UNITED STATES

                     SECURITIES AND EXCHANGE COMMISSION

                           WASHINGTON, D.C. 20549

                                 FORM 10-K

                                 (Mark One)

[X]     Annual Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934 [Fee Required]
        For the fiscal year ended December 31, 1996

or
        Transition Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934 [No Fee Required]
        For the Transition Period from __________ to __________

                       Commission File Number 0-27958

                            FLANDERS CORPORATION
           (Exact name of registrant as specified in its charter)

                          ELITE ACQUISITIONS, INC.
                       (Previous name of registrant)

              North Carolina                                   13-3368271
(State or other jurisdiction of                        (IRS Employer ID Number)
 incorporation or organization)            

531 Flanders Filters Road, Washington, NC                        27889
(Address of principal executive offices)                      (Zip Code)



    Registrant's telephone number, including area code:  (919) 946-8081

    Securities registered pursuant to Section 12(b) of the Act:  None
    Securities registered pursuant to Section 12(g) of the Act:

        Title of each class                Name of exchange on which registered
Common Stock, $.001 per share par value                     Nasdaq

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

    YES  [X]    NO    [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of March 19, 1997, the number of shares outstanding of the registrant's
common stock was 17,791,548 shares.

As of March 19, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $111,020,828

<PAGE>


                            FLANDERS CORPORATION
                                 FORM 10-K
                    FOR THE YEAR ENDED DECEMBER 31, 1996

PART I

    Item 1.    Business......................................................3

    Item 2.    Properties...................................................10

    Item 3.    Legal Proceedings............................................11

    Item 4.    Submission of Matters to a Vote of Security Holders..........11

PART II

    Item 5.    Market for Registrant's Common Equity and Related
               Stockholder Matters..........................................12

    Item 6.    Selected Financial Data......................................13

    Item 7.    Management's Discussion and Analysis of Financial
               Condition and Results of Operations..........................14

    Item 8.    Financial Statements and Supplementary Data..................20

    Item 9.    Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure..........................20

PART III

    Item 10.   Directors and Executive Officers.............................21

    Item 11.   Executive Compensation.......................................22

    Item 12.   Security Ownership of Certain Beneficial Owners
               and Management...............................................26

    Item 13.   Certain Relationships and Related Transactions...............27

    Item 14.   Exhibits, Financial Statement Schedules and Reports
               on Form 8-K..................................................28

    Signatures..............................................................30

FINANCIAL STATEMENTS......................................................F- 1
    Independent Auditor's Report..........................................F- 2
    Consolidated Balance Sheets...........................................F- 3
    Consolidated Statements of Operations.................................F- 4
    Consolidated Statements of Stockholders' Equity.......................F- 5
    Consolidated Statements of Cash Flows.................................F- 6
    Notes to Consolidated Financial Statements............................F- 8
    Financial Statement Schedules.........................................F-22


                                       2
<PAGE>


                                   PART I

Item 1.    Business

OVERVIEW

Flanders Corporation (the "Company") designs, manufactures and markets a broad
range of air filtration products ranging from high performance laminar flow High
Efficiency Particulate Air ("HEPA") filters and charcoal filters for
semiconductor plants, to residential furnace filters. The Company's air
filtration products are utilized by many industries, including those associated
with commercial and residential air conditioning and heating systems,
semiconductor manufacturing, ultra-pure materials, biotechnology,
pharmaceuticals, synthetics, nuclear power and nuclear materials processing. The
Company has historically specialized in HEPA and medium efficiency filters and
equipment. In December 1995, the Company implemented a strategy of growth by
acquisition, and in 1996, the Company expanded its product line through the
purchase of three other companies: Charcoal Service Corporation ("CSC"), which
specializes in charcoal filtration systems for the removal of gaseous
contaminants, Air Seal Filter Housings, Inc. ("AirSeal"), which specializes in
filter housings and customized industrial HVAC equipment and Precisionaire, Inc.
("Precisionaire"), which specializes in the manufacture and sale of filter
products ranging from mid-range ASHRAE grade filters through residential furnace
filters. The acquisitions of AirSeal, CSC and Precisionaire are sometimes
collectively referred to herein as the "Acquisitions." See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview." 

GENERAL DEVELOPMENT OF BUSINESS 

Elite, the predecessor of the Company, was incorporated on July 2, 1986 in the
State of Nevada. Flanders Filters, Inc. ("FFI") was started in 1950 by A.R.
Allan, Jr. in Riverhead, New York, and moved its entire plant and office from
New York to Washington, North Carolina in 1968. In December 1995 Elite acquired
FFI in a stock-for-stock exchange, and FFI became a subsidiary of Elite. Prior
to the acquisition of FFI, Elite was a "public shell" company with no
significant operations or assets. The acquisition of FFI was accounted for as a
reverse acquisition, meaning that for purposes of financial statement
disclosure, the historical results of FFI become the historical results of
Elite. In January of 1996, Elite formed a new subsidiary, Flanders Corporation,
under the laws of North Carolina, and entered into a merger agreement therewith.
As a result of this reincorporation merger, Elite merged into its wholly owned
subsidiary, changed its name to Flanders Corporation, and changed its domicile
to North Carolina. 

Flanders Airpure Products Company, LLC ("Airpure"), was organized on February
24, 1994, and is a sixty-three percent (63%) owned subsidiary of Flanders
Filters, Inc. Airpure manufactures and markets industrial and commercial bags,
pleats and industrial grade HEPA filters. In March 1996, the Company formed a
wholly owned subsidiary, Airpure Products West, Inc. ("Airpure West") to
manufacture Airpure's products for the Western United States. In June 1996, the
Company formed a wholly owned subsidiary in Singapore, Flanders International
Pte, Ltd. ("FIL"), to market and eventually manufacture the Company's products
in the Far East. 

In May 1996, pursuant to a stock purchase agreement, the Company acquired all of
the outstanding stock of CSC, a charcoal filter manufacturer based in North
Carolina specializing in activated charcoal filters and containment
environments, as well as the land and buildings where CSC's manufacturing plant
and offices are located. The acquisition was effective as of March 1, 1996. The
total cost of acquisition, net of cash acquired, was approximately $4,497,000
and up to 100,000 shares of the Company's common stock if certain performance
criteria are met. The acquisition by the Company of CSC has been accounted for
by the Company as a purchase. 

In June 1996, pursuant to a stock purchase agreement, the Company acquired all
of the outstanding stock of AirSeal, a mid-range custom filter housing
manufacturer based in Stafford, Texas, as well as the land and building where
AirSeal's plant and offices are located. The total cost of acquisition, net of
cash acquired, was approximately $2,270,000 and up to 150,000 shares of the
Company's common stock if certain performance criteria are met. The Company
accounted for this acquisition as a purchase. 

In September 1996, the Company acquired all of the outstanding stock of
Precisionaire pursuant to a stock purchase agreement dated July 1, 1996. The
total cost of acquisition, net of cash acquired, was approximately $25,205,000,
subject to a post-closing purchase price adjustment, and up to 786,885 shares of
Company Common Stock, if certain performance criteria are met. Precisionaire
manufactures and sells filter products for use in conventional, commercial and
residential HVAC systems. The acquisition of Precisionaire by the Company has
been accounted for as a purchase. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources".


                                       3
<PAGE>


INDUSTRY BACKGROUND 

Frost & Sullivan, a leading industry analyst, estimates that the total domestic
industrial air filtration market was approximately $1.15 billion in 1995 and
$1.2 billion in 1996. Management believes the domestic market for retail and
wholesale off-the-shelf air filters and related products was over $500 million
in 1996. The forces driving the air filtration market have evolved over the past
decade from concerns related to the preservation of machinery and equipment to
present day requirements for air quality and production efficiency. Because of
these requirements, air filtration products are essential to many industries,
including those associated with semiconductor manufacturing, commercial and
residential heating, ventilation and air conditioning ("HVAC") systems,
ultra-pure materials manufacturing, biotechnology, pharmaceuticals, synthetics,
nuclear power and nuclear materials processing. Increasingly, companies are
devoting resources to air filtration products to enhance efficiency and
productivity. 

Management believes the world market for its products currently is more than
five times the total domestic market, and that as public awareness of the
benefits of living and working in clean environments become more generally known
and mandated by governments, this market will increase dramatically. The world
air filtration market is extremely fragmented, with over 100 companies ranging
in size from large companies like AAF International, with over $200 million in
revenues per year, to privately held niche manufacturing firms on which no
revenue data is available. 

The Company's air filtration products are used in many different applications,
including the following:

    Industrial. Air filtration products are used in standard industrial settings
    to provide cleaner work environments; for example, air filtration systems
    are used by auto makers to remove "oil mist" contaminants from the air in
    their plants, and industrial paint booth users utilize air filtration to
    remove paint particulates from the air. 

    Semiconductor Manufacturing. The Company believes air filtration products
    are necessary to meet the increasingly stringent manufacturing environment
    requirements of semiconductor manufacturers. Laminar flow grade final
    filters are an essential component of a semiconductor manufacturers'
    cleanrooms. The Company believes the laminar flow filters for a typical
    state-of-the-art semiconductor production line with 75,000 square feet of
    ultra-clean manufacturing area would be worth approximately $2.0 million. 

    Pharmaceutical and Biotechnology. Most pharmaceuticals are not manufactured
    in cleanrooms, but recent regulation changes for the industry which increase
    the standards for purity and production quality of pharmaceuticals have led
    to increased demand for pharmaceutical cleanrooms. 

    Nuclear Power and Materials Processing. Filtration systems are necessary to
    radioactive containment procedures for all nuclear facilities. 

    Commercial and Residential HVAC Systems. Replacement filters are an
    essential requirement for the efficient operation of commercial and
    residential HVAC systems.

RECENT TRENDS

Recent trends in industry, as well as changes in laws and governmental
regulations, all lead to the increasing awareness of the benefits of the use of
air filtration products. Some of these trends and changes are:

    Indoor Air Quality (IAQ) and Health. The Company believes there is an
    increase in public concern regarding the effects of indoor air quality
    ("IAQ") on employee productivity, as well as an increase in interest in
    standards for detecting and solving IAQ problems. For example, the American
    Society of Heating, Refrigerating and Air Conditioning Engineers, Inc.
    ("ASHRAE") recently submitted for comment ASHRAE Standard 62-1989 which
    deals with ventilation for acceptable indoor air quality. 

    Hazardous Working Environments. Several studies recognize that air quality
    in working facilities has an impact upon human health. OSHA regulations, in
    particular, have made IAQ a consideration in a wide variety of industries,
    ranging from those industries using spray-paint booths to those using
    automobile assembly lines. 


                                       4
<PAGE>


    Sick Building Syndrome. Sick Building Syndrome ("SBS"), which is
    characterized by lethargy, frequent headaches, eye irritation and fatigue,
    has recently been shown to be a valid concern, and is a major design
    consideration in new and renovated commercial and industrial buildings. The
    identification of "sick" buildings, and the solutions to SBS, involve
    complex issues which need to be examined on a case-by-case basis by
    qualified engineers; solutions typically include improving the HVAC and
    filtration systems of the "sick" buildings. 

    Hazardous Emission Regulation and Liability. Electrical utilities became
    subject to emissions regulations under Title I of the Clean Air Act
    Amendments of 1990. In addition, OSHA's Hazardous Communication Standard,
    the Toxic Release Inventory and community "right to know" regulations
    regarding liability for claims made by employees or neighboring communities
    have made many industries, in particular the chemical and semiconductor
    industries, more aware of clean air regulations. As a result, these
    industries have taken voluntary steps, including the utilization of air
    filtration systems, to reduce emissions of potentially hazardous substances.

STRATEGIES

The Company's growth strategy is to: (i) increase the Company's market share;
(ii) introduce new products; and (iii) increase operating efficiencies. The
Company intends to pursue these strategies as set forth below.

    Increase Market Share 

    Strategic Acquisitions. The Company will continue to increase its market
    share through strategic acquisitions of synergistic businesses. The Company
    seeks to identify potential acquisition targets with (i) dominant positions
    in local or regional markets, (ii) excess or underutilized capacity, (iii)
    an ability to add new product lines to the Company's business, and (iv)
    significant asset value to enable the Company to obtain debt financing or
    non-dilutive equity financing for the acquisition. The Company is
    continuously evaluating acquisition opportunities in light of the above
    criteria. Once a potential target is identified, the Company commences an
    in-depth due diligence evaluation of the target's operations, markets,
    profitability and examines all potential liabilities including environmental
    liabilities and any contingent liabilities. At the present time, the Company
    has no specific agreements with respect to future acquisitions, but is
    continually investigating potential acquisition prospects. 

    Sell Broad Range of Products to Existing Customers. Currently, the Company
    sells its products through a direct sales force and manufacturers'
    representatives. Historically, the manufacturer's representatives have only
    sold certain of the Company's products. With the Company's recent expansion
    of product lines through acquisition, those representatives can now offer
    the Company's full range of air filtration products, instead of selling a
    mix of air filters from a range of manufacturers. 

    Establish Foreign Presence. The Company intends to manufacture and continue
    to market its products in foreign markets. In April 1996, the Company
    established a sales office, through a wholly owned subsidiary, in Singapore.
    The Company intends to begin manufacturing ASHRAE-grade filters in the
    region by the end of 1997, and has already begun sales of the Company's
    products which are shipped from its domestic manufacturing sites. 

    Expand Domestic Rep Network. The Company plans to expand its network of
    domestic manufacturers' representatives by taking advantage of its
    established contacts with specialty contractors and manufacturers'
    representatives throughout the mid-West, Southwest and Eastern regions of
    the United States. Using its contacts for high end products and its new
    facilities in the Western U.S., the Company intends to expand into West
    Coast markets for mid-range and low-end products. 

    Establish Facilities Throughout U.S. The Company plans to establish a
    facility in the Mid-West, which will manufacture mid-range and
    standard-grade filters and equipment (see "Products"). The Company also
    plans to relocate its Airpure West facility in California to Las Vegas,
    Nevada. 

    Continued Emphasis on Quality and Performance. The Company's continued
    emphasis on product quality has allowed it to grow in several high-
    technology industries in recent years. See "Business--Products" and
    "Management's Discussion and Analysis of Financial Condition and Results of
    Operations." 


                                       5
<PAGE>


    Expand Market with New Products. 

    The Company intends to develop products for new markets by applying existing
    technology developed for high-technology niche markets to new applications.
    For each new application, the Company will first develop a line of products
    to meet the needs of the specific application, and through trade shows,
    technical publications, mass marketing, distributor education and other
    appropriate methods, will create demand for the application in the new
    target market. 

    Increase Operating Efficiency 

    Eliminate Redundancy. The Company is planning to increase the focus of its
    individual subsidiaries and manufacturing facilities, so that each
    subsidiary only produces a single category of product. The Company expects
    to reduce costs by eliminating redundant part and lot tracking between its
    FFI and CSC facilities. These containment environments will now be produced
    exclusively at CSC's site in Bath, North Carolina. 

    Centralize Overhead Functions. The Company has begun to implement plans to
    centralize and eliminate duplication of efforts between the subsidiaries in
    the following areas: purchasing, marketing, accounting, personnel
    management, risk management and policies and other benefit plan
    administration, production planning and shipping coordination. 

    Cross-Apply Technology and Expertise. The Company plans to evaluate the
    manufacturing technologies used by its various subsidiaries and to
    cross-apply such technologies to create greater efficiencies in each
    manufacturing line. The Company has already identified cost saving
    procedures used by FFI which, when implemented, will enhance the efficiency
    at Precisionaire.

The Company's ability to achieve these objectives is subject to various risks
and uncertainties as described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Outlook."

MARKETING

The Company sells its products through manufacturer's representatives,
distributors and a direct sales force. Sales to the semiconductor, biotechnology
and general industrial markets are typically made through manufacturer's
representatives. The direct sales force sells primarily to wholesale
distributors, large retail chains, original equipment manufacturers, end users
and government organizations. 

Each of the Company's subsidiaries has historically used manufacturers'
representatives for their respective product lines. Each representative
typically represents a group of end users with similar filtration needs, in a
relatively small geographical region. For example, FFI typically has at least
one "exclusive" representative with respect to its HEPA products in each major
urban center in the U.S., whose customers are the high-technology firms who use
FFI's products, or the specialty HVAC contractors who serve these end users.
These representatives have historically also sold mid-range ASHRAE filters,
standard-grade filters and related products and housings from other
manufacturers to fill out their product offerings. Now that the Company offers
all of these products, management believes that many of these distributors will
elect to offer the Company's line of products exclusively, and discontinue
offering other competitors' products; however, the Company currently has no such
exclusive agreements. 

The Company is currently focused on expanding its business with each of these
representatives to include all of the Company's products. The Company believes
it will be successful in implementing this strategy with the majority of its
current representatives for the following reasons:

    Product Quality. The Company manufacturers high performance air filtration
    products. It currently offers filters of 99.999997% efficiency on particles
    0.1 microns or larger, which the Company believes is the highest efficiency
    rating available anywhere. Flanders has provided 8 pharmaceutical isolators
    which are currently in use for production of cytotoxic and mutagenic drugs. 

    Name Recognition. The Company believes that each of its product lines has
    high name recognition in its target markets. The Company's representatives
    have indicated that they believe their sales will be increased with
    additional products associated with the Company. 

    Single Source Supplier. The Company provides a broad spectrum of air
    filtration products. The ability to work with a single source for filters
    will enable representatives to operate more efficiently, only needing to be
    trained on one filtration system, maintain contacts with a single
    organization and order from a central source. 


                                       6
<PAGE>


    Product Promotion and Innovation. The Company plans to introduce the public
    to new applications it is developing for filtration products.
    Representatives will be able to take advantage of the additional name
    recognition and public knowledge associated with the marketing of the new
    products, and see this as a competitive advantage to selling the Company's
    products. 

The Company is also seeking to consolidate its share of its direct customers'
business in the same fashion. For example, CSC has historically sold high-end
radiation containment filtration systems for radioactive containment and exhaust
purposes to U.S. Department of Energy nuclear facilities. These facilities also
use standard and industrial-grade filters for air intake systems and control
areas. The Company believes each of its subsidiaries will be able to sell its
direct customers additional products from the other subsidiaries, for many of
the same reasons given above: perception of product quality, name recognition,
and public knowledge of product innovations and technical superiority. 

PRODUCTS 

The Company's principal products are high-end, mid-range and standard-grade air
filtration products and related equipment and hardware. These principal products
are divided into product lines and each product line is marketed separately
through a combination of direct sales and a network of regional distributors and
specialized technical representatives and contractors

    "High-End" Products. 

    The Company manufactures and sells "high-end" air filtration products for
    use in applications requiring High Efficiency Particulate Air ("HEPA")
    filters, or absolute control of other contaminants or toxic gases, typically
    with at least 99.97% efficiency. Set forth below is a description of some of
    the Company's high-end products. 

    HEPA Filters. The Company manufactures a full line of commercial-grade and
    specialty HEPA filters, in a variety of styles, including bag filters, fluid
    seal filters and clamp-down ceiling filters. These filters are used to
    remove extremely small particles from air and other gases for a variety of
    applications ranging from removing radioactive particles in the event of a
    nuclear containment breach to removing oil mist from the air of automobile
    plants to meet OSHA requirements, to removing cigarette smoke from the air
    of smoking areas at airport terminals before it is mixed with the general
    airport air. 

