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 fiscal year ended December 31, 1998
                                       or

[   ] 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                        (IRS Employer ID Number)
  incorporation or organization)


                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  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 [ ]

    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. [ ]

    As of March 29, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $40,107,059.

    As of March 29, 1999, the number of shares  outstanding of the  registrant's
common stock was 25,624,339 shares.



<PAGE>


                              FLANDERS CORPORATION
                                    FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1998


                                TABLE OF CONTENTS


PART I

   Item 1.   Business.........................................................3
   Item 2.   Properties......................................................13
   Item 3.   Legal Proceedings...............................................13
   Item 4.   Submission of Matters to a Vote of Security Holders.............14

PART II

   Item 5.   Market for Registrant's Common Equity and Related
             Stockholder Matters.............................................15
   Item 6.   Selected Consolidated Financial Data............................16
   Item 7.   Management's Discussion and Analysis of Financial
             Condition and Results of Operations.............................17
   Item 7A.  Quantitative and Qualitative Disclosures About
             Market Risk.....................................................25
   Item 8.   Financial Statements and Supplementary Data.....................25
   Item 9.   Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure.............................25

PART III

   Item 10.  Directors and Executive Officers of the Registrant..............26
   Item 11.  Executive Compensation..........................................27
   Item 12.  Security Ownership of Certain Beneficial Owners
             and Management..................................................29
   Item 13.  Certain Relationships and Related Transactions..................31

PART IV

   Item 14.  Exhibits, Financial Statement Schedules and
             Reports on Form 8-K.............................................32

   Signatures................................................................35

FINANCIAL STATEMENTS

   Independent Auditor's Report.............................................F-2
   Consolidated Balance Sheets..............................................F-3
   Consolidated Statements of Income........................................F-4
   Consolidated Statements of Stockholders' Equity..........................F-5
   Consolidated Statements of Cash Flows....................................F-6
   Notes to Consolidated Financial Statements...............................F-9
   Financial Statement Schedules...........................................F-27


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                                     PART I

Item 1.       Business


OVERVIEW

Flanders  Corporation  (the "Company" or "Flanders")  designs,  manufactures and
markets a broad range of air filtration products,  including (i) high efficiency
particulate air ("HEPA") filters, with at least 99.97% efficiency,  and absolute
isolation  barriers  ("Absolute   Isolation   Barriers")  for  the  creation  of
synthesized  atmospheres  to  control  manufacturing  environments  and  for the
absolute  control and  containment  of  contaminants  and toxic gases in certain
manufacturing  processes,  (ii) mid-range  filters for individual and commercial
use, which fall under specifications which are categorized by efficiency ratings
established  by  the  American  Society  of  Heating,   Refrigeration   and  Air
Conditioning  Engineers ("ASHRAE"),  and (iii) standard-grade,  low cost filters
with  efficiency  ratings below 30% sold  typically  off-the-shelf  for standard
residential   and  commercial   furnace  and  air   conditioning   applications.
Approximately  70% of the  Company's  net  sales  are from  products  with  high
replacement  potential.  The Company's air  filtration  products are utilized by
many  industries,  including  those  associated  with commercial and residential
heating,  ventilation  and air  conditioning  systems  (commonly known as "HVAC"
systems),  semiconductor  manufacturing,  ultra-pure  materials,  biotechnology,
pharmaceuticals, synthetics, nuclear power and nuclear materials processing. The
Company also designs and manufactures its own production  equipment to allow for
highly  automated  manufacturing  of these  products.  Furthermore,  the Company
produces  glass-based  filter media for many of its products to maintain control
over the quality and composition of such media. The Company's  customers include
Abbott Laboratories, Home Depot, Inc., Motorola, Inc., Merck & Co., Inc., Upjohn
Co.,  Wal-Mart  Stores,  Inc.,  Westinghouse  Electric Corp.,  and several large
computer chip manufacturers.

Although the Company  historically has specialized in HEPA and mid-range filters
through  its  subsidiary,  Flanders  Filters,  Inc.  ("FFI"),  the  Company  has
positioned  itself  to offer to its  customers  a full  range of air  filtration
products.  In 1996, the Company  diversified  its product line by implementing a
strategy of growth by acquisition through the purchase of three other companies:
Charcoal Service  Corporation,  now known as Flanders/CSC  Corporation  ("CSC"),
which  specializes  in  charcoal  filtration  systems for the removal of gaseous
contaminants;  Air Seal Filter Housings, Inc. ("Air Seal"), which specializes in
filter housings and customized  industrial HVAC  equipment,  and  Precisionaire,
Inc. ("Precisionaire"),  which specializes in the manufacture and sale of filter
products  ranging from mid-range  through  standard-grade  filters.  The Company
continued its growth through acquisition in 1998 by purchasing Eco-Air Products,
Inc.  ("Eco-Air"),  a West Coast regional  supplier of air  filtration  products
(hereinafter,  the purchases of the four  companies  shall be referred to as the
"Acquisitions").  As a result of the Company's  diversified  product  line,  the
Company expects to benefit from growth in all air filtration markets.

GENERAL DEVELOPMENT OF BUSINESS

The Company was incorporated on July 2, 1986 in the State of Nevada. The Company
is  currently  domiciled  in North  Carolina.  Effective  May 1996,  the Company
acquired all of the  outstanding  stock of CSC, a charcoal  filter  manufacturer
based  in  North  Carolina   specializing  in  activated  charcoal  filters  and
containment  environments.  In  June  1996,  the  Company  acquired  all  of the
outstanding  stock of Air Seal, a mid-range  custom filter housing  manufacturer
based in Stafford,  Texas.  Also in June 1996, the Company formed a wholly owned
subsidiary in Singapore,  Flanders  International  Pte., Ltd. ("FIL"), to market
and  eventually  manufacture  the  Company's  products  in the  Pacific  Rim. In
September  1996,  the  Company   acquired  all  of  the  outstanding   stock  of
Precisionaire,  a  manufacturer  of  air  filter  products  for  commercial  and
residential HVAC systems, headquartered in St. Petersburg, Florida.

In February 1997, the Company organized Airseal West, Inc.  ("Airseal West"), an
80% owned subsidiary of Flanders.  In March 1997, the Company acquired,  through
Airseal  West,   the  majority  of  the  assets  of   Intermountain   Paint  and
Sub-Assembly,  Inc. and BB&D Manufacturing,  Inc. (collectively "BB&D"). Airseal
West  manufactures  specialty and standard  housings for air filtration and HVAC
systems,  as well as integrated custom  industrial-grade  HVAC systems and other
specialty  products for sale and  distribution in the western United States.  In


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<PAGE>

December  1997,  the  Company  acquired  GFI,  Inc.  ("GFI").  GFI  manufactures
glass-based filter media and specialty filters.

Effective  June 30, 1998,  pursuant to a stock purchase  agreement,  the Company
acquired substantially all the outstanding stock of Eco-Air. The purchase price,
including expenses, was approximately $15,677,419, plus up to $5,000,000 payable
in  cash  or  the  Company's  common  stock  (at  sellers'  option)  if  certain
performance criteria are met. If Eco-Air achieves certain performance  criteria,
Flanders will issue common stock or record a liability for the cash payment over
a five year period and Flanders will add the amount to goodwill  associated with
the purchase transaction and amortize it over the remaining  amortization period
of the  goodwill  asset.  The  acquisition  of Eco-Air was funded by utilizing a
revolving  credit  facility  which  provides  a line of  credit  up to a maximum
principal  amount of  $30,000,000.  The effective  date of the  acquisition  for
financial  statement  purposes was June 30, 1998,  and the  Company's  financial
statements  include the  operating  activities  and assets of Eco-Air  from that
date.  As of December 31, 1998,  Flanders has not recorded a liability or issued
shares to the Eco-Air  sellers as a result of Eco-Air  achieving the performance
criteria.

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 Exchange Act,
including,  among others,  those statements  preceded by, following or including
the words "believes," "expects," "anticipates" 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.  The
Company's  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  risk  of  product  demand,  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.

INDUSTRY BACKGROUND

Frost & Sullivan, a leading industry analyst,  estimated that the total domestic
industrial air filtration  market would be  approximately  $1.02 billion in 1997
and $1.05 billion in 1998. Additionally, management believes the domestic market
for retail and wholesale  off-the-shelf air filters and related products used in
residential and commercial HVAC applications  exceeded $500 million in 1998. The
forces driving the air filtration  market have evolved over the past decade from
concerns  related to the  preservation  of machinery  and  equipment to industry
goals of  maintaining  productivity  and present day concerns  and  governmental
requirements  related to employee  health.  Because of these  requirements,  air
filtration products are essential to many industries, including those associated
with  semiconductor  manufacturing,  commercial  and  residential  HVAC systems,
ultra-pure materials manufacturing, biotechnology,  pharmaceuticals, synthetics,
nuclear  power and nuclear  materials  processing.  Increasingly,  companies are
devoting  resources  to  air  filtration  products  to  enhance  efficiency  and
productivity.

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

    Industrial. Air filtration products are used in standard industrial settings
    to provide  cleaner  work  environments;  for  example,  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 particulates from the air.

    Semiconductor  Manufacturing.  Air filtration products are necessary to meet
    the  increasingly  stringent  manufacturing   environment   requirements  of
    semiconductor  manufacturers.  Laminar  flow  grade  final  filters  are  an
    essential component of a semiconductor manufacturers' cleanrooms.

    Pharmaceutical.  Pharmaceutical  companies are increasingly using cleanrooms
    to prevent cross-contamination between different products and different lots
    of the same products being manufactured at the same facility.

                                       4
<PAGE>

    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.

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


RECENT TRENDS

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

    Indoor Air Quality and Health.  The Company believes there is an increase in
    public  concern  regarding  the  effects  of indoor air  quality  ("IAQ") on
    employee  productivity  and  health,  as well as an  increase in interest in
    standards for detecting  and solving IAQ problems.  For example,  ASHRAE has
    recently  established  certain minimum  standards for ventilation and indoor
    air quality for commercial and industrial settings. During 1998, the Company
    developed  two new lines of products  which offer  off-the-shelf  methods of
    dealing with two different  aspects of the indoor air quality  problem.  The
    two new lines  are:  (1) Arm & Hammer  Pleated  Filters  - a retail  product
    designed to reduce  airborne  odors in residences  which works in place of a
    standard spun-glass furnace or air conditioner filter; and (2) Environmental
    Tobacco  Smoke  systems  - a  specialty  product  to be  sold  through  HVAC
    distributors  which  offers an  off-the-shelf  solution  for the  control of
    second-hand   smoke  in  restaurants,   taverns  and  commercial   areas  by
    incorporating  HEPA filters with proprietary bonded carbon filter technology
    to cleanse  impurities  such as second-hand  smoke,  allergens and particles
    which provoke asthma, hay fever and similar health conditions.

    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.

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

    Hazardous Emission Regulation and Resultant Liability.  Electrical utilities
    became subject to emissions  regulations under Title 4 of the Clean Air Act.
    In addition,  OSHA's  Hazardous  Communication  Standard,  the Toxic Release
    Inventory and community "right to know" regulations  regarding liability for
    claims  made  by  employees  or  neighboring   communities  have  made  many
    industries,  in particular the chemical and semiconductor  industries,  more
    aware of clean air  regulations.  As a result,  these  industries have taken
    voluntary  steps,  including the utilization of air filtration  systems,  to
    bring  emissions  of  potentially   hazardous   substances  into  line  with
    regulatory standards.

STRATEGIES

The Company's  business  strategy is to (i) increase the Company's market share,
(ii) expand the Company's  market through the  introduction of new products with
high replacement potential, and (iii) improve operating efficiencies.

    Increase Market Share

    Strategic  Acquisitions.  The Company  intends to  continue to increase  its
    market share through strategic acquisitions of synergistic  businesses.  The
    Company seeks to identify  potential  acquisition  targets with (i) dominant
    positions in local or regional markets, (ii) a stable customer base distinct
    from the


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    Company's existing customers,  (iii) financial stability, (iv) an ability to
    add new product lines to the Company's  business,  and (v) significant asset
    value to enable the Company to obtain debt financing or non-dilutive  equity
    financing  for the  acquisition.  The  Company  is  continuously  evaluating
    acquisition  opportunities  in  light of the  above  criteria.  The  Company
    focuses on those acquisition targets which complement the Company's existing
    technology,  increase market share, or broaden  distribution  channels.  The
    Company also seeks  acquisition  targets which provide vertical  integration
    opportunities.  At the present time,  the Company has no binding  agreements
    with respect to future acquisitions.

    Increase Sales to Existing and New Customers. The Company sells its products
    through   a  direct   sales   force  and   manufacturers'   representatives.
    Historically,  manufacturers'  representatives have only sold certain of the
    Company's products. With the recent expansion of the Company's product lines
    through acquisition, these representatives can now purchase from the Company
    a full  line of air  filtration  products  instead  of  buying  a mix of air
    filtration  products  from a range of  manufacturers,  and  thereby  use the
    Company as a "one stop" purchasing source.

    Use  Facilities  Located  Throughout  the United  States to Increase  Market
    Share. The Company has recently established facilities in Illinois and North
    Carolina which will  manufacture  mid-range and  standard-grade  filters and
    equipment.  The Company believes this ability to regionalize  production and
    distribution will improve its business in several ways: (i) Decrease cost of
    sales by reducing the average  distance between the Company's plants and its
    customers,  and hence decrease the cost of outbound  freight;  (ii) increase
    responsiveness  by decreasing  the average time required to ship products to
    customers;  and (iii)  increase the  Company's  share of national  accounts'
    total  business by having  manufacturing  facilities in closer  proximity to
    customers' regional distribution centers.

    Continued  Emphasis  on Quality and  Performance.  The  Company's  continued
    emphasis on product  quality has allowed it to capture  market share serving
    several industries in recent years.

    Expand Market with New Products

    The Company is  developing  new products  for  emerging  markets by applying
    technology  developed for  high-technology  niche markets to more  generally
    useful applications.  During 1998, the Company developed three product lines
    which use these types of technology  in a broader  market  application.  The
    Company  may  also  work  on  similar  projects  as  opportunities   present
    themselves.  The  following  new products are at the center of the Company's
    efforts to expand its market.

    Arm & Hammer Pleated  Filters.  The Company's Arm & Hammer Pleated  Filters,
    developed in cooperation  with Church & Dwight,  the  manufacturer  of Arm &
    Hammer  Baking Soda and related  products,  use a  proprietary  filter media
    impregnated  with baking soda to enhance the  performance  of the  Company's
    retail pleated filter lines. The Company believes the proper introduction of
    these filters will expand its market by increasing  the frequency with which
    its filters are replaced.  The Company believes that replacement  periods on
    these filters will more closely approach the recommended three-month period,
    as the efficacy of the  odor-absorbing  media  decreases over time, and thus
    the  performance  difference  between  a new  and an  older  filter  is more
    obvious.

    Environmental Tobacco Smoke Systems. The Company has developed a new line of
    off-the-shelf  products designed to remove  environmental  tobacco smoke and
    other contaminants from restaurants,  taverns and commercial buildings.  The
    units,  which  will be  marketed  through  HVAC  specialty  contractors  and
    distributors, will also serve as a high-profile lead-in product line used to
    secure  additional sales and  distribution  channels for the Company's other
    mid-range products.  These units are designed to be used in conjunction with
    standard  environmental  control  systems  which  typically  do not  address
    airborne contaminants. These units will also generate after-market business,
    as their  proprietary  filter  elements  must be  replaced  periodically  to
    maintain effectiveness.

    Retrofit Air Handlers. Many commercial and industrial buildings have


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    outdated HVAC equipment  which is  inefficient or does not provide  adequate
    levels of  ventilation  necessary to meet the new  standards  for indoor air
    quality.  Many of these HVAC systems were placed in difficult to reach areas
    which make adding capacity or replacing  older units with  higher-efficiency
    units  a  complex   undertaking.   The  Company  has  developed  a  line  of
    prefabricated  industrial  and  commercial  air handlers  which may be moved
    through a  man-sized  door,  and  readily  assembled  in place.  The Company
    believes  this  product will  effectively  expand the market for custom HVAC
    systems  by  significantly   lowering  the  cost  barriers  associated  with
    renovating existing environmental control systems.

    Synthesized  Manufacturing  Environments.   The  Company  is  marketing  its
    Absolution  Isolation  Barriers,  in combination  with gas-phase  filtration
    technologies,   to  industries  which  require   specialized   environments,
    typically involving oxygen-free or noble gas atmospheres. Several industries
    are already  using or are moving  toward  using  these types of  specialized
    environments  for  their  new  products  and  processes.  For  example,  the
    semiconductor  industry  is  considering  using noble gas  environments  for
    processes to  eliminate  microscopic  flaws  caused by  oxidation  and other
    chemical reactions with ambient air during microcircuit production.  The use
    of these units in semiconductor or other  manufacturing  environments  would
    significantly expand the Company's involvement in new fab construction, from
    supplying the filters to supplying  specialized  enclosures  and  integrated
    filter elements, with much higher associated revenues per project.

    Increase Operating Efficiency

    Automation.  In an effort to increase gross margins,  the Company commenced,
    in 1997, a program to automate  portions of its production  lines at FFI and
    Precisionaire using technology developed and produced internally. Currently,
    this process is  substantially  complete for its  standard-grade  spun-glass
    filters,  the Company's  largest volume product line. The Company  estimates
    that it has expended  approximately  90% of the amount  required to complete
    its automation program.

    Centralize  Overhead  Functions.   The  Company  is  implementing  plans  to
    centralize and eliminate  duplication of efforts between its subsidiaries in
    the following areas: purchasing, production planning, shipping coordination,
    marketing,  accounting,  personnel  management,  risk management and benefit
    plan administration. During the fourth quarter of 1998, the Company combined
    its Airpure facility in Selma,  North Carolina,  into its facility in nearby
    Smithfield,  North Carolina,  which  decreased  costs  associated with plant
    administration,  production  planning,  shipping  coordinating and personnel
    management.

MARKETING

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

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

The Company is also establishing direct sales offices in areas where it does not
currently have strong distributors and manufacturers' representatives.

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



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<PAGE>

the following reasons:

    Product Quality.  The Company  manufacturers high performance air filtration
    products. It currently offers filters of 99.999997% on particles 0.1 microns
    or larger,  which the  Company  believes is the  highest  efficiency  rating
    available anywhere.

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

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

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

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

PRODUCTS

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

    "High-End" Products

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

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

                                       8
<PAGE>

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

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

    Synthesized Manufacturing Environments. The Company manufactures specialized
    containment environments,  called Absolute Isolation Barriers, for a variety
    of  high  technology  applications.  These  environments  typically  combine
    stainless  steel  housings with HEPA filters,  activated  carbon filters and
    self-contained  fan-filter  units.  Depending on the  application,  Absolute
    Isolation Barriers generate  specialized  environments  meeting requirements
    for a combination of  temperature,  humidity,  oxygen levels,  air pressure,
    ambient noise and chemical make-up.  They typically also include measures to
    protect  personnel  and  equipment  located  outside the barriers from toxic
    chemicals,  poisonous  atmospheres or infectious  organisms contained within
    the  environment.   They  are  currently  used  in  applications   including
    pharmaceutical development, recombinant DNA research and contagion isolation
    in critical care and quarantine  facilities.  The Company believes they will
    become the norm for state-of-the-art pharmaceutical production facilities in
    the  near  future.  The  Company  also  believes  they  offer  semiconductor
    manufacturers sizable advantages over their current productions methods.

