Table of Contents





|                                   
|-----------------------------------
|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
|                                                                            | For the year
 ended December 31, 2007                                                
|                                                                           
|or                                                                         
|                                                                           
|o                                                                           | Annual
 Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|For the
 transition period from ___________________ to ____________________

|                                                      
|------------------------------------------------------
|Commission File Number 0-27958                        
|                                                      
|FLANDERS
 CORPORATION                                 
|                                                      
|(Exact name of registrant as specified in its charter)

|                                                                    |                         
|------------------------------------------------------------------- | ------------------------
|North Carolina                                                      | 13-3368271              
|                                                                    |                         
|(State or other jurisdiction of incorporation or organization)      | (IRS Employer ID Number)
|                                                                    |                         
|2399 26th Avenue North, St. Petersburg, FL                          | 33734                   
|                                                                    |                         
|(Address of principal executive offices)                            | (Zip Code)              
|                                                                   
|Registrants
 telephone number, including area code: (727) 822-4411
|                                                                   
|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                                                
|                                                                   
|                                                                   
|Common Stock, $.001 per share par value                            

Indicate by
check mark if the registrant is a well-known seasoned issuer (as defined in
Rule 405 of the Securities Act).
          YES x          NO
o

Indicate by
check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
          YES o          NO
x

Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) 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
o

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.
          YES o          NO
x

As
of June 30, 2007, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $142.9 million.

Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
          YES x          NO
o

Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act).          YES o          NO
x

As of February
15, 2008, the number of shares outstanding of the registrants common stock was
25,806,632 shares.

Documents
incorporated into this report on Form 10-K by reference: None.





---

FLANDERS
CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2007

TABLE
OF CONTENTS

|                      |                                                                      |                                                                                        |   
|--------------------- | -------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | --
|PART I                |                                                                      |                                                                                        | 4 
|                      |                                                                      |                                                                                        |   
|                      | Item 1.                                                              | Business                                                                               | 4 
|                      | Item 1A.                                                             | Risk Factors                                                                           | 12
|                      | Item 1B.                                                             | Unresolved Staff Comments                                                              | 16
|                      | Item 2.                                                              | Properties                                                                             | 17
|                      | Item 3.                                                              | Legal Proceedings                                                                      | 18
|                      | Item 4.                                                              | Submission of Matters to a Vote of Security Holders                                    | 18
|                      |                                                                      |                                                                                        |   
|PART II               |                                                                      |                                                                                        | 20
|                      |                                                                      |                                                                                        |   
|                      | Item 5.                                                              | Market for Registrants Common Equity and Related Stockholder Matters                  | 20
|                      | Item 6.                                                              | Selected Financial Data                                                                | 21
|                      | Item 7.                                                              | Managements Discussion and Analysis of Financial Condition and
 Results of Operations | 22
|                      | Item 7A.                                                             | Quantitative and Qualitative Disclosures About Market Risk                             | 28
|                      | Item 8.                                                              | Financial Statements and Supplementary Data                                            | 29
|                      | Item 9.                                                              | Changes in and Disagreements with Accountants on Accounting and
 Financial Disclosure  | 29
|                      | Item 9A.                                                             | Controls and Procedures                                                                | 29
|                      | Item 9B                                                              | Other                                                                                  | 30
|                      |                                                                      |                                                                                        |   
|PART III              |                                                                      |                                                                                        | 31
|                      |                                                                      |                                                                                        |   
|                      | Item 10.                                                             | Directors, Executive Officers and Corporate Governance of the
 Registrant              | 31
|                      | Item 11.                                                             | Executive Compensation                                                                 | 33
|                      | Item 12.                                                             | Security Ownership of Certain Beneficial Owners and Management                         | 40
|                      | Item 13.                                                             | Certain Relationships and Related Transactions                                         | 40
|                      | Item 14.                                                             | Principal Accountant Fees and Services                                                 | 41
|                      |                                                                      |                                                                                        |   
|PART IV               |                                                                      |                                                                                        | 43
|                      |                                                                      |                                                                                        |   
|                      | Item 15.                                                             | Exhibits, Financial Statement Schedules and Reports on Form 8-K                        | 45
|                      |                                                                      |                                                                                        |   
|SIGNATURES            |                                                                      | 49                                                                                    
|                      |                                                                      |                                                                                       
|FINANCIAL
 STATEMENTS |                                                                     
|                      |                                                                     
|                      | Report of
 Independent Registered Public Accountant Firm             | F-2                                                                                   
|                      | Consolidated
 Balance Sheets                                         | F-5                                                                                   
|                      | Consolidated
 Statements of Operations                               | F-6                                                                                   
|                      | Consolidated
 Statements of Stockholders Equity                     | F-7                                                                                   
|                      | Consolidated
 Statements of Cash Flows                               | F-8                                                                                   
|                      | Notes to
 Consolidated Financial Statements                          | F-10                                                                                  
|                      | Report of Independent
 Registered Public Accountant Firm on Schedule | F-34                                                                                  
|                      | Financial
 Statement Schedule                                        | F-35                                                                                  

3

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Table of Contents

PART I

|        |         
|------- | --------
|Item 1. | Business

OVERVIEW

We design, manufacture and
market air filters and related products, and are focused on providing complete
environmental filtration systems for end uses ranging from controlling
contaminants in residences and commercial office buildings through specialized
manufacturing environments for semiconductors, pharmaceuticals, chemical,
biological, radiological and nuclear processing. Currently, we believe, based
on available trade and industry data, that we are one of the largest domestic
manufacturers of air filters that are utilized by many industries including
those associated with commercial and residential heating, ventilation and air
conditioning systems (commonly known as HVAC systems), semiconductor
manufacturing, ultra-pure materials, chemical, biological, radiological and
materials processing, biotechnology, pharmaceuticals, synthetics, nuclear power
and nuclear materials processing. We also design and manufacture much of our
own production equipment to automate our processes in order to decrease labor
costs associated with our standard products. Our customers include Abbott
Laboratories, The Home Depot, Inc., Motorola, Inc., Merck & Co., Inc.,
Upjohn Co., Wal-Mart Stores, Inc., Westinghouse Electric Corp., Ace, True Value,
Intel, etc.

The majority of our revenues
come from the sale of after-market replacement filters, since air filters are
typically placed in equipment designed to last much longer than the filters.

GENERAL DEVELOPMENT OF BUSINESS

Flanders Corporation was
originally incorporated on July 2, 1986 in the State of Nevada, but is
currently incorporated in the State of North Carolina. Our principal executive
offices are currently located at 2399 26thAvenue North, St.
Petersburg, FL 33713. The Companys internet website address is
www.flanderscorp.com. The information contained on our website is not part of
our reports with the Securities and Exchange Commission and is not incorporated
by reference into this report. The Companys annual reports on Form 10-K,
quarterly reports on Form 10-Q, and current reports on Form 8-K, and all
amendments thereto, are available free of charge on the Companys website as
soon as reasonably practicable after such reports are electronically filed
with, or furnished to, the Securities and Exchange Commission.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

This annual report,
including all documents incorporated herein by reference, includes certain
forward-looking statements within the meaning of that term in Section 27A of
the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934, including, among others, those statements preceded by, following or
including the words believe, expect, anticipate or similar expressions.
These forward-looking statements are based largely on the current expectations
of management and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to the other risks described in the Factors That May Affect Future
Results discussion under Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part II of this annual report,
important factors to consider in evaluating such forward-looking statements include
risks associated with demand for our products, market acceptance, economic
conditions, competitive products and pricing, difficulties in product
development, commercialization and technology. In light of these risks and
uncertainties, there can be no assurance that the events contemplated by the
forward-looking statements contained in this annual report will, in fact,
occur. Accordingly, readers should not place undue reliance on forward-looking
statements. The forward-looking statements speak as of the date of this report
and we do not undertake any obligation to revise or update the forward-looking
statements.

4

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Table of Contents

STRATEGY

We have embarked on a
program to increase earnings, and hence shareholder value, by improving our
operating efficiency. We are seeking to grow at rates in excess of our markets
general rate of growth, primarily through the introduction of qualitatively
superior new products to our major marketplaces through existing customers.

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | INTRODUCE
 NEW PRODUCTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | In the last three years,
 we have focused our development efforts on products which address the actual
 technical requirements of maintaining clean air to promote health.
 Maintaining ultra-clean air in residential and commercial settings requires
 continuous and complete replacement of used air contaminated by contact
 with hair, skin, carpet, solvents, cigarette smoke and other common particle
 sources with air filtered through a combination of pre-filters, High
 Efficiency Particulate Air (commonly called HEPA) filtration, and odor
 removal, as well as controlling all air inlets. This typically requires
 upgraded and augmented blowers for central or zoned HVAC systems necessary to
 push air through more effective filters, additional filtration placed at
 building air inlets, and enough additional HVAC capacity to generate
 over-pressure so that the majority of air leaks push clean air out, rather
 than allow dirty air inside.                                                                                                                                                                                                 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | We have developed 5 new
 patents associated with our new nested filter concept during 2005. This concept
 enables us to stack 4 filters into a space normally holding only 1 filter.
 This provides labor savings associated with handling of inventory, storage
 space savings as well as significant freight savings. This product rolled out
 into retail stores during the second quarter of 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | During the fourth quarter
 of 2006 we began manufacturing our own air filtration medias for our Merv 6,
 Merv 8, Merv 10, and Merv 11. (MERV stands for Minimum Efficiency Reporting
 Values) retail and commercial pleated products. These new medias meet the new
 anticipated reporting standards to be effective July of this year by using
 mechanical means of filtration instead of relying on electrically charged
 medias. Electrically charged medias tend to discharge in many environments
 and do not benefit the end user.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | We have also been able to
 provide an upgrade path for government buildings, large commercial office
 buildings and other public venues wishing to utilize HEPA filtration as part
 of a program to harden buildings against bioterrorist attacks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Most currently available
 air filters for commercial, industrial and residential use are primarily
 useful for protecting motors, coils and other mechanical components from
 airborne grease condensation and other contaminants which reduce the life and
 energy-efficiency of the HVAC equipment and have little or no effect on
 reducing airborne contamination which may be harmful to humans. In fact,
 standard pleated filters, even those with high-MERV ratings, offer no appreciable
 benefit in terms of better air quality for the inhabitants than the cheapest
 spun-glass filters. These pleated filters are accompanied by increased
 heating and cooling costs caused by the decreased amount of air flowing
 through the system, and decreased efficiency, which may be accompanied by
 more frequent equipment breakdowns as equipment is stressed by attempting to
 push higher volumes of air through tighter filters. Our new products are
 designed to offer end-users substantial and measurable benefits to health and
 productivity through substantially cleaner air, and are properly engineered
 to reduce detrimental effects on equipment life.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Co-branding
 with major name-brands.
 During the past four years, we have developed and co-marketed products which
 utilize, and are branded with, Church and Dwights Arm&Hammer® products.
 We believe the brand-name recognition associated with these products will
 enable us to gain entrance with major retailers who are not currently our
 customers or to increase the number of our products carried by current
 customers who only carry portions of our product line. We will continue to
 look for appropriately branded technologies which might produce similarly
 beneficial products and branding opportunities. Additionally we are beginning
 to establish our own brand name NaturalAire®.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Security
 Products for Government Buildings and Commercial Office Buildings. We have adapted our containment control
 technology to be used in hardening government facilities, large commercial
 office buildings and public venues against anthrax attacks and other
 bioterrorist incidents. While these systems do                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

5

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | not offer complete
 protection against bioterrorist attacks, any credible multi-layered defense
 requires HEPA filtration and related technologies adapted to the unique
 requirements of these facilities. Marketing for these products will include
 analysis and diagnostic services offered through our IAQ (Indoor Air Quality)
 Diagnostic Group, adapted sales literature, technical seminars and electronic
 multimedia presentations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | IMPROVE
 OPERATING EFFICIENCY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Centralize
 Overhead Functions.
 During 2007, we continued our ongoing programs to centralize functions and
 eliminate duplication of efforts between subsidiaries in the following areas:
 purchasing, production planning, shipping coordination, accounting and
 personnel management, risk management and benefit plan administration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | StrategicGlobal Containment
 Systems, Inc. (GCS) is a wholly owned subsidiary of Flanders Corporation
 which manufactures critical environments for the nuclear, pharmaceutical and
 semi conductor. During 2008 GCS will be merged back under our Flanders
 Filters, Inc. and Charcoal Services Corporation divisions and these divisions
 will be working directly with the Department of Energy for creation of these
 projects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Additionally, during 2004,
 Flanders Complete Service Division (Flanders CSD), an air filtration service
 provider was formed. Flanders CSD offers weekly, monthly and quarterly
 service contracts for clean room and glove box certification; commercial,
 industrial, retail and residential surveys, onsite service; and complete
 filtration management including mold remediation and analysis. Flanders CSD
 continues to expand its footprint and currently enjoys various regional
 contracts and should expand its base over the next year to be ready to take
 on national contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Strategic
 Acquisitions. We
 will continue to evaluate acquisition opportunities, however, it is not
 likely we will make any acquisitions in 2008 as we continue to focus on
 improving core competencies rather than making acquisitions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Optimization
 of Mature Products.
 Now that we have completed the rationalization and consolidation of our
 product lines, we should be able to stabilize designs and complete efficiency
 studies on our manufacturing processes and supply chains which should enable
 us to duplicate our most successful processes across all plants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | INCREASE
 MARKET SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Use
 Strategically Located Facilities Throughout the United States to Increase
 Market Share.
 Through acquisition and the establishment of new plants, we have placed
 facilities within one days over-the-road shipping to most major population
 centers in the United States. We believe this ability to regionalize
 production and distribution has improved our business in several ways: (i)
 decreased cost of products to customers by reducing the average distance
 between our plants and both our customers and our major raw materials suppliers,
 hence decreasing freight expenses; (ii) increased responsiveness by
 decreasing the average time required to ship products to customers; and (iii)
 increased our share of national accounts total business by having
 manufacturing facilities in closer proximity to customers regional
 distribution centers. The ability to service all major population centers
 with regional manufacturing centers is critical for our business, allowing us
 to compete on price against less broadly based competitors without sacrificing
 margins as well as the ability to respond more rapidly than most of our
 competition. We will continue to review the market for new locations for
 expansion.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Continued
 Emphasis on Quality and Performance. A continued emphasis on product quality and on-time shipments has
 allowed us to capture market share in serving several industries in recent
 years. We are expanding our NQA1 Quality Assurance Program to include a more
 expanded approach to allow us to provide many other products related to our
 current product line.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Utilize
 High Efficiency Production and Logistics Systems to Dominate Niche Markets. During the past several years we have
 invested heavily in upgrading and opening new production facilities,
 scheduling                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

6

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Table of Contents

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | capacity, and logistics
 management capabilities. We intend to continue using these advantages to
 capture market share in niche markets with specialized products tailored to
 their exact requirements. Many end users with specialized air filtration
 needs are currently making do with standard products. It has been our
 experience that minor changes made to our standard products to meet
 specialized requirements may offer significant operational savings to these
 end users, although the actual filters cost more.

AIR FILTER MARKET BACKGROUND

The air filtration market is
mature, with market growth driven by a gradual trend toward higher efficiency
filters for residential, commercial and industrial applications.

Management is of the belief
that concerns about anthrax and other harmful microbes will accelerate this
trend over the next five years as commercial buildings in large U.S. cities
upgrade their ventilation systems to install more efficient filters. Other
growth drivers include an increasing propensity towards using
higher-performance filters in commercial and residential spaces instead of
current low-efficiency models, and the use of HEPA filters in new applications.

Management believes the
forces driving the air filtration market are evolving, beginning in the past
decade and continuing for the next several years, from preserving machinery and
equipment to maintaining and or facilitating indoor air quality. In addition,
we expect many technology industries to increase their reliance on air filters
to remove microscopic and gaseous contaminants from sensitive manufacturing
processes associated with semiconductor manufacturing, pharmaceutical
production, ultra-pure materials manufacturing, nuclear power and materials
processing, and biotechnology. Companies are devoting resources to air
filtration products to enhance process efficiency and employee productivity.

Air filters are used in many
different applications, including the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Commercial
 and Residential HVAC Systems. Replacement filters are an essential requirement for the efficient
 operation of commercial and residential HVAC systems.                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Residential
 air cleaners.Stand-alone
 air cleaners which produce ultra-clean air in a defined area are also gaining
 in popularity among allergy sufferers and asthmatics, although follow-up
 sales of replacement filtration cartridges have been limited.                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | General
 Industrial. Air
 filters are used in standard industrial settings to provide cleaner work
 environments; for example, auto makers use air filtration systems to remove
 oil mist contaminants from the air in their plants and industrial paint
 booth users utilize air filtration to remove paint particles from the air.                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Semiconductors. HEPA and carbon filters are necessary to
 meet the increasingly stringent manufacturing environment requirements of
 semiconductor manufacturers, where microscopic airborne contaminants can ruin
 microchips during production, having a large impact on manufacturing yield
 and profitability. Carbon filters are also being increasingly used to filter
 gaseous contaminants from semiconductor manufacturing areas.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Pharmaceuticals.
 Pharmaceutical companies are increasingly using cleanrooms to prevent
 cross-contamination between different products and different lots of the same
 product being manufactured at the same facility. The increasing use of
 cultured microbes for drug production is also expected to increase demand for
 high-end containment environments.                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Biotechnology. Containment systems for the manipulation of
 viruses and bacteria using genetic engineering techniques are critical to the
 biotechnology industry.                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Nuclear
 Power and Materials Processing. Filtration systems are necessary to radioactive containment
 procedures for all nuclear facilities, containment systems are necessary to
 provide shielding.                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Chemical,
 Biological and Radiological Safe Environments. Filtration systems are necessary to
 provide a safe environment for those working in sensitive areas that may be
 subject to exposure to such substances.                                                                                                                                                                                                                       

7

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Table of Contents

RECENT TRENDS

Recent trends in the air
filter industry, as well as changes in laws and governmental regulations during
the past five years, all encourage an increased awareness of the benefits of
the use of air filtration products. Some of these trends and changes are:

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Security
 Initiatives to Counter Terrorist Threats. We believe initiatives to harden
 buildings against bioterrorist attacks and other security initiatives will
 result in many governmental and commercial facilities upgrading their HVAC
 systems to incorporate HEPA filters and other types of upgraded air control
 systems. We have seen orders increase in this area over the past quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Semiconductor
 Downturn and Economic Recovery. Sales of air filtration products for semiconductor facilities,
 historically a major market, are expected to be slow again during 2007, with
 most analysts pushing recovery for this sector out until 2008. The
 strengthening economy is also having a positive effect on sales of all of our
 products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Indoor
 Air Quality and Health.
 We believe there is an increase in public concern regarding the effects of
 indoor air quality on employee productivity and health, as well as an
 increase in interest in standards for detecting and solving IAQ problems. For
 example, the American Society of Heating Refrigeration and Air-Conditioning
 Engineers (ASHRAE) has recently established certain minimum standards for
 ventilation and indoor air quality for commercial and industrial settings.
 The World Health Organization has recently been studying the effects of air
 quality on human health, including widely publicized epidemiological studies
 indicating that airborne contaminants kill more people than automobile
 accidents. We are seeing a greater interest in upgrading residential
 filtration systems as well as commercial systems to address both energy
 savings and better indoor quality.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Lack of
 Legitimate Competing Products. We believe there is an increase in public and regulatory
 frustration with spurious and misleading claims made by certain manufacturers
 in the air filtration industry. This trend is evidenced by recent rulings by
 the Federal Trade Commission disallowing claims of cleaning the air in an
 entire room made by several manufacturers of area HEPA filtration systems
 as well as medical benefits claimed by manufacturers of passive
 electrostatic washable synthetic filters and other articles in consumer
 reports. ASHARE (American Society of Heating, Air, and Refrigeration
 Engineers) is tightening the test standards to help the consumer more easily
 rate air filters. We hope that as the public becomes more interested in real
 filtration products that we will see continued strength in this market.                                             
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 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. We are
 encouraged by the awareness and increased interest in improving indoor air
 quality in working environments.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Sick
 Building Syndrome.Sick
 Building Syndrome, 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 solutions
 for mitigation, 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 affected buildings.                                                                                                                                                                                                                                                                                                                                                             

MARKETING

Retail Sales: Retail
marketing is focused on increasing the effectiveness and efficiency of
communicating to customers, consumers, suppliers, and prospects (customers and
suppliers). The communication is directed to all four groups of constituents:

| |    |                                                                                                                               
| | -- | ------------------------------------------------------------------------------------------------------------------------------
| | 1. | Institutional
 to enhance Flanders image by educating on the depth of knowledge and
 expertise Flanders has in air filtration.
| |    |                                                                                                                               
| | 2. | Persuade
 that our products have want-satisfying capabilities                                                               

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3. 
Advertorial to inform prospects of the existence of our products.

Direct interaction with Retailers will continue. Trade
show participation will be minimized to contracted agreements primarily with
Hardware Co-ops and these venues will focus on the institutional and
advertorial messages. Our direct interaction methods are primarily technical
selling with emphasis on providing solutions for consumers through our
filtration expertise and experience; and Creative selling of providing our
key retailers analytical support to grow their market share.

Our non-personal presentation and promotion of the
marketing message is print, primarily industry journals, magazines, and
newspapers; direct advertising, mail and billboards; broadcast, primarily radio.
The billboard, newspaper and radio campaigns focus on strategic markets with
well defined geographic exposure where effectiveness can be measured.

A marketing strategy for
prospects will include opening and penetrating new retail market segments.

Commercial
& Industrial Sales: Marketing for the Commercial and
Industrial Division is focused on increasing communication and education to our
customer distribution network. This will be accomplished through printed
material, email, CDs, technical presentations and website.

Direct interaction will continue with four Regional
Managers covering the United States, Mexico and Canada. Regional Managers
support the existing customer base as well as new prospects with product
expertise, experience, and support in the filtration industry.

Management will continue direct interaction with
existing customer base. Education and visual presence will be achieved with
actively being involved through professional memberships such as NAFA, ASHRAE,
IEST, CETA, ABSA, CBSA, ANS and HARDI. Management will also put more emphasis
on securing product specifications on all products through specifying
engineering firms.

Tradeshows will continue but only on a selective
nature. Market-share will be gained by increasing factory-support with educated
staff, improved stocking programs, decreased lead-times, as well as new and
improved products from our R&D Department. Non-personal advertising will be
increased to promote and increase our presence in the filtration industry
primarily in the industry journals and magazines.

Expansion:Global Containment Systems, Inc. (GCS) is a wholly owned
subsidiary of Flanders Corporation which manufactures critical environments for
the nuclear, pharmaceutical and semi conductor. During 2008 GCS will be merged
back under our Flanders Filters, Inc. and Charcoal Services Corporation
divisions and these divisions will be working directly with the Department of
Energy for creation of these projects.

Additionally, during 2004, Flanders Complete Service
Division (Flanders CSD), an air filtration service provider was formed.
Flanders CSD offers weekly, monthly and quarterly service contracts for clean
room and glove box certification; commercial, industrial, retail and
residential surveys; and complete filtration management including mold
remediation and analysis. The company is currently negotiating several large
contracts and if they are executed, the company expects to have national
coverage by the end of 2010.

PRODUCTS

We design, manufacture and market a broad range of air
filters and related products, including:

| |   |                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Residential heating and air conditioning filters,
  typically sold through retailers under the Flanders~Precisionaire brand name.                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                           
| |  | Residential air cleaners, developed in 2000, which
  offer different filtration types ranging from single-room HEPA units which
  clean the air in a room to near-cleanroom levels to in-duct electrostatic
  precipitators which remove large quantities of airborne contaminants from
  entire residences without negatively impacting the efficiency of HVAC
  systems.
| |   |                                                                                                                                                                                                                                                                                                                                                                           
| |  | Industrial specialty
  filters which fall under specifications that are categorized by efficiency
  ratings                                                                                                                                                                                                                                                               

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| |   |                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | established by ASHRAE and used in a wide variety of
  industries, including paint facilities, automobile factories, chemical
  treatment plants, mushroom farms, coal mines, oil refineries and power
  plants.                                               
| |   |                                                                                                                                                                                                                                                               
| |  | Commercial and industrial filters for use in office
  and general manufacturing environments, typically sold through wholesalers
  and distributors.                                                                                                          
| |   |                                                                                                                                                                                                                                                               
| |  | High Efficiency Particulate Air (HEPA) filters (at
  least 99.97% efficient to 99.999997% efficient) in various grades, for use in
  semiconductor facilities, nuclear containment vessels, disease containment
  facilities, and other critical applications.
| |   |                                                                                                                                                                                                                                                               
| |  | Absolute Isolation Barriers which are customized
  stand-alone units, typically manufactured of stainless steel, used in various
  industries which require absolute control over contaminants, atmospheric
  composition and containment.                    
| |   |                                                                                                                                                                                                                                                               
| |  | Carbon filters, both in bonded panels, various
  impregnated medias, and activated charcoal beds, used to remove gaseous
  contaminants, odors and toxic chemical vapors in various commercial and
  industrial applications.                                 
| |   |                                                                                                                                                                                                                                                               
| |  | Specialized air filter housings for use in
  multi-stage filtration applications.                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                               
| |  | Other related products, including ductwork and
  equipment cleaning chemicals, custom air handlers and specialized filter
  housings.                                                                                                                         
| |   |                                                                                                                                                                                                                                                               
| |  | Surface finishing filters for any paint booth or
  surface finishing application in the overall surface finishing market.                                                                                                                                     

MANUFACTURING

We manufacture air filters, housings, Absolute
Isolation Barriers and related equipment at several facilities in the United
States and Mexico, which range in size from 18,000 square feet to approximately
600,000 square feet. The major plants are:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fourteen separate manufacturing and warehousing
  facilities located in Washington, North Carolina (2 locations); Bath, North
  Carolina; Bartow, Florida; Momence, Illinois; Smithfield, North Carolina (2
  locations); Tijuana, Mexico; Matamoros, Mexico (2 locations); Clarkton, North
  Carolina; Stafford, Texas; Dallas, Texas and Auburn, Pennsylvania, produce a
  broad range of HEPA, commercial, residential and industrial filters.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Other facilities in Bath and Washington, North
  Carolina, and Stafford, Texas, manufacture HEGA filters, high-end containment
  environments, housings, custom filter assemblies and other custom filtration
  products and systems which require extensive custom design, production and
  lot tracking, including products used in the production and containment of
  potentially dangerous biologically engineered microorganisms.          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Ten direct offices spread across the US that provide
  a distribution point as well as light manufacturing.                                                                                                                                                                                                                                                                                                                                      

In addition, we design and manufacture much of our
automated production equipment.

Our manufacturing operations are subject to periodic
inspection by regulatory authorities. Because of the nature of some of our
products, these agencies include the Department of Energy, Department of
Defense 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 our manufacturing facilities utilizes testing
and design strategies appropriate to the products manufactured. These range
from standard statistical process quality controls for residential replacement
filters to individual testing and certification with patented proprietary
particle scanning technologies for each laminar-grade HEPA filter. We believe
that our ability to comprehensively test and certify HEPA filters is a
competitive advantage.

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SOURCE
AND AVAILABILITY OF RAW MATERIALS

Our principal raw materials are cardboard, fiberglass
fibers, recyclable waste-glass, extruded glass, sheet metal, extruded aluminum,
stainless steel, various grades of mild rolled steel, adhesives, resins and
wood. All of 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 our market areas. We
believe that the principal competitive factors in the air filtration business
include product performance, name recognition, price, product knowledge,
reputation, customized design, timely delivery and product maintenance. We
believe that we compete favorably in all of these categories. Competitors
include companies with resources, assets, financial strength and market share
which may be greater than ours. Major competitors include American Air Filter
International, Camfil Farr Company, Donaldson Company, Inc. and Airguard
Corporation.

PATENTS,
TRADEMARKS AND LICENSES

The Company and its subsidiaries currently holds
approximately (30) Thirty patents relating to filtration technology including
patents relating to HEPA filters and fabrication methods, filter leak testing
methods, filter assembly, laminar flow cleanrooms, components of isolation
barriers, and the baking soda impregnation method used in the manufacture of
the Arm & HammerÒ infused Filters.

In addition, the Company maintains twenty-five (25)
trademark registrations including the following: FLANDERSÒ,
PRECISIONAIREÒ, EZ FLOWÒ,
SMILIEÒ, AIRVELOPEÒ,
CHANNEL-CEILÒ, PUREFORMÒ,
ECONO-CELLÒ, GAS-PAKÒ,
PUREFRAMEÒ, DIMPLE PLEATÒ,
BLU-JELÒ, VLSIÒ, KWIK KUTÒ,
SUPER-FLOWÒ, NATURALAIREÒ,
AIRPUREÒ, PURESEALÒ,
FLANDERS ABSOLUTE ISOLATIONÒ, FLANDERS/CSCÒ,
TECH-SORBÒ, NATURALAIRE FILTER FRANGRANCEÒ,
AIRIAÒ, and BECAUSE WE KNOW AIR FORWARDS AND BACKWARDSÒ.
The Company also has applied for federal trademark protection for the SWISSAIRE
mark (Serial No. 76/475,934) for its new paintbooth product line. Although
management believes that the patents and trademarks associated with our various
product lines and subsidiaries are valuable, we do not consider any of them to
be essential to our business.

The Company developed 5 new patents associated with
its new nested filter concept during 2005. This concept enables us to stack 4
filters into a space normally holding only 1 filter. This also provides labor
savings associated with handling of inventory, storage space savings as well as
significant freight savings. This product rolled out into retail stores during
the first quarter of 2006.

The Company currently holds a license for the
intellectual property mark of Arm & HammerÒ
from Church & Dwight Company for labeling uses on our baking soda infused
product line. The Company is party to a Royalty Agreement with Church &
Dwight for the use of said mark which management believes to be a reasonable
and necessary agreement that is in the best interest of the Company

CUSTOMERS

We are not dependent upon any single customer. One
customer, Wal-Mart Stores, Inc., accounted for 10.4%, 13% and 15% of net sales
during 2007, 2006 and 2005, respectively. The Home Depot, Inc., accounted for
16%, 16% and 15% of net sales during 2007, 2006 and 2005, respectively. No
other single customer accounted for 10% or more of net sales during the past
three years. Other significant customers include Abbott Laboratories, Motorola,
Inc., Intel Corporation, Merck & Co., Inc., Upjohn Co., Westinghouse
Electric Corp., and several U.S. government agencies.