    Laminar Flow Grade Filters. The Company manufactures an extensive line of
    high- performance air filters designed to meet the additional requirements
    of cleanrooms. Efficiencies for various laminar flow filter types range from
    99.99% to 99.999997% for particle removal. The performance of these product
    lines forms the basis for the Company's reputation among high-end users. The
    Company produces its own fiber-glass based filter media so that it can
    maintain quality control over the production of the media. Besides allowing
    more immediate and effective product quality control, the Company has
    developed unique processes which enable them to manufacture "completely
    separatorless" filters, while competing filters use aluminum, tape, glue or
    strings to separate adjacent pleats of the media which obstruct air flow and
    contribute to off- gassing and particle generation. Laminar flow grade
    filters are essential for the production of semiconductors, pharmaceuticals
    and many other high-technology products. 

    HEGA Products. High-Efficiency Gas Adsorbers ("HEGAs") collect gaseous
    contaminants through "adsorption," or collecting contaminants in a condensed
    form on a surface. HEGA filters are used to control or eliminate gaseous
    contaminants, odors, bacteria and, toxic chemicals. HEGA products typically
    contain one of several forms of activated charcoal, selected to match the
    types of contaminant which need to be filtered for the particular
    application. HEGA filters, in combination with ASHRAE-grade and HEPA
    filters, are critical to many applications, including the production and
    disposal of chemical and biological warfare agents, the removal of
    radioactive gases from the exhaust of nuclear facilities and the removal of
    volatile organic compounds generated by many industries including hospital
    operating rooms. 

    Containment Environments. The Company manufactures isolated containment
    environments for a variety of applications which combine HEPA and HEGA
    filtration with specialized housings and self-contained fan-filter units.
    These systems are customized to meet the requirements of the end user, and
    have been used in applications including isolating contagion in critical
    care wards. These containment environments are potentially adaptable,
    especially in combination with gas-phase filtration technologies, to many
    other industries, including the pharmaceutical and semiconductors
    industries. 

                                       7
<PAGE>


    "Mid-Range" Filtration Products. 

    The Company also manufactures and sells products intended for "mid-range"
    applications. These filters are also known as ASHRAE filters, because they
    fall under specifications and are categorized by efficiency ratings
    established by the American Society of Heating, Refrigeration and Air-
    conditioning Engineers. These applications are generally characterized by
    requiring filtration of at least 20% efficiency. 

    The Company's mid-range industrial grade products include Pureform(R)
    Separatorless Filters, Separator-Type filters with corrugated aluminum
    separators, high-temperature HEPA filters, and 95% DOP high-efficiency
    filters, in a variety of styles, including nipple-connected, square gasketed
    with gel-seal and round with or without faceguards. Other major ASHRAE-rated
    products include Precision Pak(TM) extended surface area "bag" type filters,
    Rigi-Pleat(TM) deep-pleated filters, Multi-Fold(TM) Collapsible medium and
    high-efficiency air filter cartridges, and Multi-Cap and Multi-Flo
    collapsible air filter cartridges for replacement of competitors' filters. 

    "Standard-Grade" Products. 

    The Company manufactures and sells standard-grade products for use in
    conventional commercial and residential HVAC systems. These products are
    typically sold off-the-shelf to HVAC distributors, retail outlets,
    industrial wholesalers and specialty contractors. These filters are
    characterized by their low cost, and typically have efficiency ratings below
    30%, with average arrestance ranging from 50% to 95%. The Company's product
    lines in this category include a full range of filters and media for
    standard residential and commercial furnace and air conditioning
    applications. 

    The Company's standard-grade filters are sold under more than 20 different
    brand names, including Precisionaire Industrial Grade, Tri-Bond, E-Z Flow,
    Dustgard, Kwik Kut, Smilie, Permaire, Kwik Kleen, Pre-Foam Kleen, Kwik Kleen
    Synthetic, Pre-Pleat and Micro- Particle Pleated Home Air Filters. 

    Other Products and Services. 

    In addition to filters, the Company also sells related products, including
    filter housings, lay-in grid cleanroom ceilings, fans and blowers, isolation
    dampers, adhesives, caulk, filter media, and sealants. The Company also has
    a limited number of service clients, where the Company will replace or
    recharge media and perform related maintenance services.

MANUFACTURING 

The Company designs and manufactures air filters, housings, containment
environments and related equipment. Its products are manufactured at seven
facilities in the U.S., which range in size from 40,000 square feet to over
200,000 square feet. CSC, located in Bath, North Carolina, manufactures high-end
containment environments, housings, custom filter assemblies and other custom
filtration products and systems which require extensive custom design,
production and lot tracking, such as enclosures for the production and
containment of potentially dangerous biologically engineered microorganisms.
Precisionaire has three separate manufacturing facilities, in Bartow, Florida,
Terrell, Texas and Auburn, Pennsylvania, which produce medium efficiency and
standard-grade filters in standard sizes, which are shipped in bulk to
retailers, distributors and other customers. FFI's facility in Washington, North
Carolina, produces high-end HEPA products. Management believes that FFI's
ability to manufacture its own filter media provides it with a significant
competitive advantage, allowing more direct control over quality and composition
than is generally available with outside suppliers. The Company's Selma, North
Carolina and Santa Rosa, California, facilities manufacture ASHRAE grade
filters. 

The Company's manufacturing operations are subject to periodic inspection by
regulatory authorities. Because of the nature of some of the Company's products,
these agencies include, in some cases, the Department of Energy, the Food and
Drug Administration and other agencies responsible for overseeing sensitive
technologies. One of the considerations in deciding which types of products each
facility will manufacture is the segregation of highly-regulated products to a
minimal number of facilities, to reduce the overhead associated with regulatory
monitoring and compliance. 

Each of the Company's manufacturing facilities utilize testing and design
strategies appropriate to the products manufactured. These range from standard
statistical process quality controls for standard-grade residential replacement
filters to individual testing and certification with patented proprietary
particle scanning technologies for each laminar-grade HEPA filter. The Company
believes that its ability to comprehensively test and certify its filters
provides it with a competitive advantage.

                                       8
<PAGE>


SOURCE AND AVAILABILITY OF RAW MATERIALS 

The Company's principal raw materials are cardboard, fiberglass fibers, extruded
glass, sheet metal, extruded aluminum and wood. These raw materials are readily
available in sufficient quantities from many suppliers. 

COMPETITION 

The air-filtration market is fragmented and highly competitive. There are many
companies which compete in the Company's market areas. The Company believes that
the principal competitive factors in the air-filtration business include,
product performance, price, product knowledge, reputation, customized design,
timely delivery and product maintenance. The Company believes it competes
favorably in all of these categories. The Company's competitors include
successful companies with resources, capital requirements, financial strength,
and market share which may be greater than the Company's. Major competitors
include AAF International, Farr Company, HEPA Corporation, Purolator Products
Air Filtration Company, Donaldson Corporation, and Clark Corporation. 

PATENTS, TRADEMARKS AND LICENSES 

The Company currently holds eight patents relating to filtration technology,
including patents relating to HEPA filters and fabrication methods, filter leak
testing methods, and laminar flow cleanrooms. The Company has a patent pending
on its isolation workstation technology. 

The Company has applied for federal trademark protection for the following
marks: Precisionaire(R), E-Z flow(R), Smilie(R), Airvelope(TM), Channel-Ceil(R),
Channel-Hood(TM), Pureform(TM), Econocell(TM) and Pureseal(R). Although
management believes that the patents and trademarks associated with the
Company's various product lines and subsidiaries are valuable to the Company, it
does not consider any of them to be essential to its business. 

The Company currently licenses some of its manufacturing products to specialty
HVAC and ASHRAE filter manufacturers who produce products under their own name
and with their own identifying labels. 

CUSTOMERS 

The Company is not dependent upon any single customer, and no single customer
accounted for revenues equal to or greater than ten percent of the total
revenues of the Company. The Company's significant customers include Abbot
Pharmaceuticals, E.I. Dupont, Home Depot, Inc., Lucent Technologies, Inc., Merck
& Co., Inc., Upjohn Co., Walmart Stores, Inc., Westinghouse Electric Corp., and
several large semiconductor and computer chip manufacturers. 

BACKLOG 

The Company had approximately $13,872,000 in firm backlog, on a pro forma basis
at December 31, 1996, compared to $16,537,000 at December 31, 1995, and
$14,564,000 at December 30, 1994 (figures for December 31, 1995 and December 30,
1994 include backlog from the Acquisitions at those dates). Firm backlog
includes orders received and not begun and the unfinished and unbilled portion
of contracts in progress. Orders are typically not cancelable without penalty,
except for certain stable filter supply contracts to nuclear facilities operated
by the United States government. Backlog varies from week to week, based on the
timing and mix of orders received. All backlog at December 31, 1996 is expected
to be shipped by the end of the second quarter of 1997. 

EMPLOYEES 

The Company employed 1,361 full-time employees on December 31, 1996: 1,163 in
manufacturing, 27 in development and technical staff, 33 in sales and marketing,
and the remaining 138 in support staff and administration. The Company's
employees are not represented by a labor union. The Company believes that its
relationship with its employees is satisfactory. Manufacturer's representatives
are not employees of the Company. 

RESEARCH AND DEVELOPMENT

The Company's research and development is focused in the following areas:

    Automated equipment design, to increase the efficiency and profitability of
    production lines used for mass production of off-the-shelf filters; 

    Alternative filtration media types, including evaluation of new synthetic
    media products which might either increase efficiency or decrease media
    costs; 

                                       9
<PAGE>


    Improved media production techniques, particularly at FFI's plant in
    Washington, NC, where the Company produces its Dimple-Pleat media and other
    media for high-end HEPA products; during the past ten years, the Company has
    increased the efficiency of its most efficient filter lines through advances
    in media formulation and production techniques from 99.97% to 99.9999997%. 

    Application development, where new methods and products are developed from
    existing technologies. See "Business Strategies--Expand Market with New
    Products."

Research and development costs for fiscal years 1996, 1995 and 1994 were 
approximately $460,000, $120,000 and $158,000, respectively. Research and 
development costs were expensed and included in general and administration 
expenses during the period incurred. 

GOVERNMENT REGULATION 

The Company's operations are subject to certain federal, state and local
requirements relating to environmental, waste management, health and safety
regulations. The Company believes its business is operated in compliance with
all applicable government, environmental, waste management, health and safety
regulations and that its products meet standards from applicable government
agencies, however reference is made to "Item 3 - Legal Proceedings". There can
be no assurance that future regulations will not require the Company to modify
its products to meet revised particulate or other requirements.

Item 2.    Properties

The following table lists the principal facilities owned or leased by the
Company.

<TABLE>
<CAPTION>

                                                        Approximate Floor      Monthly     Lease/Type
Principal Facility                     Location          Space (sq. ft.)       Expense
<S>                             <C>                     <C>                    <C>         <C>

Headquarters and                Washington, North            220,000             N/A        N/A  owned<F1>
manufacturing facility          Carolina

Manufacturing, service          Bath, North Carolina          44,282             N/A        N/A  owned
and office facility

Plant and office                Selma, North Carolina         55,000           $10,838      Monthly lease
facility<F2>

Manufacturing plant<F3>,<F4>    Bartow, Florida              175,000           $36,495      10 year, expires in 2006

Manufacturing plant             Lakeland, Florida             30,000            $5,963      Monthly lease

Manufacturing plant             Terrell Texas                146,256             N/A        N/A  owned5

Manufacturing plant<F3>,<F4>    Auburn, Pennsylvania          91,000           $17,104      1 year, expires in 1997

Office space                    St. Petersburg, Florida       12,000            $7,651      1 year, expires in 1997

Office space                    Terrell, Texas                13,200             N/A        N/A  owned

R&D; cafeteria<F3>              St. Petersburg, Florida        6,000            $1,464      5 year, expires in 2001

Warehouse                       South Holland, Illinois       33,226            $8,307      4 year, expires in 1998

Manufacturing plant             Sonoma, California            40,000            $6,675      1 year, expires April 30, 1997

Manufacturing plant             Stafford, Texas                8,000            $1,600      Monthly lease

Office space                    Stafford, Texas               18,000             N/A        N/A  owned

____________________
<FN>
<F1>
    The Washington, North Carolina facility is encumbered by a mortgage from a
    mortgage company. Outstanding balance on the debt was approximately $865,000
    at December 31, 1996. See "Notes to Consolidated Financial Statements - Note
    8."


                                       10
<PAGE>


<F2>

    The Selma facility is leased from a related party pursuant to a
    month-to-month lease. See "Certain Relationships and Related Transactions."

<F3>
    Upon satisfaction of certain conditions, the landlord at this location has
    the right to cause the Company to purchase such property and the Company has
    the right to purchase this property for five (5) years thereafter.

<F4>
    These facilities are leased from a related party pursuant to leases. See
    "Certain Relationships and Related Transactions."

<F5>
    The Terrell, Texas facility is encumbered by a mortgage from a mortgage
    company. Outstanding balance on the debt was approximately $2,154,000 at
    December 31, 1996. See "Notes to Consolidated Financial Statements - Note
    8."
</FN>
</TABLE>

Item 3.    Legal Proceedings

The Company is currently being monitored by the United States Environmental
Protection Agency ("EPA") for possible environmental contamination at one of its
main facilities. The Company has entered into an agreement with the EPA to
conduct monthly monitoring of groundwater. The Company estimates the monitoring
will last from 3-5 years, and believes the total cost will not exceed $45,000.
The Company has received a limited indemnification from Thomas Allan, Robert
Amerson and Steven Clark (directors, officers and shareholders of the Company)
of approximately $975,000 with respect to the claims by the EPA; however, there
can be no assurance that the amount of this indemnification will be sufficient
to cover the aggregate of liabilities asserted by the EPA (See also "Notes to
Consolidated Financial Statements - Note 17"). 

Additionally, from time to time, the Company is also a party to various legal
proceedings incidental to its business. None of these proceedings are material
to the conduct of the Company's business, operations or financial condition. 

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

The Company held its annual meeting of Shareholders on November 22, 1996. During
the meeting, holders of 10,202,955 shares, out of 15,938,348 shares outstanding,
of the Company's common stock voted to adopt the following proposals:

*   Elect as members of the Board of Directors of the Company the following
    individuals: Thomas T. Allan, Robert R. Amerson, Gustavo Hernandez, Steven
    K. Clark, William M. Claytor and William H. Clark. 

*   Ratify the firm of McGladrey & Pullen, LLP as the Company's independent
    auditors for the fiscal year ended December 31, 1996.

There were no votes against any of the proposals.

                                       11
<PAGE>



                                    PART II


Item 5.    Market for Registrant's Common equity and Related Stockholder Matters

The Company's Common Stock is listed on the Nasdaq National Market System under
the symbol FLDR. 

Price Range of Common Stock 

The following table sets forth, for the periods indicated, the high and low sale
prices of the Common Stock as reported by the Nasdaq National Market System and
the Nasdaq Small-Cap System. Such quotations do not include retail mark-ups,
mark-downs, or other fees or commissions. The Company was listed on the Nasdaq
National Market System on November 11, 1996. Prior to that time, the Company's
Common Stock was traded on the Nasdaq Small-Cap Market System from April 8, 1996
to November 8, 1996. From February 27, 1996 through April 7, 1996, the Common
Stock was listed on the OTC Bulletin Board. Prior to February 27, 1996, there
was no public market in the Company's Common Stock.

<TABLE>
<CAPTION>

                                                  High                 Low
                                              ------------        ------------
<S>                                           <C>                 <C>
Fiscal 1997            
First Quarter (through February 28, 1997)     $    12.25          $     9.38 
            
Fiscal 1996            
Fourth Quarter ended December 31, 1996             10.25                8.38 
Third Quarter ended September 30, 1996             10.50                9.00 
Second Quarter ended June 30, 1996                 10.00                5.00 
First Quarter ended March 31, 1996                  2.50                5.00 
</TABLE>

On March 19, 1997, the closing price for the Company's common stock was
$11.50 per share. As of March 19, 1997, there were 408 holders of record of
the Company's Common Stock.

Dividend Policy

The Company has not declared or paid cash dividends on its Common Stock. The
Company currently intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be made by the Board of Directors in light of the Company's
earnings, financial position, capital requirements and such other factors as the
Board of Directors deems relevant. Under the terms of its revolving credit line
with NationsBank, N.A. ("NationsBank"), the Company cannot pay dividends without
the prior written consent of NationsBank. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Notes to Consolidated Financial Statements - Note 8."



                                       12
<PAGE>


Item 6.    Selected Financial Data

The following financial data is an integral part of, and should be read in
conjunction with, the "Consolidated Financial Statements" and notes thereto.
Information concerning significant trends in the financial condition and results
of operations is contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."


Selected Operations Data  (000's omitted except per share data)

<TABLE>
<CAPTION>

                                              1996        1995        1994        1993        1992
                                           ----------  ----------  ----------  ----------  ----------
<S>                                        <C>         <C>         <C>         <C>         <C>

Net sales                                   $ 73,056    $ 38,636    $ 26,706    $ 20,569    $ 20,757 
Gross profit                                  19,459       9,682       7,861       6,504       6,075 
Operating expenses                            13,460       7,263       7,239       6,695       5,411 
Operating income                               5,999       2,419         622         356         915 
Earnings before income taxes                   5,771       1,830         171          25         451 
Income taxes                                   2,178         685         176          15         207 
Income (loss) from continuing operations       3,594       1,146          (5)         10         244 
Cumulative effect of accounting change           -           -           -           307         -   
Extraordinary items                              -           -           -           -            89 
                                           ----------  ----------  ----------  ----------  ----------
Net income (loss)                           $  3,594    $  1,146    $     (5)   $    317    $    333 
                                           ==========  ==========  ==========  ==========  ========== 

Earnings per common and common                                                
  equivalent share outstanding:                                            
     Primary                                $   0.21    $   0.12    $    -      $   0.03    $   0.03 
                                           ==========  ==========  ==========  ==========  ==========
     Fully Diluted                          $   0.21    $   0.12    $    -      $   0.03    $   0.03 
                                           ==========  ==========  ==========  ==========  ==========

Weighted average common and common                                                
  equivalent shares outstanding:                                            
     Primary                                  17,042       9,832       9,693       9,654       9,654 
                                           ==========  ==========  ==========  ==========  ==========
     Fully Diluted                            18,072       9,832       9,693       9,654       9,654 
                                           ==========  ==========  ==========  ==========  ==========

</TABLE>


Selected Balance Sheet Data  (000's omitted)

<TABLE>
<CAPTION>

                                              1996        1995        1994        1993        1992
                                           ----------  ----------  ----------  ----------  ----------
<S>                                        <C>         <C>         <C>         <C>         <C>

Working capital                             $ 22,570    $  4,108    $    349    $    675    $    788 
Total assets                                  86,518      18,529      14,414      12,213      11,026 
Long-term obligations<F1>                     34,156       1,761       1,892       1,803       2,258 
Committed capital                              8,000        -           -           -           -   
Total shareholders' equity                    25,353       8,208       3,953       3,967       3,612 

____________________
<FN>
<F1>
Long-term obligations includes notes payable, current maturities of
long-term debt, long-term debt and convertible debt.
</FN>
</TABLE>


                                       13
<PAGE>


Item 7.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations

The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
and the notes thereto, all included elsewhere herein. Unless otherwise stated,
this discussion includes the results of operations of the Acquisitions only from
the respective date of acquisition. The information set forth in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" includes forward-looking statements that involve risks and
uncertainties. Many factors could cause actual results to differ materially from
those contained in the forward- looking statements below. See "Outlook."