    ASHRAE-RATED MID-RANGE PRODUCTS

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

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

    "Standard-Grade" Products

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


                                       9
<PAGE>

    The Company's  standard-grade  filters are sold under more than 20 different
    brand  names,   including  Arm  &  Hammer  Pleated   Filters,   NaturalAire,
    Precisionaire  Industrial Grade, Tri-Bond, EZ FLOW(R),  Dustgard,  Kwik Kut,
    SMILIE(R),  Permaire,  Kwik Kleen,  Pre-Foam  Kleen,  Kwik Kleen  Synthetic,
    Pre-Pleat and Micro-Particle Pleated Home Air Filters.

    Other Products and Services

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

    The Company has recently adapted testing procedures and equipment  developed
    for the  semiconductor  industry,  along with newly developed  bonded carbon
    filtration  technology,  to offer  customized  IAQ  diagnosis,  remediation,
    control and monitoring for commercial and public buildings.

MANUFACTURING

The Company manufactures its air filters, housings,  Absolute Isolation Barriers
and related equipment at several facilities in the United States, which range in
size from 18,000 square feet to approximately 400,000 square feet. Precisionaire
has seven separate manufacturing facilities located in Bartow, Florida, Terrell,
Texas, Salt Lake City, Utah, Henderson,  Nevada, Momence, Illinois,  Smithfield,
North  Carolina and Auburn,  Pennsylvania,  which  produce  ASHRAE-rated  medium
efficiency  filters and  standard-grade  filters.  FFI's facility in Washington,
North Carolina, produces high-end HEPA products.  Management believes that FFI's
ability to manufacture  its own HEPA filter media provides it with a significant
competitive advantage, allowing more direct control over quality and composition
than is generally available with outside suppliers.  CSC's facility,  located in
Bath,  North  Carolina,   manufactures   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. For example, CSC's products are used in the production and containment
of potentially  dangerous  biologically  engineered  microorganisms.  Air Seal's
facility, located in Stafford, Texas, produces mid-range custom filter housings.
Airseal West's facility,  located in Salt Lake City, Utah,  manufactures  custom
filter housings, mini-pleat filters, and other miscellaneous products. Eco-Air's
facilities  in San Diego,  California,  and  Tijuana,  Mexico,  manufacture  air
filtration  products  ranging from  standard-grade  disposable  filters  through
industrial HEPA filters.  In addition,  the Company  designs,  manufactures  and
assembles the majority of its own automation production equipment.

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

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

SOURCE AND AVAILABILITY OF RAW MATERIALS

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


                                       10
<PAGE>


COMPETITION

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

PATENTS, TRADEMARKS AND LICENSES

The  Company  currently  holds 17 patents  relating  to  filtration  technology,
including patents relating to HEPA filters and fabrication methods,  filter leak
testing methods and laminar flow cleanrooms. The Company has patents pending for
one of the  components  related  to its  Absolute  Isolation  Barriers,  and the
impregnation method used in the manufacture of its Arm & Hammer Pleated Filters.

The Company has obtained and owns the following federal trademark registrations:
PRECISIONAIRE(R),   EZ  FLOW(R),   SMILIE(R),   AIRVELOPE(R),   CHANNEL-CEIL(R),
CHANNEL-HOOD(R),  PUREFORM(R),  ECONO-CELL(R),  GAS-PAK(R), PUREFRAME(R), DIMPLE
PLEAT(R),   BLU-JEL(R),    VLSI(R),    CHANNEL-SEAL-ADAPTER(R),    SUPERFLOW(R),
FLANDERS(R),  CHANNEL-WALL(R),  SUPERSEAL(R),  AIRPURE(R) and  PURESEAL(R).  The
Company  also has applied for federal  trademark  protection  for the  following
marks:   FLANDERS   ABSOLUTE   ISOLATIONTM,   FLANDERS/CSCTM,   TECH-SORBTM  and
FUTUREFLOTM.  Although  management  believes  that the  patents  and  trademarks
associated  with the  Company's  various  product  lines  and  subsidiaries  are
valuable to the Company, it does not consider any of them to be essential to its
business.

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

CUSTOMERS

The Company is not dependent upon any single  customer.  One customer,  Wal-Mart
Stores,  Inc.,  accounted  for 10% and 11% of net sales  during the years  ended
December 31, 1998 and 1997,  respectively.  Home Depot, Inc.,  accounted for 10%
and 8% of net  sales  during  the  years  ended  December  31,  1998  and  1997,
respectively.  No other  single  customer  accounted  for net sales  equal to or
greater  than 10% of the total net sales of the  Company.  The  Company's  other
significant customers include Abbott Laboratories,  Motorola, Inc., Merck & Co.,
Inc., Upjohn Co.,  Westinghouse  Electric Corp., and several large computer chip
manufacturers.

BACKLOG

The Company had approximately  $11,084,000 in firm backlog on December 31, 1998,
compared to  $12,941,000  at December 31, 1997.  Firm  backlog  includes  orders
received and not begun and the unfinished  and unbilled  portion of contracts in
progress.  Orders are  typically  not  cancelable  without  penalty,  except for
certain  stable filter supply  contracts to nuclear  facilities  operated by the
United States government.  Backlog varies from week to week, based on the timing
and mix of orders received.  All backlog at December 31, 1998, is expected to be
shipped by the end of the second quarter of 1999.

EMPLOYEES

The Company  employed 2,152 full-time  employees on December 31, 1998;  1,861 in
manufacturing, 33 in development and technical staff, 62 in sales and marketing,
and the remaining 196 in support staff and administration.  The Company believes
that  its  relationship  with  its  employees  is  satisfactory.  Manufacturers'
representatives are not employees of the Company.

RESEARCH AND DEVELOPMENT

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



                                       11
<PAGE>


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

    Alternative  filtration media types,  including  evaluation of new synthetic
    media  products,  which might either  increase  efficiency or decrease media
    costs; the Company's Arm & Hammer Pleated Filters are an application of this
    type of research.

    Improved media production  techniques,  particularly at Precisionaire's spun
    fiberglass production facility in Salt Lake City, Utah, and FFI's HEPA paper
    mill in Washington,  North Carolina;  during the past ten years, the Company
    has  increased  the  efficiency  of its  filters  through  advances in media
    formulation and production techniques from 99.97% to 99.999997%.

    Application  development,  where new methods and products are developed from
    existing technologies.

Research  and  development  costs  for  fiscal  years  1998,  1997 and 1996 were
approximately  $2,250,000,  $373,000 and  $460,000,  respectively.  Research and
development  costs were  expensed  and  included in general  and  administration
expenses  during  the  period  incurred.  The large  increase  in  research  and
development  expense  between 1998 and 1997 was primarily due to the development
of three product lines:  Arm & Hammer  Pleated  Filters,  Environmental  Tobacco
Smoke Systems, and Retrofit Air Handlers.

GOVERNMENT REGULATION

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

SEASONALITY

Historically,  the  Company's  business has been  seasonal,  with a  substantial
percentage of its sales  occurring  during the second and third quarters of each
year. In addition,  demand for the Company's  standard-grade 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

The  Company  sells some  products  for end users  outside of the United  States
through domestic specialty cleanroom contractors.  These sales are accounted for
as domestic sales. The Company also sells products through foreign distributors,
primarily in Europe,  and through FIL, which sells to customers in the Far East.
Sales through foreign distributors and FIL amounted to less than 5% of net sales
for each of the last three fiscal  years.  Assets held outside the United States
are negligible.


                                       12
<PAGE>


Item 2.       Properties


The  following  table  lists  the  principal  facilities  owned or leased by the
Company. The Company believes that these properties are adequate for its current
operational  needs,  but 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.

<TABLE>
<CAPTION>
                                                      Approximate
                                                         Floor      Monthly
Principal Facility           Location               Space (sq.ft.)  Expense   Lease/Type
------------------           --------------------   --------------  -------   ----------
<S>                          <C>                    <C>             <C>       <C>
Manufacturing, service and   Bath, North Carolina     44,282           N/A     Owned
office facility

Manufacturing plant          Bartow, Florida         175,000         $29,121   Owned1

R&D & Warehouse              Lakeland, Florida        40,000         $ 6,559   Lease

Manufacturing plant          Terrell, Texas          146,256         $29,858   Owned1

Manufacturing plant          Auburn, Pennsylvania     91,000         $ 7,097   Owned1

Office space and             St. Petersburg,          18,000           N/A     Owned
headquarters                 Florida

Warehouse                    South Holland,           33,226         $ 8,307   Lease
Illinois

Manufacturing plant          Henderson, Nevada       100,000         $26,000   Lease

Manufacturing plant          Momence, Illinois       210,000         $44,062   Owned1,2

Sales office and warehouse   Singapore                10,000         $ 3,350   Lease

Manufacturing and office     Stafford, Texas          18,000           N/A     Owned
facility

Manufacturing plant          Salt Lake City, Utah     60,000         $14,400   Lease

Manufacturing plant          Salt Lake City, Utah     70,805         $21,963   Lease

Manufacturing plant          Smithfield, North       399,090          N/A3     Owned
Carolina

Plant and office facility    San Diego, California    96,660         $36,435   Lease

Manufacturing plant          Tijuana, Mexico          49,000         $14,420   Lease

<FN>
1   This property is encumbered by a mortgage.

2   This mortgage is paid quarterly rather than monthly;  the quarterly payments
    are $132,187.

3   This property is used as security for an  Industrial  Revenue Bond with face
    value of $4,500,000. Monthly payments are for interest only on the bond, and
    vary from month to month based on the  interest  rate during the period.  At
    December 31, 1998, the interest rate on the bond was 4.1%.
</FN>
</TABLE>


Item 3.       Legal Proceedings


The Company is involved in a dispute with a customer  involving a trade  account
receivable  of  approximately  $2.6  million,  filed as Case No. CV  98-19817 on
October 10, 1998 in the Superior Court of the State of Arizona in and for

                                       13
<PAGE>


the County of Maricopa, Intel Corporation v. Flanders Filters, Inc. The customer
contends  that certain  filters  manufactured  by the Company did not conform to
specifications,  and has asked for unspecified  relief and damages.  The Company
has  filed  a  counter-claim  asking  for  the  amount  of  its  receivable  and
unspecified  relief  and  damages.  Independent  testing  and other  information
available  to  management  indicate  the filters did conform to  specifications;
therefore,  management  believes  that  the  receivable  is  fully  collectible.
However,  it is reasonably possible the estimate of collection may change in the
near term.

The Company is  currently  being  monitored by the United  States  Environmental
Protection Agency ("EPA") for possible environmental contamination at one of its
facilities.  The Company is in the process of completing  negotiations  with the
EPA to resolve issues related to monthly monitoring of groundwater.  The Company
estimates the monitoring  will last from 3-5 years,  and believes the total cost
for such monitoring will not exceed $45,000.  The Company has received a limited
indemnification  from Thomas T.  Allan,  a former  officer  and  director of the
Company, and Robert R. Amerson and Steven K. Clark, both directors, officers and
shareholders  of the  Company,  of  approximately  $975,000  with respect to the
claims of the EPA;  however,  there can be no assurance  that the amount of this
indemnification  will be  sufficient  to  cover  the  aggregate  of  liabilities
asserted by the EPA.

In 1997, the Company purchased property in Momence, County of Kankakee, Illinois
(the  "Illinois  Property")  for a new air  filter  manufacturing  facility.  In
connection  with  such  purchase,  the  Company  agreed  to  assume  all risk of
environment  liability  for past,  present or future  conditions on the Illinois
Property except for any liability for  environmental  problems related to ground
water. The Illinois Property had certain  environmental  problems which required
remediation  under federal and Illinois law. The seller of the Illinois Property
has  worked  extensively  with  the  Illinois  Environmental  Protection  Agency
("IEPA") with regard to the environmental  matters and the Company has completed
Phase I and Phase II environmental surveys with respect to the property,  and it
appears that the  environmental  matters have been resolved,  except for certain
monitoring procedures required by the IEPA. However,  resolution of state issues
has no effect on any potential federal or common law claims, and there can be no
assurance that such claims will not be made.

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


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


The Company held its annual meeting of shareholders on December 10, 1998. During
the meeting,  holders of 16,444,117 shares, out of 25,163,339 shares outstanding
on the record date, attended either in person or by proxy. Holders of 12,169,449
shares voted to elect as members of the Board of Directors of the Company Robert
R. Amerson and William H. Clark, with no votes against, and holders of 4,274,668
shares abstaining.

Holders of 11,631,753 shares voted to elect as members of the Board of Directors
Steven K. Clark and  William C.  Gibbs,  with no votes  against,  and holders of
4,812,364 abstaining.

Holders of 16,274,519 shares voted to ratify the firm of McGladrey & Pullen, LLP
as the  Company's  independent  auditors for the fiscal year ended  December 31,
1998, with holders of 27,100 shares voting against the ratification, and holders
of 142,498 shares abstaining.


                                       14
<PAGE>


                                     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 closing 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
                                                             --------  --------
Fiscal 1998
Fourth Quarter ended December 31, 1998                        4 3/16   2 15/16
Third Quarter ended September 30, 1998                        5 1/2    3 1/2
Second Quarter ended June 30, 1998                            6        4 1/2
First Quarter ended March 31, 1998                            8 1/2    5 9/16

Fiscal 1997
Fourth Quarter ended December 31, 1997                        9 1/4    6 15/16
Third Quarter ended September 30, 1997                        8 1/4    6 3/4
Second Quarter ended June 30, 1997                            9 7/8    5 7/8
First Quarter ended March 31, 1997                           12        9 3/8


Approximate Number of Equity Securityholders

On March 29, 1999,  the closing price for the  Company's  common stock was $2.75
per share. As of March 29, 1999, there were  approximately 300 holders of record
of the Company's common stock. The Company  estimates there are in excess of 600
beneficial owners of the Company's common stock.

Dividends

The Company has not  declared or paid cash  dividends on its common  stock.  The
Company  currently  intends to retain any future  earnings to finance the growth
and  development of its business and therefore  does not anticipate  paying cash
dividends  in the  foreseeable  future.  Any  future  determination  to pay cash
dividends  will be made by the  Board of  Directors  in  light of the  Company's
earnings, financial position, capital requirements and such other factors as the
Board of Directors deems relevant.  Under the terms of its revolving credit line
with SunTrust Bank, N.A. and Zions First National Bank, N.A.  (together referred
to hereinafter  as  "SunTrust"),  the Company  cannot pay dividends  without the
prior written consent of SunTrust. See "Management's  Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
and "Notes to Consolidated Financial Statements - Note 6."


                                       15
<PAGE>


Item 6.       Selected Consolidated Financial Data


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

Selected Historical Operations Data  (In thousands, except per share data)

<TABLE>
<CAPTION>
                           Fiscal Year Ended December,
                               --------------------------------------------------
                                 1998       1997      1996      1995       1994
                               --------   --------   -------   -------   --------
<S>                            <C>        <C>        <C>       <C>       <C>     
Net sales                      $157,822   $134,135   $73,056   $38,636   $ 26,706
Gross profit                     36,380     33,323    19,459     9,682      7,861
Operating expenses               28,408     24,156    13,460     7,263      7,239
Operating income                  7,971      9,167     5,999     2,419        622
Earnings before income taxes      8,886      9,544     5,771     1,830        171
Income taxes                      3,598      3,705     2,178       685        176
                               ========   ========   =======   =======   ========
Net income (loss)              $  5,289   $  5,839   $ 3,594   $ 1,146   $     (5)
                               ========   ========   =======   =======   ========
Earnings per common share
  Basic                        $   0.21   $   0.32   $  0.27   $  0.12   $   --
                               ========   ========   =======   =======   ========
  Diluted                      $   0.20   $   0.27   $  0.23   $  0.12   $   --
                               ========   ========   =======   =======   ========

Weighted average common
  shares outstanding
    Basic                        25,134     18,509    13,171     9,832      9,693
                               ========   ========   =======   =======   ========
    Diluted                      27,107     22,477    16,384     9,832      9,693
                               ========   ========   =======   =======   ========
</TABLE>


Selected Historical Balance Sheet Data (In thousands)

<TABLE>
<CAPTION>
                                   1998       1997      1996      1995       1994
                               --------   --------   -------   -------   --------
<S>                            <C>        <C>        <C>       <C>       <C>     
Working capital                $ 47,972   $ 55,179   $22,570   $ 4,108   $    349
Total assets                    167,780    145,881    86,518    18,529     14,414

Long-term obligations1           31,371     14,771    42,156     1,761      1,892

Total shareholders'
equity2                         109,603    106,207    25,353     8,208      3,953

--------------------
<FN>
1   Long-term obligations include long-term notes payable, current maturities of
    long-term debt, long-term debt, convertible debt, and committed capital.

2   Comparisons of year-to-year balance sheet data should be made in conjunction
    with a  comparison  of the  effect of the  Acquisitions.  See  "Management's
    Discussions and Analysis of Financial Condition and Results of Operations."
</FN>
</TABLE>


                                       16
<PAGE>


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
Consolidated Financial Data" and the Company's Consolidated Financial Statements
and the notes thereto,  all included elsewhere 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 could cause actual results to differ materially from
those contained in the forward-looking statements below.

Overview

The Company is a full-range air filtration product company engaged in designing,
manufacturing and marketing high performance,  mid-range and  standard-grade air
filtration  products  and certain  related  products and  services.  The Company
focuses on those products with high replacement  potential.  The Company designs
and  manufactures  its own  production  equipment and also produces  glass-based
media for many of its  products.  From  1996 to 1998,  the  Company  experienced
significant  growth  from  the  acquisition  of  other  air  filtration  related
companies.  As  of  June  30,  1998,  the  Company  acquired  Eco-Air.   Eco-Air
specializes in the manufacture and sale of air filtration products to markets on
the West  Coast  ranging  from  high-end  HEPA  filters  through  standard-grade
filters.  The results of operations for the acquired  businesses are included in
the Company's financial statements only from the applicable date of acquisition.
As a result,  the Company's  historical  results of  operations  for the periods
presented should be evaluated  specifically in the context of the  Acquisitions.
Additionally,  the  historical  results of  operations  do not fully reflect the
operating  efficiencies and improvements expected from upgrading and integrating
the acquired businesses into the Company's operations. There can be no guarantee
that  the  Company  will  be able to  achieve  these  objectives  and  gains  in
efficiency. The Company believes the Acquisitions will have a positive impact on
its future results of operations.

Results of Operations

    Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

    The following  table  summarizes  the  Company's  results of operations as a
    percentage of net sales for the years ended December 31, 1998 and 1997.

<TABLE>
<CAPTION>
                                                        Year ended
                                          -------------------------------------
                                          December 31, 1998   December 31, 1997
                                          -----------------   -----------------
<S>                                       <C>        <C>      <C>         <C>   
    Net sales ........................... $157,822   100.0%   $134,135    100.0%
    Gross profit ........................   36,380    23.1      33,323     24.8
    Operating expenses ..................   28,408    18.0      24,156     18.0
    Operating income ....................    7,971     5.1       9,167      6.8
    Income before income taxes ..........    8,886     5.6       9,544      7.1
    Income taxes ........................    3,598     2.3       3,705      2.8
    Net income ..........................    5,289     3.4       5,839      4.4
</TABLE>

    Net  Sales:  Net sales  for 1998  increased  by  $23,687,000,  or 17.7%,  to
    $157,822,000 for 1998, from $134,135,000 for 1997. The increase in net sales
    was due to: (i) the acquisition of Eco-Air, which contributed  approximately
    $12,718,000 of net sales; and (ii) the Company's  success in attracting work
    and expanding its original core business,  which grew by approximately  8.2%
    between  1998 and 1997 and  contributed  an  additional  $10,969,000  to net
    sales. The Company experienced  reductions in sales of its laminar-flow HEPA
    products for cleanroom applications,  which were balanced by increased sales
    of  its  ASHRAE-rated  mid-range  products  for  industrial  and  commercial
    applications.

