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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K





(Mark One)

|x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

For the year ended December 31, 2009

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

Registrants telephone number, including area code: (252) 946-8081





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

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

Title of each class

Common Stock, $.001 per share par value





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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    YES  x    NO   ̈



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).    YES   ̈    NO  x

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.    YES   ̈    NO  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company (as defined in Rule 12b-2 of the Exchange Act).



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

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

As of June 30, 2009, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $119.6 million.

As of March 22, 2010, the number of shares
outstanding of the registrants common stock was 26,132,838 shares.

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









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FLANDERS CORPORATION

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2009

TABLE OF CONTENTS



|                     |  |                                                                     |  |                                                                                       |  |   
|-------------------- |  | ------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I               |  | 3                                                                  
|                     |  |                                                                     | 
|                     |  | Item 1.                                                             |  | Business                                                                              |  | 3 
|                     |  | Item 1A.                                                            |  | Risk Factors                                                                          |  | 11
|                     |  | Item 1B.                                                            |  | Unresolved Staff Comments                                                             |  | 16
|                     |  | Item 2.                                                             |  | Properties                                                                            |  | 16
|                     |  | Item 3.                                                             |  | Legal Proceedings                                                                     |  | 17
|                     |  | Item 4.                                                             |  | Reserved                                                                              |  | 17
|                     | 
|PART II              |  | 18                                                                 
|                     |  |                                                                     | 
|                     |  | Item 5.                                                             |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 18
|                     |  | Item 6.                                                             |  | Selected Financial Data                                                               |  | 20
|                     |  | Item 7.                                                             |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 21
|                     |  | Item 7A.                                                            |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 27
|                     |  | Item 8.                                                             |  | Financial Statements and Supplementary Data                                           |  | 27
|                     |  | Item 9.                                                             |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 27
|                     |  | Item 9A.                                                            |  | Controls and Procedures                                                               |  | 27
|                     |  | Item 9B                                                             |  | Other                                                                                 |  | 29
|                     | 
|PART III             |  | 30                                                                 
|                     |  |                                                                     | 
|                     |  | Item 10.                                                            |  | Directors, Executive Officers and Corporate Governance of the Registrant              |  | 30
|                     |  | Item 11.                                                            |  | Executive Compensation                                                                |  | 33
|                     |  | Item 12.                                                            |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 40
|                     |  | Item 13.                                                            |  | Certain Relationships and Related Transactions                                        |  | 42
|                     |  | Item 14.                                                            |  | Principal Accountant Fees and Services                                                |  | 43
|                     | 
|PART IV              |  | 44                                                                 
|                     |  |                                                                     | 
|                     |  | Item 15.                                                            |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 44
|                     | 
|SIGNATURES           |  | 48                                                                 
|                     | 
|FINANCIAL STATEMENTS |  |                                                                    
|                     |  |                                                                    
|                     |  | Report of Independent Registered Public Accounting Firm             |  | F-2                                                                                  
|                     |  | Managements Report on Internal Control Over Financial Reporting    |  | F-3                                                                                  
|                     |  | Report of Independent Registered Public Accounting Firm             |  | F-4                                                                                  
|                     |  | Consolidated Balance Sheets                                         |  | F-5                                                                                  
|                     |  | Consolidated Statements of Operations                               |  | F-6                                                                                  
|                     |  | Consolidated Statements of Stockholders Equity                     |  | F-7                                                                                  
|                     |  | Consolidated Statements of Cash Flows                               |  | F-8                                                                                  
|                     |  | Notes to Consolidated Financial Statements                          |  | F-10                                                                                 
|                     |  | Financial Statement Schedule                                        |  | F-34                                                                                 
|                     |  | Report of Independent Registered Public Accounting Firm on Schedule |  | F-35                                                                                 



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PART I



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

OVERVIEW

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

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

GENERAL DEVELOPMENT OF BUSINESS AND AVAILABILITY OF INFORMATION

Flanders Corporation is incorporated in the State of North Carolina. Our principal executive offices are currently located at 531 Flanders Filters Road, Washington, NC 27889. Our internet website address
is www.flanderscorp.com. The information contained on our website is not part of our reports with the Securities and Exchange Commission and is not incorporated by reference into this report. Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, and current reports on Form 8-K, and all amendments thereto, are available free of charge on the Companys website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities
and Exchange Commission.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

