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, 1999

                                       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                      ----------
        incorporation or organization)                (IRS Employer ID Number)

   2399 26th Avenue North, St. Petersburg, FL                 33734
   ------------------------------------------                 -----
    (Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code: (727) 822-4411

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

Securities registered pursuant to Section 12(g) of the Act:

                               Title of each class

                     Common Stock, $.001 per share par value

    Indicate  by check mark  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 April 13, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $57,985,947.

    As of April 13, 2000, the number of shares  outstanding of the  registrant's
common stock was 25,435,583 shares.


<PAGE>


                              FLANDERS CORPORATION
                                    FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1999

                                TABLE OF CONTENTS

PART I........................................................................3

    Item 1.  Business.........................................................3
    Item 2.  Properties......................................................11
    Item 3.  Legal Proceedings...............................................12
    Item 4.  Submission of Matters to a Vote of Security Holders.............12

PART II......................................................................13

    Item 5.  Market for Registrant's Common Equity and Related
             Stockholder Matters.............................................13
    Item 6.  Selected Financial Data.........................................14
    Item 7.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations.............................15
    Item 7A. Quantitative and Qualitative Disclosures About
             Market Risk.....................................................24
    Item 8.  Financial Statements and Supplementary Data.....................24
    Item 9.  Changes in and Disagreements with Accountants
             on Accounting and Financial Disclosure..........................24

PART III.....................................................................25

    Item 10. Directors and Executive Officers of the Registrant..............25
    Item 11. Executive Compensation..........................................26
    Item 12. Security Ownership of Certain Beneficial Owners and
             Management......................................................32
    Item 13. Certain Relationships and Related Transactions..................34

PART IV......................................................................35

    Item 14. Exhibits, Financial Statement Schedules and
             Reports on Form 8-K.............................................35

SIGNATURES...................................................................38

FINANCIAL STATEMENTS

    Report of Grant Thornton LLP Independent Certified Public Accountants...F-2
    Independent Auditor's Report of McGladrey & Pullen, LLP.................F-3
    Consolidated Balance Sheets.............................................F-4
    Consolidated Statements of Earnings.....................................F-5
    Consolidated Statements of Stockholders' Equity.........................F-6
    Consolidated Statements of Cash Flows...................................F-7
    Notes to Consolidated Financial Statements.............................F-10
    Financial Statement Schedules..........................................F-27


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                                     PART I

Item 1.  Business

OVERVIEW

We design, manufacture and sell air filters and related products.  Historically,
we have been a leading  manufacturer of High  Efficiency  Particulate Air (HEPA)
filters,  specializing  in high-end  cleanroom and  containment  filters for end
users in semiconductor  manufacturing,  nuclear processing,  biotechnology,  and
other high  technology  applications.  In 1995,  we began a  strategy  of growth
through acquisition,  and acquired  manufacturers of a broad range of additional
air  filtration  products,  growing  from  $39  million  in  sales  in  1995  to
approximately  $171 million in sales in 1999.  We now offer air filters  ranging
from spun-glass furnace filters through high-volume electrostatic  precipitators
and cleanroom laminar-flow HEPA filters.

Our air filters 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.  We also design and manufacture much of our own production
equipment to automate our processes in order to decrease labor costs  associated
with our standard  products.  We also produce  glass-based  air filter media for
many of our products. Our customers include Abbott Laboratories, The Home Depot,
Inc.,  Motorola,  Inc., Merck & Co., Inc.,  Upjohn Co.,  Wal-Mart Stores,  Inc.,
Westinghouse Electric Corp., and several large computer chip manufacturers.

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

GENERAL DEVELOPMENT OF BUSINESS

Flanders  Corporation  was  incorporated on July 2, 1986 in the State of Nevada,
and is currently  domiciled in North  Carolina.  Beginning in December  1995, we
began to implement a strategy of growth through  acquisition,  acquiring several
companies  specializing in air filters and related products,  including Flanders
Filters,  Inc., Charcoal Service  Corporation,  Air Seal Filter Housings,  Inc.,
Precisionaire, Inc., and Eco-Air Products, Inc.

Effective  April 1, 1999,  we purchased  the  Tidewater  group of companies  for
$1,750,000,  and spent  approximately  $177,000 in legal,  accounting  and other
expenses which were counted as part of the acquisition cost, for a total cost of
acquisition of approximately $1,927,000.  Tidewater is an air filter distributor
and service organization, with some limited manufacturing capacity for specialty
products. Prior to the acquisition,  Tidewater was an exclusive distributor of a
competitor's products.

Effective  June 30, 1998,  pursuant to a stock purchase  agreement,  we acquired
substantially all the outstanding  stock of Eco-Air Products,  Inc. The purchase
price,   including  expenses  and  net  of  cash  received,   was  approximately
$15,455,160,  plus up to $5,000,000 payable in cash or common stock (at sellers'
option) if certain performance criteria are met.

RECENT DEVELOPMENTS

On March 21, 2000, we announced that we had engaged the investment  banking firm
PaineWebber  Incorporated to help us explore strategic  alternatives,  including
the possible sale of the Company.

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.




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These  forward-looking  statements are based largely on the current expectations
of  management  and are subject to a number of risks and  uncertainties.  Actual
results  could  differ  materially  from these  forward-looking  statements.  In
addition to the other risks  described  in the "Factors  That May Affect  Future
Results"  discussion  under  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" in Part II of this annual report, important
factors to consider in evaluating such  forward-looking  statements include 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

The McIlvaine Company, a leading industry analyst,  estimated that the worldwide
air  filtration  market would be  approximately  $3.2 billion in 1999,  with the
United States being the largest market for air filters because of the prevalence
of forced air heating and cooling.  McIlvaine  also estimated the air filtration
market would grow at an annual rate of 8% per year through 2003.  They indicated
that the driving  forces  behind  growth in the air  filtration  market would be
using higher-performance filters in commercial and residential spaces instead of
current  low-efficiency  models, and the use of air filters in new applications.
Management  believes the forces driving the air filtration  market are evolving,
beginning in the past decade and  continuing  for the next several  years,  from
preserving  machinery  and  equipment  to  maintaining  indoor air  quality.  In
addition,  we expect many  high-growth  technology  industries to increase their
reliance on air filters to remove  microscopic  and  gaseous  contaminants  from
sensitive manufacturing  processes associated with semiconductor  manufacturing,
pharmaceutical production, ultra-pure materials manufacturing and biotechnology.
Companies are devoting  resources to air filtration  products to enhance process
efficiency and employee productivity.

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

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

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

    o   Semiconductors.  HEPA  and  carbon  filters  are  necessary  to meet the
        increasingly  stringent   manufacturing   environment   requirements  of
        semiconductor manufacturers, where microscopic airborne contaminants can
        ruin   microchips   during   production,   having  a  large   impact  on
        manufacturing  yield and  profitability.  Carbon  filters are also being
        increasingly  used to filter  gaseous  contaminants  from  semiconductor
        manufacturing areas.

    o   Pharmaceuticals.   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. The increasing use of cultured microbes for drug production is
        also expected to increase demand for high-end containment environments.

    o   Biotechnology.  Containment  systems for the manipulation of viruses and
        bacteria  using  genetic  engineering  techniques  are  critical  to the
        biotechnology industry.

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

RECENT TRENDS

Recent  trends  in the air  filter  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:



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    Indoor Air  Quality and  Health.  We believe  there is an increase in public
    concern regarding the effects of Indoor Air Quality on employee productivity
    and health,  as well as an increase in interest in standards  for  detecting
    and solving IAQ  problems.  For  example,  the  American  Society of Heating
    Refrigeration   and   Air-Conditioning   Engineers   (ASHRAE)  has  recently
    established certain minimum standards for ventilation and indoor air quality
    for commercial and industrial  settings.  The World Health  Organization has
    recently been studying the effects of air quality on human health, including
    widely   publicized   epidemiological   studies   indicating  that  airborne
    contaminants kill more people than automobile accidents.

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

STRATEGY

Our current business strategy seeks to increase earnings,  and hence shareholder
value, by improving operating efficiency and increasing our market share.

    IMPROVE OPERATING EFFICIENCY

    Eliminate  Unprofitable  Operations.  During  1997,  we  established  a  new
    subsidiary, Airseal West, Inc., to serve as a manufacturer of industrial air
    handlers,  custom  housings,  and related  products for the western U.S. The
    market opportunities  envisioned by this venture failed to materialize,  and
    Airseal  West  focused its primary  efforts on  perceived  opportunities  in
    businesses  and products  unrelated to air  filtration,  including  sporting
    goods, vending equipment and other general manufacturing.  In December 1999,
    the Board of Directors  adopted a formal plan to close Airseal West and sell
    its non air filter related assets. We estimate this will save  approximately
    $2 million per year (see "Management's Discussions and Analysis of Financial
    Condition and Results of Operations - Discontinued Operations").

    Vertical  Integration.  In  December  1997,  we acquired a small glass media
    manufacturing plant in Salt Lake City, Utah, which produced spun-glass media
    for our  highest-volume  products,  flat panel  filters,  using  traditional
    processes,  supplying perhaps 5% of our demand for this material. This plant
    was also in the process of building a more efficient plant for producing the
    spun-glass  media  used in these  filters.  In 1998,  we began to build  the
    second  generation of equipment for this purpose.  By September 1999, we had
    completed,  evaluated and replicated the second  generation of equipment and
    begun  building  enough of this  equipment to increase our production to the
    level  required to supply our three plants in the western  U.S.  with media.
    This project  should be completed in the second  quarter of 2000. We plan to
    establish  a duplicate  plant in North  Carolina to supply our plants in the
    rest of the U.S.  With both plants in  production,  we estimate this process
    will decrease our costs  associated  with  spun-glass  materials by at least
    forty  percent,  representing  approximately  $2.5  million  in annual  cost
    savings at current rates of usage.

    Strategic  Acquisitions.  We continue to search for opportunities to acquire
    new businesses,  although our criteria for evaluating  these  businesses has
    moved toward acquiring  regional  distributors and resellers,  and away from
    acquiring competing air filter  manufacturers.  We are looking for potential
    acquisitions with the



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    following  characteristics:  (i)  dominant  positions  in local or  regional
    markets,  (ii) a stable customer base distinct from our existing  customers,
    and (iii) a history of consistent and healthy earnings.  Acquiring resellers
    and distributors with these characteristics  allows us to increase operating
    margins by removing at least one layer of "middlemen," and their compounding
    mark-ups and commissions from the sales and distribution  process,  allowing
    us to charge higher prices while  maintaining  competitive  pricing with end
    users.  At the  present  time,  we do not have any binding  agreements  with
    respect to future acquisitions.

    Centralize  Overhead  Functions.  During  the  fourth  quarter  of 1999,  we
    consolidated  all of the sales  forces of our  various  subsidiaries  into a
    single, consistent national sales team, eliminating overlapping territories,
    duplication of literature, centralizing travel coordination and adding focus
    to our  sales  efforts.  We  are  continuing  to  centralize  and  eliminate
    duplication efforts between subsidiaries in the following areas: purchasing,
    production   planning,   shipping   coordination,    accounting,   personnel
    management, risk management and benefit plan administration.

    Expand  Mexican  Manufacturing.  We expect to have completed an expansion of
    our Tijuana,  Mexico,  plant, which will produce our standard spun-glass and
    pleated  filters,  in all grades,  for sale in the  western  U.S. We will be
    moving  some of the  production  equipment  from our plants in San Diego and
    Nevada to this expansion.

    Electronic Commerce. We believe there are significant cost savings and error
    reduction  opportunities in allowing our customers to enter orders,  examine
    specifications,  receive  confirmations,  and  check on the  status of their
    orders,  via the  Internet.  In September  1999,  we began an  initiative to
    analyze all other areas of our business  for plans to  implement  savings by
    using the  Internet  to  automate  communications  with  current  customers,
    potential  customers,   end  users  and  investors.  We  believe  there  are
    opportunities for significant cost reductions in customer service,  shipping
    errors, orders administration,  customer pre-qualification,  lead generation
    and documentation  storage. We anticipate  completion of the first iteration
    and  implementation  of this process in the year 2000,  and plan to make the
    Internet  a  central  part  of our  future  strategy  for  growth  and  cost
    minimization.  We do not  anticipate  significant  direct  retail sales from
    electronic  commerce  in the  foreseeable  future,  because  shipping  bulky
    packages  of  inexpensive  filters  in less  than  truckload  quantities  is
    prohibitively expensive.

    Increase Market Share

    Increase Sales to Existing and New Customers. We sell our products through a
    direct sales force and  manufacturers'  representatives.  Historically,  any
    given  manufacturers'  representative  has only sold a small  sub-set of our
    current complete product line.  However, we now offer a much larger range of
    air filtration  products,  allowing these  representatives to purchase their
    full line of air filtration  products from us instead of buying a mix of air
    filtration products from a range of manufacturers.

    Use  Facilities  Located  Throughout  the United  States to Increase  Market
    Share.  Through  acquisition and the  establishment  of new plants,  we have
    placed  facilities  within one day's  over-the-road  shipping  of most major
    population  centers  in the  United  States.  We  believe  this  ability  to
    regionalize production and distribution will improve our business in several
    ways:  (i) Decrease cost of sales by reducing the average  distance  between
    our  plants  and our  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  our share of
    national  accounts'  total  business by having  manufacturing  facilities in
    closer proximity to customers' regional distribution centers. The ability to
    service all major population centers with regional  manufacturing centers is
    critical  for our  business,  allowing us to compete on price  against  less
    broadly  based  competitors  without  sacrificing  margins,  as  well as the
    ability to respond more rapidly than most of our competition.

    Adapt Processes to New End User Requirements.  During 1999, we established a
    complete line of air  filtration  products for the removal of airborne paint
    and  associated  solvents  from the  air.  We were  able to  adapt  our bulk
    manufacturing processes to the high-volume synthetic media required for this
    end use, and  anticipate  that revenues in this area will exceed $10 million
    in 2000.  We  continue  to watch  for  applications  where  our  competitive
    strengths can be readily adapted to new end users.


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    Offer Indoor Air Quality Diagnosis and Remediation Services. During 1999, as
    part of the acquisition of the Tidewater  group of companies,  we acquired a
    small   engineering  firm  specializing  in  monitoring  air  quality  using
    automated  real-time  data  collection  techniques  over a period of months,
    diagnosing  any  potential   indoor  air  quality  problems  and  suggesting
    remediation  programs. We believe we will be able to leverage this expertise
    into value-added sales to our existing industrial and commercial  customers,
    and the filter sales and service companies which supply them, increasing our
    revenues by adding value-added consulting and monitoring services.

    Continued  Emphasis on Quality  and  Performance.  A  continued  emphasis on
    product  quality  has allowed us to capture  market  share  serving  several
    industries in recent years.

MARKETING

During 1999, we restructured and centralized our sales and marketing  structure,
which we believe allows us to focus our marketing  efforts more  precisely,  and
ensures   consistency  of   presentation   and  pricing  across  all  customers.
Previously,  each  subsidiary  had its own sales and  marketing  infrastructure,
which  contributed  to waste  and  inefficiency,  and more  importantly,  market
confusion.  Our  marketing  efforts  are  targeted  to the  needs of  individual
customers and groups of customers,  and may consist of mass marketing allowances
and incentive  programs for retailers,  educational point of purchase  materials
and enhanced signage for consumers and industry-specific  technical seminars for
filter sales and service organizations.

Much of our  marketing  effort  consists of  personal  visits to  customers  and
distributors  through  an  extensive  tiered  network of  contract  salespeople.
Periodic  visits  are  enhanced  by  mass  mailings   announcing  new  products,
participation  in  trade  shows  for  exposure  and lead  generation,  technical
articles and advertisements in trade periodicals, and a newly redesigned catalog
containing all Flanders  products.  During 1999, we restructured and unified all
of our product  offerings,  so that each subsidiary no longer  generates its own
marketing  literature.  We also re-wrote the bulk of our catalog and promotional
materials  to include  all  product  lines in a  consistent  and  easy-to-access
format, which can be used by all of our customers.