    Gross  Profit:  Gross  profit for 1998  increased  $3,057,000,  or 9.2%,  to
    $36,380,000,  which represented 23.1% of net sales, compared to $33,323,000,
    which  represented  24.8% for 1997. The primary  reasons for the decrease in
    gross profit margin  percentage were: (i) The consolidation of the Company's
    Airpure facility,  located in Selma, North Carolina,  into the Company's new
    facility in nearby Smithfield, North


                                       17
<PAGE>


    Carolina, which took place during the fourth quarter of 1998 and resulted in
    extended  periods of downtime due to  equipment  movement,  calibration  and
    production flow  refinement,  as well as other direct costs  associated with
    moving equipment and inventory from the old facility to the new plant;  (ii)
    higher than normal costs,  mostly  during the first three  quarters of 1998,
    associated with new facilities in Henderson,  Nevada and  Smithfield,  North
    Carolina,  consisting  primarily  of labor  inefficiencies  associated  with
    training new production  employees and installation of new equipment;  (iii)
    higher than normal  freight costs  associated  with  shipping  products from
    "established"  facilities to meet demand from new  geographical  areas while
    additional   equipment   was   installed   in  various   plants;   and  (iv)
    inefficiencies  associated  with  irregular  orders and  slowdowns  at FFI's
    facility in Washington, North Carolina. These decreases in gross profit were
    partially  balanced by efficiencies  associated  with the Company's  ongoing
    automation project for stock product lines, which is substantially  complete
    for the Company's highest volume products.

    Operating  Expenses:  Operating  expenses during the year ended December 31,
    1998 increased  $4,252,000,  or 17.6% to $28,408,000,  representing 18.0% of
    net sales,  compared to  $24,156,000  for the year ended  December 31, 1997,
    which represented 18.0% of net sales. The increase in operating expenses was
    primarily  due to the  acquisition  of Eco-Air,  which  added  approximately
    $3,720,000 in operating  expenses.  Excluding  Eco-Air,  operating  expenses
    increased  $532,000  from the year ended  December 31, 1998  compared to the
    year ended December 31, 1997.  Major factors  affecting  operating  expenses
    included approximately  $2,250,000 in research and development  expenditures
    for the development of new product lines, compared to approximately $373,000
    in 1997, the consolidation and  centralization  of overhead  functions,  and
    increased sales commission expense associated with increase sales.

    Net  Income:  Net income  for the year ended  December  31,  1998  decreased
    $550,000, or 9.4%, to $5,289,000,  or $0.21 per share basic ($0.20 diluted),
    compared to $5,839,000,  or $0.32 per share basic ($0.27  diluted),  for the
    year ended  December  31,  1997.  The  decrease  in net income is  primarily
    attributable  to the Company's  decrease in profit margin as a percentage of
    sales.

    Year Ended December 31, 1997 Compared to Year Ended December 30, 1996

    The following  table  summarizes  the  Company's  results of operations as a
    percentage  of net sales for the years ended  December 31, 1997 and December
    30, 1996.

<TABLE>
<CAPTION>
                                                         Year ended
                                            ------------------------------------
                                            December 31, 1997  December 30, 1996
                                            -----------------  -----------------
<S>                                         <C>        <C>     <C>        <C>   
    Net sales ............................. $134,135   100.0%  $ 73,056   100.0%
    Gross profit ..........................   33,323    24.8     19,459    26.6
    Operating expenses ....................   24,156    18.0     13,460    18.4
    Operating income ......................    9,167     6.8      5,999     8.2
    Income before income taxes ............    9,544     7.1      5,771     7.9
    Income taxes ..........................    3,705     2.8      2,178     3.0
    Net income ............................    5,839     4.4      3,594     4.9
</TABLE>

    Net  Sales:  Net sales  for 1997  increased  by  $61,079,000,  or 83.6%,  to
    $134,135,000,  from  $73,056,000 for 1996. The increase in net sales was due
    to the Acquisitions and establishment of new subsidiaries, which contributed
    approximately   $60,750,000  of  net  sales.   Excluding  the  Acquisitions,
    comparable  sales  from the  Company's  business  at  December  31,  1996 to
    December  31,  1997 were up  approximately  $329,000,  or 0.5%.  The Company
    believes  this is slower  than  normal  growth  for its  industry,  which it
    estimates  grew between 3% and 4% during 1997, and attributes its lower than
    expected  growth to a  cyclical  downturn  in demand  for new  semiconductor
    production  facilities.  Because  of this  cyclical  slowdown,  the  Company
    redirected  underutilized  capacity  normally  used  in the  manufacture  of
    high-end  filtration  products for  semiconductor  cleanrooms to containment
    environments for the pharmaceutical  industry and mid-range  industrial HEPA
    products.

    Gross Profit:  Gross profit for 1997 increased by $13,864,000,  or 71.2%, to
    $33,323,000, which represented 24.8% of net sales, from $19,459,000 in 1996,
    which  represented  26.6% of net sales. The primary reasons for the decrease
    in gross margin percentage were (i) higher than normal costs associated with
    opening new



                                       18
<PAGE>

    facilities  in Momence,  Illinois and  Henderson,  Nevada,  which  consisted
    primarily of labor  inefficiencies  associated  with training new production
    employees;  (ii) higher than normal freight costs  associated  with shipping
    products from facilities on the East Coast to meet demand from new customers
    while the new facilities were in their startup phase;  and (iii) higher than
    normal costs  associated  with changing  portions of the Company's  high-end
    production  facilities to emphasize  production of containment  environments
    for the  pharmaceutical  industry  and  mid-range  industrial  HEPA  filters
    instead of high-end filtration products for the semiconductor industry.

    Operating Expenses: Operating expenses for 1997 increased by $10,696,000, or
    79.5%,  to  $24,156,000,   which   represented  18.0%  of  net  sales,  from
    $13,460,000  in 1996,  which  represented  18.4% of net sales.  The  primary
    reasons for the overall increase in operating expenses were the Acquisitions
    and  the  establishment  of  Airseal  West,  which  together  accounted  for
    $10,785,000 of the increase. Operating expenses decreased as a percentage of
    net  sales  compared  to  1996,  primarily  due to  the  impact  of  savings
    associated with the consolidation of operations of the various subsidiaries.
    Other factors affecting  operating expenses  included:  An increase in sales
    commissions  related to the increase in sales volume;  additional travel and
    management  expenses  associated  with  establishing  new  facilities;   and
    expenses  incurred  developing and marketing new  containment and filtration
    products. See "Industry Outlook."

    Net  Income:  Net income for 1997  increased  by  $2,245,000,  or 62.5%,  to
    $5,839,000,  or $0.32 per share basic ($0.27 diluted),  from $3,594,000,  or
    $0.27 per share basic ($0.23 diluted) for 1996.

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

Working capital was $47,972,000 at December 31, 1998, compared to $55,179,000 at
December 31, 1997.  This includes cash and cash  equivalents of $13,673,000  and
$35,455,000 at December 31, 1998 and 1997, respectively.

Trade receivables increased $5,876,000, or 28.3%, to $26,671,000 at December 31,
1998 from  $20,795,000  at December 31, 1997. The largest factor in the increase
in receivables is the acquisition of Eco-Air,  which accounted for approximately
$2,585,000 of the increase. The remaining increase is primarily due to increases
associated with the increased volume in net sales (approximately $1,705,000) and
timing differences in shipments and payments received.

Operations  used  $797,000  of cash  during the year ended  December  31,  1998,
compared to  generating  $5,850,000  for the year ended  December 31, 1997.  The
difference  in  cash  flows  was  associated  with  increased   receivables  and
inventories,  partially offset by income net of depreciation  and  amortization.
Financing  activities during 1998 generated  $13,300,000 of cash, primarily from
debt financing.  Investing  activities during 1998 consumed $34,285,000 of cash,
consisting primarily of the purchase of property,  plant and equipment,  largely
consisting  of  machinery  for  the  automation  of  the  Company's   production
facilities,  and cash paid for the  acquisition of Eco-Air,  which was effective
June 30,  1998.  The  purchase  price,  including  expenses,  was  approximately
$15,677,419, plus up to $5,000,000 payable in cash or the Company's common stock
(at  sellers'  option)  if  certain  performance  criteria  are met.  If Eco-Air
achieves  certain  performance  criteria,  Flanders  will issue  common stock or
record a liability  for the cash  payment  over a five year period and  Flanders
will add the amount to goodwill  associated  with the purchase  transaction  and
amortize it over the remaining  amortization  period of the goodwill asset.  The
acquisition of Eco-Air was funded by utilizing a revolving credit facility which
provides a line of credit up to a maximum  principal amount of $30,000,000.  The
effective date of the acquisition for financial  statement purposes was June 30,
1998, and the Company's  financial  statements include the operating  activities
and assets of Eco-Air from that date.  As of December  31, 1998,  no shares have
been  issued  or  liability  recorded  to the  Eco-Air  sellers  as a result  of
achieving performance criteria.

The Company has arranged a revolving line of credit facility with SunTrust.  The
credit agreement is for a term of two years and provides the Company with a line
of credit up to a maximum principal amount of $30,000,000.  Outstanding balances
on the credit line bear interest at the option of the Company, at either (a) the
"prime" rate of


                                       19
<PAGE>


interest  publicly  announced  by  SunTrust  Bank,  or (b) the  "LIBOR"  rate as
reported  by the Wall  Street  Journal  plus an amount  equal to 1.00% to 1.95%,
depending on the ratio of total  liabilities  of the Company to its tangible net
worth.  As of December 31, 1998,  this rate was 6.06%.  As of December 31, 1998,
the Company had used $13,000,000 of the revolving  credit facility.  Unless this
line of  credit is  renewed,  it will  expire in  February  2000.  In  addition,
Eco-Air,  a subsidiary of the Company has a line of credit agreement with a bank
which allows for advances based on 80% of eligible  accounts  receivable up to a
maximum of $2,500,000, of which $1,300,000 was outstanding at December 31, 1998.
Borrowings under this  arrangement are  collateralized  by substantially  all of
Eco-Air's assets.  Outstanding  amounts on the line of credit bear interest at a
combination  of LIBOR plus 1.8% and the bank's prime rate.  Eco-Air may elect to
fix the rate for any or all advances  under this line of credit  agreement for a
term of 30 to 90 days at the then  current  LIBOR rate plus  1.8%,  and has made
such an election at the 30-day LIBOR rate (5.06% at December 31, 1998).

As of April 1, 1998, the Company entered into a Loan Agreement and issued a Note
to the Johnston County  Industrial  Facilities and Pollution  Control  Financing
Authority and such authority issued  Industrial  Development  Revenue Bonds (the
"Bonds") for an aggregate  of  $4,500,000,  the proceeds of which were loaned to
the Company for the construction of a 400,000 square foot manufacturing facility
in Johnston County, North Carolina.  The Note extends for a term of fifteen (15)
years and bears interest at a variable rate determined by the remarketing  agent
of the Bonds on a weekly basis equal to the minimum rate  necessary to sell such
Bonds at their par value which, as of December 31, 1998, was 4.1% per annum. The
Bonds are  collateralized by a $4,500,000 letter of credit which expires October
16, 1999.

Continuing  expansion of the Company will require substantial capital investment
for the manufacture of filtration  products.  Although the Company has been able
to  arrange  debt  facilities  or  equity  financing  to date,  there  can be no
assurance that sufficient debt financing or equity will continue to be available
in the future,  or that it will be available on terms acceptable to the Company.
Failure to obtain  sufficient  capital  could  materially  adversely  impact the
Company's growth strategy.

In 1998, the Company's Board of Directors authorized the repurchase of up to two
million shares of the Company's  common stock. As of March 29, 1999, the Company
has  repurchased  731,350  shares of its common stock under this  authorization;
thus, as of this date, up to an  additional  1,268,650  shares are available for
repurchase.  These  shares  may  be  acquired  in the  open  market  or  through
negotiated  transactions.  These  repurchases  may be made  from  time to  time,
depending on market conditions, share price and other factors. These repurchases
are to be used  primarily to satisfy the Company's  obligations  under its stock
option  and  purchase  plans or any other  authorized  incentive  plans,  or for
issuance pursuant to future equity financing by the Company.

Outlook

The Company  believes that the  semiconductor  industry has been  experiencing a
cyclical  slowdown in capital spending for new facilities,  and thus on spending
for cleanroom  filtration  products,  since the first quarter of 1997. While the
Company  does  expect  capital  spending  for new  semiconductor  facilities  to
increase in the future,  it does not expect this to be a  significant  factor in
the Company's overall business during 1999, where sales for semiconductor plants
are expected to remain flat through at least the third quarter.

Data collected by the Company  indicates that  residential  filter users replace
their  filters,  on  average,  approximately  once 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 the
Company's business.

The Company's 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,  such as the
Company's anti-microbial or higher-efficiency  filters for residential use, with
associated  sales prices  typically over $5.00 each. Any such trend would have a
beneficial effect on the Company's  business.  The Company's recent development,
in  conjunction  with  Church & Dwight,  the makers of Arm & Hammer  baking soda
products, of its Arm & Hammer Pleated Filters for residential use, is also aimed
toward increasing  consumer awareness of the benefits of using a more effective,
but more expensive,  filter, and replacing it more frequently. The Company hopes
that the  dramatic and readily  recognizable  difference  in efficacy  between a
fresh Arm & Hammer Pleated Filter,  and one which has been in place for three or
more months


                                       20
<PAGE>

will help to encourage the public to become more aware of these issues.

Currently,  the  largest  domestic  market for air  filtration  products  is for
mid-range  ASHRAE-rated products and HVAC systems,  typically used in commercial
and industrial buildings.  To date, the Company's penetration of this market has
been  relatively  small.  The Company  believes that its ability to offer a "one
stop" supply of air filtration  products to HVAC  distributors  and  wholesalers
will  increase its share of this market  segment.  The Company also believes its
recently developed modular air handlers and environmental  tobacco smoke systems
will enable it to expand sales to these  customers;  the new products will serve
as high profile entrants with distributors and  manufacturers'  representatives,
who can then be motivated to carry the Company's complete product line.

The  foregoing  contains  forward-looking  statements  that  involve  risks  and
uncertainties  including: (i) the shortage of reliable market data regarding the
air filtration market; (ii) changes in external competitive market factors or in
the  Company's  internal  budgeting  process  which might  impact  trends in the
Company's results of operations; (iii) anticipated working capital or other cash
requirements; (iv) changes in the Company's business strategy or an inability to
execute its strategy  due to  unanticipated  changes in the market;  (v) product
obsolescence  due  to  the  development  of  new   technologies,   (vi)  various
competitive factors that may prevent the Company from competing  successfully in
the  marketplace  and (vii) other  risks  described  below in "Factors  That May
Affect Future Results." 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.

Factors That May Affect Future Results

The Company operates in a highly  competitive  market and is subject to a number
of risks,  some of which are beyond the Company's  control.  While the Company's
management is optimistic about the Company's long-term prospects,  the following
discussion  highlights some risks and uncertainties that should be considered in
evaluating  its  growth  outlook.  See  "Part  I -  Business  -  Forward-Looking
Statements and Associated Risks."

Integration of Acquired  Companies.  Prior to their  acquisition by the Company,
CSC, Air Seal,  Precisionaire  and Eco-Air  operated under different  management
philosophies,  management  teams  and  marketing  strategies.  These  companies'
operations are currently being  integrated into the Company's,  and there can be
no  assurance  that the  Company's  systems,  procedures  and  controls  will be
adequate to accommodate integration of these companies.  Failure to successfully
integrate  these  companies  could  materially  adversely  affect the  Company's
business and results of operations.

Management of Growth. With the Company's recent acquisitions,  the Company's net
sales increased by approximately 173.6% from the year ended December 30, 1994 to
the year ended December 31, 1996, and  approximately  116.0% from the year ended
December 31, 1996 to the year ended December 31, 1998. There can be no assurance
that the Company will continue to expand at this rate, or at all. If the Company
continues to grow,  the  additional  growth will place  burdens on management to
manage such growth while  maintaining  the Company's  profitability.  Additional
growth  may  require  the  Company to recruit  and train  additional  management
personnel in the areas of corporate management,  sales,  accounting,  marketing,
research and  development  and  operations.  There can be no assurance  that the
Company will be able to do so. Both the Company's  growth by acquisition and any
further  expansion  may also  significantly  strain  the  Company's  management,
financial  and other  resources.  There can be no assurance  that the  Company's
systems,  procedures  and  controls  will be adequate  to support the  Company's
operations and growth.

Acquisition  Strategy.  The Company  intends to continue to increase  its market
share through  strategic  acquisitions  of synergistic  businesses.  The Company
seeks to identify potential  acquisition  targets with (i) dominant positions in
local  or  regional  markets,  (ii) a stable  customer  base  distinct  from the
Company's existing customers,  (iii) financial stability, (iv) an ability to add
new product lines to the Company's business,  and (v) significant asset value to
enable the Company to obtain debt financing or non-dilutive equity financing for
the   acquisition.   The   Company  is   continuously   evaluating   acquisition
opportunities  in light of the above  criteria.  The  Company  focuses  on those
acquisition targets which complement the Company's existing technology, increase
market  share,  or  broaden  distribution   channels.  The  Company  also  seeks
acquisition  targets  which  provide  vertical  integration  opportunities.  The
Company's  strategy  of growth  through  acquisition  exposes the Company to the
potential  risks  inherent  in  assessing  the  value,  strengths,   weaknesses,
contingent or other liabilities and potential


                                       21
<PAGE>


profitability  of acquisition  candidates  and in integrating  the operations of
acquired  companies.  Although  the Company  generally  has been  successful  in
pursuing these acquisition  targets,  there can be no assurance that acquisition
opportunities  will continue to be available,  that the Company will have access
to the capital required to finance potential acquisitions, that the Company will
continue to acquire  businesses or that any business acquired will be integrated
successfully  or  prove  profitable.   The  Company  currently  has  no  binding
agreements with respect to future acquisitions, but is continuing to investigate
potential acquisition opportunities.

Need for Additional Financing for Future Acquisitions. The Company believes that
the revenues from current  operations  will provide the Company with  sufficient
capital to fund continuing  operations for the foreseeable  future.  However, to
continue its growth through acquisition,  substantial  additional debt or equity
financing may be needed.  Failure to obtain sufficient  capital could materially
adversely affect the Company's acquisition strategy.

Need for Technical  Employees.  The Company's future operating results depend in
part  upon  its   ability  to  retain   and   attract   qualified   engineering,
manufacturing,  technical,  sales  and  support  personnel  for its  operations.
Competition  for such  personnel is intense,  and there can be no assurance that
the Company will be successful in attracting or retaining  such  personnel.  The
failure to attract or retain such persons could materially  adversely affect the
Company's business and results of operations.