Overview

The Company is an air filtration product company engaged in designing,
manufacturing and marketing high performance air filtration products and related
products, services and equipment. During the last year, the Company has
experienced significant growth in its HEPA filter business and from the
acquisition of other air filtration companies. Airpure was organized on February
24, 1994 and it is a sixty-three percent (63%) subsidiary of FFI. Airpure West
was organized on March 25, 1996 and is a wholly owned subsidiary of FFI. Airpure
and Airpure West manufacture and market industrial and commercial bags, pleats
and industrial grade HEPA filters. As of May 31, 1996, the Company acquired CSC,
and on June 15, 1996, acquired AirSeal. As of September 23, 1996, the Company
acquired Precisionaire. CSC specializes in the manufacture of high-end charcoal
filters and containment environments, and has a service arm. AirSeal produces
customized mid-range housings and HVAC equipment. Precisionaire manufactures air
filters and related products for commercial and residential air conditioning and
heating systems. As a result, the Company's historical results of operations for
the periods presented should be evaluated specifically in the context of the
Acquisitions. Additionally, the historical results of operations do not fully
reflect the operating efficiencies and improvements that are expected to be
achieved by integrating the acquired businesses into the Company's operations.
There can be no guarantee that the Company will be able to achieve these gains
in efficiency. 

The Company believes the Acquisitions will have a positive impact on its future
results of operations and accordingly believes that the effects of the
Acquisitions should be considered when evaluating the Company's historical
results of operations. 

Results of Operations

    Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

    The following table summarizes the Company's results of operations as a
    percentage of net sales for the years ended December 31, 1996 and 1995.

    <TABLE>
    <CAPTION>
                                                           Year ended                
                                           December 31, 1996        December 31, 1995
                                         ---------------------    ---------------------
    <S>                                  <C>          <C>         <C>          <C>
    Net sales                             $  73,056    100.0%      $  38,636    100.0%
    Gross profit                             19,459     26.6           9,682     25.1 
    Operating expenses                       13,460     18.4           7,263     18.8 
    Operating income                          5,999      8.2           2,419      6.3 
    Income before income taxes                5,771      7.9           1,830      4.7 
    Income taxes                              2,178      3.0             684      1.8 
    Net income                                3,594      4.9           1,146      3.0 
    </TABLE>

    To aid in the evaluation of the effect of the Acquisitions, certain pro
    forma financial information has been included in the text of this
    discussion; this pro forma information has been prepared by combining the
    historical results of operations of the various subsidiaries as though the
    Acquisitions had occurred at January 1, 1995, and includes adjustments
    directly attributable to the Acquisitions, such as additional depreciation
    from the write-up of assets to market value from book value, additional
    amortization due to recognition of goodwill from the Acquisitions, decrease
    in rental expense for certain land and buildings leased by the acquired
    companies which were acquired as part of the Acquisitions, additional
    interest expense from financing the Acquisitions, and decrease in
    compensation expense to account for the elimination of non-recurring
    salaries paid to former shareholders of the acquired companies. These
    figures are presented herein for informational purposes only, and do not
    purport to represent the operations of the Company had the Acquisitions, in
    fact, occurred on January 1, 1995.


                                       14
<PAGE>


    Net Sales: Net sales for 1996 increased by $34,420,000, or 89.1%, to
    $73,056,000 for 1996, from $38,636,000 for 1995. The increase in net sales
    was due to: (i) the Acquisitions, which contributed approximately
    $23,360,000 of net sales; (ii) two new subsidiaries, Airpure West and FIL,
    whose combined sales accounted for $1,570,000 of the increase; and (iii) the
    Company's success in attracting work and expanding its original core
    business, which grew by approximately 24.6% between 1996 and 1995 and
    contributed an additional $9,490,000 to net sales. Examining the Company on
    a pro forma basis by adding the operating results of the acquired companies
    as though the Acquisitions had been completed on January 1, 1995, combined
    net sales would have increased $20,238,000, or 18.7%, to $128,222,000 for
    1996, compared to $107,984,000 for 1995. This increase is due to the success
    of its each of the Company's subsidiaries in capturing additional market
    share and increasing production. 

    Gross Profit: Gross profit for 1996 increased $9,777,000, or 101.0%, to
    $19,459,000, which represented 26.6% of net sales, compared to $9,682,000,
    which represented 25.1% for 1995. Considered on a pro forma basis by adding
    the operating results of the acquired companies as though the Acquisitions
    had been completed on January 1, 1995, pro forma gross profit for 1996
    increased $6,119,000, or 22.7%, to $33,058,000, which represented 25.8% of
    pro forma net sales, compared to $26,939,000, which represented 24.9% of pro
    forma net sales, for 1995. The primary reasons for the increase in gross
    profit margin were improvements in operating efficiency associated with
    focusing each manufacturing facility on a particular type of product, which
    reduced direct costs in the following areas: (i) reduced down time due to
    the switching lines between products; (ii) eliminated individual lot
    inventory tracking at the Company's Washington, NC facility required by
    regulations governing the manufacture of nuclear and biological containment
    environments, by moving all containment environment manufacturing operations
    to CSC's plant in Bath, NC; and (iii) reduced training and coordination time
    at each location as a result of reducing the number of certification and
    training hours required of employees by producing fewer types of products at
    each facility. Other factors affecting gross profit margins included low
    profit margins from the newly started subsidiaries Airpure West and FIL,
    which averaged 9.3% of their net sales, and the Company's ongoing automation
    project for stock product lines. 

    Operating Expenses: Operating expenses during 1996 increased $6,197,000, or
    85.3% to $13,460,000, representing 18.4% of net sales, compared to
    $7,263,000 for 1995, which represented 18.8% of net sales. The majority of
    the increase in operating expenses was due to the Acquisitions, which
    accounted for $5,306,000 of the increase. Other factors increasing 1996
    operating expenses compared to 1995 include increased commissions resulting
    from increased sales and costs associated with the establishment of Airpure
    West and FIL, which averaged 41.1% of their net sales. 

    Net Income (Loss): Net income for 1996 increased $2,448,000, or 213.7%, to
    $3,594,000, or $0.21 per share, compared to $1,146,000, or $0.12 per share,
    for 1995. Considered on a pro forma basis, as though the Acquisitions had
    been completed on January 1, 1995, pro forma net income for 1996 increased
    $2,959,000, or 108.8%, to $5,678,000, or $0.30 per share ($0.30 fully
    diluted), compared to $2,719,000, or $0.20 per share ($0.18 fully diluted),
    for 1995. 

    Year Ended December 31, 1995 Compared to Year Ended December 30, 1994 

    The following table summarizes the Company's results of operations as a
    percentage of net sales for the years ended December 31, 1995 and December
    30, 1994. 


    <TABLE>
    <CAPTION>
                                                           Year ended                
                                           December 31, 1996        December 31, 1995
                                         ---------------------    ---------------------
    <S>                                  <C>          <C>         <C>          <C>
    Net sales                             $  38,636    100.0%      $  26,706    100.0%
    Gross profit                              9,682     25.1           7,861     29.4 
    Operating expenses                        7,263     18.8           7,239     27.1 
    Operating income                          2,419      6.3             622      2.3 
    Income before income taxes                1,830      4.7             171      0.6 
    Income taxes                                684      1.8             176      0.7 
    Net income                                1,146      3.0              (5)     -
    </TABLE>

    Net Sales: Net sales for 1995 increased by $11,930,000, or 44.7% to
    $38,636,000 compared to $26,706,000 in 1994. This increase was due primarily
    to increased overall demand for the Company's products, several large
    contracts for end users, building facilities for semiconductor
    manufacturing, and approximately $4,500,000 of increased net sales from
    Airpure, a subsidiary established in 1994. 


                                       15
<PAGE>


    Gross Profit: Gross profit for 1995 represented 25.1% of net sales, compared
    to 29.4% of net sales in 1994. The primary reasons for the decrease in gross
    profit margin percentage were: (i) the consolidation of operations of
    Airpure, whose products had been priced at lower margins (an average of
    19.5%) in order to achieve entry into the mid- level ASHRAE products market,
    accounting for 1.1% of the decrease in gross profit margin percentage; (ii)
    a price increase in an essential component of the filtration media caused by
    resource scarcity which increased these costs to approximately $370,000 over
    budget for the year. The Company does not anticipate that shortages in these
    materials will result in any significant increased costs in the foreseeable
    future because the Company has increased the number of suppliers from which
    it purchases such materials, and the number of suppliers in the industry
    have also increased. Other normal fluctuations in materials prices and
    product mix accounted for the rest of the change in gross margin percentage.

    Operating Expenses: Operating expenses during 1995 increased 0.3% to
    $7,263,000, representing 18.8% of net sales, compared to $7,239,000 in 1994,
    which represented 27.1% of net sales. Operating expenses included $375,000
    and $150,000 in 1995 and 1994, respectively, of costs from settlement of
    lawsuits in December 1995 with two insurance companies, indemnified by
    certain officers and shareholders of the Company. See "Business--Legal
    Proceedings." Because these officers are deemed affiliates, this
    indemnification was deemed to be a capital contribution to offset expenses
    incurred by the Company, rather than as a decrease in expense, and was
    recorded as a debit to accrued liabilities and a credit to paid-in capital.
    There was no effect upon the cash flows from operations for recording this
    indemnification. If the settlement had been indemnified by non-affiliates,
    operating expenses during 1995 would have declined 5.2%, to $6,888,000, or
    17.9% of net sales, from $7,089,000, or 26.5% of net sales, during 1994,
    income tax expense would have increased approximately $146,000 and $58,000,
    respectively, and total stockholders' equity would have decreased
    approximately $204,000 and $58,000, respectively. 

    Net Income (Loss): Net income for 1995 was $1,146,000, or $0.12 per share,
    compared to a net loss of $5,000, or $0.00 per share, for 1994. Net income
    was decreased by $229,000 (after consideration of a tax benefit of $146,000)
    and $92,000 (after consideration of a tax benefit of $58,000) during 1995
    and 1994, respectively, by the indemnified lawsuit settlement. Without these
    indemnified settlement expenses, net income would have been $1,375,000, or
    $0.14 per share, for 1995, compared to $87,000, or $0.01 per share, for
    1994.

Liquidity and Capital Resources 

Working capital was $22,570,000 at December 31, 1996, compared to $4,108,000 at
December 31, 1995. This includes cash and cash equivalents of $2,390,000 and
$2,974,000 at December 31, 1996 and 1995, respectively. Working capital at
December 31, 1996 does not include the unused portion of the Company's revolving
credit line in the amount of $9,058,000. After the end of the year, the Company
received $15,596,000 from an underwritten public offering, and used these
proceeds to completely repay its Term Loan and Revolving Credit Line. See
"Subsequent Events." 

Trade receivables increased $10,663,000, or 147.2%, to $17,907,000 at December
31, 1996 from $7,244,000 at December 31, 1995. The increase in receivables is
primarily attributable to the Acquisitions, which accounted for approximately
$8,775,000 of the increase. The remaining increase is primarily due to increases
associated with the increased volume in net sales and timing differences in
shipments and payments received. 

Operations generated $1,613,000 of cash during 1996, compared to generating
$1,611,000 for 1995. The difference in cash flows was associated with increased
sales, which is primarily composed of the increases in receivables and
inventories at December 31, 1996, balanced by the increase in net income and
payables. Investing activities during 1996 consumed $33,028,000 of cash,
consisting primarily of the cash payments made for the Acquisitions. Financing
activities during 1996 generated $30,832,000 of cash, primarily from private
placement of the Company's common stock, incurrence of debt, and the issuance of
convertible debentures.


                                       16
<PAGE>


    Acquisitions 

    Effective September 23, 1996, the Company acquired all of the outstanding
    capital stock of Precisionaire pursuant to a stock purchase agreement dated
    July 1, 1996. The total cost of acquisition, net of cash acquired, was
    approximately $25,205,000 in cash and 786,885 shares of the Company's common
    stock, subject to a post-closing purchase price adjustment (the
    "Precisionaire Escrow Shares"), and was paid by the delivery of both
    $25,123,425 in cash to the Precisionaire sellers and 786,885 shares of the
    Company's common stock to an escrow agent to be held in escrow and released
    to the Precisionaire sellers over a three year period pending the evaluation
    of certain future performance criteria. Contemporaneously therewith,
    Precisionaire entered into an agreement to acquire from POT Realty (owned by
    the former shareholders of Precisionaire) a manufacturing facility,
    warehouse and related real property, located in Terrell, Texas, whereby
    Precisionaire would assume $2,191,575 of debt with respect to such building.
    This transaction was completed as of October 31, 1996. For financial
    statement purposes, the acquisition of Precisionaire is being accounted for
    as a purchase having occurred on September 30, 1996. As of December 31,
    1996, 262,295 Precisionaire Escrow Shares with a market value of $2,491,803
    were released from escrow to the Precisionaire sellers. 

    To finance the acquisition of Precisionaire, the Company arranged a credit
    facility with NationsBank, N.A. consisting of (i) a working capital
    revolving credit facility in the maximum principal amount of $25,000,000
    which bears interest at the prime rate as established by NationsBank, N.A.,
    plus one percent (1%) per annum and is due and payable in full on September
    30, 1998 and (ii) a term loan facility in the maximum principal amount of
    $6,500,000 which bears interest at the prime rate as established by
    NationsBank, N.A., plus one and one-half percent (1.50%) per annum and is
    due and payable in full on September 30, 1998. Substantially all of the
    Company's assets secure both the revolving credit facility and the term loan
    facility. At December 31, 1996, the Company had used approximately
    $15,942,000 of the revolving credit facility, approximately $9,000,000 of
    which was used for the acquisition of Precisionaire, and $4,869,000 of the
    term loan facility. In January and February 1997, the Company completely
    repaid the outstanding balances of the revolving line and the term loan. 

    Effective March 1, 1996, the Company completed the acquisition of all of the
    outstanding capital stock of CSC, a North Carolina Corporation, along with
    certain land and buildings formerly owned by the shareholders of CSC,
    pursuant to a stock purchase agreement. The total cost of acquisition, net
    of cash acquired, was approximately $4,497,000. In addition, 100,000 shares
    of the Company's common stock were issued and are being held in escrow
    pending the evaluation of certain future performance criteria. The
    acquisition by the Company of CSC has been accounted for by the Company as a
    purchase. As of December 31, 1996, 20,000 CSC Escrow Shares with a market
    value of $190,000 were released from escrow to the CSC sellers. 

    CSC, headquartered in Bath, North Carolina, manufactures high-efficiency
    charcoal filters, specialized housings, containment environments and related
    services. CSC's operations are contained in a 44,282 square foot facility,
    which was included in the purchase. 

    Effective May 31, 1996, the Company acquired all of the outstanding capital
    stock of Air Seal Filter Housings, Inc. ("Air Seal"), along with certain
    land and buildings formerly owned by the shareholders of Air Seal, pursuant
    to a stock purchase agreement. The total cost of acquisition, net of cash
    received, was approximately $2,270,000. In addition, 150,000 shares of the
    Company's common stock were issued and are being held in escrow pending the
    evaluation of certain future performance criteria. The acquisition of Air
    Seal by the Company has been accounted for by the Company as a purchase. 

    Air Seal, located in Stafford, Texas, manufactures specialty and standard
    housings for air filtration and HVAC systems, as well as integrated custom
    industrial-grade HVAC systems. Air Seal conducts its operations from an
    18,000 square foot facility, which was included in the purchase. 

    Including shares released from escrow as of December 31, 1996, the excess of
    fair value of assets acquired was $10,898,000, $901,000 and $1,213,000 for
    Precisionaire, CSC and Air Seal, respectively, and is being amortized on a
    straight-line basis over 40 years. 

    During the year, the Company established two new locations: An 80,000 square
    foot manufacturing plant for ASHRAE grade products in Santa Rosa,
    California, operating under the name Airpure West, which the Company plans
    to relocate to the vicinity of Las Vegas, Nevada, and a sales office in
    Singapore, operating under the name FIL. The Company plans to expand its
    Singapore office to include the manufacture of ASHRAE grade products by the
    end of the year. 


                                       17
<PAGE>


    Stock Offerings 

    During September and October, 1996, the Company raised: (i) $12,005,000
    through a private offering of 1,333,889 shares of its Common Stock at $9.00
    per share; (ii) $2,500,000 through a private offering of Series A
    Subordinated Convertible Debentures to certain unrelated investors; and
    (iii) $4,000,000 from the sale of 10% Convertible Notes pursuant to
    Regulation S to certain unrelated offshore investors (collectively, the
    stock and debt offerings in September and October are called the "October
    Offering"). The 10% Convertible Notes are convertible at any time,
    commencing forty-one (41) days after issuance, into shares of the Company's
    Common Stock at a conversion price equal to the lower of (i) eighty-two
    percent (82%) of the average closing bid price for the seven (7) trading
    days immediately preceding the conversion date, or (ii) $9.00; provided,
    however, that in no event shall the conversion price be less than $5.00;
    provided further, that in no event shall the holder of the 10% Convertible
    Notes be entitled to convert any portion of such notes if such action would
    result in beneficial ownership by a holder and its affiliates of more than
    4.9% of the outstanding shares of the Common Stock of the Company. If the
    average closing bid price of the Company's Common Stock over any continuous
    seven day trading period is less than $7.38 per share, the Company may
    redeem the convertible notes at a price equal to 115% of the outstanding
    principal amount of the notes. As of December 31, 1996, no notes had been
    converted. Net proceeds to the Company for the October Offering after
    commissions and expenses of $1,653,000 were $16,852,000. At December 31,
    1996, $8,000,000 of the $18,505,000 raised in the October Offering was
    subject to certain potential rights of rescission in favor of two investors,
    such that if a Registration Statement under the Securities Act of 1933
    registering certain shares held by the two investors was not declared
    effective by January 15, 1997, the investors would have had the right to
    return their shares to the Company for the original price of the shares;
    such a Registration Statement was declared effective on January 6, 1997, and
    hence these potential rights of rescission terminated. In connection with
    the 10% Convertible Notes, certain unrelated offshore investors were given a
    contractual right to receive, on the date of the conversion of the notes
    into common stock, warrants to purchase a number of shares of common stock
    equal to ten percent (10%) of the number of common shares issued upon any
    such conversion. The exercise price of the warrants will be equal to the
    amount per share at which the convertible notes were converted into common
    stock. 

    On June 3, 1996, the Company completed a private placement offering of
    1,537,315 shares of the Company's common stock at $5.00 per share to
    accredited investors. The net proceeds to the Company after commissions and
    expenses from the offering totaling $347,000 amounted to $7,340,000. A
    portion of the proceeds of this private placement were used to acquire CSC. 

    On January 24, 1996, the Company completed a private placement offering of
    500,000 shares of the Company's common stock at $2.50 per share to
    accredited investors. The net proceeds to the Company after commissions and
    expenses from the offering totaling $177,000 amounted to $1,073,000.