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



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STRATEGY

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

INTRODUCE NEW PRODUCTS

In the last three years, we have focused our
development efforts on products which address the actual technical requirements of maintaining clean air to promote health. Maintaining ultra-clean air in residential and commercial settings requires continuous and complete replacement of
used air contaminated by contact with hair, skin, carpet, solvents, cigarette smoke and other common particle sources with air filtered through a combination of pre-filters, High Efficiency Particulate Air (commonly called
HEPA) filtration, and odor removal, as well as controlling all air inlets. This typically requires upgraded and augmented blowers for central or zoned HVAC systems necessary to push air through more effective filters, additional
filtration placed at building air inlets, and enough additional HVAC capacity to generate over-pressure so that the majority of air leaks push clean air out, rather than allow dirty air inside.

We have been able to provide an upgrade path for government buildings, large commercial office buildings and other public venues wishing to
utilize HEPA filtration as part of a program to harden buildings against bioterrorist attacks.

Most currently
available air filters for commercial, industrial and residential use are primarily useful for protecting motors, coils and other mechanical components from airborne grease condensation and other contaminants which reduce the life and
energy-efficiency of the HVAC equipment and have little or no effect on reducing airborne contamination which may be harmful to humans. In fact, standard pleated filters, even those with high-MERV ratings, offer no appreciable benefit in
terms of better air quality for the inhabitants than the cheapest spun-glass filters. These pleated filters are accompanied by increased heating and cooling costs caused by the decreased amount of air flowing through the system, and decreased
efficiency, which may be accompanied by more frequent equipment breakdowns as equipment is stressed by attempting to push higher volumes of air through tighter filters. Our new products are designed to offer end-users substantial and
measurable benefits to health and productivity through substantially cleaner air, and are properly engineered to reduce detrimental effects on equipment life.

Security Products for Government Buildings and Commercial Office Buildings. We have adapted our containment control technology to be used in hardening government facilities, large
commercial office buildings and public venues against anthrax attacks and other bioterrorist incidents. While these systems do not offer complete protection against bioterrorist attacks, any credible multi-layered defense requires HEPA filtration
and related technologies adapted to the unique requirements of these facilities. Marketing for these products will include analysis and diagnostic services offered through our IAQ (Indoor Air Quality) Diagnostic Group, adapted sales literature,
technical seminars and electronic multimedia presentations.

IMPROVE OPERATING EFFICIENCY

Centralize Overhead Functions. During 2008, we continued our ongoing programs to centralize functions and eliminate duplication of
efforts between subsidiaries in the following areas: purchasing, production planning, shipping coordination, accounting and personnel management, risk management and benefit plan administration.

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



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During 2007, Flanders Corporation sold its expanded wire machinery, and in 2008, sold its
media producing facility and disposed of its spun glass making equipment. The closing of these transactions were part of the focus of shedding verticality and making operations efficient and profitable.

Concentration of efforts to manufacturing and marketing of air filters and air filtration equipment. In 2008, we moved away from
participating in direct sales efforts and offices which marketed our products directly to commercial end users and the HVAC industry. We have transitioned these activities to other businesses which will continue to market Flanders products.
This will allow us to concentrate resources on the designing and manufacturing of air filters and filtration equipment. We will then focus our marketing efforts of our products to these wholesale distribution channels rather than to the commercial
end users, lowering operating expenses.

Strategic Acquisitions. We will continue to evaluate acquisition opportunities,
however, it is not likely we will make any acquisitions in 2010 as we continue to focus on improving core competencies rather than making acquisitions.

Optimization of Mature Products. Now that we have completed the rationalization and consolidation of our product lines, we should be able to stabilize designs and complete efficiency studies on our
manufacturing processes and supply chains which should enable us to duplicate our most successful processes across all plants.