Besides  developing  new  sales  leads  and  contacts,  we are also  focused  on
increasing the effectiveness of our existing distributors and contract salesmen,
by allowing  them to offer our  products as a complete  "single-source"  for air
filtration products. We believe this will allow them to increase their sales for
the following reasons:

    Dependability and  Responsiveness.  Our ability to express-ship via standard
    ground  freight  to any  major  population  center  within  one day is a key
    competitive  advantage.  We also  believe  that our  expansion  program  and
    general production  capacity also allow us to handle relatively large orders
    with shorter lead times than any of our competitors.

    Product  Quality.  We are known as a manufacturer  of high  performance  air
    filtration  products.  We currently offer filters of 99.999997% on particles
    0.1  microns or larger,  which we believe is the highest  efficiency  rating
    available anywhere. We have also been recognized for consistency and quality
    of our products by several third-party rating organizations.

    Name  Recognition.  We believe that each of our product  lines has high name
    recognition in its target markets. Our representatives and distributors have
    indicated  that they  believe  their  sales will  increase  with  additional
    products associated with Flanders.

    Single-Source  Supplier.  We  provide  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.  We plan to continue to  introduce  new
    applications we are developing for filtration products.  Representatives and
    distributors  will  be  able  to  take  advantage  of  the  additional  name
    recognition  and public  knowledge  associated with the marketing of the new
    products.  We believe these  representatives  will see this as a competitive
    advantage to selling our products.



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PRODUCTS

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

    o   High  Efficiency   Particulate  Air  (HEPA)  filters  (at  least  99.97%
        efficient)  in  various  grades,  for use in  semiconductor  facilities,
        nuclear containment vessels,  disease containment facilities,  and other
        critical applications

    o   Absolute  Isolation  Barriers  which are customized  stand-alone  units,
        typically  manufactured of stainless steel,  used in various  industries
        which   require   absolute   control  over   contaminants,   atmospheric
        composition and containment

    o   Industrial  mid-range specialty filters which fall under  specifications
        which are categorized by efficiency ratings  established by the American
        Society  of  Heating,   Refrigeration  and  Air  Conditioning  Engineers
        (ASHRAE),  used  in  a  wide  variety  of  industries,  including  paint
        facilities,  automobile factories,  chemical treatment plants,  mushroom
        farms, coal mines, oil refineries and power plants

    o   Carbon filters,  both in bonded panels and activated charcoal beds, used
        to remove  gaseous  contaminants,  odors and  toxic  chemical  vapors in
        various commercial and industrial applications

    o   Commercial  and  industrial  filters  for  use  in  office  and  general
        manufacturing  environments,  typically  sold  through  wholesalers  and
        distributors

    o   Residential heating and air conditioning filters, typically sold through
        retailers

    o   Specialized  air  filter  housings,  for use in  multi-stage  filtration
        applications

    o   Other  related  products,  including  tubing  insulation,  ductwork  and
        equipment cleaning chemicals, custom air handlers and specialized filter
        housings.

MANUFACTURING

We manufacture 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.

    o   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 a broad range of commercial, residential and
        industrial filters.

    o   FFI's facility in Washington,  North  Carolina,  produces  high-end HEPA
        products  for  cleanrooms.  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.

    o   Flanders/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.

    o   Air Seal's  facility,  located in Stafford,  Texas,  produces  mid-range
        custom filter housings. o 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,  we design,  manufacture and assemble the majority of our automated
production equipment.

Our  manufacturing  operations are subject to periodic  inspection by regulatory
authorities.  Because  of the  nature of some of our  products,  these  agencies
include,   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.


                                       8
<PAGE>


Each of our  manufacturing  facilities  utilizes  testing and design  strategies
appropriate to the products manufactured.  These range from standard statistical
process  quality  controls for  residential  replacement  filters to  individual
testing  and   certification   with  patented   proprietary   particle  scanning
technologies for each  laminar-grade HEPA filter. We believe that our ability to
comprehensively test and certify HEPA filters is a competitive advantage.

SOURCE AND AVAILABILITY OF RAW MATERIALS

Our 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.

COMPETITION

The air-filtration  market is fragmented and highly competitive.  There are many
companies  which  compete in our market  areas.  We believe  that the  principal
competitive factors in the air filtration business include product  performance,
name recognition,  price,  product  knowledge,  reputation,  customized  design,
timely delivery and product maintenance. We believe that we compete favorably in
all  of  these  categories.   Competitors  include  successful   companies  with
resources, assets, financial strength and market share which may be greater than
ours. 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

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

We  have  obtained  and  own  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 our various product lines and subsidiaries  are valuable,  we do
not consider any of them to be essential to our business.

We currently  license some of our products to specialty  HVAC and ASHRAE  filter
manufacturers  who  produce  products  under  their own name and with  their own
identifying labels.

CUSTOMERS

We are not dependent upon any single  customer.  One customer,  Wal-Mart Stores,
Inc.,  accounted  for 10%, 10% and 11% of net sales during 1999,  1998 and 1997,
respectively.  Home  Depot,  Inc.,  accounted  for 12%,  10% and 8% of net sales
during 1999, 1998 and 1997, respectively. No other single customer accounted for
10%  or  more  of  net  sales.   Other  significant   customers  include  Abbott
Laboratories,  Motorola,  Inc.,  Merck & Co.,  Inc.,  Upjohn  Co.,  Westinghouse
Electric Corp., and several large computer chip manufacturers.

BACKLOG

We had approximately  $12,700,000 in firm backlog on December 31, 1999, compared
to $11,084,000 on December 31, 1998.  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, 1999, is expected to be shipped by
the end of the second quarter of 2000.



                                       9
<PAGE>

EMPLOYEES

The Company  employed 2,391 full-time  employees on December 31, 1999;  1,986 in
manufacturing, 29 in development and technical staff, 48 in sales and marketing,
and the remaining 328 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

Our research and development is focused in the following areas:

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

    Alternative  filtration media types,  including  evaluation of new synthetic
    media  products,  which might either  increase  efficiency or decrease media
    costs; 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 1999,  1998 and 1997  were  approximately
$763,000, $2,250,000 and $373,000, 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

Our  operations  are subject to certain  federal,  state and local  requirements
relating to environmental,  waste management,  health and safety regulations. We
attempt to operate our business in compliance  with all  applicable  government,
environmental,  waste management,  health and safety  regulations and we believe
that our products meet standards from applicable government agencies.  There can
be no  assurance  that  future  regulations  will not  require  us to modify our
products to meet revised safety or other requirements.

SEASONALITY

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

EXPORT SALES

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



                                       10
<PAGE>

Item 2.       Properties

The following  table lists our principal  facilities.  Management  believes that
these properties are adequate for its current  operational  needs, but we may at
some point relocate, reorganize or consolidate various facilities for reasons of
operating  efficiencies,  or may open new plants to take  advantage of perceived
new economic opportunities.

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

Manufacturing and office      Washington, North
facility                      Carolina                     220,000          $13,775  Owned<F1>

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

Manufacturing plant           Bartow, Florida              175,000           29,121  Owned<F1>

R&D & Warehouse               Lakeland, Florida             40,000            6,559  Leased

Manufacturing plant           Terrell, Texas               146,256           29,858  Owned<F1>

Manufacturing plant           Auburn, Pennsylvania          91,000            7,097  Owned<F1>

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

Office space and Warehouse    Richmond, VA                  10,000            2,200  Leased

Office space and Warehouse    Virginia Beach, VA            25,000            6,850  Leased

Manufacturing plant           Henderson, Nevada            100,000           26,000  Leased

Manufacturing plant           Momence, Illinois            210,000           44,062  Owned<F1><F2>

Sales office and warehouse    Singapore                     10,000            3,350  Leased

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

Manufacturing plant           Salt Lake City, Utah          70,805           21,963  Leased<F4>

                              Smithfield, North
Manufacturing plant           Carolina                     399,090          N/A<F3>  Owned

Plant and office facility     San Diego, California         96,660           37,697  Leased

Manufacturing plant           Tijuana, Mexico               49,000           13,500  Leased

<FN>
<F1>    This property is encumbered by a mortgage.

<F2>    This  mortgage is paid  quarterly  rather than  monthly;  the  quarterly
        payments are $132,187.

<F3>    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, 1999, the interest rate on the bond was 3.2%.

<F4>    We are purchasing this building, along with an additional 100,000 square
        feet of space under  construction for approximately  $3,994,000  pending
        completion  of the  additional  space,  expected to be  completed in May
        2000. See  "Managements  Discussion and Analysis of Financial  Condition
        and Results of Operations - Liquidity and Capital  Resources" and "Notes
        to Consolidated Financial Statements - Note M."
</FN>
</TABLE>


                                       11
<PAGE>


Item 3.       Legal Proceedings

The  Company is involved  in a dispute  with a customer  involving a purchase of
approximately  $5 million in air  filters,  with  approximately  $2.6 million of
related accounts receivable currently uncollected, filed as Case No. CV 98-19817
on October 10, 1998 in the Superior Court of the State of Arizona in and for 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 the receivable is fully collectible.  However, it
is reasonably possible the estimate of collection may change in the near term.

Additionally,  from time to time,  we are a party to various  legal  proceedings
incidental  to our  business.  None of these  proceedings  are  material  to our
business, operations or financial condition.

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

We held our annual  meeting of  shareholders  on December 21,  1999.  During the
meeting,  holders of  17,496,387  shares,  representing  approximately  68.8% of
25,435,583 shares  outstanding on the record date,  attended either in person or
by proxy.  Holders of 13,846,481 shares  (approximately 79.1% of shares present)
voted to elect as members of the Board of Directors Robert R. Amerson, Steven K.
Clark,  J.  Russell  Fleming  and  Linwood  Allen  Hahn,  holders of 1,968 voted
against;  and  holders  of  3,647,938  shares  abstained.  As a result,  Messrs.
Amerson, Clark, Fleming and Hahn were elected for one-year terms as directors.

Holders of 13,858,772  shares  (approximately  79.2% of shares present) voted to
ratify the firm of Grant Thornton LLP as the Company's  independent auditors for
the fiscal year ended December 31, 1999,  holders of 14,168 shares voted against
the ratification and holders of 3,623,446 shares abstained.  As a result,  Grant
Thornton's appointment was ratified.


                                       12
<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.

<TABLE>
<CAPTION>
                                                  High           Low
                                              -----------    -----------
<S>                                           <C>            <C>
Fiscal 1999

Fourth Quarter ended December 31, 1999        $ 3   5/16     $ 2   1/4
Third Quarter ended September 30, 1999          3   3/8        2   3/8
Second Quarter ended June 30, 1999              3  13/16       2   1/2
First Quarter ended March 31, 1999              5   1/8        2   9/16

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
</TABLE>

Approximate Number of Equity Securityholders

On April 13,  2000,  Flanders'  common  stock  closed at $3 1/8. As of April 13,
2000,  there were  approximately  296 holders of record of the Company's  common
stock. The Company estimates there are approximately  2,400 beneficial owners of
the Company's common stock.

Dividends

We have not declared or paid cash dividends on our common stock.  Currently,  we
intend to retain any future  earnings to finance the growth and  development  of
the  business,  therefore  we do not  anticipate  paying cash  dividends  in the
foreseeable  future. In the future,  the Board of Directors may decide to change
this policy,  based upon its  evaluation  of our earnings,  financial  position,
capital  requirements  and any factors the Board of Directors may consider to be
relevant.  Under the terms of our revolving  credit line we cannot pay dividends
without the prior written consent of the bank. See "Management's  Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital Resources" and "Notes to Consolidated Financial Statements - Note H."

SALES OF UNREGISTERED SECURITIES

The Company did not sell any  unregistered  common shares or other  unregistered
securities during 1997, 1998 and 1999.


                                       13
<PAGE>


Item 6.       Selected Financial Data

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

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

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                               ---------------------------------------------------------
                                                  1999         1998       1997        1996       1995
                                               ----------  ----------  ----------  ---------- ----------
<S>                                            <C>         <C>         <C>         <C>        <C>
Net sales                                      $ 171,392   $ 154,765   $ 131,899   $  73,056  $  38,636
Gross profit                                      43,975      37,660      32,880      19,459      9,682
Operating expenses                                33,802      28,108      23,510      13,460      7,263
Operating income from continuing operations       10,172       9,551       9,370       5,999      2,419
Earnings from continuing operations before
income taxes                                      10,174      10,991       9,850       5,771      1,830
Provision for income taxes                         4,671       4,450       3,751       2,178        685
Earnings from continuing operations                5,503       6,541       6,098       3,594      1,146
Loss from discontinued operations                 (2,686)     (1,253)       (259)       --         --
Net Earnings                                   $   2,817   $   5,288   $   5,839   $   3,594  $   1,146
                                               ==========  ==========  ==========  =========  =========

Earnings per share from continuing operations
  Basic                                        $    0.22   $    0.26   $    0.33   $    0.27  $    0.12
                                               ==========  ==========  ==========  =========  =========
  Diluted                                      $    0.21   $    0.24   $    0.28   $    0.23  $    0.12
                                               ==========  ==========  ==========  =========  =========

Earnings per share
  Basic                                        $    0.11   $    0.21   $    0.32   $    0.27  $    0.12
                                               ==========  ==========  ==========  =========  =========
  Diluted                                      $    0.11   $    0.20   $    0.27   $    0.23  $    0.12
                                               ==========  ==========  ==========  =========  =========

Weighted average common shares outstanding
  Basic                                           25,344      25,134      18,509      13,171      9,832
                                               ==========  ==========  ==========  =========  =========
  Diluted                                         26,525      27,107      22,477      16,384      9,832
                                               ==========  ==========  ==========  =========  =========
</TABLE>


Selected Historical Balance Sheet Data (In thousands)

<TABLE>
<CAPTION>
                                                                  December 31,
                                               --------------------------------------------------
                                                 1999      1998      1997      1996      1995
                                               --------  --------  --------  --------  ----------
<S>                                            <C>       <C>       <C>       <C>       <C>
Working capital                                $ 45,889  $ 47,972  $ 55,179  $ 22,570  $  4,108
Total assets                                    170,429   167,780   145,881    86,518    18,529
Long-term obligations1                           32,328    31,371    14,771    42,156     1,761
Total shareholders' equity                      112,127   109,603   106,207    25,353     8,208

--------------------
</TABLE>

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



                                       14
<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  "Consolidated  Financial  Statements,"  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,  including but not limited to those discussed below under "Factors That
May Affect Future Results" could cause actual results to differ  materially from
those contained in the forward-looking statements below.

Overview

Flanders 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. We focus on those
products with high replacement potential. We also design and manufacture much of
our own production  equipment and also produce glass-based media for many of our
air filtration  products.  From 1996 to 1999, we experienced  significant growth
from the acquisition of other air filtration related companies.  As of March 30,
1999,  we acquired  the Taffco  group,  a regional  air filter sales and service
distributor headquartered in Virginia. As of June 30, 1998, we 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 our  financial  statements  only from the  applicable  date of
acquisition.  As a result,  historical  results of  operations  for the  periods
presented should be evaluated specifically in the context of these acquisitions.
Additionally,  the  historical  results of  operations do not reflect any future
operating  efficiencies and improvements  from integrating and consolidating the
acquired businesses into our operations.  There can be no guarantee that we will
be able to achieve  these  objectives  and gains in  efficiency.  We believe the
Acquisitions  will have a positive  impact on its future  results of operations.
Also in 1998, we established Sierra Ridge Filtration, Inc., a direct distributor
of air  filtration  products  with sales offices  located in the western  United
States.

Results of Operations

    1999 Compared to 1998

    The following  table  summarizes  the  Company's  results of operations as a
    percentage of net sales for 1999 and 1998.

<TABLE>
<CAPTION>
                                                               1999                  1998
                                                         -----------------    -----------------
<S>                                                          <C>        <C>       <C>        <C>
    Net sales .............................................  $ 171,392  100.0%    $ 154,765  100.0%
    Gross profit ..........................................     43,975   25.7        37,660   24.3
    Operating expenses ....................................     33,802   19.7        28,108   18.2
    Operating income from continuing operations ...........     10,172    5.9         9,551    6.2
    Earnings from continuing operations before income taxes     10,174    5.9        10,991    7.1
    Provision for income taxes ............................      4,671    2.7         4,450    2.9
    Earnings from continuing operations ...................      5,503    3.2         6,541    4.2
    Loss from discontinued operations .....................     (2,686)  (1.6)       (1,253)  (0.8)
    Net earnings ..........................................  $   2,817    1.6     $   5,289    3.4
</TABLE>

    Net  Sales:  Net sales  for 1999  increased  by  $16,627,000  or  10.7%,  to
    $171,392,000 for 1999, from $154,765,000 for 1998. The increase in net sales
    was due to: (i) the acquisitions of Eco-Air and the Tidewater  group,  which
    contributed  approximately  $15,334,000 of net sales; and (ii) the Company's
    success in attracting  work and expanding its original core business,  which
    grew by approximately 1% between 1999 and 1998 and contributed an additional
    $1,293,000 to net sales.