BACKLOG

We had approximately $25.1 million of firm backlog on
December 31, 2007, compared to $44.2 million on December 31, 2006. Firm backlog
includes orders received and not yet begun and the unfinished, unbilled portion
of

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special orders. 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, 2007, is expected to be shipped by the end of the second quarter
of 2008.

EMPLOYEES

The Company employed 2,800 full-time employees on
December 31, 2007; 2,512 in manufacturing, 29 in development and technical
staff, 61 in sales and marketing, 12 in services, and the remaining 186 in
support staff and administration. None of these are represented by a union. The
Company believes that its relationship with its employees is satisfactory.

GOVERNMENT
REGULATION

Although we believe our operations are in material
compliance with applicable environmental laws and regulations, risks of
significant costs and liabilities are inherent in manufacturing operations, and
we cannot assure that significant costs and liabilities will not be incurred.
Moreover, it is possible that other developments, such an increasingly strict
environmental laws and regulations and enforcement policies, and claims for
damages to property or persons resulting from our operations, could result in
substantial costs and liabilities to us. We believe that changes in
environmental laws and regulations will not have a material adverse effect on
our financial position, results of operations or cash flows in the near term.

We are also subject to the requirements of OSHA and
comparable state statutes. We believe we are in material compliance with OSHA
and state requirements, including general industry standards, record keeping
requirements and monitoring of occupational exposures. In general, we expect to
increase our expenditures to comply with stricter industry and regulatory
safety standards such as those described above. Although such expenditures
cannot be accurately estimated at this time, we do not believe that they will
have future material adverse effect on our financial position, results of
operations or cash flows.

SEASONALITY

Historically, our business has been seasonal, with a
substantial percentage of sales occurring during the second and third quarters
of each year. We believe that this will continue in future years. In addition,
demand for our general commercial and industrial products appears to be highly
influenced by the weather, with higher sales generally associated with extremes
of either hot or cold weather, and lower sales generally associated with
temperate weather. Because of these seasonal and weather-related demand
fluctuations, quarter-to-quarter performance may not be a good predictor of
future results.

EXPORT
SALES

We sell products to end users outside of the United
States through domestic specialty cleanroom contractors. These sales are
counted as domestic sales. We also sell products through foreign distributors,
primarily in Europe, and through Flanders International, Ltd., a wholly-owned
subsidiary located in Singapore which sells to customers in the Pacific Rim.
Sales through foreign distributors and Flanders International amounted to less
than 5% of net sales for each of the last three fiscal years. Assets held
outside the United States are negligible.

|         |             
|-------- | ------------
|Item 1A. | Risk Factors

Investors should carefully consider the risks
described below and all other information in this Form 10-K. The risks and
uncertainties described below are not the only ones facing the Company.
Additional risks and uncertainties not presently known to the Company or that
it currently deems immaterial may also impair the Companys business and
operations.

If any of the following risks actually occur, the
Companys business, financial condition or results of operations could be
materially adversely affected. In such case, the trading price of the Companys
common stock could decline and investors may lose all or part of their
investment.

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Failure
to Manage Future Growth Could Adversely Impact Our Business Due to the Strain
on Our Management, Financial and Other Resources

If our business expands in the future, the additional
growth will place burdens on management to manage such growth while maintaining
profitability. Our ability to compete effectively and manage future growth
depends on our ability to:

| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | recruit, train and manage our work force,
  particularly in the areas of corporate management, accounting, research and
  development and operations,
| |   |                                                                                                                                                      
| |  | manage production and inventory levels to meet
  product demand,                                                                                     
| |   |                                                                                                                                                      
| |  | manage and improve production quality,                                                                                                               
| |   |                                                                                                                                                      
| |  | expand both the range of customers and the
  geographic scope of our customer base, and                                                              
| |   |                                                                                                                                                      
| |  | improve financial and management controls, reporting
  systems and procedures.                                                                       

Any failure to manage growth effectively could have a
material adverse effect on our business, financial condition and results of
operations.

Failure to Adequately Ramp-Up Production
Capacity to Meet Demand Could Adversely Impact Our Business Due to Strain on
Financial Resources.

Any delays in an untried supply chain, new production
chains, and other delays common to the launch of a new product line could also
adversely impact the success of the products, as well as current relationships
with major accounts.

Our
Business May Suffer If Our Competitive Strategy is Not Successful

Our continued success depends on our ability to
compete in an industry that is highly competitive. This competition may
increase as new competitors enter the market. Several of our competitors may
have longer operating histories and greater financial, marketing and other
resources than we do. Additionally, our competitors may introduce new products
or enhancements to products that could cause a decline in sales or loss of
market acceptance of our existing products. Under our current competitive
strategy, we endeavor to remain competitive by:

| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | increasing our market share,                                                                           
| |   |                                                                                                        
| |  | expanding our market through the introduction of new
  products which require periodic replacement, and
| |   |                                                                                                        
| |  | improving operating efficiencies.                                                                      

Although our executive management team continues to
review and monitor our strategic plans, we have no assurance that we will be
able to follow our current strategy or that this strategy will be successful.

Our
Business May Suffer if Our Strategy to Increase the Size and Customer Base of
the Air Filtration Market is Unsuccessful

We are developing new products as part of our strategy
to increase the size and customer base of the air filtration market. We have no
assurance that this strategy will be successful. We have no guarantee that any
new products we develop will gain acceptance in the marketplace, or that these
products will be successful. Additionally, we have no assurance we will be able
to recoup the expenditures associated with the development of these products.
To succeed in this area we must:

| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | increase public awareness of the issues surrounding
  indoor air quality,                                    
| |   |                                                                                                              
| |  | adequately address the unknown requirements of the
  potential customer base,                                
| |   |                                                                                                              
| |  | develop new products that are competitive in terms
  of price, performance and quality, and                  
| |   |                                                                                                              
| |  | avoid significant increases in current expenditure
  levels in development, marketing and consumer education.

We
May Experience Critical Equipment Failure Which Could Have a Material Adverse
Effect on Our Business

|                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|If we experience extended periods of downtime due to
  the malfunction or failure of our automated production equipment, our
  business, financial condition and operations may suffer. We design and
  manufacture much of the automated production equipment used in our
  facilities. We also use other technologically advanced equipment for

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which manufacturers may have limited production
capability or service experience. If we are unable to quickly repair our equipment
or quickly obtain new equipment or parts from outside manufacturers, we could
experience extended periods of downtime in the event of malfunction or
equipment failure.

Our
Plan to Centralize Overhead Functions May Not Produce the Anticipated Benefits
to Our Operating Results

We are currently completing the implementation of
plans to centralize overhead functions and eliminate duplication of efforts
between our subsidiaries in the following areas:

| |   |                             
| | - | ----------------------------
| |  | purchasing,                 
| |   |                             
| |  | production planning,        
| |   |                             
| |  | shipping coordination,      
| |   |                             
| |  | marketing,                  
| |   |                             
| |  | accounting,                 
| |   |                             
| |  | personnel management,       
| |   |                             
| |  | risk management, and        
| |   |                             
| |  | benefit plan administration.

We have no assurance that cutting overhead in this
fashion will have the anticipated benefits to our operating results.
Additionally, we have no assurance that these reorganizations will not
significantly disrupt the operations of the affected subsidiaries.

Our
Success Depends on Our Ability to Retain and Attract Key Personnel

Our success and future operating results depend in
part upon our ability to retain our executives and key personnel, many of whom
would be difficult to replace. Our success also depends on our ability to
attract highly qualified engineering, manufacturing, technical, sales and
support personnel for our operations. Competition for such personnel,
particularly qualified engineers, is intense, and there can be no assurance
that we will be successful in attracting or retaining such personnel. Our
failure to attract or retain such persons could have a material adverse effect
on our business, financial condition and results of operations.

Our
Current Distribution Channels May be Unavailable if Our Manufacturers
Representatives Decide to Work Primarily With One of Our Competitors

We provide our manufacturers representatives with the
ability to offer a full product line of air filtration products to existing and
new customers. Some of our competitors offer similar arrangements. We do not
have exclusive relationships with all of our representatives. Consequently, if
our representatives decide to work primarily with one of our competitors, our
current distribution channels, and hence, our sales, could be significantly
reduced.

Management
Controls a Significant Percentage of Our Stock

As of December 31, 2007, our directors and executive
officers beneficially held approximately 34.52% of our outstanding common
stock. As a result, such shareholders effectively control or significantly
influence all matters requiring shareholder approval. These matters include the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying or preventing a
change in control that may otherwise be advantageous to the non-affiliated
shareholders.

We
May be Required to Issue Stock in the Future That Will Dilute the Value of Our
Existing Stock

We have granted options to purchase a total of
3,267,000 shares of common stock to various parties with exercise prices
ranging from $1.74 to $11.72 per share. The majority of these options are
currently exercisable. Additionally, if the option holders exercise their
options, the interests of current shareholders may be diluted.

Our
Shareholders May Not Realize Certain Opportunities Because of Our Charter
Provisions and North Carolina Law

|                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Our Articles of Incorporation and Bylaws contain
  provisions that are designed to provide our Board of Directors with time to
  consider whether a hostile takeover offer is in our best interest and the
  best interests of our shareholders. These provisions may discourage potential
  acquisition proposals and could delay or prevent a change of control in

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our business. Additionally, we are subject to the
Control Shares Acquisition Act of the State of North Carolina. This act
provides that any person who acquires control shares of a publicly held North
Carolina corporation will not have voting rights with respect to the acquired
shares unless a majority of the disinterested shareholders of the corporation vote
to grant such rights. This could deprive shareholders of opportunities to
realize takeover premiums for their shares or other advantages that large
accumulations of stock would typically provide.

Our
Business Can be Significantly Affected by Environmental Laws

The constantly changing body of environmental laws and
regulations may significantly influence our business and products. These laws
and regulations require that various environmental standards be met and impose
liability for the failure to comply with such standards. While we endeavor at
each of our facilities to assure compliance with environmental laws and
regulations, and are currently not aware of any ongoing issues of this nature,
we cannot be certain that our operations or activities, or historical
operations by others at our locations, will not result in civil or criminal
enforcement actions or private actions that could have a materially adverse
effect on our business. We have, in the past, and may, in the future, purchase
or lease properties with unresolved potential violations of federal or state
environmental regulations. In these transactions, we have been successful in
obtaining sufficient indemnification and mitigating the impact of the issues
without recognizing significant expenses associated with litigation and
cleanup. However, purchasing or leasing these properties requires us to weigh
the cost of resolving these issues and the likelihood of litigation against the
potential economic and business benefits of the transaction. If we fail to
correctly identify, resolve and obtain indemnification against these risks,
they could have a material adverse impact on our financial position.

Fire disruptions may adversely affect our business

Our raw materials and
manufacturing process involve a greater than average risk of fire loss or
disruption. We have recently experienced two fires. In April 2006, a
manufacturing facility in Texas was destroyed by fire. In July 2007, a
manufacturing facility in Bartow, Florida was destroyed by fire. To date we
have been able to mitigate the effects of fires and floods by transferring
manufacturing, warehousing and shipping to other facilities. Our management has
advised us that to date we have been insured against the losses caused by such
fires. Although we intend to increase security and increase fire protection
equipment at our facilities, another major fire could occur and materially
affect our operations. Furthermore, there is no assurance that we will be able
to maintain business interruption, loss of income and physical damage insurance
in sufficient amounts to fully recoup losses caused by fire or other natural
disasters. It is an event of default under our credit facility with Bank of
America if we are not fully insured for any loss, theft, damage or destruction
to our assets, subject to agreeable insurance deductibles, that exceeds $200.

Covenants in our credit facilities could restrict our
ability to borrow additional funds, which could impair the improvement and
expansion of our operations

Certain covenants in our
credit facility with Bank of America restrict the types and amounts of
additional indebtedness that we may incur. In addition, the credit facility
contains specific financial covenants. These restrictions could inhibit our
ability to improve and expand our operations. Our credit facility with Bank of
America matures in October 2009. There is no assurance that we will be able to
maintain covenant compliance, negotiate extensions to this credit facility or
find a replacement credit facility on comparable terms. We pledged
substantially all of our assets as security for the Bank of America credit
facility.

A significant amount of our leased physical facilities are
owned by Mr. Amerson.

We are the lessee under a series of six (6) real
estate operating leases for approximately 1,006,000 square feet of warehousing,
shipping and manufacturing facilities, expiring in 2025, 2026 or 2027 with
Wal-Pat II, LLC (Wal-Pat), an entity owned by Robert R. Amerson. Mr. Amerson
is our CEO and Chairman of our Board of Directors and beneficially owns
approximately 29.6% of our outstanding common shares as of December 31, 2007.
Mr. Amerson acquired Mr. Clarks interest in Wal-Pat as part of the Settlement
and Mutual Release with Mr. Clark.

Our aggregate monthly base lease payment obligation to
Wal-Pat is approximately $221. Our total remaining aggregate obligation under
the Wal-Pat operating leases is approximately $50,639. These amounts exclude
any obligations for payment of real estate taxes and repairs and maintenance,
which are our responsibility as the lessee.

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In September 2007, we entered into a Master Lease
Modification Agreement with Wal-Pat, which requires Wal-Pat to notify us at
least thirty (30) days in advance of any future proposed sale of any of the
premises or a proposed sale of a majority of the equity interests in Wal-Pat.
In such event, we have the right to accept, renegotiate or terminate the
leases. We were granted a future right of first refusal in connection with a
sale of any of the leased Wal-Pat facilities. In the event of a future sale of
Flanders, which includes a merger, sale of substantially all of our assets or
acquisition of greater than 50% of our shares, by a party other than Mr.
Amerson, then Flanders is granted the right to terminate or renegotiate the
terms of the Wal-Pat leases. We also have a fair market value purchase option
for the facilities we lease from Wal-Pat.

A default by us under the terms of any of these leases
or a default by Wal-Pat, or Mr. Amerson, as guarantor on their obligations to
BB&T, the financial institution which holds mortgages and deeds of trust on
these properties, could adversely affect our leasehold interests in these
properties. Mr. Amerson has pledged 5,128,103 of our common shares as security
to BB&T in order to facilitate the financings to Wal-Pat, other personal
loans, and the acquisition of Mr. Clarks shares.

Because of the foregoing factors, as well as other
variables affecting our operating results, past financial performance should
not be considered a reliable indicator of future performance, and investors
should not use historical trends to anticipate results or trends in future
periods.

|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments

|                                                                                         
|-----------------------------------------------------------------------------------------
|There are no unresolved comments from the staff
  comment letter dated December 12, 2007.

16

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Table of Contents

|        |           
|------- | ----------
|Item 2. | Properties

The following
table lists our principal facilities. Management believes that these properties
are adequate for its current operational needs. We may, at some point,
relocate, reorganize or consolidate various facilities for reasons of operating
efficiencies or may open new plants to take advantage of perceived new economic
opportunities. We are of the opinion that all properties are well maintained
and appropriately insured.

|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|-------------------------------------------- |  | ---------------------------- |  | ----------------- | - | ------- | - | ---------- | - |  | -------
|                                             |  |                              |  | Approximate Floor |   | Monthly |   |           
|Principal
  Facility                         |  | Location                     |  | Space (sq. ft.)   |   | Payment |   | Lease/Type
|                                             |  |                              |  |                   |   |         |   |           
|Manufacturing
  and office facility          |  | Washington,
  North Carolina |  | 285,000           |   |         |   | N/A        |   |  | Owned  
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Manufacturing,
  service and office facility |  | Bath, North
  Carolina       |  | 46,000            |   |         |   | N/A        |   |  | Owned  
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Land                                         |  | Bartow,
  Florida            |  | N/A               | 1 |         |   | N/A        |   |  | Owned  
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Manufacturing
  plant                        |  | Lake Wales,
  Florida        |  | 137,693           |   |         | $ | 31,555     |   |  | Leased 
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Warehouse                                    |  | Bartow,
  Florida            |  | 60,000            |   |         | $ | 15,671     |   |  | Leased 
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Warehouse                                    |  | Terrell,
  Texas             |  | 75,000            |   |         |   | N/A        |   |  | Owned  
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Manufacturing
  plant                        |  | Auburn,
  Pennsylvania       |  | 92,000            |   |         | $ | 5,857      |   |  | Owned  
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Office space
  and headquarters              |  | St.
  Petersburg, Florida    |  | 18,000            |   |         |   | N/A        |   |  | Owned  
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Manufacturing
  plant                        |  | Momence,
  Illinois          |  | 211,000           |   |         | $ | 136,174    | 2 |  | Owned  
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Sales office
  and warehouse                 |  | Singapore                    |  | 3,800             |   |         | $ | 2,100      |   |  | Leased 
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Manufacturing
  and warehouse                |  | Smithfield,
  North Carolina |  | 415,000           |   |         | $ | 79,816     |   |  | Leased3
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Manufacturing
  plant                        |  | Smithfield,
  North Carolina |  | 474,000           |   |         | $ | 11,981     | 4 |  | Owned  
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Manufacturing
  and office facility          |  | Fort Bend,
  Texas           |  | 60,000            |   |         |   | 30,850     |   |  | Leased3
|                                             |  |                              |  |                   |   |         |   |            |   |  |        
|Warehouse                                    |  | Salt Lake
  City, Utah       |  | 192,000           |   |         |   | N/A        |   |  | Leased 



---

|  |                                                                                                                                                                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Property was
  destroyed by fire in 2007.                                                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                             
|2 | Property is
  pledged as security for an Economic Development Revenue Bond with a face
  value of $6,000,000. The obligation is paid quarterly rather than monthly by
  paying a portion of principal and interest on the entire amount. The payment
  shown above is for the entire fourth quarter of 2007.
|  |                                                                                                                                                                                                                                                                                                             
|3 | The property
  and building is owned by Wal-Pat.                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                             
|4 | The property
  is used as security for two Industrial Revenue Bonds with face value of
  $4,500,000 and $4,000,000. Monthly payments are for interest only on the
  bonds, and vary from month to month based on the interest rate during the
  period.                                                     

17

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Table of Contents

|                                          |  |                                   |  |          |  |         |  |        
|----------------------------------------- |  | --------------------------------- |  | -------- |  | ------- |  | -------
|Manufacturing
  plant and office facility |  | San Diego,
  California           |  | 96,000   |  | $49,914 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Manufacturing
  plant                     |  | Tijuana,
  Mexico                 |  | 127,0005 |  | $46,651 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office                     |  | Phoenix,
  Arizona                |  | 22,000   |  | $ 6,697 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office                     |  | Santa Fe
  Springs, California    |  | 20,000   |  | $ 8,650 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office                     |  | Hayward,
  California             |  | 10,000   |  | $ 5,900 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office                     |  | Salt Lake
  City, Utah            |  | 15,000   |  | $ 3,139 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office                     |  | Sanford,
  North Carolina         |  | 1,000    |  | $   950 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office& Warehouse          |  | Kent,
  Washington                |  | 12,500   |  | $ 5,640 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Manufacturing
  plant                     |  | Washington, North
  Carolina      |  | 110,000  |  | $12,500 |  | Leased3
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office& Warehouse          |  | Philadelphia,
  Pennsylvania      |  | 26,000   |  | $16,000 |  | Leased3
|                                          |  |                                   |  |          |  |         |  |        
|Manufacturing
  Plant                     |  | Matamoros,
  Mexico               |  | 86,651   |  | $30,328 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Manufacturing
  Plant                     |  | Matamoros,
  Mexico               |  | 107,323  |  | $33,270 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Manufacturing
  Plant                     |  | Beaufort
  County, North Carolina |  | 120,000  |  | $27,000 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office& Warehouse          |  | Cerritos,
  California            |  | 21,735   |  | $11,270 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office& Warehouse          |  | Dallas,
  Texas                   |  | 120,000  |  | $32,000 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office& Warehouse          |  | Clarkton,
  North Carolina        |  | 350,000  |  | $49,321 |  | Leased3
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office& Warehouse          |  | Greenville,
  North Carolina      |  | 50,000   |  | $12,000 |  | Leased3
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office& Warehouse          |  | Las Vegas,
  Nevada               |  | 10,106   |  | $ 8,006 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        
|Direct Sales
  Office& Warehouse          |  | Chaska,
  Minnesota               |  | 28,000   |  | $14,000 |  | Leased 
|                                          |  |                                   |  |          |  |         |  |        

|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

From time to
time, the Company is a party as plaintiff or defendant to various legal
proceedings related to our normal business operations. In the opinion of
management, although the outcome of any legal proceeding cannot be predicted
with certainty, the ultimate liability of the Company in connection with its
legal proceedings will not have a material adverse effect on the Companys
financial position, but could be material to the results of operations in any
one future accounting period. The Company makes appropriate reserves for
litigation, even if not material. Defense costs are expensed as incurred.

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

The Company
held its annual meeting of shareholders on December 17, 2007. During the
meeting, holders of 22,824,402 shares, representing eighty-eight percent (88%)
of the 25,896,729 shares outstanding on the record date,



---

|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|5 | The Tijuana
  plant has 2 temporary buildings measuring 45,000 sq. ft. and 40,000 sq. ft.

18

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attended
either in person or by proxy. Holders in excess of 60% of the totals vote cast
voted for the election of members to the Board of Directors for Robert R.
Amerson, Harry Smith, Kirk Dominick, Jeff Korn., and David M. Mock. As a result
of the meeting, Messrs. Amerson, Smith, Dominick, Korn, and Mock were elected
for an additional one-year term as directors.

19

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PART II

|        |                                                                      
|------- | ---------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related Stockholder Matters

PRICE RANGE OF COMMON STOCK

The Companys common stock is listed on the Nasdaq National Market
System under the symbol FLDR. The following table sets forth, for the periods
indicated, the high and low sale prices of the Companys common stock as
reported by the Nasdaq National Market System. Such quotations do not include
retail mark-ups, mark-downs, or other fees or commissions.

|                                       |  |      |       |     |   |       | 
|-------------------------------------- |  | ---- | ----- | --- | - | ----- | 
|                                       |  | High |       | Low |  
|                                       |  |      |       |     |  
|2007                                   |  |      |       |     |   |       | 
|Fourth Quarter ended December 31, 2007 |  | $    | 6.86  |     | $ | 4.53  | 
|Third Quarter ended September 30, 2007 |  | $    | 8.20  |     | $ | 4.39  | 
|Second Quarter ended June 30, 2007     |  | $    | 7.67  |     | $ | 6.31  | 
|First Quarter ended March 31, 2007     |  | $    | 9.52  |     | $ | 7.07  | 
|                                       |  |      |       |     |   |       | 
|2006                                   |  |      |       |     |   |       | 
|Fourth Quarter ended December 31, 2006 |  | $    | 10.27 |     | $ | 8.42  | 
|Third Quarter ended September 30, 2006 |  | $    | 10.36 |     | $ | 8.56  | 
|Second Quarter ended June 30, 2006     |  | $    | 11.99 |     | $ | 9.49  | 
|First Quarter ended March 31, 2006     |  | $    | 12.10 |     | $ | 10.29 | 
|                                       |  |      |       |     |   |       | 
|2005                                   |  |      |       |     |   |       | 
|Fourth Quarter ended December 31, 2005 |  | $    | 12.46 |     | $ | 9.81  | 
|Third Quarter ended September 30, 2005 |  | $    | 14.09 |     | $ | 8.85  | 
|Second Quarter ended June 30, 2005     |  | $    | 11.67 |     | $ | 7.77  | 
|First Quarter ended March 31, 2005     |  | $    | 11.43 |     | $ | 8.55  | 

EQUITY COMPENSATION PLAN INFORMATION

The following
table provides information about our Equity Compensation Plans as of December
31, 2007.

|                                                                 |  |                                                                             |  |                                                     |  |                                                                  |      |  |  |           |  | 
|---------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | --------------------------------------------------- |  | ---------------------------------------------------------------- | ---- |  |  | --------- |  | 
|Plan Category                                                    |  | Number of securities 
 to be issued upon 
 exercise of outstanding
 options |  | Weighted 
 average price of 
 outstanding 
 options |  | Number of securities 
 remaining available 
 for future issuance |     
|                                                                 |  |                                                                             |  |                                                     |  |                                                                  |     
|Equity
 Incentive plan approved by security holders              |  | 620,000                                                                     |  |                                                     |  | $                                                                | 5.23 |  |  | 1,380,000 |  | 
|Equity
 Incentive plan not approved by security holders          |  |                                                                            |  |                                                     |  |                                                                  |     |  |  |          |  | 
|Long Term
 Incentive plan approved by security holders           |  | 370,000                                                                     |  |                                                     |  | $                                                                | 7.45 |  |  |          |  | 
|Long Term
 Incentive plan not approved by security holders       |  |                                                                            |  |                                                     |  |                                                                  |     |  |  |          |  | 
|Directors
 and Officers plan approved by security holders        |  | 277,000                                                                     |  |                                                     |  | $                                                                | 7.43 |  |  |          |  | 
|Directors
 and Officers plan not approved by security holders    |  |                                                                            |  |                                                     |  |                                                                  |     |  |  |          |  | 
|Other equity
 compensation plan approved by security holders     |  | 2,000,000                                                                   |  |                                                     |  | $                                                                | 5.00 |  |  |          |  | 
|Other equity
 compensation plan not approved by security holders |  |                                                                            |  |                                                     |  |                                                                  |     |  |  |          |  | 

20

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APPROXIMATE NUMBER OF EQUITY SECURITYHOLDERS

On February
15, 2008, Flanders common stock closed at $6.46. As of February 15, 2008,
there were approximately 135 holders of record of the Companys common stock.

DIVIDENDS

We have not declared or paid cash dividends on our common stock.
Currently, we retain any future earnings, except those used to repurchase
stock, to finance the growth and development of the business, however, we are
currently considering paying cash dividends in the future. The Board of
Directors may decide to declare a dividend, based upon its evaluation of our
earnings, financial position, capital requirements and any other factors the
Board of Directors may consider to be relevant. Under the terms of our
revolving credit line we cannot pay dividends without the prior written consent
of the bank. The Company also has a stock repurchase program that is currently
subject to restriction under the Companys line of credit facility. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations ‐ Liquidity and Capital Resources and Notes to Consolidated
Financial Statements ‐ Note G.

|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following
financial data is derived from, 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 HISTORICAL OPERATIONS DATA (In thousands, except per share data)

|                                                        |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                                        |  | Year Ended December 31, |        
|                                                        |  |                         |        
|                                                        |  | 2007                    |         | 2006 |   | 2005    |   | 2004 |         | 2003 |  
|                                                        |  |                         |         |      |   |         |   |      |         |      |  
|Net sales                                               |  | $                       | 244,941 |      | $ | 238,378 |   | $    | 229,276 |      | $ | 199,933 |  | $ | 182,780 | 
|Gross profit                                            |  |                         | 31,789  |      |   | 48,725  |   |      | 52,917  |      |   | 48,288  |  |   | 43,271  | 
|Operating expenses                                      |  |                         | 58,511  |      |   | 40,868  |   |      | 35,297  |      |   | 33,569  |  |   | 32,112  | 
|Operating income from continuing operations             |  |                         | (26,722 | )    |   | 7,857   |   |      | 17,620  |      |   | 14,719  |  |   | 11,159  | 
|Earnings from continuing operations before income taxes |  |                         | (28,691 | )    |   | 8,208   |   |      | 17,245  |      |   | 14,351  |  |   | 11,251  | 
|Provision for income taxes                              |  |                         | (8,791  | )    |   | 2,683   |   |      | 4,739   |      |   | 4,581   |  |   | 3,505   | 
|Earnings from continuing operations                     |  |                         | (19,900 | )    |   | 5,525   |   |      | 12,506  |      |   | 9,770   |  |   | 7,746   | 
|Cumulative effect of accounting change                  |  |                         |        |      |   |        |   |      |        |      |   |        |  |   |        | 
|Extraordinary Gain (Loss)                               |  |                         | 213     |      |   | (3,475  | ) |      |        |      |   |        |  |   |        | 
|Net earnings (loss)                                     |  | $                       | (19,687 | )    | $ | 2,050   |   | $    | 12,506  |      | $ | 9,770   |  | $ | 7,746   | 
|                                                        |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Earnings per share from continuing operations           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Basic                                                   |  | $                       | (0.75   | )    | $ | 0.21    |   | $    | 0.48    |      | $ | 0.37    |  | $ | 0.30    | 
|                                                        |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Diluted                                                 |  | $                       | (0.75   | )    | $ | 0.20    |   | $    | 0.45    |      | $ | 0.36    |  | $ | 0.29    | 
|                                                        |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|                                                        |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Net earnings (loss) per share                           |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Basic                                                   |  | $                       | (0.75   | )    | $ | 0.08    |   | $    | 0.48    |      | $ | 0.37    |  | $ | 0.30    | 
|                                                        |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Diluted                                                 |  | $                       | (0.75   | )    | $ | 0.07    |   | $    | 0.45    |      | $ | 0.36    |  | $ | 0.29    | 
|                                                        |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|                                                        |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Weighted average common shares outstanding              |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Basic                                                   |  |                         | 26,362  |      |   | 26,340  |   |      | 26,309  |      |   | 26,201  |  |   | 26,033  | 
|                                                        |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 
|Diluted                                                 |  |                         | 26,362  |      |   | 27,725  |   |      | 27,807  |      |   | 27,289  |  |   | 26,428  | 
|                                                        |  |                         |         |      |   |         |   |      |         |      |   |         |  |   |         | 

21

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SELECTED HISTORICAL BALANCE SHEET DATA (In thousands)

|                           |  |              |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|-------------------------- |  | ------------ | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                           |  | December 31, |        
|                           |  |              |        
|                           |  | 2007         |         | 2006 |   | 2005    |  | 2004 |         | 2003 |  
|                           |  |              |         |      |   |         |  |      |         |      |  
|Working capital            |  | $            | 50,251  |      | $ | 67,967  |  | $    | 60,595  |      | $ | 54,212  |  | $ | 45,547  | 
|Total assets               |  |              | 183,555 |      |   | 207,104 |  |      | 172,216 |      |   | 159,670 |  |   | 145,415 | 
|Long-term obligations1     |  |              | 32,348  |      |   | 42,880  |  |      | 27,293  |      |   | 23,059  |  |   | 26,290  | 
|Total shareholders equity |  |              | 87,402  |      |   | 107,379 |  |      | 105,534 |      |   | 93,161  |  |   | 80,709  | 

|  |                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------
| 
|1 | Long-term
 obligations include long-term notes payable, long-term debt, including
 current maturities, convertible debt, and committed capital.

|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial Condition and
 Results of Operations

The following
discussion should be read in conjunction with Item 6  Selected Financial
Data and our Consolidated Financial Statements, all included herein. 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, including but
not limited to those discussed below under Factors That May Affect Future
Results could cause actual results to differ materially from those contained
in these forward-looking statements.