Technological  Change;  New  Product  Introduction.  As of  December  31,  1998,
approximately  20% of the  Company's  net sales  resulted from sales of high-end
filtration   products  which  are   especially   vulnerable  to  new  technology
development.  The Company's  ability to remain  competitive  will depend in part
upon its  ability  to  anticipate  technological  changes,  to  develop  new and
enhances filtration systems and to introduce these systems at competitive prices
in a timely  and  cost-efficient  manner.  There  can be no  assurance  that the
Company  will  successfully  anticipate  future  technological  changes  or that
technologies  or systems  developed  by others  will not  render  the  Company's
technology  obsolete.  The Company also plans to develop new products as part of
its  strategy  to  increase  the size and  customer  base of the air  filtration
market.  There  can be no  assurance  that the  Company  will be  successful  in
developing the new products or that any product  developed will be  commercially
viable.

Acquiring and  Maintaining  Equipment.  The Company  designs,  manufactures  and
assembles  the  majority  of the  automatic  production  equipment  used  in its
facilities.  The Company also uses other technologically advanced equipment, for
which   manufacturers  may  have  limited   production   capability  or  service
experience,  which could result in delays in the acquisition and installation of
such  equipment or extended  periods of down-time in the event of malfunction or
equipment  failure.  Any such  extended  period of  down-time  for any  critical
equipment  could have a material  adverse  impact on the Company,  its financial
condition and operations.

Product  Demand.  Approximately  7% of the Company's net sales in 1998 were from
high-end  products  sold  for use in the  semiconductor  industry.  The  Company
believes  that  new  manufacturing  plant  construction  for  the  semiconductor
industry,  which typically occurs in large phases as new manufacturing  capacity
is needed,  is in a periodic  slowdown.  As such,  the demand for the  Company's
laminar flow HEPA products may be less in future years than previous years.

Potential  Environmental  Risks.  The  Company's  business  and  products may be
significantly  influenced by the constantly  changing body of environmental laws
and regulations,  which require that certain environmental  standards be met and
impose  liability  for the  failure  to comply  with such  standards.  While the
Company   endeavors  at  each  of  its  facilities  to  assure  compliance  with
environmental laws and regulations, there can be no assurance that the Company's
operations or  activities,  or historical  operations by others at the Company's
locations,  will not result in civil or criminal  enforcement actions or private
actions that could have a materially adverse effect on the Company.

Competition. The Company currently faces significant competition in its business
activities,  and this  competition  may  increase as new  competitors  enter the
market.  Several of these  competitors may have longer  operating  histories and
greater financial,  marketing and other resources than the Company. There can be
no assurance that the Company will be able to compete successfully with existing
or new entrant companies. In addition, new product introductions or enhancements
by the  Company's  competitors  could cause a decline in sales or loss of market
acceptance of the Company's existing products.  Increased  competitive  pressure
could also lead to intensified price-based competition resulting in lower prices
and profit  margins,  which could  adversely  affect the Company's  business and
results of operations.

Dependence on Key  Personnel.  The Company's  success will depend in significant
part upon the continued 


                                       22
<PAGE>


contributions of its officers and key personnel, many of whom would be difficult
to replace.  The Company has entered into  employment  agreements with Robert R.
Amerson,  its President and Chief Executive Officer,  Steven K. Clark, its Chief
Financial Officer and Chief Operating  Officer,  and Leonard J. Fetcho, its Vice
President  of  Operations.  The loss of any key  person  could  have a  material
adverse effect on the business, financial condition and results of operations of
the Company.

Distribution Channels. The Acquisitions give the Company a broader assortment of
air filtration  products.  As part of the integration of the  Acquisitions,  the
Company has adopted a strategy of  increasing  its market share by providing its
manufacturers'  representatives with the ability to offer a full product line of
the Company's  products and "one stop" purchasing of air filtration  products to
existing and new customers. Many of the Company's representatives have indicated
a willingness to offer the Company's  products  exclusively now that the Company
offers a broader range of products; however, these representatives may decide to
work exclusively with some other company for various reasons;  thus, the current
distribution channels would be unavailable.

Automation.  In 1997,  the Company began a program to increase its gross margins
by automating  portions of its production lines at FFI and  Precisionaire  using
technology  and  designs  developed   in-house.   Currently,   this  process  is
substantially complete for its standard-grade  spun-glass filters, the Company's
largest  volume  product  line.  The  Company  estimates  that  it has  expended
approximately  90% of the amounts  required to complete its automation  program.
Although the designs have been extensively  tested in the field, there can be no
assurance  that the new  equipment  will have the  beneficial  results  on gross
margins that have been budgeted,  or that any increases in efficiencies will not
be offset in the marketplace by competitors making similar improvements to their
facilities.

New Products and New Markets.  The Company has recently  invested a  significant
amount of time,  money and reputation on the development of new product lines to
(i) control indoor tobacco smoke; (ii) remove airborne odors in residences using
impregnated  baking soda in  filters;  and (iii)  allow  replacement  of certain
classes of outdated HVAC equipment without structural  demolition or rework. The
Company believes there is currently a gradually  increasing  public awareness of
the issues  surrounding  IAQ,  and that this trend  will  continue  for the next
several  years.  The Company  believes  there is an  increase in public  concern
regarding the effects of IAQ on employee productivity, as well as an increase in
interest by  standards-making  bodies in creating  specifications and techniques
for  detecting,  defining and solving IAQ problems.  The Company  believes there
will be an increase in interest in its Absolute Isolation Barriers in the future
because these products prevent  cross-contamination  between  different lots and
different processes being performed at the same facility,  as well as increasing
production  yields in many  applications.  There can be no assurance  that these
products  will gain  acceptance  in the  marketplace,  or that any new  products
developed by the Company will be  successful.  There can be no assurance that in
the future the Company will be able to recoup the  expenditures  associated with
the development of these products.

Centralize  Overhead  Functions.  The  Company has begun to  implement  plans to
centralize and eliminate  duplication of efforts between its subsidiaries in the
following  areas:  Purchasing,   production  planning,   shipping  coordination,
marketing,  accounting,  personnel management,  risk management and benefit plan
administration.  There can be no assurance that cutting overhead in this fashion
will have the  anticipated  benefits,  or that  these  reorganizations  will not
significantly disrupt the operations of the affected  subsidiaries.  The Company
believes  centralizing  these overhead  functions will have a beneficial  impact
upon its future operating results.

Year 2000

    The Problem

    The Year  2000  issue is the  result of  potential  problems  with  computer
    systems or any equipment with computer chips that store that year portion of
    the  date as just  two  digits  (e.g.,  98 for  1998).  Systems  using  this
    two-digit approach will not be able to determine whether "00" represents the
    year 2000 or 1900. The problem,  if not  corrected,  will make those systems
    fail   altogether  or,  even  worse,   allow  them  to  generate   incorrect
    calculations causing a disruption of normal operations.

    Readiness Efforts

    In 1997, the Company began a comprehensive  project plan to address the Year
    2000  issue as it  relates  to its  operations.  This  plan  was  developed,
    approved by the Board of Directors,  and implemented.  The scope of the plan
    includes five phases: Awareness, Evaluation, Hardware Implementation, Phased
    Software 


                                       23
<PAGE>


    Implementation  and Validation.  A project team that consists of key members
    of the technology staff,  representatives  of functional  business units and
    senior management was developed. Additionally, the duties of the Director of
    Information  Technology  were realigned to serve  primarily as the Year 2000
    project manager.

    An assessment of the impact of the Year 2000 issue on the Company's computer
    systems has been  completed.  The scope of the project also  includes  other
    operational and environmental systems since they may be impacted if embedded
    computer  chips  control  the  functionality  of  those  systems.  From  the
    assessment,  the Company has identified and prioritized those systems deemed
    to be mission  critical  or those that have a  significant  impact on normal
    operations.

    The Company relies on third party vendors and service providers for its data
    processing  capabilities  and  to  maintain  its  computer  systems.  Formal
    communications   with  these  providers  and  other  external  parties  were
    initiated in 1997 to assess the Year 2000  readiness  of their  products and
    services.  Their  progress  in meeting  their  targeted  schedules  is being
    monitored  for any  indication  that  they  may not be able to  address  the
    problems in time. Thus far,  responses indicate that most of the significant
    providers  currently have compliant  versions available or are well into the
    renovation  and testing  phases with  completion  scheduled for some time in
    early 1999.  However,  the Company can give no guarantee that the systems of
    these service providers and vendors on which the Company's systems rely will
    be timely renovated.

    Additionally,  the Company has  implemented  a plan to manage the  potential
    risk  posed by the  impact  of the Year 2000  issue on its major  customers.
    Formal communications have been initiated,  software modifications have been
    initiated,  and testing has been successfully  completed with several of the
    Company's major customers. Testing is scheduled to be substantially complete
    by June 30, 1999.

    Current Status

    The project team estimates that the Company's Year 2000 readiness project is
    86% complete,  and that the activities  involved in assessing external risks
    and  operational  issues are 80%  completed  overall.  The  following  table
    provides a summary of the current  status of the five phases  involved and a
    projected timetable for completion.

    Project Phase                        % Completed       Scheduled Completion

    Awareness                               100%                 Completed
    Evaluation                              100%                 Completed
    Hardware Implementation                  95%               January 1999
    Phased Software Implementation           85%                 May 1999
    Final Validation                         50%                August 1999
    ---------------------------------------------------------------------------
    Overall                                  86%

    Costs

    The Company has thus far primarily used and expects to continue to primarily
    use internal  financial  resources to implement  its  readiness  plan and to
    upgrade or replace and test  systems  affected  by the Year 2000 issue.  The
    total cost to the Company of these Year 2000  compliance  activities has not
    been and is not  anticipated  to be  material to its  financial  position or
    results of  operations in any given year.  In total,  the Company  estimates
    that its costs,  excluding personnel expenses, for Year 2000 remediation and
    testing of its computer  systems will amount to less than  $275,000 over the
    three-year  period from 1997 through 1999.  Not included in this estimate is
    the cost to replace  fully  depreciated  systems  during this period,  which
    occurs in the normal course of business and is not directly  attributable to
    the Year 2000 issue.

    The costs and the timetables in which the Company plans to complete the Year
    2000 readiness  activities are based on management's  best estimates,  which
    were derived  using  numerous  assumptions  of future  events  including the
    continued availability of certain resources, third party readiness plans and
    other factors.  The Company can make no guarantee that these  estimates will
    be achieved, and actual results could differ from such plans.

                                       24
<PAGE>

    Risk Assessment

    Based upon current  information related to the progress of its major vendors
    and service  providers,  management has determined  that the Year 2000 issue
    will not pose  significant  operational  problems for its computer  systems.
    This  determination  is based on the  ability of those  vendors  and service
    providers  to  renovate,  in a timely  manner,  the products and services on
    which the Company's systems rely. However, the Company can give no guarantee
    that the systems of these suppliers will be timely renovated.

    Contingency Plan

    Realizing  that some  disruption  may occur  despite its best  efforts,  the
    Company is in the process of developing  contingency plans for each critical
    system in the event that one or more of those systems fail. While this is an
    ongoing  process,  the  Company  expects  to  have  its  plan  substantially
    documented by May 1999.

Because of the  foregoing  factors,  as well as other  variables  affecting  the
Company's 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.

NEW ACCOUNTING STANDARDS

In 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-5, reporting on the Costs of Start-Up Activities. This statement,
which is effective for fiscal years beginning after December 15, 1998,  requires
costs of start-up activities and organization costs to be expensed.  The Company
has not  determined  the impact on its financial  statements of adopting the new
accounting standard.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk


The Company is exposed to various  market  risks,  including  changes in foreign
currency  exchange  rates and interest rate risks.  Market risk is the potential
loss  arising from  adverse  change in market rates and prices,  such as foreign
currency  exchange and interest  rates.  For the Company,  these  exposures  are
primarily  related to the sale of product to foreign  customers  and  changes in
interest  rates.  The Company does not have any  derivatives or other  financial
instruments for trading or speculative purposes.

The  fair  value  of  the  Company's   total  debt  at  December  31,  1998  was
approximately  $32,671,000.  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, 1998.  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.

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.  The Company's sensitivity analysis of the effects of changes in
foreign currency  exchanges rates does not factor in a potential change in sales
levels of local currency prices, as the preponderance of its foreign sales occur
over short periods of time or are demarcated in U.S. dollars.


Item 8. Financial Statements and Supplementary Data


          Attached, beginning at page F-1.


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

          None.

                                       25
<PAGE>


                                    PART III

Item 10. Directors and Executive Officers 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    49      President, Chief Executive Officer and Director

    Steven K. Clark      46      Chief Operating Officer, Vice President of 
                  Finance/Chief Financial Officer and Director

    Steven D. Klocke     38      Vice President of Engineering

    C. W. "Andy" Wood    59      Vice President of Sales

    Leonard J. Fetcho    59      Vice President of Operations

    William C. Gibbs     41      Director

    William H. Clark     56      Director

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

Steven K.  Clark.  Mr.  Clark was named as Vice  President  and Chief  Financial
Officer of the Company as of December 15, 1995, and a director of the Company as
of December  29,  1995.  Mr.  Clark acted as a  consultant  to the Company  from
November 15, 1995 through  December  15,  1995.  From July 1992 through  October
1995, he was the Chief Financial Officer of Daw Technologies,  Inc., a specialty
cleanroom  contractor and major customer of the Company.  While Chief  Financial
Officer of Daw Technologies, Mr. Clark was late in filing a Form 3 amendment and
certain  Form 4s and Form 5s. He agreed to a cease and desist order with respect
to these  violations.  No violations  other than the  timeliness of filing those
reports were alleged by the Securities and Exchange Commission ("SEC"). Prior to
this he was a senior  partner of Miller and Clark,  an accounting and management
services  firm.  Mr.  Clark  spent  four years  with  Price  Waterhouse,  and an
additional  four years with Arthur  Andersen,  both  accounting  firms.  He is a
Certified  Public  Accountant,  has Bachelor of Arts degrees in  Accounting  and
Political Science and a Master of Business  Administration  Degree, all from the
University of Utah.

Stephen D. Klocke.  Mr. Klocke has been Vice  President of  Engineering  for the
Company  since  March  1997.  He is  responsible  for all  aspects of filter and
equipment design, directs the engineering staff and is directly in charge of all
product and  technical  literature.  Mr.  Klocke is a member of the Institute of
Environment  Science,  the primary  technical  standards body for this industry,
where he has chaired many of the committees  which make filtration and cleanroom
standards.  He has been with Flanders since 1986. Mr. Klocke received a Bachelor
of Science degree in Mechanical  Engineering from the University of Kentucky and
a Bachelor of Arts degree in Physics from Thomas Moore College.

C.W.  "Andy"  Wood.  Mr. Wood has been Vice  President  of Sales for the Company
since 1998 and Vice  President of Sales for  Precisionaire,  a subsidiary of the
Company,  since 1982.  Mr. Wood  oversees all marketing and sales efforts of the
Company. Mr. Wood has more than thirty years of experience in the air filtration
industry.  Mr. Wood has an Associates  Degree in Industrial  Management from the
Georgia Institute.

                                       26
<PAGE>


Leonard J. Fetcho.  Mr.  Fetcho has been Vice  President of  Operations  for the
Company since December 1998 and has been  President of Eco-Air,  a subsidiary of
the  Company  acquired  in June 1998,  since  1993.  Mr.  Fetcho has also been a
Director of Eco-Air since 1994. Mr. Fetcho is a graduate of Morrisville College.

William C. Gibbs.  Mr. Gibbs has been an outside  director of the Company  since
December  1998.  Since  December  1998, he has been Vice  President in charge of
Corporate  Development  at Evans & Sutherland  Computer  Corporation.  From 1990
until December 1998, he was a partner in the law firm of Snell & Wilmer,  L.L.P.
Mr. Gibbs has a Bachelor of Science  Degree and Juris  Doctorate,  both from the
University of Utah. He also  obtained an LL.M.  in Securities  Regulations  from
Georgetown University.

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

Compliance with SEC Reporting Requirements

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

Based  solely on its  review  of the  copies of such  reports  furnished  to the
Company and written  representations  that no other reports were  required,  the
Company  believes  that,  during the 1998 fiscal year,  all filing  requirements
applicable  to its officers,  directors and greater than ten percent  beneficial
owners were complied  with,  except that Andy Wood, Len Fetcho and William Gibbs
each filed a Form 3 late, and Steve Klocke filed a Form 5 late.


Item 11. Executive Compensation


Compensation Committee Interlocks and Insider Participation

The  sole  member  of the  Compensation  Committee  of the  Company's  Board  of
Directors is Messr. William Clark, a non-employee director.

Summary Compensation Table

The  following  table sets forth the  aggregate  cash  compensation  paid by the
Company for services rendered during the last three years to the Company's Chief
Executive  Officer and to each of the Company's other  executive  officers whose
annual salary, bonus and other compensation exceeded $100,000 in 1998.

                                       27
<PAGE>

<TABLE>
<CAPTION>
                                                 Annual Compensation              Long-Term Compensation
                                         ----------------------------------  --------------------------------
                                                                                      Awards          Payouts
                                                                             -----------------------  -------
                                                                   Other     Restricted
                                                                   Annual      Stock       Options/    LTIP
                                                                  Compen-     Award(s)       SARs     Payouts
Name and Principal Position      Year    Salary ($)  Bonus ($)   sation ($)       ($)         (#)       ($)
-----------------------------   ----     ----------  ----------  ----------  ----------   ----------  -------
<S>                             <C>       <C>        <C>          <C>        <C>          <C>         <C> 
Robert R. Amerson               1998(1)   $250,000   $     --     $  --      $     --          --     $ --
   President and CEO            1997       250,000         --       5,500          --          --       --
                                1996       212,550         --        --            --     2,000,000     --
Steven K. Clark                 1998(2)    250,000         --        --            --          --       --
   Vice President Finance/CFO   1997       250,000         --        --            --          --       --
                                1996       150,192         --        --            --     2,000,000     --
C.W. "Andy" Wood                1998       183,558         --        --            --          --       --
   Vice President Sales         1997       169,856         --       4,965          --          --       --
                                1996       164,677         --      27,218          --          --       --
Leonard J. Fetcho               1998(3)    206,008    2,000,000      --            --        40,000     --
   Vice President Operations    1997       265,927         --        --            --          --
                                1996       201,034         --        --            --          --       --
<FN>
1   Mr.  Amerson's  annual salary is $250,000,  plus a possible bonus each year,
    under his Employment Agreement, as amended. See "Employment Agreements."

2   Mr.  Clark's  annual  salary is $250,000,  plus a possible  bonus each year,
    under his Employment Agreement, as amended. See "Employment Agreements."