                                       15
<PAGE>


    Gross  Profit:  Gross profit for 1999  increased  $6,315,000,  or 16.8%,  to
    $43,975,000,  which represented 25.7% of net sales, compared to $37,660,000,
    which  represented  24.3% for 1998. This increase in gross margin percentage
    was primarily due to:

        o   Higher margins on sales made through our direct sales offices, which
            made  significant  contributions  to sales of our  products  for the
            first time during the last half of 1999;

        o   Margin improvement from our ongoing automation projects;

        o   Operational   efficiencies  at  our  newest  facilities  in  Nevada,
            Illinois and North  Carolina,  which are gradually  increasing  over
            time and should increase to the levels  experienced  historically at
            other plants during the next twelve to eighteen months; and

        o   Internally   produced  spun-glass  media  for  our  residential  and
            commercial  flat-panel furnace and air conditioning filters began in
            significant  quantities during the fourth quarter of 1999, providing
            an estimated savings of approximately $100,000.

        o   Hurricane  Floyd which  caused us to close four of our plants in the
            eastern United States for periods ranging from 0.5 days to 5.5 days.
            There is an associated insurance claim whose amount has not yet been
            determined, which will be booked as "other income" during the period
            in which the amount becomes fully determined.

    Operating Expenses:  Operating expenses during 1999 increased $5,694,000, or
    20.3%  to  $33,802,000,   representing  19.7%  of  net  sales,  compared  to
    $28,108,000 for 1998, which  represented 18.2% of net sales. The increase in
    operating  expenses was primarily due to the acquisitions of Eco-Air and the
    Tidewater group, which added approximately $5,031,000 in operating expenses.
    Excluding these  acquisitions,  operating  expenses  increased $663,000 from
    1999 compared to 1998.  This increase is primarily due to the  establishment
    of direct sales offices during the last part of 1998 and all of 1999,  which
    offset the increase in gross profit  margin  attributable  to direct  office
    operations.  Other factors affecting  operating  expenses included decreased
    expenditures for new product development expenditures between 1999 and 1998,
    the consolidation and  centralization  of overhead  functions,  increased in
    outbound  freight expenses related to increased sales and higher fuel costs,
    and increased sales commission expenses associated with increased sales.

    Discontinued Operations: In December 1999, we adopted a formal plan to close
    Airseal West, a  wholly-owned  subsidiary,  and sell its various  assets and
    product lines to unrelated third parties. The anticipated date of closure is
    approximately  April 30, 2000. All dispositions of assets are expected to be
    completed before December 31, 2000. The assets to be sold consist  primarily
    of accounts receivable,  inventories,  manufacturing equipment,  designs and
    other  intellectual  properties.  The estimated net loss of the discontinued
    operations of approximately  $2,686,000 represents  approximately $1,793,000
    of  losses  incurred  during  1999 and  $893,000  of  estimated  loss on the
    disposal  of the assets of  Airseal  West  (both  figures  net of income tax
    benefit). During 1998, operating losses from Airseal West were approximately
    $1,253,000, net of income tax benefit.

    Provision for Taxes:  Our income tax provision for 1999 increased  $221,000,
    or 5.0%, to $4,671,000,  from $4,450,000 for 1998, which  represented  45.9%
    and 40.5% of  earnings  from  continuing  operations  before  income  taxes,
    respectively.  Our tax  provision  increased  because  of larger  amounts of
    nondeductible  expenses,  primarily  amortization  of goodwill,  and certain
    one-time  adjustments related to estimated accrued income taxes. Our blended
    rate state and  federal  tax rate,  excluding  the  effect of  nondeductible
    expenses  consisting  primarily of amortization of goodwill of approximately
    $900,000 per year and one-time adjustments, is approximately 40.0%.

    Earnings from Continuing Operations: Earnings from continuing operations for
    1999 decreased $1,038,000, or 15.9%, to $5,503,000, or $0.22 per share basic
    ($0.21  diluted),  compared to  $6,541,000,  or $0.26 per share basic ($0.24
    diluted),  for 1998. The decrease in earnings is primarily  attributable  to
    decreases in net  nonoperating  income  (expense),  consisting  primarily of
    additional  interest expense and reduced interest income, and an increase in
    our effective income tax rate.



                                       16
<PAGE>

    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>
                                                                   1998                  1997
                                                             -----------------    ------------------
<S>                                                          <C>        <C>       <C>         <C>
    Net sales .............................................  $ 154,765  100.0%    $ 131,899   100.0%
    Gross profit ..........................................     37,660   24.3        32,880    24.9
    Operating expenses ....................................     28,108   18.2        23,509    17.8
    Operating income from continuing operations ...........      9,551    6.2         9,370     7.1
    Earnings from continuing operations before income taxes     10,991    7.1         9,850     7.5
    Provision for income taxes ............................      4,450    2.9         3,751     2.8
    Earnings from continuing operations ...................      6,541    4.2         6,098     4.6
    Loss from discontinued operations .....................     (1,253)  (0.8)         (259)   (0.2)
    Net earnings ..........................................  $   5,289    3.4     $   5,839     4.4
</TABLE>

    Net  Sales:  Net sales  for 1998  increased  by  $22,866,000,  or 17.3%,  to
    $154,765,000,  from $131,899,000 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  7.7%
    between  1998 and 1997 and  contributed  an  additional  $10,148,000  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  $4,780,000,  or 14.5%,  to
    $37,660,000,  which represented 24.3% of net sales, compared to $32,880,000,
    which  represented  24.9% 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 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 1998 increased $4,599,000, or
    19.6%  to  $28,108,000,   representing  18.2%  of  net  sales,  compared  to
    $23,509,000 for 1997, which  represented 17.8% 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 $879,000 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 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 1997.  The decrease in net income is
    primarily  attributable  to the  Company's  decrease  in profit  margin as a
    percentage of sales.


                                       17
<PAGE>


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 $45,889,000 at December 31, 1999, compared to $47,972,000 at
December 31,  1998.  This  includes  cash and cash  equivalents  of $824,000 and
$13,763,000 at December 31, 1999 and 1998, respectively.

Trade receivables increased $2,352,000,  or 8.8%, to $29,023,000 at December 31,
1999 from  $26,671,000  at December 31, 1998.  The  increase in  receivables  is
primarily due to increases  associated  with the  increased  volume of net sales
(approximately  $2,659,000)  and timing  differences  in shipments  and payments
received.

Continuing  operations  generated  $5,242,000  of cash during 1999,  compared to
generating  $849,000  during 1998.  The  difference in cash flows was associated
with  smaller  increases in  inventories  during 1999  compared to 1998,  and an
increase  in  accounts  payable of  $173,000  in 1999  compared to a decrease of
$2,629,000 in 1998.  Financing  activities  for continuing  operations  consumed
$5,262,000  during 1999 of cash,  primarily  from  payments  on debt  financing.
Investing  activities for  continuing  operations  consumed  $11,881,000 of cash
during  1999,  consisting  primarily  of the  purchase  of  property,  plant and
equipment,  and cash  paid  for the  acquisition  of the  Tidewater  group.  The
purchase price,  including expenses and net of cash received,  was approximately
$1,787,000. The acquisition of Tidewater was funded from operating cash flow and
the Company's  revolving credit facility.  The effective date of the acquisition
for financial  statement  purposes was April 1, 1999,  and financial  statements
include the operating  activities  and assets of the  Tidewater  group from that
date.

On February 9, 2000,  we completed the  extension of our  $45,000,000  revolving
line of credit facility with SunTrust.  Outstanding  balances on the credit line
bear  interest at the option of the  Company,  at either (a) the "prime" rate of
interest  publicly  announced by SunTrust  Bank,  which was 8.5% at December 31,
1999, or (b) the "LIBOR" rate as reported by the Wall Street Journal,  which was
5.3% at December 31, 1999, 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, 1999,  the Company had used  $11,370,000  of the  revolving  credit
facility. Unless this line of credit is renewed, it will expire in June 2002.

As of April 1, 1998,  we 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  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,  1999,  was 3.2% per annum.  The Bonds are
collateralized by a $4,500,000 letter of credit which expires in June 2002.

Continuing   expansion  may  require  substantial  capital  investment  for  the
manufacture of filtration  products.  Although we have 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 acceptable  terms.  Failure to obtain sufficient
capital could materially adversely impact our growth strategy.

In 1998,  the Board of Directors  authorized the repurchase of up to two million
shares of the  Company's  common  stock.  As of March 24, 2000,  the Company had
repurchased 1,014,650 shares of its common stock under this authorization; thus,
as  of  this  date,  up  to an  additional  985,350  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.  Effective with the
engagement  of  PaineWebber  in March  2000,  repurchases  under  the plan  were
suspended.




                                       18
<PAGE>


Outlook

During  1999,  we saw the first signs that our newly  established  manufacturing
facilities are beginning to complete their start-up phases.  Efficiency at these
new facilities is beginning to increase.  We expect this process to continue for
the next  eighteen  months,  until the new plants  reach our goals for  material
utilization,  labor  productivity  and  throughput.  Critical  to this  process,
however, will be our success in obtaining additional sales to more fully utilize
the production capacity we have put into place.

In July 1999, we  established a national  contracts  sales group.  This group is
focused on obtaining national supply agreements with major industrial end users,
typically  with  purchases  from us by each such customer  expected to exceed $1
million per year.  These types of customers are not typically  accessible to our
predominantly  regional  representative  and distributor  organizations,  and so
remain a largely  untapped  market for us.  While it is difficult to predict the
precise magnitude of sales that will actually result from this endeavor, we have
targeted  customers with aggregate annual air filtration  requirements in excess
of $100 million.  To date,  we have  received our first major  contract for this
market segment, a three-year exclusive arrangement to provide filters to a major
HVAC system  manufacturer which is expected to contribute at least $5 million to
annual sales, which began in the fourth quarter of 1999.

During the year, we negotiated  joint venture  agreements  with major air filter
distributors  or  manufacturers  in several  different areas in the Pacific Rim,
including Australia,  Korea, Malaysia,  Singapore,  Taiwan, Hong Kong and China.
These  arrangements  are  structured  so that we sell the  ventures  proprietary
materials and provide certain  proprietary  equipment.  These agreements are not
expected  to have a  material  effect on our  financial  position  or results of
operations during the year 2000.  However, we hope that the ventures will become
a significant source of revenue and income in the future.

During 1999, we finished our internal  verification  of a new Indoor Air Quality
system targeted toward commercial office  buildings.  This product,  part of our
engineered  services  group,  uses air quality  monitoring,  computer models and
automated  data  collection to develop a complete  analysis of a building's  air
quality over time,  which is then used to generate  and verify  solutions to air
quality problems.  While the installations of this technology currently in place
are not material to our results, and sales from this product are not expected to
be a material  contributor  in the year 2000,  we believe  this  combination  of
filtration  products and engineering  services is the best way to address Indoor
Air  Quality  problems,  including  Sick  Building  Syndrome,  and  believe  the
potential market for this application exceeds $5 million.

We believe 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 we expect capital
spending for new  semiconductor  facilities to increase in the future,  this was
not a significant  factor in our overall  business  during 1999 (less than 7% of
our  sales in 1999 and 1998  were  from  high-end  products  sold for use in the
semiconductor industry). During the first quarter of 2000, we have seen definite
signs that the semiconductor  industry will require  additional  capacity in the
near future, including price increases in commodity DRAM markets and several new
facility  announcements.  Therefore,  we  expect  sales  for  products  used  in
semiconductor plants to increase through the rest of 2000.

We have  collected data that  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 our
business.

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




                                       19
<PAGE>


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

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

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

    o   the  shortage  of  reliable  market data  regarding  the air  filtration
        market,

    o   changes  in  external  competitive  market  factors  or in our  internal
        budgeting   process   which  might  impact  trends  in  our  results  of
        operations,

    o   anticipated working capital or other cash requirements,

    o   changes in our business strategy or an inability to execute our strategy
        due to unanticipated changes in the market,

    o   product obsolescence due to the development of new technologies, and

    o   various   competitive   factors  that  may  prevent  us  from  competing
        successfully in the marketplace.

In light of these risks and  uncertainties,  there can be no assurance  that the
events  contemplated by the  forward-looking  statements  contained in this Form
10-K will in fact occur.

Factors That May Affect Future Results

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

If our business  continues to grow, the additional  growth will place burdens on
management  to manage such growth while  maintaining  profitability.  We have no
guarantee  that we will be able to do so.  Due to our  recent  acquisitions  and
expansions,  our net sales  increased  by  approximately  344% from 1995 through
1999,  (a compound  annual growth rate of 45%). We may not continue to expand at
this rate. Our ability to compete  effectively  and manage future growth depends
on our ability to:

    o   recruit,  train and manage our work force,  particularly in the areas of
        corporate   management,   accounting,   research  and   development  and
        operations,

    o   manage production and inventory levels to meet product demand,

    o   manage and improve production quality,

    o   expand  both the  range of  customers  and the  geographic  scope of our
        customer base, and

    o   improve  financial  and  management  controls,   reporting  systems  and
        procedures.

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



                                       20
<PAGE>


We Must  Develop,  Produce  and  Sell  New  Products  That  Keep  Up With  Rapid
Technological Change to Maintain  Approximately 20% of Our Revenues and Maintain
Value of Our Inventory and Other Assets

As of December 31, 1999,  approximately  20% of our revenues resulted from sales
of high-end filtration products that are especially vulnerable to new technology
development.  Our ability to remain competitive in this area will depend in part
upon our ability to:

    o   anticipate technological changes,

    o   develop new and enhanced  filtration  systems  that meet our  customers'
        needs, and

    o   introduce   these  systems  at  competitive   prices  in  a  timely  and
        cost-efficient manner.

We have no assurance that we will successfully  anticipate future  technological
changes or that  technologies or systems developed by others will not render our
technology  obsolete.  Additionally,  we have no assurance  that the products we
develop will be commercially viable. A failure to successfully anticipate future
technological changes could also require us to write down inventories, equipment
or other assets  associated with obsolete products or dispose of these assets at
a price lower than book value, which could have a material adverse effect on our
financial condition and results of operations.

Our Business May Suffer if Our Competitive Strategy is Not Successful

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

    o   increasing our market share,

    o   expanding  our market  through the  introduction  of new products  which
        require periodic replacement, and

    o   improving operating efficiencies.

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

Our  Market  Share May Not  Continue  to  Increase  if we are  Unable to Acquire
Additional Synergistic Businesses

In the past several  years we have  significantly  increased our market share by
acquiring synergistic businesses. Although we intend to continue to increase our
market  share in this  manner,  we have no  assurance  that  future  acquisition
opportunities  will be  available.  Additionally,  in the future we may not have
access  to the  substantial  debt  or  equity  financing  to  finance  potential
acquisitions.  Moreover,  these types of transactions  may result in potentially
dilutive issuances of equity  securities,  the incurrence of additional debt and
amortization of expenses related to goodwill and intangible assets, all of which
could  adversely  affect  our  profitability.  Our  strategy  of growth  through
acquisition  also exposes us to the  potential  risks  inherent in assessing the
value,  strengths,   weaknesses,  and  potential  profitability  of  acquisition
candidates and in integrating  the operations of acquired  companies.  We do not
currently have any binding agreements with respect to future acquisitions.

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

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

    o   increase public awareness of the issues surrounding indoor air quality,

    o   adequately  address the unknown  requirements of the potential  customer
        base,



                                       21
<PAGE>


    o   develop new products that are competitive in terms of price, performance
        and quality, and

    o   avoid   significant   increases   in  current   expenditure   levels  in
        development, marketing and consumer education.