OVERVIEW

Flanders is a
full-range air filtration product company engaged in designing, manufacturing
and marketing air filtration products and certain related products and
services. Our focus has evolved from expansion through acquisition to
increasing the quality and efficiency of our high-volume replacement filtration
products, and using these benefits to compete more effectively in the
marketplace. We also design and manufacture much of our own production
equipment as well as glass-based media for many of our air filtration products.

CRITICAL ACCOUNTING
POLICIES AND ESTIMATES

The following discussion and analysis is based upon our consolidated
financial statements which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of our financial statements requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses, and
assets and liabilities during the periods reported. Estimates are used when
accounting for certain items such as revenues, allowances for returns, early
payment discounts, customer discounts, doubtful accounts, employee compensation
programs, depreciation and amortization periods, taxes, inventory values,
insurance programs, and valuations of investments, goodwill, other intangible
assets and long-lived assets. We base our estimates on historical experience,
where applicable, and other assumptions that we believe are reasonable under
the circumstances. Actual results may differ from our estimates under different
assumptions or conditions. We believe that the following critical accounting
policies affect our more significant judgments and estimates used in
preparation of our consolidated financial statements.

We maintain
allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. We base our estimates on
the aging of our accounts receivable balances and our historical write-off
experience, net of recoveries. Significant changes were made to the Companys
estimate of allowance for doubtful

22

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accounts
during the third quarter of 2007 as a result of the Company changing its
methodology and assumptions of estimating this allowance. If the financial
condition of our customers were to deteriorate, additional allowances may be
required.

We value our
inventories at the lower of cost or market. We write down inventory balances
for estimated obsolescence or unmarketable inventory equal to the difference
between the cost of the inventory and the estimated market value based upon
assumptions about future demand and market conditions. Inventories were written
down to net realizable value during the third quarter of 2007. This was due
mainly to discontinued product lines as well as discovery of some damaged
inventory. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.

Estimates of
our insurance costs are developed by managements evaluation of the likelihood
and probable amount of potential claims based on historical experience and
evaluation of each claim. Changes in the key assumptions may occur in the
future, which would result in changes to related insurance costs.

Goodwill is
reviewed for possible impairment at least annually or more frequently upon the
occurrence of an event or when circumstances indicate that the Companys
carrying amount is greater than the fair value. In accordance with SFAS 142,
the Company examined goodwill for impairment and determined that the Companys
carrying amount did not exceed the fair value, thus, there was no impairment.

Generally,
sales are recognized when shipments are made to customers. Rebates, allowances
for damaged goods and other advertising and marketing program rebates are
accrued pursuant to contractual provisions and included in accrued expenses. An
insignificant amount of our revenues fall under the percentage-of-completion
method of accounting used for long-term contracts. Under this method, sales and
gross profit are recognized as work is performed based on the relationship between
actual costs incurred and total estimated costs at completion. Sales and gross
profit are adjusted prospectively for revisions in estimated total contract
costs and contract values. Estimated losses are recorded when identified.

RESULTS OF
OPERATIONS(thousands omitted, except per share amounts)

| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | 2007 Compared to 2006                                                                                                 
| |                                                                                                                       
| | The
  following table summarizes the Companys results of operations as a
  percentage of net sales for 2007 and 2006.

|                                     |  |      |         |      |  |       |   |   |         |   |  |       |  
|------------------------------------ |  | ---- | ------- | ---- |  | ----- | - | - | ------- | - |  | ----- | -
|                                     |  | 2007 |         | 2006 | 
|                                     |  |      |         |      | 
|Net sales                            |  | $    | 244,941 |      |  | 100.0 | % | $ | 238,378 |   |  | 100.0 | %
|                                    
|Gross profit                         |  |      | 31,789  |      |  | 13.0  |   |   | 48,725  |   |  | 20.4  |  
|Operating expenses                   |  |      | 58,511  |      |  | 23.9  |   |   | 40,868  |   |  | 17.1  |  
|Operating income (loss)              |  |      | (26,722 | )    |  | (10.9 | ) |   | 7,857   |   |  | 3.3   |  
|Non operating income (expense)       |  |      | (1,969  | )    |  | (0.1  | ) |   | 351     |   |  | .2    |  
|Earnings before income taxes         |  |      | (28,691 | )    |  | (11.7 | ) |   | 8,208   |   |  | 3.4   |  
|Provision (Benefit) for income taxes |  |      | (8,791  | )    |  | (3.6  | ) |   | 2,683   |   |  | 1.1   |  
|Extraordinary items                  |  |      | 213     |      |  | .1    |   |   | (3,475  | ) |  | (1.5  | )
|Net earnings (loss)                  |  |      | (19,687 | )    |  | (8.0  | ) |   | 2,050   |   |  | .1    |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net Sales: Net
  sales for 2007 increased by $6,563 or 2.8%, to $244,941, from $238,378 for
  2006. Sales growth increased during the year of 2007 in the retail sector
  primarily due to the release of our new Microparticle Plus product at Home
  Depot. Our commercial and industrial sales have also attributed to the
  increase. The overall market demand increased during the last year. The
  Company also introduced two new products, EnergyAire and our new nested
  product in the first half of 2007.

23

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Gross Profit:
  Gross profit for 2007 decreased $16,936 or 34.8%, to $31,789 which made up
  13.0% of net sales, from $48,725 for 2006, which made up 20.4% of net sales.
  The US economy experienced cost increases due to inflation including
  increases in in-bound shipping costs due to increased fuel costs and raw
  material costs, especially in the cost of metal. In addition, gross profit
  during the last six months has decreased due to the start up of new
  production lines for the EnergyAire and nested filters. Also, the success of
  the nested flat panel filter continues to have a negative impact on product
  mix and consequently gross margins. The Company also increased its reserve
  for obsolete inventory during the third quarter of 2007 by $3.1 million.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Operating Expenses:
  Operating expenses for 2007 increased $17,643, or 43.2%, to $58,511, from
  $40,868 in 2006. Operating expenses as a percentage of sales increased in
  2007 to 23.9% from 17.1% in 2006. The increase in operating expenses was
  primarily due to an increase in managements estimate of allowance for
  doubtful accounts during the third quarter of 2007 by $8.1 million and the
  Company disposing of assets considered impaired of approximately $2.5
  million, as well as an increase in fuel costs. Additionally, an increase in
  operating expenses is expected with a higher volume of sales.                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Non operating Income (Expenses):Non
  operating expense increased approximately $2,320 to ($1,969) of expense for
  2007, compared to $351 of income in 2006. The increase in expense was due to
  an increase of interest expense of approximately $700. Additionally, the
  balance in 2006 included an amount of $500 from favorable litigation.
  Additionally in 2007, the Company relocated from certain offices it was
  subleasing which reduced 2007 other income by $500 compared to 2006.                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Provision for Income Taxes:
  Our effective state and federal tax rate, adjusted for the effect of certain
  credits and adjustments, was approximately 38% and 38% for 2007 and 2006,
  respectively. The IRS is currently examining the Companys federal income tax
  returns of 2004, 2005, and 2006. To date the IRS has not proposed any
  material adjustments for the 2004 through 2006. For the 2002 and 2003
  examination, the IRS has proposed certain changes, resulting in additional
  liabilities due. The Company has submitted a petition for a redetermination
  of the changes with the U.S. Tax Court.                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Extraordinary Items: In 2006, a warehouse in
  Texas was destroyed by a fire and a warehouse in Pennsylvania was damaged by
  a flood. The Company reported an extraordinary gain on the fire of $4,558
  (net of income taxes of $3,039). In 2007, a warehouse in Bartow was destroyed
  by a fire. The Company reported an extraordinary loss on the fire of $4,345
  (net of income taxes of $2,897).                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 2006 Compared to 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The
  following table summarizes the Companys results of operations as a
  percentage of net sales for 2006 and 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                              |  |      |         |      |  |       |   |   |         |   |  |       |  
|----------------------------- |  | ---- | ------- | ---- |  | ----- | - | - | ------- | - |  | ----- | -
|                              |  | 2006 |         | 2005 | 
|                              |  |      |         |      | 
|Net sales                     |  | $    | 238,378 |      |  | 100.0 | % | $ | 229,276 |   |  | 100.0 | %
|Gross profit                  |  |      | 48,725  |      |  | 20.4  |   |   | 52,917  |   |  | 23.1  |  
|Operating expenses            |  |      | 40,868  |      |  | 17.1  |   |   | 35,297  |   |  | 15.4  |  
|Operating income              |  |      | 7,857   |      |  | 3.3   |   |   | 17,620  |   |  | 7.7   |  
|Nonoperating income (expense) |  |      | 351     |      |  | .2    |   |   | (375    | ) |  | (.2   | )
|Earnings before income taxes  |  |      | 8,208   |      |  | 3.4   |   |   | 17,245  |   |  | 7.5   |  
|Provision for income taxes    |  |      | 2,683   |      |  | 1.1   |   |   | 4,739   |   |  | 2.1   |  
|Extraordinary items           |  |      | (3,475  | )    |  | (1.5  | ) |   | 0       |   |  | 0.0   |  
|Net earnings                  |  |      | 2,050   |      |  | .1    |   | $ | 12,506  |   |  | 5.5   |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net Sales: Net
  sales for 2006 increased by $9,102 or 4.0%, to $238,378, from $229,276 for
  2005. The increase in net sales was due to our success in increasing our
  market share in our industrial division which was partially offset by a
  downturn in our retail sector as well as delays in shipping containment. The
  Company introduced two new products, Energy Air and our new nested product
  which increased sales but was offset by the plant fire in Texas and plant
  flood in Pennsylvania which reduced manufacturing capacity.

24

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Gross Profit:
  Gross profit for 2006 decreased $4,192 or 7.9%, to $48,725 which made up
  20.4% of net sales, from $52,917 for 2005, which made up 23.1% of net sales.
  The US economy experienced cost increases due to inflation including
  increases in in-bound shipping costs due to increased fuel costs, raw
  material costs, especially in the cost of metal. These costs were partially
  offset by vertical integration of certain manufacturing processes. The gross
  profit during the quarter has decreased due to the start up of three new
  plants in Clarkton, North Carolina, Dallas, Texas and Matamoros, Mexico as
  well as new production lines for the EnergyAire and nested filters. The plant
  fire in Texas and the plant flood in Auburn, Pennsylvania increased the
  overall cost of production. Additionally, the product mix has shifted towards
  lower margin items, however it is anticipated that this trend will reverse
  during the near term.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Operating Expenses:
  Operating expenses for 2006 increased $5,571, or 15.8%, to $40,868, from
  $35,297 in 2005. Operating expenses as a percentage of sales increased in
  2006 to 17.1% from 15.4% in 2005. The increase in operating expenses was
  primarily caused by an increase in the number of sales locations resulting in
  increased salaries and commissions of $2,150, rents of $987 and freight out
  of $359. Additionally, bad debt expense increased by $969.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Nonoperating Income (Expenses):Nonoperating
  expense increased approximately $726 to $351 of income for 2006, compared to
  ($375) of expense in 2005. The increase was due to favorable litigation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Provision for Income Taxes:
  Our effective state and federal tax rate, adjusted for the effect of certain
  credits and adjustments, was approximately 38% and 38% for 2006 and 2005,
  respectively. The IRS is currently examining the Companys federal income tax
  returns of 2002, 2003, and 2004. The IRS has proposed certain changes
  resulting in additional liabilities due. The Company disagrees with the
  proposed changes and is vigorously contesting these proposed changes and
  believes any final changes will be immaterial.                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Extraordinary Items: In 2006, a warehouse in
  Texas was damaged by a fire and a warehouse in Pennsylvania was damaged by a
  flood. The Company reported an extraordinary loss on the fire of $3,475 (net
  of income taxes of $2,315).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

EFFECTS OF INFLATION

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

LIQUIDITY AND CAPITAL RESOURCES(dollar
amounts in thousands)

Working
capital was $50,251 at December 31, 2007, compared to $67,967 at December 31,
2006. This included cash and cash equivalents of $498 and $568 at December 31,
2007 and 2006, respectively. The primary reason for the decrease in working
capital was the reduction of accounts receivable as well as a reduction of
inventory due to an increased reserve estimate as well as a strategic reduction
of inventory levels.

Trade
receivables decreased $4,646, or 8.6% at December 31, 2007 from $53,740 at
December 31, 2006. The decrease in accounts receivable is attributable to
receivables being written off along with the timing differences in shipments
and payments received.

Inventories
decreased $11,703 or 19.9% to $47,236 at December 31, 2007 from $58,939 at
December 31, 2006. The decreased inventory was due to an increase of the
reserve estimate for bad inventory combined with a strategic reduction of
inventory levels.

Continuing
operations generated $4,607 of cash in 2007, compared to consuming $4,088 of
cash in 2006. The increase in cash flows was primarily related to the decrease
in inventory combined with insurance proceeds received in 2007. Investing
activities for continuing operations generated $4,869 of cash during 2007,
compared to consuming
$11,519 during 2006. The increase in cash provided by investing activities was
primarily attributable to the reduction in the Companys acquisition of
equipment that was done in 2006 related to the fire and flood that occurred as
well proceeds from the sale of fixed assets in 2007. Financing activities
consumed $9,546 of cash in 2007, compared to

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generating $15,480 of cash in
2006, consisting primarily of payments on the revolving credit agreement and
other long term borrowings.

On October 17,
2002, we signed agreements for a credit facility with Fleet Capital
Corporation, now known as Bank of America through acquisition, which replaced
and repaid our previous $30 million revolving credit facility. The new $36
million facility has up to $11 million of letters of credit and a $25 million
revolving credit line, which expires on October 17, 2009. The term loan bears
interest, at our option, at either (i) LIBOR plus between 2.5% and 3%,
dependent on the Companys fixed charge coverage during the prior twelve
months; or (ii) the greater of the Federal Funds Effective Rate plus 0.5% or
Bank of Americas base rate, plus between 0.5% and 1%, dependent on the
Companys fixed charge coverage during the prior twelve months. The $36 million
revolving credit facility bears interest at 0.25% less than the term loan. Up
to $11 million of the revolving credit facility may be used to issue letters of
credit. The facility is collateralized by substantially all of the Companys
assets. The line of credit agreement restricts capital expenditures, dividends
and share repurchases. As of December 31, 2007, all financial covenants were
waived. Unless this credit facility is renewed, it will expire on October 17,
2009. There are no prepayment penalties on any of the credit facilities with
Bank of America.

In connection
with the amended working capital credit facility and notes payable to a
regional development authority and bank, the Company has agreed to certain
restrictive covenants which include, among other things, not paying dividends
or repurchasing its stock without prior written consent, and maintenance of
certain financial ratios at all times including: a minimum current ratio,
minimum tangible net worth, a maximum ratio of total liabilities to tangible
net worth and a minimum fixed charge coverage ratio.

As of December
31, 2007 we had the following fixed obligations and commitments

|                          |  |                  |  |                |     |                |  |                                |  |  |  |       | 
|------------------------- |  | ---------------- |  | -------------- | --- | -------------- |  | ------------------------------ |  |  |  | ----- | 
|Year ended
  December 31, |  | Operating leases |  | Capital leases |     | Long-term debt |  | Other long-term 
  obligations | 
|                          |  |                  |  |                |     |                |  |                                | 
|2008                      |  | 5,494            |  |                | 618 |                |  | 2,118                          |  |  |  |      | 
|2009                      |  | 5.566            |  |                | 656 |                |  | 16,376                         |  |  |  |      | 
|2010                      |  | 4,790            |  |                | 194 |                |  | 380                            |  |  |  |      | 
|2011                      |  | 3,909            |  |                | 46  |                |  | 404                            |  |  |  |      | 
|2012                      |  | 3,613            |  |                | 46  |                |  | 427                            |  |  |  |      | 
|Thereafter                |  | 41,504           |  |                | 0   |                |  | 11,083                         |  |  |  | 1,444 | 

We believe that our cash on
hand, cash generated by operations, and cash available from our existing credit
facilities is sufficient to meet the capital demands of our current operations
during the 2008 fiscal year. Any major increases in sales, particularly in new
products, may require substantial capital investment for the manufacture of
filtration products. Failure to obtain sufficient capital could materially
adversely impact our growth potential.

In 1998, the Board of Directors
authorized the repurchase of up to two million shares of our common stock,
which repurchase was completed in September 2000. On September 22, 2000, the
Board of Directors authorized the repurchase of up to an additional two million
shares of common stock through open market or negotiated transactions. Further
repurchases under this program are restricted under our current line of credit
agreement, and require prior consent of Bank of America. As of February 22,
2008 approximately 408,000 shares had been repurchased in the open market under
this authorization.

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Outlook

Global
Containment Systems, Inc. (GCS) is a wholly owned subsidiary of Flanders
Corporation which manufactures critical environments for the nuclear,
pharmaceutical and semi conductor. During 2008 GCS will be merged back under
our Flanders Filters, Inc. and Charcoal Services Corporation divisions and
these divisions will be working directly with the Department of Energy for
creation of these projects.

Additionally,
during 2004, Flanders Complete Service Division (Flanders CSD), an air
filtration service provider was formed. Flanders CSD offers weekly, monthly and
quarterly service contracts for clean room and glove box certification;
commercial, industrial, retail and residential surveys; and complete filtration
management including mold remediation and analysis. The company is currently
negotiating several large contracts and if they are executed, the company
expects to have national coverage by the end of 2010.

During the
past three years, we have captured additional market share among big box retailers
like The Home Depot and Wal-Mart, capitalizing on our ability to service
national accounts from regional distribution centers. We anticipate additional
market gains among these types of retailers during the next two years and are
introducing new products focused on their marketing and end-user requirements.
Sales to these retail outlets, while seasonal, also tend to follow progress in
the overall economy. Additional gains in market share in this market may not
have a significant impact on revenues without some recovery in the overall U.S.
economy. Additionally, significant revenue enhancement to these customers is
largely dependent upon the success of the new products we are introducing to
this marketplace.

During the
past three years, we introduced air filtration products which use the
Arm&Hammer® brand name. These products are expected to contribute to our
expansion in the retail marketplace, but the extent to which they will do so,
and their impact on the bottom line, is currently indeterminable.

We have
adapted our biocontainment products for use as part of a system for hardening
government buildings, commercial office complexes and public venues against
airborne bioweapons such as anthrax and smallpox. There is currently an
increase of interest in these products over the past quarter. Any interest
towards hardening these types of facilities against airborne bioweapons could
have a significant impact on our business.

Sales of air
filtration products for semiconductor facilities, historically a major market,
are expected to be slow again during 2008, with most analysts pushing recovery
for this sector out until 2009. However, the strengthening economy is also
having a positive effect on sales of all our products.

We have
collected data that indicates that residential filter users replace their
filters, on average, approximately one and a half times per year. Manufacturers
of residential furnace and air conditioning systems recommend that these
filters be changed every month. A minor trend toward increased maintenance of
these residential heating and cooling systems could have a positive impact on
our business.

Our most
common products, in terms of both unit and dollar volume, are residential
throw-away spun-glass filters, which usually sell for prices under $1.00. Any
increase in consumer concern regarding air pollution, airborne pollens,
allergens, and other residential airborne contaminants could result in
replacement of some of these products with higher value products. Our higher
value products include our NaturalAire® higher-efficiency filters for
residential use, and our Arm&Hammer® co-branded product, with associated
sales prices typically over $5.00 each. Any such trend would have a beneficial
effect on our business.

We believe
there is currently a gradually increasing public awareness of the issues
surrounding indoor air quality and that this trend will continue for the next
several years. We also believe there is an increase in public concern regarding
the effects of indoor air quality on employee productivity, as well as an
increase in interest by standards-making bodies in creating specifications and
techniques for detecting, defining and solving indoor air quality problems. We
further believe there will be an increase in interest in our Absolute Isolation
Barriers in the future because these products may be used in both semiconductor
and pharmaceutical manufacturing plants to prevent cross-contamination between
different lots and different processes being performed at the same facility. These
products also increase production yields in many applications.

Currently, the
largest domestic market for air filtration products is for mid-range
ASHRAE-rated products and

27

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HVAC systems,
typically used in commercial and industrial buildings. To date, our penetration
of this market has been relatively small. We believe our ability to offer a
one stop supply of air filtration products to HVAC distributors and
wholesalers may increase our share of this market. We also believe that our
recently developed modular air handlers and environmental tobacco smoke systems
will enable us to expand sales to these customers. We intend our new products
to serve as high profile entrants with distributors and manufacturers
representatives, who can then be motivated to carry our complete product line.

We have
continually looked for cost reductions in our products. During the past five
years, we have continued to complete the development and redesigning of
numerous systems and products which were only partially completed when we
acquired the companies which originally claimed to have fully developed them.
These products include the automated machinery necessary for high-speed
production of our pleated filters, acquired with Precisionaire, and the
mass-production processes for bonded carbon high-mass zero-density products.
During 2006, we built our first fully automated production lines which are
expected to significantly reduce our labor related costs.

We plan on
rebuilding the Bartow facility which was destroyed by a fire in July 2007. The
new facility will be a 265,000 square foot, state of the art filter
manufacturing facility. Construction will begin in March 2008 with an estimated
completion time of seven to ten months.

This Outlook
section, and other portions of this document, include certain forward-looking
statements within the meaning of that term in Section 27A of the Securities
Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including,
among others, those statements preceded by, following or including the words
believe, expect, intend, anticipate or similar expressions. These
forward-looking statements are based largely on the current expectations of
management and are subject to a number of assumptions, risks and uncertainties.
Our actual results could differ materially from these forward-looking
statements. Important factors to consider in evaluating such forward-looking
statements include those discussed in Item 1A. Risk Factors as well as:

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | the shortage
  of reliable market data regarding the air filtration market,                                                                    
| |   |                                                                                                                                                
| |  | changes in
  external competitive market factors or in our internal budgeting process
  which might impact trends in our results of operations,
| |   |                                                                                                                                                
| |  | anticipated
  working capital or other cash requirements,                                                                                      
| |   |                                                                                                                                                
| |  | changes in
  our business strategy or an inability to execute our strategy due to
  unanticipated changes in the market,                       
| |   |                                                                                                                                                
| |  | product
  obsolescence due to the development of new technologies, and                                                                         
| |   |                                                                                                                                                
| |  | various
  competitive factors that may prevent us 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.

|         |                                                                                        
|-------- | ---------------------------------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
Risk(dollar amounts in thousands)

We are exposed to various market risks, primarily changes in interest
rates. Market risk is the potential loss arising from adverse change in market
rates and prices, such as foreign currency exchange and interest rates. For
Flanders, these exposures are primarily related to changes in interest rates.
We do not hold any derivatives or other financial instruments for trading or
speculative purposes.

The fair value of the Companys total long-term debt, including capital
leases and current maturities of long-term debt, at December 31, 2007 was
$32,348 Market risk was estimated as the potential decrease (increase) in
future earnings and cash flows resulting from a hypothetical 10% increase
(decrease) in the Companys estimated weighted average borrowing rate at
December 31, 2007. Although most of the interest on the Companys debt is
indexed to a market rate, there would be no material effect on the future
earnings or cash flows related to the Companys total debt for such a
hypothetical change.

We have only a
limited involvement with derivative financial instruments. We have two
interest-rate swap agreements to hedge against the potential impact on earnings
from increases in market interest rates of two variable rate bonds. Under the
interest rate swap agreements, we receive or make payments on a monthly basis,
based on the

28

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differential
between 5.14% and a tax exempt interest rate as determined by a remarketing
agent. This interest rate swap is accounted for as a cash flow hedge in
accordance with SFAS 133 and SFAS 138. Gains or losses related to
inefficiencies of the cash flow hedge were included in net income during the
period related to hedge ineffectiveness. The tax affected fair market value of
the interest rate swap of $782 is included in Accumulated other comprehensive
loss on the balance sheet. The interest rate swap contracts expire in 2013 and
2015.

The Companys
financial position is not materially affected by fluctuations in currencies
against the U.S. dollar, since assets held outside the United States are
negligible. Risks due to changes in foreign currency exchange rates are
negligible, as the preponderance of our foreign sales occur over short periods
of time or are demarcated in U.S. dollars.

|        |                                             |                       
|------- | ------------------------------------------- | ----------------------
|Item 8. | Financial Statements and Supplementary Data
|        |                                             |                       
|        |                                             | Beginning at page F-1.

|        |                                                                                        |                 
|------- | -------------------------------------------------------------------------------------- | ----------------
|Item 9. | Changes in and Disagreements with
  Accountants on Accounting and Financial Disclosure
|        |                                                                                       
|        |                                                                                        | Not
  applicable

|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of
Disclosure Controls and Procedures

Our management
carried out an evaluation, under the supervision and with the participation of
our President and Chief Executive Officer and our Chief Financial Officer, of
the effectiveness of our disclosure controls and procedures as of the end of
our year ended December 31, 2007 pursuant to Exchange Act Rule 13a-15(b).
Based upon that evaluation, our President and Chief Executive Officer and our
Chief Financial Officer concluded that, as of the end of our year ended
December 31, 2007, our disclosure controls and procedures were effective.

The term
disclosure controls and procedures, as defined under the Exchange Act, means
controls and other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuers
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.

Changes in Internal
Control over Financial Reporting

There have
been no changes in our internal control over financial reporting that occurred
during the year ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

MANAGEMENTS ANNUAL
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our
management, under the supervision and with the participation of our President
and Chief Executive Officer and our Chief Financial Officer, is responsible for
establishing and maintaining adequate internal control over financial reporting
as such term is defined in Exchange Act Rule 13a-15(f). Our management has
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2007. Managements evaluation was based on criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated
Framework. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures that:

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| |     |                                                                                                                                                                                                                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | pertain to
  the maintenance of records that, in reasonable detail, accurately and fairly
  reflect our transactions and dispositions of our assets;                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                         
| | (2) | provide
  reasonable assurance that transactions are recorded as necessary to permit
  preparation of financial statements in accordance with generally accepted
  accounting principles, and that our receipts and expenditures are being made
  only in accordance with authorizations of our management and board of
  directors; and
| |     |                                                                                                                                                                                                                                                                                                                                         
| | (3) | provide
  reasonable assurance regarding prevention or timely detection of unauthorized
  acquisition, use, or disposition of our assets that could have a material
  effect on our financial statements.                                                                                                                               

Because of its
inherent limitations, internal control over financial reporting determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and may not prevent or detect all misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.

Based on the
COSO criteria and our managements evaluation, our management believes our
internal control over financial reporting as of December 31, 2007 was
effective.

Our
independent registered public accounting firm, Pender Newkirk & Co., LLC,
has audited the financial statements included in this Annual Report on Form 10-K
and has issued an attestation report on our internal control over financial
reporting. This report appears in this Annual Report on Form 10-K.

Important
Considerations

The
effectiveness of our disclosure controls and procedures and our internal control
over financial reporting is subject to various inherent limitations, including
cost limitations, judgments used in decision making, assumptions about the
likelihood of future events, the soundness of our systems, the possibility of
human error, and the risk of fraud. Moreover, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions and the risk that the degree
of compliance with policies or procedures may deteriorate over time. Because of
these limitations, there can be no assurance that any system of disclosure
controls and procedures or internal control over financial reporting will be
successful in preventing all errors or fraud or in making all material
information known in a timely manner to the appropriate levels of management.

|         |      
|-------- | -----
|Item 9B. | Other

Not applicable

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PART III

|         |                                                                          
|-------- | -------------------------------------------------------------------------
|Item 10. | Directors, Executive Officers and Corporate Governance of the
 Registrant

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.

|                    |  |     |  |                                      | 
|------------------- |  | --- |  | ------------------------------------ | 
|Name                |  | Age |  | Title                                | 
|                    |  |     |  |                                      | 
|                   
|Robert R. Amerson   |  | 57  |  | Chief Executive Officer and Director | 
|                    |  |     |  |                                      | 
|Harry L. Smith, Jr. |  | 37  |  | Chief Operating Officer and Director | 
|                    |  |     |  |                                      | 
|Cully Bohush        |  | 36  |  | Chief Accounting Officer             | 
|                    |  |     |  |                                      | 
|David M. Mock       |  | 62  |  | Independent Director                 | 
|                    |  |     |  |                                      | 
|Kirk Dominick       |  | 40  |  | Independent Director                 | 
|                    |  |     |  |                                      | 
|Jeffrey Korn        |  | 50  |  | Independent Director                 | 

Robert R. Amerson.Mr.
Amerson, age 57, has been President and Chief Executive Officer of the Company
since 1987 but retired from these positions in December 2004 and served as
Chairman of the Board of Directors until August 13, 2007, when he assumed the
additional positions of Chief Executive Officer and President. Mr. Amerson has
been a director since 1988. Mr. Amerson has a Bachelor of Science degree in
Business Administration from Atlantic Christian College.

Harry L. Smith, Jr.Mr.
Smith, age 37, has a long history in the air filtration industry. He has worked
at Flanders since 1997, holding roles of increasing responsibility including
working with the Flanders direct offices; ARW Wholesale Division; FSS-Filter
Sales and Service; FFI-Flanders Filters, Inc.; CSC-Charcoal Services, Inc., and
AirSeal Filter Housings. Mr. Smith received his Bachelor of Science degree in
Business Administration from East Carolina University in 1992. Mr. Smith was
appointed our Chief Operating Officer in August 2007.

Cully Bohush.Mr. Bohush began with the Company as the Corporate
Controller. From 1997 to 2002 Mr. Bohush worked in public accounting for
various CPA firms including Deloitte & Touche, LLP. He is a Certified
Public Accountant in the state of Florida and has a Bachelors Degree in
Accounting from the University of Buffalo as well as a Masters of Accountancy
Degree from the University of South Florida.

David M. Mock. Mr.
Mock, age 62, has served as an independent director of the Company since August
2003. He serves on both the Compensation Committee and Audit Committee. Mr.
Mock is a General Partner with GMG Capital Partners, a New York-based
investment firm, which he co-founded in 1997. Prior to joining GMS/GMG Partners, Mr. Mock was a private investor
pursuing an investment strategy similar to that of GMG. Mr. Mock has extensive
operations and private investment experience with respect to technology
companies. He is currently Chairman of the Board of Captus Networks as
well as serving as Director or Officer to several other companies including
Alloptic, Inc., Forum Systems, and Connecting Point, Inc. Mr. Mock holds an
Accounting degree from the University of Utah.

