to performing status. To this end, we review the quality of our loans and report to the Loan Committee of the Board of Directors of the Savings Bank on a monthly basis. We have sold and may continue to sell delinquent mortgage loans. We sold 32 delinquent mortgage loans totaling $13.6 million and 45 delinquent mortgage loans totaling $33.9 million during the years ended December 31, 2008 and 2007, respectively. The terms of these loan sales included cash due upon closing of the sale, no contingencies or recourse to us, servicing is released to the buyer and time is of the essence. We realized gross gains of $74,000 and gross losses of $224,000 on the sale of these loans in 2008. We realized gross gains of $332,000 and no

gross losses on the sale of these loans in 2007. There can be no assurances that we will continue this strategy in future periods, or if continued, that we will be able to find buyers to pay adequate consideration. Non-performing assets amounted to $40.7 million and $5.9 million at December 31, 2008 and 2007, respectively. Non-performing assets as a percentage of total assets were 1.03% and 0.18% at December 31, 2008 and 2007, respectively.

Manage Deposit Growth and Maintain Low Cost of Funds, Utilizing the Internet to Grow Deposits. We have a relatively stable retail deposit base drawn from our market area through our full-service offices. Although we seek to retain existing deposits and maintain depositor relationships by offering quality service and competitive interest rates to our customers, we also seek to keep deposit growth within reasonable limits and our strategic plan. In November 2006, we launched an internet branch, "iGObanking.com®" a division of the Savings Bank, to compete for deposits from sources outside the geographic footprint of our full-service offices. During 2007, the Savings Bank formed a wholly owned subsidiary, Flushing Commercial Bank, a New York State chartered commercial bank, for the limited purpose of accepting municipal deposits and state funds, including certain court ordered funds from New York State Courts, in the State of New York as an additional source of deposits. We also obtain deposits through brokers and the CDARS® network. Management intends to balance its goal to maintain competitive interest rates on deposits while seeking to manage its overall cost of funds to finance its strategies. We generally rely on our deposit base as our principal source of funding. In creating "iGObanking.com®", our strategy is to reduce our reliance on wholesale borrowings. In addition, the Banks are members of the FHLB-NY, which provides us with a source of borrowing. We also utilize reverse purchase agreements, established with other financial institutions. These borrowings help us fund asset growth and increase net interest income. During 2008, we realized an increase in due to depositors of $434.7 million and an increase in borrowed funds of $66.4 million.

Cross Sell to Lending and Deposit Customers. A significant portion of our lending and deposit customers do not have both their loans and deposits with us. We intend to focus on obtaining additional deposits from our lending customers and originating additional loans to our deposit customers. Product offerings were expanded in the past three years and are expected to be further expanded in 2009 to accommodate perceived customer demands. In addition, specific employees are assigned responsibilities of generating these additional deposits and loans by coordinating efforts between lending and deposit gathering departments.

Actively Pursue Deposits From Local Area Governmental Units. During 2007, we formed a wholly owned subsidiary, Flushing Commercial Bank, a New York State chartered commercial bank, for the limited purpose of accepting municipal deposits and state funds, including certain court ordered funds from New York State Courts, in the State of New York. The Commercial Bank offers a full range of deposit products to municipalities and New York State, similar to the products currently being offered by the Savings Bank, but does not make loans. At December 31, 2008, the Commercial Bank had $211.8 million of deposits.

Manage Interest Rate Risk. We seek to manage our interest rate risk by actively reviewing the repricing and maturities of our interest rate sensitive assets and liabilities. The mix of loans we originate (fixed or ARM) is determined in large part by borrowers' preferences and prevailing market conditions. We seek to manage the interest rate risk of our loan portfolio by actively managing our security portfolio and borrowings. By adjusting the mix of fixed and adjustable rate securities, as well as the maturities of the securities, we have the ability to manage the combined interest rate sensitivity of our assets. See "- Interest Rate Sensitivity Analysis." Additionally, we seek to balance the interest rate sensitivity of our assets by managing the maturities of our liabilities. During 2008, we extended the maturity of our borrowings as they matured, and focused on attracting longer-term certificates of deposit and brokered deposits. In addition, management's expectation is that the new deposits generated from our internet branch, "iGObanking.com®," will help to lessen our long standing dependency on wholesale borrowings.

Explore New Business Opportunities. We have in the past increased growth through acquisitions of financial institutions and branches of other financial institutions, and will continue to pursue growth through acquisitions that are, or are expected to be within a reasonable time frame, accretive to earnings, as well as evaluating the feasibility of opening additional branches. We have in the past opened new branches. In 2006, the Company completed the acquisition of Atlantic Liberty Savings and opened a branch in Bayside, Queens. Two branches were also opened in Queens in the first quarter of 2007, and one branch has been opened in Nassau County in the first quarter of 2009. We plan to continue to seek and review potential acquisition opportunities that complement our current business, are consistent with our strategy to build a bank that is focused on the unique personal and small business banking needs of the multi-ethnic communities we serve, and will be accretive to earnings.