Expansion of the Company will require substantial continuing capital investment
for the manufacture of filtration products, including at least $1,000,000 for
the completion of the Company's current program to automate certain production
lines. See "Outlook." Although the Company has been able to arrange debt
facilities or equity financing to date, there can be no assurance that
sufficient debt financing or equity will continue to be available in the future,
or that it will be available on terms acceptable to the Company. Substantial
additional debt or equity financing may be needed for the Company to achieve its
short-term and long-term business objectives. Failure to obtain sufficient
capital could materially affect the Company's acquisition strategy. The Company
expects that future financing will include debt or equity placements, however,
no assurance can be given that the Company will be able to obtain additional
financing on reasonable terms, if at all. 

The Company's business and operations have not been materially affected by
inflation during the periods for which financial information is presented. 

Subsequent Events 

On March 7, 1997, the Company acquired, through its majority owned subsidiary,
Airseal West, Inc. ("Airseal West"), the majority of the assets of BB&D
Manufacturing, Inc. ("BB&D"), and Intermountain Painting and Subassembly, Inc
("IP&S"). Assets acquired included fixed assets, inventory and backlog. As
consideration for such assets, the Company paid $400,000 and IP&S and BB&D
received twenty percent each of the outstanding stock of Airseal West. Airseal
West will be located in Salt Lake City, Utah, and will manufacture specialty and
standard housings for air filtration and HVAC systems, as well as integrated
custom industrial-grade HVAC systems. 


                                       18
<PAGE>


On January 22, 1997, the Company completed an underwritten public secondary
offering dated January 16, 1997, of 1,600,000 shares of the Company's common
stock at $9.50 per share (the "Offering"). Net proceeds to the Company after
deducting commissions and expenses from the Offering totaling approximately
$1,720,000 amounted to $13,480,000. The Company utilized the entire amount of
the proceeds from the offering to pay down long-term and convertible debt. On
January 31, 1997, the Underwriter of the Offering exercised their over-allotment
option to purchase 240,000 shares of the Company's common stock at $9.50 per
share. Net proceeds to the Company after deducting commissions and expenses from
the over-allotment totaling approximately $164,000 amounted to $2,116,000. Net
proceeds from the Offering, including the over-allotment, were $15,596,000. 

The following "Unaudited As Adjusted" table sets forth selected balance sheet
information of the Company adjusted to reflect the receipt and initial
application of the proceeds of both the Offering and the over-allotment option
as if those transactions had been completed as of December 31, 1996 

Unaudited As Adjusted Selected Balance Sheet Data (000's omitted) 

<TABLE>
<CAPTION>
                                            1996
                                        ------------
<S>                                     <C>
Working capital                          $   15,370 
Total assets                                 78,918 
Long-term obligations <F1>                   10,960 
Total shareholders' equity                   48,949 

____________________
<FN>
<F1>
    Long-term obligations includes notes payable, current maturities of
    long-term debt, long-term debt and convertible debt.
</FN>
</TABLE>


Outlook 

This Outlook section, and other sections of the document, including specifically
"Item 1 - Business - Business Strategies," contains many "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, including, among others (i) results of operations (including expected
changes in the Company's gross margin and general, administrative and selling
expenses); (ii) the Company's business strategy for expanding its market share
of the air filtration industry (iii) the Company's strategy to increase the size
and customer base of the air filtration market; and (iv) the Company's ability
to distinguish itself from its current and future competitors. 

These forward looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. Important
factors to consider in evaluating such forward-looking statements include (i)
the shortage of reliable market data regarding the air filtration market; (ii)
changes in external competitive market factors or in the Company's internal
budgeting process which might impact trends in the Company's results of
operations; (iii) anticipated working capital or other cash requirements; (iv)
changes in the Company's business strategy or an inability to execute its
strategy due to unanticipated changes in the market; (v) product obsolescence
due to the development of new technologies, and (vi) various competitive factors
that may prevent the Company from competing successfully in the marketplace. In
light of these risks and uncertainties, there can be no assurance that the
events contemplated by the forward-looking statements contained in this Form
10-K will in fact occur. 

The Company believes its future results of operations could be affected by a
variety of factors, including the successful integration of CSC, AirSeal and
Precisionaire into the Company, whether management can successfully manage the
Company's growth, the ability of the Company to keep up with technological
changes, the success of the Company's efforts to automate its stock product
lines, increased pricing pressure from the Company's competition, changing
government regulations governing indoor air quality, the amount of capital
expenditures by semiconductor manufacturers, and any adverse changes in general
economic conditions in locations where the Company does business. 

The Acquisitions give the Company a broader product line of air filtration
products. As part of the integration of the Acquisitions, the Company has
adopted a strategy of increasing its market share by providing its existing
manufacturers' representatives with the Company's complete product line.
Integration of the Acquisitions may significantly strain the Company's
management, financial and other resources. There can be no assurance that the
Company's systems, procedures and controls will be adequate to accommodate
integration of these companies. Failure to successfully integrate these
companies could materially adversely affect the Company's business and results
of operation. 


                                       19
<PAGE>


The Company intends to continue to seek increased market share through strategic
acquisitions of synergistic businesses. The Company seeks to identify potential
acquisition targets with (i) dominant positions in local or regional markets,
(ii) excess or under-utilized capacity, (iii) an ability to add new product
lines to the Company's business and (iv) significant asset value to enable the
Company to obtain debt financing or non-diluted equity financing for such
acquisition. The Company is continuously evaluating acquisition opportunities in
light of the above criteria. Once a potential target is identified, the Company
commences an in-depth due diligence evaluation of the target's operations,
markets, profitability and examines all potential liabilities including
environmental liabilities and any contingent liabilities. The Company has no
specific agreements with respect to future acquisitions, but is continuing to
investigate potential acquisition opportunities. Substantial equity or debt
financing may be needed for the Company to continue to grow through the
acquisition of other businesses. Failure to obtain sufficient equity or debt
financing could adversely affect the Company's growth strategies. In addition,
there can be no assurance that any future acquisitions will be able to be
integrated successfully into the Company, given that any future acquisitions
will have been operated under different management philosophies, management
teams and marketing strategies. There can be no assurance that the Company's
systems, procedures and controls will be adequate to accommodate integration of
any future acquisitions. 

The Company has begun a program to increase its gross margins by automating
portions of its production lines at FFI, Precisionaire and Airpure using
technology developed at Precisionaire and FFI. Currently, approximately twenty
percent of the Company's product lines incorporate the new automated equipment
designs. The Company will continue to implement the additional automation for
these production lines one at a time, to minimize down time. The Company
estimates the total cost for this automation equipment will be $1,000,000 to
$2,000,000. 

The Company intends to continue building capacity for production of air
filtration products, and has announced plans to expand upon or build facilities
in the Mid-West and the Asia/Pacific Basin. The Company plans to relocate its
Airpure West operations to a facility in the vicinity of Las Vegas. These new or
expanded facilities, as well as the automation of existing production lines, are
part of the Company's growth strategies, and will require substantial continuing
investment in capital equipment during 1997. Although the Company has been able
to arrange equity financing or debt facilities to date, there can be no
assurance that additional equity or debt financing will continue to be available
in the future, nor that it will be available on terms acceptable to the Company.

NEW ACCOUNTING STANDARDS 

In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 establishes a new, fair
value based method of measuring stock-based compensation, but does not require
an entity to adopt the new method for preparing its basic financial statements.
The Company has decided not to adopt the new method for preparing basic
financial statements, but has included disclosure of pro forma net earnings and
earnings per share information in the notes to the financial statements as if
the fair value based method had been adopted. 

Item 8. Financial Statements and Supplementary Data 

    Attached, beginning at page F-1. 

Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure 

Upon recommendation of the Audit Committee of the Board of Directors of the
Company, the Company dismissed Smith & Company as its independent public
accounting firm on January 31, 1996. Effective February 1, 1996, the Audit
Committee engaged McGladrey & Pullen, LLP, the auditors of FFI, as the Company's
independent public accounting firm. The prior accountant's report of Smith &
Company on the financial statements of the Company for the years ended June 30,
1995, June 30, 1994 and June 30, 1993 and for the period of July 2, 1986 (date
of inception) to August 31, 1995, was not qualified or modified in any manner
(other than a going concern qualification) and contained no disclaimer of
opinion or adverse opinion. There were no disagreements with Smith & Company on
any matter of accounting principle or practice, financial disclosure or auditing
scope or procedure as related to the financial statements for the years ended
June 30, 1995, June 30, 1994 and June 30, 1993 and/or the period of July 2, 1986
(date of inception) through August 31, 1995 or for the interim period beginning
September 1, 1995 through January 31, 1996, the date of dismissal. 


                                       20
<PAGE>


                                   PART III

Item 10.    Directors and Executive Officers

    Identification of Directors and Executive Officers

    Set forth below is information regarding (i) the current directors of the
    Company, who will serve until the next annual meeting of shareholders or
    until their successors are elected or appointed and qualified, and (ii) the
    current executive officers of the Company, who are elected to serve at the
    discretion of the Board of Directors.

    <TABLE>
    <CAPTION>

    Name                    Age     Title
    ----                    ---     -----
    <S>                     <C>     <C>
    
    Thomas T. Allan         59      Chairman of the Board

    Robert R. Amerson       46      President, Chief Executive Officer and
                                    Director

    Gustavo Hernandez       61      Director

    Steven D. Klocke        36      Vice President of Engineering

    Knox Oakley             38      Vice President of Corporate Marketing and
                                    Sales

    Steven K. Clark         44      Vice President of Finance/Chief Financial
                                    Officer and Director

    William M. Claytor      55      Director

    William H. Clark        53      Director
    </TABLE>


    Thomas T. Allan. Mr. Allan is Chairman of the Board of the Company. He has
    been with Flanders since 1964, and is familiar with all aspects of Flanders'
    business. He holds a Bachelor of Arts degree in Journalism from the
    University of Pennsylvania. 

    Robert R. Amerson. Mr. Amerson has been President of Flanders since June
    1988, and is a Director. He joined the Company in 1987 as Chief Financial
    Officer. Mr. Amerson has a Bachelor of Science degree in Business
    Administration from Atlantic Christian College. 

    Gustavo Hernandez. Mr. Hernandez has been President of Precisionaire since
    1979, and became a Director of the Company contemporaneously with the
    Company's acquisition of Precisionaire in September 1996. Mr. Hernandez
    joined Precisionaire in 1969 as Vice President of Finance. Mr. Hernandez has
    a Bachelor of Arts degree in Accounting from the University of Southern
    Florida. 

    Stephen D. Klocke. Mr. Klocke is Vice President of Engineering for the
    Company. He is responsible for all aspects of filter and equipment design,
    directs the engineering staff and is directly in charge of all product and
    technical literature. Mr. Klocke is a member of the Institute of Environment
    Science, the primary technical standards body for this industry, where he
    has chaired many of the committees which make filtration and cleanroom
    standards. He has been with Flanders since 1986. Mr. Klocke received a
    Bachelor of Science degree in Mechanical Engineering from the University of
    Kentucky and a Bachelor of Arts degree in Physics from Thomas Moore College.

    Knox Oakley. Mr. Oakley has been the Vice President of Corporate Marketing
    and Sales of the Company since June 1994. Mr. Oakley oversees all marketing
    and sales efforts of the Company. From 1989 through June 1994, Mr. Oakley
    was Director of North American Sales for American Air Filter (now AAF
    International). Mr. Oakley received his Bachelor of Science degree in
    Biology from the Citadel, and has worked in the air filter manufacturing
    industry since he was 16. 


                                       21
<PAGE>


    Steven K. Clark. Mr. Clark was named as Vice President and Chief Financial
    Officer of the Company as of December 15, 1995, and a director of the
    Company as of December 29, 1995. Mr. Clark acted as a consultant to the
    Company from November 15, 1995 through December 15, 1995. From July 1992
    through October 1995, he was the Chief Financial Officer of Daw
    Technologies, Inc., a specialty cleanroom contractor and major customer of
    the Company. Prior to this he was a senior partner of Miller and Clark, an
    accounting and management services firm. Mr. Clark spent four years with
    Price Waterhouse, and an additional four years with Arthur Andersen, both
    accounting firms. He is a Certified Public Accountant, has Bachelor of Arts
    degrees in Accounting and Political Science and a Master of Business
    Administration Degree, all from the University of Utah. 

    William M. Claytor. Mr. Claytor has been an outside Director of Flanders for
    the last five years. He is a partner in the law firm of Baucom, Claytor,
    Benton, Morgan, Wood & White, P.A., and has held such position since 1975.
    Mr. Claytor graduated from Memphis State University School of Law in 1969
    and from the University of Missouri in 1963. 

    William H. Clark. Mr. Clark has been an outside Director of Flanders since
    June 1996. He is and has been since 1977, the President and Owner of Bill
    Clark Construction Co., Inc., a construction company located in Greenville,
    North Carolina specializing in residential development. He is currently a
    member of the Business Advisory Council of the East Carolina University
    School of Business. Mr. Clark has a BA degree and a Masters of Business
    Administration degree, both from East Carolina University.

Compliance with SEC Reporting Requirements 

Section 16(a) of the Securities Exchange Act of 1934, as amended (the "34
Act") requires the Company's officers and directors, and persons who own
more than ten percent of a registered class of the Company's equity
securities, to file with the SEC reports of ownership and changes in
ownership of common stock and other equity securities of the Company.
Officers, directors and greater than ten percent shareholders are required
by SEC regulations to furnish the Company with copies of all Section 16(a)
forms they file. 

The Company prepares Section 16(a) forms on behalf of its officers and
directors based on the information provided by them. Based solely on review
of this information, including written representations that no other reports
were required, the Company believes that, during the 1996 fiscal year, all
filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were complied with. 

Item 11.  Executive Compensation

Board Compensation Committee Report on Executive Compensation

The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors. The role of the
Compensation Committee is to review and approve salaries and other
compensation of the executive officers of the Company, to administer the
Executive Officer Bonus Plan (the "Bonus Plan"), and administer the stock
option plans and to review and approve stock option grants to all employees,
including the executive officers of the Company. 

    General Compensation Philosophy 

    The Company's compensation philosophy is that total cash compensation should
    vary with the performance of the Company and any long-term incentive should
    be closely aligned with the interest of the stockholders. 

    Total cash compensation for the executive officers consists of the following
    components: 

    *   Base salary
    *   An executive officer bonus that is related to growth in
        sales and operating earnings of the Company. 

    Long-term incentive is realized through the granting of stock options to
    executives and key employees through a non-qualified stock option plan,
    which was adopted by the Board and approved by a majority of the Company's
    shareholders in January of 1996. The Company has no other long-term
    incentive plans for its officers and employees. 

    Base Salary and Executive Officer Bonus Target 

    Current base salaries for the executive officers of the Company were
    determined by arms' length negotiations with the Board of Directors, and are
    set forth in the various employment contracts between the Company and the
    executive officers - see "Employment Agreements". 


                                       22
<PAGE>


    Stock Options 

    Stock options are granted to aid in the retention of executive and key
    employees and to align the interests of executive and key employees with
    those of the stockholders. The level of stock options granted (i.e., the
    number of shares subject to each stock option grant) is based on the
    employees ability to impact future corporate results. An employee's ability
    to impact future corporate results depends on the level and amount of job
    responsibility of the individual. Therefore, the level of stock options
    granted is proportional to the Compensation Committee's evaluation of each
    employee's job responsibility. For example, Mr. Amerson, as the Chief
    Executive Officer, has the highest level of responsibility and would
    typically be awarded the highest level of stock options. 

    Stock options are granted at a price not less than the fair market value on
    the date granted. They are granted to key employees, including the executive
    officers, at the direction of the Compensation Committee at levels believed
    to be appropriate for the amount and level of responsibility of each key
    employee. 

                                                BOARD COMPENSATION COMMITTEE

                                                Thomas Allan    
                                                William Claytor


Board of Director Committees and Meetings

The Board of Directors has an Audit Committee and a Compensation Committee. The
Audit Committee reviews the results and scope of the audit and other services
provided by the Company's independent auditors, reviews and evaluates the
Company's internal audit and control functions, and monitors transactions
between the Company and its employees, officers and directors. The Audit
Committee met two times in 1996. The Compensation Committee administers the
Company's equity incentive plans and designates compensation levels for officers
and directors of the Company. The Compensation Committee met four times in 1996.

The Board of directors held six meetings during 1996. All directors attended all
of the meetings of the Board and all committees of the Board of which they were
members. 

Compensation Committee Interlocks and Insider Participation 

The members of the Compensation Committee of the Company's Board of Directors
are Messrs. Claytor and Allan. Mr. Claytor is a non-employee director. Mr. Allan
is the Chairman of the Board, whose compensation is fixed at $71,000 per year,
and who is not eligible for bonuses. 

Summary Compensation Table 

The following table sets forth the aggregate cash compensation paid by the
Company for services rendered during the last three years to the Company's Chief
Executive Officer and to each of the Company's other executive officers whose
annual salary, bonus and other compensation exceeded $100,000 in 1996.


                                       23
<PAGE>


<TABLE>
<CAPTION>
                                                 ANNUAL COMPENSATION             LONG-TERM COMPENSATION
                                          ----------------------------------  ----------------------------
                                                                                     AWARDS        PAYOUTS
                                                                              -------------------- -------
                                                                   OTHER      RESTRICTED
                                                                  ANNUAL        STOCK    OPTION/S   LTIP
                                                                  COMPEN-      AWARD(S)    SARS    PAYOUTS
NAME AND PRINCIPAL POSITION     YEAR      SALARY ($) BONUS ($) SATION ($)<F1>     ($)        (#)      ($)
---------------------------     ----      ---------- --------- -------------  ---------- --------- -------
<S>                             <C>       <C>        <C>       <C>            <C>        <C>       <C>
Robert R. Amerson               1996       $ 212,550  $   -     $    -         $    -    2,000,000  $  -   
   President and CEO            1995         128,846      -      137,077            -    1,150,000     -   
                                1994         100,000      -      124,500            -          -       -   

Steven K. Clark                 1996         150,192      -          -              -   2,000,000      -   
   Vice President Finance/CFO   1995<F2>      15,000      -          -              -   1,150,000      -   
                                1994             -        -          -              -         -        -   

<FN>
<F1>
    Represents compensation paid by the Company to Flanders Equity Corporation
    ("FEC") and received by Messr. Amerson in 1995 and 1994. See Item 13,
    "Certain Relationships and Related Party Transactions". 
<F2>
    Mr. Clark commenced his employment with the Company as of December 15, 1995.
    See "Employment Agreements."
</FN>
</TABLE>


Options/SARs Granted in Last Fiscal Year

The following table sets forth the aggregate number and value of stock options
and SARs granted by the Company for services rendered during the last year to
the Company's Chief Executive Officer and to each of the Company's other
executive officers whose annual salary, bonus and other compensation exceed
$100,000.