3   Mr. Fetcho joined the Company as of June 30, 1998, when the Company acquired
    Eco-Air.  Mr.  Fetcho's  total  compensation  for  1998  since  the  date of
    acquisition  was $93,149.  Mr.  Fetcho's  annual salary is $165,000,  plus a
    possible bonus each year,  under his Employment  Agreement.  See "Employment
    Agreements."  Prior to  acquisition,  Eco-Air  paid Mr.  Fetcho  $112,859 in
    salary during 1998 and a $2,000,000  bonus for his role in  negotiating  the
    sale of Eco-Air.  During 1997 and 1996, Eco-Air paid Mr. Fetcho $265,927 and
    $201,034, respectively.
</FN>
</TABLE>

OPTIONS/SARs GRANTED IN LAST FISCAL YEAR

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

<TABLE>
<CAPTION>
                                                                            Potential Realizable
                                                                                  Value at
                                                                               Assumed/Annual
                                     % of Total                                Rates of Stock
                                    Options/SARs                             Price Appreciation
                                     Granted to   Exercise or                  for Option Term
                     Options/SARs   Employees in   Base Price  Expiration  -----------------------
       Name          Granted (#)    Fiscal Year      ($/Sh)       Date       5% ($)1     10% ($)1
       ----          ------------   ------------  -----------  ----------  -----------  ----------
<S>                  <C>            <C>           <C>          <C>         <C>          <C>
Robert  R. Amerson       --              --            --          --          --            --
Steven K. Clark          --              --            --          --          --            --
C.W. "Andy" Wood         --              --            --          --          --            --
Len Fetcho             40,000           18.4%        5.38         2001       34,794        75,220

<FN>
1   The potential  realizable  value portion of the foregoing table  illustrates
    value that might be realized upon exercise of the options  immediately prior
    to the expiration of their term, assuming the specified  compounded rates of
    appreciation on the common stock over the term of the options. These numbers
    do not take into account plan  provisions  providing for  termination of the
    option following termination of employment or non-transferability.
</FN>
</TABLE>

                                       28
<PAGE>

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

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

<TABLE>
<CAPTION>
                       Shares                      Number of Unexercised      Value of Unexercised
                      Acquired                    Options/SARs at Fiscal      In-the-Money Options/
                         On           Value             Year-End (#)         SARs at Fiscal Year-End
      Name           Exercise (#)  Realized ($)  Exercisable/Unexercisable  Exercisable/Unexercisable
-------------------  ------------  ------------  -------------------------  -------------------------
<S>                  <C>           <C>            <C>                       <C>             
Robert  R. Amerson         --      $    --        3,150,000 / --            $ 5,084,375 / --
Steven K. Clark            --           --        3,150,000 / --              5,084,375 / --
C.W. "Andy" Wood           --           --               -- / --                     -- / --
Leonard J. Fetcho          --           --           40,000 / --                     -- / --

</TABLE>

Compensation of Directors

Directors   who  are  Company   employees   receive  no  additional  or  special
remuneration for serving as directors.  The Company's non-employee Directors are
paid $500 plus out-of-pocket expenses for each meeting of the Board of Directors
and upon  meeting  certain  qualifications  receive an option to purchase  5,000
shares of the Company's  common stock at or above the market price of the common
stock on the date of grant for every year they remain a director.  During  1998,
each of the non-employee  directors received an option to purchase 50,000 shares
of the Company's common stock at an exercise price of $3.9375 per share.

Employment Agreements

The Company has entered into employment agreements with Messrs. Amerson and S.K.
Clark  effective  as  of  December  15,  1995  ("Employment  Agreements").   The
Employment Agreements, as amended, provide for an annual base salary of $250,000
for both Mr.  Amerson  and Mr.  Clark  and  terminate  in 2005.  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.

The  Company  has entered  into an  employment  agreement  with  Leonard  Fetcho
effective  as of  June  30,  1998  ("Fetcho's  Agreement").  Fetcho's  Agreement
provides  for an annual base  salary of $165,000  and  terminates  in 2003.  The
Fetcho  Agreement also provides that Mr. Fetcho shall be entitled to 200% of his
current base salary if the  employment  is  terminated by the executive for good
reason,  or if the  employment  is  terminated by the Company as a result of Mr.
Fetcho's death or disability or for any other reason except cause.

Item 12.      Security Ownership of Certain Beneficial Owners and Management


The following table sets forth all individuals  known to beneficially  own 5% or
more of the  Company's  common  stock,  and all  officers  and  directors of the
registrant,  with the amount and  percentage of stock  beneficially  owed, as of
March 29,  1999.  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.


<TABLE>
<CAPTION>
                                                             Percentage of
     Name and Address            Shares of Common Stock   Outstanding Shares of
   of Beneficial Owner             Beneficially Owned         Common Stock1
<S>                              <C>                      <C>
Robert R. Amerson2                     7,914,370                 27.50%
2399 26th Avenue North
St. Petersburg, FL  33713


                                       29
<PAGE>


Steven K. Clark2                       5,193,088                 18.05%
2399 26th Avenue North
St. Petersburg, FL  33713

Stephen Klocke3                          119,427                    *
2399 26th Avenue North
St. Petersburg, FL  33713

C.W. "Andy" Wood4                            400                    *
2399 26th Avenue North
St. Petersburg, FL  33713

Leonard J. Fetcho5                        40,000                    *
2399 26th Avenue North
St. Petersburg, FL  33713

William C. Gibbs6                         50,000                    *
2399 26th Avenue North
St. Petersburg, FL  33713

William H. Clark7                         93,069                    *
2399 26th Avenue North
St. Petersburg, FL  33713

Dimensional Fund Advisors, Inc.8       1,418,800                  5.54%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA  90401

Becker Capital Management, Inc. 9      2,032,100                  7.93%
1211 SW Fifth Avenue, Suite 2185
Portland, OR  97204

Crabbe Huson Group, Inc.10             4,131,400                 16.12%
121 SW Morrison, Suite 1400
Portland, OR  97204

Officers and Directors as a Group     13,410,354                 41.74%
2,3,4,5,6,7

-----------------------------------
<FN>
*   Represents less than 1% of the total issued and outstanding shares of common
    stock.

1   Applicable  percentage of ownership is based on 25,624,339  shares of common
    stock outstanding as of March 29, 1999, together with all applicable options
    for unissued securities for such stockholders exercisable within sixty days.
    Shares of common stock subject to options  exercisable within sixty 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  1,150,000  shares which are subject to an option to purchase  such
    shares  from the  Company at $1.00 per  share,  1,000,000  shares  which are
    subject to an option to  purchase  such shares from the Company at $2.50 per
    share and  1,000,000  shares which are subject to an option to purchase such
    shares from the Company at $7.50 per share.

3   Includes  16,800  shares  which are  subject to an option to  purchase  such
    shares from the Company at $2.50 per share,  10,000 shares which are subject
    to an option to purchase  such shares from the Company at $3.9375 per share,
    10,000  shares  which are subject to an option to purchase  such shares from
    the Company at $7.50 per share,  and 10,000  shares  which are subject to an
    option to purchase such shares from the Company at $7.125 per share.

4 Consists of 400 shares held by spouse.

5   Consists of 40,000  shares  which are subject to an option to purchase  such
    shares from the Company at $5.375 per share.


                                       30
<PAGE>

6   Consists of 50,000  shares  which are subject to an option to purchase  such
    shares from the Company at $3.9375 per share.

7   Includes 5,000 shares which are subject to an option to purchase such shares
    from the Company at $7.375 per share,  5,000  shares which are subject to an
    option to purchase  such shares from the Company at $8.50 per share,  50,000
    shares which are subject to an option to purchase such shares at $3.9375 per
    share and 5,000  shares  which are  subject  to an option to  purchase  such
    shares from the Company at $4.00 per share.

8   According to Schedule 13-G filed with the Securities and Exchange Commission
    dated February 12, 1999,  Dimensional Fund Advisors,  Inc., is an investment
    advisor and does not directly own any shares of the Company,  but  possesses
    sole voting and dispositive authority over 1,418,800 shares jointly owned by
    approximately four of its clients.

9   According to Schedule 13-G filed with the Securities and Exchange Commission
    dated February 10, 1999,  Becker Capital  Management,  Inc. is an investment
    advisor and does not directly own any shares of the Company,  but  possesses
    sole voting and dispositive power over 2,032,100 shares jointly owned by its
    clients.

10  According to Schedule 13-G filed with the Securities and Exchange Commission
    dated February 12, 1999, Crabbe Huson Group,  Inc., is an investment advisor
    and does not directly own any shares of the Company,  but  possesses  shared
    voting power over  3,706,800  shares and shared  dispositive  authority over
    4,131,400 shares jointly owned by its clients.
</FN>
</TABLE>

Item 13.      Certain Relationships and Related Transactions

At December 31, 1998, Steven K. Clark owed the Company $2,349,372 (not including
interest) which he borrowed to settle claims,  to make certain payments under an
indemnity  agreement  he entered  into with the Company and to purchase  certain
shares from Thomas T. Allan,  a former  officer and  director.  To evidence  the
amount owed, effective February 11, 1997, Mr. Clark issued a note to the Company
in the amount of $109,013 with interest at the variable rate of LIBOR plus 1.25%
per annum (6.9% at December 31, 1998), calculated on the basis of a 360-day year
and a 30-day  month.  Both the  interest  and  principal  due under the note are
payable on February 10, 1999. On April 25, 1997,  Mr. Clark issued a note to the
Company in the amount of $250,000 at the above-described  interest rate and both
the interest and  principal due under the note are payable on April 24, 1999. On
September 5, 1997,  Mr. Clark assumed  $409,750 of Mr.  Allan's debt owed to the
Company,  in  consideration  for the exercise of 163,900  options  under certain
option  agreements  between the parties.  The  interest  rate due on the assumed
loans is at the  variable  rate of LIBOR  plus  1.25%  per  annum,  and both the
principal  and interest due are payable on September 4, 1999. On April 15, 1998,
Mr. Clark issued a note to the Company in the amount of $1,580,609 with interest
at the rate of 7% per  annum,  calculated  on the basis of a 360-day  year and a
30-day  month.  Both  interest and  principal  due under the note are payable on
December 31, 2003.

At  December  31,  1998,  Robert R.  Amerson  owed the Company  $1,208,957  (not
including interest) which he borrowed to settle claims, to make certain payments
under an  indemnity  agreement  he entered into with the Company and to purchase
certain  shares  from  Thomas T. Allan,  a former  officer  and  director of the
Company.  To evidence the amount owed,  effective February 11, 1997, Mr. Amerson
issued a note to the  Company in the amount of  $109,013  with  interest  at the
variable  rate of LIBOR  plus  1.25%  per  annum,  calculated  on the basis of a
360-day year and a 30-day  month.  Both the interest and principal due under the
note are payable on February 10, 1999. On April 25, 1997,  Mr.  Amerson issued a
note to the Company in the amount of $250,000  at the  above-described  interest
rate and both the interest and principal due under the note are payable on April
24, 1999. On September 25, 1997,  Mr.  Amerson  assumed  $409,750 of Mr. Allan's
debt owed to the Company,  in consideration  for the exercise of 163,900 options
under certain option  agreements  between the parties.  The interest rate due on
the assumed  loans is at the  variable  rate of LIBOR plus 1.25% per annum,  and
both the principal and interest due are payable on September 4, 1999. On May 21,
1998,  Mr.  Amerson  issued a note to the Company in the amount of $440,194 with
interest at the rate of 7% per annum,  calculated on the basis of a 360-day year
and a 30-day  month.  Both interest and principal due under the note are payable
on December 31, 2003.

William C. Gibbs is a Company director.  Mr. Gibbs was a partner in the law firm
of Snell & Wilmer which is counsel to the Company, until December 1998, at which
time he became a Vice President of Evans and Sutherland.



                                       31
<PAGE>


                                     PART IV


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

The following  constitutes a list of Financial  Statements,  Financial Statement
Schedules and Exhibits required to be used in this report.

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

             Independent Auditor's Report................................... F-2

             Consolidated Balance Sheets at December 31, 1998 and 1997...... F-3

             Consolidated Statements of Income for the years ended 
             December 31, 1998, 1997 and 1996............................... F-4

             Consolidated Statements of Stockholders' Equity for the 
             years ended December 31, 1998, 1997 and 1996................... F-5

             Consolidated Statements of Cash Flows for the years 
             ended December 31, 1998, 1997 and 1996......................... F-6

             Notes to Consolidated Financial Statements..................... F-9


     (a)(2)  Financial Statement Schedules

             Independent Auditor's Report...................................F-28

             Schedule II.  Valuation and Qualifying Accounts................F-29

                 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   Indemnification  Agreement between Flanders  Corporation,  Steven K.
            Clark,  Robert Amerson and Thomas Allan, filed with the December 31,
            1995 Form 10-K, incorporated herein by reference.

     10.2   Stock  Purchase  Agreement  between  Flanders  Corporation  and  the
            Shareholders of Eco-Air Products, Inc. dated May 7, 1998, filed with
            the June 30, 1998 Form 8-K, incorporated herein by reference.

     10.3   Amendment  dated May 20,  1998 to Stock  Purchase  Agreement  by and
            between the Registrant  and the  Shareholders  of Eco-Air  Products,
            Inc.  dated  May 7,  1998,  filed  with the June 30,  1998 Form 8-K,
            incorporated herein by reference.

     10.4   Promissory  Note from  Precisionaire,  Inc. to SunTrust Bank,  Tampa
            Bay, in the amount of $2,134,524  dated August 28, 1997,  filed with
            the   September  15,  1997  Form  S-1  (Reg  No.   333-33635),   and
            incorporated herein by reference.


                                       32
<PAGE>

     10.5   Assumption Agreement between POF Realty,  Precisionaire,  Inc., Polk
            County  Industrial  Development  Authority and SunTrust Bank,  dated
            August 1, 1997,  filed with the September 15, 1997 Form S-1 (Reg No.
            333-33635), and incorporated herein by reference.

     10.6   Mortgage Deed and Security Agreement between Precisionaire, Inc. and
            Sun Trust  Bank,  Tampa Bay dated  August 28,  1997,  filed with the
            September 15, 1997 Form S-1 (Reg No.  333-33635),  and  incorporated
            herein by reference.

     10.7   Credit Agreement between Flanders Corporation,  SunTrust Bank, Tampa
            Bay and Zions First  National Bank,  dated November 10, 1997,  filed
            with the December  31, 1997 Form 10-K,  and  incorporated  herein by
            reference.

     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   Letter of Credit Agreement between Flanders Corporation and SunTrust
            Bank, Tampa Bay, 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 April 1, 1998,  filed with the Form 10-Q dated March 31, 1998,
            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  Stock Option Agreement between Elite Acquisitions,  Inc., and Steven
            K. Clark,  filed with the December 31, 1995 Form 10-K,  incorporated
            herein by reference.

     10.16  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  Stock Option Agreement between Elite  Acquisitions,  Inc. and Robert
            R. Amerson, filed with the December 31, 1995 Form 10-K, incorporated
            herein by reference.

     10.20  Employment Agreement between Eco-Air Products,  Inc., and Leonard J.
            Fetcho.

     10.21  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.

     10.22  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.

     10.23  Stock Option Agreement  between  Flanders  Corporation and Steven K.
            Clark  dated  June 3, 1996,  filed  with Form S-8 on July 21,  1997,
            incorporated herein by reference.


                                       33
<PAGE>

     10.24  Stock Option Agreement  between  Flanders  Corporation and Robert R.
            Amerson  dated June 3, 1996,  filed with Form S-8 on July 21,  1997,
            incorporated herein by reference.

     21     Subsidiaries of the Registrant.

     24     Power of Attorney (included on Signature page of this report).

     27     Financial Data Schedule.


     (b)    Reports on Form 8-K.

            None.  

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



                                       34
<PAGE>

                                   Signatures



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

         Dated this 8th day of April, 1999.

                              FLANDERS CORPORATION


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


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

    KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature  appears
below  constitutes and appoints Steven K. Clark, 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    President, Chief Executive Officer    April 8, 1999
------------------------  and Director                          ________________
 Robert R. Amerson      

                          Chief Operating Officer, Vice
                          President/Chief Financial Officer,
/s/ Steven K. Clark       Principal Accounting Officer and      April 8, 1999
 Steven K. Clark          Director                              ________________


/s/ William C. Gibbs      Director                              April 8, 1999
 William C. Gibbs                                               ________________


/s/ William H. Clark      Director                              April 8, 1999
 William H. Clark                                               ________________



                                       35
<PAGE>

                        CONSOLIDATED FINANCIAL STATEMENTS
                                       OF
                              FLANDERS CORPORATION


              For the Years ended December 31, 1998, 1997 and 1996



<PAGE>




                          INDEPENDENT AUDITOR'S REPORT



To the Board of Directors
Flanders Corporation
Washington, North Carolina


We have  audited  the  accompanying  consolidated  balance  sheets  of  Flanders
Corporation  and  subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three  years in the period  ended  December  31,  1998.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Flanders Corporation
and  subsidiaries  as of December  31,  1998 and 1997,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.


/s/ McGladrey & Pullen, LLP

New Bern, North Carolina

March12, 1999,  except for item (A) in Note 6 and the last  paragraph of Note 6,
     as to which the date is March 31, 1999


                                      F-2
<PAGE>

<TABLE>

                      FLANDERS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1998 and 1997
<CAPTION>



ASSETS                                                   1998           1997
-------------------------------------------------    ------------   ------------
<S>                                                  <C>            <C>         
Current assets
  Cash and cash equivalents                          $ 13,672,685   $ 35,454,580
  Receivables:
    Trade, less allowance for doubtful accounts:
      1998 $551,725; 1997 $380,566 (Note 6)            26,670,650     20,794,675
    Other                                               2,177,301      1,336,282
  Inventories (Notes 2 and 6)                          25,518,804     16,520,154
  Deferred taxes (Note 10)                              1,421,847      1,057,383
  Income tax refund                                          --          217,737
  Other current assets                                    860,310        870,897
                                                     ------------   ------------
           Total current assets                        70,321,597     76,251,708
Related party receivables (Note 14)                     4,263,409      1,861,005
Other assets (Note 3)                                   3,114,844      2,842,767
Intangible assets (Notes 4 and 6)                      28,990,924     17,164,629
Property and equipment, net (Notes 5 and 6)            61,089,420     47,760,407
                                                     ------------   ------------
                                                     $167,780,194   $145,880,516
                                                     ============   ============
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------

Current liabilities
  Notes payable, banks (Note 6)                      $  1,300,000   $       --
  Current maturities of long-term debt (Note 6)         1,265,014      1,092,442
  Accounts payable (Note 7)                            15,851,087     16,940,981
  Accrued expenses (Note 8)                             3,933,918      3,038,800
                                                     ------------   ------------
           Total current liabilities                   22,350,019     21,072,223
                                                     ------------   ------------
Long-term debt, less current maturities (Note 6)       30,105,714     13,679,052
                                                     ------------   ------------
Deferred taxes (Note 10)                                5,721,647      4,922,383
                                                     ------------   ------------
Commitments and contingencies (Notes 6, 12
  and 13)
Stockholders' equity (Notes 6, 9 and 16)
  Preferred stock, no par value, 10,000,000
    shares authorized; none issued                           --             --
  Common stock, $.001 par value; 50,000,000 shares
    authorized; issued and outstanding:
    1998 25,624,339; 1997 25,663,425                       25,624         25,663
  Additional paid-in capital                           90,077,257     91,969,830
  Retained earnings                                    19,499,933     14,211,365
                                                     ------------   ------------
                                                      109,602,814    106,206,858
                                                     ------------   ------------
                                                     $167,780,194   $145,880,516
                                                     ============   ============
</TABLE>


                 See Notes to Consolidated Financial Statements

                                      F-3
<PAGE>

<TABLE>

                      FLANDERS CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                  Years Ended December 31, 1998, 1997 and 1996
<CAPTION>