Kirk Dominick.
Mr. Dominick, age 40, serves as
President of DNS Associates, a full-service consulting firm that specializes in
strategy development, organizational restructuring, management consulting, and
board and resource development. Prior to joining DNS, Mr. Dominick enjoyed a
seventeen-year career with Boys & Girls Clubs of America, most recently in
the Office of Government Relations in Washington, D.C. In addition, Mr.
Dominick is a

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Partner in InnerBanks Capital, a private equity firm focused on real
estate development in emerging growth markets. Mr. Dominick holds a Bachelor of
Science in Criminal Justice from East Carolina University.

Jeffrey Korn.
Mr. Korn, age 50, has been a corporate attorney since 1982. He was originally
in private practice in Jacksonville, Florida from 1982-1999 in a commercial
litigation and business practice. He was general counsel and a member of the
board of directors of Prosoft Training (formerly a NASDAQ company now sold)
from 1987-2005. Since 2003, Mr. Korn has served as general counsel in iMergent,
Inc. (IIG, AMEX). Since 2001, Mr. Korn has maintained a private legal and
corporate consulting practice.

Our Corporate
Governance Practices

At Flanders
Corporation we have always believed in strong and effective corporate
governance procedures and practices. In that spirit, we have summarized several
of our corporate governance practices below.

|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Adopting Governance 
 Guidelines                    |  | The Board of
 Directors has adopted a set of corporate governance guidelines to establish a
 framework within which it will conduct its business and to guide management
 in its running of your Company. The governance guidelines can be found on our
 website at www.flanderscorp.com and are summarized below.                                                                                                                                                                                                                                                                                                         
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Monitoring Board 
 Effectiveness                    |  | It is
 important that our Board of Directors and its Committees are performing
 effectively and in the best interest of the Company and its stockholders. The
 Board of Directors and each Committee are responsible for annually assessing
 their effectiveness in fulfilling their obligations. In addition, our
 Nominating and Governance Committee is charged with annually reviewing the
 Board of Directors and its membership.                                                                                                                                                                                     
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Conducting Formal 
 Independent Director 
 Sessions |  | At the
 conclusion of each regularly scheduled Board meeting, the independent Directors
 meet without Flanders Corporation management or any non-independent
 Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Hiring Outside 
 Advisors                           |  | The Board
 and each of its Committees may retain outside advisors and consultants of
 their choosing at the Companys expense, without managements consent.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Avoiding Conflicts of 
 Interest                    |  | Flanders
 Corporation expects its Directors, executives and employees to conduct
 themselves with the highest degree of integrity, ethics and honesty. Flanders
 Corporations credibility and reputation depend upon the good judgment,
 ethical standards and personal integrity of each Director, executive and
 employee. In order to provide assurances to Flanders Corporation and its
 stockholders, Flanders Corporation has implemented standards of business
 conduct which provide clear conflict of interest guidelines to its employees,
 as well as an explanation of reporting and investigatory procedures.
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Providing 
 Transparency                            |  | Flanders
 Corporation believes it is important that stockholders understand our
 governance practices. In order to help ensure transparency of our practices,
 we have posted information regarding our corporate governance procedures on
 our website at www.flanderscorp.com.                                                                                                                                                                                                                                                                                                                                           
|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Communications with 
 the Board of Directors        |  | Although
 Flanders Corporation does not have a formal policy regarding communications
 with the Board of Directors, stockholders may communicate with the Board of
 Directors by writing to the Company at Flanders Corporation, Attention:
 Investor Relations, 2399 26th Avenue North, Saint Petersburg, FL
 33713. Stockholders who would like their submission directed to a member of
 the Board may so specify, and the communication will be forwarded, as
 appropriate.                                                                                                                                            

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|                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Standards of Business 
 Conduct |  | The Board of
 Directors has adopted a Code of Business Conduct and Ethics for all of the
 Companys employees and Directors, including the Companys principal
 executive and senior financial officers. You can obtain a copy of our Code of
 Business Conduct and Ethics via our website at www.flanderscorp.com, or by making a written request to
 the Company at Flanders Corporation, Attention: Investor Relations, 2399 26th
 Avenue North, Saint Petersburg, FL 33713. We will disclose any amendments to
 the Code of Business Conduct and Ethics, or waiver of a provision therefrom,
 on our website at the same address.
|                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Ensuring Auditor 
 Independence |  | Flanders
 Corporation has taken a number of steps to ensure the continued independence
 of our outside auditors. Our independent auditors report directly to the
 Audit Committee, which also has the ability to pre-approve or reject any
 non-audit services proposed to be conducted by our outside auditors.                                                                                                                                                                                                                                                                                                                     

|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

COMPENSATION
DISCUSSION AND ANALYSIS

Overview

The goal of
our named executive officer compensation program is the same as our goal for
operating the companyto create long-term value for our shareowners. Toward
this goal, we have designed and implemented our compensation programs for our
named executives to reward them for sustained financial and operating
performance and leadership excellence, to align their interests with those of
our shareowners and to encourage them to remain with the company for long and
productive careers. Most of our compensation elements simultaneously fulfill
one or more of our performance, alignment and retention objectives. These
elements consist of salary, bonus, equity incentive compensation, health and
other benefits. In deciding on the type and amount of compensation for each
executive, we focus on both current pay and the opportunity for future
compensation. We combine the compensation elements for each executive in a
manner we believe optimizes the executives contribution to the company.

Compensation Objectives

Performance. Our
three executives who are identified in the Summary Compensation Table (whom we
refer to as our named executives) have held different positions and been
promoted to increasing levels of responsibility. The amount of compensation for
each named executive reflects his management experience, performance and
service. A key element of compensation is equity incentive compensation in the
form of stock options, the value of which is contingent upon the performance of
the Flanders Corporation share price.

We believe
that the compensation of our executives should reflect their success in
attaining our key objectives. Our key objectives are currently: (i) growth in
operating earnings and earning per share, (ii) growth or maintenance of market
share, and (iii) improved operating margins. The key individual factors for
each executive include but are not limited to: (i) the value of their skills
and capabilities, (ii) performance of their management responsibilities, (iii)
whether that individuals is capable to assuming greater responsibilities, (iv)
leadership qualities, (v) tenure and career experience, (vi) current
compensation arrangements, (vii) long-term potential to enhance shareholder
value, and (viii) contribution as a member to our executive management team.

We allocate
compensation between cash compensation and equity based compensation. We
provide cash compensation in the form of base salaries to meet competitive
salary norms and reward performance on an annual basis, if warranted. Base
salary and bonus are designed to reward annual achievements and be commensurate
with the executives scope of responsibilities, demonstrated leadership
abilities, and management experience and

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effectiveness.
Our other elements of compensation focus on motivating and challenging the
executive to achieve superior, longer-term, sustained results. We provide
non-cash compensation in the form of equity incentive arrangements to retain
and attract key individuals and to reward performance against specific
objectives and long-term strategic goals.

Alignment.We seek
to align the interests of the named executives with those of our investors by
evaluating executive performance on the basis of key financial measurements
which we believe closely correlate to long-term shareowner value, including
revenue, organic revenue, operating profit, earnings per share, operating
margins, return on total equity or total capital, cash flow from operating
activities and total shareholder return. A key element of compensation that
align the interests of our executives with shareowners is equity incentive
compensation, which links a significant portion of compensation to shareowner
value because the total value of those awards corresponds to stock price
appreciation.

Implementing Our Objectives

During 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 and outside consultants. In December
2007 our shareholders approved the 2007 Equity Incentive Plan, which reserves
up to 2,000,000 shares for issuance. Our 1996 Long-Term Incentive Plan had a
life of ten (10) years. Furthermore, there are no more shares available for
issuance under the 1996 Long-Term Incentive Plan. Therefore, we adopted the
2007 Equity Incentive Plan as discussed above. We believe that reserving
2,000,000 shares under the 2007 Equity Incentive Plan is a reasonable number of
shares for the foreseeable future.

Equity Incentive Plan

During 2007,
the Company adopted the Equity Incentive Plan (the Plan) to assist the Company
in securing and retaining key employees and consultants. The Plan authorizes
grants of incentive stock options, non-qualified stock options, restricted
stock and stock appreciation rights (awards) to officers, directors, outside
consultants and key employees of the Company. There are 2,000,000 shares of
Common Stock reserved for award under the Plan. During 2007 the Company awarded
options to purchase 620,000 shares of Common Stock under the Plan.

The 2007 Equity Incentive Plan is administered by the Compensation
Committee. The Compensation Committee determines the total number and type of
awards granted in any year, the number and selection of employees or
consultants to receive awards, the number and type of awards granted to each
grantee and the other terms and provisions of the awards, subject to the
limitations set forth in the Equity Incentive Plan.

Stock Option Grants. The
Compensation Committee has the authority to select individuals who are to
receive options under the Plan and to specify the terms and conditions of each
option so granted (incentive or nonqualified), the exercise price (which must
be at least equal to the fair market value of the common stock on the date of
grant with respect to incentive stock options), the vesting provisions and the
option term. Unless otherwise provided by the Compensation Committee, any
option granted under the Plan expires the earlier of five years from the date
of grant or, three months after the optionees termination of service with the
Company if the termination of employment is attributable to (i) disability,
(ii) retirement, or (iii) any other reason, or 15 months after the optionees
death. We do not have a program for the timing of Stock Option grants.

Stock
Appreciation Rights. The 2007 Equity Incentive Plan also allows for the issuance of stock
appreciation rights, performance shares, restricted stock awards, dividend
equivalents, and other forms of equity incentive arrangements. Historically, we
have utilized stock options as the primary method of rewarding and compensating
employees under our equity incentive arrangements. However, if the need arises,
we have the flexibility to utilize other equity incentive instruments besides
stock options under the 2007 Equity Incentive Plan. As of December 31, 2007, no
SARs are outstanding under the Plan.

Restricted
Stock Awards. The
Compensation Committee is authorized under the Plan to issue shares of
restricted common stock to eligible participants on such terms and conditions
and subject to such restrictions, if any, outstanding under the Plan. As of
December 31, 2007, no restricted
shares have been awarded.

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Section 16(a) Beneficial Ownership
Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 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 reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers and directors are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms filed. Based solely upon review of
copies of such forms, or written representations that there were no unreported
holdings or transactions, the Company believes that for the fiscal year ending
December 31, 2007 all Section 16(a) filing requirements applicable to its
officers and directors were complied with on a timely basis.

REPORT OF THE
COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

General

The Compensation Committee of the Board of Directors is currently
composed of two independent directors, Messrs. Mock and Korn who have no
interlocking relationships (as defined by the SEC), the Board Chairman and
CEO, Mr. Amerson, who recuses himself from votes and discussions on his own
compensation.

We are engaged in highly competitive businesses and compete nationally
for personnel at the executive and technical staff level. Outstanding
candidates are aggressively recruited, often at premium salaries. Highly
qualified employees are essential to our success. We are committed to providing
competitive compensation that helps attract, retain, and motivate the highly
skilled people we require. We strongly believe that a considerable portion of the
compensation for the Chief Executive Officer and other top executives must be
tied to the achievement of business objectives, completing acquisitions, and to
business unit and overall financial performance, both current and long-term.

Executive Compensation

Our executive
compensation program is administered by the Compensation Committee. 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 Equity
Incentive Plan, and to review and approve stock option grants to all employees
including the executive officers of the Company.

Base Salary and Executive Officer Bonus Target

Current base
salaries for the executive officers were determined by arms length negotiations
with the Board of Directors. Messr. Amerson has an employment contract with the
Company which sets a base salary and allows for bonus targets and levels to be
set at the sole discretion of this committee. During 2007, none of the
executive officers reached their bonus targets, hence no bonuses were awarded
to executive officers in 2007, nor will bonuses be awarded in 2008 for
performance in 2007.

Chief Executive Officer Compensation

The current
base salary for the Chief Executive Officer of $350,000 is set according to his
employment contract, which also includes provision for annual bonuses at the
sole discretion of this committee. No bonuses were awarded to the Chief
Executive Officer in 2007 and none were accrued based upon 2007 performance.

REPORT OF THE AUDIT
COMMITTEE

General

The Audit
Committee of the Board of Directors is composed of three independent directors
who have no interlocking relationships as defined by the Commission, Messrs.
Mock, Korn, and Dominick.

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.

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Audit Committee Charter

During 2000,
the Audit Committee recommended the approval of a formal Charter, which
expanded the Audit Committees primary duties and responsibilities to include:

| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Serve as an
 independent and objective party to monitor the Companys financial reporting
 processes and internal control systems.                                                                                       
| |   |                                                                                                                                                                                                                          
| |  | Review and
 appraise the audit efforts of the Companys independent accountants and
 internal finance department.                                                                                                        
| |   |                                                                                                                                                                                                                          
| |  | Provide an
 open avenue of communication between the independent accountants, financial
 and senior management, the internal finance department, and the Board of
 Directors.                                            
| |   |                                                                                                                                                                                                                          
| |  | Review
 quarterly and annual financial statements submitted to the Securities and
 Exchange Commission, or the public, including any certification, opinion or
 review rendered by the Companys independent accountants.

Review of Annual Results

The Audit
Committee reviewed and discussed the Companys financial statements for the
year ended December 31, 2007 with the Companys management. The Audit Committee
also discussed the statements with the Companys independent auditors. In
particular, the Audit Committee discussed with the independent auditors the
matters required by SAS 61.

It is not the
responsibility of the Audit Committee to render an opinion regarding the
Companys financial statements, but to monitor the Companys internal controls
and reporting processes, as well as the Companys relationship with its
internal auditors.

The Audit
Committee received the written disclosures and the letter from the independent
accountants required by Independence Standards Board Standard No. 1 and has
discussed with and confirmed the independence of the independent accountant.

Based on its
review and the discussions noted above, the Audit Committee recommended to the
Board of Directors that the Companys Consolidated Financial Statements for the
years ended December 31, 2007, 2006 and 2005 be included in the Companys
Annual Report on Form 10-K for 2007.

| |                          |             
| | ------------------------ | ------------
| | Respectfully
 submitted,
| |                          |             
| | David M.
 Mock           | Jeffrey Korn
| | Kirk
 Dominick           |             

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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
Named Executive Officers.

|                                                                      |  |      |      |            |  |           |  |                    |   |                     |  |                                                |  |                                                                                       |  |                                |   |  |  |   |  |  |   |  |  |       | 
|--------------------------------------------------------------------- |  | ---- | ---- | ---------- |  | --------- |  | ------------------ | - | ------------------- |  | ---------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------ | - |  |  | - |  |  | - |  |  | ----- | 
|Name and Principal Position                                           |  | Year |      | Salary ($) |  | Bonus ($) |  | Stock
  Awards ($) |   | Option
  Awards ($) |  | Non-Equity
  Incentive Plan
  Compensation ($) |  | Change in Pension
  Value and
  Nonqualified
  Deferred
  Compensation
  Earnings ($) |  | All Other
  Compensation
  ($) |  
|                                                                      |  |      |      |            |  |           |  |                    |   |                     |  |                                                |  |                                                                                       |  |                                |  
|Steven K. Clark                                                       |  |      | 2007 | 1          |  | 255,770   |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  | 6,073 | 
|Former Chief Executive Officer (Former
  Principal Executive Officer) |  |      | 2006 |            |  | 350,000   |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  | 8,389 | 
|                                                                      |  |      | 2005 |            |  | 328,846   |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  | 9,574 | 
|                                                                      |  |      |      |            |  |           |  |                    |   |                     |  |                                                |  |                                                                                       |  |                                |   |  |  |   |  |  |   |  |  |       | 
|Robert Amerson                                                        |  |      | 2007 | 1          |  | 350,000   |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  |      | 
|Chief Executive Officer                                               |  |      | 2006 |            |  | 350,000   |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  |      | 
|                                                                      |  |      | 2005 |            |  | 328,846   |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  |      | 
|                                                                      |  |      |      |            |  |           |  |                    |   |                     |  |                                                |  |                                                                                       |  |                                |   |  |  |   |  |  |   |  |  |       | 
|Harry Smith                                                           |  |      | 2007 |            |  | 140,095   |  |                    |  |                     |  |                                               |  |                                                                                       |  | 333,269                        | 2 |  |  |  |  |  |  |  |  |      | 
|Chief Operating Officer                                               |  |      |      |            |  |           |  |                    |   |                     |  |                                                |  |                                                                                       |  |                                |   |  |  |   |  |  |   |  |  |       | 
|                                                                      |  |      |      |            |  |           |  |                    |   |                     |  |                                                |  |                                                                                       |  |                                |   |  |  |   |  |  |   |  |  |       | 
|John W. Hodson                                                        |  |      | 2007 |            |  | 75,500    |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  | 2,241 | 
|Former Chief Financial Officer (Former
  Principal Financial Officer) |  |      | 2006 |            |  | 127,153   |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  | 3,857 | 
|                                                                      |  |      | 2005 |            |  | 107,346   |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  | 4,431 | 
|                                                                      |  |      |      |            |  |           |  |                    |   |                     |  |                                                |  |                                                                                       |  |                                |   |  |  |   |  |  |   |  |  |       | 
|Cully Bohush                                                          |  |      | 2007 |            |  | 117,145   |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  | 1,004 | 
|Chief Accounting Officer (Principal Accounting
  Officer)             |  |      |      |            |  |           |  |                    |   |                     |  |                                                |  |                                                                                       |  |                                |   |  |  |   |  |  |   |  |  |       | 
|                                                                      |  |      |      |            |  |           |  |                    |   |                     |  |                                                |  |                                                                                       |  |                                |   |  |  |   |  |  |   |  |  |       | 
|James B. Buddy Mercer                                               |  |      | 2007 |            |  | 115,877   |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  |      | 
|                                                                     
|Former Vice President Operations                                      |  |      | 2006 |            |  | 119,899   |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  |      | 
|                                                                      |  |      | 2005 |            |  | 118,247   |  |                    |  |                     |  |                                               |  |                                                                                       |  |                               |   |  |  |  |  |  |  |  |  |      | 

|  |                                                                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Mr. Amerson and Mr. Clark each had an annual salary of $350,000, plus
  a possible bonus each year, under their respective Employment Agreements, as
  amended. Mr. Clark was removed from CEO in during 2007.
|  |                                                                                                                                                                                                               
|2 | This is grant date fair value of 100,000 vested stock options
  computed in accordance with FAS 123R.                                                                                                         

GRANTS
OF PLAN BASED AWARDS TABLE

The following
tables set forth the number of securities underlying stock options granted to
the named executive officers under the Companys stock option plans during the
year ended December 31, 2007.

|            |  |              |          |                 |                                                                 |              |                                                             |               |  |                 |  |              |  |               |         |                      |  |                      |  |                   |  |  |                                             |  |                                              |  |                                  |  |   |      |  | 
|----------- |  | ------------ | -------- | --------------- | --------------------------------------------------------------- | ------------ | ----------------------------------------------------------- | ------------- |  | --------------- |  | ------------ |  | ------------- | ------- | -------------------- |  | -------------------- |  | ----------------- |  |  | ------------------------------------------- |  | -------------------------------------------- |  | -------------------------------- |  | - | ---- |  | 
|            |  |              |          |                 | Estimated
Future Payouts Under
Non-Equity Incentive Plan
Awards |              | Estimated
Future Payouts Under
Equity Incentive Plan Awards |               |  |                 |  |              |  |               |         |                      | 
|            |  |              |          |                 |                                                                 |              |                                                             |               |  |                 |  |              |  |               |         |                      | 
|            |  |              |          |                 |                                                                 |              |                                                             |               |  |                 |  |              |  |               |         |                      |  |                      |  |                   |  |  | All
Other
Stock
Awards:
Number of
Shares of |  | All
Other
Option
Awards:
Number of
Shares of |  | Exercise
or Base
Price of
Option | 
|            |  |              |          |                 |                                                                 |              |                                                             |               |  |                 |  |              |  |               |         |                      |  |                      |  |                   |  |  |                                             |  |                                              |  |                                  | 
|Name        |  | Grant
  Date |          | Threshold
  ($) |                                                                 | Target
  ($) |                                                             | Maximum
  ($) |  | Threshold
  (#) |  | Target
  (#) |  | Maximum
  (#) |         | Stock or
  Units (#) |  | Stock or
  Units (#) |  | Awards
  ($ / Sh) | 
|            |  |              |          |                 |                                                                 |              |                                                             |               |  |                 |  |              |  |               |         |                      |  |                      |  |                   | 
|Harry Smith |  |              | 10/16/07 |                 |                                                                 |              |                                                             |               |  |                 |  |              |  |               | 500,000 |                      |  |                      |  |                   |  |  |                                             |  |                                              |  |                                  |  | $ | 4.99 | 

37

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Table of Contents

OPTION EXERCISES AND STOCK VESTED TABLE

The following table sets forth the aggregate number and value of stock
options at year end by the Companys Named Executive Officers.

|               |  |                                                 |  |                                   |  |                                                |        |                                   |  |  |   |  |  |   |   |  | 
|-------------- |  | ----------------------------------------------- |  | --------------------------------- |  | ---------------------------------------------- | ------ | --------------------------------- |  |  | - |  |  | - | - |  | 
|               |  | Option Awards                                   |  | Stock Awards                      | 
|              
|               |  |                                                 |  |                                   | 
|              
|Name           |  | Number of
  Shares
  Acquired on
  Exercise (#) |  | Value
  Realized on
  Exercise($) |  | Number of
  Shares
  Acquired on
  Vesting (#) |        | Value
  Realized on
  Vesting ($) | 
|               |  |                                                 |  |                                   |  |                                                |        |                                   | 
|              
|Robert Amerson |  |                                                |  |                                   |  | $                                              |       |                                   |  |  |  |  |  | $ |  |  | 
|Harry Smith    |  |                                                |  |                                   |  | $                                              |       |                                   |  |  |  |  |  | $ |  |  | 
|Cully Bohush   |  | 3,826                                           |  |                                   |  | $                                              | 24,945 |                                   |  |  |  |  |  | $ |  |  | 

OUTSTANDING EQUITY
AWARDS AT FISCAL YEAR END TABLE

The following
table discloses information regarding outstanding awards under stock option
plans as of December 31, 2007. The table omits any Stock Award columns because
the Company does not have any Stock Award Plans.

|                  |  |                                                                               |  |                                                                                 |         |                                                                                                    |  |                               |  |                             |  |   |       |  |  |  |          | 
|----------------- |  | ----------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------------------------- |  | ----------------------------- |  | --------------------------- |  | - | ----- |  |  |  | -------- | 
|Name              |  | Number of
  Securities
  Underlying
  Unexercised
  Options (#)
  Exercisable |  | Number of
  Securities
  Underlying
  Unexercised
  Options (#)
  Unexercisable |         | Equity Incentive Plan
  awards: Number of
  Securities Underlying
  Unexercised
  Unearned Options |  | Option
  Exercise
  Price ($) |  | Option 
  Expiration
  Date | 
|                  |  |                                                                               |  |                                                                                 |         |                                                                                                    |  |                               |  |                             | 
|Robert R. Amerson |  | 1,000,000                                                                     |  |                                                                                 |        |                                                                                                    |  |                              |  |                             |  | $ | 2.50  |  |  |  | 12/22/09 | 
|                  |  | 1,000,000                                                                     |  |                                                                                 |        |                                                                                                    |  |                              |  |                             |  | $ | 7.50  |  |  |  | 11/07/11 | 
|Harry Smith       |  | 20,000                                                                        |  |                                                                                 |        |                                                                                                    |  |                              |  |                             |  | $ | 5.00  |  |  |  | 10/03/08 | 
|                  |  | 20,000                                                                        |  |                                                                                 |        |                                                                                                    |  |                              |  |                             |  | $ | 8.60  |  |  |  | 08/24/09 | 
|                  |  | 50,000                                                                        |  |                                                                                 |        |                                                                                                    |  |                              |  |                             |  | $ | 8.85  |  |  |  | 07/01/10 | 
|                  |  | 100,000                                                                       |  |                                                                                 | 400,000 |                                                                                                    |  | 400,000                       |  |                             |  | $ | 4.99  |  |  |  | 10/16/17 | 
|Cully Bohush      |  | 20,000                                                                        |  |                                                                                 |        |                                                                                                    |  |                              |  |                             |  | $ | 5.21  |  |  |  | 03/15/09 | 
|                  |  | 50,000                                                                        |  |                                                                                 |        |                                                                                                    |  |                              |  |                             |  | $ | 11.10 |  |  |  | 12/06/10 | 

The Pension
Benefits Table and the Nonqualified Deferred Compensation Table are omitted as
they are inapplicable as the Company has no pension plans and deferred
compensation arrangements.

COMPENSATION
OF DIRECTORS

Directors who
are Company employees receive no additional or special remuneration for serving
as directors.

On May 16, 2007 the board of
directors of the Company approved an increase in the compensation of its
independent directors. The increase was approved to bring the independent
directors compensation more in line with that of comparable companies and was
based upon information provided to the Company by an independent compensation
consultant hired by the Company. Retroactive to April 1, 2007, independent
directors are paid $9,625 per quarter. Quarterly compensation is being paid to
independent directors no later than the fifteenth day following the beginning
of each calendar quarter.

38

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In addition to the cash compensation described above,
upon initial appointment to the Board and pursuant to the 1996 Flanders
Corporation Directors Option Plan, a director receives an automatic option to
purchase 50,000 shares of the Companys common stock. All independent directors
with a minimum of six (6) months on the Board are automatically granted an
additional 5,000 options to purchase Company common stock each year thereafter
for so long as the director remains on the Board.

We modified our directors compensation plan for our
new directors. New independent directors (Mr. Dominick and Mr. Korn) each
received options to acquire 50,000 shares of our common stock with an exercise
price equal to the fair market value of our shares as of the date they are
elected and agree to serve on our board. We will pay our independent directors
a $5,000 quarterly fee (a reduction from our current quarterly fee of $9,625).
Independent directors will be entitled to 5,000 options after a minimum of six
(6) months of service on an annual basis. In addition, we will pay our
independent directors $500 for each board of directors meeting personally
attended plus reimbursement of associated out-of-pocket costs.

DIRECTOR COMPENSATION TABLE

The following table sets forth all material Director
compensation information during the year ended December 31, 2007.

|                           |  |                                    |  |                    |   |                      |  |                          |   |         |  |  |   |  |  |  |   |         |  | 
|-------------------------- |  | ---------------------------------- |  | ------------------ | - | -------------------- |  | ------------------------ | - | ------- |  |  | - |  |  |  | - | ------- |  | 
|Name                       |  | Fees Earned or
  Paid in Cash ($)1 |  | Stock Awards
  ($) |   | Option Awards
  ($)2 |  | All Other
  Compensation |   | Total3  | 
|                           |  |                                    |  |                    |   |                      |  |                          |   |         | 
|William D. Mitchum, Jr.    |  | 30,875                             |  |                    |  |                      |  |                          | $ | 23,573  |  |  |  |  |  |  | $ | 30,875  |  | 
|David Mock                 |  | 30,875                             |  |                    |  |                      |  |                          | $ | 23,573  |  |  |  |  |  |  | $ | 30,875  |  | 
|Robert Kelly Barnhill, Sr. |  | 30,875                             |  |                    |  |                      |  |                          | $ | 23,573  |  |  |  |  |  |  | $ | 30,875  |  | 
|Peter Fredericks           |  | 30,875                             |  |                    |  |                      |  |                          | $ | 23,573  |  |  |  |  |  |  | $ | 30,875  |  | 
|Jeff Korn                  |  |                                   |  |                    |  |                      |  |                          | $ | 182,886 |  |  |  |  |  |  | $ | 182,886 |  | 
|Kirk Dominick              |  |                                   |  |                    |  |                      |  |                          | $ | 182,886 |  |  |  |  |  |  | $ | 182,886 |  | 

|                                                                                                                                                                                                                                                                                                                                                                                           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|1        This
  column reports the amount of cash compensation earned in 2007 for Board and
  committee service.                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                           | 
|2        This
  column represents the dollar amount recognized for financial statement
  reporting purposes with respect to the 2007 fiscal year for the fair value of
  stock options granted to the directors in 2007. The fair value was estimated
  using the Black-Scholes option-pricing model in accordance with SFAS 123R. The
  weighted average fair value per option was $5.70.
|                                                                                                                                                                                                                                                                                                                                                                                           | 
|3        The
  Non-Equity Incentive Plan Compensation and the Change in Pension Value and
  Nonqualified Deferred Compensation columns are not applicable and are omitted
  from this table.                                                                                                                                                                                              

EMPLOYMENT AGREEMENTS

Messr. Amerson has an employment
agreement effective as of December 15, 1995 (Employment Agreement). The
Employment Agreement, as amended, provide for an annual base salary of $350,000
for Mr. Amerson and terminates in 2010. 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, 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 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 of the Company has occurred.

OTHER
INFORMATION REGARDING THE BOARD OF DIRECTORS

Board Meetings and
Committees

The Nominating Committee was established in 2004. It
oversees the qualification and nomination process for potential director
candidates, reviews the continued qualification of existing directors and is
responsible for corporate governance oversight.

39

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During 2007, the Board of
Directors met six times and also executed various consent resolutions and
written actions in lieu of meetings. Additionally, all directors were present,
either in person or by proxy, at the Fiscal 2006 Annual Meeting of the
Shareholders held in December of 2007.

The Board of Directors currently
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, monitors transactions between the Company and its
employees, officers and directors, and completes other functions as required by
the Public Company Accounting Reform and Investor Protection Act (the
Sarbanes-Oxley Act) passed in 2002. David Mock is considered the audit
committee financial expert. The Compensation Committee administers the
Companys equity incentive plans and designates compensation levels for
executive officers and directors of the Company. The Audit Committee met four
times during 2007. The Compensation Committee met one time during 2007.

Currently, the Audit Committee
consists of Messrs. Mock, Korn and Dominick, with Mr. Mock serving as Chair.
The Compensation Committee consists of Messrs. Mock and Korn. Mr. Mock serves
as Chair and Mr. Amerson serve as non-voting advisory members.