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

If we experience  extended periods of downtime due to the malfunction or failure
of our automated  production  equipment,  our business,  financial condition and
operations may suffer.  We design,  manufacture and assemble the majority of the
automated  production  equipment  used  in our  facilities.  We also  use  other
technologically  advanced  equipment  for which  manufacturers  may have limited
production capability or service experience.  If we are unable to quickly repair
our   equipment  or  quickly   obtain  new   equipment  or  parts  from  outside
manufacturers,  we could experience extended periods of downtime in the event of
malfunction or equipment failure.

If Automation of Our  Production  Lines Fails to Produce the Projected  Results,
Our Business Will Suffer

We have only  recently  substantially  completed a program to increase our gross
margins by automating  portions of our  production  lines.  Although the designs
have been  extensively  tested in the field,  we have no assurance  that the new
equipment  will produce the expected  beneficial  results on our gross  margins.
Additionally,  we are not certain that any increases in efficiencies will not be
offset in the  marketplace by competitors  making similar  improvements to their
facilities.

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

We are currently  implementing plans to centralize and eliminate  duplication of
efforts between our subsidiaries in the following areas:

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

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

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

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

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

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




                                       22
<PAGE>


Management Controls a Significant Percentage of Our Stock

As of December 31, 1999, our directors and executive officers  beneficially held
approximately  41.9%  of  our  outstanding  common  stock.  As  a  result,  such
shareholders   effectively  control  or  significantly   influence  all  matters
requiring shareholder approval.  These matters include the election of directors
and  approval of  significant  corporate  transactions.  Such  concentration  of
ownership  may also  have the  effect  of  delaying  or  preventing  a change in
control.

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

If we issue the following  securities,  such  securities may dilute the value of
the securities that our existing stockholders now hold.

We have granted warrants to purchase of total of 612,239 of our shares of common
stock to various  parties with exercise  prices ranging from $5.54 to $14.73 per
share.  All of the  warrants  are  currently  exercisable.  As a result,  if the
warrant holders exercise these warrants, we will issue shares of stock that will
generally be available for sale in the public market.

We have granted options to purchase a total of 7,005,700  shares of common stock
to various  parties with exercise  prices ranging from $1.00 to $9.50 per share.
The majority of these options are currently exercisable.  Additionally,  most of
the common stock  issuable upon the exercise of these options is registered on a
Form S-8. As a result,  if the option holders  exercise  these options,  we will
issue shares of stock that will  generally  be available  for sale in the public
market.

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

Our Articles of Incorporation and Bylaws contain provisions that are designed to
provide our board of directors with time to consider  whether a hostile takeover
offer is in our best interest and the best interests of our shareholders.  These
provisions may  discourage  potential  acquisition  proposals and could delay or
prevent a change of control in our business. Additionally, we are subject to the
Control Shares Acquisition Act of the State of North Carolina. This act provides
that any person who acquires  "control shares" of a publicly held North Carolina
corporation  will not have voting  rights with  respect to the  acquired  shares
unless a majority of the  disinterested  shareholders of the corporation vote to
grant such rights.  This could deprive  shareholders of opportunities to realize
takeover premiums for their shares or other advantages that large  accumulations
of stock would typically provide.

Our Business Can be Significantly Affected by Environmental Laws

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

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




                                       23
<PAGE>


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,  1999  was
approximately  $32,328,000.  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, 1999.  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  exchange 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

On November 23,  1999,  the Board of Directors  approved (i) the  engagement  of
Grant Thornton LLP as the independent auditors for Flanders Corporation and (ii)
the  dismissal  of  McGladrey  & Pullen LLP as such  independent  auditors.  The
shareholders  ratified  this  selection  in our  annual  meeting.  See "Item 4 -
Submission of Matters to a Vote of Security Holders."

During the three years ended December 31, 1998 and the subsequent interim period
through  November 23, 1999,  (i) there were no  disagreements  with  McGladrey &
Pullen,  LLP on any matter of  accounting  principles  or  practices,  financial
statement  disclosure,  or auditing scope or procedures,  which disagreements if
not  resolved  to its  satisfaction  would have caused it to make  reference  in
connection with its report to the subject matter of the  disagreement,  and (ii)
McGladrey & Pullen, LLP did not advise the registrant  regarding any "reportable
events" as defined in Item 304 (a)(1)(v) of Regulation S-K.

The accountants' report of McGladrey & Pullen, LLP on the consolidated financial
statements  of Flanders  Corporation  and  subsidiaries  as of and for the years
ended  December 31, 1998,  1997 and 1996 did not contain any adverse  opinion or
disclaimer  of opinion,  and was not  qualified  or modified as to  uncertainty,
audit scope, or accounting principles.

Neither Grant Thornton LLP or its members has any financial interest,  direct or
indirect in the Company nor does Grant  Thornton  LLP or any of its members ever
been connected with the Company as a promoter,  underwriter,  trustee, director,
officer or employee.


                                       24
<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

    C. W. "Andy" Wood          60      Vice President Sales

    Steven K. Clark            47      Chief Operating Officer, Vice President
                                         Finance/Chief Financial Officer
                                         and Director

    Leonard J. Fetcho          59      Vice President Operations

    John L. Cherry             56      Vice President Engineered Products

    John Houmis                52      Vice President Engineering

    Linwood Allen Hahn         51      Director

    J. Russell Fleming         50      Director

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

C.W.  "Andy" Wood. Mr. Wood has been Vice President of Sales since 1998 and Vice
President of Sales for Precisionaire, a wholly owned subsidiary, 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.

Steven K. Clark. Mr. Clark was named as Vice President Finance,  Chief Financial
Officer and Director in December  1995 and Chief  Operating  Officer in November
1999.  Mr. Clark acted as a consultant  from  November,  1995 through  December,
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.

Leonard J. Fetcho. Mr. Fetcho has been Vice President  Operations since December
1999. He is also President of Eco-Air Products,  Inc., which was acquired by the
Company in June 1998.  Mr.  Fetcho has held the position of President of Eco-Air
Products  Inc.  since  1993.  Mr.  Fetcho has  extensive  experience  in the air
filtration  industry,




                                       25
<PAGE>


including being manager of national accounts for Farr Corporation,  and director
of sales and marketing for Cambridge Filter Corporation,  both competitors.  Mr.
Fetcho has a bachelor's degree in accounting from Morrisville College.

John L. Cherry.  Mr. Cherry has been Vice  President  Engineered  Products since
December  1999.  At that time,  he was  appointed  General  Manager of  Flanders
Filters,  Inc., and  Flanders/CSC,  both wholly owned  subsidiaries.  Mr. Cherry
served as President of Flanders/CSC from March 1997 through December 1999 and as
Vice President/General Manager before that, beginning in 1980. Mr. Cherry has an
Associates Degree in design technology from Thomas Nelson Community College.

John Houmis. Mr. Houmis has been Vice President Engineering since December 1998.
He has direct responsibility for manufacturing engineering,  quality control and
production  control systems.  From May 1998 to December 1998, he was Director of
Special Project - Plants for Precisionaire, a wholly owned subsidiary. From 1993
to October 1997,  Mr.  Houmis was the general  manager of  Precisionaire's  main
manufacturing facility in Florida. Mr. Houmis has Bachelor of Science and Master
of Science degrees in engineering from the University of South Florida.

Linwood  Allen Hahn.  Mr. Hahn was elected as a Director in December  1999.  Mr.
Hahn  practices Real Property Law,  Estates,  Municipal Law and Corporate Law in
Greenville,  North  Carolina.  Mr. Hahn  graduated  from he  University of North
Carolina at Chapel Hill with a BA degree in 1970,  the  University  of Tennessee
College  of Law,  JD  degree  in 1973.  He is  currently  a member  of the North
Carolina State Bar Association and the North Carolina Trial Lawyer's Association
as  well as  serving  on the  advisory  boards  of  several  private  charitable
organizations.

J. Russell Fleming.  Mr. Fleming was elected as a Director in December 1999. Mr.
Fleming is  Owner/President  of Cape Point  Development  Co.,  Inc.,  located in
Greenville,    North   Carolina,    specializing   in   land   development   and
commercial/multi-family construction. Mr. Fleming Is also Owner/President of New
East Management & Realty,  Inc.,  also located in Greenville,  NC, which manages
residential and commercial rental properties. Mr. Fleming attended East Carolina
University  prior to obtaining  his General  Contractor  and Real Estate  Broker
licenses.


Item 11.      Executive Compensation

Compensation Committee Interlocks and Insider Participation

The  Compensation  Committee of the  Company's  Board of  Directors  consists of
Messrs. Hahn and Fleming, both non-employee  directors,  and Messr. Amerson, the
Chief Executive Officer.

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 1999.



                                       26
<PAGE>

<TABLE>
<CAPTION>

                                                    Annual Compensation                  Long-Term Compensation
                                            -------------------------------------  -----------------------------------
                                                                                            Awards            Payouts
                                                                                   -------------------------  --------
                                                                                                Securities
                                                                        Other      Restricted   Underlying
                                                                       Annual        Stock       Options/      LTIP
                                                                       Compen-      Award(s)       SARs       Payouts
Name and Principal Position         Year    Salary ($)   Bonus ($)   sation ($)       ($)           (#)         ($)
------------------------------------------  -----------  ----------  ------------  -----------  ------------  --------
<S>                                 <C>        <C>       <C>         <C>           <C>           <C>
Robert R. Amerson                   1999       254,808         -            -            -       1,000,0002         -
   President and CEO                1998<F1>   250,000         -            -            -                          -
                                    1997       250,000         -           5,500         -              -           -
C.W. "Andy" Wood                    1999       304,519         -            -            -              -           -
   Vice President Sales             1998       183,558         -            -            -              -           -
                                    1997       169,856         -           4,965         -              -           -
Steven K. Clark                     1999       250,000         -            -            -       1,000,0002         -
   Vice President Finance/CFO       1998<F2>   250,000         -            -            -              -           -
                                    1997       250,000         -            -            -              -           -
Leonard J. Fetcho                   1999       164,827         -         11,787          -              -           -
   Vice President Operations        1998<F3>   206,008    2,000,000         -            -         40,000           -
                                    1997       265,927         -            -            -              -           -
John L. Cherry                      1999       150,408         -         12,452          -         10,000           -
   Vice President Engineered
Products                            1998       149,600         -         10,771          -         10,000           -
                                    1997       145,006         -         12,089          -         10,000           -
John Houmis                         1999       106,164         -            -            -              -           -
   Vice President Engineering       1998<F4>    59,828.        -            -            -              -           -
                                    1997<F4>    68,009         -            -            -              -           -

<FN>
<F1>    Mr. Amerson's and Mr. Clark each have an annual salary of $250,000, plus
        a  possible  bonus  each  year,   under  their   respective   Employment
        Agreements, as amended. See "Employment Agreements."

<F2>    Messrs.  Amerson and Clark each had options to purchase 1,000,000 shares
        at $2.50 per share whose  expiration date was extended,  on December 22,
        1999,  from  February  22, 2001 to February  22,  2006.  This  extension
        resulted in the establishment of a new measurement date for the value of
        the options for financial statement  reporting purposes.  On the date of
        grant,  the closing market price for the Company's stock was equal to or
        above the options' strike price.

<F3>    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.

<F4>    Mr. Houmis'  compensation  for 1997 reflected ten months of salary.  Mr.
        Houmis' compensation for 1998 reflects seven months' salary.
</FN>
</TABLE>


                                       27
<PAGE>


OPTIONS/SARs GRANTED IN LAST FISCAL YEAR

The following table sets forth  information  regarding all individual  grants of
options made during the last completed year to the named executive officers.

<TABLE>
<CAPTION>
                                                     Individual Grants
--------------------------------------------------------------------------------------------------------------------
                                                                                           Potential Realizable
                                                                                                 Value at
                                                                                              Assumed Annual
                        Number of         % of Total                                          Rates of Stock
                        Securities       Options/SARs                                       Price Appreciation
                        Underlying        Granted to      Exercise or                        for Option Term
                       Options/SARs      Employees in     Base Price     Expiration    -----------------------------
        Name           Granted (#)       Fiscal Year        ($/Sh)          Date         5% ($)<F1>     10% ($)<F1>
-------------------   ---------------   ---------------  --------------  ------------  --------------  -------------
<S>                     <C>             <C>              <C>             <C>           <C>             <C>
Robert R. Amerson       1,000,000<F2>          46.3%         $ 2.50       2/22/2006     $  918,382      $2,174,135
C.W. "Andy" Wood            -                   -              -              -              -              -
Steven K. Clark         1,000,0002             46.3%           2.50       2/22/2006        918,382       2,174,135
Leonard J. Fetcho             -                 -              -              -              -              -
John L. Cherry             10,000               0.5%           4.75       7/23/2004          -               6,113
John Houmis                   -                 -              -              -              -              -

<FN>
<F1>    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.

<F2>    Messrs.  Amerson and Clark each had options to purchase 1,000,000 shares
        at $2.50 whose  expiration  date was extended  from February 22, 2001 to
        February 22, 2006 effective December 22, 1999.
</FN>
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                      Number of Securities
                          Shares                     Underlying 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>
Robert  R. Amerson             -      $      -           3,150,000 / -            $  1,725,000 / -
C.W. "Andy" Wood               -             -                   - / -                      -  / -
Steven K. Clark                -             -           3,150,000 / -               1,725,000 / -
Leonard J. Fetcho              -             -              40,000 / -                       - / -
John L. Cherry                 -             -              40,000 / -                       - / -
John Houmis                    -             -                   - / -                       - / -
</TABLE>


                                       28
<PAGE>

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  1999,
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 $2.50 per share.

Employment Agreements

Messrs.  Amerson and Clark have employment  agreements  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 2010. The Employment Agreements also provide that the executive
shall be entitled to the following termination payments: (i) 100% of his current
base  salary  if the  employment  is  terminated  as a  result  of his  death or
disability;  (ii) up to 200% of his  current  base salary if the  employment  is
terminated  by the Company for any reason  other than death,  disability  or for
cause,  or (iii) up to 250% of the  executive's  gross  income  during  the year
preceding  his  termination  if the  Employment  Agreement is  terminated by the
executive  for good reason or by the  Company  for any reason  other than death,
disability or cause and the  termination  occurs within two years after a change
of control of the Company has occurred.

Messr.  Fetcho has an employment  agreement effective as of June 30, 1998, which
provides  for an annual base  salary of $165,000  and  terminates  in 2003.  Mr.
Fetcho's employment agreement also provides that the executive shall be entitled
to the following  termination  payments:  (i) 100% of his current base salary if
the employment is terminated as a result of his death or disability;  (ii) up to
200% of his current base salary if the  employment is terminated  for any reason
other  than  death,  disability  or  for  cause,  or  (iii)  up to  250%  of the
executive's  gross  income  during the year  preceding  his  termination  if the
Employment  Agreement is  terminated  by the executive for good reason or by the
Company for any reason other than death, disability or cause and the termination
occurs within two years after a change of control of the Company has occurred.

OTHER INFORMATION REGARDING THE BOARD OF DIRECTORS

Board Meetings and Committees

During 1999, the Board of Directors met two (2) times and also executed  various
resolutions  and written  actions in lieu of  meetings.  All  directors  were in
attendance  at each of  these  meetings.  The  Board of  Directors  has an Audit
Committee and a Compensation Committee.  The Audit Committee reviews the results
and scope of the audit and other services provided by the Company's  independent
auditors,  reviews  and  evaluates  the  Company's  internal  audit and  control
functions,  and  monitors  transactions  between the Company and its  employees,
officers and directors.  The  Compensation  Committee  administers the Company's
equity  incentive  plans and  designates  compensation  levels for  officers and
directors of the Company. The Audit Committee met two (2) times during 1999. The
Compensation Committee met two (2) times during 1999.

Currently,  the Audit Committee consists of Messrs. Hahn, Fleming and Clark. The
Compensation Committee consists of Messrs. Hahn, Fleming and Amerson.

Long-Term Incentive Plan

During  1996,  the Company  adopted the Long Term  Incentive  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 1,986,800  shares of Common Stock  reserved for award
under the LTI Plan.  During 1999,  1998 and 1997, the Company awarded options to
purchase  52,850,  316,850 and 95,600 shares of Common Stock under the LTI Plan,
respectively.