<TABLE>
<CAPTION>
                                                                           POTENTIAL REALIZABLE
                                                                                VALUE AT       
                                                                             ASSUMED/ANNUAL    
                                       % OF TOTAL                            RATES OF STOCK   
                                      OPTIONS/SARS                         PRICE/APPRECIATION 
                                       GRANTED TO  EXERCISE OR              FOR OPTION TERM   
                         OPTIONS/SARS EMPLOYEES IN BASE PRICE  EXPIRATION -------------------- 
   NAME                  GRANTED (#)  FISCAL YEAR  ($/SH)<F1>     DATE    5% ($)<F2> 10% ($)<F2>
   ----                  ------------ ------------ ----------- ---------- ---------- -----------
<S>                      <C>          <C>          <C>         <C>        <C>        <C>
Robert  R. Amerson         2,000,000       47.2%   $2.50/$7.50  2000/2001 $2,610,878  $5,739,075 
Steven K. Clark            2,000,000       47.2%   $2.50/$7.50  2000/2001 $ 2,610,878 $5,739,075 

<FN>
<F1>
    Messrs. Amerson and Clark were each granted options to purchase 1,000,000
    shares of the Company's common stock at $2.50 per share in February 1996
    which expire in February 2000, and additional options to purchase 1,000,000
    shares each of the Company's common stock at $7.50 per share in June 1996
    which expire in June 2001. 
<F2>
    The potential realizable value portion of the foregoing table illustrates
    value that might be realized upon exercise of the options immediately prior
    to the expiration of their term, assuming the specified compounded rates of
    appreciation on the Common Stock over the term of the options. These numbers
    do not take into account plan provisions providing for termination of the
    option following termination of employment or non-transferability.
</FN>
</TABLE>

Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values

The following table sets forth the aggregate number and value of stock
options and SAR's exercised during the last year by the Company's Chief
Executive Officer and by each of the Company's other executive officers
whose annual salary, bonus and other compensation exceed $100,000.

                                       24
<PAGE>

<TABLE>
<CAPTION>
                                                                                VALUE OF
                                                               NUMBER OF      UNEXERCISED
                                                              UNEXERCISED     IN-THE-MONEY
                                                            OPTIONS/SARS AT  OPTIONS/SAR'S
                                                             FISCAL YEAR-      AT FISCAL
                                                                END (#)       YEAR-END(S)
                         SHARES ACQUIRED                     EXERCISABLE/     EXERCISABLE/
  NAME                   ON EXERCISE (#) VALUE REALIZED ($)  UNEXERCISABLE  UNEXERCISABLE(1)
  ----                   --------------- ------------------ --------------- ----------------
<S>                      <C>             <C>                <C>             <C>
Robert  R. Amerson              -         $        -         3,150,000 / -   $18,775,000 / -
Steven K. Clark                 -                  -         3,150,000 / -   $18,775,000 / -
</TABLE>


Employment Agreements 

The Company has entered into employment agreements with Messrs. Amerson and
Clark effective as of December 15, 1995 ("Employment Agreements"). Mr. Amerson's
Employment Agreement provides for an initial base salary of $200,000, which was
increased to an annual base salary of $250,000 in June 1996. Mr. Clark's
Employment Agreement provides for an initial base salary of $120,000, which was
raised to $250,000 in June 1996. The Employment Agreements both have an initial
five (5) year term. The Employment Agreements also provide that the executive
shall be entitled to the following termination payments: (i) 100% of his current
base salary if the employment is terminated as a result of his death or
disability, (ii) up to 200% of his current base salary, if the employment is
terminated by the Company for any reason other than death, disability or for
Cause (as defined in his Employment Agreement), or (iii) up to 250% of the
executive's gross income during the year preceding his termination if the
Employment Agreement is terminated by the executive for Good Reason (as defined
in the Employment Agreement) or by the Company for any reason other than death,
disability or Cause and the termination occurs within two years after a Change
of Control (as defined in the Employment Agreement) of the Company has occurred.

The Company has also entered into an employment agreement with Mr. Hernandez
effective September 23, 1996. This agreement currently provides for a base
salary of $250,000 and has an initial five (5) year term. The employment
agreement also provides that the executive shall be entitled to the following
termination payments: (i) 100% of his current base salary if the employment is
terminated as a result of his death or disability, and (ii) up to 200% of his
current base salary, if the employment is terminated by the Company for any
reason other than death, Disability or for Cause (as defined in his employment
agreement). 

Compensation of Directors 

Directors who are Company employees receive no additional or special
remuneration for serving as directors. The Company's non-employee Directors are
paid $500 plus out-of-pocket expenses for each meeting of the Board of Directors
and receive an option to purchase 5,000 shares of common stock at or above the
market price of the common stock on the date of grant for every year they remain
a director. 


                                       25
<PAGE>


Comparative Stock Performance Graph 

The following graph shows a comparison of cumulative total returns for the
Company, the NASDAQ Stock Market - U.S. Index and the Nasdaq Non-Financial
Stocks Index during the period commencing February 27, 1996 and ending December
31, 1996. The comparison assumes $100 was invested on February 27, 1996 in the
Company's Common Stock with the reinvestment of all dividends, if any. Total
shareholder returns for prior periods are not an indication of future returns.

                       [Stock Performance Line Graph]

<TABLE>
<CAPTION>
                                                  Cumulative Total Return
                                                   2/28/96      12/31/96
                                                  ---------    ---------- 
<S>                                               <C>          <C>
Flanders Corporation                               $   100      $    375 
NASDAQ Non-Financial                                   100           126 
NASDAQ Stock Market - U.S.                             100           118 
</TABLE>


Item 12.  Security Ownership of Certain Owners and Management

The following table sets forth all individuals known to beneficially own 5% or
more of the Company's Common Stock, and all officers and directors of the
registrant, with the amount and percentage of stock beneficially owed, as of
February 15, 1997.

<TABLE>
    Name and Address                                         Percentage of
  of Beneficial Owner               Common Stock Owned        Outstanding
    
<S>                                 <C>                      <C>

A. Russell Allan, III<F1>                1,027,544               5.78%
531 Flanders Filters Road
Washington, NC  27889
        
Robert R. Amerson<F1><F2>                8,160,759              38.97%
531 Flanders Filters Road
Washington, NC  27889
       
Thomas T. Allan<F1><F3>                  6,041,250              33.67%
531 Flanders Filters Road
Washington, NC  27889
        
Knox Oakley<F4>                             84,525               0.47%
531 Flanders Filters Road
Washington, NC  27889
        
Steven Klocke<F4>                           99,427               0.56%
531 Flanders Filters Road
Washington, NC  27889


                                       26
<PAGE>


Gustavo Hernandez<F5>                       71,613               0.40%
531 Flanders Filters Road
Washington, NC  27889
        
Steven K. Clark<F1><F2>                  5,364,014              25.61%
531 Flanders Filters Road
Washington, NC  27889
        
William M. Claytor<F6>                     164,172               0.92%
531 Flanders Filters Road
Washington, NC  27889
        
William H. Clark                              -                  0.00%
531 Flanders Filters Road
Washington, NC  27889

Officers and Directors as
a Group<F1><F2><F3><F4><F5><F6>         15,272,760              62.73%

<FN>
<F1>
    Includes shares subject to an option in favor of Messrs. Amerson and Clark
    (3,321,021 shares and 2,214,014 shares, respectively), from Thomas T. Allan
    and A. Russell Allan, III (4,713,000 shares and 822,035 shares,
    respectively). 
<F2>
    Includes 1,150,000 shares which are subject to an option to purchase such
    shares from the Company at $1.00 per share, 1,000,000 shares which are
    subject to an option to purchase such shares from the Company at $2.50 per
    share and 1,000,000 shares which are subject to an option to purchase such
    shares from the Company at $7.50 per share. 
<F3>
    Includes 150,000 shares which are subject to an option to purchase such
    shares from the Company at $1.00 per share. 
<F4>
    Includes 16,800 shares which are subject to an option to purchase such
    shares from the Company at $2.50 per share and 10,000 shares which are
    subject to an option to purchase such shares from the Company at $7.50 per
    share. 
<F5>
    Consists of 71,613 shares which are held in escrow as part of a post-closing
    purchase price adjustment to the acquisition of Precisionaire. These shares
    will be released from escrow only if Precisionaire meets certain revenue
    targets during the next three years. 
<F6>
    Includes 50,000 shares which are subject to an option to purchase such
    shares from the Company at $1.00 per share. 
</FN>
</TABLE>


Item 13.  Certain Relationships and Related Transactions

In November 1995, Thomas T. Allan, Robert R. Amerson and Steven K. Clark entered
into an Indemnity Agreement with Flanders whereby Messrs. Allan, Amerson and
Clark will collectively deposit up to $1,500,000 into an escrow fund to
indemnify the Company for the payment of any claims, judgments, and expenses
arising from the potential environmental claims made by the EPA, and $525,000
due for the settlement of the lawsuits against the Company by Hartford Casualty
Insurance Co. v. Flanders Filters, Inc., and St. Paul Fire and Marine Insurance
Co. v. Flanders Filters, Inc. See "Item 3. Legal Proceedings." The
indemnification is limited to $1,500,000 and in no event will any of the
individuals named be required to contribute more than $500,000 each. As an
inducement to enter into this indemnification, and contemporaneously therewith,
Thomas T. Allan and A. Russell Allan (the "Allans"), who were then majority
shareholders of the Company, entered into an option agreement with Messrs.
Amerson and Clark, whereby Messrs. Amerson and Clark could purchase a total of
5,535,035 shares of common stock from the Allans for $2.50 per share. See also
"Item 12 - Security Ownership of Certain Owners and Management." Messrs. Allan,
Amerson and Clark have complied with the Indemnity Agreement whereby payments of
$525,000 were made to the respective insurance companies. 

ABB Partnership, as landlord, and Airpure, as tenant, entered into a Lease
Agreement, dated July 31, 1995. ABB Partnership is controlled by Robert Amerson,
president of the Company. The month-to-month lease was entered into on terms
believed by the Company to be fair and reasonable and generally reflective of
market conditions. The expense for this lease for 1996 and 1995 amounted to
$84,375 and $6,250, respectively. 


                                       27
<PAGE>


LBH Realty, as landlord, and Precisionaire, as tenant, entered into a
year-to-year Lease Agreement. Gustavo Hernandez, a Director of the Company, is
the managing partner of LBH Realty. The year-to-year lease was entered

into on terms believed by the Company to be fair and reasonable and generally
reflective of market conditions. The expense for this lease for 1996 and 1995
amounted to $48,912 and $0, respectively. 

At December 31, 1996, the Company had notes receivable of approximately $906,000
due from various directors, officers and employees with interest thereon varying
between 7 percent and 8.5 percent, due in 1997. 

Transactions with Flanders Equity Corporation, a company affiliated through
common ownership, are as follows:

<TABLE>
<CAPTION>
                                          1996          1995          1994
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
Management fees expense                $    -        $  532,000    $  420,000
</TABLE>

Liabilities at December 31, 1996, December 31, 1995 and December 30, 1994
include amounts owed to Flanders Equity Corporation as follows:

<TABLE>
<CAPTION>
                                          1996          1995          1994
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
Accrued management fees                $     -       $   50,000    $     -
</TABLE>


Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

    (a)(1)  Financial Statements:  Financial Statements are included
            beginning at page F-1 as follows:

            Independent Auditor's Report                                    F-2

            Consolidated Balance Sheets at December 31, 1996 and 1995       F-3

            Consolidated Statements of Operations for the years ended
            December 31, 1996, December 31, 1995 and December 30, 1994      F-4

            Consolidated Statements of Stockholders' Equity for the
            years ended December 31, 1996, December 31, 1995 and
            December 30, 1994                                               F-5

            Consolidated Statements of Cash Flows for the years ended
            December 31, 1996, December 31, 1995 and December 30, 1994      F-6

            Notes to Consolidated Financial Statements                      F-8

    (a)(2)  Financial Statement Schedules

            Independent Auditor's Report                                   F-23

            Schedule II.  Valuation and Qualifying Accounts                F-24

            All schedules not listed have been omitted because they are not
            applicable or the information has been otherwise supplied in the
            Registrant's financial statements and schedules.

    (a)(3)  Exhibits:

    3.1     Articles of Incorporation for Flanders Corporation, filed with the
            Form 8-A dated March 8, 1996, incorporated herein by reference.
    3.2     Bylaws of Flanders Corporation, filed with the Form 8-A dated March
            8, 1996, incorporated herein by reference.
    4.1     Form of Series A Convertible Subordinated Debentures, filed with
            the September 30, 1996 Form 10-Q, incorporated herein by reference.
    4.2     Form of 10% Convertible Notes, filed with the September 30, 1996
            Form 10-Q, incorporated herein by reference.
    10.1    Agreement and Plan of Merger between Elite Acquisitions, Inc., and
            Flanders Filters, Inc., filed with the December 31, 1995 Form 10-K,
            incorporated herein by reference.
    10.2    Stock Purchase Agreement between Flanders Corporation and the
            Shareholders of Charcoal Service Corporation, filed with the May
            31, 1996 Form 8-K, incorporated herein by reference.

                                       28
<PAGE>


    10.3    Stock Purchase Agreement between Flanders Corporation and the
            Shareholders of AirSeal Filter Housings, Inc., filed with Form S-1
            dated October 21, 1996 (Reg. No. 333-14655) and incorporated herein
            by reference.
    10.4    Stock Purchase Agreement between Flanders Corporation and the
            Shareholders of Precisionaire, Inc., filed with the Form 8-K dated
            December 31, 1995, incorporated herein by reference.
    10.5    Employment Agreement between Elite Acquisitions, Inc., Flanders
            Filters, Inc., and Steven K. Clark, filed with the December 31,
            1995 Form 10-K, incorporated herein by reference.
    10.6    Stock Option Agreement between Elite Acquisitions, Inc., and Steven
            K. Clark, filed with the December 31, 1995 Form 10-K, incorporated
            herein by reference.
    10.7    Employment Agreement between Elite Acquisitions, Inc., Flanders
            Filters, Inc. and Robert R. Amerson, filed with the December 31,
            1995 Form 10-K, incorporated herein by reference.
    10.8    Stock Option Agreement between Elite Acquisitions, Inc. and Robert
            R. Amerson, filed with the December 31, 1995 Form 10-K, incorporated
            herein by reference.
    10.9    Stock Option Agreement between Elite Acquisitions, Inc., and Thomas
            T. Allan, filed with the December 31, 1995 Form 10-K, incorporated
            herein by reference.
    10.10   Stock Option Agreement between Elite Acquisitions, Inc., and William
            M. Claytor, filed with the December 31, 1995 Form 10-K, incorporated
            herein by reference.
    10.11   Employment Agreement between Flanders Corporation, Precisionaire,
            Inc., and Gustavo Hernandez, filed with Form S-1 dated October 21,
            1996 (Reg. No. 333-14655) and incorporated herein by reference.
    10.12   Indemnification Agreement between Flanders Corporation, Steven K.
            Clark, Robert Amerson and Thomas Allan, filed with the December 31,
            1995 Form 10-K, incorporated herein by reference.
    10.13   Amendment to Employment Agreement between Elite Acquisitions, Inc.,
            Flanders Filters, Inc., and Steven K. Clark, filed with Form S-1
            dated October 21, 1996 (Reg. No. 333-14655) and incorporated herein
            by reference.
    10.14   Amendment to Employment Agreement between Elite Acquisitions, Inc.,
            Flanders Filters, Inc., and Robert R. Amerson, filed with Form S-1
            dated October 21, 1996 (Reg. No. 333-14655) and incorporated herein
            by reference.
    10.15   Purchase and Sale Agreement between POT Realty and Precisionaire,
            Inc., filed with the September 30, 1996 Form 10-Q, incorporated
            herein by reference.
    10.16   Assumption Agreement with Release of Liability between POT Realty
            and Precisionaire, Inc., for original principal amount of
            $2,069,653, filed with the September 30, 1996 Form 10-Q,
            incorporated herein by reference.
    10.17   Assumption Agreement with Release of Liability between POT Realty
            and Precisionaire, Inc., for original principal amount of $133,025,
            filed with the September 30, 1996 Form 10-Q, incorporated herein by
            reference.
    10.18   Guaranty Agreement between Flanders Corporation and American
            National Bank of Texas, filed with the September 30, 1996 Form 10-Q,
            incorporated herein by reference.
    10.19   Change in Certifying Accountant, filed with the January 29, 1996
            Form 8-K, incorporated herein by reference.
    21      Subsidiaries of the Registrant.
    27      Financial Data Schedule.

    (b)     Reports on Form 8-K.

            None.

    (c)     Financial Statement Schedules:  See (a)(2) above.


                                       29
<PAGE>


                                  SIGNATURES

Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

    Dated this 17th day of March, 1997.

                                FLANDERS CORPORATION


                                By  /s/ Robert R. Amerson
                                  Robert R. Amerson
                                  President, Chief Executive Officer,
                                  and Director


                                By  /s/ Steven K. Clark
                                  Steven K. Clark
                                  Vice President/Chief Financial Officer,
                                  Principal Accounting Officer
                                  and Director


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.


        Date                    Title                             Signature



  March 17, 1997    President, Chief Executive Officer    /s/ Robert R. Amerson
                    and Director                            Robert R. Amerson 

  March 17, 1997    Vice President/Chief Financial
                    Officer, Principal Accounting Officer /s/ Steven K. Clark
                    and Director                            Steven K. Clark 

  March 17, 1997    Chairman of the Board                 /s/ Thomas T. Allan
                                                            Thomas T. Allan 

  March 17, 1997    Director                              /s/ Gustavo Hernandez
                                                            Gustavo Hernandez 

  March 17, 1997    Director                              /s/ William M. Claytor
                                                            William M. Claytor 

  March 17, 1997    Director                              /s/ William M. Clark
                                                            William H. Clark 


                                       30
<PAGE>




                       CONSOLIDATED FINANCIAL STATEMENTS
                                       OF
                             FLANDERS CORPORATION


 For the Years ended December 31, 1996, December 31, 1995 and December 30, 1994


                                      F-1
<PAGE>


                         INDEPENDENT AUDITOR'S REPORT



To the Board of Directors
Flanders Corporation
Washington, North Carolina


We have audited the accompanying consolidated balance sheets of Flanders
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. 

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. 

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Flanders corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles. 


/s/ McGladrey & Pullen, LLP

New Bern, North Carolina
February 7, 1997, except for the
second paragraph of Note 8 and
the first paragraph of Note 23 as to 
which the date is March 10, 1997.