There is no family relationship
between the directors, executive officers or persons nominated or appointed by
the board to become directors or executive officers. Directors are
independent in accordance with the rules of NASDAQ. Each director attended at
least 75% of (a) the total number of meetings of the board of directors, and
(b) the total number of meetings of all committees of the board of directors on
which he served for Fiscal Year 2006. Our policy is to encourage board members
to attend the annual meeting of stockholders. All of our directors attended the
previous annual meeting.

|           |                                                                 
|---------- | ----------------------------------------------------------------
|Item
  12. | Security
  Ownership of Certain Beneficial Owners and Management

The following table sets forth
all individuals known by the Company 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 owned, as of December 31, 2007.
Except as indicated in the following footnotes, each listed beneficial owner
has sole voting and investment power over the shares of common stock held in
their names.

|                                                                      |  |                                             |           |                                                           |  |       |  
|--------------------------------------------------------------------- |  | ------------------------------------------- | --------- | --------------------------------------------------------- |  | ----- | -
|Name and Address ofBeneficial
  Owner                                 |  | Shares of
  CommonStock
  BeneficiallyOwned |           | Percentage
  ofOutstanding
  Shares of
  Common Stock (1) | 
|                                                                      |  |                                             |           |                                                           | 
|Robert
  R. Amerson (2)531 Flanders Filters Road Washington, NC 27889 |  |                                             | 7,612,103 |                                                           |  | 29.63 | %
|Harry
  Smith (3)531 Flanders Filters Road Washington, NC 27889       |  |                                             | 945,183   |                                                           |  | 3.68  | %
|Cully
  Bohush(4)                                                     |  |                                             | 73,826    |                                                           |  |       | *
|Jeff
  Korn(5)                                                        |  |                                             | 90,000    |                                                           |  |       | *
|Kirk
  Dominick(6)                                                    |  |                                             | 50,000    |                                                           |  |       | *
|David
  Mock(7)                                                       |  |                                             | 97,700    |                                                           |  |       | *
|Heartland
  Advisors789 North Water Street Milwaukee, WI 53202        |  |                                             | 2,866,874 |                                                           |  | 11.16 | %

40

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|                                                                                                                      |  |                                             |           |                                                           |  |       |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | --------- | --------------------------------------------------------- |  | ----- | -
|Name and Address ofBeneficial
  Owner                                                                                 |  | Shares of
  CommonStock
  BeneficiallyOwned |           | Percentage
  ofOutstanding
  Shares of
  Common Stock (1) | 
|                                                                                                                      |  |                                             |           |                                                           | 
|Royce
  & Associates, LLC1414 Avenue of the Americas New York, NY
  10019                                             |  |                                             | 1,375,320 |                                                           |  | 5.35  | %
|Bank
  of America Corporation 100 North Tryon Street, Floor 25 Bank of America
  Corporate Center Charlotte, NC 28255 |  |                                             | 1,302,906 |                                                           |  | 5.07  | %
|Officers and Directors as a group 
(6 persons) (2), (3), (4), (5), (6), (7)                                           |  |                                             | 8,868,812 |                                                           |  | 34.52 | %



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Represents less than 1% of the total issued and
  outstanding shares of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(1) | Applicable percentage of ownership is based on
  25,691,632 shares of common stock outstanding as of December 31, 2007,
  together with all applicable options for unissued securities for such
  shareholders exercisable within 60 days. Shares of common stock subject to
  options exercisable within 60 days are deemed outstanding for computing the
  percentage ownership of the person holding such options, but are not deemed
  outstanding for computing the percentage of any other person.                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(2) | Includes 1,000,000 shares which are subject to an
  option to purchase such shares from the Company at $2.50 per share. These
  options expire in 2009. Also includes 1,000,000 shares which are subject to
  an option to purchase such shares from the Company at $7.50 per share. These
  options expire in 2011.                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(3) | Includes 20,000 shares which are subject to an
  option to purchase such shares from the Company at $5.00 per share. These
  options expire in 2008. Also includes 20,000 shares which are subject to an
  option to purchase such shares from the Company at $8.60 per share. These
  options expire in 2009. Also includes 50,000 shares which are subject to an
  option to purchase such shares from the Company at $8.85 per share. These
  options expire in 2010. Also includes 100,000 shares which are subject to an
  option to purchase such shares from the Company at $4.99 per share. These
  options expire in 2017.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(4) | Includes 20,000 shares which are subject to an
  option to purchase such shares from the Company at $5.21 per share. These
  options expire in 2009. Also includes 50,000 shares which are subject to an
  option to purchase such shares from the Company at $11.10 per share. These
  options expire in 2010.                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(5) | Includes 25,000 shares which are subject to an
  option to purchase such shares from the Company at $9.03 per share. These
  options expire in 2010. Also includes 50,000 shares which are subject to an
  option to purchase such shares from the Company at $5.55 per share. These
  options expire in 2017.                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(6) | Includes 50,000 shares which are subject to an
  option to purchase such shares from the Company at $5.55 per share. These
  options expire in 2017.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(7) | Includes 50,000 shares which are subject to an
  option to purchase such shares from the Company at $4.37 per share. These
  options expire in 2008. Also includes 5,000 shares which are subject to an
  option to purchase such shares from the Company at $11.01 per share. These
  options expire in 2010. Also includes 5,000 shares which are subject to an
  option to purchase such shares from the Company at $11.72 per share. These
  options expire in 2011. Also includes 5,000 shares which are subject to an
  option to purchase such shares from the Company at $9.52 per share. These
  options expire in 2017.  

|           |                                                                                
|---------- | -------------------------------------------------------------------------------
|Item
  13. | Certain
  Relationships and Related Transactions(dollar amounts in
  thousands)

Review and Approval of
Related Person Transactions.

41

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The Audit Committee reviews all relationships and
transactions in which the company and our directors and executive officers or
their immediate family members are participants to determine whether such
persons have a direct or indirect material interest. The companys legal
consultant is primarily responsible for the development and implementation of
processes and controls to obtain information from the directors and executive
officers with respect to related person transactions and for then determining,
based on the facts and circumstances, whether the company or a related person
has a direct or indirect material interest in the transaction. As required
under SEC rules, transactions that are determined to be directly or indirectly
material to the company or a related person are disclosed in the companys
proxy statement. In addition, the Audit Committee reviews and approves or ratifies
any related person transaction that is required to be disclosed. As set forth
in the Audit Committees key practices, in the course of its review and
approval or ratification of a disclosable related party transaction, the
committee considers:

| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | the nature of the related persons interest in the
  transaction;                                                                       
| |   |                                                                                                                                         
| |  | the material terms of the transaction, including,
  without limitation, the amount and type of transaction;                             
| |   |                                                                                                                                         
| |  | the importance of the transaction to the related
  person;                                                                              
| |   |                                                                                                                                         
| |  | the importance of the transaction to the company;                                                                                       
| |   |                                                                                                                                         
| |  | whether the transaction would impair the judgment of
  a director or executive officer to act in the best interest of the company;
  and
| |   |                                                                                                                                         
| |  | any other matters the committee deems appropriate.                                                                                      

Any member of the Audit Committee who is a related
person with respect to a transaction under review may not participate in the
deliberations or vote respecting approval or ratification of the transaction,
provided, however, that such director may be counted in determining the
presence of a quorum at a meeting of the committee that considers the
transaction.

Satisfaction
of related party notes

Mr. Clark, our former chief executive officer and
former director, satisfied an outstanding balance of approximately $5,454,810
as of September 30, 2007 on an outstanding promissory note in consideration of
his surrendering 1,183,872 shares of our common stock. These shares were valued
at $4.60, which approximates the 30-day average market value of our shares. See
Settlement Agreement and Mutual Release with Mr. Clark.

On October 16, 2007, Mr. Amerson, our current CEO and
Chairman of the Board of Directors, paid us in full for all outstanding amounts
due under a promissory note of approximately $2,700,000. We returned to Mr.
Amerson 269,761 shares of our common stock, which were held as security for
repayment of this note.

Personal
Guaranties/Indemnities

Mr. Amerson is a personal guarantor on our credit
facility with Bank of America. As part of the Settlement Agreement and Mutual
Release with Mr. Clark, we are required to indemnify Mr. Clark and his
affiliates, as a guarantor of this credit facility. In connection with the
Settlement Agreement and Mutual Release with Mr. Clark, Mr. Amerson agreed to
assign his interest in Mercury Die Cutting (50% owner of Superior Diecutting,
Inc.) to Mr. Clark.

In April 2007, our board of directors approved
indemnity agreements for its officers and directors. The indemnification
agreements provide indemnification for (i) proceedings by or in the right of
the company (ii) indemnification for expenses of a party who is wholly or
partly successful and (iii) indemnification for expenses as a witness. The
indemnification rights generally applies only if the officer or director acted
in good faith and in a manner in which he or she reasonably believed to be in
or not opposed to the best interests of the Company, and, in the case of a
criminal proceeding had no reasonable cause to believe that his or her conduct
was unlawful.

42

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Table of Contents

Related
party transactions

As of December 31, 2007 the Company has entered into
six operating leases expiring either in 2025 or 2026 with Wal-Pat II. Wal-Pat
II is owned by Robert R. Amerson, our Chief Executive Officer. The monthly
payments to Wal-Pat II total $221. The Company made payments of $3,372, $2,816
and $1,067 in 2007, 2006 and 2005, respectively. The Company believes these
leases are at prevailing market rates.

|           |                                                                      
|---------- | ---------------------------------------------------------------------
|Item
  14. | Principal
  Accountant Fees and Services(dollar amounts in thousands)

Audit
Related Fees

Our principal accountants billed us an aggregate of
$279 and $261 in fees and expenses for professional services rendered in
connection with the audits of our financial statements for the calendar years
ended December 31, 2007 and 2006, respectively, and reviews of the financial
statements included in our quarterly reports on Form 10-Q during such calendar
years.

Our principal accountants did not bill us any
additional fees that are not disclosed under audit fees in each of the last two
calendar years for assurance and related services that are reasonably related
to the performance of our audit or review of our financial statements.

Tax
Fees

Our principal accountants billed us an aggregate of
$180 and $26 in fees and expenses for tax compliance, tax advice and tax
planning during calendar years ended December 31, 2007 and 2006, respectively.

All
Other Fees

Our principal accountants billed us an aggregate of
$33 and $24 in fees and expenses during calendar years ended December 31, 2007
and 2006, respectively, for products and services other than those products and
services described above. These services consist of the following:

| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | Audit of profit sharing plan and discussions
  regarding Sarbanes Oxley 404.

Audit Committee Pre-Approval Process,
Policies and Procedures

The appointment of Pender Newkirk & Co., LLP was
approved by our Audit Committee and full Board of Directors. Our principal
auditors have performed their audit procedures in accordance with pre-approved
policies and procedures established by our Audit Committee. Our principal
auditors have informed our Audit Committee of the scope and nature of each
service provided. With respect to the provisions of services other than audit,
review, or attest services, our principal accountants brought such services to
the attention of our Audit Committee, or one or more members of our Audit
Committee for the members of our Board of Directors to whom authority to grant
such approval had been delegated by the Audit Committee, prior to commencing
such services. Such services primarily consisted of tax related services.

Code of
Ethics for Senior Financial Officers

The code of ethics established by the Company for
its Senior Financial Officers is required to be signed by each such officer, is
maintained on file by the Company, and incorporates the following:

Senior Financial Officers hold an important and
elevated role in corporate governance. While members of the management team,
they are uniquely capable and empowered to ensure that all stakeholders
interests are appropriately balanced, protected and preserved. This Code
provides principles to which Flanders Corporation Officers are expected to
adhere and advocate. They embody rules regarding individual and peer
responsibilities, as well as responsibilities to employers, the public and
other stakeholders. Our Senior Financial Officers agree by their signature
below that they will:

| |    |                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------
| | 1. | Act with honesty and integrity, avoiding actual or
  apparent conflicts of interest in personal and professional relationships.

43

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Table of Contents

| |    |                                                                                                                                                                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Will make reasonable efforts to comply with rules
  and regulations of federal, state, provincial and local governments, and
  other appropriate private and public regulatory agencies as known to them and
  will make reasonable efforts to maintain or obtain a professional level of
  knowledge of applicable rules and regulations.
| |    |                                                                                                                                                                                                                                                                                                                                           
| | 3. | Act in good faith, responsibly, with due care,
  competence and diligence, without misrepresenting material facts or allowing
  ones independent judgment to be subordinated.                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                           
| | 4. | Respect the confidentiality of information acquired
  in the course of ones work except when authorized or otherwise legally
  obligated to disclose. Confidential information acquired in the course of
  ones work will not be used for personal advantage.                                                                           

44

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Table of Contents

PART IV

|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K

|                                                                                                                            |        |  |                                                                                                                                                                                      |  |     
|--------------------------------------------------------------------------------------------------------------------------- | ------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|The
 following constitutes a list of Financial Statements, Financial Statement
 Schedules and Exhibits used in this report. |        | 
|                                                                                                                            |        |  |                                                                                                                                                                                      |  |     
|                                                                                                                            | (a)(1) |  | Financial Statements: Financial Statements are included beginning at
 page F-1 as follows:                                                                                           |  |     
|                                                                                                                            |        |  |                                                                                                                                                                                      |  |     
|                                                                                                                            |        |  | Report of
 Independent Registered Public Accounting Firm                                                                                                                             |  | F-2 
|                                                                                                                            |        |  |                                                                                                                                                                                      |  |     
|                                                                                                                            |        |  | Consolidated
 Balance Sheets at December 31, 2007 and 2006                                                                                                                           |  | F-5 
|                                                                                                                            |        |  |                                                                                                                                                                                      |  |     
|                                                                                                                            |        |  | Consolidated
 Statements of Operations for the years ended December 31, 2007, 2006 and 2005                                                                                          |  | F-6 
|                                                                                                                            |        |  |                                                                                                                                                                                      |  |     
|                                                                                                                            |        |  | Consolidated
 Statements of Stockholders Equity for the years ended December 31, 2007,
 2006 and 2005                                                                               |  | F-7 
|                                                                                                                            |        |  |                                                                                                                                                                                      |  |     
|                                                                                                                            |        |  | Consolidated
 Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005                                                                                          |  | F-8 
|                                                                                                                            |        |  |                                                                                                                                                                                      |  |     
|                                                                                                                            |        |  | Notes to
 Consolidated Financial Statements                                                                                                                                          |  | F-10
|                                                                                                                            |        |  |                                                                                                                                                                                      |  |     
|                                                                                                                            | (a)(2) |  | Financial Statement Schedules                                                                                                                                                        |  |     
|                                                                                                                            |        |  |                                                                                                                                                                                      |  |     
|                                                                                                                            |        |  | Report of
 Independent Registered Public Accounting Firm on schedule                                                                                                                 |  | F-34
|                                                                                                                            |        |  |                                                                                                                                                                                      |  |     
|                                                                                                                            |        |  | Schedule II.
 Valuation and Qualifying Accounts                                                                                                                                      |  | F-35
|                                                                                                                            |        |  |                                                                                                                                                                                      |  |     
|                                                                                                                            |        |  | 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.                                                                                                                                                                                                                                                                                                    
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 10.1   |  | Loan and
 Security Agreement, dated October 9, 2002, by and among Fleet Capital
 Corporation, Flanders Corporation, Flanders/Precisionaire Corp., Flanders
 Filters, Inc., Flanders/CSC Corporation, Precisionaire, Inc., Precisionaire
 of Utah, Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc. and
 Flanders Realty Corp., filed with the Form 8-K/A dated October 21, 2002.                       
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 10.2   |  | First
 Amendment to Loan and Security Agreement, dated October 18, 2002, by and
 among Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters,
 Inc., Flanders/CSC Corporation, Precisionaire, Inc., Precisionaire of Utah,
 Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc., Flanders Realty
 Corp. and Fleet Capital Corporation, filed with the Form 8-K/A dated October
 21, 2002.  
| |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 10.3   |  | Second
 Amendment to Loan and Security Agreement, dated November 19, 2002, by and
 among Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters,
 Inc., Flanders/CSC Corporation, Precisionaire, Inc., Precisionaire of Utah,
 Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc., Flanders Realty
 Corp. and Fleet Capital Corporation, filed with the Form 8-K/A dated October
 21, 2002.

45

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Table of Contents

| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | ------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.3.1 |  | Third
 Amendment to Loan and Security Agreement, dated Sptember 6, 2003 by and among
 Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters, Inc.,
 Flanders/CSC Corporation, Precisionaire, Inc., Precisionaire of Utah, Inc.,
 Eco-Air Products, Inc., Air Seal Filter Housings, Inc., Flanders Realty Corp.
 and Fleet Capital Corporation.  
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.3.2 |  | Fourth
 Amendment to Loan and Security Agreement, dated December 8, 2003, by and
 among Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters,
 Inc., Flanders/CSC Corporation, Precisionaire, Inc., Precisionaire of Utah,
 Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc., Flanders Realty
 Corp. and Fleet Capital Corporation.
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.4   |  | Support
 Agreement and Guaranty dated October 18, 2002, between Fleet Capital Corporation
 and Steven K. Clark, filed with the Form 8-K/A dated October 21, 2002.                                                                                                                                                                                              
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.5   |  | Support
 Agreement and Guaranty dated October 18, 2002, between Fleet Capital
 Corporation and Robert Amerson, filed with the Form 8-K/A dated October 21,
 2002.                                                                                                                                                                                              
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.6   |  | Continuing
 Guaranty Agreement dated October 18, 2002, between Fleet Capital Corporation
 and Superior Diecutting, Inc., filed with the Form 8-K/A dated October 21,
 2002.                                                                                                                                                                                    
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.7   |  | Amended and Restated Continuing Guaranty dated November
 26, 2002, between Fleet Capital Corporation and Superior Diecutting, Inc.,
 filed with the Form 8-K/A dated October 21, 2002.                                                                                                                                                                         
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.8   |  | Loan
 Agreement between Will-Kankakee Regional Development Authority and Flanders
 Corporation dated December 15, 1997, filed with the December 31, 1997 Form
 10-K, and incorporated herein by reference.                                                                                                                                                     
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.9   |  | Loan
 Agreement between Flanders Corporation and the Johnston County Industrial
 Facilities and Pollution Control Financing Authority, dated April 1, 1998,
 filed with the Form 10-Q dated March 31, 1998, and incorporated herein by
 reference.                                                                                                             
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.10  |  | Loan
 Agreement between Flanders Corporation and the Johnston County Industrial
 Facilities and Pollution Control Financing Authority, dated March 1, 2000,
 filed with the Form 10-K dated December 31, 1999, and incorporated herein by
 reference.                                                                                                          
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.11  |  | Flanders
 Corporation 1996 Director Option Plan, filed with the Form 10-K dated
 December 31, 1995, and incorporated herein by reference.                                                                                                                                                                                                                      
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.12  |  | 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.                                                                                                                                                                           
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.13  |  | 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 Steven K. Clark, filed with the Form 10-K dated
 December 31, 1997 and incorporated herein by reference.                                                                                                                                                      
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.15  |  | Amendment to Employment Agreement between Elite Acquisitions, Inc.,
 Flanders Filters, Inc., and Steven K. Clark, filed with the
 Form 10-K dated December 31, 1999, and incorporated herein by reference.                                                                                                                                                     
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.16  |  | 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.                                                                                                                                                                          
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.17  |  | 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.                                                                                                                                    
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.18  |  | Amendment to
 Employment Agreement between Elite Acquisitions, Inc., Flanders Filters,
 Inc., and Robert R. Amerson, filed with the Form 10-K dated December 31, 1997
 and incorporated herein by reference.                                                                                                                                                   
| |        |  |                                                                                                                                                                                                                                                                                                                                                                
| | 10.19  |  | Amendment to Employment Agreement between Elite Acquisitions, Inc.,
 Flanders Filters, Inc., and Robert R. Amerson, filed with the
 Form 10-K dated December 31, 1999, and incorporated herein by reference.                                                                                                                                                   

46

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| |       |  |                                                                                                                                                                                                                          |                            
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------
| | 10.20 |  | Stock Option Agreement between Flanders Corporation and Robert R.
 Amerson dated February 22, 1996, filed with Form S-8 on July 21, 1997,
 incorporated herein by reference.                                            
| |       |  |                                                                                                                                                                                                                         
| | 10.21 |  | Amendment to Stock Option Agreement between Flanders Corporation and
 Robert R. Amerson dated December 22, 1999, filed with the Form
 10-K dated December 31, 1999, and incorporated herein by reference.               
| |       |  |                                                                                                                                                                                                                         
| | 10.22 |  | Stock Option Agreement between Flanders Corporation and Robert R.
 Amerson dated November 7, 2001, filed with Form 10-K for December 31, 2001,
 incorporated herein by reference.                                       
| |       |  |                                                                                                                                                                                                                         
| | 10.23 |  | Stock Option Agreement between Flanders Corporation and Steven K.
 Clark dated February 22, 1996, filed with Form S-8 on July 21, 1997,
 incorporated herein by reference.                                              
| |       |  |                                                                                                                                                                                                                         
| | 10.24 |  | Amendment to Stock Option Agreement between Flanders Corporation and
 Steven K. Clark dated December 22, 1999, filed with the Form
 10-K dated December 31, 1999, and incorporated herein by reference.                 
| |       |  |                                                                                                                                                                                                                         
| | 10.25 |  | Stock Option Agreement between Flanders Corporation and Steven K.
 Clark dated November 7, 2001, filed with Form 10-K dated December 31, 2001,
 incorporated by reference.                                              
| |       |  |                                                                                                                                                                                                                         
| | 10.26 |  | Note Agreement between Steven K. Clark and Flanders Corporation,
 dated April 24, 1999, filed with the Form 10-K dated December
 31, 1999, and incorporated herein by reference.                                        
| |       |  |                                                                                                                                                                                                                         
| | 10.27 |  | Note Agreement between Robert R. Amerson and Flanders Corporation,
 dated April 24, 1999, filed with the Form 10-K dated December
 31, 1999, and incorporated herein by reference.                                      
| |       |  |                                                                                                                                                                                                                         
| | 10.28 |  | Stock Option Agreement between Flanders Corporation and Steven K.
 Clark dated August 24, 2004, filed with Form 10-K dated December 31, 2004,
 incorporated by reference.                                               
| |       |  |                                                                                                                                                                                                                         
| | 10.29 |  | Stock Option Agreement between Flanders Corporation and Steven K.
 Clark dated December 7, 2005, filed with Form 10-K dated December 31, 2005,
 incorporated by reference.                                              
| |       |  |                                                                                                                                                                                                                         
| | 10.30 |  | Settlement Agreement and Mutual Release between Steven K. Clark and
 Flanders Corporation dated October 3, 2007, filed with Form 8-K dated October
 5, 2007, incorporated by reference.                                 
| |       |  |                                                                                                                                                                                                                         
| | 10.31 |  | Master Lease Amendment between Wal-Pat, LLC and Flanders Corporation
 dated September 6, 2007, filed with Form 8-K dated September 7, 2007,
 incorporated by reference.                                                 
| |       |  |                                                                                                                                                                                                                         
| | 10.32 |  | Separation Agreement and General Release between John Hodson and
 Flanders Corporation dated August 2, 2007, filed as an exhibit to Form 10-Q
 dated August 7, 2007, incorporated by reference.                         
| |       |  |                                                                                                                                                                                                                         
| | 10.33 |  | 2007 Equity Incentive Plan filed as an exhibit to the 2006 Proxy
 Statement dated November 13, 2007, incorporated by reference.                                                                                         
| |       |  |                                                                                                                                                                                                                         
| | 21    |  | Subsidiaries of the Registrant.                                                                                                                                                                                         
| |       |  |                                                                                                                                                                                                                         
| | 23.1  |  | Consent of Pender Newkirk LLP for incorporation by reference of their
 report into Form S-8 filed on July 21, 1997, filed herewith.                                                                                     
| |       |  |                                                                                                                                                                                                                         
| | 23.2  |  | Consent of Grant Thornton LLP for incorporation by reference of their
 report into Form S-8 filed on July 21, 1997, filed herewith.                                                                                     
| |       |  |                                                                                                                                                                                                                         
| | 24    |  | Power of Attorney (included on Signature page of this report).                                                                                                                                                          
| |       |  |                                                                                                                                                                                                                         
| | 31    |  | Certification of Chief Executive Officer and Chief Financial Officer
 pursuant to Rule 13A-14 of the Securities Exchange Act of 1934, as amended,
 as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
| |       |  |                                                                                                                                                                                                                         
| | 32    |  | Certification of Chief Executive Officer and Chief Financial Officer
 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The
 Sarbanes-Oxley Act of 2002.                                        
| |       |  |                                                                                                                                                                                                                         
| | (b)   |  | Form 8-K dated February 21, 2007                                                                                                                                                                                        
| |       |  |                                                                                                                                                                                                                         
| |       |  |                                                                                                                                                                                                                          | Form 8-K dated May 2, 2007 
| |       |  |                                                                                                                                                                                                                          |                            
| |       |  |                                                                                                                                                                                                                          | Form 8-K dated May 18, 2007

47

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| |     |  |                                                    |                                 
| | --- |  | -------------------------------------------------- | --------------------------------
| |     |  |                                                    | Form 8-K dated July 11, 2007    
| |     |  |                                                    |                                 
| |     |  |                                                    | Form 8-K dated August 1, 2007   
| |     |  |                                                    |                                 
| |     |  |                                                    | Form 8-K dated August 15, 2007  
| |     |  |                                                    |                                 
| |     |  |                                                    | Form 8-K dated September 7, 2007
| |     |  |                                                    |                                 
| |     |  |                                                    | Form 8-K dated October 15, 2007 
| |     |  |                                                    |                                 
| |     |  |                                                    | Form 8-K dated November 1, 2007 
| |     |  |                                                    |                                 
| | (c) |  | Financial
 Statement Schedules: See (a) (2) above.

48

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Table of Contents

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 13th day of March, 2008.

| |                                                           | 
| | --------------------------------------------------------- | 
| | FLANDERS CORPORATION                                     
| |                                                          
| | By  /s/ Robert
 Amerson                                  
| |                                                           | 
| | Robert Amerson                                           
| | Chief Executive Officer / (Principal Executive
Officer)  
| |                                                          
| | By  /s/ Cully
 Bohush                                    
| |                                                           | 
| | Cully Bohush                                             
| | Chief Accounting Officer / (Principal Accounting
Officer)

KNOW
ALL PERSONS BY THESE PRESENTS that each person whose signature appears below
constitutes and appoints Robert Amerson, his attorney-in-fact, to sign any
amendments to this report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Commission, hereby ratifying
and confirming all the said attorney-in-fact may lawfully do or cause to be
done by virtue hereof.

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.

|                       |                                        |                
|---------------------- | -------------------------------------- | ---------------
|Signature              | Title                                  | Date           
|                       |                                        |                
|/s/Robert R. Amerson   | Chief Executive Officer /
 (Principal  | March
 13, 2008
|                       | Executive Officer)                     |                
|Robert R. Amerson      |                                        |                
|                       |                                        |                
|/s/Cully Bohush        | Chief Accounting Officer /
 (Principal | March
 13, 2008
|                       | Accounting Officer)                    |                
|Cully Bohush           |                                        |                
|                       |                                        |                
|/s/Harry L. Smith, Jr. | Director                               | March
 13, 2008
|                       |                                        |                
|Harry L. Smith, Jr.    |                                        |                
|                       |                                        |                
|/s/Jeffrey Korn        | Director                               | March
 13, 2008
|                       |                                        |                
|Jeffrey Korn           |                                        |                
|                       |                                        |                
|/s/Kirk Dominick       | Director                               | March
 13, 2008
|                       |                                        |                
|Kirk Dominick          |                                        |                
|                       |                                        |                
|/s/David M. Mock       | Director                               | March
 13, 2008
|                       |                                        |                
|David M. Mock          |                                        |                

49

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FLANDERS CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2007, 2006 and 2005

The accompanying notes are an integral part
of these financial statements

F-1

---

Table of Contents

Report
of Independent Registered Public Accounting Firm

Board of Directors
Flanders Corporation and Subsidiaries 
St. Petersburg, Florida

We have audited the accompanying consolidated balance sheets of
Flanders Corporation and subsidiaries (the Company) as of December 31, 2007
and December 31, 2006 and the related consolidated statements of operations,
stockholders equity, and cash flows for the years ended December 31, 2007,
2006, and 2005. These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amount and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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 consolidated financial position
of the Company as of December 31, 2007 and 2006 and the consolidated results of
its operations and cash flows for the years ended December 31, 2007, 2006, and
2005 in conformity with accounting principles generally accepted in the United
States of America.

We have also audited, in accordance with the standards of the Public
Company Oversight Board (United States), the effectiveness of the Companys
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 12, 2008 expressed an unqualified opinion thereon.

Pender Newkirk & Company, LLP
Certified Public Accountants
Tampa, Florida
March 12, 2008

The accompanying notes are an integral part
of these financial statements

F-2

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Table of Contents

MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management
of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) or 15d-(f) promulgated under the
Exchange Act as a process designed by, or under the supervision of, the
Companys principal executive and principal financial officers and effected by
the Companys board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that:

| |   |                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pertain to
 the maintenance of records that in reasonable detail accurately and fairly
 reflect the transactions and dispositions of the assets of the Company;                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | Provide
 reasonable assurance that transactions are recorded as necessary to permit
 preparation of financial statements in accordance with generally accepted
 accounting principles, and that receipts and expenditures of the Company are
 being made only in accordance with authorizations of management and directors
 of the Company; and
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | Provide
 reasonable assurance regarding prevention or timely detection of unauthorized
 acquisition, use or disposition of the Companys assets that could have a
 material effect on the financial statements.                                                                                                                                 

Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

The Companys
management assessed the effectiveness of the Companys internal control over
financial reporting as of December 31, 2007. In making this assessment, the
Companys management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.

Based on our
assessment, management believes that, as of December 31, 2007, the Companys
internal control over financial reporting is effective based on those criteria.

Our internal
control over financial reporting as of December 31, 2007 has been audited by
Pender Newkirk and Company, LLP, independent registered public accounting firm,
as stated in their report which is included herein.

The accompanying notes are an integral part
of these financial statements

F-3

---

Table of Contents

Report
of Independent Registered Public Accounting Firm

Board of Directors Flanders Corporation and Subsidiaries 
St. Petersburg, Florida

We have audited the internal control over financial reporting of
Flanders Corporation and Subsidiaries (the Company) as of December 31, 2007
based on criteria established in Internal Control - Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). The Companys management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on the COSO criteria.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the balance sheets of the
Company as of December 31, 2007 and 2006, and the related statements of
operations, stockholders equity and cash flows for the years ended December
31, 2007, 2006 and 2005 and our report dated March 12, 2008 expressed an
unqualified opinion thereon.