The  Plan  is  administered  by the  Compensation  Committee.  The  Compensation
Committee  determines  the total number and type of awards  granted in any year,
the number and  selection of employees or  consultants  to receive  awards,  the




                                       29
<PAGE>


number  and type of awards  granted  to each  grantee  and the  other  terms and
provisions of the awards, subject to the limitations set forth in the LTI Plan.

Stock Option  Grants.  The  Compensation  Committee  has the authority to select
individuals  who are to receive  options  under the LTI Plan and to specify  the
terms and conditions of each option so granted (incentive or nonqualified),  the
exercise  price  (which must be at least  equal to the fair market  value of the
common stock on the date of grant with respect to incentive stock options),  the
vesting  provisions  and the  option  term.  Unless  otherwise  provided  by the
Compensation  Committee,  any  option  granted  under the LTI Plan  expires  the
earlier  of ten  years  from  the date of  grant  or,  three  months  after  the
optionee's  termination  of  service  with the  Company  if the  termination  of
employment is  attributable  to (i) disability,  (ii)  retirement,  or (iii) any
other reason,  or 15 months after the  optionee's  death.  As of April 13, 2000,
there are 503,870 options outstanding under the LTI Plan.

Stock Appreciation Rights. The Compensation  Committee may grant SARs separately
or in tandem with a stock option award. A SAR is an incentive award that permits
the holder to receive (per share  covered  thereby) an equal amount by which the
fair market value of a share of common stock on the date of exercise exceeds the
fair market value of such share on the date the SAR was  granted.  Under the LTI
Plan,  the Company may pay such amount in cash, in common stock or a combination
of both. Unless otherwise provided by the Compensation  Committee at the time of
grant,  the provisions of the LTI Plan relating to the termination of employment
of a holder of a stock option will apply equally,  to the extent applicable,  to
the  holder of a SAR.  A SAR  granted  in  tandem  with a  related  option  will
generally  have the same terms and provisions as the related option with respect
to  exercisability.  A SAR  granted  separately  will  have  such  terms  as the
Compensation Committee may determine, subject to the provisions of the LTI Plan.
As of April 13, 2000, no SARs are outstanding under the LTI Plan.

Performance Shares. The Compensation  Committee is authorized under the LTI Plan
to grant performance shares to selected employees. Performance shares are rights
granted to employees to receive cash,  stock, or other property,  the payment of
which is contingent upon achieving certain  performance goals established by the
Compensation  Committee.  As of  April  13,  2000,  no  performance  shares  are
outstanding under the LTI Plan.

Restricted Stock Awards. The Compensation  Committee is authorized under the LTI
Plan to issue shares of restricted  common stock eligible  participants  on such
terms and conditions and subject to such restrictions, if any, outstanding under
the LTI Plan. As of April 13, 2000, no restricted shares have been awarded under
the LTI Plan.

Dividend  Equivalents.  The  Compensation  Committee  may  also  grant  dividend
equivalent rights to participants subject to such terms and conditions as may be
selected by the Compensation  Committee.  Dividend equivalent rights entitle the
holder to receive  payments  equal to dividends with respect to all or a portion
of the  number  of  shares  of stock  subject  to an  option  award or SARs,  as
determined by the Committee.  As of April 13, 2000, no dividend  equivalents are
outstanding under the LTI Plan.

REPORT OF THE  COMPENSATION  COMMITTEE  OF THE BOARD OF  DIRECTORS  ON EXECUTIVE
COMPENSATION

General

The  Compensation  Committee  of the  Board  of  Directors  is  composed  of two
independent  directors who have no "interlocking  relationships"  (as defined by
the SEC) and the Chief  Executive  Officer,  who recuses  himself from votes and
discussions on his own compensation.

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




                                       30
<PAGE>


Executive Compensation

Our  executive   compensation   program  is  administered  by  the  Compensation
Committee.  The role of the  Compensation  Committee  is to review  and  approve
salaries and other  compensation  of the executive  officers of the Company,  to
administer  the  executive  officer  bonus plan and stock option  plans,  and to
review and approve stock option grants to all employees  including the executive
officers of the Company.

General Compensation Philosophy

Our compensation philosophy is that total cash compensation should vary with the
performance of the Company and any long-term incentive should be closely aligned
with the interest of the stockholders. Total cash compensation for the executive
officers consists of the following components:

    o   Base salary

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

Long-term  incentives  are  realized  through the  granting of stock  options to
executives and key employees  through the LTI Plan. We have also granted certain
non-qualified  options to our  executive  officers.  We have no other  long-term
incentive plans for our officers and employees.

Base Salary and Executive Officer Bonus Target

Current base salaries for the executive officers were determined by arms' length
negotiations  with the  Board of  Directors.  Certain  executive  officers  have
employment  contracts  with  the  Company.  During  1998 and  1999,  none of the
executive officers,  including the Chief Executive Officer,  reached their bonus
target,  and hence no bonuses were awarded to  executive  officers in 1999,  nor
will bonuses be awarded in 2000 for performance in 1999.

Stock Options

Stock options are granted to aid in the retention of executive and key employees
and to align the  interests of  executive  and key  employees  with those of the
stockholders.  The level of stock options  granted  (i.e.,  the number of shares
subject to each stock option grant) is based on the employee's ability to impact
future  corporate  results.  An employee's  ability to impact  future  corporate
results depends on the level and amount of job responsibility of the individual.
Therefore,   the  level  of  stock  options   granted  is  proportional  to  the
Compensation  Committee's evaluation of each employee's job responsibility.  For
example,  Robert R. Amerson,  as the Chief  Executive  Officer,  has the highest
level of  responsibility  and would  typically  be awarded the highest  level of
stock  options.  Stock  options  are  granted  at a price not less than the fair
market value on the date granted.




                                       31
<PAGE>


Comparative Stock Performance Graph

The  following  graph1 shows a comparison  of  cumulative  total returns for the
Company,  the NASDAQ  Stock  Market -- U.S.  Index and the NASDAQ  Non-Financial
Index during the period  commencing  February  26, 1996 and ending  December 31,
1999.  The  comparison  assumes  $100 was  invested on February  26, 1996 in the
Company's  common stock with the  reinvestment  of all dividends,  if any. Total
shareholder returns for prior periods are not an indication of future returns.

[GRAPHIC OMITTED]

<TABLE>
<CAPTION>
                                2/96   12/96   12/97   12/98   12/99
                                ----   -----   -----   -----   -----
<S>                             <C>     <C>     <C>     <C>     <C>
Flanders Corporation            100     380     370     163     100
Nasdaq Stock Market (U.S.)      100     122     150     223     414
Nasdaq Industrial               100     121     142     193     331
</TABLE>

------------------------------------

    1   Flanders did not have a public market for its stock prior to its listing
        on the OTC Bulletin Board in February 1996.


                             Respectfully submitted,

                             COMPENSATION COMMITTEE:


                             Linwood Allen Hahn            J. Russell Fleming
                             Robert R. Amerson


Item 12.      Security Ownership of Certain Beneficial Owners and Management

The  following  table  sets  forth  all  individuals  known  by the  Company  to
beneficially  own 5% or more of the Company's common stock, and all officers and
directors  of  the   registrant,   with  the  amount  and  percentage  of  stock
beneficially  owned, as of April 13, 2000.  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.


                                       32
<PAGE>


<TABLE>
<CAPTION>
                                                                 Percentage of
     Name and Address                Shares of Common Stock  Outstanding Shares of
   of Beneficial Owner                 Beneficially Owned       Common Stock<F1>
   -------------------               ----------------------  ---------------------
<S>                                  <C>                     <C>

Robert R. Amerson<F2>
531 Flanders Filters Road
Washington, NC  27889                       7,914,370                27.69%

Steven K. Clark<F2>
531 Flanders Filters Road
Washington, NC  27889                       5,170,183                18.09%

Stephen D. Klocke<F3>
531 Flanders Filters Road
Washington, NC  27889                         109,427                 *

John L. Cherry<F4>
531 Flanders Filters Road
Washington, NC  27889                          40,000                 *

C.W. "Andy" Wood
2399 26th Avenue North
St. Petersburg, FL  33713                         700                 *

Linwood Allen Hahn<F5>
531 Flanders Filters Road
Washington, NC  27889                          52,500                 *

J. Russell Fleming<F5>
531 Flanders Filters Road
Washington, NC  27889                          70,000                 *

Leonard J. Fetcho<F6>
2399 26th Avenue North
St. Petersburg, FL  33713                      40,000                 *

Franklin Resources, Inc.
777 Marivers Island Blvd., 6th Fl.
San mateo, CA  94404                        1,328,931                 5.22%

Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, CA  90401                     1,980,500                 7.79%

Becker Capital Management, Inc.
1211 SW Fifth Avenue, Suite 2185
Portland, OR  97204                         2,194,700                 8.63%

Crabbe Huson Group, Inc.
121 SW Morrison, Suite 1400
Portland, OR  97204                         2,641,200                10.38%

All Executive  Officers and Directors
as a Group (8 persons)<F2>,<F3>,<F4>,
<F5>,<F6>                                  13,396,880                41.93%
</TABLE>
-------------------------------------

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



                                       33
<PAGE>

<F1>    Applicable  percentage  of  ownership is based on  25,435,583  shares of
        common  stock  outstanding  as of  April  13,  2000,  together  with all
        applicable  options  for  unissued   securities  for  such  shareholders
        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.

<F2>    Includes  1,150,000  shares  which are  subject to an option to purchase
        such shares from the Company at $1.00 per share,  1,000,000 shares which
        are  subject to an option to  purchase  such  shares from the Company at
        $2.50 per share and  1,000,000  shares which are subject to an option to
        purchase such shares from the Company at $7.50 per share.

<F3>    Includes  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 $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.

<F4>    Includes  10,000  shares which are subject to an option to purchase such
        shares  from the  Company at $6.94 per share,  10,000  shares  which are
        subject to an option to  purchase  such shares from the Company at $7.13
        per share,  and 20,000 shares which are subject to an option to purchase
        such shares from the Company at $4.75 per share.

<F5>    Includes  50,000  shares which are subject to an option to purchase such
        shares from the  Company at $2.50 per share.

<F6>    Includes  40,000  shares which are subject to an option to purchase such
        shares from the Company at $5.38 per share.


Item 13. Certain Relationships and Related Transactions

At April 13,  2000,  Steven K.  Clark  owed the  Company  $2,743,014  (including
accrued interest) which he previously 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,  payable in full 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  interest  rate,  payable in full on April 24, 1999. On September 5, 1997,
Mr.  Clark  assumed a note  between  Thomas T. Allan for a  principal  amount of
$409,750,  at the above interest rate,  payable in full 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,  payable  in full on
December  31,  2003.  On April  24,  1999,  the  Board of  Directors  agreed  to
consolidate  and refinance Mr.  Clark's debts to the Company,  whereby Mr. Clark
issued a note to the Company in the amount of $2,569,871 with interest  accruing
at the rate of LIBOR  plus 1%,  payable  in full on  December  31,  2010 or upon
demand by the Company, and canceled all of the other above-described notes.

At December 31, 1999, Robert R. Amerson owed the Company  $1,657,392  (including
accrued interest) which he previously 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 rate of LIBOR plus 1.25% per annum, payable in full 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,  payable in full on April 24,
1999. On September 25, 1997, Mr. Amerson  assumed a note between Thomas T. Allan
for a principal amount of $409,750,  at the above interest rate, payable in full
on  September  4, 1999.  On April 15,  1998,  Mr.  Amerson  issued a note to the
Company in the amount of  $440,194  with  interest  at the rate of 7% per annum,
payable in full on December 31, 2003. On April 24, 1999,  the Board of Directors
agreed to consolidate and refinance Mr.  Amerson's debt to the Company,  whereby
Mr.  Amerson  issued a note to the  Company  in the  amount of  $1,555,802  with
interest  accruing at the rate of LIBOR plus 1%, payable in full on December 31,
2010  or  upon  demand  by  the   Company,   and   canceled  all  of  the  other
above-described notes.


                                       34
<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:

            Report of Grant Thornton LLP Independent Certified Public
            Accountants......................................................F-2

            Independent Auditor's Report of McGladrey & Pullen, LLP..........F-3

            Consolidated Balance Sheets at December 31, 1999 and 1998........F-4

            Consolidated  Statements of Earnings for the years ended
            December 31, 1999, 1998 and 1997.................................F-5

            Consolidated  Statements of  Stockholders'  Equity for the
            years ended December 31, 1999, 1998 and 1997.....................F-6

            Consolidated  Statements  of Cash Flows for the years  ended
            December 31, 1999, 1998 and 1997.................................F-7

            Notes to Consolidated Financial Statements......................F-10


    (a)(2)  Financial Statement Schedules

            Report of Grant Thornton LLP Independent Certified Public
            Accountants.....................................................F-28

            Independent Auditor's Report of McGladrey & Pullen, LLP.........F-29

            Schedule II.  Valuation and Qualifying Accounts.................F-30

            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.



                                       35
<PAGE>


    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.

    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   Credit Agreement between Flanders  Corporation,  SunTrust  Equitable
            Securities  Corporation  and SunTrust Bank,  dated February 9, 2000,
            filed herewith.

    10.11   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.

    10.12   Loan Agreement between Flanders  Corporation and the Johnston County
            Industrial  Facilities and Pollution  Control  Financing  Authority,
            dated March 1, 2000, filed herewith.

    10.13   Flanders  Corporation 1996 Director Option Plan, filed with the Form
            10-K dated December 31, 1995, and incorporated herein by reference.

    10.14   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.

    10.15   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.

    10.16   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.

    10.17   Amendment to Employment Agreement between Elite Acquisitions,  Inc.,
            Flanders Filters, Inc., and Steven K. Clark, filed herewith.

    10.18   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.

    10.19   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.

    10.20   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.

    10.21   Amendment to Employment Agreement between Elite Acquisitions,  Inc.,
            Flanders Filters, Inc., and Robert R. Amerson, filed herewith.

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


                                       36
<PAGE>


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

    10.24   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.

    10.25   Amendment to Stock Option Agreement between Flanders Corporation and
            Robert R. Amerson dated December 22, 1999, filed herewith.

    10.26   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.

    10.27   Stock Option Agreement between Elite Acquisitions,  Inc., and Steven
            K. Clark,  filed with the December 31, 1995 Form 10-K,  incorporated
            herein by reference.

    10.28   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.

    10.29   Amendment to Stock Option Agreement between Flanders Corporation and
            Steven K. Clark dated December 22, 1999, filed herewith.

    10.30   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.

    10.31   Note  Agreement  between  Steven K. Clark and Flanders  Corporation,
            dated April 24, 1999, filed herewith.

    10.32   Note Agreement  between Robert R. Amerson and Flanders  Corporation,
            dated April 24, 1999, filed herewith.

    21      Subsidiaries of the Registrant.

    23.1    Consent of Grant  Thornton  LLP for  incorporation  by  reference of
            their report into Form S-8 filed on July 21, 1997, filed herewith.

    23.2    Consent of McGladrey & Pullen, LLP for incorporation by reference of
            their report into Form S-8 filed on July 21, 1997, filed herewith.

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

    27      Financial Data Schedule.


    (b)     Reports on Form 8-K.

            None.

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



                                       37
<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 13th day of April, 2000.

                                 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      4/13/00
-------------------------    and Director                          ------------
 Robert R. Amerson

                             Chief Operating Officer, Vice
                             President/Chief Financial Officer,
/s/ Steven K. Clark          Principal Accounting Officer and        4/13/00
-------------------------    Director                              ------------
 Steven K. Clark


 /s/ Linwood Allen Hahn
-------------------------                                            4/13/00
 Linwood Allen Hahn          Director                              ------------


/s/ J. Russell Fleming
-------------------------                                            4/13/00
 J. Russell Fleming          Director                              ------------


                                       38
<PAGE>

                              FLANDERS CORPORATION

                        CONSOLIDATED FINANCIAL STATEMENTS

                  Years ended December 31, 1999, 1998 and 1997


<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Flanders Corporation

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Flanders
Corporation  and   Subsidiaries  as  of  December  31,  1999,  and  the  related
consolidated  statements of earnings,  stockholders'  equity, and cash flows for
the year then ended.  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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,   the  consolidated   financial  position  of  Flanders
Corporation  and  Subsidiaries  as of December  31, 1999,  and the  consolidated
results of their operations and their  consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.