                                      F-2
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                          December 31, 1996 and 1995


<TABLE>
<CAPTION>

ASSETS                                                              1996             1995
-------------------------------------------------------------  --------------  --------------
<S>                                                            <C>             <C>
Current assets                            
  Cash and cash equivalents                                     $  2,390,411    $  2,973,797 
  Restricted cash (Note 2)                                         8,000,005            -   
  Receivables:                        
    Trade, less allowance for doubtful accounts:
      1996 $346,480; 1995 $148,000 (Note 8)                       17,906,879       7,243,557 
    Related party (Note 17)                                          905,930            -   
    Other                                                            786,811         321,356 
  Inventories (Notes 3 and 8)                                      9,894,707       2,321,367 
  Deferred taxes (Note 13)                                           920,520         137,961 
  Other current assets                                               687,524          46,586 
                                                               --------------  --------------
            Total current assets                                  41,492,787      13,044,624 
                                                               --------------  --------------
Other assets (Note 4)                                                909,307         333,542 
Intangible assets (Notes 5 and 8)                                 14,016,691            -   
Property and equipment, net (Notes 6 and 8)                       30,099,626       5,151,063 
                                                               --------------  --------------
                                                                $ 86,518,411    $ 18,529,229 
                                                               ==============  ==============

LIABILITIES AND STOCKHOLDERS' EQUITY                            
-------------------------------------------------------------                            
Current liabilities                            
  Note payable (Note 8)                                         $       -       $  3,890,425 
  Current maturities of long-term debt (Note 8)                    4,379,973         454,181 
  Accounts payable (Note 9)                                       11,002,587       3,425,022 
  Accrued expenses (Note 10)                                       3,540,110       1,166,639 
                                                               --------------  --------------
            Total current liabilities                             18,922,670       8,936,267 
                                                               --------------  --------------
Long-term debt, less current maturities (Note 8)                  25,776,295       1,306,584 
Convertible debt (Note 11)                                         4,000,000            -   
Deferred taxes (Note 13)                                           4,466,676          77,961 
Committed capital (Notes 2 and 12)                                 8,000,005            -   
Commitments and contingencies (Notes 8, 14, 15, 16,
  18, 20 and 22)                            

Stockholders' equity (Notes 12, 17, 20 and 23)                            
  Preferred stock, no par value, 10,000,000 shares
    authorized; none issued                                             -               -   
  Common stock, $.001 par value; 50,000,000 shares
    authorized; issued and outstanding:
    1996 15,951,548; 1995 11,433,979                                  15,952          11,434 
  Additional paid-in capital                                      16,964,713       3,418,671 
  Retained earnings                                                8,372,100       4,778,312 
                                                               --------------  --------------
                                                                  25,352,765       8,208,417 
                                                               --------------  --------------
                                                                $ 86,518,411    $ 18,529,229 
                                                               ==============  ==============
</TABLE>

                See Notes to Consolidated Financial Statements

                                      F-3
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
    Years Ended December 31, 1996, December 31, 1995 and December 30, 1994


<TABLE>
<CAPTION>
                                                       1996            1995            1994
                                                  --------------  --------------  --------------
<S>                                               <C>             <C>             <C>
Net sales                                          $ 73,056,197    $ 38,635,810    $ 26,706,404 
Cost of goods sold (Notes 15, 16, 17 and 18)         53,597,621      28,953,729      18,845,385 
                                                  --------------  --------------  --------------
            Gross profit                             19,458,576       9,682,081       7,861,019 
                                                  --------------  --------------  --------------
Operating expenses (Notes 15, 16, 17 and 18)         13,459,721       7,262,668       7,238,609 
                                                  --------------  --------------  --------------
            Operating income                          5,998,855       2,419,413         622,410 
                                                  --------------  --------------  --------------
Nonoperating income (expense):                                
  Other income                                          975,750          43,852          26,371 
  Interest expense                                   (1,203,226)       (633,029)       (477,822)
                                                  --------------  --------------  --------------
                                                       (227,476)       (589,177)       (451,451)
                                                  --------------  --------------  --------------
            Income before income taxes                5,771,379       1,830,236         170,959 
Income taxes (Note 13)                                2,177,591         684,582         176,402 
                                                  --------------  --------------  --------------
            Net income (loss)                      $  3,593,788    $  1,145,654    $     (5,443)
                                                  ==============  ==============  ==============

Earnings per weighted average common and common                                
  equivalent share outstanding (Note 21)                            
    Primary                                        $       0.21    $       0.12    $       -   
                                                  ==============  ==============  ==============
    Fully diluted                                  $       0.21    $       0.12    $       -   
                                                  ==============  ==============  ==============
Weighted average common and common                                 
  equivalent shares outstanding:                            
    Primary                                          17,041,931       9,831,996       9,693,478 
                                                  ==============  ==============  ==============
    Fully diluted                                    18,072,271       9,831,996       9,693,478 
                                                  ==============  ==============  ==============
</TABLE>

                See Notes to Consolidated Financial Statements

                                      F-4
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
    Years Ended December 31, 1996, December 31, 1995 and December 30, 1994



<TABLE>
<CAPTION>
                                                                    Additional
                                                      Common         Paid-In         Retained
                                                      Stock          Capital         Earnings
                                                  --------------  --------------  --------------
<S>                                               <C>             <C>             <C>
Balance, January 1, 1994                           $      9,656    $    319,348    $  3,638,435 
  Issuance of 49,274 shares of common stock                  49          21,740            -   
  Purchase and retirement of 61,630 shares                        
    of common stock                                         (62)        (30,347)           -   
  Net loss                                                 -               -             (5,443)
                                                  --------------  --------------  --------------
Balance, December 30, 1994                                9,643         310,741       3,632,992 
  Issuance of 378,411 shares of                         
    common stock                                            378         165,543            -   
  Issuance of 1,100,000 shares of                        
    common stock related to December 11, 1995                    
    Private Placement                                     1,100       2,429,004            -   
  Reverse acquisition of Elite Acquisitions, Inc.           334            -               (334)
  Purchase and retirement of 21,197 shares of                        
    common stock                                            (21)        (11,617)           -   
  Indemnification of claim by Stockholders                 -            525,000            -   
  Net income                                               -               -          1,145,654 
                                                  --------------  --------------  --------------
Balance, December 31, 1995                               11,434       3,418,671       4,778,312 
  Issuance of 3,371,204 shares of common stock                         
    related to the Private Offerings                      3,372      18,760,986            -   
  Less committed capital (Note 2)                          -         (8,000,005)           -   
  Issuance of 1,036,885 shares of common stock                         
    related to the Acquisitions                           1,037          (1,037)           -   
  Valuation and release from escrow of 282,295                        
    shares of common stock related to the                     
    Acquisitions                                           -          2,681,803            -
  Issuance of 96,280 shares of common stock                        
    upon exercise of warrants                                96         240,604            -   
  Issuance of 13,200 shares of common stock                        
    upon exercise of options                                 13          32,987            -   
  Income tax benefit from stock options                         
    exercised                                              -             37,433            -   
  Fair value of warrants issued with                        
    convertible debt                                       -             33,971            -   
  Receivables secured by stock related to                        
    exercise of warrants                                   -           (240,700)           -   
  Net income                                               -               -          3,593,788 
                                                  --------------  --------------  --------------
Balance, December 31, 1996                         $     15,952    $ 16,964,713    $  8,372,100 
                                                  ==============  ==============  ==============
</TABLE>

                See Notes to Consolidated Financial Statements

                                      F-5
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
    Years Ended December 31, 1996, December 31, 1995 and December 30, 1994

<TABLE>
<CAPTION>
                                                       1996            1995            1994
                                                  --------------  --------------  --------------
<S>                                               <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES                                        
  Net income (loss)                                $  3,593,788    $  1,145,654    $     (5,443)
  Adjustments to reconcile net income (loss) to
    net cash provided by (used in) operating
    activities:                                
      Depreciation and amortization                   1,485,740         636,178         631,476 
      Stock compensation                                   -               -             12,500 
      Provision for doubtful accounts                  (120,423)        108,000         (25,500)
      Allowance for obsolete inventory                 (115,000)        (45,000)        (69,134)
      (Gain) loss on sale of property and
        equipment                                       (54,002)           -             18,091 
      (Gain) loss on disposition of cash
        value of life insurance                         (24,600)           -               -   
      Realized gain on sale of marketable
        securities                                       12,123            -            (32,941)
      Deferred income taxes                            (113,520)        160,000          70,000 
      Indemnification of claim by stockholders             -            375,000            -   
      Change in assets and liabilities:                            
        Receivables                                    (871,440)     (1,937,752)     (1,730,577)
        Inventories                                    (504,576)        790,947      (1,209,802)
        Other current assets                           (520,092)         77,763         (95,573)
        Accounts payable                               (997,168)       (339,999)      1,443,504 
        Accrued expenses                                302,682         158,591        (511,765)
        Income tax payable                             (460,334)        481,157         (65,307)
                                                  --------------  --------------  --------------
                Net cash provided by (used in)
                           operating activites        1,613,178       1,610,539      (1,570,471)
                                                  --------------  --------------  --------------
                                        
CASH FLOWS FROM INVESTING ACTIVITIES                                        
    Acquisitions, net of cash acquired              (31,971,448)           -               -   
    Purchase of equipment                            (2,501,308)       (611,713)     (1,052,669)
    Proceeds from sale of marketable equity
      securities                                        823,396            -            580,918 
    Proceeds from sale of property and equipment        226,234            -             82,620 
    Proceeds from disposition of cash                                    
        value of life insurance                         884,895            -               -   
    Disbursements on notes receivables,                                     
        stockholders                                   (905,930)           -               -   
    Proceeds from repayment of notes receivable,                                    
        stockholders                                    458,428            -               -   
    Disbursements on trademarks and trade names         (17,246)           -               -   
    Disbursement on deferred debt expense                  -               -             (9,600)
    Purchase of real estate held for sale                  -               -            (60,486)
    Increase in cash value of life insurance            (25,272)        (52,524)           -   
                                                  --------------  --------------  --------------
        Net cash used in investing activities       (33,028,251)       (664,237)       (459,217)
                                                  --------------  --------------  --------------

</TABLE>

                                 - Continued -

                See Notes to Consolidated Financial Statements

                                      F-6
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
    Years Ended December 31, 1996, December 31, 1995 and December 30, 1994


<TABLE>
<CAPTION>
                                                       1996            1995            1994
                                                  --------------  --------------  --------------
<S>                                               <C>             <C>             <C>
CASH FLOWS FROM FINANCING ACTIVITIES                                        
  Payments on revolving credit agreement            (58,637,083)    (38,562,227)    (27,064,360)
  Proceeds from revolving credit agreement           67,618,777      38,329,791      28,369,813 
  Proceeds from long-term borrowings                  9,340,200            -            526,932 
  Principal payments on long-term borrowings         (2,782,871)       (481,147)       (437,786)
  Proceeds from issuance of common stock, net of                                     
    committed capital                                11,894,353       2,596,024           9,289 
  Disbusement of loan origination fees                 (634,689)           -               -   
  Purchase of common stock for retirement                  -            (11,638)        (30,409)
  Proceeds from exercise of options and warrants         33,000            -               -   
  Proceeds from issuance of convertible debt          4,000,000            -               -   
                                                  --------------  --------------  --------------
       Net cash provided by financing activities     30,831,687       1,870,803       1,373,479 
                                                  --------------  --------------  --------------
                 Net increase (decrease) in cash
                            and cash equivalents       (583,386)      2,817,105        (656,209)
                                        
CASH AND CASH EQUIVALENTS                                        
  Beginning                                           2,973,797         156,692         812,901 
                                                  --------------  --------------  --------------
  Ending                                           $  2,390,411    $  2,973,797    $    156,692 
                                                  ==============  ==============  ==============

SUPPLEMENTAL DISCLOSURES OF CASH                                         
  FLOW INFORMATION                                    
    Cash payments for:                                
      Interest                                     $    732,976    $    667,117    $    446,019 
                                                  ==============  ==============  ==============
      Income taxes                                 $  2,293,555    $     43,425    $    188,934 
                                                  ==============  ==============  ==============
                                        
SUPPLEMENTAL SCHEDULE OF NONCASH                                        
  FINANCING ACTIVITIES                                    
    Fair value of warrants issued with
      convertible debt                             $     33,971    $       -       $       -   
                                                  ==============  ==============  ==============
    Issuance of common stock as compensation       $       -       $       -       $     12,500 
                                                  ==============  ==============  ==============
    Valuation and release from escrow of
      282,295 shares of common stock related
      to the Acquisitions                          $  2,681,803    $       -       $       -   
                                                  ==============  ==============  ==============
    Commissions payable on gross proceeds from                                
      issuance of common stock                     $  1,130,000    $       -       $       -   
                                                  ==============  ==============  ==============
    Issuance of 96,280 shares of common stock
      upon exercise of warrants in exchange
      for receivable                               $    240,700    $       -       $       -   
                                                  ==============  ==============  ==============
    Capital lease obligation incurred for use                                
      of property and equipment                    $    284,250    $    350,000    $       -   
                                                  ==============  ==============  ==============
    Indemnification of claims by Officers and                                 
      Directors (Note 17)                          $       -       $    525,000    $       -   
                                                  ==============  ==============  ==============
                                        
ACQUISITION OF COMPANIES (Note 14)                                        
    Working capital acquired, net of                                
      cash and cash equivalents of $468,204        $  4,677,588    $       -       $       -   
    Fair value of other assets, acquired,
      principally property and equipment             25,152,612            -               -   
    Goodwill                                         10,823,053            -               -   
    Long-term debt assumed                           (8,681,805)           -               -   
                                                  --------------  --------------  --------------
                                                   $ 31,971,448    $       -       $       -   
                                                  ==============  ==============  ==============
</TABLE>


                See Notes to Consolidated Financial Statements

                                      F-7
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note  1.    Nature of Business and Significant Accounting Policies


Nature of business: Flanders Corporation (the "Company") primarily designs,
manufactures and markets a broad range of air filtration products ranging from
high performance laminar flow High Efficiency Particulate Air filters and
charcoal filters for semiconductor manufacturing facilities, to residential
furnace filters. The Company's air filtration products are utilized by many
industries, including those associated with commercial and residential heating,
ventilation and air conditioning systems (commonly known as "HVAC" systems),
semiconductors, ultra-pure materials processing, biotechnology, pharmaceuticals,
synthetics, nuclear power and nuclear materials processing. The Company also
provides installation supervision, filter testing, and certification services
for installed systems. The Company sells its products primarily to cleanroom
contractors, industrial users, heating, ventilation and air-conditioning
wholesalers and retailers in North America, based on credit terms established
for individual customers. 

Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned. One
of the Company's subsidiaries has a subsidiary which was 63.0 percent owned for
the years ended December 31, 1996 and 1995. All material intercompany accounts
and transactions have been eliminated in consolidation. 

Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. 

Cash and cash equivalents: The Company maintains its cash in bank deposit
accounts, which at times may exceed federally insured limits. The Company has
not experienced any losses in such accounts. The Company believes it is not
exposed to any significant credit risk on cash and cash equivalents. For
purposes of reporting cash flows, the Company considers all cash accounts which
are not subject to withdrawal restrictions and certificates of deposit which
have an original maturity of three months or less to be cash equivalents. 

Inventories: Inventories are valued at lower of cost (first-in, first-out
method) or market. 

Goodwill: The Company has classified as goodwill the cost in excess of fair
value of the net assets (including tax attributes) of companies acquired in
purchase transactions. Goodwill is being amortized on a straight line basis over
40 years. At each balance sheet date, the Company evaluates goodwill for
impairment by comparing expectations of non-discounted future cash flows
excluding interest costs with the carrying value of goodwill for each subsidiary
having a material goodwill balance. Based upon its most recent analysis, the
Company believes that no impairment of goodwill exists at December 31, 1996. 

Trademarks and trade names: Trademarks and trade names are being amortized on a
straight line basis over 17 years. At each balance sheet date, the Company
evaluates the value of trademarks and tradenames for impairment by comparing
expectations of non-discounted future cash flows excluding interest costs with
the carrying value of trademarks and trade names for each trademark or trade
name having a material unamortized balance. Based upon its most recent analysis,
the Company believes that no impairment of trademarks and trade names exists at
December 31, 1996. 

Property and equipment: Property and equipment are stated at cost. Depreciation
is computed by the straight-line method over estimated useful lives.
Amortization of capital leases is included in depreciation expense. The carrying
amount of all long-lived assets is evaluated periodically to determine if
adjustment to the depreciation and amortization period or to the unamortized
balance is warranted. Based upon its most recent analysis, the Company believes
that no impairment of property and equipment exists at December 31, 1996. 

Revenue recognition: All sales are recognized when shipments are made to
customers. 

Export sales: The Company sells some products for end users outside of the
United States through domestic specialty cleanroom contractors. These sales are
accounted for as domestic sales. The Company also sells products through foreign
distributors, primarily in Europe, and a wholly owned subsidiary, which sells to
customers in the Far East. Sales through foreign distributors and its wholly
owned subsidiary total less than 5% of net sales. 

Self insurance expenses: The Company has elected to self-insure its employees'
health and accident insurance up to a maximum of $30,000 to $80,000 per
occurrence, depending on the subsidiary. Expenses related to health claims are
accrued during the period when the Company is notified of a claim or probable
claim under the policy, including incurred but not reported claims, and adjusted
when the actual claim is submitted.


                                      F-8
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.    Nature of Business and Significant Accounting Policies - Continued


Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment. 

Research and development: Research and development expenses and ongoing costs
associated with improving existing products and manufacturing processes are
expensed in the period incurred. Costs associated with research and development
amounted to approximately $460,000, $120,000 and $158,000 for the years ended
December 31, 1996, December 31, 1995 and December 30, 1994, respectively. 

Reclassifications: Certain account balances for the years ended December 31,
1995 and December 30, 1994 have been reclassified with no effect on net income
(loss) or retained earnings to be consistent with the classification adopted for
the year ended December 31, 1996. 


Note 2. Restricted Cash and Committed Capital 


At December 31, 1996, $8,000,005 of cash which was raised through a private
placement in September and October of 1996 was held in escrow and was subject to
a potential right of rescission in favor of two investors if a Registration
Statement under the Securities Act of 1933 registering certain shares held by
the two investors was not declared effective by January 15, 1997. This amount is
reflected on the balance sheet at December 31, 1996 as "Restricted cash" and
"Committed capital." The $8,000,005 was reclassified to "Cash" and "Additional
paid-in capital" on January 6, 1997, the date such registration was declared
effective.


Note 3.    Inventories


Inventories consists of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>

                                                                    1996             1995
                                                               --------------  --------------
<S>                                                            <C>             <C>
Finished goods                                                  $  3,321,713    $    198,607 
Work in progress                                                   1,490,438         879,987 
Raw materials                                                      5,127,556       1,302,773 
                                                               --------------  --------------
                                                                   9,939,707       2,381,367 
Less allowance for obsolete raw materials                             45,000          60,000 
                                                               --------------  --------------
                                                                $  9,894,707    $  2,321,367 
                                                               ==============  ==============
</TABLE>


Note 4.    Other Assets


Other assets consist of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>

                                                                    1996             1995
                                                               --------------  --------------
<S>                                                            <C>             <C>
Real estate held for sale                                       $    266,486    $    266,486 
Cash value of officers' life insurance                                77,796          52,524 
Deferred expenses, net of accumulated amortization of                
  $104,962 for 1996 and $17,814 for 1995                             565,025          14,532 
                                                               --------------  --------------
                                                                $    909,307    $    333,542 
                                                               ==============  ==============
</TABLE>

                                      F-9
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 5.    Intangible Assets


Intangible assets consist of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                    1996             1995
                                                               --------------  --------------
<S>                                                            <C>             <C>
Goodwill, net of accumulated amortization of $85,901            $ 13,012,439    $       -   
Trademarks and trade names, net of accumulated
  amortization of $17,098                                          1,004,252            -   
                                                               --------------  --------------
                                                                $ 14,016,691    $       -   
                                                               ==============  ==============
</TABLE>


Note 6.    Property and Equipment


Property and equipment consist of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                                 Estimated
                                                   1996             1995        Useful Lives
                                              ---------------  --------------  --------------
<S>                                           <C>              <C>             <C>
Land                                           $     638,465    $    125,595 
Buildings, including assets acquired under                        
  capital lease: 1996  $2,974,000; 1995  $0       15,049,245       5,534,094     15-30 years
Machinery and equipment, including assets
  acquired under capital lease:
  1996 $779,321; 1995 $20,906                     16,640,939       3,637,497        10 years
Office equipment                                   2,718,124       1,106,730         5 years
Vehicles                                             557,988         201,065         5 years
Construction in progress                           1,361,682         136,759         
                                              ---------------  --------------
                                                  36,966,443      10,741,740         
Less accumulated depreciation, including                        
  amortization applicable to assets
  acquired under capital lease:
  1996 $129,152; 1995 $20,906                      6,866,817       5,590,677         
                                              ---------------  --------------
                                               $  30,099,626    $  5,151,063
                                              ===============  ==============
</TABLE>

Total depreciation expense charged to operations totaled $1,382,741, $633,226
and $628,524 for the years ended December 31, 1996, December 31, 1995 and
December 30, 1994, respectively.