                                                  1998             1997            1996
                                             -------------    -------------    ------------
<S>                                          <C>              <C>              <C>         
Net sales                                    $ 157,821,876    $ 134,135,433    $ 73,056,197
Cost of goods sold (Notes 12, 13 and 14)       121,442,367      100,812,262      53,597,621
                                             -------------    -------------    ------------
        Gross profit                            36,379,509       33,323,171      19,458,576
Operating expenses (Notes 12, 13 and 14)        28,408,118       24,156,197      13,459,721
                                             -------------    -------------    ------------
        Operating income                         7,971,391        9,166,974       5,998,855
                                             -------------    -------------    ------------
Nonoperating income (expense):
  Other income                                   1,858,732        1,234,541         975,750
  Interest expense                                (943,720)        (857,527)     (1,203,226)
                                             -------------    -------------    ------------
                                                   915,012          377,014        (227,476)
                                             -------------    -------------    ------------
        Income before income taxes               8,886,403        9,543,988       5,771,379
Income taxes (Note 10)                           3,597,835        3,704,723       2,177,591
                                             -------------    -------------    ------------
        Net income                           $   5,288,568    $   5,839,265    $  3,593,788
                                             =============    =============    ============
Earnings per common share (Note 17)
    Basic                                    $        0.21    $        0.32    $       0.27
                                             =============    =============    ============
    Diluted                                  $        0.20    $        0.27    $       0.23
                                             =============    =============    ============
Weighted average common shares
  outstanding (Note 17)
    Basic                                       25,133,820       18,508,763      13,171,440
                                             =============    =============    ============
    Diluted                                     27,106,924       22,477,184      16,383,962
                                             =============    =============    ============
</TABLE>


                 See Notes to Consolidated Financial Statements

                                      F-4
<PAGE>


<TABLE>
                      FLANDERS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  Years Ended December 31, 1998, 1997 and 1996

<CAPTION>
                                                                    Additional
                                                        Common        Paid-In        Retained
                                                         Stock        Capital        Earnings
                                                       --------    ------------    -----------
<S>              <C>                                   <C>         <C>             <C>        
Balance, January 1, 1996                               $ 11,434    $  3,418,671    $ 4,778,312
  Issuance of 3,371,204 shares of common stock
    related to the Private Offerings (Note 9)             3,372      18,760,986           --
  Less committed capital (Note 9)                          --        (8,000,005)          --
  Issuance of 1,036,885 shares of common stock
    related to the Acquisitions                           1,037          (1,037)          --
  Valuation and release from escrow of 282,295
    shares of common stock related to the
    Acquisitions                                           --         2,681,803           --
  Issuance of 96,280 shares of common stock upon
    exercise of warrants                                     96         240,604           --
  Issuance of 13,200 shares of common stock upon
    exercise of options                                      13          32,987           --
  Income tax benefit from stock options exercised          --            37,433           --
  Fair value of warrants issued with convertible
    debt                                                   --            33,971           --
  Receivables secured by stock related to
    exercise of warrants                                   --          (240,700)          --
  Net income                                               --              --        3,593,788
                                                       --------    ------------    -----------
Balance, December 31, 1996                               15,952      16,964,713      8,372,100
  Release of committed capital (Note 9)                    --         8,000,005           --
  Issuance of 8,377,000 shares of common stock
    (Note 9)                                              8,377      57,045,636           --
  Issuance of 722,375 shares of common stock upon
    conversion of convertible debt (Note 9)                 722       4,381,689           --
  Issuance of 425,000 shares of common stock upon
    exercise of options (Note 16)                           425       1,262,075           --
  Valuation and release from escrow of 344,691
    shares of common stock related to the
    Acquisitions                                           --         2,984,635           --
  Issuance of 187,502 shares of common stock related
    to the Acquisitions (Note 11)                           187       1,394,452           --
  Income tax benefit from stock options exercised          --           969,125           --
  Issuance of receivables related to exercise of
    options                                                --        (1,262,500)          --
  Payment on receivables related to exercised
    warrants and options                                   --           230,000           --
  Net income                                               --              --        5,839,265
                                                       --------    ------------    -----------
Balance, December 31, 1997                               25,663      91,969,830     14,211,365
  Issuance of 110,000 shares of common stock to
    acquire remaining interest in a subsidiary
    from minority stockholders                              110         522,390           --
  Issuance of 121,264 shares of common stock upon
    non-cash exercise of stock options                      121            (121)          --
  Purchase and retirement of 731,350 shares of
    common stock                                           (731)     (3,284,827)          --
  Issuance of 461,000 shares of common stock upon
    exercise of options                                     461       1,152,039           --
  Issuance of receivables related to exercise of
    options                                                --          (722,500)          --
  Payment on receivables related to exercised
    options                                                --           235,700           --
  Income tax benefit of stock options exercised            --           253,795           --
  Registration of Company common stock                     --           (77,487)          --
  Valuation and release from escrow of 7,000
    shares of common stock related to the
    Acquisitions                                           --            28,438           --
  Net income                                               --              --        5,288,568
                                                       --------    ------------    -----------
Balance, December 31, 1998                             $ 25,624    $ 90,077,257    $19,499,933
                                                       ========    ============    ===========
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-5
<PAGE>


<TABLE>
                      FLANDERS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 1998, 1997 and 1996
<CAPTION>

                                                           1998            1997            1996
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                           $  5,288,568    $  5,839,265    $  3,593,788
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
      Depreciation and amortization                       5,120,043       3,799,957       1,485,740
      Provision for doubtful accounts                       111,159           9,086        (120,423)
      Allowance for obsolete inventory                       32,414          17,000        (115,000)
      (Gain) loss on sale of property and equipment         (41,221)         31,942         (54,002)
      Gain on sale of real estate                           (48,767)           --              --
      Gain on disposition of cash value of life
        insurance                                              --              --           (24,600)
      Realized gain on sale of marketable securities           --              --            12,123
      Deferred income taxes                                 185,814         (34,555)       (113,520)
      Income tax benefit from exercise of stock
        options                                             253,795         969,125          37,433
      Change in working capital components, net of
        effects from
          acquisitions:
          Receivables                                    (4,152,080)     (3,245,972)       (871,440)
          Inventories                                    (6,236,258)     (6,554,150)       (504,576)
          Other current assets                              131,515        (183,373)       (520,092)
          Accounts payable                               (2,267,358)      5,920,363        (997,168)
          Accrued expenses                                  (99,649)        (22,597)        302,682
          Income tax (payable) refund                       925,243        (696,450)       (497,767)
                                                       ------------    ------------    ------------
                      Net cash provided by (used in)
                                operating activities       (796,782)      5,849,641       1,613,178
                                                       ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Acquisitions, net of cash acquired                    (15,455,160)           --       (31,971,448)
  Purchase of equipment                                 (16,877,214)    (20,287,003)     (2,501,308)
  Proceeds from sale of marketable equity securities           --              --           823,396
  Proceeds from sale of property and equipment               96,005          92,572         226,234
  Proceeds from sale of real estate                         259,253            --              --
  Proceeds from disposition of cash value of life
    insurance                                                  --              --           884,895
  Disbursements on notes receivables, stockholders       (2,402,404)       (955,075)       (905,930)
  Proceeds from repayment of notes receivable,
    stockholders                                               --              --           458,428
  Disbursements on trademarks and trade names                (9,224)           --           (17,246)
  Disbursement on deferred expenses                        (248,923)       (461,824)           --
  Proceeds from repayment of notes receivable
    related to exercise of options and warrants             235,700         230,000            --
  Decrease (increase) in cash designated for
    equipment additions                                     856,441        (856,441)           --
  Disbursements on prepaid commissions                     (348,058)       (491,273)           --
  Disbursements for deposits                               (385,067)       (415,464)           --
  Increase in cash value of life insurance                   (6,071)        (21,054)        (25,272)
                                                       ------------    ------------    ------------
               Net cash used in investing activities    (34,284,722)    (23,165,562)    (33,028,251)
                                                       ------------    ------------    ------------
</TABLE>

                                  - Continued -

                 See Notes to Consolidated Financial Statements

                                      F-6
<PAGE>


<TABLE>
                      FLANDERS CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
                  Years Ended December 31, 1998, 1997 and 1996
<CAPTION>

                                                            1998            1997           1996
                                                       -------------   -------------   ------------
<S>                                                    <C>             <C>             <C>          
CASH FLOWS FROM FINANCING ACTIVITIES
  Payments on revolving credit agreement               $ (26,100,000)  $ (62,320,442)  $(58,637,083)
  Proceeds from revolving credit agreement                39,000,000      46,378,297     67,618,777
  Proceeds from long-term borrowings                       4,500,000      10,050,118      9,340,200
  Principal payments on long-term borrowings              (1,167,346)     (8,781,901)    (2,782,871)
  Proceeds from issuance of common stock, net of
    committed capital                                           --        57,054,013     11,894,353
  Release of committed capital                                  --         8,000,005           --
  Disbursement of loan origination fees                         --              --         (634,689)
  Purchase of common stock for retirement                 (3,285,558)           --             --
  Proceeds from exercise of options and warrants             430,000            --           33,000
  Proceeds from issuance of convertible debt                    --              --        4,000,000
  Cost to register common stock                              (77,487)           --             --
                                                       -------------   -------------   ------------
           Net cash provided by financing activities      13,299,609      50,380,090     30,831,687
                                                       -------------   -------------   ------------
                     Net increase (decrease) in cash
                                and cash equivalents     (21,781,895)     33,064,169       (583,386)
CASH AND CASH EQUIVALENTS
  Beginning                                               35,454,580       2,390,411      2,973,797
                                                       ------------    ------------    ------------
  Ending                                               $  13,672,685   $  35,454,580   $  2,390,411
                                                       =============   =============   ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash payments for:
    Interest, net of $295,089 and $424,332 interest
      capitalized to property and equipment for 1998
      and 1997, respectively                           $     837,576   $   1,328,380   $    732,976
                                                       =============   =============   ============
    Income taxes                                       $   2,486,778   $   4,435,728   $  2,293,555
                                                       =============   =============   ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
  Fair value of warrants issued with convertible
    debt                                               $        --     $        --     $     33,971
                                                       =============   =============   ============
  Valuation and  release  from  escrow of 7,000,  344,691 and 282,295  shares of
    common stock related to the Acquisitions for the years ended
    December 31, 1998, 1997 and 1996, respectively     $      28,438   $   2,984,635   $  2,681,803
                                                       =============   =============   ============
  Commissions payable on gross proceeds from
    issuance of common stock                           $        --     $        --     $  1,130,000
                                                       =============   =============   ============
  Issuance of 96,280 shares of common stock upon
    exercise of warrants in exchange for receivables   $        --     $        --     $    240,700
                                                       =============   =============   ============
  Issuance of  289,000  and  425,000  shares of common  stock upon  exercise  of
    options in exchange for receivable for the years ended December 31, 1998
    and 1997, respectively                             $     722,500   $   1,262,500   $       --
                                                       =============   =============   ============
  Issuance of 722,375 shares of common stock upon
    conversion of $4,000,000 of convertible debt and
    $382,411 of related accrued interest               $        --     $   4,382,411   $       --
                                                       =============   =============   ============
  Acquisition of property through assumption of debt   $        --     $   1,642,099   $       --
                                                       =============   =============   ============
</TABLE>

                                  - Continued -

                 See Notes to Consolidated Financial Statements

                                      F-7
<PAGE>


<TABLE>
                      FLANDERS CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
                  Years Ended December 31, 1998, 1997 and 1996
<CAPTION>


                                                           1998            1997            1996
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>       
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
  ACTIVITIES (Continued)
    Cancellation of capital lease                      $       --      $  2,764,634    $       --
                                                       ============    ============    ============
    Capital lease obligation incurred for use of
      property and equipment                           $    116,580    $       --      $    284,250
                                                       ============    ============    ============
    Issuance of stock in exchange for minority
      interest                                         $    522,500    $       --      $       --
                                                       ============    ============    ============
ACQUISITION OF COMPANIES (Note 11)
  Working capital acquired, net of cash and cash
    equivalents received                               $  2,635,781    $    270,646    $  4,677,588
  Fair value of other assets acquired, principally
    property and equipment                                1,742,794         930,000      25,152,612
  Goodwill                                               11,106,585         547,393      10,823,053
  Long-term debt assumed                                    (30,000)       (353,400)     (8,681,805)
                                                       ------------    ------------    ------------
                                                       $ 15,455,160    $  1,394,639    $ 31,971,448
                                                       ============    ============    ============
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-8
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note  1.      Nature of Business and Significant Accounting Policies

Nature of business:  Flanders Corporation (the "Company") designs,  manufactures
and markets a broad range of air  filtration  products,  including  (i) high-end
High  Efficiency   Particulate  Air  ("HEPA")  filters,  with  at  least  99.97%
efficiency,  and Absolute  Isolation  Barriers  for the creation of  synthesized
atmospheres to control  manufacturing  environments and for the absolute control
and  containment  of  contaminants  and  toxic  gases in  certain  manufacturing
processes;  (ii) mid-range filters for individual and commercial use, which fall
under  specifications which are categorized by efficiency ratings established by
the American Society of Heating  Refrigeration  and Air  Conditioning  Engineers
("ASHRAE");  and (iii) standard-grade,  low cost filters with efficiency ratings
below 30% sold typically  off-the-shelf for standard  residential and commercial
furnace and air conditioning  applications.  Approximately  70% of the Company's
net sales are from products with high replacement  potential.  The Company's air
filtration products are utilized by many industries,  including those associated
with commercial and residential heating ventilation and air conditioning systems
("HVAC"   systems),    semiconductor   manufacturing,    ultra-pure   materials,
biotechnology,  pharmaceuticals, synthetics, nuclear power and nuclear materials
processing.  The  Company  also  designs  and  manufactures  its own  production
equipment  to allow  for  highly  automated  manufacturing  of  these  products.
Furthermore,  the  Company  produces  glass-based  filter  media for some of its
products to maintain control over the quality and composition of such media. The
Company has only one segment, filtration products.

Net sales for the years ended  December 31, 1998 and 1997 included  sales to the
following  major  customers,  together  with  the  receivables  due  from  those
customers:

<TABLE>
<CAPTION>
                               Amount of Net Sales     Trade Receivable Balance
                             Year Ended December 31,       As of December 31,
                             -----------------------   ------------------------
                                1998         1997         1998         1997
                             ----------   ----------   ----------   -----------
<S>                          <C>          <C>           <C>          <C>      
  Customer A .............   16,030,892   14,962,349    1,112,788    1,156,094
  Customer B .............   16,197,490   10,466,677    2,286,944    1,157,019
</TABLE>

Although the Company historically has specialized in HEPA and mid-range filters,
the Company  has  positioned  itself to offer its  customers a full range of air
filtration  products.  As a result of certain  acquisitions and its operation of
various  subsidiaries,  the Company has the ability to design,  manufacture  and
market  high-end,  mid-range  and  standard-grade  air  filtration  products and
related equipment and hardware.

Principles of consolidation:  The consolidated  financial statements include the
accounts  of the Company and its  subsidiaries,  all of which are wholly  owned,
except  for one  subsidiary  which was 80  percent  owned  for the  years  ended
December 31, 1998 and 1997.  The Company  acquired the  remaining  interest in a
subsidiary during the year ended December 31, 1998, which was 63.0 percent owned
by one of the Company's  subsidiaries  for the years ended December 31, 1997 and
1996. All material  intercompany  accounts and transactions have been eliminated
in consolidation. Amounts of minority interest are insignificant.

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

Cash  and cash  equivalents:  The  Company  maintains  its cash in bank  deposit
accounts,  which at times 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
to be cash equivalents.

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


                                      F-9
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


Goodwill:  The Company  has  classified  as goodwill  the cost in excess of fair
value of the net assets  (including  tax  attributes)  of companies  acquired in
purchase transactions. Goodwill is being amortized on a straight line basis over
40 years.  At each  balance  sheet date,  the  Company  evaluates  goodwill  for
impairment  by  comparing  expectations  of  non-discounted  future  cash  flows
excluding interest costs with the carrying value of goodwill for each subsidiary
having a material  goodwill  balance.  Based upon its most recent analysis,  the
Company believes that no impairment of goodwill exists at December 31, 1998.

Trademarks and trade names:  Trademarks and trade names are being amortized on a
straight  line basis over 17 years.  At each  balance  sheet  date,  the Company
evaluates the value of trademarks  and  tradenames  for  impairment by comparing
expectations of non-discounted  future cash flows excluding  interest costs with
the carrying  value of  trademarks  and trade names for each  trademark or trade
name having a material unamortized balance. Based upon its most recent analysis,
the Company  believes that no impairment of trademarks and trade names exists at
December 31, 1998.

Property and equipment:  Property and equipment are stated at cost. Depreciation
is  computed  by  the   straight-line   method  over  estimated   useful  lives.
Amortization of capital leases is included in depreciation expense. The carrying
amount of all  long-lived  assets is  evaluated  periodically  to  determine  if
adjustment to the  depreciation  and  amortization  period or to the unamortized
balance is warranted.  Based upon its most recent analysis, the Company believes
that no impairment of property and equipment exists at December 31, 1998.

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

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

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

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

Research and  development:  Research and development  expenses and ongoing costs
associated  with improving  existing  products and  manufacturing  processes are
expensed in the period incurred.  Costs associated with research and development
amounted to approximately $2,250,000,  $373,000 and $460,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.

Reclassifications:  Certain  account  balances for the years ended  December 31,
1997 and 1996 have been  reclassified  with no effect on net income or  retained
earnings to be  consistent  with the  classification  adopted for the year ended
December 31, 1998.


                                      F-10
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 2.       Inventories

Inventories consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
                                                         1998           1997
                                                     ------------   ------------
<S>                                                  <C>            <C>         
Finished goods                                       $ 12,988,501   $  7,456,542
Work in progress                                        1,036,809      1,924,024
Raw materials                                          11,587,908      7,201,588
                                                     ------------   ------------
                                                       25,613,218     16,582,154
Less allowance for obsolete raw materials                  94,414         62,000
                                                     ------------   ------------
                                                     $ 25,518,804   $ 16,520,154
                                                     ============   ============
</TABLE>


Note 3.       Other Assets

Other assets consist of the following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                         1998           1997
                                                     ------------   ------------
<S>                                                  <C>            <C>         
Real estate held for sale                            $     56,000   $    266,486
Cash value of officers' life insurance                    104,921         98,850
Cash designated for equipment acquisitions                   --          856,441
Prepaid commissions                                       839,331        491,273
Deposits                                                  800,531        415,464
Deferred expenses, net of accumulated amortization
  $108,643 1998; $49,207 1997                             903,740        714,253
Other                                                     410,321           --
                                                     ============   ============
                                                     $  3,114,844   $  2,842,767
                                                     ============   ============
</TABLE>


Note 4.       Intangible Assets

Intangible assets consist of the following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                         1998           1997
                                                     ------------   ------------
<S>                                                  <C>            <C>         
Goodwill, net of accumulated amortization $980,253
  1998; $415,468 1997                                $ 28,095,134   $ 16,217,984
Trademarks and trade names, net of accumulated
  amortization of $135,178 1998; $75,099 1997             895,790        946,645
                                                     ------------   ------------
                                                     $ 28,990,924   $ 17,164,629
                                                     ============   ============
</TABLE>


                                      F-11
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 5.       Property and Equipment


Property and equipment consist of the following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                                     Estimated
                                                         1998         1997         Useful Lives
                                                     -----------   -----------    ------------
<S>                                                   <C>           <C>           <C>        
Land                                                 $ 1,018,007   $ 1,018,007
Buildings                                             29,374,879    24,026,169    15-40 years
Machinery and equipment, including assets acquired
  under capital lease:  1998 $1,133,980;
  1997 $1,007,144                                     35,605,613    23,645,191    10 years
Office equipment                                       4,557,195     3,115,607    5 years
Vehicles                                                 963,289       635,844    5 years
Construction in progress                               3,640,045     4,966,421
                                                     -----------   -----------
                                                      75,159,028    57,407,239
Less accumulated depreciation, including
  amortization applicable to assets acquired under
  capital lease: 1998 $264,312; 1997 $158,354         14,069,608     9,646,832
                                                     -----------   -----------
                                                     $61,089,420   $47,760,407
                                                     ===========   ===========
</TABLE>


Total depreciation expense charged to operations totaled $4,435,744,  $3,103,271
and  $1,382,741  for  the  years  ended  December  31,  1998,   1997  and  1996,
respectively.