/s/ Grant Thornton LLP

Salt Lake City, Utah
March 8, 2000



                                      F-2
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
Flanders Corporation

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Flanders
Corporation  and   subsidiaries  as  of  December  31,  1998,  and  the  related
consolidated statements of income,  stockholders' equity, and cash flows for the
years ended  December  31, 1998 and 1997.  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 the results of their  operations
and  their  cash  flows  for the  years  ended  December  31,  1998  and 1997 in
conformity with generally accepted accounting principles.

/s/ McGladrey & Pullen, LLP

New Bern, North Carolina
March 12, 1999, except for item (A) in Note H and the last  paragraph of Note H,
    as  to which the date is March 31, 1999, and Note D, as to which the date is
    December 31, 1999.


                                      F-3
<PAGE>

                      FLANDERS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                  December 31,

<TABLE>
<CAPTION>
ASSETS                                                   1999             1998
---------------------------------------------------------------------------------
<S>                                                 <C>             <C>
Current assets
  Cash and cash equivalents                         $     824,220   $  13,672,685
  Receivables:
    Trade, less allowance for doubtful accounts:
      1999 $487,321; 1998 $551,725                     29,023,225      26,670,650
    Other                                               1,415,794       2,177,301
  Inventories (Note C)                                 25,901,700      25,518,804
  Deferred taxes (Note L)                               1,849,481       1,421,847
  Other current assets                                  1,959,725         860,310
  Net assets of discontinued operations (Note D)        5,217,737            --
                                                    -------------   -------------
         Total current assets                          66,191,882      70,321,597
Related party receivables (Note O)                      4,369,028       4,263,409
Other assets (Note E)                                   4,113,491       4,637,062
Intangible assets, net (Note F)                        30,022,487      28,990,924
Property and equipment, net (Notes G and H)            65,253,828      59,567,202
                                                    -------------   -------------
                                                    $ 169,950,716   $ 167,780,194
                                                    =============   =============
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------  -------------   -------------
Current liabilities
  Notes payable, banks (Note H)                     $        --     $   1,300,000
  Current maturities of long-term debt (Note H)         1,115,184       1,265,014
  Accounts payable (Note I)                            15,760,022      15,851,087
  Accrued expenses (Note J)                             3,895,274       3,933,918
                                                    -------------   -------------
         Total current liabilities                     20,770,480      22,350,019
Long-term debt, less current maturities (Note H)       31,212,985      30,105,714
Deferred taxes (Note L)                                 5,840,654       5,721,647
Commitments and contingencies  (Notes G, M and N)

Stockholders' equity (Notes H, K and P)
  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:
    1999 25,435,583; 1998 25,624,339                       25,436          25,624
  Additional paid-in capital                           91,798,188      91,837,257
  Notes receivable                                     (2,014,094)     (1,760,000)
  Retained earnings                                    22,317,067      19,499,933
                                                    -------------   -------------
                                                      112,126,597     109,602,814
                                                    -------------   -------------
                                                    $ 169,950,716   $ 167,780,194
                                                    =============   =============
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                      F-4
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
                            Years Ended December 31,

<TABLE>
<CAPTION>
                                                          1999            1998            1997
                                                     -------------   -------------   -------------
<S>                                                  <C>             <C>             <C>
Net sales                                            $ 171,392,281   $ 154,764,804   $ 131,898,603
Cost of goods sold (Notes M, N and O)                  127,417,753     117,104,977      99,018,962
                                                     -------------   -------------   -------------
    Gross profit                                        43,974,528      37,659,827      32,879,641
Operating expenses (Notes M, N and O)                   33,802,204      28,108,372      23,509,447
                                                     -------------   -------------   -------------
    Operating income from continuing operations         10,172,324       9,551,455       9,370,194
                                                     -------------   -------------   -------------

Nonoperating income (expense) from continuing
  operations:
    Other income                                         1,258,440       2,014,881       1,230,991
    Interest expense                                    (1,257,157)       (574,950)       (751,499)
                                                     -------------   -------------   -------------
                                                             1,283       1,439,931         479,492
                                                     -------------   -------------   -------------
    Earnings from continuing operations before
      income taxes                                      10,173,607      10,991,386       9,849,686
Provision for income taxes (Note L)                      4,670,682       4,450,079       3,751,399
                                                     -------------   -------------   -------------
    Earnings from continuing operations                  5,502,925       6,541,307       6,098,287
Discontinued operations (Note D)
  Loss from operations of discontinued
    subsidiary (including tax benefit
    of $1,134,799 in 1999, $852,244 in 1998
    and $46,676 in 1997)                                (1,792,417)     (1,252,739)       (259,022)
  Estimated loss on disposal of subsidiary
    (including tax benefit of $565,604)                   (893,374)           --              --
                                                     -------------   -------------   -------------
Loss from discontinued operations                       (2,685,791)     (1,252,739)       (259,022)
                                                     -------------   -------------   -------------
    Net earnings                                     $   2,817,134   $   5,288,568   $   5,839,265
                                                     =============   =============   =============
Earnings per share from continuing
  operations (Note Q)
    Basic                                            $        0.22   $        0.26   $        0.33
                                                     =============   =============   =============
    Diluted                                          $        0.21   $        0.24   $        0.28
                                                     =============   =============   =============
Loss per share from discontinued operations
    Basic                                            $       (0.11)  $       (0.05)  $       (0.01)
                                                     =============   =============   =============
    Diluted                                          $       (0.10)  $       (0.04)  $       (0.01)
                                                     =============   =============   =============
Net earnings per share
    Basic                                            $        0.11   $        0.21   $        0.32
                                                     =============   =============   =============
    Diluted                                          $        0.11   $        0.20   $        0.27
                                                     =============   =============   =============
Weighted average common shares outstanding (Note Q)
    Basic                                               25,344,433      25,133,820      18,508,763
                                                     =============   =============   =============
    Diluted                                             26,525,429      27,106,924      22,477,184
                                                     =============   =============   =============
</TABLE>


   The accompanying notes are an integral part of these financial statements.



                                      F-5
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                      Additional
                                                            Common      Paid-In        Notes       Retained
                                                            Stock       Capital      Receivable    Earnings
                                                          ---------  -------------  ------------  -----------
<S>              <C>                                      <C>        <C>            <C>           <C>
Balance, January 1, 1997                                  $ 15,952   $ 17,205,413   $  (240,700)  $ 8,372,100
  Release of committed capital (Note K)                       --        8,000,005          --            --
  Issuance of 8,377,000 shares of common stock (Note K)      8,377     57,045,636          --            --
  Issuance of 722,375 shares of common stock upon
    conversion of convertible debt (Note K)                    722      4,381,689          --            --
  Issuance of 425,000 shares of common stock upon
    exercise of options (Note P)                               425      1,262,075          --            --
  Valuation and release from escrow of 344,691 shares
    of common stock related to acquisitions                   --        2,984,635          --            --
  Issuance of 187,502 shares of common stock related to
    acquisitions (Note B)                                      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 earnings                                                --             --            --       5,839,265
                                                          --------   ------------   -----------   -----------
Balance, December 31, 1997                                  25,663     93,243,030    (1,273,200)   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 earnings                                                --             --            --       5,288,568
                                                          --------   ------------   -----------   -----------
Balance, December 31, 1998                                  25,624     91,837,257    (1,760,000)   19,499,933
  Issuance of 94,544 shares of common stock related to
    certain acquisitions                                        95            (95)         --            --
  Interest on notes receivable secured by common shares       --             --        (254,094)         --
  Issuance and release from escrow of 245,899 shares of
    common stock related to certain acquisitions              --          988,028          --            --
  Purchase and retirement of 283,300 shares of common
    stock                                                     (283)    (1,027,002)         --            --
  Net earnings                                                --             --            --       2,817,134
                                                          --------   ------------   -----------   -----------
Balance, December 31, 1999                                $ 25,436   $ 91,798,188   $(2,014,094)  $22,317,067
                                                          ========   ============   ===========   ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                      F-6
<PAGE>

                      FLANDERS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            Years Ended December 31,

<TABLE>
<CAPTION>
                                                             1999           1998           1997
                                                         ------------   ------------   ------------
<S>                                                      <C>            <C>            <C>
Increase (decrease) in cash and cash equialents
CASH FLOWS FROM OPERATING ACTIVITIES
  Earnings from continuing operations                    $  5,502,925   $  6,541,307   $  6,098,287
  Adjustments to reconcile earnings from continuing
    operations to net cash provided by (used in)
    operating activities:
      Depreciation and amortization                         6,122,134      4,854,043      3,695,445
      Provision (credit) for doubtful accounts                (64,404)       111,159          9,086
      Allowance for obsolete inventory                         93,586         32,414         17,000
      (Gain) loss on sale of property and equipment           127,703        (41,221)        31,942
      Gain on sale of real estate                                --          (48,767)          --
      Deferred income taxes                                  (308,627)       185,814        (34,555)
      Income tax benefit from exercise of stock options          --          253,795        969,125
      Interest income on notes receivable                    (254,094)          --             --
      Change in working capital components, net of
        effects from acquisitions:
          Receivables                                      (3,607,050)    (2,898,821)    (2,455,755)
          Inventories                                      (1,480,901)    (6,245,876)    (5,040,280)
          Other current assets                               (365,743)      (326,868)       325,027
          Accounts payable                                    173,435     (2,628,592)     5,410,082
          Accrued expenses                                   (350,953)       135,699        (50,353)
          Income tax payable                                 (298,458)       925,243       (696,450)
                                                         ------------   ------------   ------------
            Net cash provided by continuing operations      5,289,553        849,229      8,278,601
            Net cash used in discontinued operations       (1,153,100)    (1,646,011)    (2,428,960)
                                                         ------------   ------------   ------------
            Net cash provided by (used in) operating
              activities                                    4,136,453       (796,782)     5,849,641
                                                         ------------   ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Acquisitions, net of cash acquired                       (1,786,692)   (15,455,160)          --
  Purchase of property and equipment                       (9,301,802)   (15,050,371)   (18,788,048)
  Proceeds from sale of property and equipment                 39,000         96,005         92,572
  Proceeds from sale of real estate                              --          259,253           --
  Disbursements on notes receivables                         (960,709)    (2,402,404)      (955,075)
  Disbursements for trademarks and trade names                 (6,216)        (9,224)          --
  Disbursement on deferred expenses                          (318,855)      (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)
  Decrease (increase) in other assets                       1,125,027       (347,856)      (927,791)
                                                         ------------   ------------   ------------
            Net cash used in investing activities
              of continuing operations                    (11,210,247)   (32,066,539)   (21,666,607)
            Net cash used in investing activities
              of discontinued operations                     (424,769)    (2,218,183)    (1,498,955)
                                                         ------------   ------------   ------------
            Net cash used in investing activities         (11,635,016)   (34,284,722)   (23,165,562)
                                                         ------------   ------------   ------------
</TABLE>

                                  - Continued -

   The accompanying notes are an integral part of these financial statements.

                                      F-7
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
                            Years Ended December 31,

<TABLE>
<CAPTION>
                                                             1999           1998           1997
                                                         ------------   ------------   ------------
<S>                                                      <C>            <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES
  Net proceeds (payments) from revolving credit
    agreement                                              (1,630,250)    12,900,000    (15,942,145)
  Proceeds from long-term borrowings                             --        4,500,000      9,725,659
  Principal payments on long-term borrowings               (2,604,392)    (1,096,416)    (8,781,901)
  Proceeds from issuance of common stock, net of
    committed capital                                            --             --       57,054,013
  Release of committed capital                                   --             --        8,000,005
  Purchase and retirement of common stock                  (1,027,285)    (3,285,558)          --
  Proceeds from exercise of options and warrants                 --          430,000           --
  Cost to register common stock                                  --          (77,487)          --
                                                         ------------   ------------   ------------
            Net cash provided by (used in) financing
              activities of continuing operations          (5,261,927)    13,370,539     50,055,631
            Net cash provided by (used in) financing
              activities of discontinued operations           (87,975)       (70,930)       324,459
                                                         ------------   ------------   ------------
            Net cash provided by (used in) financing
              activities                                   (5,349,902)    13,299,609     50,380,090
                                                         ------------   ------------   ------------
            Net increase (decrease) in cash and cash
              equivalents                                 (12,848,465)   (21,781,895)    33,064,169

CASH AND CASH EQUIVALENTS
  Beginning                                                13,672,685     35,454,580      2,390,411
                                                         ------------   ------------   ------------
  Ending                                                 $    824,220   $ 13,672,685   $ 35,454,580
                                                         ============   ============   ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash payments for:
    Interest, net of $395,074, $295,089 and $424,332
      interest capitalized to property and equipment
      for 1999, 1998 and 1997, respectively:
        Continuing operations                            $  1,365,866   $    814,934   $  1,222,352
                                                         ============   ============   ============
        Discontinued operations                          $     20,492   $     22,642   $    106,028
                                                         ============   ============   ============
    Income taxes:
      Continuing operations                              $  3,257,773   $  2,486,778   $  4,435,728
                                                         ============   ============   ============
      Discontinued operations                            $       --     $       --     $       --
                                                         ============   ============   ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
  FINANCING  ACTIVITIES
    Valuation and release from escrow of 245,899,
      7,000 and 344,691 shares of common stock related
      to acquisitions for 1999, 1998 and 1997,
      respectively                                       $    970,528   $     28,438   $  2,984,635
                                                         ============   ============   ============
    Issuance of 289,000 and 425,000 shares of common
      stock upon exercise of options in exchange for
      receivable in 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 -

   The accompanying notes are an integral part of these financial statements.


                                      F-8
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
                            Years Ended December 31,

<TABLE>
<CAPTION>
                                                             1999           1998           1997
                                                         ------------   ------------   ------------
<S>                                                      <C>            <C>            <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
  FINANCING ACTIVITIES (Continued)
    Cancellation of capital lease                        $       --     $       --     $  2,764,634
                                                         ============   ============   ============
    Capital lease obligation incurred for use of
      property and equipment                             $       --     $    116,580   $       --
                                                         ============   ============   ============
    Issuance of stock in exchange for minority interest  $       --     $    522,500   $       --
                                                         ============   ============   ============
    Exchange of assets for minority interest             $    866,139   $       --     $       --
                                                         ============   ============   ============
ACQUISITION OF COMPANIES (Note 11)
  Working capital acquired, net of cash and cash
    equivalents received                                 $    592,288   $  2,635,781   $    270,646
  Fair value of other assets acquired, principally
    property and equipment                                    698,647      1,742,794        930,000
  Goodwill                                                    647,369     11,106,585        547,393
  Long-term debt assumed                                     (151,612)       (30,000)      (353,400)
                                                         ------------   ------------   ------------
                                                         $  1,786,692   $ 15,455,160   $  1,394,639
                                                         ============   ============   ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                      F-9
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note A.  Nature of Business and Significant Accounting Policies

A summary of the significant  accounting  policies  consistently  applied in the
preparation of the accompanying consolidated financial statements follows.

    1.  Financial statement presentation

    The  accounting  and  reporting   policies  of  Flanders   Corporation   and
    Subsidiaries  (the  Company)  conform  with  generally  accepted  accounting
    principles and with general practices in the manufacturing industry.

    2.  Principles of consolidation

    The consolidated financial statements include the accounts and operations of
    the Company and its subsidiaries,  all of which are wholly owned, except for
    one  subsidiary  which was 80 percent owned for the year ended  December 31,
    1998.  All  material   intercompany  accounts  and  transactions  have  been
    eliminated in consolidation. Amounts of minority interest are insignificant.

    3.  Nature of business

    The  Company  designs,  manufactures  and  markets  a  broad  range  of  air
    filtration  products,  including  high-end High  Efficiency  Particulate Air
    ("HEPA")  filters,  with at  least  99.97%  efficiency,  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,  mid-range
    filters for  individual  and  commercial  use,  custom air filter  housings,
    industrial  air handlers and standard low cost  residential  and  commercial
    furnace and air conditioning  filters. The Company's air filtration products
    are utilized by many industries,  including those associated with commercial
    and residential  heating  ventilation and air  conditioning  systems ("HVAC"
    systems), semiconductor manufacturing,  ultra-pure materials, biotechnology,
    pharmaceuticals, synthetics, nuclear power and nuclear materials processing.
    The  Company  also  designs  and  manufactures  much of 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.  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
    foreign subsidiary total less than 5% of net sales.  Assets held outside the
    United States are negligible.