Note 7.    Note Payable


The Company had prime plus 0.75 percent and prime plus 1.00 percent revolving
loan agreements with a bank, which provided for maximum borrowings based on the
lesser of defined borrowing bases and $5,000,000 and $1,500,000, respectively,
at December 31, 1995. The weighted average interest rate at December 31, 1995
was 9.3 percent. The lender's prime rate at December 31, 1995 was 8.50 percent. 


                                      F-10
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 8.    Pledged Assets and Long-Term Debt


A summary of the Company's long-term debt, and collateral pledged thereon,
consists of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                    1996             1995
                                                               --------------  --------------
<S>                                                            <C>             <C>

18% subordinated debentures, interest and principal due and
payable on the earlier of September 17, 1999 or the release
of $4,000,005 of cash to the Company which was held in escrow
at December 31, 1996 pending the effectiveness of a
registration statement of the Company on or before January
15, 1997. The registration statement was declared effective
on January 6, 1997. See Notes 2 and 23.                         $  2,500,000    $       - 

Prime plus 1.0 percent revolving credit agreement with a bank
due September 1998, collateralized by a first security
interest on receivables, inventory, substantially all
machinery and equipment, securities and general
intangibles.(A)                                                   15,942,145            - 

Prime plus 1.5 percent note payable to a bank due in
quarterly payments of $641,700 plus interest due September
1998, collateralized by a first security interest on
receivables, inventory, substantially all machinery and
equipment, securities, common stock of subsidiaries and
general intangibles. This note is subject to mandatory
prepayment provisions as provided in the loan document.(A)         4,869,130            - 

Prime plus 0.25% notes payable to a mortgage company due in
monthly payments of $23,110 including interest through
January 2006, at which time all unpaid principal is due,
collateralized by a deed of trust on land and buildings with
a carrying value of $3,777,408.                                    2,154,497            - 

10.125 percent note payable to a mortgage company, due in
monthly payments of $13,775, including interest through July
2004, collateralized by a first deed of trust on real
property with a carrying value of $1,106,805 and a second
security interest in certain machinery and equipment.                864,953         938,576 

Note payable to a bank with interest at the One Month London
Interbank Offered Rate (LIBOR) plus 2.67%, due in monthly
payments of $5,670 plus interest through March 2001,
collateralized by equipment with a carrying value of
$316,983.                                                            289,170            - 

7.058 percent fixed rate capital lease obligation, due in
monthly payments of $34,429, including interest through
September 2006, collateralized by land and buildings with a
carrying value of $2,924,433.                                      2,906,202            - 

Various contracts payable including capital lease
obligations; interest rates from 5.9 percent to 10.25 percent
and 7 percent to 10 percent at December 31, 1996 and 1995,
respectively, collateralized by certain equipment; due in
monthly payments of approximately $24,000 including interest
at December 31, 1996 and monthly and quarterly payments of
approximately $2,000 and $2,665, respectively, including
interest at December 31, 1995 and expiring at various times
through September 2001.                                              630,170         822,189
                                                               --------------  --------------
                                                                  30,156,268       1,760,765
Less current maturities                                            4,379,973         454,181
                                                               --------------  --------------
                                                                $ 25,776,295    $  1,306,584
                                                               ==============  ==============
</TABLE>

                                      F-10
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 8.    Pledged Assets and Long-Term Debt - Continued


(A)   The lender's prime rate at December 31, 1996 was 8.25 percent. The
      revolving credit agreement provides for maximum borrowings based on the
      lesser of defined borrowing bases and $25,000,000 at December 31, 1996.
      The term loan agreement with the same bank provides for maximum borrowings
      of $6,500,000. The weighted average interest rate at December 31, 1996 was
      9.4 percent. The agreements expire in September 1998. Both notes are
      collateralized by a first security interest on receivables, inventory,
      substantially all machinery and equipment, securities, general intangibles
      and common stock of the subsidiaries. Balances due on the revolving loan
      agreement and the term loan agreement have been classified as long-term
      debt according to the provisions of Statement of Financial Accounting
      Standards No. 6, Classification of Short-Term Obligations Expected to be
      Refinanced, since subsequent to December 31, 1996, the Company completed
      an underwritten public offering for the purpose of repaying the debt on
      these loan agreements (Note 23). In connection with the revolving and term
      loan agreements, the Company has agreed to certain restrictive covenants
      which include, among other things, the lender's approval to pay dividends
      and maintenance of certain financial ratios at December 31, 1996,
      including tangible net worth of $20,290,000, debt to worth ratio of not
      more than 2.5 to 1.0, and various net worth covenants for the individual
      subsidiaries. 

The Company was in violation of certain covenants with its lenders as of
December 31, 1996; however, these violations have been waived by the lenders
through January 1, 1998.

Aggregate maturities required on long-term debt as of December 31, 1996 are due
in future years as follows:

<TABLE>
<CAPTION>

Fiscal Years Ending                
-------------------
<S>                                       <C>
      1997                                 $  4,379,973 
      1998                                   20,306,761 
      1999                                      637,460 
      2000                                      649,116 
      2001                                      565,988 
      Later years                             3,616,970
                                          --------------
                                           $ 30,156,268 
                                          ==============
</TABLE>

The following is a schedule of future minimum lease payments under the capital
leases together with the present value of the net minimum lease payments as of
December 31, 1996:

<TABLE>
<CAPTION>

Fiscal Years Ending                
-------------------
<S>                                       <C>
      1997                                 $    747,076 
      1998                                      538,790 
      1999                                      534,306 
      2000                                      498,030 
      2001                                      438,811 
      Later years                             1,964,581 
                                          --------------
      Total minimum lease payments            4,721,594 
      Less amounts representing interest      1,206,747 
                                          --------------
                                           $  3,514,847 
                                          ==============
</TABLE>

                                      F-12
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 9.    Accounts Payable


Accounts payable consist of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                    1996             1995
                                                               --------------  --------------
<S>                                                            <C>             <C>
Accounts payable, trade                                         $  8,655,757    $  2,940,716 
Commissions payable                                                2,007,761         460,092 
Customer deposits                                                    339,069          24,214 
                                                               --------------  --------------
                                                                $ 11,002,587    $  3,425,022 
                                                               ==============  ==============
</TABLE>                


Note 10.    Accrued Expenses


Accrued expenses consists of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                    1996             1995
                                                               --------------  --------------
<S>                                                            <C>             <C>
Payroll (Note 15)                                               $    966,465    $    277,911 
Insurance, including workers compensation                          1,118,711            -   
Management fees, related party (Note 17)                                -             50,000 
Sales and use taxes                                                   98,307          92,940 
Interest                                                             502,134          31,884 
Income taxes payable (Note 13)                                       478,713         481,157 
Other                                                                375,781         232,747 
                                                               --------------  --------------
                                                                $  3,540,111    $  1,166,639 
                                                               ==============  ==============
</TABLE>


Note 11.    Convertible Notes


In September 1996, the Company issued $4,000,000 of 10% Convertible Notes
pursuant to Regulation S to certain unrelated offshore investors. The notes are
payable on September 20, 1999 and are convertible at any time commencing
forty-one (41) days after issuance into shares of common stock at a conversion
price equal to the lower of (i) eighty-two percent (82%) of the average closing
bid price for the seven (7) trading days immediately preceding the conversion
date, or (ii) $9.00; provided, however, that in no event shall the conversion
price be less than $5.00; provide further, that in no event shall the holder of
the 10% Convertible Notes be entitled to convert any portion of such notes if
such action would result in beneficial ownership by a holder and its affiliates
of more than 4.9% of the outstanding shares of common stock. If the average
closing bid price of the common stock over any continuous seven day trading
period is less than $7.38 per share, the Company may redeem the convertible
notes at a price equal to 115% of the outstanding principal amount of the notes.
As of December 31, 1996, no notes had been converted. In connection with the 10%
Convertible Notes, certain unrelated offshore investors were given a contractual
right to receive, on the date of the conversion of the Notes into common stock,
warrants to purchase such number of shares of common stock equal to ten percent
(10%) of the number of common shares issued upon any such conversion. The
exercise price of the warrants is equal to the amount per share at which the 10%
Convertible Notes were converted into common stock.


                                      F-13
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 12.    Stockholders' Equity


During the year ended December 31, 1996, the Company raised $18,764,358 through
the sale of 3,371,204 shares of common stock in three private placements to
accredited investors. Net proceeds, after commissions and expenses, for each
offering consisted of: (i) $10,352,131 from an offering of 1,333,889 shares of
its common stock at $9.00 per share completed in October 1996 (the "October
Offering"); (ii) $7,339,573 from an offering of 1,537,315 shares of its common
stock at $5.00 per share, completed in June 1996; and (iii) $1,072,654 from an
offering of 500,000 shares of its common stock at $2.50 per share completed in
January 1996. At December 31, 1996, $8,000,005 of the funds raised in the
October Offering was subject to certain potential rights of rescission in favor
of two investors, such that if a Registration Statement under the Securities Act
of 1933 registering certain shares held by the two investors was not declared
effective by January 15, 1997, the investors would have had the right to return
their shares to the Company for the original price of the shares; such a
Registration Statement was declared effective on January 6, 1997, and hence
these potential rights of rescission were never realized. 

On December 29, 1995, the Company completed a private placement offering of
1,100,000 shares of the Company's common stock at $2.50 per share to accredited
investors. The net proceeds to the Company after commissions and expenses from
the offering totaling $319,896 amounted to $2,430,104. 

The President and Vice President/Chief Financial Officer of the Company have
options to purchase 3,321,021 and 2,214,014 shares, respectively, of the
Company's common stock from two stockholders of the Company at an option price
of $2.50 per share. The options expire November 29, 1997. 


Note 13.    Income Tax Matters


The components of income tax expense for the years ended December 31, 1996,
December 31, 1995 and December 30, 1994 are as follows:

<TABLE>
<CAPTION>
                                                       1996            1995            1994
                                                  --------------  --------------  --------------
<S>                                               <C>             <C>             <C>
Current:                        
  Federal                                          $  1,750,374    $    419,492    $    106,402 
  State                                                 540,737         105,090            -   
                                                  --------------  --------------  --------------
                                                      2,291,111         524,582         106,402 
                                                  --------------  --------------  --------------
Deferred:                        
  Federal                                               (42,509)        130,000          40,000 
  State                                                 (71,011)         30,000          30,000 
                                                  --------------  --------------  --------------
                                                       (113,520)        160,000          70,000 
                                                  --------------  --------------  --------------
                                                   $  2,177,591    $    684,582    $    176,402 
                                                  ==============  ==============  ==============
</TABLE>

The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate of 34% to pretax income for years
ended December 31, 1996, December 31, 1995 and December 30, 1994 due to the
following:

<TABLE>
<CAPTION>
                                                       1996            1995            1994
                                                  --------------  --------------  --------------
<S>                                               <C>             <C>             <C>
Computed "expected" tax expense                    $  1,962,269    $    622,280    $     58,126 
Increase (decrease) in income taxes resulting from:                        
  Nondeductible expenses                                 33,158          50,980         140,037 
  State income taxes net of federal tax benefit         152,460          89,159          19,818 
  Change in valuation allowance                          22,822         (32,490)        (23,680)
  Exercise of stock options                             (37,433)           -               -   
  Benefit of income taxed at lower rates                   -               -             (7,309)
  Tax credits                                           (10,914)        (45,347)        (10,590)
  Other                                                  55,229            -               -   
                                                  --------------  --------------  --------------
                                                   $  2,177,591    $    684,582    $    176,402 
                                                  ==============  ==============  ==============
</TABLE>


                                      F-14
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 13.    Income Tax Matters - Continued


Net deferred tax assets and liabilities consist of the following components as
of December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                    1996             1995
                                                               --------------  --------------
<S>                                                            <C>             <C>
Deferred tax assets:                
  Accounts receivable allowance                                 $     48,064    $     46,150 
  Inventory allowances                                               284,930         107,786 
  Accrued expenses                                                   541,314            -   
  Loss carryforwards                                                  85,009            -   
                                                               --------------  --------------
                                                                     959,317         153,936 
  Less valuation allowance                                            38,797          15,975 
                                                               --------------  --------------
                                                                     920,520         137,961 
Deferred tax liabilities:                
  Property and equipment                                           4,466,676          77,961 
                                                               --------------  --------------
                                                                $ (3,546,156)   $     60,000 
                                                               ==============  ==============
</TABLE>

The components giving rise to the net deferred tax assets and liabilities
described above have been included in the accompanying consolidated balance
sheets at December 31, 1996 and 1995 as follows:

<TABLE>
<CAPTION>
                                                                    1996             1995
                                                               --------------  --------------
<S>                                                            <C>             <C>
Current assets                                                  $    920,520    $    137,961 
Noncurrent liabilities                                            (4,466,676)        (77,961)
                                                               --------------  --------------
                                                                $ (3,546,156)   $     60,000 
                                                               ==============  ==============
</TABLE>


Note 14.    Mergers and Acquisitions

On January 22, 1996, Elite Acquisitions, Inc. stockholders approved a change of
domicile reincorporation merger with Flanders Corporation, a newly formed
wholly-owned North Carolina company, whereby Elite Acquisitions, Inc. would
merge with Flanders Corporation in a share for share stock exchange with
Flanders Corporation being the surviving company. The Merger Agreement and
Articles of Merger were effective as of January 29, 1996. As a result of the
merger, the financial statements of Elite Acquisitions, Inc. have been presented
as those of Flanders Corporation and the authorized capitalization of Flanders
Corporation consisting of 50,000,000 shares of common stock, at a par value of
$.001, and 10,000,000 shares of preferred stock, at a par value of $.001, has
been presented as the capital structure of the company. 

On May 31, 1996, the Company completed the acquisition of all the outstanding
stock of Charcoal Service Corporation ("CSC"), a competing carbon filter and
containment manufacturer, as well as the land and building on which CSC operates
that was owned by the stockholders of CSC. The total cost of acquisition, net of
cash acquired, was approximately $4,497,000, and up to 100,000 shares of the
Company's common stock, which are being held in escrow pending the evaluation of
certain future performance criteria. Upon achieving certain performance
criteria, the common stock will be released from escrow, valued at the market
price on the date of release and will be added to the goodwill associated with
the purchase transaction and amortized over the remaining amortization period of
the respective goodwill asset. The acquisition was funded by private placement
of the Company's common stock which were completed in June 1996. The effective
date of the acquisition is March 1, 1996, and the Company's financial statements
include the operating activities and assets of CSC from that date. As of
December 31, 1996, 20,000 CSC escrow shares with a market value of $190,000 were
released from escrow to the CSC sellers. 

On June 15, 1996, the Company completed the acquisition of all the outstanding
stock of Air Seal Filter Housings, Inc. ("Airseal"), as well as the land and
building on which Airseal operates that was owned by the stockholders of
Airseal. The total cost of acquisition, net of cash acquired, was approximately
$2,270,000 and up to 150,000 shares of the Company's common stock, which are
being held in escrow pending the evaluation of certain future performance
criteria. Upon achieving certain performance criteria, the common stock will be
released from escrow, valued at the market price on the date of release and will
be added to the goodwill associated with the purchase transaction and amortized
over the remaining amortization period of the respective goodwill asset. The
acquisition was funded by a private placement of the Company's common stock
completed in June 1996. The effective date of the acquisition was May 31, 1996,
and the Company's financial statements include the operating activities and
assets of Airseal from that date.


                                      F-15
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 14.    Mergers and Acquisitions - Continued


On September 23, 1996, the Company acquired all the outstanding stock of
Precisionaire, Inc. ("Precisionaire"), a manufacturer of precision air filters,
containment systems and filtration equipment, as well as a tract of land and a
building on which Precisionaire operates that was owned effectively by the
majority stockholders of Precisionaire. The total cost of acquisition, net of
cash acquired, was approximately $25,205,000 with a post closing valuation
allowance of up to 786,885 shares of the Company's common stock, which are held
in escrow, to be released only if certain performance criteria are met. Upon
achieving certain performance criteria, the common stock will be released from
escrow, valued at the market price on the date of release and added to the
goodwill associated with the purchase transaction and amortized over the
remaining amortization period of the respective goodwill asset. The acquisition
of Precisionaire, Inc. was funded by a private placement of the Company's common
stock, subordinated debentures and convertible debt, closed on October 16, 1996,
a credit facility provided by NationsBank consisting of (1) a revolving credit
facility in the maximum principal amount of $25,000,000 and (2) a term loan
facility in the maximum principal amount of $6,500,000, and the assumption of
approximately $2,200,000 of debt associated with a mortgage on the purchased
land and building. The effective date of the acquisition for financial statement
purposes was September 30, 1996, and the Company's financial statements include
the operating activities and assets of Precisionaire from that date. As of
December 31, 1996, 262,295 Precisionaire escrow shares with a market value of
$2,491,803 were released from escrow to the Precisionaire sellers. 

Summarized below are the unaudited pro forma results of operations of the
Company as though Precisionaire, CSC and Airseal had been acquired at the
beginning of the fiscal years ended December 31, 1996 and 1995. 

<TABLE>
<CAPTION>
                                                                    1996             1995
                                                               --------------  --------------
<S>                                                            <C>             <C>
Revenues                                                        $128,221,517    $107,983,759 
                                                               ==============  ==============
Net income                                                      $  5,678,195    $  2,718,764 
                                                               ==============  ==============
Net income per common share, primary                            $       0.30    $       0.20 
                                                               ==============  ==============
Net income per common share, fully diluted                      $       0.30    $       0.18 
                                                               ==============  ==============
</TABLE>


Note 15.    Employment Agreements and Discretionary Bonuses


The Company has employment agreements with its President and Chief Executive
Officer, its Vice President Finance/Chief Financial Officer, and its Vice
President Operations, which expire on various dates from December 2000 through
September 2001. In addition to a base salary, the agreements provide for a
termination payment ranging from one hundred to two hundred and fifty percent of
their base compensation in the event the officers' employment is terminated
under various circumstances. 

The Company pays discretionary cash bonuses to its employees. The amount of
these cash bonuses included in cost of goods sold and operating expenses totaled
approximately $296,000, $50,000 and $30,000 for the years ended December 31,
1996, December 31, 1995 and December 30, 1994, respectively. During the year
ended December 30, 1994, the Company issued 28,543 shares of common stock with a
value of $12,500 to employees of the Company and charged to operating expenses
with credits to common stock for $28 and paid-in capital for $12,472. 