Pender Newkirk
& Company, LLP
Certified Public Accountants
Tampa, Florida
March 12, 2008

The accompanying notes are an integral part
of these financial statements

F-4

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Table of Contents

FLANDERS
CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
December 31,(In thousands, except per share
data)

|                                                                                                                                                    |  |      |         |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                                                                                                                                                    |  | 2007 |         | 2006 |  
|                                                                                                                                                    |  |      |         |      |  
|ASSETS                                                                                                                                              |  |      |         |      |  
|Current assets                                                                                                                                      |  |      |         |      |   |         |  
|Cash and cash equivalents                                                                                                                           |  | $    | 498     |      | $ | 568     |  
|Receivables:                                                                                                                                        |  |      |         |      |   |         |  
|Trade, less allowance for
 doubtful accounts: $3,663 in 2007 and $4,313 in 2006                                                                     |  |      | 49,094  |      |   | 53,740  |  
|Other                                                                                                                                               |  |      | 1,260   |      |   | 1,200   |  
|Inventories                                                                                                                                         |  |      | 47,236  |      |   | 58,939  |  
|Deferred taxes                                                                                                                                      |  |      | 4,197   |      |   | 3,332   |  
|Income taxes                                                                                                                                        |  |      | 8,549   |      |   | 1,640   |  
|Other current assets                                                                                                                                |  |      | 2,672   |      |   | 1,832   |  
|                                                                                                                                                    |  |      |         |      |   |         |  
|Total current assets                                                                                                                                |  |      | 113,506 |      |   | 121,251 |  
|Related party receivables                                                                                                                           |  |      | 0       |      |   | 428     |  
|Property and equipment, net                                                                                                                         |  |      | 61,468  |      |   | 77,297  |  
|Intangible assets, net                                                                                                                              |  |      | 3,872   |      |   | 5,975   |  
|Other assets                                                                                                                                        |  |      | 4,709   |      |   | 2,153   |  
|                                                                                                                                                    |  |      |         |      |   |         |  
|                                                                                                                                                    |  | $    | 183,555 |      | $ | 207,104 |  
|                                                                                                                                                    |  |      |         |      |   |         |  
|LIABILITIES
 AND STOCKHOLDERS EQUITY                                                                                                               |  |      |         |      |   |         |  
|                                                                                                                                                    |  |      |         |      |   |         |  
|Current liabilities                                                                                                                                 |  |      |         |      |   |         |  
|Current maturities of long-term
 debt and capital lease obligations                                                                                 |  | $    | 2,736   |      | $ | 5,075   |  
|Accounts payable                                                                                                                                    |  |      | 30,046  |      |   | 29,442  |  
|Accrued expenses                                                                                                                                    |  |      | 24,593  |      |   | 18,767  |  
|Other current liabilities                                                                                                                           |  |      | 5,880   |      |   | 0       |  
|                                                                                                                                                    |  |      |         |      |   |         |  
|                                                                                                                                                    |  |      |         |      |   |         |  
|Total current liabilities                                                                                                                           |  |      | 63,255  |      |   | 53,284  |  
|Long-term capital lease
 obligations, less current maturities                                                                                       |  |      | 943     |      |   | 1,372   |  
|Long-term debt, less current
 maturities                                                                                                            |  |      | 28,669  |      |   | 36,433  |  
|Long-term liabilities, other                                                                                                                        |  |      | 2,112   |      |   | 1,325   |  
|Deferred taxes                                                                                                                                      |  |      | 1,174   |      |   | 7,311   |  
|Commitments and contingencies                                                                                                                       |  |      |         |      |   |         |  
|Stockholders equity                                                                                                                                |  |      |         |      |   |         |  
|Preferred stock, $.001 par
 value, 10,000 shares authorized; none issued                                                                            |  |      |         |      |   |        |  
|Common stock, $.001 par value;
 50,000 shares authorized; issued and outstanding: 25,691 and 26,343 as of
 December 31, 2007 and 2006, respectively |  |      | 26      |      |   | 26      |  
|Additional paid-in capital                                                                                                                          |  |      | 87,305  |      |   | 90,872  |  
|Notes receivable  secured by
 common shares                                                                                                        |  |      | 0       |      |   | (7,441  | )
|Accumulated other comprehensive
 loss                                                                                                               |  |      | (782    | )    |   | (698    | )
|Retained earnings                                                                                                                                   |  |      | 853     |      |   | 24,620  |  
|                                                                                                                                                    |  |      |         |      |   |         |  
|                                                                                                                                                    |  |      | 87,402  |      |   | 107,379 |  
|                                                                                                                                                    |  |      |         |      |   |         |  
|                                                                                                                                                    |  | $    | 183,555 |      | $ | 207,104 |  
|                                                                                                                                                    |  |      |         |      |   |         |  

The accompanying notes are an integral part
of these financial statements

F-5

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Table of Contents

FLANDERS
CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS

Year
Ended December 31,(In thousands,
except per share data)

|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                      |  | 2007 |         | 2006 |   | 2005    |  
|                                                                                                      |  |      |         |      |   |         |  
|                                                                                                      |  |      |         |      |   |         |  
|Net sales                                                                                             |  | $    | 244,941 |      | $ | 238,378 |   | $ | 229,276 |  
|Cost of goods sold                                                                                    |  |      | 213,152 |      |   | 189,653 |   |   | 176,359 |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Gross profit                                                                                          |  |      | 31,789  |      |   | 48,725  |   |   | 52,917  |  
|Operating expenses                                                                                    |  |      | 58,511  |      |   | 40,868  |   |   | 35,297  |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|                                                                                                     
|Operating income (loss)                                                                               |  |      | (26,722 | )    |   | 7,857   |   |   | 17,620  |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Non operating income (expense)                                                                        |  |      |         |      |   |         |   |   |         |  
|Other income, net                                                                                     |  |      | 774     |      |   | 2,400   |   |   | 1,297   |  
|Interest expense                                                                                      |  |      | (2,743  | )    |   | (2,049  | ) |   | (1,672  | )
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|                                                                                                      |  |      | (1,969  | )    |   | 351     |   |   | (375    | )
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Earnings (Losses) from
 operations before income taxes                                                |  |      | (28,691 | )    |   | 8,208   |   |   | 17,245  |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Provision (Benefit) for income
 taxes                                                                 |  |      | (8,791  | )    |   | 2,683   |   |   | 4,739   |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Income (Loss) before
 extraordinary items                                                             |  |      | (19,900 | )    |   | 5,525   |   |   | 12,506  |  
|Extraordinary Items:                                                                                  |  |      |         |      |   |         |   |   |         |  
|Extraordinary Loss  Flood loss
 (net of taxes $1,012)                                                |  |      | 0       |      |   | (1,518  | ) |   | 0       |  
|Extraordinary Gain (Loss) 
 Fire loss (net of taxes $142 and $1,305 for 2007 and 2006, respectively) |  |      | 213     |      |   | (1,957  | ) |   | 0       |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|                                                                                                     
|Net earnings (loss)                                                                                   |  |      | (19,687 | )    | $ | 2,050   |   | $ | 12,506  |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Income (Loss) before
 extraordinary items Basic earnings per share                                    |  | $    | (.75    | )    | $ | .21     |   | $ | .48     |  
|Extraordinary items                                                                                   |  | $    | .0      |      | $ | (.13    | ) | $ | .0      |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Net earnings (loss) per share                                                                         |  | $    | (.75    | )    | $ | .08     |   | $ | .48     |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Income (Loss) before
 extraordinary items Diluted earnings per share                                  |  | $    | (.75    | )    | $ | .20     |   | $ | .45     |  
|Extraordinary items                                                                                   |  | $    | .0      |      | $ | (.13    | ) | $ | .0      |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Net earnings (loss) per share                                                                         |  | $    | (.75    | )    | $ | .07     |   | $ | .45     |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Weighted average common shares
 outstanding                                                           |  |      |         |      |   |         |   |   |         |  
|Basic                                                                                                 |  |      | 26,362  |      |   | 26,340  |   |   | 26,309  |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Diluted                                                                                               |  |      | 26,362  |      |   | 27,725  |   |   | 27,807  |  
|                                                                                                      |  |      |         |      |   |         |   |   |         |  

The accompanying notes are an integral part
of these financial statements

F-6

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Years Ended December 31, 2007, 2006 and 2005(In thousands)

|                                                                   |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   |         |  
|------------------------------------------------------------------ |  | ------------- | -- | ---------------------------- | - | ----------------- | - | --------------------------------------- | ------ | ------------------ | - | ------ | - | - | ------- | - | - | ------- | -
|                                                                   |  | Common
 Stock |    | Additional
 Paid-In
 Capital |   | Notes
 Receivable |   | Accumulated
 Other
 Comprehensive
 Loss |        | Retained
 Earnings |   | Total  |  
|                                                                   |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |  
|Balance, January 1, 2005                                           |  |               | 26 |                              |   | 90,758            |   |                                         | (6,650 | )                  |   | (1,037 | ) |   | 10,064  |   |   | 93,161  |  
|Accrued interest on notes receivable
 secured by common shares     |  |               |   |                              |   |                  |   |                                         | (337   | )                  |   |       |   |   |        |   |   | (337    | )
|Purchase and retirement of 4 shares of
 common stock               |  |               |   |                              |   | (46               | ) |                                         |       |                    |   |       |   |   |        |   |   | (46     | )
|Issuance of 18 shares of common stock upon
 exercise of options    |  |               |   |                              |   | 46                |   |                                         |       |                    |   |       |   |   |        |   |   | 46      |  
|Comprehensive earnings                                             |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   |         |  
|Net earnings                                                       |  |               |   |                              |   |                  |   |                                         |       |                    |   |       |   |   | 12,506  |   |   | 12,506  |  
|Gain on cash flow hedges                                           |  |               |   |                              |   |                  |   |                                         |       |                    |   | 204    |   |   |        |   |   | 204     |  
|                                                                   |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   |         |  
|Total comprehensive earnings, net of tax                           |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   | 12,710  |  
|                                                                   |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   |         |  
|Balance, December 31, 2005                                         |  | $             | 26 |                              | $ | 90,758            |   | $                                       | (6,987 | )                  | $ | (833   | ) | $ | 22,570  |   | $ | 105,534 |  
|Stock option award compensation                                    |  |               |    |                              |   | 114               |   |                                         |        |                    |   |        |   |   |         |   |   | 114     |  
|Accrued interest on notes receivable
 secured by common shares     |  |               |   |                              |   |                  |   |                                         | (454   | )                  |   |       |   |   |        |   |   | (454    | )
|Purchase and retirement of 13 shares of
 common stock              |  |               |   |                              |   | (148              | ) |                                         |       |                    |   |       |   |   |        |   |   | (148    | )
|Issuance of 38 shares of common stock upon
 exercise of options    |  |               |   |                              |   | 148               |   |                                         |       |                    |   |       |   |   |        |   |   | 148     |  
|Comprehensive earnings                                             |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   |         |  
|Net earnings                                                       |  |               |   |                              |   |                  |   |                                         |       |                    |   |       |   |   | 2,050   |   |   | 2,050   |  
|Gain on cash flow hedges                                           |  |               |   |                              |   |                  |   |                                         |       |                    |   | 135    |   |   |        |   |   | 135     |  
|                                                                   |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   |         |  
|Total comprehensive earnings, net of tax                           |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   | 2,185   |  
|                                                                   |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   |         |  
|Balance, December 31, 2006                                         |  | $             | 26 |                              | $ | 90,872            |   | $                                       | (7,441 | )                  | $ | (698   | ) | $ | 24,620  |   | $ | 107,379 |  
|Stock option award compensation                                    |  |               |    |                              |   | 859               |   |                                         |        |                    |   |        |   |   |         |   |   | 859     |  
|Accrued interest on notes receivable
 secured by common shares     |  |               |   |                              |   |                  |   |                                         | (360   | )                  |   |       |   |   |        |   |   | (360    | )
|Proceeds from notes receivable secured by
 common stock            |  |               |   |                              |   |                  |   |                                         | 2,355  |                    |   |       |   |   |        |   |   | 2,355   |  
|Purchase and retirement of 826 shares of
 common stock             |  |               | (1 | )                            |   | (4,327            | ) |                                         |       |                    |   |       |   |   |        |   |   | (4,328  | )
|Issuance of 1,159 shares of common stock
 upon exercise of options |  |               | 1  |                              |   | 2,958             |   |                                         |       |                    |   |       |   |   |        |   |   | 2,959   |  
|Common shares issued for satisfaction of trade accounts payable    |  |               |   |                              |   | 1,454             |   |                                         |       |                    |   |       |   |   |        |   |   | 1,454   |  
|Common shares received in lieu of Equity note
 receivable          |  |               |   |                              |   | (5,445            | ) |                                         | 5,446  |                    |   |       |   |   |        |   |   | 1       |  
|Loss of controlling interest in affiliate                          |  |               |   |                              |   |                  |   |                                         |       |                    |   |       |   |   | (4,080  | ) |   | (4,080  | )
|Tax Benefit from Stock Options                                     |  |               |   |                              |   | 934               |   |                                         |       |                    |   |       |   |   |         |   |   | 934     |  
|Comprehensive earnings                                             |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   |         |  
|Net earnings                                                       |  |               |   |                              |   |                  |   |                                         |       |                    |   |       |   |   | (19,687 | ) |   | (19,687 | )
|Gain on cash flow hedges                                           |  |               |   |                              |   |                  |   |                                         |       |                    |   | (84    | ) |   |        |   |   | (84     | )
|                                                                   |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   |         |  
|Total Comprehensive earnings, net of tax                           |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   | (19,771 | )
|                                                                   |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   |         |  
|Balance, December 31, 2007                                         |  | $             | 26 |                              | $ | 87,305            |   | $                                       | (0     | )                  | $ | (782   | ) | $ | 853     |   | $ | 87,402  |  
|                                                                   |  |               |    |                              |   |                   |   |                                         |        |                    |   |        |   |   |         |   |   |         |  

The accompanying notes are an integral part
of these financial statements

F-7

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Table of Contents

FLANDERS CORPORATION AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,(In thousands)

|                                                                                                                      |  |      |         |      |   |         |   |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                                      |  | 2007 |         | 2006 |   | 2005    |  
|                                                                                                                      |  |      |         |      |   |         |  
|                                                                                                                      |  |      |         |      |   |         |   |   |         |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                  |  |      |         |      |   |         |   |   |         |  
|Net Earnings                                                                                                          |  | $    | (19,687 | )    | $ | 2,050   |   | $ | 12,506  |  
|Adjustments to reconcile earnings from
 continuing operations to net cash (used in) provided by operating activities: |  |      |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                                                         |  |      | 7,415   |      |   | 8,087   |   |   | 8,527   |  
|Provision for doubtful accounts and notes                                                                             |  |      | 10,638  |      |   | 3,063   |   |   | 2,094   |  
|Provision for obsolete inventory                                                                                      |  |      | 3,133   |      |   | 146     |   |   | 85      |  
|Loss on Goodwill                                                                                                      |  |      | 543     |      |   |         |   |   |         |  
|Loss on sale of property and equipment                                                                                |  |      | 3,152   |      |   | 1       |   |   | 123     |  
|Compensation expense                                                                                                  |  |      | 859     |      |   | 114     |   |   | 0       |  
|Extraordinary (Gain) Loss                                                                                             |  |      | (213    | )    |   | 5,792   |   |   | 0       |  
|Proceeds from insurance claim on inventory                                                                            |  |      | 11,228  |      |   | 2,312   |   |   | 0       |  
|Loss on sale of subsidiaries                                                                                          |  |      | 222     |      |   |         |   |   |         |  
|Deferred taxes                                                                                                        |  |      | (7,082  | )    |   | 825     |   |   | (5,581  | )
|Minority interest                                                                                                     |  |      | (19     | )    |   | 66      |   |   | 216     |  
|Accrued interest on notes receivable
 secured by common shares                                                        |  |      | (360    | )    |   | (454    | ) |   | (337    | )
|Change in working capital components:                                                                                 |  |      |         |      |   |         |   |   |         |  
|Receivables                                                                                                           |  |      | (10,344 | )    |   | (7,021  | ) |   | (8,845  | )
|Inventories                                                                                                           |  |      | 2,527   |      |   | (21,843 | ) |   | 1,302   |  
|Other current assets and income tax receivable                                                                        |  |      | (15,463 | )    |   | (13,234 | ) |   | (550    | )
|Accounts payable                                                                                                      |  |      | 5,441   |      |   | 15,479  |   |   | (5,685  | )
|Accrued expenses                                                                                                      |  |      | 6,069   |      |   | 529     |   |   | 3,419   |  
|Increase in Other Current Liabilities                                                                                 |  |      | 5,880   |      |   |         |   |   |         |  
|Long Term Liabilities Other                                                                                           |  |      | 668     |      |   |         |   |   |         |  
|Income taxes, net                                                                                                     |  |      | 0       |      |   | 0       |   |   | 0       |  
|                                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Net cash (used in) provided by operating
 activities                                                                  |  |      | 4,607   |      |   | (4,088  | ) |   | 7,274   |  
|                                                                                                                      |  |      |         |      |   |         |   |   |         |  
|                                                                                                                     
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                                  |  |      |         |      |   |         |   |   |         |  
|Acquisitions, net of cash acquired                                                                                    |  |      |        |      |   | (154    | ) |   | (2,939  | )
|Disposal, net of cash disposed                                                                                        |  |      | (97     | )    |   |         |   |   |         |  
|Purchase of property and equipment                                                                                    |  |      | (7,838  | )    |   | (20,490 | ) |   | (8,136  | )
|Purchase of technology                                                                                                |  |      |        |      |   |        |   |   | (451    | )
|Proceeds from sale of property and
 equipment                                                                         |  |      | 6,004   |      |   | 306     |   |   | 195     |  
|Proceeds from insurance claim on building
 and equipment                                                              |  |      | 5,500   |      |   | 8,688   |   |   |        |  
|Cash received (paid) on notes receivables                                                                             |  |      | 428     |      |   | (33     | ) |   | (21     | )
|Decrease in other assets                                                                                              |  |      | 872     |      |   | 164     |   |   | 272     |  
|                                                                                                                      |  |      |         |      |   |         |   |   |         |  
|Net cash provided (used) in investing
activities                                                                      |  |      | 4,869   |      |   | (11,519 | ) |   | (11,080 | )
|                                                                                                                      |  |      |         |      |   |         |   |   |         |  

- Continued -

The accompanying notes are an integral part
of these financial statements

F-8

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS
ContinuedYears Ended December 31,(In thousands)

|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                                                                  |  | 2007 |        | 2006 |   | 2005   |  
|                                                                                                                                  |  |      |        |      |   |        |  
|CASH FLOWS
 FROM FINANCING ACTIVITIES                                                                                             |  |      |        |      |   |        |   |   |        |  
|Net proceeds from (payments on) revolving
 credit agreement                                                                       |  |      | (4,847 | )    |   | 19,408 |   |   | 5,458  |  
|Principal payments on long-term borrowings                                                                                        |  |      | (5,685 | )    |   | (3,928 | ) |   | (2,843 | )
|Purchase and retirement of common stock                                                                                           |  |      | (1,369 | )    |   |       |   |   |       |  
|Proceeds from notes receivable secured by
 common shares                                                                          |  |      | 2,355  |      |   |       |   |   |       |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|Net cash provided by (used in) financing
 activities                                                                              |  |      | (9,546 | )    |   | 15,480 |   |   | 2,615  |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|Net (decrease) increase in cash and cash
 equivalents                                                                             |  |      | (70    | )    |   | (127   | ) |   | (1,191 | )
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|CASH AND
 CASH EQUIVALENTS                                                                                                        |  |      |        |      |   |        |   |   |        |  
|Beginning of year                                                                                                                 |  |      | 568    |      |   | 695    |   |   | 1,886  |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|End of year                                                                                                                       |  | $    | 498    |      | $ | 568    |   | $ | 695    |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|SUPPLEMENTAL
 DISCLOSURES OF CASH FLOW INFORMATION                                                                                |  |      |        |      |   |        |   |   |        |  
|                                                                                                                                 
|Interest paid, net of $239, $474 and $116
 interest capitalized to property and equipment for 2007, 2006 and 2005,
 respectively: |  | $    | 2,824  |      | $ | 1,897  |   | $ | 1,656  |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|Income taxes paid                                                                                                                 |  | $    | 179    |      | $ | 2,426  |   | $ | 6,910  |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|Tax impact of Stock Options                                                                                                       |  | $    | 934    |      | $ | 0      |   | $ | 0      |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
 AND FINANCING ACTIVITIES                                                              |  |      |        |      |   |        |   |   |        |  
|                                                                                                                                 
|Cashless exercise of common stock (Net)                                                                                           |  | $    | (738   | )    | $ |       |   | $ |       |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|Accounts receivable in exchange for notes
 receivable                                                                             |  | $    |       |      | $ | 20     |   | $ |       |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|Stock issued in lieu of trade accounts
 payable                                                                                   |  | $    | 1,454  |      | $ |       |   | $ |       |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|Sale of equipment for note receivable                                                                                             |  | $    | 996    |      | $ |       |   | $ |       |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|Common shares received in lieu of Equity
 note                                                                                    |  | $    | 5,446  |      | $ |       |   | $ |       |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|ACQUISITION/DISPOSAL
 OF COMPANIES                                                                                                |  |      |        |      |   |        |   |   |        |  
|Working Capital surplus (deficit)
 acquired/disposed, net of cash and cash equivalents received                                   |  | $    | 3,880  |      | $ | 215    |   | $ | (1,187 | )
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|Fair value of other assets
 acquired/(disposed), principally property and equipment                                               |  | $    | 1,466  |      | $ | 74     |   | $ | 614    |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|Goodwill acquired/(disposed)                                                                                                      |  | $    | 1,428  |      | $ | 295    |   | $ | 4,601  |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|Minority interest                                                                                                                 |  | $    |       |      | $ |       |   | $ | 220    |  
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  
|Long-term debt assumed                                                                                                            |  | $    |       |      | $ |       |   | $ | (1,302 | )
|                                                                                                                                  |  |      |        |      |   |        |   |   |        |  

The accompanying notes are an integral part of these financial
statements

F-9

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

Note A. Nature of Business and Summary of
Significant Accounting Policies

The nature of
the business and a summary of the significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements follows.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Nature
  of business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The Company
  designs, manufactures and sells air filters and related products. It is focused
  on providing complete environmental filtration systems for end uses ranging
  from controlling contaminants in residences and commercial office buildings
  through specialized manufacturing environments for semiconductors and
  pharmaceuticals. The Company also designs and manufactures much of its own
  production equipment to automate processes to decrease labor costs associated
  with its standard products. The Company also produces glass-based air filter
  media for many of its products. The vast majority of the Companys current
  revenues come from the sale of after-market replacement filters, since air
  filters are typically placed in equipment designed to last much longer than
  the filters.                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The Company
  sells some products for end users outside of the United States through
  domestic specialty clean room contractors. These sales are accounted for as
  domestic sales. The Company also sells products through foreign distributors,
  primarily in Europe, and through a wholly-owned subsidiary, which sells to
  customers in the Pacific Rim. Sales through foreign distributors and its
  wholly owned foreign subsidiary total less than 5% of net sales. Assets held
  outside the United States are negligible.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The Company
  has one reportable segment which is air filtration systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 2. Principles
  of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The
  consolidated financial statements include the accounts and operations of the
  Company and its subsidiaries, all of which are wholly owned except for Air
  Filter Sales and Service, Inc. and Superior Diecutting, Inc. which are
  consolidated in accordance with FIN 46. All intercompany transactions and
  balances are eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The Company
  is the primary beneficiary of Air Filter Sales and Service, Inc., which
  qualifies as a variable interest entity. Accordingly, the assets and
  liabilities and revenues and expenses of this company have been included in
  the accompanying consolidated financial statements. As of December 31, 2007
  and 2006, Air Filter Sales and Service, Inc. had assets of $836 and $771,
  liabilities of $788 and $691, revenues of $2,871 and $2,815, and expenses of
  $2,903 and $2,706, respectively. Creditors and beneficial holders of Air
  Filter Sales and Service, Inc have no recourse to the assets or general
  credit of the Company.                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Prior to
  September 30, 2007, Superior Diecutting, Inc. was 50% was owned by two
  officers and directors and 50% was owned by other shareholders unrelated to
  the Company or any of its officers and directors. As of September 30, 2007
  Superior Diecutting, Inc. ceased to be consolidated, due to the Settlement
  Agreement and Mutual Release filed on October 5, 2007, which resulted in the
  Company no longer qualifying as the primary beneficiary. The accompanying
  financial statements present the consolidated result including Superior
  Diecutting, Inc. up until September 30, 2007 with all intercompany
  transactions eliminated. After that date the financial statements do not
  include the financial results of Superior Diecutting, Inc. The revenues and
  expense of Superior Diecutting, Inc. through September 30, 2007 were $16,600
  and $16,139, respectively. The revenues and expense for the year ended
  December 31, 2006 were $24,206 and $22,647, respectively.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-10

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. Significant
  customers                                                                                                                                             
| |                                                                                                                                                                        
| | Net sales for
the years ended December 31, 2007, 2006 and 2005 included sales to the
following major customers, together with the receivables due from those customers:

| |            |  |                     |        |                                                 |   |        |  |      |        |      |   |        |  |   |        | 
| | ---------- |  | ------------------- | ------ | ----------------------------------------------- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
| |            |  | Amount of Net Sales |        | Trade Receivable
  Balance
  As of December 31, |  
| |            |  |                     |        |                                                 |  
| |            |  | 2007                |        | 2006                                            |   | 2005   |  | 2007 |        | 2006 |  
| |            |  |                     |        |                                                 |   |        |  |      |        |      |  
| | Customer A |  | $                   | 25,679 |                                                 | $ | 30,922 |  | $    | 33,905 |      | $ | 1,874  |  | $ | 5,018  | 
| | Customer B |  | $                   | 38,431 |                                                 | $ | 38,549 |  | $    | 34,432 |      | $ | 12,739 |  | $ | 11,906 | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4. Use of
  estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The
  preparation of financial statements in conformity with accounting principles
  generally accepted in the United States of America 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.