    4.  Significant customers

    Net sales for the years ended  December  31,  1999,  1998 and 1997  included
    sales to the following  major  customers,  together with the receivables due
    from those customers:

<TABLE>
<CAPTION>
                                                                   Trade Receivable Balance
                            Amount of Net Sales                       As of December 31,
                 ----------------------------------------    ------------------------------------
                     1999          1998          1997           1999         1998         1997
                 ------------  ------------  ------------    -----------  ----------  -----------
<S>              <C>           <C>           <C>             <C>          <C>         <C>
    Customer A   $ 16,441,644  $ 16,030,892  $ 14,962,349    $ 1,385,692  $1,112,788  $ 1,156,094
    Customer B     21,148,340    16,197,490    10,466,677      2,937,626   2,286,944    1,157,019
</TABLE>


                                      F-10
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


    5.  Use of 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.

    6.  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.

    7.  Fair value of financial instruments

    The carrying amount of cash equivalents  approximates fair value at December
    31, 1999 and 1998 because of the short maturity of those instruments.  Based
    on the  borrowing  rates  currently  available to the Company for bank loans
    with similar maturities and similar collateral requirements,  the fair value
    of notes payable and long-term  debt  approximates  the carrying  amounts at
    December 31, 1999 and 1998.

    8.  Inventories

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

    9.  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, 1999.

    10. 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 tradenames for each trademark or tradename  having a
    material  unamortized  balance.  Based upon its most  recent  analysis,  the
    Company  believes that no impairment of trademarks and tradenames  exists at
    December 31, 1999.



                                      F-11
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

    11. 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, 1999.

    12. Revenue recognition

    All sales are recognized when shipments are made to customers.

    13. 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.

    14. 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  $763,000,  $2,250,000  and $373,000 for 1999,  1998 and 1997,
    respectively.

    15. Earnings (loss) per share

    The Company  follows the  provisions  of Statement  of Financial  Accounting
    Standards No. 128 "Earnings Per Share" (SFAS No. 128). SFAS No. 128 requires
    the  presentation  of basic and diluted  EPS.  Basic EPS are  calculated  by
    dividing  earnings (loss)  available to common  shareholders by the weighted
    average number of common shares outstanding during each period.  Diluted EPS
    are similarly calculated,  except that the weighted average number of common
    shares  outstanding  includes  common  shares that may be issued  subject to
    existing rights with dilutive potential.

    16. Stock Options

    The Company has elected to follow  Accounting  Principles  Board Opinion No.
    25,  "Accounting  for  Stock  Issued  to  Employees"  (APB  25) and  related
    Interpretations  in accounting  for its employee  stock options  rather than
    adoptiong  the  alternative  fair value  accounting  provided for under FASB
    Statement 123, "Accounting for Stock-Based Compensation" (SFAS 123).

    17. Advertising

    The costs of advertising are expensed as incurred.

    18. Warranty

    The costs of warranties on the Company's products have not been historically
    significant and are expensed as incurred.


                                      F-12
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


    19. Reclassifications

    Certain account  balances for 1998 and 1997 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, 1999.

Note B.  Mergers and Acquisitions

    Effective  April 1, 1999,  the  Company  purchased  the  Tidewater  group of
    companies,  consisting of Tidewater Air Filter  Fabrication  Company,  Inc.,
    Newport  Manufacturing,  Inc.,  and  Bio-Tec  Inc.,  for  a  total  cost  of
    acquisition,  net  of  cash  received,  of  approximately  $1,787,000  in  a
    transaction which has been recorded as a purchase. Goodwill of approximately
    $647,000 has been recognized in this transaction. Tidewater is an air filter
    distributor and service  organization.  Prior to the acquisition,  Tidewater
    was  an  exclusive   distributor   of  a  competitor's   products.   Newport
    Manufacturing is an air filter manufacturer with some limited  manufacturing
    capacity for specialty products. Bio-Tec is an indoor air quality consulting
    firm. The Company's  financial  statements  include the operating results of
    the Tidewater group of companies from April 1, 1999.

    On May 7,  1998,  the  Company  agreed to acquire  substantially  all of the
    outstanding  stock of Eco-Air  Products,  Inc.  ("Eco-Air") in a transaction
    which has been  recorded as a purchase.  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. In connection with this purchase,  the Company
    recorded  approximately  $11,107,000  of goodwill.  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, 1999, no
    shares have been issued or  liability  recorded to the Eco-Air  sellers as a
    result of not having met the performance criteria.

    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 in a  transaction  which has been recorded
    as a purchase.  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.
    In connection with the purchase, the Company recorded approximately $547,000
    of goodwill.

    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.

<TABLE>
<CAPTION>
                                                         1998            1997
                                                    -------------   -------------
<S>                                                 <C>             <C>
    Revenues                                        $ 178,473,654   $ 154,250,241
                                                    =============   =============
    Earnings from continuing operations             $   6,594,619   $   6,390,694
                                                    =============   =============
    Earnings per common share from continuing
      operations:
        Basic                                       $        0.26   $        0.34
                                                    =============   =============
        Diluted                                     $        0.24   $        0.29
                                                    =============   =============
</TABLE>

    Pro forma results of operations of the Company as though  Tidewater had been
    acquired  as of January 1, 1998 and GFI had been  acquired  as of January 1,
    1997 are not  presented  because  amounts of pro forma  differences  are not
    significant.


                                      F-13
<PAGE>

                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note C.  Inventories

     Inventories consists of the following at December 31:

<TABLE>
<CAPTION>
                                                             1999         1998
                                                          -----------  -----------
<S>                                                       <C>          <C>
    Finished goods                                        $12,041,722  $12,988,501
    Work in progress                                        1,665,953    1,036,809
    Raw materials                                          12,382,025   11,587,908
                                                          -----------  -----------
                                                           26,089,700   25,613,218
    Less allowance for obsolete raw materials                 188,000       94,414
                                                          -----------  -----------
                                                          $25,901,700  $25,518,804
                                                          ===========  ===========
</TABLE>


Note D.  Discontinued Operations

    During 1997, the Company  established a new subsidiary,  Airseal West, Inc.,
    to serve as a manufacturer of industrial air handlers,  custom housings, and
    related products for the western U.S. The market opportunities envisioned by
    this  venture  failed to  materialize,  and Airseal West focused its primary
    efforts on perceived  opportunities in businesses and products  unrelated to
    air  filtration,  including  sporting  goods,  vending  equipment  and other
    general manufacturing.

    In December 1999, the Company adopted a formal plan to close Airseal West, a
    wholly owned  subsidiary,  and sell its various  assets and product lines to
    unrelated third parties.  The anticipated  date of closure is  approximately
    April 30,  2000.  All  dispositions  of assets are  expected to be completed
    December 31, 2000. The assets to be sold consist primarily of non-filtration
    assets  consisting  of  inventories,  manufacturing  equipment,  designs and
    intellectual properties.

    Operating  results  of  Airseal  West for 1999 are shown  separately  in the
    accompanying  statement of earnings.  Revenues and expenses  associated with
    Airseal West for 1998 and 1997 have been  reclassified and combined into the
    heading, "Loss from operations of discontinued subsidiary."

    The  estimated  loss  on the  disposal  of the  discontinued  operations  of
    approximately $893,000 (net of income tax benefit of approximately $566,000)
    represents  the estimated loss on the disposal of the assets of Airseal West
    and the write-off of goodwill associated with Airseal West.

    Net  sales of  Airseal  West for  1999,  1998  and 1997  were  approximately
    $2,354,000,  $3,057,000 and $2,237,000,  respectively. These amounts are not
    included in net sales in the accompanying statement of earnings.

    Net assets of Airseal West at December 31, 1999 consisted of the following:

<TABLE>
<CAPTION>

<S>                                                       <C>
    Accounts receivable                                   $   952,379
    Inventories                                             1,348,888
    Other current assets                                       48,439
    Property and equipment, net                             3,487,864
    Accounts payable                                         (429,075)
    Accrued liabilities                                       (25,204)
    Current portion long term debt                           (165,554)
                                                          -----------
             Net assets of discontinued operations        $ 5,217,737
                                                          ===========
</TABLE>




                                      F-14
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note E.  Other Assets

    Other assets consist of the following at December 31:

<TABLE>
<CAPTION>
                                                             1999         1998
                                                          -----------  -----------
<S>                                                       <C>          <C>
    Real estate held for sale                             $ 1,578,218  $ 1,578,218
    Notes receivable                                          960,709         --
    Cash value of officers' life insurance                       --        104,921
    Prepaid commissions                                          --        839,331
    Deposits                                                  295,643      800,531
    Deferred expenses, net of accumulated amortization
      of $214,001 in 1999 and $108,643 in 1998              1,118,937      903,740
    All other                                                 159,984      410,321
                                                          -----------  -----------
                                                          $ 4,113,491  $ 4,637,062
                                                          ===========  ===========
</TABLE>


Note F.  Intangible Assets

    Intangible assets consist of the following at December 31:

<TABLE>
<CAPTION>
                                                             1999         1998
                                                          -----------  -----------
<S>                                                       <C>          <C>
    Goodwill, net of accumulated amortization of
      $1,773,144 in 1999 and $980,253 in 1998             $29,160,232  $28,095,134
    Trademarks and trade names, net of accumulated
      amortization of $174,929 in 1999 and
      $135,178 in 1998                                        862,255      895,790
                                                          -----------  -----------
                                                          $30,022,487  $28,990,924
                                                          ===========  ===========
</TABLE>


Note G.  Property and Equipment

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

<TABLE>
<CAPTION>
                                                              Estimated
                                      1999         1998      Useful Lives
                                   -----------  -----------  ------------
<S>                                <C>          <C>          <C>
    Land                           $ 3,862,886  $ 1,018,007       --
    Buildings                       28,107,676   27,852,661  15-40 years
    Machinery and equipment         38,411,695   35,605,613  10 years
    Office equipment                 6,187,553    4,557,195  5 years
    Vehicles                         1,141,145      963,289  5 years
    Construction in progress         6,382,453    3,640,045       --
                                   -----------  -----------
                                    84,093,408   73,636,810
    Less accumulated depreciation   18,839,580   14,069,608
                                   -----------  -----------
                                   $65,253,828  $59,567,202
                                   ===========  ===========
</TABLE>

    Total  depreciation   expense  charged  to  operations  totaled  $5,544,018,
    $4,435,744 and $3,103,271 for 1999, 1998 and 1997, respectively.


                                      F-15
<PAGE>

                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note H.  Pledged Assets and Debt

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

<TABLE>
<CAPTION>
                                                           1999         1998
                                                        -----------  -----------
<S>                                                     <C>          <C>
Short-term debt:

Lower of prime or LIBOR plus defined percentage line
  of credit agreements (A)                              $     --    $1,300,000
                                                        ==========  ==========

Long-term debt:

Lower of prime (8.5% at December 31, 1999) or LIBOR
  plus defined percentage line of credit agreements (A) $11,369,750 $13,000,000

Prime(8.5% at December 31, 1999) 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, 1999                        1,570,104   1,795,731

Real estate contract payable to a company for purchase
  of land and buildings                                  3,994,000        --

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, 1999, and a
  second security interest in certain machinery and
  equipment                                                593,818     693,513

Various notes payable to a bank with interest at prime
  (8.5% at December 31, 1999) 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, 1999                                      1,114,020   1,180,226

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, 1999          5,680,000   5,845,000

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, 1999            833,623     849,751

Industrial revenue bond with a variable tax exempt
  interest rate as determined by a remarketing agent
  which was 3.2% at December 31, 1999, collateralized
  by a $4,500,000 letter of credit which expires June
  28, 2002                                               4,500,000   4,500,000

Note payable to an industrial development authority,
  with an interest rate of 83 percent of prime rate
  (8.5% at December 31, 1999), 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, 1999                          702,810     838,810

</TABLE>


                         F-16
<PAGE>

                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note H.     Pledged Assets and Debt - Continued


<TABLE>
<CAPTION>
                                                            1999          1998
                                                        ------------  ------------
<S>                                                     <C>          <C>
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,
  1999                                                     1,654,256     1,849,920

Various contracts payable including capital lease
  obligations; interest rates from 6.3 percent to 9.6
  percent at December 31, 1999 and 1998,
  collateralized by certain equipment; due in monthly
  payments aggregating approximately $40,000 including
  interest, expiring at various dates through May
  2003                                                       315,788       817,777
                                                        ------------  ------------
                                                          32,328,169    31,370,728
Less current maturities                                    1,115,184     1,265,014
                                                        ------------  ------------
                                                        $ 31,212,985  $ 30,105,714
                                                        ============  ============
</TABLE>

(A) These are amounts  outstanding  on revolving  credit  facilities  with banks
    which  provide  lines  of  credit  up  to  a  maximum  principal  amount  of
    $45,000,000 and $33,000,000 at December 31, 1999 and 1998, respectively. The
    lines of credit bear  interest  rates at the option of the Company at either
    1) prime rate,  which was 8.5% at December 31, 1999, or 2) LIBOR,  which was
    5.3% at December 31, 1999, 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 June 28, 2002. The lines of credit are
    collateralized  by the pledge of all common stock of the subsidiaries  owned
    by the Company.

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.

Aggregate  maturities required on long-term debt as of December 31, 1999 are due
in future years as follows:

<TABLE>
<CAPTION>
    Years Ending December 31,
    -------------------------
<S>         <C>                   <C>
            2000                  $  1,115,184
            2001                     1,002,232
            2002                    13,774,451
            2003                     1,075,354
            2004                     1,108,414
            Later years             14,252,534
                                  ------------
                                  $ 32,328,169
                                  ============
</TABLE>


                                      F-17
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note I.  Accounts Payable

    Accounts payable consist of the following at December 31:

<TABLE>
<CAPTION>
                                                             1999         1998
                                                          -----------  -----------
<S>                                                       <C>          <C>
    Accounts payable, trade                               $15,017,193  $13,889,388
    Commissions payable                                       543,365    1,577,470
    Customer deposits                                         199,464      384,229
                                                          -----------  -----------
                                                          $15,760,022  $15,851,087
                                                          ===========  ===========
</TABLE>


Note J.  Accrued Expenses

     Accrued expenses consist of the following at December 31:

<TABLE>
<CAPTION>
                                                             1999         1998
                                                          -----------  -----------
<S>                                                       <C>          <C>
    Payroll                                               $ 1,486,216  $ 1,618,197
    Insurance, including workers compensation               1,053,794    1,133,331
    Sales and use taxes                                       144,951       65,679
    Interest                                                   28,680      137,424
    Income taxes payable                                         --        298,458
    All other                                               1,181,633      680,829
                                                          -----------  -----------
                                                          $ 3,895,274  $ 3,933,918
                                                          ===========  ===========
</TABLE>


Note K.  Stockholders' Equity

    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  with  exercise  prices  between  $8.40 and  $14.725 per share,
    expiring at various periods between January 2002 and October 2002.

    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  common  stock from the two  stockholders  on
    December 1, 1997.  The  remaining  options were not exercised and expired on
    December 15, 1997.