Note 16. Employee Benefit Plans 

Due to the Acquisitions, the Company currently has four defined contribution
401(k) salary reduction plans intended to qualify under section 401(a) of the
Internal Revenue Code of 1986, as amended: One for each of Flanders Filters,
Inc. ("FFI"), CSC, Airpure and Precisionaire (collectively, the "401(k) Plans").
The Company is in the process of combining the 401(k) Plans into a single plan.
The 401(k) Plans allow employees to defer up to the lesser of a plan defined
limit ranging from 12 percent to 20 percent of their salary, depending on which
of the 401(k) plan the employees participate, or such amount as determined by
the U.S. Secretary of the Treasury, with the Company contributing an amount
determined by its Board of Directors each year. The Company contributed
approximately $44,000, $18,000 and $33,000 to the 401(k) Plans for the years
ended December 31, 1996, December 31, 1995 and December 30, 1994, respectively. 


                                      F-16
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 16.    Employee Benefit Plans - Continued


The Company employee benefit program also includes health, accident, dental and
life insurance and disability benefits. The Company has elected to self-insure
the health and accident insurance at an individual maximum of $1 million for
several subsidiaries. The Company also maintains a stop loss policy which covers
100 percent of liability from $30,000 to $1,000,000. A separate subsidiary
maintains a stop loss policy which covers 100 percent of liability over $80,000
per occurrence. The employer's portion of claims charged to operations for the
years ended December 31, 1996, December 31, 1995 and December 30, 1994 totaled
approximately $222,000, $314,000 and $251,000, respectively. 

During the year ended December 31, 1996, the Company adopted the Long Term
Incentive Plan ("LTI Plan") to assist the Company in securing and retaining key
employees and consultants. The LTI Plan authorizes grants of incentive stock
options, nonqualified stock options, stock appreciation rights ("SARs"),
restricted stock performance shares and dividend equivalents to officers and key
employees of the Company and outside consultants to the Company. There are
2,000,000 shares of Common Stock reserved for award under the LTI Plan. During
the year ended December 31, 1996, the Company awarded options to purchase
236,520 shares of common stock under the LTI Plan. See Note 20. 

During the year ended December 31, 1996, the Company also awarded options to
purchase a total of 4,000,000 shares of its common stock to two of its officers
and directors and options to purchase a total of 900,000 shares of its common
stock to consultants to the Company. See Note 20 

As permitted under generally accepted accounting principles, grants under the
LTI Plan and other grants of options made during the year are accounted for
following APB Opinion No. 25 and related interpretations. Accordingly, no
compensation cost has been recognized for grants under the LTI Plan, since all
options granted had an exercise price at or above the market price of the
Company's common stock on the date of grant. Had compensation cost for the LTI
Plan been determined based on the grant date fair values of awards using the
Black-Scholes option pricing model (the method described in FASB Statement No.
123), reported net income and earnings per common share would have been reduced
to the pro forma amounts shown below for the years ended December 31, 1996 and
1995:

<TABLE>
<CAPTION>
                                                                    1996             1995
                                                               --------------  --------------
<S>                                                            <C>             <C>
Net income:                
  As reported                                                   $  3,593,788    $  1,145,654 
  Pro forma                                                     $    765,682    $    843,243 
Primary earnings per share:                
  As reported                                                   $       0.21    $       0.12 
  Pro forma                                                     $       0.04    $       0.09 
Fully diluted earnings per share:                
  As reported                                                   $       0.21    $       0.12 
  Pro forma                                                     $       0.04    $       0.09 
                
Weighted average fair value per option of options
  granted during the year                                       $       0.89    $       0.20 

</TABLE>

In determining the pro forma amounts above, the value of each grant is estimated
at the grant date using the Black-Scholes option pricing method prescribed in
FASB Statement No. 123, with the following assumptions: Dividend rate of 0%;
risk-free interest rates based upon the zero- coupon rate on the date of grant
for the expected life of the option; and expected price volatility based upon
the trading history of a comparable public company during the period ended on
the date of grant. The weighted average assumptions for options granted in 1996
were as follows: Dividend rate of 0%; average risk-free interest rate of 5.46%;
average expected lives of 2.4 years; and average expected price volatility of
20.0%.


                                      F-17
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 17.    Related Party Transactions and Balances


Three of the officers and directors of the Company entered into an Indemnity
Agreement with FFI whereby the officers and directors will collectively deposit
up to $1,500,000 into an escrow fund to indemnify FFI for the payment of a
$525,000 judgment arising from the lawsuits against FFI by Hartford Casualty
Insurance Co. v. Flanders Filters, Inc., case no. 92-CVS-07766; and St. Paul
Fire and Marine Insurance Co. v. Flanders Filters, Inc., case no. 93-CVS-2798,
and potential environmental issues at FFI's facility in Washington, North
Carolina (See also Note 22). The indemnification is limited to $1,500,000 and in
no event will any of the individuals named be required to contribute more than
$500,000 each. The indemnification has been recorded as a contribution to
capital for all known amounts, during the period at which the amount of the
claims became known. The officers and directors have complied with the Agreement
whereby payments of $525,000 were made to the respective insurance companies.
Expenses related to the Insurance Companies' claims totaled $0, $375,000 and
$150,000 for the years ended December 31, 1996, December 31, 1995 and December
30, 1994, respectively. 

ABB Partnership, as landlord, and Flanders Airpure Products, a subsidiary of
FFI, as tenant, entered into a Lease Agreement, dated July 31, 1995. ABB
Partnership is controlled by the president of the Company. The lease, which is a
month to month lease of $10,938 per month, was entered into on terms believed by
Airpure to be fair and reasonable and generally reflective of market conditions.
The expense for this lease for the years ended December 31, 1996 and 1995
amounted to $84,375 and $6,250, respectively. 

LBH Realty, as landlord, and Precisionaire, as tenant, entered into a
year-to-year Lease Agreement. A Director of the Company is the managing partner
of LBH Realty. The year-to-year lease was entered into on terms believed by the
Company to be fair and reasonable and generally reflective of market conditions.
The expense for this lease for the year ended December 31, 1996 amounted to
approximately $49,000. 

Transactions with Flanders Equity Corporation, a company affiliated through
common ownership, consisted of $0, $532,000 and $420,000 during the years ended
December 31, 1996, December 31, 1995 and December 30, 1994, respectively,
recorded as management fees expense. Liabilities at December 31, 1996 and 1995
included amounts owed to Flanders Equity Corporation of $0 and $50,000,
respectively, included on the balance sheet as accrued management fees (See Note
10). 

At December 31, 1996, the Company had notes receivable of $905,930 due from
various directors, officers and employees with interest thereon varying between
7% and 8.5%, maturing in 1997. 

Note 18. Lease Commitments and Total Rental Expense 

Certain equipment and buildings are leased under agreements expiring between
1997 and 2001. The following is a schedule for the total rental commitments
under these leases as of December 31, 1996:

<TABLE>
<CAPTION>

Fiscal Years Ending                
-------------------
<S>                                       <C>
      1997                                 $  209,162 
      1998                                    156,789 
      1999                                    128,867 
      2000                                     92,246 
      2001                                     62,168 
                                          ------------
                                           $  649,232 
                                          ============
</TABLE>

The total rental expense charged to operations totaled approximately $465,000,
$148,000 and $208,000 for the years ended December 31, 1996, December 31, 1995
and December 30, 1994, respectively.


                                      F-18
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 19.    Disclosures About Fair Value of Financial Instruments


The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value: 

Cash equivalents: The carrying amount approximates fair value at December 31,
1996 and 1995 because of the short maturity of those instruments. 

Notes receivable, related party: Based on the investing rates currently
available to the Company from financial institutions with similar maturities,
the fair value of notes receivable, related party, approximates the carrying
value. 

Notes payable, long-term debt and convertible debt: Based on the borrowing rates
currently available to the Company for bank loans with similar maturities and
similar collateral requirements, the fair value of notes payable and long-term
debt approximates the carrying amounts at December 31, 1996 and 1995. 


Note 20.    Stock Options and Warrants


During the year ended December 31, 1996, the Company granted options to purchase
236,520 shares of common stock under its LTI Plan, with exercise prices ranging
from $2.50 per share to $9.50 per share. The Company also issued 900,000 shares
to consultants with exercise prices ranging from $2.50 per share to $3.50 per
share, and 4,000,000 shares to officers and directors with exercise prices
ranging from $2.50 per share to $7.50 per share. All options granted during the
year ended December 31, 1996 were non-qualified fixed price options, and were
exercisable at December 31, 1996. 

The following table summarizes the activity related to the Company's stock
options and warrants for the years ended December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                              WEIGHTED AVERAGE
                                        SHARES            EXERCISE PRICE       EXERCISE PRICE
                                  ------------------         PER SHARE            PER SHARE
                                             STOCK   ----------------------- -----------------
                                  WARRANTS  OPTIONS   WARRANTS     OPTIONS   WARRANTS  OPTIONS
                                  -------- --------- ----------- ----------- --------- -------
<S>                               <C>      <C>       <C>         <C>         <C>       <C>
Outstanding at January 1, 1995      -           -                   
  Granted                         61,280   2,500,000  $ 2.50      $ 1.00      $ 2.50    $ 1.00 
  Exercised                         -           -                   
  Canceled or expired               -           -                   
                                  -------- ---------
Outstanding at December 31, 1995  61,280   2,500,000  $ 2.50      $ 1.00      $ 2.50    $ 1.00 
  Granted                         97,712   5,136,520 $2.50-$9.63 $2.50-$9.50  $ 5.29    $ 4.61 
  Exercised                       96,280      13,200  $ 2.50      $ 2.50      $ 2.50    $ 2.50 
  Canceled or expired             37,712        -                   
                                  -------- ---------
Outstanding at December 31, 1996  25,000   7,623,320  $ 9.63     $1.00-$9.50  $ 9.63    $ 3.43 
                                  ======== =========
Exercisable at December 31, 1996  25,000   7,623,320 $2.50-$9.63 $1.00-$9.50  $ 9.63    $ 3.43 
                                  ======== =========
</TABLE>

The warrants and options expire at various dates ranging from December 1998 to
July 2001. A further summary of information related to fixed options outstanding
at December 31, 1996 is as follows:

<TABLE>
<CAPTION>
                                  Options Outstanding
                    ------------------------------------------------------
                                    Weighted Average        
  Range of             Number          Remaining         Weighted Average 
Exercise Prices     Outstanding     Contractual Life      Exercise Price
---------------     -----------    ------------------   ------------------
<S>                 <C>            <C>                  <C>
   $ 1.00            2,500,000         3.88 Years            $ 1.00 
     2.50            2,806,320         3.35                    2.50 
     3.50              200,000         2.00                    3.50 
 6.94 to 7.50        2,077,000         4.42                    7.49 
     9.50               40,000         4.50                    9.50 

</TABLE>

                                      F-19
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 21.    Earnings per share

The computation of earnings per common share and common share equivalent is done
according to the treasury method, which is based upon the weighted average
number of common shares outstanding during the period. Earnings per common and
common equivalent share include the effect of the stock options and warrants
mentioned in Note 20 as if the options and warrants had been exercised at the
date the options and warrants were granted. The number of common shares
outstanding was increased by the number of shares issuable under the stock
options and warrants and this theoretical increase in the number of common
shares was reduced by the number of common shares which are assumed to have been
repurchased with the applicable portion of the proceeds from the exercise of the
options and warrants. 

Primary earnings per common and common equivalent share for the years ended
December 31, 1996, December 31, 1995 and December 30, 1994 were calculated as
follows:

<TABLE>
<CAPTION>
                                                       1996            1995            1994
                                                  --------------  --------------  --------------
<S>                                               <C>             <C>             <C>
Net income (loss)                                  $  3,593,788    $  1,145,654    $     (5,443)
                                                  ==============  ==============  ==============
                                    
Weighted average shares outstanding                  13,171,439       9,831,996       9,693,478 
     Add:  weighted average shares related to                                 
     exercisable warrants and options reduced by                                 
     the shares that could be purchased with                                 
     the proceeds                                     3,870,492            -               -   
                                                  --------------  --------------  --------------
Adjusted weighted average shares                                    
     outstanding                                     17,041,931       9,831,996       9,693,478 
                                                  ==============  ==============  ==============
                                    
Net income per common share                        $       0.21    $       0.12    $       -   
                                                  ==============  ==============  ==============
</TABLE>

Fully diluted earnings per common and common equivalent share for the years 
ended December 31, 1996, December 31, 1995 and December 30, 1994 were 
calculated as follows:

<TABLE>
<CAPTION>
                                                       1996            1995            1994
                                                  --------------  --------------  --------------
<S>                                               <C>             <C>             <C>
Net income (loss)                                  $  3,593,788    $  1,145,654    $     (5,443)
    Interest on convertible debt, net of taxes          148,110            -               -   
                                                  --------------  --------------  --------------
                                                   $  3,741,898    $  1,145,654    $     (5,443)
                                                  ==============  ==============  ==============
                                    
Weighted average shares outstanding                  13,762,092       9,831,996       9,693,478 
     Add:  weighted average shares related to                                  
     exercisable warrants and options reduced                                 
     by the shares that could be purchased                                 
     with the proceeds                                4,310,179            -               -   
Adjusted weighted average shares                                    
     outstanding                                     18,072,271       9,831,996       9,693,478 
                                                  --------------  --------------  --------------
Net income per common share                     $           0.21          $          0.12          $               -   
                                                  ==============  ==============  ==============
</TABLE>


Note 22.    Litigation


The Company is currently being monitored by the United States Environmental
Protection Agency ("EPA") for possible environmental contamination at one of its
main facilities. The Company has entered into an agreement with the EPA to
conduct monthly monitoring of groundwater. The Company estimates the monitoring
will last from 3-5 years, with total cost not to exceed $45,000. The Company has
received a limited indemnification from certain directors, officers and
shareholders of the Company of approximately $975,000 with respect to the claims
by the EPA; however, there can be no assurance that the amount of this
indemnification will be sufficient to cover the aggregate of liabilities
asserted by the EPA (See also Note 17).

Additionally, from time to time, the Company is also a party to various legal
proceedings incidental to its business. Management believes none of these
proceedings are material to the conduct of the Company's business, operations or
financial condition.


                                      F-20
<PAGE>


                     FLANDERS CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 23.    Subsequent Events

On March 7, 1997, the Company completed the purchase of the majority of the
assets of BB&D Manufacturing, Inc., and Intermountain Painting and Subassembly,
Inc. Assets acquired included fixed assets, inventory and backlog. The assets
were placed in a newly formed subsidiary, Airseal West, Inc. ("Airseal West"),
located in Salt Lake City, Utah. Airseal West will manufacture specialty and
standard housings for air filtration and HVAC systems, as well as integrated
custom industrial-grade HVAC systems. 

On January 22, 1997, the Company completed an underwritten public secondary
offering dated January 16, 1997, of 1,600,000 shares of the Company's common
stock at $9.50 per share (the "Offering"). Net proceeds to the Company after
deducting commissions and expenses from the offering totaling approximately
$1,720,000 amounted to $13,480,000. The Company utilized the entire amount of
the proceeds from the offering to relieve long-term and convertible debt. On
January 31, 1997, the Underwriter of the Offering exercised their over-allotment
option to purchase 240,000 shares of the Company's common stock at $9.50 per
share. Net proceeds to the Company after deducting commissions and expenses from
the over-allotment totaling approximately $164,000 amounted to $2,116,000. Net
proceeds from the Offering, including the over-allotment, were $15,596,000. 

The following unaudited pro forma balance sheet sets forth the balance sheet of
the Company as of December 31, 1996, adjusted to reflect the receipt and initial
application of the proceeds of both the Offering and the over-allotment option:


            UNAUDITED SUMMARY PRO FORMA CONSOLIDATED BALANCE SHEET
                               December 31, 1996

<TABLE>
<CAPTION>
                    
ASSETS                    
-------------------------------------------------------  --------------
<S>                                                      <C>
Current assets                                              33,892,787 
Other assets                                                   909,307 
Intangible assets                                           14,016,691 
Property and equipment, net                                 30,099,626
                                                         --------------
                                                          $ 78,918,411 
                                                         ==============


LIABILITIES AND STOCKHOLDERS' EQUITY                    
                    
Current liabilities                                         18,522,670 
Long-term debt, less current maturities                      2,980,261 
Convertible debt                                             4,000,000 
Deferred income taxes                                        4,466,676 
Commitments and contingencies                                     -   
Stockholders' equity                                        48,948,804 
                                                         --------------
                                                          $ 78,918,411 
                                                         ==============
</TABLE>



                                      F-21
<PAGE>



                         FINANCIAL STATEMENT SCHEDULES




                                      F-22
<PAGE>



           INDEPENDENT AUDITOR'S REPORT ON THE SUPPLEMENTAL SCHEDULE



To the Board of Directors
Flanders Corporation
Washington, North Carolina


Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
Supplemental Schedule II is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.


/s/  McGladrey & Pullen, LLP

New Bern, North Carolina
February 7, 1997

                                      F-23
<PAGE>



                     FLANDERS CORPORATION AND SUBSIDIARIES
                       VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, December 31, 1995 and December 30, 1994


<TABLE>
<CAPTION>
                                                                      Additions
                                                               ----------------------
                                                   Balance at  Charged to  Charged to                           Balance
                                                   Beginning    Cost and     Other                              at End
                  Description                      of Period    Expense     Accounts       Deductions          of Period
                  -----------                      ----------  ----------  ----------      ----------          ---------
<S>                                                <C>         <C>         <C>             <C>                 <C>
For the year ended Dec. 31, 1996                                                                                
  Allowance for doubtful accounts                  $ 148,000   $    -      $ 318,903<F3>   $(120,423)<F1><F2>  $346,480
  Allowance for inventory value                       60,000        -        100,000<F3>    (115,000)<F2>        45,000 
  Valuation allowance for deferred tax assets         15,975      38,797       3,404<F3>     (19,379)<F2>        38,797
                                                   ----------  ----------  ----------      ----------          ---------
    Total                                          $ 223,975   $  38,797   $ 422,307       $(254,802)          $430,277
                                                   ==========  ==========  ==========      ==========          =========

                                                                                
For the year ended Dec. 31, 1995                                                                                
  Allowance for doubtful accounts                  $  40,000   $ 121,799   $    -          $ (13,799)<F1>      $148,000 
  Allowance for inventory value                      105,000        -           -            (45,000)<F2>        60,000
  Valuation allowance for deferred tax assets         48,465        -           -            (32,490)<F2>        15,975     
                                                   ----------  ----------  ----------      ----------          ---------
    Total                                          $ 193,465   $ 121,799   $    -          $ (91,289)          $223,975     
                                                   ==========  ==========  ==========      ==========          =========

For the year ended Dec. 30, 1994                                                                                
  Allowance for doubtful accounts                  $  65,500   $    -      $    -          $ (25,500)<F1><F2>  $ 40,000
  Allowance for inventory value                      174,134        -           -            (69,134)<F2>       105,000
  Valuation allowance for deferred tax assets         72,145        -           -            (23,680)<F2>        48,465
                                                   ----------  ----------  ----------      ----------          ---------
    Total                                          $ 311,779   $    -      $    -          $(118,314)          $193,465
                                                   ==========  ==========  ==========      ==========          =========


<FN>
<F1>
    Uncollected receivables written-off, net of recoveries.
<F2>
    Reduction in valuation allowance.
<F3>
    Increase due to acquisition of subsidiaries.
</FN>
</TABLE>

                                      F-24