F-11

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

Note A. Nature of Business and Summary of
Significant Accounting Policies  Continued

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. Cash
  and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Company
  maintains its cash in bank deposit accounts, which at times, 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
  or designated for equipment acquisitions and certificates of deposit which
  have an original maturity of three months or less when purchased to be cash
  equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 6. Accounts
  Receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Company
  provides an allowance for losses on trade receivables based on a review of
  the current status of existing receivables and managements evaluation of
  periodic aging of accounts. The Company charges off accounts receivable
  against the allowance for losses when an account is deemed to be
  uncollectible. It is the Companys policy to accrue interest on past due
  receivables. The provision expensed for doubtful accounts and notes was
  $10,638, $3,063, and 2,094 for the years ended December 31, 2007, 2006 and
  2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 7. Fair
  value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The carrying
  amount of cash equivalents, trade receivables and trade payables approximates
  fair value at December 31, 2007 and 2006 because of the short maturity of
  these instruments. 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, 2007 and 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 8. Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Inventories
  are valued at lower of cost (first-in, first-out method) or market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 9. Comprehensive
  income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | FAS 130,
  Reporting Comprehensive Income, requires disclosure of comprehensive income
  in addition to the existing income statement. Other comprehensive income
  (loss) is defined as the change in equity during a period, from transactions
  and other events, excluding changes resulting from investments by owners
  (e.g., supplemental stock offerings) and distributions to owners (e.g.,
  dividends). An analysis of the changes in the components of accumulated
  comprehensive income is presented in the statement of changes in
  stockholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 10. Derivative
  financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Effective
  January 1, 2001, the Company adopted Statement of Financial Accounting
  Standard No. 133, Accounting for Derivative Instruments and Hedging
  Activities (SFAS 133) as amended by SFAS 138, Accounting for Certain
  Derivative Instruments and Hedging Activities  an Amendment to FASB
  Statement No. 133. SFAS 133 and SFAS 138 established new accounting and
  reporting standards for derivative instruments, including certain derivative
  instruments embedded in other contracts, and for hedging activities. All
  derivatives, whether designated in hedging relationships or not, are required
  to be recorded on the balance sheet at fair value. If the derivative is a
  cash flow hedge, the effective portions of changes in the fair value of the
  derivative are recorded in other comprehensive income and are recognized in
  the income statement when the hedged item affects earnings. Ineffective
  portions of changes in the fair value of cash flow hedges are recognized in
  earnings

F-12

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

Note A. Nature of Business and Summary of
Significant Accounting Policies  Continued

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company
  has only limited involvement with derivative financial instruments. The
  Company has two interest rate swap agreements to hedge against the potential
  impact on earnings from increases in market interest rates of two variable
  rate bonds. Under the interest rate swap agreements, the Company receives or
  makes payments on a monthly basis, based on the differential between 5.14%
  and a tax exempt interest rate as determined by a remarketing agent. This
  interest rate swap is accounted for as a cash flow hedge in accordance with
  SFAS 133 and SFAS 138. The tax effected fair market value of the interest
  rate swap of $782 and $698 is included in accumulated other comprehensive
  loss at December 31, 2007 and 2006, respectively. The interest rate swap contracts
  expire in 2013 and 2015.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 11. Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | As of
  January 1, 2002, the Company adopted Statement of Financial Accounting
  Standard (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142).
  SFAS 142 changes the accounting for goodwill from an amortization method to
  an impairment-only approach. Thus, effective January 1, 2002, the Company has
  ceased amortization of goodwill, including goodwill recorded in past business
  combinations. The Company does not have any intangible assets with indefinite
  lives other than goodwill.                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | SFAS 142
  requires that goodwill be tested for impairment annually, or more frequently
  if circumstances indicate potential impairment, by comparing the fair value
  of the asset to its carrying amount. Such testing requires, as an initial
  step, that each of the Companys reporting units, as defined in SFAS 142, be
  identified and that the Companys assets and liabilities, including the
  existing goodwill and intangible assets, be assigned to those reporting
  units. The Company has determined it has only one reporting unit and that
  there is no impairment as of December 31, 2007.                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 12. 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
  trade names for impairment. Based upon its most recent analysis, the Company
  believes that no impairment of trademarks and trade names exists at December
  31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 13. Property
  and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Property and
  equipment are stated at cost. Depreciation is computed by the straight-line
  method over estimated useful lives. Amortization of property and equipment
  held under 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 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,
  2007.                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 14. Debt
  issuance costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The costs
  related to the issuance of debt are capitalized and amortized on a
  straight-line basis over the term of the related debt, which approximates the
  effective interest method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 15. Revenue
  recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The
  Companys products are sold with terms and conditions, which vary depending
  on particular business environments in which the Company operates. The
  standard policy of the Company is to recognize revenue in accordance with
  accounting principles generally accepted in the United States of America;
  specifically SAB Topic 13A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Generally,
  sales are recognized when shipments are made to customers. Rebates,
  allowances for damaged goods                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-13

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | and other
  advertising and marketing program rebates, are accrued pursuant to
  contractual provisions and included in accrued expenses. An insignificant
  amount of our revenues fall under the percentage-of-completion method of
  accounting used for long-term contracts. Under this method, sales and gross
  profit are recognized as work is performed based on the relationship between
  actual costs incurred and total estimated costs at completion. Sales and
  gross profit are adjusted prospectively for revisions in estimated total
  contract costs and contract values. Estimated losses are recorded when
  identified.                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 16. Income
  taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Deferred
  taxes are provided on the liability method whereby deferred tax assets are
  recognized for deductible temporary differences and operating loss and tax
  credit carry forwards 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 17. Earnings
  per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Basic EPS is
  calculated by dividing earnings available to common shareholders by the
  weighted average number of common shares outstanding during each period.
  Diluted EPS is similarly calculated, except that the denominator includes
  common shares that may be issued subject to existing rights with dilutive
  potential, except when their inclusion would be antidilutive.                                                                                                                                                                                                                                                                                                                                                  

F-14

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

Note A. Nature of Business and Summary of
Significant Accounting Policies  Continued

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 18. Stock
 Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In December
 2004, the Financial Accounting Standards Board (FASB) issued Statement of
 Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share-Based
 Payment (SFAS 123R). SFAS 123R requires all share-based payments to
 employees, including grants of employee stock options, to be recognized as
 compensation expense in the consolidated financial statements based on their
 fair values. That expense will be recognized over the period during which an
 employee is required to provide services in exchange for the award, known as
 the requisite service period (usually the vesting period). We adopted SFAS
 123R effective beginning January 1, 2006 using the Modified Prospective
 Application Method. Under this method, SFAS 123R applies to new awards and to
 awards modified, repurchased or cancelled after the effective date. Prior to
 the adoption of SFAS 123(R) we accounted for stock option grants using the
 intrinsic value method prescribed in APB Opinion No. 25, Accounting for
 Stock Issued to Employees, and accordingly, recognized no compensation
 expense for stock option grants.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Compensation
 cost is also recognized for the unvested portion of awards granted prior to
 adoption. Prior periods were not restated to reflect the impact of adopting
 the new standard, and there is no cumulative effect.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | As a result
 of adopting SFAS 123(R), our earnings before income taxes and net earnings
 for the year ended December 31, 2007 were $859 and $516 lower, respectively,
 than if we had continued to account for stock based compensation under APB
 Opinion No. 25 for our stock option grants. There was no impact on cash flows
 from operating or financing activities or basic or diluted earnings per
 share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The value of
 each grant is estimated at the grant date using the Black-Scholes option
 model with the following weighted average assumptions for options granted in
 2007, 2006 and 2005: Dividend rate of 0%; risk-free interest rate of 4.75%,
 2.38% and 4.38%, respectively; expected lives of 10, 5, and 5 years
 respectively; and expected price volatility of 50%, 51% and 110%,
 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The
 unrecognized stock-based compensation expense related to nonvested stock
 options was $1,267 and $0 for the years ended December 31, 2007 and 2006,
 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | During 2007
 and 2006, there was $0 of cash received from the exercise of stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | At December
 31, 2006, the Company has three stock-based compensation plans. The following
 table illustrates the effect on net income and earnings per share if the
 Company had applied the fair value recognition provisions of SFAS 123R, to
 stock-based employee compensation prior to January 1, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                                                                                                         |  |      |        |  
| | ----------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | -
| |                                                                                                                         |  | 2005 |       
| |                                                                                                                         |  |      |       
| | Net
 earnings, as reported                                                                                              |  | $    | 12,506 |  
| |                                                                                                                         |  |      |        |  
| | Deduct:
 Total stock-based compensation expense determined under fair value based
 methods for all awards, net of taxes |  |      | (4,112 | )
| |                                                                                                                         |  |      |        |  
|
| | Pro forma
 net earnings                                                                                                 |  | $    | 8,394  |  
| |                                                                                                                         |  |      |        |  
| |                                                                                                                         |  |      |        |  
| | Basic
 earnings per share:                                                                                              |  |      |        |  
| | As reported                                                                                                             |  | $    | .48    |  
| | Pro forma                                                                                                               |  | $    | .32    |  
| |                                                                                                                         |  |      |        |  
| | Diluted earnings per share                                                                                              |  |      |        |  
| | As reported                                                                                                             |  | $    | .45    |  
| | Pro forma                                                                                                               |  | $    | .30    |  

F-15

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

The following
table represents our nonvested stock option activity for the year ended
December 31, 2007:

|                                       |  |                    |      |                                          |   |       |   |   | 
|-------------------------------------- |  | ------------------ | ---- | ---------------------------------------- | - | ----- | - | - | 
|                                       |  | Number of
 Options |      | Weighted Average
 Grant Date
 Fair Value |  
|                                       |  |                    |      |                                          |  
|Nonvested
 options - January 1, 2007   |  |                    |      |                                         |   | $     |   |  | 
|                                       |  |                    |      |                                          |   |       |   |  
|Granted                                |  |                    | 500  |                                          | $ | 4.99  |  
|Vested                                 |  |                    | (100 | )                                        | $ | (4.99 | )
|Forfeited                              |  |                    |      |                                         |   | $     |   |  | 
|                                       |  |                    |      |                                          |   |       |   |   | 
|Nonvested
 options - December 31, 2007 |  |                    | 400  |                                          | $ |       |  |  
|                                       |  |                    |      |                                          |   |       |   |  

The aggregate
intrinsic value of options outstanding at December 31, 2007, based on the
Companys closing stock price of $5.61 as of the last business day of the
period ended December 31, 2007, which would have been received by the optionees
had all options been exercised on that date was $3,923. The aggregate intrinsic
value of options exercisable at December 31, 2007, based on the Companys
closing stock price of $5.61 as of the last business day of the period ended
December 31, 2007, which would have been received by the optionees had all
options exercisable been exercised on that date was $3,675. The aggregate
intrinsic value of options exercised during the years ended December 31, 2007,
2006 and 2005 were $2,646, 294 and 153, respectively. Intrinsic value is the
amount by which the fair value of the underlying stock exceeds the exercise
price of the options.

| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 19. Outbound
 shipping expenses                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                  
| | Outbound
 shipping expenses are included in operating expenses, not in cost of goods
 sold. Outbound shipping expenses were $12,148, $9,813, and $9,455 for the
 years ending December 31, 2007, 2006 and 2005, respectively.
| |                                                                                                                                                                                                                                  
| | 20. Advertising                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                  
| | The costs of
 advertising are expensed as incurred. Advertising expense was $5,788, $2,853,
 and $2,543 for the years ending December 31, 2007, 2006 and 2005,
 respectively.                                                    
| |                                                                                                                                                                                                                                  
| | 21. Reclassifications                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                  
| | Certain
 account balances for 2006 have been reclassified with no effect on net
 earnings or retained earnings to be consistent with the classification
 adopted for the year ended December 31, 2007.                           

F-16

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

Note A. Nature of Business and Summary of
Significant Accounting Policies  Continued

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 22. Impact
 of Recently Issued Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In February
 2006, FASB issued SFAS No. 155. This accounting standard permits fair value
 re-measurement for any hybrid financial instrument containing an embedded
 derivative that otherwise would require bifurcation; clarifies which
 interest-only strips and principal-only strips are not subject to the
 requirements of SFAS No. 133; establishes a requirement to evaluate interests
 in securitized financial assets to identify them as freestanding derivatives
 or as hybrid financial instruments containing an embedded derivative
 requiring bifurcation; clarifies that concentrations of credit risk in the
 form of subordination are not embedded derivatives; and amends SFAS No. 140
 to eliminate the prohibition on a qualifying special-purpose entity from
 holding a derivative financial instrument pertaining to a beneficial interest
 other than another derivative financial instrument. SFAS No. 155 is effective
 for all financial instruments acquired or issued after the beginning of an
 entitys first fiscal year beginning after September 15, 2006. SFAS No. 155
 did not have a material effect on our results of operations or financial
 position.                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In March
 2006, the FASB issued SFAS No. 156, which addresses the accounting for
 servicing assets and liabilities. SFAS No. 156 is effective at the beginning
 of an entitys first fiscal year beginning after September 15, 2006. SFAS No.
 156 did not have a material effect on our results of operations or financial
 position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In July
 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
 Income Taxes (FIN 48), effective for fiscal years beginning after December
 15, 2006. FIN 48 requires a two-step approach to determine how to recognize
 tax benefits in the financial statements where recognition and measurement of
 a tax benefit must be evaluated separately. A tax benefit will be recognized
 only if it meets a more-likely-than-not recognition threshold. For tax
 positions that meet this threshold, the tax benefit recognized is based on
 the largest amount of tax benefit that is greater than 50 percent likely of
 being realized upon ultimate settlement with the taxing authority. See Note I
 Income Taxes below for the impact this had on the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In September
 2006, the Financial Accounting Standards Board issued Statement of Financial
 Accounting Standards (SFAS) 157 Fair Value Measurements. SFAS 157 defines
 fair value, establishes a framework for measuring fair value in generally
 accepted accounting principles (GAAP) and expanded disclosures about fair
 value measurements. This Statement is effective for financial statements
 issued for fiscal years beginning after November 15, 2007. We are currently
 evaluating the impact of adopting SFAS No. 157 on our result of operations
 and financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In September
 2006, the Financial Accounting Standards Board issued Statement of Financial
 Accounting Standards (SFAS) 158 Employers Accounting for Defined Benefit
 Pension and Other postretirement Plansan amendment of FASB Statements no.
 87, 88, 106, and 132(R). SFAS 158 improves financial reporting by requiring
 an employer to recognize the overfunded or underfunded status of a defined
 benefit postretirement plan as an asset or liability in its statement of
 financial position. Also, requires an employer to measure the funded status
 of a plan as of the date of its year-end statement of financial position,
 with limited exceptions. An employer that is a business entity and sponsors
 one or more single-employer defined benefit plans is required to recognize
 the funded status of a benefit plan in its statement of financial position;
 recognize other components not recognized by FASB 87 or 106; measure defined
 benefit plan assets and obligations as of the date of the employers fiscal
 year-end statement of financial position.; and disclose addition information.
 Publicly traded companies are required to initially recognize the funded
 status of a defined benefit postretirement plan and to provide the required
 disclosures as of the end of the fiscal year ending after December 15, 2006.
 SFAS No. 158 did not have a material effect on our results of operations or
 financial position.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | On September
 13, 2006, the Securities and Exchange Commission (SEC) staff issued Staff
 Accounting Bulletin (SAB) 108, interpretive guidance on how errors that
 carryover or reversal of prior year misstatements should be considered from a
 materiality perspective and be considered in quantifying a current year
 misstatement. The SEC staff believes that public companies should use both
 the current year income statement approach and the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-17

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | balance
 sheet approach. Then evaluate whether either approach results in quantifying
 a misstatement that, when all relevant quantitative and qualitative factors
 are considered, is material. SAB 108 also discusses when it would be
 appropriate to record a one-time cumulative adjustment for prior year
 misstatements that were considered immaterial along with required
 disclosures. SAB 108 did not have a material effect on our results of
 operations or financial position.                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In February
 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets
 and Financial Liabilities, which permits entities to choose to measure many
 financial instruments and certain other items at fair value that are not
 currently required to be measured at fair value and establishes presentation
 and disclosure requirements designed to facilitate comparisons between
 entities that choose different measurement attributes for similar types of
 assets and liabilities. SFAS No. 159 is effective for fiscal years beginning
 after November 15, 2007. The Company is in the process of evaluating the
 effect, if any, the adoption of SFAS No. 159 will have on its financial
 statements.                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In January
 2008, the FASB posted SFAS No. 133 Implementation Issue No. E23, Issues
 Involving the Application of the Shortcut Method under Paragraph 68. This
 standard addresses issues pertaining to the application of the shortcut
 method in accounting for hedges when the settlement of a hedged item occurs
 subsequent to the interest rate swap trade date. It also addresses hedging
 relationships when the transaction price of an interest rate swap is zero.
 This standard is effective for hedging relationships designated on or after
 January 1, 2008 and requires the reassessment of preexisting hedges utilizing
 the shortcut method under this new guidance. We are currently evaluating this
 standard but we do not anticipate that the adoption of this standard will
 have a material effect on our results of operations or financial position.

Note B. Inventories

| |                                                      
| | -----------------------------------------------------
| | Inventories
 consist of the following at December 31:

| |                   |  |      |        |      |   |        | 
| | ----------------- |  | ---- | ------ | ---- | - | ------ | 
| |                   |  | 2007 |        | 2006 |  
| |                   |  |      |        |      |  
|
| | Finished
 goods   |  | $    | 27,209 |      | $ | 31,786 | 
| | Work in
 progress |  |      | 3,254  |      |   | 5,535  | 
| | Raw
 materials    |  |      | 19,631 |      |   | 23,241 | 
| |                   |  |      |        |      |   |        | 
|
| |                   |  |      | 50,094 |      |   | 60,562 | 
| | Less
 allowances  |  |      | 2,858  |      |   | 1,623  | 
| |                   |  |      |        |      |   |        | 
|
| |                   |  | $    | 47,236 |      | $ | 58,939 | 
| |                   |  |      |        |      |   |        | 

Note C. Other Assets

| |                                                        |  |      |       |      |   |       | 
| | ------------------------------------------------------ |  | ---- | ----- | ---- | - | ----- | 
| | Other assets
 consist of the following at December 31: |  |      |       |      |   |       | 
| |                                                        |  | 2007 |       | 2006 |  
| |                                                        |  |      |       |      |  
|
| | Real estate
 held for sale                             |  | $    | 52    |      | $ | 52    | 
| | Notes receivable                                       |  |      | 3,530 |      |   | 910   | 
| | Deposits                                               |  |      | 563   |      |   | 421   | 
| | Deferred
 expenses                                     |  |      | 154   |      |   | 365   | 
| | Investment,
 at cost                                   |  |      | 410   |      |   | 405   | 
| |                                                        |  |      |       |      |   |       | 
|
| |                                                        |  | $    | 4,709 |      | $ | 2,153 | 
| |                                                        |  |      |       |      |   |       | 

F-18

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

| |                                                           
| | ----------------------------------------------------------
| | Notes
receivable consists of the following at December 31,

| |                                                                                                                                              |  |      |       |      |   |      |  
| | -------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ---- | -
| |                                                                                                                                              |  | 2007 |       | 2006 |  
| |                                                                                                                                              |  |      |       |      |  
| | Note receivable, which bears interest at 9%
 per annum. $4 due each week beginning July1, 2004.                                              |  | $    | 49    |      | $ | 224  |  
| |                                                                                                                                              |  |      |       |      |   |      |  
| | Senior note receivable, which is interest
 free for first year and 5% per annum thereafter. $6.5 due each month
 beginning January 31, 2005. |  |      | 274   |      |   | 352  |  
| |                                                                                                                                              |  |      |       |      |   |      |  
| | Junior note receivable, which is interest
 free. $5 due each quarter beginning March 31, 2005.                                               |  |      | 245   |      |   | 265  |  
| |                                                                                                                                              |  |      |       |      |   |      |  
| | Note Receivable, which bears interest at
 the rate of 6.5% per annum. $5.7 due each month beginning October 14th,2007.                       |  |      | 494   |      |   |      |  
| |                                                                                                                                              |  |      |       |      |   |      |  
| | Note Receivable, which bears interest at
 the rate of 6.5% per annum. $20 due each month beginning December 4th,
 2007.                      |  |      | 1,772 |      |   |      |  
| |                                                                                                                                              |  |      |       |      |   |      |  
| | Note Receivable, which bears interest at
 the rate of 6.5% per annum. $3.6 due each month beginning December 4th,
 2007.                     |  |      | 315   |      |   |      |  
| |                                                                                                                                              |  |      |       |      |   |      |  
| | Note Receivable, which bears interest at
 the rate of prime plus 1.5%. $4.3 due each month beginning February 21st,
 2003.                   |  |      | 258   |      |   |      |  
| |                                                                                                                                              |  |      |       |      |   |      |  
| | Various other notes receivable                                                                                                               |  |      | 393   |      |   | 420  |  
| | Less: Current portion of notes receivable                                                                                                    |  |      | (270  | )    |   | (351 | )
| |                                                                                                                                              |  |      |       |      |   |      |  
| | Total                                                                                                                                        |  | $    | 3,530 |      | $ | 910  |  
| |                                                                                                                                              |  |      |       |      |   |      |  

F-19

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

Note D. Intangible Assets

Intangible
assets consist of the following at December 31:

|                                                                                                                                                                                            |  |      |       |      |   |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | 
|                                                                                                                                                                                            |  | 2007 |       | 2006 |  
|                                                                                                                                                                                            |  |      |       |      |  
|Goodwill                                                                                                                                                                                    |  | $    | 3,031 |      | $ | 5,002 | 
|Trademarks and trade names, net
 of accumulated amortization of $903 and $1,256 in 2007 and 2006, respectively                                                                              |  | $    | 841   |      | $ | 973   | 
|                                                                                                                                                                                            |  |      |       |      |   |       | 
|                                                                                                                                                                                            |  |      |       |      |   |       | 
|                                                                                                                                                                                            |  | $    | 3,872 |      | $ | 5,975 | 
|                                                                                                                                                                                            |  |      |       |      |   |       | 
|                                                                                                                                                                                            |  |      |       |      |   |       | 
|Amortization
 expense was $131, $147 and $141 in 2007, 2006 and 2005, respectively.
 Estimated amortization expense for each of the ensuing years through December
 31, 2011 is as follows:

|     |  |   |     | 
|---- |  | - | --- | 
|2008 |  | $ | 128 | 
|2009 |  | $ | 103 | 
|2010 |  | $ | 91  | 
|2011 |  | $ | 91  | 
|2012 |  | $ | 91  | 

Note E. Property and Equipment

Property
and equipment and estimated useful lives consist of the following at December
31:

|                                                                                                                             |  |      |         |      |   |                         |  |             | 
|---------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ----------------------- |  | ----------- | 
|                                                                                                                             |  | 2007 |         | 2006 |   | Estimated
 Useful Lives | 
|                                                                                                                             |  |      |         |      |  
|                                                                                                                             |  |      |         |      |  
|Land                                                                                                                         |  | $    | 1,124   |      | $ | 1,673                   |  |            | 
|Buildings                                                                                                                    |  |      | 30,656  |      |   | 40,155                  |  | 15-40 years | 
|Machinery and equipment                                                                                                      |  |      | 67,395  |      |   | 72,097                  |  | 5 -15 years | 
|Office equipment                                                                                                             |  |      | 10,202  |      |   | 10,309                  |  | 5-7 years   | 
|Vehicles                                                                                                                     |  |      | 1,699   |      |   | 2,026                   |  | 5 years     | 
|Construction in progress                                                                                                     |  |      | 4,624   |      |   | 15,641                  |  |            | 
|                                                                                                                             |  |      |         |      |   |                         |  |             | 
|                                                                                                                             |  |      | 115,700 |      |   | 141,901                 |  |             | 
|Less accumulated depreciation                                                                                                |  |      | 54,232  |      |   | 64,604                  |  |             | 
|                                                                                                                             |  |      |         |      |   |                         |  |             | 
|                                                                                                                             |  |      |         |      |   |                         |  |             | 
|                                                                                                                             |  | $    | 61,468  |      | $ | 77,297                  |  |             | 
|                                                                                                                             |  |      |         |      |   |                         |  |             | 
|                                                                                                                             |  |      |         |      |   |                         |  |             | 
|Total
 depreciation expense charged to operations totaled $7,073, $7,717, and $8,170
 for 2007, 2006 and 2005, respectively.

F-20

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

Note F. Accrued Expenses

Accrued
expenses at December 31, 2007 and 2006 were as follows:

|                        |  |      |        |      |   |        | 
|----------------------- |  | ---- | ------ | ---- | - | ------ | 
|                        |  | 2007 |        | 2006 |  
|                        |  |      |        |      |  
|                        |  |      |        |      |   |        | 
|Vendor
 Rebates         |  | $    | 7,226  |      | $ | 4,282  | 
|Bank
 overdraft         |  | $    | 2,394  |      | $ | 1,646  | 
|Other
 accrued expenses |  | $    | 14,973 |      | $ | 12,839 | 
|                        |  |      |        |      |   |        | 
|                        |  | $    | 24,593 |      | $ | 18,767 | 
|                        |  |      |        |      |   |        | 

Note G. Pledged Assets and Debt

A
summary of the Companys debt, and collateral pledged thereon, consists of the
following at December 31:

|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | 
|                                                                                                                                                                                                                                                      |  | 2007 |        | 2006 |  
|                                                                                                                                                                                                                                                      |  |      |        |      |  
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|Long-term debt:                                                                                                                                                                                                                                       |  |      |        |      |   |        | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|Prime plus 0 to .50 percent (7.75% at
 December 31, 2007) revolving line of credit; interest rate dependent on fixed
 charge coverage*.                                                                                                               |  | $    | 16,019 |      | $ | 20,866 | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|Prime plus 0 to .50 percent term note
 agreement; interest rate dependent on fixed charge coverage*.                                                                                                                                                  |  |      | 0      |      |   | 1,168  | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|LIBOR plus 2.25% note (mortgage) payable to
 a bank, due in monthly payments of $14 including interest, collateralized by
 certain land, building and improvements, due October 2007.                                                                 |  |      | 1,784  |      |   | 1,877  | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|Prime plus 0 to .50 percent term note
 agreement due to bank; interest rate dependent on fixed charge coverage*.                                                                                                                                      |  |      | 0      |      |   | 3,583  | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|6.5 percent note payable to a regional
 development authority, due in varying quarterly installments, plus interest,
 through December 2017, collateralized by a security agreement and financing
 statement on real and personal property.           |  |      | 3,920  |      |   | 4,190  | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|Note payable to a bank with interest at
 prime plus 0.25 percent, with rate adjusted annually (7.50% at December 31,
 2007), due in monthly payments of $7 including interest through June 2017,
 collateralized by a deed of trust on real property. |  |      | 565    |      |   | 604    | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|Industrial revenue bond with a variable tax
 exempt interest rate as determined by a remarketing agent, with rate
 effectively fixed at 5.14% by an interest-rate swap, balance due April 1,
 2015, collateralized by a $4,000 letter of credit.      |  |      | 4,000  |      |   | 4,000  | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|Industrial revenue bond with a variable tax
 exempt interest rate as determined by a remarketing agent, with rate
 effectively fixed at 5.14% by an interest-rate swap, balance due April 1,
 2013, collateralized by a $4,500 letter of credit.      |  |      | 4,500  |      |   | 4,500  | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|Prime plus 2.0 percent revolving line of
 credit up to $100, canceled in 2007.                                                                                                                                                                        |  |      | 0      |      |   | 100    | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|Various obligations under capital lease
 agreements                                                                                                                                                                                                   |  |      | 1,560  |      |   | 1,992  | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|                                                                                                                                                                                                                                                      |  | $    | 32,348 |      | $ | 42,880 | 
|Less current maturities                                                                                                                                                                                                                               |  |      | 2,736  |      |   | 5,075  | 
|                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|                                                                                                                                                                                                                                                      |  |      | 29,612 |      |   | 37,805 | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|Less long-term capital lease obligations,
 less current maturities                                                                                                                                                                                    |  |      | 943    |      |   | 1,372  | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 
|                                                                                                                                                                                                                                                      |  | $    | 28,669 |      | $ | 36,433 | 
|                                                                                                                                                                                                                                                      |  |      |        |      |   |        | 

F-21

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Aggregate
 maturities required on long-term debt and capital lease obligations as of
 December 31, 2007 are due in future years as follows:

|                         |             |  |   |        | 
|------------------------ | ----------- |  | - | ------ | 
|Year Ending December 31, |             |  |  
|                         |             |  |  
|                         |             |  |   |        | 
|                         | 2008        |  | $ | 2,736  | 
|                         | 2009        |  |   | 17,033 | 
|                         | 2010        |  |   | 574    | 
|                         | 2011        |  |   | 450    | 
|                         | 2012        |  |   | 472    | 
|                         | Later years |  |   | 11,083 | 
|                         |             |  |   |        | 
|                         |             |  |   |        | 
|                         |             |  | $ | 32,348 | 
|                         |             |  |   |        | 

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Our current
 revolving credit agreement with a bank provides a maximum line of credit of
 $36 million (subject to availability) and bears interest at either (i) LIBOR
 plus between 1.75% and 2.25%, dependent on the Companys fixed charge
 coverage during the prior twelve months; or (ii) the banks base rate, plus
 between 0% and .5%, dependent on the Companys fixed charge coverage during
 the prior twelve months. Up to $11 million of this credit facility may be
 used to issue letters of credit. The revolving credit agreement is part of a
 combined facility with a bank that also includes an $11 million facility to
 guarantee letters of credit. The line of credit is due in 2009. The combined
 facility is collateralized by substantially all of the Companys assets, is
 guaranteed by the Companys majority stockholder and restricts capital
 expenditures, payment of dividends and share repurchases. As of December 31,
 2007 the financial covenants of the Company have been waived.

F-22

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in
thousands, except per share amounts)

|               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note H. Leases
|              
|               | The Company
 leases certain facilities and equipment under long-term non-cancelable
 operating leases, which may be renewed in the ordinary course of business,
 including a building lease with a related party. The Company leases certain manufacturing and warehousing space
 under a capital lease with an original term of ten years with two consecutive
 ten-year renewal options. Leased
 capital assets are included in property and equipment as follows at December
 31:

| |                          |  |      |        |      |   |        |  
| | ------------------------ |  | ---- | ------ | ---- | - | ------ | -
| |                          |  | 2007 |        | 2006 |  
| |                          |  |      |        |      |  
| |                          |  |      |        |      |   |        |  
| | Buildings                |  | $    | 3,700  |      | $ | 3,700  |  
| | Machinery and equipment  |  |      | 707    |      |   | 490    |  
| | Office equipment         |  |      | 204    |      |   | 204    |  
| | Accumulated depreciation |  |      | (1,249 | )    |   | (1,221 | )
| |                          |  |      |        |      |   |        |  
| |                          |  |      |        |      |   |        |  
| |                          |  | $    | 3,362  |      | $ | 3,173  |  
| |                          |  |      |        |      |   |        |  

| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Future
 minimum payments, by year and in aggregate, under capital leases and
 operating leases consist of the following at December 31, 2007:

|                                      |  |                |       |                  |   |        | 
|------------------------------------- |  | -------------- | ----- | ---------------- | - | ------ | 
|Year Ending December 31,              |  | Capital leases |       | Operating leases |  
|                                      |  |                |       |                  |  
|                                      |  |                |       |                  |  
|2008                                  |  | $              | 736   |                  | $ | 5,686  | 
|2009                                  |  |                | 722   |                  |   | 5,758  | 
|2010                                  |  |                | 209   |                  |   | 4,982  | 
|2011                                  |  |                | 52    |                  |   | 4,101  | 
|2012                                  |  |                | 47    |                  |   | 3,805  | 
|Later years                           |  |                | 0     |                  |   | 44,007 | 
|                                      |  |                |       |                  |   |        | 
|                                      |  |                |       |                  |  
|Total minimum lease payments          |  | $              | 1,766 |                  | $ | 68,339 | 
|                                      |  |                |       |                  |   |        | 
|Less amount representing interest     |  |                | 160   |                  |   |        | 
|                                      |  |                |       |                  |   |        | 
|                                      |  |                |       |                  |  
|Present value of net minimum payments |  |                | 1,606 |                  |   |        | 
|Current portion                       |  |                | 618   |                  |   |        | 
|                                      |  |                |       |                  |   |        | 
|                                      |  |                |       |                  |  
|Long-term portion                     |  | $              | 988   |                  |   |        | 
|                                      |  |                |       |                  |   |        | 

| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Total rent
 expense charged to operations was approximately $7,075, $5,138, and $3,539
 for 2007, 2006 and 2005, respectively.