Note 6.  Pledged Assets and Debt

A summary of the Company's debt, and collateral pledged thereon, consists of the
following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                            1998         1997
                                                         ----------   ----------
<S>                                                      <C>          <C>     
Short-term debt:

Lower of Prime or LIBOR  plus  defined  percentage
  line of credit agreements (A)  .....................   $1,300,000   $     --
                                                         ==========   ==========
</TABLE>


                                      F-12
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 6.  Pledged Assets and Debt - Continued

<TABLE>
<CAPTION>
                                                            1998         1997
                                                        -----------   ----------
<S>                                                      <C>          <C>     
Long-term debt:

Lower of Prime or LIBOR  plus  defined  percentage
  line of credit agreements (A)  ....................   $13,000,000   $     --

Prime plus 0.25  percent  notes  payable  to a mortgage  company  due in monthly
  payments of $30,096 including interest through January 2006, at which time all
  unpaid  principal  is due,  collateralized  by a deed  of  trust  on land  and
  buildings with a carrying value of approximately
  $3,530,000 at December 31, 1998  ..................     1,795,731    1,988,226

10.125 percent note payable to a mortgage  company,  due in monthly  payments of
  $13,775,  including interest through July 2004, collateralized by a first deed
  of trust on real property with a carrying value of  approximately  $974,000 at
  December 31, 1998, and a second security
  interest in certain machinery and equipment .......       693,513      783,519

Various notes  payable to a bank with  interest at prime plus .25 percent due in
  monthly installments of $12,038, including interest, expiring at various times
  through  April  2004,  collateralized  by a deed of trust on  property  with a
  carrying value of approximately
  $1,510,000 at December 31, 1998  ..................     1,180,226    1,228,372

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
  with a carrying value of approximately
  $5,400,000 at December 31, 1998  ..................     5,845,000    6,000,000

Note  payable  to a bank  with  interest  at 7.9  percent  until  June 2001 when
  interest rate changes to prime plus 0.25 percent,  due in monthly  payments of
  $7,098  including  interest through June 2017 subject to a call option in June
  2007,  collateralized  by a deed of trust on real  properties  with a carrying
  value of
  approximately $1,870,000 at December 31, 1998  ....       849,751      866,335

Industrial  revenue bond with a variable tax exempt  interest rate as determined
  by a remarketing agent which was 4.1% at December 31, 1998,  collateralized by
  a $4,500,000 letter of credit
  which expires February 2000 .......................     4,500,000         --
</TABLE>


                                      F-13
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 6.  Pledged Assets and Debt - Continued

<TABLE>
<CAPTION>
                                                          1998          1997
                                                       -----------   -----------
<S>                                                      <C>          <C>     
Note payable to industrial  development authority,
  with an interest rate of 83 percent of prime rate, due in monthly installments
  of $11,333 plus interest  through  January 2005,  collateralized  by a deed of
  trust on real property with a carrying value of approximately
  $2,900,000 at December 31, 1998  .................   $   838,810   $   963,477

Note payable to a bank with  interest  at LIBOR plus an adjusted  base rate,  as
  defined, due in monthly installments of $17,788 plus interest,  with a balloon
  payment due on June 30, 2002, of $1,120,625,  collateralized  by a second deed
  of trust and security  agreement  on real  property  with a carrying  value of
  approximately
  $2,900,000 at December 31, 1998  .................     1,849,920     2,081,161

Various contracts payable including  capital lease  obligations;  interest rates
  from 6.3 percent to 9.6 percent and 5.9 percent to 9.6 percent at December 31,
  1998 and 1997,  respectively,  collateralized  by  certain  equipment;  due in
  monthly payments of  approximately$40,000  and $30,000  including  interest at
  December 31, 1998 and 1997, respectively, expiring at various
  times through May 2003  ..........................       817,777       860,404
                                                       -----------   -----------
                                                        31,370,728    14,771,494

Less current maturities ............................     1,265,014     1,092,442
                                                       -----------   -----------
                                                       $30,105,714   $13,679,052
                                                       ===========   ===========
<FN>
 (A) At December 31, 1998,  the Company has  revolving  credit  facilities  with
     banks which  provide  lines of credit up to a maximum  principal  amount of
     $33,000,000  and  $30,000,000 at December 31, 1998 and 1997,  respectively.
     The lines of credit  bear  interest  rates at the option of the  Company at
     either 1) prime rate,  which was 7.75% at December 31,  1998,  or 2) LIBOR,
     which was 5.06% at  December  31,  1998,  plus an amount  equal to 1.00% to
     1.95%,  depending on the ratio of total  liabilities  of the Company to its
     tangible net worth. The line of credit  agreements expire in February 2000.
     The lines of credit are collateralized by the pledge of all common stock of
     the subsidiaries owned by the Company.
</FN>
</TABLE>

In connection with the line of credit agreements 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  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.

The Company was in violation of certain  covenants  with a lender as of December
31,  1998;  however,  these  violations  have been waived by the lender  through
January 1, 2000.


                                      F-14
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 6.  Pledged Assets and Debt - Continued

Aggregate  maturities required on long-term debt as of December 31, 1998 are due
in future years as follows:

<TABLE>
<CAPTION>
   Fiscal Years Ending
   -------------------
<S>      <C>                                         <C>        
         1999                                        $ 1,265,014
         2000                                         18,707,863
         2001                                          1,114,798
         2002                                          2,377,988
         2003                                            990,142
         Later years                                   6,914,923
                                                     -----------
                                                     $31,370,728
                                                     ===========
</TABLE>


Note 7.       Accounts Payable

Accounts payable consist of the following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                         1998           1997
                                                     ------------   ------------
<S>                                                  <C>            <C>         
Accounts payable, trade                              $ 13,889,388   $ 14,589,651
Commissions payable                                     1,577,470      1,795,944
Customer deposits                                         384,229        555,386
                                                     ------------   ------------
                                                     $ 15,851,087   $ 16,940,981
                                                     ============   ============
</TABLE>


Note 8.       Accrued Expenses


Accrued expenses consists of the following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                         1998           1997
                                                     ------------   ------------
<S>                                                  <C>            <C>         
Payroll                                              $  1,618,197   $  1,051,981
Insurance, including workers compensation               1,133,331        939,548
Sales and use taxes                                        65,679        186,015
Interest                                                  137,424         31,281
Income tax payable                                        298,458           --
Other                                                     680,829        829,975
                                                     ------------   ------------
                                                     $  3,933,918   $  3,038,800
                                                     ============   ============
</TABLE>


                                      F-15
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 9.       Stockholders' Equity

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

During the year ended December 31, 1997, the Company raised $57,054,013,  net of
offering  commissions and expenses of $6,052,237,  through the sale of 8,320,000
shares of Common Stock by underwritten  public  offerings dated January 16, 1997
at $9.50 per  share  and  October  16,  1997 at $7.00 per share and the  private
placement of 57,000 shares of Common Stock at a weighted  average price of $4.67
per share. In conjunction with these offerings,  the Company granted warrants to
purchase a total of 540,000 shares to the underwriters.

In September  1996,  the Company  issued  $4,000,000  of 10%  Convertible  Notes
pursuant to Regulation S to certain unrelated offshore investors. The notes were
payable  on  September  20,  1999 and were  convertible  at any time  commencing
forty-one (41) days after issuance into shares of common stock.  During the year
ended December 31, 1997, all $4,000,000 of Convertible Notes were converted into
722,375 shares of common stock. In connection  with the 10%  Convertible  Notes,
certain unrelated  offshore investors were given a contractual right to receive,
on the date of the  conversion  of the Notes  into  common  stock,  warrants  to
purchase such number of shares of common stock equal to ten percent (10%) of the
number of common shares issued upon any such  conversion.  During the year ended
December  31,  1997,  72,239  warrants  were  issued  due to the  conversion  of
convertible debt into common stock. The exercise price of the warrants was equal
to the amount per share at which the 10%  Convertible  Notes were converted into
common stock.

The  President  and Vice  President/Chief  Financial  Officer of the Company had
options  to  purchase  3,321,021  and  2,214,014  shares,  respectively,  of the
Company's  common stock from two  stockholders of the Company at an option price
of $2.50 per share. The President and Vice President/Chief  Financial Officer of
the  Company  exercised  options  to acquire  2,830,732  and  1,799,188  shares,
respectively,  of the Company common stock from the two stockholders on December
1, 1997.  The  remaining  options were not exercised and expired on December 15,
1997.


                                      F-16
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 10.      Income Tax Matters


The components of income tax expense for the years ended December 31, 1998, 1997
and 1996 are as follows:

<TABLE>
<CAPTION>
                                                  1998             1997            1996
                                             -------------    -------------    ------------
<S>                                          <C>              <C>              <C>         
Current:
  Federal                                    $   2,655,933    $   3,266,645    $  1,750,374
  State                                            756,088          472,633         540,737
                                             -------------    -------------    ------------
                                                 3,412,021        3,739,278       2,291,111
                                             -------------    -------------    ------------
Deferred:
  Federal                                          162,098         (151,017)        (42,509)
  State                                             23,716          116,462         (71,011)
                                             -------------    -------------    ------------
                                                   185,814          (34,555)       (113,520)
                                             -------------    -------------    ------------
                                             $   3,597,835    $   3,704,723    $  2,177,591
                                             =============    =============    ============
</TABLE>


The income tax  provision  differs from the amount of income tax  determined  by
applying  the U.S.  federal  income  tax rate of 34% to pretax  income for years
ended December 31, 1998, 1997 and 1996 due to the following:

<TABLE>
<CAPTION>
                                                           1998            1997            1996
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>         
Computed "expected" tax expense                        $  3,021,374    $  3,244,956    $  1,962,269
Increase (decrease) in income taxes resulting
  from:
    Nondeductible expenses                                  150,210          82,051          33,158
    Nontaxable income                                       (23,874)           --              --
    State income taxes net of federal tax benefit           515,233         435,000         115,027
    Change in valuation allowance                           (17,479)        (19,224)         22,822
    Tax credits                                             (47,629)         (5,396)        (10,914)
    Other                                                      --           (32,664)         55,229
                                                       ------------    ------------    ------------
                                                       $  3,597,835    $  3,704,723    $  2,177,591
                                                       ============    ============    ============
</TABLE>

Net deferred tax assets and liabilities  consist of the following  components as
of December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                         1998           1997
                                                     ------------   ------------
<S>                                                  <C>            <C>         
Deferred tax assets:
  Accounts receivable allowance                      $    103,454   $     56,711
  Inventory allowances                                    547,446        418,028
  Accrued expenses                                        773,041        564,398
  Loss carryforwards                                         --           37,819
                                                     ------------   ------------
                                                        1,423,941      1,076,956
  Less valuation allowance                                  2,094         19,573
                                                     ------------   ------------
                                                        1,421,847      1,057,383
Deferred tax liabilities:
  Property and equipment                               (5,721,647)    (4,922,383)
                                                     ------------   ------------
                                                     $ (4,299,800)  $ (3,865,000)
                                                     ============   ============
</TABLE>


                                      F-17
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 10.      Income Tax Matters - Continued


The  components  giving  rise to the net  deferred  tax assets  and  liabilities
described  above have been  included in the  accompanying  consolidated  balance
sheets at December 31, 1998 and 1997 as follows:

<TABLE>
<CAPTION>
                                                         1998           1997
                                                     ------------   ------------
<S>                                                  <C>            <C>         
Current assets                                       $  1,421,847   $  1,057,383
Noncurrent liabilities                                 (5,721,647)    (4,922,383)
                                                     ------------   ------------
                                                     $ (4,299,800)  $ (3,865,000)
                                                     ============   ============
</TABLE>


Note 11.      Mergers and Acquisitions

On May 31, 1996, the Company  completed the  acquisition of all the  outstanding
stock of Charcoal  Service  Corporation  ("CSC"),  a competing carbon filter and
containment manufacturer, as well as the land and building on which CSC operates
that was owned by the stockholders of CSC. The total cost of acquisition, net of
cash acquired,  was  approximately  $4,497,000,  and up to 100,000 shares of the
Company's common stock, which are being held in escrow pending the evaluation of
certain  future  performance   criteria.   Upon  achieving  certain  performance
criteria, the common stock released from escrow is valued at the market price on
the date of  release  and added to the  goodwill  associated  with the  purchase
transaction  and  amortized  over  the  remaining  amortization  period  of  the
respective  goodwill asset.  The acquisition was funded by private  placement of
the Company's  common stock which was completed in June 1996. The effective date
of the  acquisition  was March 1, 1996, and the Company's  financial  statements
include  the  operating  activities  and  assets  of CSC from that  date.  As of
December 31, 1998, 86,000 CSC escrow shares with a market value of $656,938 were
released from escrow to the CSC sellers.

On June 15, 1996, the Company  completed the  acquisition of all the outstanding
stock of Air Seal Filter  Housings,  Inc.  ("Airseal"),  as well as the land and
building  on which  Airseal  operates  that was  owned  by the  stockholders  of
Airseal. The total cost of acquisition,  net of cash acquired, was approximately
$2,270,000  and up to 150,000  shares of the Company's  common stock,  which are
being  held in escrow  pending  the  evaluation  of certain  future  performance
criteria. Upon achieving certain performance criteria, the common stock released
from  escrow is valued at the market  price on the date of release  and added to
the goodwill  associated  with the purchase  transaction  and amortized over the
remaining  amortization period of the respective goodwill asset. The acquisition
was funded by a private  placement of the  Company's  common stock  completed in
June 1996.  The  effective  date of the  acquisition  was May 31, 1996,  and the
Company's  financial  statements include the operating  activities and assets of
Airseal from that date.  As of December 31, 1998,  no shares have been  released
from escrow to the Airseal sellers.


                                      F-18
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 11.      Mergers and Acquisitions - Continued


On  September  23,  1996,  the Company  acquired  all the  outstanding  stock of
Precisionaire, Inc. ("Precisionaire"),  a manufacturer of precision air filters,
containment systems and filtration  equipment,  as well as a tract of land and a
building  on which  Precisionaire  operates  that was owned  effectively  by the
majority  stockholders of Precisionaire.  The total cost of acquisition,  net of
cash  acquired,  was  approximately  $25,205,000  with a post closing  valuation
allowance of up to 786,885  shares of the  Company's  common  stock,  which were
placed in escrow, to be released only if certain  performance  criteria are met.
Upon  achieving  certain  performance  criteria,  the common stock released from
escrow is valued at the  market  price on the date of  release  and added to the
goodwill  associated  with  the  purchase  transaction  and  amortized  over the
remaining  amortization period of the respective goodwill asset. The acquisition
of Precisionaire, Inc. was funded by a private placement of the Company's common
stock,  subordinated debentures and convertible debt closed on October 16, 1996,
a credit facility  provided by NationsBank  consisting of (1) a revolving credit
facility  in the maximum  principal  amount of  $25,000,000  and (2) a term loan
facility in the maximum  principal  amount of $6,500,000,  and the assumption of
approximately  $2,200,000  of debt  associated  with a mortgage on the purchased
land and building. The effective date of the acquisition for financial statement
purposes was September 30, 1996, and the Company's financial  statements include
the  operating  activities  and assets of  Precisionaire  from that date.  As of
December 31, 1998,  547,956  Precisionaire  escrow shares with a market value of
$5,037,938  were  released  from escrow to the  Precisionaire  sellers,  and the
remainder of the escrow shares have expired.

On  May  7,  1998,  the  Company  agreed  to  acquire  substantiall  all  of the
outstanding stock of Eco-Air Products,  Inc. ("Eco-Air").  The total cost of the
acquisition,  net of cash  acquired,  was  approximately  $15,455,160,  plus the
Company's  common stock  equivalent  in value to  $5,000,000  or cash if certain
performance  criteria are met.  Upon  achieving  certain  performance  criteria,
common stock will be issued or a liability recorded for cash payment over a five
year  period  and  will be  added  to  goodwill  associated  with  the  purchase
transaction  and  amortized  over  the  remaining  amortization  period  of  the
respective  goodwill asset. The acquisition of Eco-Air was funded by utilizing a
revolving  credit  facility  which  provides  a line of  credit  up to a maximum
principal  amount of  $30,000,000.  The effective  date of the  acquisition  for
financial  statement  purposes was June 30, 1998,  and the  Company's  financial
statements  include the  operating  activities  and assets of Eco-Air  from that
date. As of December 31, 1998, no shares have been issued or liability  recorded
to the Eco-Air sellers as a result of achieving performance criteria.

Summarized  below are the  unaudited  pro forma  results  of  operations  of the
Company as though  Eco-Air had been acquired at the beginning of the fiscal year
ended December 31, 1997, and Precisionaire, CSC and Airseal had been acquired at
the beginning of the fiscal year ended December 31, 1996.

<TABLE>
<CAPTION>
                                                  1998             1997            1996
                                             -------------    -------------    ------------
<S>                                          <C>              <C>              <C>         
Revenues                                     $ 181,530,726    $ 156,487,071    $128,221,517
                                             =============    =============    ============
Net income                                   $   5,341,880    $   6,131,672    $  5,678,195
                                             =============    =============    ============
Net income per common share, basic           $        0.21    $        0.33    $       0.38
                                             =============    =============    ============
Net income per common share, diluted         $        0.20    $        0.27    $       0.30
                                             =============    =============    ============
</TABLE>

Effective  December 1, 1997, the Company  acquired all the outstanding  stock of
Glass  Fiber  Industries,  Inc.  ("GFI"),  a  manufacturer  of glass  fiber,  by
exchanging  187,502 shares of the Company's stock for all the outstanding  stock
of GFI in a tax free merger. The total cost of acquisition was $1,394,639, based
on the price of the  Company's  stock on November  26,  1997,  of  approximately
$7.44.  Pro forma  results of  operations  of the Company as though GFI had been
acquired as of January 1, 1996 are not  presented  because  amounts of pro forma
differences are not significant.


                                      F-19
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 12.      Commitments and Contingencies

Employment Agreements and Discretionary Bonuses:

The Company has  employment  agreements  with its President and Chief  Executive
Officer,  its Chief Operating  Officer/Vice  President  Finance/Chief  Financial
Officer and its Vice President of Operations, which expire at various times from
March 2003 to  December  2005.  In  addition to a base  salary,  the  agreements
provide for a  termination  payment  ranging from one hundred to two hundred and
fifty percent of their base  compensation in the event the officers'  employment
is terminated under various circumstances.

The Company  pays  discretionary  cash bonuses to its  employees.  The amount of
these cash bonuses included in cost of goods sold and operating expenses totaled
approximately $296,000 for the year ended December 31, 1996. The Company did not
pay bonuses for the years ended December 31, 1998 and 1997.

Litigation:

The Company is involved in a dispute with a customer  involving a trade  account
receivable of  approximately  $2.6 million.  The customer  contends that certain
filters   manufactured  by  the  Company  did  not  conform  to  specifications.
Independent  testing and other information  available to management indicate the
receivable should be fully collectible.  However,  it is reasonably possible the
estimate of collection may change in the near term.

Lease Commitments and Total Rental Expense:

Certain  equipment and buildings are leased under  agreements  expiring  between
1999 and 2003.  The  following is a schedule  for the total  rental  commitments
under these leases as of December 31, 1998:

  Fiscal Years Ending
------------------------
        1999                                                 $  1,672,908
        2000                                                    1,065,484
        2001                                                      720,626
        2002                                                      237,041
        2003                                                       80,364
                                                             ============
                                                             $  3,776,423
                                                             ============

The total rental expense charged to operations totaled approximately  2,000,000,
$2,300,000  and $465,000 for the years ended  December 31, 1998,  1997 and 1996,
respectively.