                                      F-18
<PAGE>

                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note L.  Income Taxes

     The components of income tax expense (benefit) are as follows for the years
ended December 31:

<TABLE>
<CAPTION>
                                                             1999          1998          1997
                                                          -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>
        Current:
          Federal                                         $ 2,485,920   $ 2,655,933   $ 3,266,645
          State                                               792,986       756,088       472,633
                                                          -----------   -----------   -----------
                                                            3,278,906     3,412,021     3,739,278
                                                          -----------   -----------   -----------
        Deferred:
          Federal                                            (250,675)      162,098      (151,017)
          State                                               (57,952)       23,716       116,462
                                                          -----------   -----------   -----------
                                                             (308,627)      185,814       (34,555)
                                                          -----------   -----------   -----------
        Total                                               2,970,279     3,597,835     3,704,723
        Allocated to discontinued operations               (1,700,403)     (852,244)      (46,676)
                                                          -----------   -----------   -----------
        Total provision from continuing operations        $ 4,670,682   $ 4,450,079   $ 3,751,399
                                                          ===========   ===========   ===========
    </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 due to the
    following for years ended December 31:

<TABLE>
<CAPTION>
                                                             1999          1998          1997
                                                          -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>
    Computed "expected" tax expense                       $ 1,967,719   $ 3,021,374   $ 3,244,956
    Increase (decrease) in income taxes resulting from:
      Nondeductible expenses                                  377,919       150,210        82,051
      Nontaxable income                                        (1,061)      (23,874)         --
      State income taxes net of federal tax benefit           427,769       515,233       435,000
      Change in valuation allowance                            (2,094)      (17,479)      (19,224)
      Tax credits                                                --         (47,629)       (5,396)
      Adjustment to estimated income tax accrual              200,000          --            --
      All other                                                  --            --         (32,664)
                                                          -----------   -----------   -----------
                                                          $ 2,970,252   $ 3,597,835   $ 3,704,723
                                                          ===========   ===========   ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                             1999         1998
                                                          -----------  -----------
<S>                                                       <C>          <C>
    Deferred tax assets:
      Accounts receivable allowance                       $   181,935  $   103,454
      Inventory allowances                                    861,637      547,446
      Accrued expenses                                        740,261      773,041
      Prepaid expenses                                         65,648         --
                                                          -----------  -----------
                                                            1,849,481    1,423,941
      Less valuation allowance                                   --          2,094
                                                          -----------  -----------
                                                            1,849,481    1,421,847
    Deferred tax liabilities:
      Property and equipment                               (5,840,654)  (5,721,647)
                                                          -----------  -----------
                                                          $(3,991,173) $(4,299,800)
                                                          ===========  ===========
</TABLE>


                                      F-19
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note L.     Income Taxes - 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:

<TABLE>
<CAPTION>
                                                             1999         1998
                                                          -----------  -----------
<S>                                                       <C>          <C>
    Current assets                                        $ 1,849,481  $ 1,421,847
    Noncurrent liabilities                                 (5,840,654)  (5,721,647)
                                                          -----------  -----------
                                                          $(3,991,173) $(4,299,800)
                                                          ===========  ===========
</TABLE>


Note M.  Commitments and Contingencies

1.  Employment Agreements:

    The President and Chief Executive Officer, the Chief Operating  Officer/Vice
    President Finance/Chief Financial Officer, and the Vice President Operations
    all have employment agreements which expire at various times from March 2003
    to December 2010. In addition to a base salary and bonuses which may be paid
    at the discretion of the Board of Directors,  the  agreements  provide for a
    termination  payment  ranging from one hundred  percent of their base annual
    compensation to the minimum amount due under the employment  contract if the
    officer had served their full term, in the event the officers' employment is
    terminated under various circumstances.

    The Company pays  discretionary  cash bonuses to its officers and employees.
    The Company did not pay bonuses for 1999, 1998 and 1997.

2.  Litigation

    The   Company  is  being  sued  by  a  customer   regarding  a  purchase  of
    approximately $5 million in laminar-flow  cleanroom-grade HEPA filters, with
    approximately  $2.6  million  of  related  accounts   receivable   currently
    uncollected.  The customer  contends  that these  filters were  manufactured
    using a defective  urethane sealant and seeks  reimbursement for replacement
    costs and  damages.  The  Company  contends  that the  filters  meet all the
    specifications of the customer, and are not, in fact, defective.  We believe
    that in the event of an adverse  decision,  it is reasonably  likely that we
    would be able to successfully  assert  liability by the  manufacturer of the
    sealant,   and  we  have  filed  a   cross-complaint   against  the  sealant
    manufacturer.  We also  believe  that any losses due to these  lawsuits  are
    fully  insured  under both our general  liability  insurance  policy and the
    general liability policy of the sealant manufacturer.  For these reasons, we
    do not  believe  that the  resolution  of this  matter  will have a material
    adverse impact upon our financial condition or results of operations.

    From time to time,  the  Company  is a party to  various  legal  proceedings
    related to our normal  business  operations.  Management of the Company does
    not  believe  that the  ultimate  outcome  of this  litigation  will  have a
    material  impact  on  the  Company's  results  of  operations  or  financial
    condition.



                                      F-20
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note M. Commitments and Contingencies - Continued

    3.  Lease Commitments and Total Rental Expense

    Certain equipment and buildings are leased under agreements expiring between
    2000 and 2004. The following is a schedule for the total rental  commitments
    under these leases as of December 31, 1999

<TABLE>
<CAPTION>
    Fiscal Years Ending
    -------------------
<S>       <C>                       <C>
          2000                        $  2,012,281
          2001                           1,850,515
          2002                           1,505,735
          2003                           1,339,361
          2004                           1,350,570
                                    ---------------
                                      $  8,058,462
                                    ===============
</TABLE>

    The total rental expense charged to operations was approximately $2,900,000,
    $2,000,000 and $2,300,000 for 1999, 1998 and 1997, respectively.

Note N. Employee Benefit Plans

    The Company has a defined contribution 401(k) salary reduction plan intended
    to  qualify  under  section  401(a)  of the  Internal  Revenue  Code of 1986
    ("Salary  Savings  Plan").  The Salary  Savings  Plan  allows  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  $195,000,  $168,000 and $145,000 to the
    Salary  Savings Plan and the 401(k)  Plans for the years ended  December 31,
    1999, 1998 and 1997, respectively.

    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 $90,000 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
    $1,100,000, $1,160,000 and $650,000 for 1999, 1998 and 1997, respectively.

    During 1996,  the Company  adopted the Long Term Incentive Plan ("LTI Plan")
    to  assist  the  Company  in  securing  and   retaining  key  employees  and
    consultants.  The LTI Plan  authorizes  grants of incentive  stock  options,
    nonqualified stock options,  stock appreciation rights ("SARs"),  restricted
    stock  performance  shares and  dividend  equivalents  to  officers  and key
    employees of the Company and outside  consultants to the Company.  There are
    1,986,800  shares of Common  Stock  reserved  for award  under the LTI Plan.
    During 1999, 1998 and 1997, the Company awarded options to purchase  52,850,
    316,850 and 95,600  shares of Common Stock under the LTI Plan,  respectively
    (Note P).

    During 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 1999,  1998 and 1997, the Company
    awarded options to purchase 105,000, 115,000 and 5,000 shares, respectively,
    of Common Stock under the 1996 Director Option Plan (Note P).


                                      F-21
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note O. Related Party Transactions and Balances

    At  December  31,  1999 and  1998,  the  Company  had  notes  receivable  of
    $4,369,028  and  $4,263,409,   respectively,  due  from  various  directors,
    officers and  employees  with  interest  thereon  varying  between 6.31% and
    8.75%,  maturing at various dates to December 2010 and callable on demand by
    the Company (Note K).

Note P. Stock Options and Warrants

    During 1999, the Company granted options to purchase 52,850 shares of common
    stock under its LTI Plan at a weighted  average  exercise price of $3.76 per
    share.  The Company also granted options in 1999 to purchase  105,000 shares
    under the Director  Option Plan,  at a weighted  average  exercise  price of
    $2.57 per share.  All options granted during 1999 were  non-qualified  fixed
    price options,  and all 157,850 options were not exercisable at December 31,
    1999.

    The following  table  summarizes  the activity  related to all Company stock
    options and warrants for 1999, 1998, and 1997:

<TABLE>
<CAPTION>
                                                                                                        Weighted Average
                                             Shares                    Exercise Price               Exercise Price
                                   ---------------------------            per Share                   per Share
                                                    Stock     ----------------------------------------------------------
                                     Warrants      Options        Warrants         Options      Warrants      Options
                                   -------------------------------------------------------------------------------------
<S>                                <C>             <C>          <C>             <C>              <C>          <C>
Outstanding at January 1, 1997           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
    Granted                                   -       157,850          -         2.50 - 4.75         -           2.97
    Exercised                                 -             -           -               -          -              -
    Canceled or expired                 (25,000)      (82,520)      9.63         2.50 - 9.50          9.63       5.29
                                   -------------  ------------
Outstanding at December 31, 1999        612,239     7,005,700   5.54 - 14.73     1.00 - 9.50          9.57       3.66
                                   =============  ============
Exercisable at December 31, 1999        612,239     6,847,850   5.54 - 14.73     1.00 - 9.50          9.57       3.68
                                   =============  ============
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
                                   =============  ============
</TABLE>

    During 1999, the expiration date of options to purchase  2,000,000 shares at
    $2.50 per share was extended  from  February  2001 to February  2006,  which
    resulted in a new measurement date under  interpretations to APB Opinion No.
    25.


                                      F-22
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note P. Stock Options and Warrants - Continued

    The warrants and options  expire at various dates ranging from February 2000
    to December 2008. A further summary of information  related to fixed options
    outstanding at December 31, 1999 is as follows:

<TABLE>
<CAPTION>
                                                      Weighted Average             Weighted Average
  Range of Exercise             Number             Remaining Contractual            Exercise Price
       Prices          Outstanding / Exercisable        Life (Years)           Outstanding / Exercisable
---------------------- -------------------------- -------------------------   ----------------------------
<S>                      <C>                                <C>                     <C>
        $1.00            2,300,000 / 2,300,000              0.88                    $  1.00 / 1.00
    2.50 to 4.75         2,377,600 / 2,219,750              6.01                       2.67 / 2.65
    5.38 to 7.50         2,282,100 / 2,282,100              1.58                       7.33 / 7.33
    8.50 to 9.50            46,000 / 46,000                 1.96                       9.19 / 9.19
</TABLE>

    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  earnings and earnings per common share would have
    been  reduced  to the pro forma  amounts  shown  below  for the years  ended
    December 31:

<TABLE>
<CAPTION>
                                                             1999          1998          1997
                                                          -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>
    Net earnings:
      As reported                                         $ 2,817,134   $ 5,288,568   $ 5,839,265
      Pro forma                                           $ 1,136,155   $ 4,962,085   $ 5,766,265
    Basic earnings per share:
      As reported                                         $      0.11   $      0.21   $      0.32
      Pro forma                                           $      0.04   $      0.20   $      0.31
    Diluted earnings per share:
      As reported                                         $      0.11   $      0.20   $      0.27
      Pro forma                                           $      0.04   $      0.18   $      0.26

    Weighted average fair value per option of options
      Granted during the year                             $      1.53   $      1.40   $      2.11
</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 1999, 1998 and 1997 were as follows: Dividend rate of 0%;
    average  risk-free  interest rate of 5.66%,  5.18% and 6.11%,  respectively;
    average  expected lives of 5, 4.3 and 2.5 years,  respectively;  and average
    expected price volatility of 67%, 40% and 40%, respectively.


                                      F-23
<PAGE>


                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note Q. Earnings per Share

    The  following  data show the amounts  used in  computing  net  earnings per
    common share from  continuing  operations.  The following data also show the
    weighted average number of shares and dilutive potential common stock.

<TABLE>
<CAPTION>
                                                                                                        Per Share
                                                                                                         Amounts
                                                                                                      ---------------
                                                               Numerator          Denominator          Net Earnings
                                                            ----------------    -----------------     ---------------
                                                                          Year Ended December 31, 1999
                                                            ---------------------------------------------------------
<S>                                                           <C>                   <C>                 <C>
Basic earnings per share, earnings from continuing
  operations available to common stockholders                 $  5,502,925          25,344,433          $      0.22
                                                                                                      ===============
Effect of dilutive securities:
    Options                                                           -              1,159,996
    Contingent shares                                                 -                 21,000
                                                            ----------------    -----------------
Diluted earnings per share, earnings from continuing
  operations available to common stockholders plus
  assumed exercise of options and warrants and
  issuance of contingent shares                               $  5,502,925          26,525,429          $      0.21
                                                            ================    =================     ===============


                                                                          Year Ended December 31, 1998
                                                            ---------------------------------------------------------
Basic earnings per share, earnings from continuing
  operations available to common stockholders                 $  6,541,307          25,133,820          $      0.26
                                                                                                      ===============
Effect of dilutive securities:
    Options                                                           -              1,949,177
    Contingent shares                                                 -                 21,000
    Warrants                                                          -                  2,927
                                                            ----------------    -----------------
Diluted earnings per share, earnings from continuing
  operations available to common stockholders plus
  assumed exercise of options and warrants and issuance
  of contingent shares                                        $  6,541,307          27,106,924          $      0.24
                                                            ================    =================     ===============


                                                                          Year Ended December 31, 1997
                                                            ---------------------------------------------------------
Basic earnings per share, earnings from continuing
  operations available to common stockholders                 $  6,098,287          18,508,763          $      0.33
                                                                                                      ===============
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, earnings from continuing
  operations available to common stockholders plus
  assumed exercise of options and warrants, conversion
  of debt and issuance of contingent shares                   $  6,262,243          22,477,184          $      0.28
                                                            ================    =================     ===============
</TABLE>


                                      F-24
<PAGE>

                      FLANDERS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note R. Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
                                                            Quarters Ended
                                       ---------------------------------------------------------
                                        March 31,       June 30,     September 30,  December 31,
                                           1999           1999           1999           1999
                                       ------------   ------------   ------------   ------------
<S>                                    <C>            <C>            <C>            <C>
Net sales                              $37,629,851    $44,706,108    $48,658,081    $40,398,241
Gross profit                             9,860,706     12,191,179     13,734,386      8,188,257
Operating income (loss)
  from continuing operations             2,479,216      3,856,610      4,280,124       (443,626)
Earnings (loss) from
  continuing operations                $ 1,249,208    $ 2,008,580    $ 2,257,560    $   (12,423)
                                       ============   ============   ============   ============
Earnings (loss) from continuing
  operations per share:
    Basic                              $      0.05    $      0.08    $      0.09    $      --
    Diluted                                   0.05           0.08           0.09           --
Common stock prices:
    High                               $    5 1/8     $   3 13/16    $     3 3/8    $     3 1/8
    Low                                     2 9/16        2 1/2            2 3/8          2 1/4
</TABLE>


<TABLE>
<CAPTION>
                                        March 31,       June 30,     September 30,  December 31,
                                           1999           1999           1999           1999
                                       ------------   ------------   ------------   ------------
<S>                                    <C>            <C>            <C>            <C>
Net sales                              $30,213,699    $38,771,247    $48,486,595    $ 37,293,263
Gross profit                             7,479,158      9,106,988     12,569,942       8,503,739
Operating income from
  continuing operations                  1,929,177      3,461,093      3,780,532         380,653
Earnings (loss) from
  continuing operations                $ 1,359,001    $ 2,404,309    $ 2,190,490    $   (665,232)
                                       ===========    ===========    ===========    ============
Earnings (loss) from continuing
  operations per share:
    Basic                              $      0.05    $      0.08    $      0.09    $      (0.02)
    Diluted                                   0.05           0.08           0.09           (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
</TABLE>


                                      F-25
<PAGE>


                              FLANDERS CORPORATION
                          FINANCIAL STATEMENT SCHEDULES



<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                          ON THE SUPPLEMENTAL SCHEDULE

Board of Directors
Flanders Corporation

Our audit was made for the  purpose  of  forming  an  opinion  on the 1999 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  1999  audit  of the  basic  consolidated
financial  statements and, in our opinion, the 1999 information is fairly stated
in all material  respects in relation to the 1999 basic  consolidated  financial
statements taken as a whole.


/s/  Grant Thornton LLP

Salt Lake City, Utah
March 8, 2000



                                      F-27
<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 for the years  ended  December  31,  1998 and 1997 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, 1999, 1998 and 1997

<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, 1999
  Allowance for doubtful accounts                $551,725    $ 39,620    $  --         $(104,024)(1)       $487,321
  Allowance for inventory value                    94,414      93,586       --              --              188,000
  Valuation allowance for deferred tax assets       2,094        --         --            (2,094)(2)           --
                                                 --------    --------    -------       ---------           --------
        Total                                    $648,223    $133,206    $  --         $(106,118)          $675,321
                                                 ========    ========    =======       =========           ========
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
                                                 ========    ========    =======       =========           ========
</TABLE>

-----------------------------
(1)  Uncollected receivables written-off, net of recoveries.
(2)  Reduction in allowance.
(3)  Increase due to acquisition of subsidiary.


                                      F-29