F-23

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in
thousands, except per share amounts)

|                     |                                                                                                    
|-------------------- | ---------------------------------------------------------------------------------------------------
|Note I. Income Taxes
|                    
|                     | The
 Companys provision (benefit) for income taxes is as follows for the years
 ended December 31:

| |                 |  |      |        |      |   |        |   |   |        |  
| | --------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
| |                 |  | 2007 |        | 2006 |   | 2005   |  
| |                 |  |      |        |      |   |        |  
| | Current:        |  |      |        |      |   |        |   |   |        |  
| | Federal         |  | $    | (1,961 | )    | $ | 5,785  |   | $ | 8,834  |  
| | State           |  |      | (168   | )    |   | 496    |   |   | 757    |  
| | Foreign         |  |      | 285    |      |   | 90     |   |   | 34     |  
| |                 |  |      |        |      |   |        |   |   |        |  
| |                 |  |      | (1,844 | )    |   | 6,371  |   |   | 9,625  |  
| |                 |  |      |        |      |   |        |   |   |        |  
| | Deferred:       |  |      |        |      |   |        |   |   |        |  
| | Federal         |  |      | (6,398 | )    |   | (3,397 | ) |   | (4,500 | )
| | State           |  |      | (549   | )    |   | (291   | ) |   | (386   | )
| |                 |  |      |        |      |   |        |   |   |        |  
| |                 |  |      |        |      |   |        |   |   |        |  
| |                 |  |      | (6,947 | )    |   | (3,688 | ) |   | (4,886 | )
| |                 |  |      |        |      |   |        |   |   |        |  
| |                 | 
| | Total provision |  | $    | (8,791 | )    | $ | 2,683  |   | $ | 4,739  |  
| |                 |  |      |        |      |   |        |   |   |        |  

| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | The income
 tax provision for continuing operations differs from the amount of tax
 determined by applying the Federal statutory rate as follows:

| |                                                   |  |      |         |      |   |       |   |   |        |  
| | ------------------------------------------------- |  | ---- | ------- | ---- | - | ----- | - | - | ------ | -
| |                                                   |  |      |         |      |   |       |  
| |                                                   |  | 2007 |         | 2006 |   | 2005  |  
| |                                                   |  |      |         |      |   |       |  
| | Income tax provision at statutory rate:           |  | $    | (10,042 | )    | $ | 2,873 |   | $ | 6,036  |  
| | Increase (decrease) in income taxes due to:       |  |      |         |      |   |       |   |   |        |  
| | Nondeductible expenses                            |  |      | 72      |      |   | 32    |   |   | 28     |  
| | State income taxes net                            |  |      | (878    | )    |   | 378   |   |   | 683    |  
| | Foreign taxes/Non consolidated
 subs              |  |      | (111    | )    |   | 0     |   |   | 0      |  
| | Interest, Penalties, and Other
 tax contingencies |  |      | 1,335   |      |   | 0     |   |   | 0      |  
| |                                                   |  |      |         |      |   |       |   |   |        |  
| | Credits and adjustments                           |  |      | (812    | )    |   | (600  | ) |   | (2,008 | )
| | Change in valuation allowance                     |  |      | 1,645   |      |   | 0     |   |   | 0      |  
| |                                                   |  |      |         |      |   |       |   |   |        |  
| |                                                   | 
| |                                                   |  | $    | (8,791  | )    | $ | 2,683 |   | $ | 4,739  |  
| |                                                   |  |      |         |      |   |       |   |   |        |  

F-24

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in
thousands, except per share amounts)

|                                 |                                                                                                                                                                                                              
|-------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note I. Income Taxes  Continued
|                                
|                                 | The
 components giving rise to the deferred tax assets and liabilities included in
 the accompanying consolidated balance sheets at December 31, 2007 and
 December 31, 2006 were comprised of the following:

| |                                          |  |      |        |      |   |         |  
| | ---------------------------------------- |  | ---- | ------ | ---- | - | ------- | -
| |                                          |  | 2007 |        | 2006 |  
| |                                          |  |      |        |      |  
| | Deferred tax assets/(liabilities):       |  |      |        |      |   |         |  
| | Accounts receivable allowance            |  | $    | 1,324  |      | $ | 609     |  
| | Inventory allowance and
 capitalization  |  |      | 1,873  |      |   | 1,743   |  
| | Accrued expenses                         |  |      | 710    |      |   | 410     |  
| | Deferred expenses                        |  |      | (85    | )    |   | 1       |  
| | State credits                            |  |      | 97     |      |   | 400     |  
| | FIN 48 Interest  Current                |  |      | 278    |      |   | 0       |  
| | Foreign Income                           |  |      | 0      |      |   | 169     |  
| |                                          |  |      |        |      |   |         |  
| | Net Current Asset                        |  | $    | 4,197  |      | $ | 3,332   |  
| |                                          |  |      |        |      |   |         |  
| | Deferred tax assets/(liabilities):       |  |      |        |      |   |         |  
| | Property and equipment                   |  | $    | (6,357 | )    | $ | (12,226 | )
| | Stock Options                            |  |      | 366    |      |   | 0       |  
| | Interest rate swap                       |  |      | 521    |      |   | 466     |  
| | State Tax expense                        |  |      | 196    |      |   | 0       |  
| | FIN 48 Interest expense                  |  |      | 30     |      |   | 0       |  
| | State net operating loss carry
 forwards |  |      | 669    |      |   | 283     |  
| | State credits                            |  |      | 3,401  |      |   | 4,166   |  
| |                                          |  |      |        |      |   |         |  
| | Net Noncurrent Liability                 |  | $    | (1,174 | )    | $ | (7,311  | )
| |                                          |  |      |        |      |   |         |  
| |                                          |  |      |        |      |   |         |  
| | Current assets                           |  | $    | 4,197  |      | $ | 3,332   |  
| | Noncurrent Liabilities                   |  |      | (1,174 | )    |   | (7,311  | )
| |                                          |  |      |        |      |   |         |  
| | Total Deferred Tax                       |  | $    | 3,023  |      | $ | (3,979  | )
| |                                          |  |      |        |      |   |         |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The IRS is
 currently examining the Companys federal income tax returns of 2002, 2003,
 2004, 2005, and 2006. To date the IRS
 has not proposed any material adjustments for the 2004 through 2006, however,
 for the 2002 and 2003 examination,
 the IRS has proposed certain changes, resulting in additional liabilities
 due. The Company has submitted a petition
 to the IRS for a redetermination of the changes with the U.S. Tax Court. These liabilities have been included in
 the Companys FIN 48 liability discussed below.                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | FIN 48                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In June
 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
 Income Taxes (FIN 48), which clarifies the accounting for uncertainty in
 income taxes recognized in a companys financial statements in accordance
 with FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a
 recognition threshold and measurement attribute for the financial statement
 recognition and measurement of a tax position taken or expected to be taken
 in a tax return. FIN 48 also provides
 guidance on de-recognition of tax benefits, classification on the balance
 sheet, interest and penalties, accounting in interim periods, disclosure, and
 transition. The Company adopted FIN
 48 effective January 1, 2007.
|
| | The Company
 is subject to income taxes in the U.S, Mexico and Singapore. Significant
 judgment is required in evaluating our tax positions and determining our
 provision for income taxes. During the ordinary course of business, there are
 many transactions and calculations for which the determination of the
 ultimate tax effects is uncertain. We record our tax provision based on
 current and future income taxes that will be due. In the                                                                                                                                                                                                                                                                                                               

F-25

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | determination
 of our provision, we have taken certain tax positions in the consideration of
 the effects of income and expenses that have been recognized and included in
 the accompanying financial statements that may or may not be recognized in
 the determination of current or future income taxes. Under Fin 48 we record a
 liability for these unrecognized tax benefits when we believe that certain
 positions might be challenged despite our belief that our tax return
 positions are fully supportable. We review our liability for unrecognized tax
 benefits quarterly and adjust it in light of changing facts and
 circumstances, such as the outcome of tax audit. We calculate and accrue
 potential interest and penalties on our FIN 48 liability.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Included in
 our deferred income taxes as of January 1, 2007, the effective date of FIN
 48, was approximately $5.6 million relating to unrecognized tax benefits that
 we have determined were FIN 48 liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The
 reconciliation of our liability for unrecognized tax benefits are as follows
 (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                                               |  |   |       |  
| | ------------------------------------------------------------- |  | - | ----- | -
| | Balance at
 January 1, 2007                                   |  | $ | 5,625 |  
| |                                                               |  |   |       |  
| | Gross
 increases to tax positions in prior periods            |  |   | 0     |  
| | Gross
 decreases to tax positions in prior periods            |  |   | (400  | )
| | Gross
 increases to current period tax positions              |  |   | 0     |  
| | Gross
 decreases to current period tax positions              |  |   | (0    | )
| | Audit
 settlements paid during 2007                           |  |   | (0    | )
| | Decreases
 related to the lapse of the statute of limitations |  |   | (0    | )
| |                                                               |  |   |      
| | Balance at
 December 31, 2007                                 |  | $ | 5,225 |  
| |                                                               |  |   |       |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
 December 31, 2007, the amount of accrued interest and penalties related to
 unrecognized tax benefits was $1.0 million net of federal income tax
 benefits. Interest and penalties for the year ended December 31, 2007 was $.2
 million, net of federal income tax benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In
 determination of our unrecognized tax benefits that give rise to our FIN 48
 liability, we take into account potential audit assessments. We are currently
 under examination by the Internal Revenue Service for calendar years 2002
 through 2006. As previously indicated we are currently disputing proposed
 audit assessments of approximately $2 million relating to the 2002 and 2003
 IRS audit, assessed in April of 2007. We expect to settle these amounts
 within the next 12 months. Although the amount of the assessment is still
 being disputed, we have reserved for this item in our FIN 48 liability. We
 estimate changes to our unrecognized tax benefits related to the settlement
 in the next 12 months to be approximately $4.7 million.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | We also may
 be subject to examination, in the following major jurisdictions for the years
 specified: Mexico for 2002 through 2006, Singapore for 2000 through 2006,
 Florida for 2002 through 2006, and North Carolina for 2002 to 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Note J. Commitments and Contingencies

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Employment
 Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Messr.
 Amerson has an employment agreement effective as of December 15, 1995
 (Employment Agreement). The Employment Agreement, as amended, provides for
 an annual base salary of $350 Mr. Amerson and terminates in 2010. 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; (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, 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 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
 of the Company has occurred.

F-26

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

Note J. Commitments and Contingencies 
Continued

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. Litigation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | From time to
 time, the Company is a party as plaintiff or defendant to various legal
 proceedings related to our normal business operations. In the opinion of
 management, although the outcome of any legal proceeding cannot be predicted
 with certainty, the ultimate liability of the Company in connection with its
 legal proceedings will not have a material adverse effect on the Companys
 financial position, but could be material to the results of operations in any
 one future accounting period. The Company makes appropriate reserves for
 litigation, even if not material. Defense costs are expensed as incurred.                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 3. Self-Insurance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | During all
 periods presented, workers compensation claims incurred by employees were
 fully insured through a high deductible policy with a policy year ending each
 May. The deductible per employee was $500 in 2007 and $500 in 2006, with no
 limit in the aggregate. The Company continuously monitors and estimates the
 estimated costs of claims incurred based on historical loss information and
 other information provided by its carriers claims management personnel.
 Included in the liabilities in the accompanying balance sheets are accrued
 workers compensation expenses of approximately $1,000 and $201 as of
 December 31, 2007 and 2006, respectively.                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Company
 provides medical benefits to its employees under a self-insured program.
 Through June 30, 2002, the Company paid for 100% of an employees health costs
 as the services were incurred. In July 2002, the Company changed the program
 that provides medical benefits to its employees once certain deductibles are
 met. The benefits to the employees are limited to $35 per year with a $1,000
 lifetime benefit. The Company estimates the amount of incurred but unreported
 claims based on historical information. Included in the liabilities in the
 accompanying balance sheets are estimated accrued health insurance expenses
 of approximately $200 and $200 as of December 31, 2007 and 2006,
 respectively. The employers portion of claims charged to operations totaled
 approximately $974, $1,085 and $971 for 2007, 2006 and 2005, respectively.

F-27

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4. License
 and Royalty Agreements                                                                                                                                                                                       
| |                                                                                                                                                                                                                          
| | The Company
 has secured licensing and royalty agreements with two companies allowing the
 Company to use their trade names and brands on its products. Costs associated
 with these agreements are expensed as incurred.

Note K. Employee Benefit Plans

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company
 has a defined contribution 401(k) salary reduction plan intended to qualify
 under section 401(a) of the Internal Revenue Code of 1986 (Salary Savings
 Plan). The Salary Savings Plan allows eligible employees, as defined in the
 plan document, to defer up to fifteen percent of their eligible compensation,
 with the Company contributing an amount determined at the discretion of the
 Companys Board of Directors. The Company contributed approximately $96, $100
 and $97 to the Salary Savings Plan for the years ended December 31, 2007, 2006
 and 2005, respectively.                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | During 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, key employees of the Company and outside
 consultants to the Company. There are 1,987,000 shares of Common Stock
 reserved for award under the LTI Plan. During 2007, 2006 and 2005, the
 Company awarded options to purchase 0, 0 and 670,000 shares of Common Stock
 under the LTI Plan, respectively.                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | During 1996,
 the Company also adopted the 1996 Director Option Plan which provides for the
 grant of 50,000 stock options to outside directors of the Company who were
 elected or appointed after February 1, 1996, and who were not existing
 directors on the effective date of the plan. Each such outside director who
 is serving as a director on January 1 of each calendar year will
 automatically be granted an option to acquire up to 5,000 shares of Common
 Stock on such date, assuming such outside director had been serving for at
 least six months prior to the date of grant. During 2007, 2006 and 2005, the
 Company awarded options to purchase 0, 20,000 and 125,000 shares,
 respectively, of common stock under the 1996 Director Option Plan.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | During 2007,
 the Company adopted the 2007 Equity Incentive Plan. The Company has reserved
 2,000,000 shares of its Common Stock for issuance under the 2007 Equity
 Incentive Plan that expires in 2017. During 2007, the Company awarded options
 to purchase 620,000 shares of common stock under the 2007 Equity Incentive
 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-28

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in
thousands, except per share amounts)

|                                                 |                                                                                                                                                                                                                                                                          
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note L. Extraordinary Items                     
|                                                 |                                                                                                                                                                                                                                                                          
|                                                 | In 2006, a
 warehouse in Texas was destroyed by a fire and a warehouse in Pennsylvania
 was damaged by a flood. The Company reported an extraordinary gain on the
 fire of $4,558 (net of income taxes of $3,039).                                                       
|                                                 |                                                                                                                                                                                                                                                                          
|                                                 | In 2007, a
 warehouse in Bartow was destroyed by a fire. The Company reported an
 extraordinary loss on the fire of $4,345 (net of income taxes of $2,897).
 This extraordinary item will be subject to change as the insurance claims
 process progresses for the claim.
|                                                 |                                                                                                                                                                                                                                                                          
|Note M. Related Party
 Transactions and Balances

On October 3,
2007 the Company entered into a Settlement Agreement and Mutual Release,
effective as of September 30, 2007, by and between Steven K. Clark (former
Chief Executive Officer); Robert R. Amerson (Current Chief Executive Officer);
Harry L. Smith, Jr. (Chief Operating Officer); Wal-Pat, LLC, a North Carolina
limited liability company; and Mercury Die Cutting, LLC, a Florida limited
liability company. A copy of the Settlement Agreement was filed as a Form 8-K
on October 5, 2007 with the Securities and Exchange Commission. The major terms
affecting the Company are summarized below:

| |   |                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mr. Clark
 transfers his fifty percent (50%) membership interest in Wal-Pat to Mr.
 Amerson.                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                    
| |  | Mr. Clark
 exercised, on a cashless exercise basis, a stock option for 1,000,000 shares
 of Flanders common stock at an exercise price of $2.50 per share by tendering
 543,748 shares of Flanders common stock resulting in a net issuance of
 426,522 shares to Mr. Clark. The 573,478 shares were then retired.                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                    
| |  | Mr. Clark
 satisfied his obligations under a promissory note due Flanders, which had an
 outstanding balance of $5,446 as of September 30, 2007 in consideration of
 his surrendering 1,183,872 shares of Flanders common stock. These shares were
 valued at $4.60, which was the 30-day average market value of Flanders
 shares. These shares were then retired.
| |   |                                                                                                                                                                                                                                                                                                                                                                    
| |  | Mr. Clark
 and Flanders mutually release each other from any obligations created under
 or related to Mr. Clarks employment agreements with Flanders. Mr. Clark is
 also released from his noncompetition covenants set forth in his employment agreement.                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                    
| |  | Flanders
 transfers certain manufacturing assets with a net book value of approximately
 $250 from the Salt Lake City, Utah facility to Mr. Clark.                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                    
| |  | Mr. Clark
 resigned as a director as of October 4, 2007.                                                                                                                                                                                                                                                                                                           

At December
31, 2007 and 2006, the Company had notes receivable secured by common stock
classified as contra-equity of $0 and $7,441, respectively, due from various
directors, officers, shareholders and employees, with interest thereon at LIBOR
plus 1%, maturing at various dates to December 2010.

As of December
31, 2007 the Company has entered into six operating leases expiring either in
2025, 2026 or 2027 with Wal-Pat II. Wal-Pat II is owned by Robert R. Amerson,
our Chief Executive Officer. The monthly payments to Wal-Pat II total $221. The
Company made payments of $3,371, $2,816 and $1,067 in 2007, 2006 and 2005,
respectively. The Company believes these leases are at prevailing market rates.

The above
amounts and transactions are not necessarily indicative of amounts and
transactions which would have been incurred if comparable transactions had been
entered into with independent parties.

F-29

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in
thousands, except per share amounts)

Note N. Stock Options and Warrants

| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2007,
 the Company granted options to purchase: 620,000 shares of common stock under
 its 2007 Equity Incentive Plan at a weighted average exercise price of $5.23
 per share. All options granted during 2007 were non-qualified fixed price
 options.
| |                                                                                                                                                                                                                                                               
| | The
 following table summarizes the activity related to all Company stock options
 and warrants for 2007, 2006 and 2005:                                                                                                                                      

|                                 |  |                       |   |                         |  |          |   |         |   |          |  |               |  |                                         |   |  |  |       | 
|-------------------------------- |  | --------------------- | - | ----------------------- |  | -------- | - | ------- | - | -------- |  | ------------- |  | --------------------------------------- | - |  |  | ----- | 
|                                 |  |                       |   |                         |  |          |   |         |   |          |  |               |  | Weighted AverageExercise Priceper Share |  
|                                 |  | Shares (In thousands) |   | Exercise Priceper Share |  |         
|                                 |  |                       |   |                         | 
|                                 |  |                       |   | Stock                   |  |          |  
|                                 |  | Warrants              |   | Options                 |  | Warrants |   | Options |   | Warrants |  | Options       | 
|                                 |  |                       |   |                         |  |          |   |         |   |          |  |               | 
|Outstanding at January 1, 2005   |  |                       |  |                         |  | 5,015    |   |         |  |          |  | 1.50  8.60   |  |                                         |  |  |  | 5.28  | 
|Granted                          |  |                       |  |                         |  | 795      |   |         |  |          |  | 8.85  11.10  |  |                                         |  |  |  | 10.75 | 
|Exercised                        |  |                       |  |                         |  | (18      | ) |         |  |          |  | 1.74  1.74   |  |                                         |  |  |  | 2.54  | 
|Canceled or expired              |  |                       |  |                         |  |         |   |         |  |          |  |               |  |                                         |  |  |  |       | 
|                                 |  |                       |   |                         |  |          |   |         |   |          |  |               |  |                                         |   |  |  |       | 
|Outstanding at December 31, 2005 |  |                       |  |                         |  | 5,792    |   |         |  |          |  | 1.50  11.10  |  |                                         |  |  |  | 6.04  | 
|Granted                          |  |                       |  |                         |  | 20       |   |         |  |          |  | 11.72  11.72 |  |                                         |  |  |  | 11.72 | 
|Exercised                        |  |                       |  |                         |  | (38      | ) |         |  |          |  | 2.40  5.21   |  |                                         |  |  |  | 3.90  | 
|Canceled or expired              |  |                       |  |                         |  | (22      | ) |         |  |          |  | 2.50  2.50   |  |                                         |  |  |  | 2.50  | 
|                                 |  |                       |   |                         |  |          |   |         |   |          |  |               |  |                                         |   |  |  |       | 
|Outstanding at December 31, 2006 |  |                       |  |                         |  | 5,752    |   |         |  |          |  | 1.50  11.72  |  |                                         |  |  |  | 6.08  | 
|Granted                          |  |                       |  |                         |  | 620      |   |         |  |          |  | 4.99  9.52   |  |                                         |  |  |  | 5.23  | 
|Exercised                        |  |                       |  |                         |  | (1,105   | ) |         |  |          |  | 1.50  5.21   |  |                                         |  |  |  | 2.55  | 
|Canceled or expired              |  |                       |  |                         |  | (2,000   | ) |         |  |          |  | 7.50  11.10  |  |                                         |  |  |  | 8.68  | 
|                                 |  |                       |   |                         |  |          |   |         |   |          |  |               |  |                                         |   |  |  |       | 
|Outstanding at December 31, 2007 |  |                       |  |                         |  | 3,267    |   |         |  |          |  | 1.74  11.72  |  |                                         |  |  |  | 5.53  | 
|                                 |  |                       |   |                         |  |          |   |         |   |          |  |               |  |                                         |   |  |  |       | 
|Exercisable at December 31, 2007 |  |                       |  |                         |  | 2,867    |   |         |  |          |  | 1.74  11.72  |  |                                         |  |  |  | 5.60  | 
|                                 |  |                       |   |                         |  |          |   |         |   |          |  |               |  |                                         |   |  |  |       | 
|Exercisable at December 31, 2006 |  |                       |  |                         |  | 5,752    |   |         |  |          |  | 1.50  11.72  |  |                                         |  |  |  | 6.08  | 
|                                 |  |                       |   |                         |  |          |   |         |   |          |  |               |  |                                         |   |  |  |       | 
|Exercisable at December 31, 2005 |  |                       |  |                         |  | 5,652    |   |         |  |          |  | 1.50  11.10  |  |                                         |  |  |  | 6.10  | 
|                                 |  |                       |   |                         |  |          |   |         |   |          |  |               |  |                                         |   |  |  |       | 

| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The warrants
 and options expire at various dates ranging from May 2008 to December 2017. A
 further summary of information related to options outstanding at December 31,
 2007 is as follows:

|                           |                |                                    |  |                                                         |  |                                                             |  |  |  |              |  | 
|-------------------------- | -------------- | ---------------------------------- |  | ------------------------------------------------------- |  | ----------------------------------------------------------- |  |  |  | ------------ |  | 
|Range of Exercise 
 Prices |                | Number 
 Outstanding / Exercisable |  | Weighted Average 
 Remaining Contractual 
 Life (Years) |  | Weighted Average
 Exercise Price
 Outstanding / Exercisable | 
|                           |                |                                    |  |                                                         |  |                                                             | 
|                           | $1.74 to 2.52  |                                    |  | 1,092 / 1,092                                           |  | 1.96                                                        |  |  |  | $2.48 / 2.48 |  | 
|                           | $3.94 to 6.49  |                                    |  | 790 / 390                                               |  | 7.68                                                        |  |  |  | $4.98 / 4.96 |  | 
|                           | $7.50 to 11.72 |                                    |  | 1,385 / 1,385                                           |  | 3.53                                                        |  |  |  | $8.24 / 8.24 |  | 

Prior to January
1, 2006, as permitted under accounting principles generally accepted in the
United States of America, grants to employees under the LTI Plan and other
grants to employees of options were accounted for following APB Opinion No. 25
and related Interpretations. Accordingly, no compensation cost had been
recognized for grants to employees under the LTI Plan, since all options
granted had an exercise price at or above the quoted market price of the
Companys common stock on the date of grant.

F-30

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in
thousands, except per share amounts)

Note O. Earnings per Share

| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | The
 following table shows the shares (in thousands) used in computing net
 earnings per common share including dilutive potential common stock.

|                                                                                            |  |      |        |      |  |        |  |  |        | 
|------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ------ |  |  | ------ | 
|                                                                                            |  | 2007 |        | 2006 |  | 2005   | 
|                                                                                            |  |      |        |      |  |        | 
|Common shares outstanding at
 beginning of year                                             |  |      | 26,343 |      |  | 26,317 |  |  | 26,303 | 
|Net weighted average common
 shares issued and canceled during year                         |  |      | 19     |      |  | 23     |  |  | 6      | 
|                                                                                            |  |      |        |      |  |        |  |  |        | 
|Weighted average number of
 common shares used in basic EPS                                 |  |      | 26,362 |      |  | 26,340 |  |  | 26,309 | 
|Dilutive effect of stock
 options and warrants                                              |  |      | 0      |      |  | 1,385  |  |  | 1,498  | 
|                                                                                            |  |      |        |      |  |        |  |  |        | 
|Weighted average number of
 common shares and dilutive potential shares used in diluted EPS |  |      | 26,362 |      |  | 27,725 |  |  | 27,807 | 
|                                                                                            |  |      |        |      |  |        |  |  |        | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
 December 31, 2007, 2006 and 2005, options and warrants to purchase 1,385,000,
 730,000 and 580,000 shares, respectively, of the Companys common stock
 described in Note N were excluded from the computation of diluted EPS because
 the market price of the underlying stock was less than the exercise price.
 The number of securities that would have had a dilutive effect on earnings
 per shares, had they not been considered antidilutive was 466.

F-31

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in
thousands, except per share amounts)

Note P. Quarterly Financial Data (Unaudited)

|                                  |  |                 |        |                |   |                      |  |                     |         |   |   |         |  
|--------------------------------- |  | --------------- | ------ | -------------- | - | -------------------- |  | ------------------- | ------- | - | - | ------- | -
|                                  |  | Quarters
 Ended |       
|                                  |  |                 |       
|                                  |  |                 |        |                |   |                      |  |                     |        
|                                  |  | March 31,
 2007 |        | June 30,
 2007 |   | September
 30,
 2007 |  | December
 31,
 2007 |        
|                                  |  |                 |        |                |   |                      |  |                     |        
|Net sales                         |  | $               | 60,248 |                | $ | 64,285               |  | $                   | 62,578  |   | $ | 57,830  |  
|Gross profit                      |  | $               | 9,022  |                | $ | 11,623               |  | $                   | 6,561   |   | $ | 4,584   |  
|Operating
 Income / (Loss)        |  | $               | (1,961 | )              | $ | 505                  |  | $                   | (15,190 | ) | $ | (10,075 | )
|Net Earnings
 / (Loss)            |  | $               | (11    | )              | $ | 802                  |  | $                   | (16,215 | ) | $ | (4,262  | )
|                                  |  |                 |        |                |   |                      |  |                     |         |   |   |         |  
|Net Earnings
 / (Loss) per share: |  |                 |        |                |   |                      |  |                     |         |   |   |         |  
|Basic                             |  | $               | (.00   | )              | $ | .03                  |  | $                   | (.61    | ) | $ | (.16    | )
|Diluted                           |  |                 | (.00   | )              |   | .03                  |  |                     | (.61    | ) |   | (.16    | )
|Common stock
 prices:             |  |                 |        |                |   |                      |  |                     |         |   |   |         |  
|High                              |  | $               | 9.52   |                | $ | 7.67                 |  | $                   | 8.20    |   | $ | 6.86    |  
|Low                               |  |                 | 7.07   |                |   | 6.31                 |  |                     | 4.39    |   |   | 4.53    |  

|                         |  |                 |        |                |   |                      |  |                     |        |  |   |        |  
|------------------------ |  | --------------- | ------ | -------------- | - | -------------------- |  | ------------------- | ------ |  | - | ------ | -
|                         |  | March 31,
 2006 |        | June 30,
 2006 |   | September
 30,
 2006 |  | December
 31,
 2006 |       
|                         |  |                 |        |                |   |                      |  |                     |       
|Net sales                |  | $               | 50,872 |                | $ | 60,765               |  | $                   | 66,400 |  | $ | 60,341 |  
|Gross profit             |  | $               | 11,494 |                | $ | 13,805               |  | $                   | 13,452 |  | $ | 9,974  |  
|Operating
 income        |  | $               | 2,456  |                | $ | 2,627                |  | $                   | 2,696  |  | $ | 78     |  
|Net Earnings             |  | $               | 1,984  |                | $ | 2,536                |  | $                   | 6,234  |  | $ | (8,704 | )
|                         |  |                 |        |                |   |                      |  |                     |        |  |   |        |  
|Net Earnings
 per share: |  |                 |        |                |   |                      |  |                     |        |  |   |        |  
|Basic                    |  | $               | .08    |                | $ | .10                  |  | $                   | .24    |  | $ | (.34   | )
|Diluted                  |  |                 | .07    |                |   | .09                  |  |                     | .23    |  |   | (.32   | )
|Common stock
 prices:    |  |                 |        |                |   |                      |  |                     |        |  |   |        |  
|High                     |  | $               | 12.10  |                | $ | 11.99                |  | $                   | 10.36  |  | $ | 10.27  |  
|Low                      |  |                 | 10.29  |                |   | 9.49                 |  |                     | 8.56   |  |   | 8.42   |  

F-32

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Table of Contents

FLANDERS CORPORATION
FINANCIAL STATEMENT SCHEDULE

F-33

---

Table of Contents

REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTING FIRM 
ON SCHEDULE

Board of Directors
Flanders Corporation

In connection
with our audits of the consolidated financial statements of Flanders
Corporation and Subsidiaries referred to in our report dated February 22, 2008,
which is included in the Companys Annual Report of Form 10-K for the year
ended December 31, 2007 we have also audited Schedule II for each of the three
years in the period ended December 31, 2007. In our opinion, this schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

|                               |                                   
|------------------------------ | ----------------------------------
|                               | /s/ Pender
 Newkirk & Company, LLP
|                               |                                   
|Pender
 Newkirk & Company, LLC |                                   
|Certified
 Public Accountants  |                                   
|Tampa,
 Florida                |                                   
|March 12,
 2008                |                                   

F-34

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Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIESSCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2007, 2006 and 2005

|                                      |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 
|------------------------------------- |  | -------------------------------- | ----- | ----------------------------- | - | ---------- |  | -------------------------- | ------- | ---- | - | ----- | 
|                                      |  |                                  |       | Additions                     |   |            |  |                            |        
|                                      |  |                                  |       |                               |   |            |  |                            |        
|                                      |  | Balance at
 Beginning
 of Period |       | Charged to
 Cost and
 Expense |   | Deductions |  | Balance
 at End
 of Period |        
|                                      |  |                                  |       |                               |   |            |  |                            |        
|                                      |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 
|For the year ended December 31,
 2007 |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 
|Allowance for doubtful accounts       |  | $                                | 4,313 |                               | $ | 10,638     |  | $                          | (11,288 | )(1) | $ | 3,663 | 
|Allowance for inventory               |  |                                  | 1,623 |                               |   | 3,133      |  |                            | (1,897  | )    |   | 2,859 | 
|                                      |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 
|Total                                 |  | $                                | 5,936 |                               | $ | 13,771     |  | $                          | (13,185 | )    | $ | 6,522 | 
|                                      |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 
|                                      |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 
|For the year ended December 31,
 2006 |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 
|Allowance for doubtful accounts       |  | $                                | 4,018 |                               | $ | 3,063      |  | $                          | (2,768  | )(1) | $ | 4,313 | 
|Allowance for inventory               |  |                                  | 1,477 |                               |   | 146        |  |                            |        |      |   | 1,623 | 
|                                      |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 
|Total                                 |  | $                                | 5,495 |                               | $ | 3,209      |  | $                          | (2,768  | )    | $ | 5,936 | 
|                                      |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 
|                                      |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 
|For the year ended December 31,
 2005 |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 
|Allowance for doubtful accounts       |  | $                                | 3,300 |                               | $ | 2,094      |  | $                          | (1,376  | )(1) | $ | 4,018 | 
|Allowance for inventory               |  |                                  | 1,392 |                               |   | 85         |  |                            |        |      |   | 1,477 | 
|                                      |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 
|Total                                 |  | $                                | 4,692 |                               | $ | 2,179      |  | $                          | (1,376  | )    | $ | 5,495 | 
|                                      |  |                                  |       |                               |   |            |  |                            |         |      |   |       | 

|    |                                                         
|--- | --------------------------------------------------------
|(1) | Uncollected
 receivables written-off, net of recoveries.

F-35

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