Note 13.      Employee Benefit Plans


During 1996, due to the Acquisitions,  the Company had four defined contribution
401(k) salary  reduction  plans  intended to qualify under section 401(a) of the
Internal  Revenue Code of 1986,  as amended;  one for each of Flanders  Filters,
Inc. ("FFI"), CSC, Airpure and Precisionaire (collectively, the "401(k) Plans").
The 401(k)  plans allow  employees  to defer up to the lessor of a plan  defined
limit ranging from 12 percent to 20 percent of their salary,  depending on which
of the 401(k) the  employees  participate,  or such amount as  determined by the
U.S.  Secretary  of the  Treasury,  with  the  Company  contributing  an  amount
determined by its Board of Directors each year.  Effective  January 1, 1997, the
Company  combined the 401(k) Plans into the Flanders  Corporation  401(k) Salary
Savings  Plan  ("Salary  Savings  Plan").  The Salary  Savings  Plan  allows the
eligible employees,  as defined in the plan document,  to defer up to 15 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 $168,000,  $145,000 and $44,000 to the Salary Savings
Plan and the 401(k) Plans for the years ended December 31, 1998,  1997 and 1996,
respectively.


                                      F-20
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 13.      Employee Benefit Plans - Continued


The Company  employee benefit program also includes  health,  accident,  dental,
life  insurance  and  disability  benefits.   Substantially  all  the  Company's
subsidiaries have elected to self-insure the health and accident insurance at an
individual  maximum ranging from $30,000 to $80,000 per employee per claim year.
A stop loss policy is maintained for subsidiaries that are  self-insured,  which
covers 100 percent of liability over amounts ranging from $30,000 to $80,000 per
occurrence  per  individual  per plan  year.  The  employer's  portion of claims
charged to operations totaled  approximately  $1,160,000,  $650,000 and $222,000
for the years ended December 31, 1998, 1997 and 1996, respectively.

During the year ended  December  31,  1996,  the  Company  adopted the Long Term
Incentive  Plan ("LTI Plan") to assist the Company in securing and retaining key
employees and  consultants.  The LTI Plan  authorizes  grants of incentive stock
options,   nonqualified  stock  options,  stock  appreciation  rights  ("SARs"),
restricted stock performance shares and dividend equivalents to officers and key
employees  of the Company  and outside  consultants  to the  Company.  There are
1,986,000  shares of Common Stock reserved for award under the LTI Plan.  During
the years ended December 31, 1998, 1997 and 1996, the Company awarded options to
purchase 316,850,  95,600 and 236,520 shares of Common Stock under the LTI Plan,
respectively. See Note 16.

During the year ended  December  31,  1996,  the Company  also  adopted the 1996
Director  Option Plan which  provides for the grant of 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.  The Company has reserved  500,000 shares
of its Common  Stock for  issuance  under the 1996  Director  Option  Plan which
expires in 2006.  During the years ended December 31, 1998 and 1997, the Company
awarded options to purchase  115,000 and 5,000,  respectively,  shares of Common
Stock under the 1996 Director Option Plan. See Note 16.

During the year ended  December  31, 1996,  the Company also awarded  options to
purchase a total of 4,000,000  shares of its common stock to two of its officers
and  directors  and options to purchase a total of 900,000  shares of its common
stock to consultants to the Company. See Note 16.

As permitted under generally accepted  accounting  principles,  grants under the
LTI Plan and other grants of options are accounted for following APB Opinion No.
25 and  related  interpretations.  Accordingly,  no  compensation  cost has been
recognized  for grants  under the LTI Plan,  since all  options  granted  had an
exercise price at or above the market price of the Company's common stock on the
date of grant. Had  compensation  cost for the LTI Plan been determined based on
the grant date fair  values of awards  using the  Black-Scholes  option  pricing
model (the method described in FASB Statement No. 123),  reported net income and
earnings per common share would have been reduced to the pro forma amounts shown
below for the years ended December 31, 1998, 1997 and 1996:


                                      F-21
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 13.      Employee Benefit Plans - Continued


<TABLE>
<CAPTION>
                                                           1998            1997            1996
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>         
Net income:
  As reported                                          $  5,288,568    $  5,839,265    $  3,593,788
  Pro forma                                            $  4,962,085    $  5,766,265    $    765,682
Basic earnings per share:
  As reported                                          $       0.21    $       0.32    $       0.27
  Pro forma                                            $       0.20    $       0.31    $       0.06
Diluted earnings per share:
  As reported                                          $       0.20    $       0.27    $       0.23
  Pro forma                                            $       0.18    $       0.26    $       0.05

Weighted average fair value per option of options
  granted during the year                              $       1.40    $       2.11    $       0.89
</TABLE>

In determining the pro forma amounts above, the value of each grant is estimated
at the grant date using the  Black-Scholes  option pricing method  prescribed in
FASB  Statement No. 123, with the  following  assumptions:  Dividend rate of 0%;
risk-free  interest rates based upon the  zero-coupon  rate on the date of grant
for the expected life of the option;  and expected price  volatility on the date
of grant.  Weighted  average  assumptions  for options granted in 1998, 1997 and
1996 were as follows:  Dividend rate of 0%; average  risk-free  interest rate of
5.18%, 6.11% and 5.46%, respectively; average expected lives of 4.3, 2.5 and 2.4
years, respectively;  and average expected price volatility of 40%, 40% and 20%,
respectively.


Note 14.      Related Party Transactions and Balances


ABB Partnership,  as landlord,  and Flanders Airpure  Products,  a subsidiary of
FFI,  as  tenant,  entered  into a Lease  Agreement,  dated July 31,  1995.  ABB
Partnership is controlled by the president of the Company. The lease, which is a
month to month lease of $10,938 per month, was entered into on terms believed by
Airpure to be fair and reasonable and generally reflective of market conditions.
The  expense  for this  lease for the years  ended  December  31,  1997 and 1996
amounted  to  $41,607  and  $84,375,  respectively.  In May  1997,  the  Company
purchased the property from ABB Partnership for $879,862.

LHB  Realty,  as  landlord,  and  Precisionaire,   as  tenant,  entered  into  a
year-to-year  Lease Agreement.  A former Director of the Company is the managing
partner of LHB Realty. The year-to-year lease was entered into on terms believed
by the Company to be fair and  reasonable  and  generally  reflective  of market
conditions. The expense for this lease for the years ended December 31, 1997 and
1996 amounted to approximately $81,000 and $49,000,  respectively. In June 1997,
the Company purchased the property from LHB Partnership for $910,000.

At December 31, 1998 and 1997,  the Company had notes  receivable  of $4,263,409
and $1,861,005 due from various directors,  officers and employees with interest
thereon varying between 6.31% and 8.75%, maturing at various dates to June 2003.


                                      F-22
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 15.      Disclosures About Fair Value of Financial Instruments


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

Cash  equivalents:  The carrying amount  approximates fair value at December 31,
1998 and 1997 because of the short maturity of those instruments.

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

Notes payable, long-term debt and convertible debt: Based on the borrowing rates
currently  available to the Company for bank loans with similar  maturities  and
similar collateral  requirements,  the fair value of notes payable and long-term
debt approximates the carrying amounts at December 31, 1998 and 1997.


Note 16.      Stock Options and Warrants


During the year ended December 31, 1998, the Company granted options to purchase
316,850 shares of common stock under its LTI Plan at a weighted average exercise
price of $4.64 per share.  The Company issued options to purchase  10,000 shares
under the Director  Option Plan, at a weighted  average  exercise price of $8.50
per share.  The  Company  also  issued  options to  purchase  5,000  shares at a
weighted  average  exercise price of $8.50 per share. All options granted during
the year ended December 31, 1998 were  non-qualified  fixed price  options,  and
176,850 options were not exercisable at December 31, 1998.

The following  table  summarizes  the activity  related to the  Company's  stock
options and warrants for the years ended December 31, 1998, 1997 and 1996:

<TABLE>

                                           Shares                                        Weighted Average
                                   ----------------------        Exercise Price           Exercise Price
                                                                    per Share                per Share
                                               Stock     --------------------------------------------------
                                   Warrants   Options        Warrants        Options     Warrants  Options
                                   ------------------------------------------------------------------------
<CAPTION>
<S>                    <C>          <C>      <C>         <C>              <C>            <C>       <C>     
Outstanding at January 1, 1996      61,280   2,500,000   $         2.50   $       1.00   $   2.50  $   1.00
  Granted                           97,712   5,136,520   $  2.50 - 9.63   $2.50 - 9.50   $   5.29  $   4.61
  Exercised                         96,280      13,200   $         2.50   $       2.50   $   2.50  $   2.50
  Canceled or expired               37,712        --     $         5.00   $       --     $   5.00  $--
                                   -------------------                                             
Outstanding at December 31, 1996    25,000   7,623,320   $         9.63   $1.00 - 9.50   $   9.63  $   3.43
  Granted                          612,239     100,600   $ 5.54 - 14.73   $7.13 - 7.38   $   9.57  $   7.14
  Exercised                           --       425,000             --     $2.50 - 3.50   $--       $   2.97
  Canceled or expired                 --         6,000             --     $       7.50   $--       $   7.50
                                   -------------------                                             
Outstanding at December 31, 1997   637,239   7,292,920   $ 5.54 - 14.73   $1.00 - 9.50   $   9.57  $   3.51
  Granted                             --       331,850   $         --     $3.94 - 8.50   $--       $   4.69
  Exercised                           --       611,000   $         --     $1.00 - 2.50   $--       $   2.13
  Canceled or expired                 --        83,400   $         --     $1.00 - 9.50   $--       $   2.83
                                   -------------------                                             
Outstanding at December 31, 1998   637,239   6,930,370   $ 5.54 - 14.73   $1.00 - 9.50   $   9.57  $   3.70
                                   ===================                                             
Exercisable at December 31, 1998   637,239   6,753,520   $ 5.54 - 14.73   $1.00 - 9.50   $   9.57  $   3.69
                                   ===================                                             
Exercisable at December 31, 1997    97,239   7,192,320   $  5.54 - 9.63   $1.00 - 9.50   $   6.98  $   3.46
                                   ===================                                             
Exercisable at December 31, 1996    25,000   7,623,320   $         9.63   $1.00 - 9.50   $   9.63  $   3.43
                                   ===================                                           
</TABLE>


                                      F-23
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 16.      Stock Options and Warrants - Continued


The warrants and options  expire at various dates ranging from September 1999 to
December  2008.  A further  summary  of  information  related  to fixed  options
outstanding at December 31, 1998 is as follows:


<TABLE>
<CAPTION>
                                                Weighted Average         Weighted Average
Range of Exercise          Number            Remaining Contractual        Exercise Price
     Prices       Outstanding / Exercisable         Life             Outstanding / Exercisable
----------------- ------------------------- -----------------------  ----------------------------
<S>                 <C>                     <C>                      <C>    <C> 
     $1.00          2,300,000 / 2,300,000          1.88 Years             $ 1.00 / 1.00
  2.50 to 4.75      2,282,770 / 2,105,920          3.17                     2.62 / 2.50
  5.38 to 7.50      2,301,600 / 2,301,600          2.47                     7.35 / 7.35
  8.50 to 9.50         46,000 / 46,000             3.36                     9.28 / 9.28
</TABLE>

The  weighted-average  grant-date  fair value of warrants  granted was $8.40 and
$9.88 for the years ended December 31, 1997 and 1996, respectively.


                                      F-24
<PAGE>

Note 17. Earnings per Share

Following is  information  about the  computation of the earnings per share data
for the years ended December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                                        Per Share
                                                                                         Amounts
                                                                                       ------------
                                                        Numerator      Denominator      Net Income
                                                       ------------    ------------    ------------
                                                                  Year Ended December 31, 1998
                                                       --------------------------------------------
<S>                                                    <C>               <C>           <C>         
Basic earnings per share, income available to
  common stockholders                                  $  5,288,568      25,133,820    $       0.21
                                                                                       ============
Effect of Dilutive securities:
  Options                                                      --         1,949,177
  Contingent shares                                            --            21,000
  Warrants                                                     --             2,927
                                                       ------------    ------------
Diluted earnings per share, income available to common stockholders plus assumed
  exercise of options and warrants and issuance of contingent
  shares                                               $  5,288,568      27,106,924    $       0.20
                                                       ============    ============    ============

                                                                  Year Ended December 31, 1997
                                                       --------------------------------------------
Basic earnings per share, income available to
  common stockholders                                  $  5,839,265      18,508,763    $       0.32
                                                                                       ============
Effect of Dilutive securities:
  Options                                                      --         2,737,642
  Contingent shares                                            --           752,187
  Convertible debt                                          163,956         470,250
  Warrants                                                     --             8,342
                                                       ------------    ------------
Diluted earnings per share, income available to common stockholders plus assumed
  exercise of options and warrants, conversion of debt and
  issuance of contingent shares                        $  6,003,221      22,477,184    $       0.27
                                                       ============    ============    ============

                                                                  Year Ended December 31, 1996
                                                       --------------------------------------------
Basic earnings per share, income available to
  common stockholders                                  $  3,593,788      13,171,440    $       0.27
                                                                                       ============
Effect of Dilutive securities:
  Options                                                      --         2,378,008
  Contingent shares                                            --           590,652
  Convertible debt                                          148,110         227,086
  Warrants                                                     --            16,776
                                                       ------------    ------------
Diluted earnings per share, income available to common stockholders plus assumed
  exercise of options and warrants, conversion of debt and
  issuance of contingent shares                        $  3,741,898      16,383,962    $       0.23
                                                       ============    ============    ============
</TABLE>


                                      F-25
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 17.      Earnings per Share - Continued

The Company  had options to  employees  to  purchase  approximately  524,000 and
40,000  shares of common  stock at prices  ranging from $3.94 to $9.50 per share
for the years ended  December 31, 1998 and 1997,  respectively.  The Company had
warrants outstanding to purchase approximately 550,000 shares of common stock at
prices  ranging  from $8.15 per share to $14.73 per share during the years ended
December 31, 1998 and 1997,  respectively.  These  options and warrants were not
included in the  computation  of diluted  earnings per share for the years ended
December 31, 1998 and 1997, respectively, because effect of the inclusion of the
exercise of these options and warrants would have been anti-dilutive.


Note 18.      Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
                                                       Quarters Ended
                             ---------------------------------------------------------------

                                March 31,        June 30,       September 30,   December 31,
                                  1998             1998             1998            1998
                             --------------   --------------   --------------   ------------
<S>                          <C>              <C>              <C>              <C>         
Net sales                    $   30,685,093   $   39,687,179   $   49,669,341   $ 37,780,263
Gross profit                      7,549,266        9,245,046       12,446,294      7,138,903
Operating income (loss)           1,961,823        3,467,364        3,561,164     (1,018,960)
Net income (loss)            $    1,359,001   $    2,404,309   $    2,190,490   $   (665,232)
                             ==============   ==============   ==============   ============
Basic earnings per share     $         0.05   $         0.10   $         0.09   $      (0.02)
                             ==============   ==============   ==============   ============
Diluted earnings per share   $         0.05   $         0.09   $         0.08   $      (0.02)
                             ==============   ==============   ==============   ============
Common stock prices:
  High                              8 1/2            6                5 1/2         4 3/16
                             ==============   ==============   ==============   ============
  Low                               5 9/16           4 1/2            3 1/2         2 15/16
                             ==============   ==============   ==============   ============

                                March 31,        June 30,       September 30,   December 31,
                                  1997             1997             1997            1997
                             --------------   --------------   --------------   ------------
Net sales                    $   27,866,841   $   33,383,196   $   39,232,931   $33,652,465
Gross profit                      7,003,564        8,940,061        9,344,956     8,034,590
Operating income                  1,260,961        2,829,274        3,217,132     1,859,652
Net income                   $      795,264   $    1,870,140   $    2,126,063   $ 1,047,798
                             ==============   ==============   ==============   ===========
Basic earnings per share     $         0.05   $         0.11   $         0.12   $      0.05
                             ==============   ==============   ==============   ===========
Diluted earnings per share   $         0.04   $         0.09   $         0.10   $      0.04
                             ==============   ==============   ==============   ===========
Common stock prices:
  High                             12                9 7/8            8 1/4        9 1/4
                             ==============   ==============   ==============   ===========
  Low                               9 3/8            5 7/8            6 3/4        6 15/16
                             ==============   ==============   ==============   ===========
</TABLE>


Note 19.      New Accounting Standard


In 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-5, reporting on the Costs of Start-Up Activities. This statement,
which is effective for fiscal years beginning after December 15, 1998,  requires
costs of start-up activities and organization costs to be expensed.  The Company
has not  determined  the impact on its financial  statements of adopting the new
accounting standard.


                                      F-26
<PAGE>


                              FLANDERS CORPORATION
                          FINANCIAL STATEMENT SCHEDULES


<PAGE>




            INDEPENDENT AUDITOR'S REPORT ON THE SUPPLEMENTAL SCHEDULE



To the Board of Directors
Flanders Corporation
Washington, North Carolina


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


/s/  McGladrey & Pullen, LLP

New Bern, North Carolina
March 12, 1999


                                      F-28
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                  Years Ended December 31, 1998, 1997 and 1996



<TABLE>
<CAPTION>
                                                                       Additions
                                                           ----------------------------------
                                               Balance at Charged to Charged to                        Balance
                                               Beginning   Cost and    Other                            at End
                                               of Period   Expense    Accounts      Deductions        of Period
                                                --------   --------   --------      ---------          --------
<S>                                             <C>        <C>          <C>         <C>                <C>     
For the year ended December 31, 1998
  Allowance for doubtful accounts               $380,566   $148,168     60,000      $ (37,009)(1)      $551,725
  Allowance for inventory value                   62,000     32,414       --             --              94,414
  Valuation allowance for deferred tax assets     19,573       --         --          (17,479)(2)         2,094
                                                ========   ========   ========      =========          ========
     Total                                      $462,139   $180,582   $ 60,000      $ (54,488)         $648,233
                                                ========   ========   ========      =========          ========
For the year ended December 31, 1997
  Allowance for doubtful accounts               $346,480   $ 80,245   $ 25,000(3)   $ (71,159)(1)(2)   $380,566
  Allowance for inventory value                   45,000     17,000       --             --              62,000
  Valuation allowance for deferred tax assets     38,797       --         --        $ (19,224)(2)        19,573
                                                ========   ========   ========      =========          ========
     Total                                      $430,277   $ 97,245   $ 25,000      $ (90,383)         $462,139
                                                ========   ========   ========      =========          ========

For the year ended December 31, 1996
  Allowance for doubtful accounts               $148,000       --     $318,903(3)   $(120,423)(2)      $346,480
  Allowance for inventory value                   60,000       --      100,000(3)    (115,000)(2)        45,000
  Valuation allowance for deferred tax assets     15,975     38,797      3,404(3)     (19,379)(2)        38,797
                                                ========   ========   ========      =========          ========
     Total                                      $223,975   $ 38,797   $422,307      $(254,802)         $430,277
                                                ========   ========   ========      =========          ========

----------
<FN>
(1)  Uncollected receivables written-off, net of recoveries.
(2)  Reduction in allowance.
(3)  Increase due to acquisition of subsidiaries.
</FN>
</TABLE>


                                      F-29
<PAGE>