Manage Capital. The Savings Bank faces several minimum capital requirements imposed by the OTS. These requirements limit the dividends the Savings Bank is allowed to pay to Flushing Financial Corporation, and can limit the annual growth of the Savings Bank. As part of the strategy to find ways to best utilize our available capital, we have, in the past, repurchased shares of our common stock. We did not repurchase any of our common stock during 2008. At December 31, 2008, 362,050 shares remain to be repurchased under the current stock repurchase program. We had no shares held in treasury and had 21,625,709 shares outstanding at December 31, 2008.

Trends and Contingencies. Our operating results are significantly affected by national and local economic and competitive conditions, including changes in market interest rates, the strength of the local economy, government policies and actions of regulatory authorities. As short-term interest rates rose during the first half of 2006, remained at those levels throughout most of 2007, and declined throughout 2008, we remained strategically focused on the origination of multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans. As a result of this strategy, we were able to continue to achieve a higher yield on our mortgage portfolio than we would have otherwise experienced. We also established a business banking unit during the second half of 2006, and launched an internet branch in November 2006.

Prevailing interest rates affect the extent to which borrowers repay and refinance loans. In a declining interest rate environment, the number of loan prepayments and loan refinancing tends to increase, as do prepayments of mortgage-backed securities. Call provisions associated with our investments in U.S. government agency and corporate securities may also adversely affect yield in a declining interest rate environment. Such prepayments and calls may adversely affect the yield of our loan portfolio and mortgage-backed and other securities as we reinvest the prepaid funds in a lower interest rate environment. However, we typically receive additional loan fees when existing loans are refinanced, which partially offsets the reduced yield on our loan portfolio resulting from prepayments. In periods of low interest rates, our level of core deposits also may decline if depositors seek higher-yielding instruments or other investments not offered by us, which in turn may increase our cost of funds and decrease our net interest margin to the extent alternative funding sources are utilized. By contrast, an increasing interest rate environment would tend to extend the average lives of lower yielding fixed rate mortgages and mortgage-backed securities, which could adversely affect net interest income. In addition, depositors tend to open longer term, higher costing certificate of deposit accounts which could adversely affect our net interest income if rates were to subsequently decline. Additionally, adjustable rate residential mortgage loans and mortgage-backed securities generally contain interim and lifetime caps that limit the amount the interest rate can increase at re-pricing dates.

During the first half of 2006, the Federal Reserve's Federal Open Market Committee ("FOMC") increased short term interest rates through their meeting in June, while longer-term interest rates remained relatively stable. As a result, the yield curve flattened to the point where there was little difference between the rate on overnight funds and the rate on ten year bonds. During the second half of 2006 and through September 2007, the FOMC maintained the overnight rate, while longer term rates declined, resulting in an inverted yield curve. As a result, our net interest margin declined as the spread between the rate we received on loans originated narrowed compared to the rate paid on new deposits. The FOMC began lowering the overnight interest rate in the fourth quarter of 2007, and the treasury yield curve returned to a more normal slope by the end of 2007. The FOMC continued to lower the overnight interest rate throughout 2008, and the treasury yield curve remained positively sloped throughout 2008. Since demand remained strong for our higher-yielding loan products, we grew our loan portfolio $258.5 million in 2008. We funded this growth with principal payments received on our securities portfolio, deposit growth, and borrowings. At December 31, 2008, we had loan applications in process of $185.4 million.

During the year ended December 31, 2008, certificates of deposit increased $269.1 million, while lower-costing core deposits increased $165.6 million. To fund the strong demand for our loan products and the growth in our securities portfolio, the growth in deposits was augmented by an increase in borrowed funds. The total increase in borrowed funds during 2008 was $66.4 million. The cost of funds declined to 3.85% in the fourth quarter of 2008 from 4.54% in the fourth quarter of 2007.

As a result of our balance sheet growth, net interest income increased $16.8 million to $87.7 million in 2008 from $70.9 million in 2007. The net interest rate spread increased 20 basis points to 2.43% for 2008 as compared to 2.23% for 2007. The net interest margin increased 16 basis points to 2.60% for 2008 as compared to 2.44% for 2007. The net interest margin increased to 2.55% in the fourth quarter of 2008 as compared to 2.31% in the fourth quarter of 2007.

We are unable to predict the direction of future interest rate changes. However, the FOMC reduced short-term interest rates from September 2007 through December 2008, and the treasury yield curve has returned to a more normal slope. Approximately 46% of our certificates of deposit accounts and borrowed funds reprice or mature during the next

year, which could result in a decrease in the cost of our interest-bearing liabilities. Also, in a decreasing interest rate environment, mortgage loans and mortgage-backed securities with higher rates tend to prepay, which could result in a reduction in the yield on our interest-earning assets.

During 2008, the nation's economy was generally considered to be in a recession. The housing market in the United States saw a significant slowdown during 2008 and 2007, and foreclosures of single family homes rose from the levels seen in the prior five years. Commercial vacancies started to increase in the second half of 2008. The national and regional unemployment rates increased during 2008. These economic conditions can result in borrowers defaulting on . . .