INCREASE MARKET SHARE

Use Strategically Located Facilities Throughout the United States to Increase Market
Share. Through acquisition and the establishment of new plants, we have placed facilities within one days over-the-road shipping to most major population centers in the United States. We believe this ability to regionalize production and
distribution has improved our business in several ways: (i) decreased cost of products to customers by reducing the average distance between our plants and both our customers and our major raw materials suppliers, hence decreasing freight
expenses; (ii) increased responsiveness by decreasing the average time required to ship products to customers; and (iii) increased our share of national accounts total business by having manufacturing facilities in closer proximity
to customers regional distribution centers. The ability to service all major population centers with regional manufacturing centers is critical for our business, allowing us to compete on price against less broadly based competitors without
sacrificing margins as well as the ability to respond more rapidly than most of our competition. We will continue to review the market for new locations for expansion.

Continued Emphasis on Quality and Performance. A continued emphasis on product quality and on-time shipments has allowed us to capture market share in serving several industries in recent years. We
are expanding our NQA1 Quality Assurance Program to include a more expanded approach to allow us to provide many other products related to our current product line.

Utilize High Efficiency Production and Logistics Systems to Dominate Niche Markets. During the past several years we have invested heavily in upgrading and opening new production facilities,
scheduling capacity, and logistics management capabilities. We intend to continue using these advantages to capture market share in niche markets with specialized products tailored to their exact requirements. Many end users with specialized air
filtration needs are currently making do with standard products. It has been our experience that minor changes made to our standard products to meet specialized requirements may offer significant operational savings to these end users,
although the actual filters cost more.

Create Brand Awareness for Flanders residential air filtration
products.We are establishing our own brand names NaturalAire® and EnergyAire®. During 2008 and 2009 we focused efforts to grow the NaturalAire® brand through a Billboard campaign, full page magazine and trade journal advertisements, and marketing at national televised sporting events. These
efforts gave us broadcast television and cable television exposure for the NaturalAire® brand. We believe
recognition of the NaturalAire® and EnergyAire® brands will create awareness for Flanders as a primary selection for residential air filtration products.



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AIR FILTER MARKET BACKGROUND

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

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

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

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



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



| |  |  | Residential air cleaners.Stand-alone air cleaners which produce ultra-clean air in a defined area are also gaining in popularity among allergy
sufferers and asthmatics, although follow-up sales of replacement filtration cartridges have been limited.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | Pharmaceuticals. Pharmaceutical companies are increasingly using cleanrooms to prevent cross-contamination between different products and
different lots of the same product being manufactured at the same facility. The increasing use of cultured microbes for drug production is also expected to increase demand for high-end containment environments.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Nuclear Power and Materials Processing. Filtration systems are necessary to radioactive containment procedures for all nuclear facilities,
containment systems are necessary to provide shielding.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Chemical, Biological and Radiological Safe Environments. Filtration systems are necessary to provide a safe environment for those working in
sensitive areas that may be subject to exposure to such substances.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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RECENT TRENDS

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

Security Initiatives to Counter Terrorist Threats. We
believe initiatives to harden buildings against bioterrorist attacks and other security initiatives will result in many governmental and commercial facilities upgrading their HVAC systems to incorporate HEPA filters and other types of
upgraded air control systems. We have seen orders increase in this area over the past quarter.

Semiconductor Downturn and
Economic Recovery. Sales of air filtration products for semiconductor facilities, historically a major market, are expected to begin recovery during 2010 with continued improvement during 2011.

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) 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, We are seeing a greater interest in upgrading
residential filtration systems as well as commercial systems to address both energy savings and better indoor quality.

Lack
of Legitimate Competing Products. We believe there is an increase in public and regulatory frustration with spurious and misleading claims made by certain manufacturers in the air filtration industry. This trend is evidenced by recent rulings by
the Federal Trade Commission disallowing claims of cleaning the air in an entire room made by several manufacturers of area HEPA filtration systems as well as medical benefits claimed by manufacturers of passive
electrostatic washable synthetic filters and other articles in consumer reports. ASHARE is tightening the test standards to help the consumer more easily rate air filters. We hope that as the public becomes more interested in real filtration
products that we will see continued strength in this market.

Hazardous Working Environments. Several studies recognize
that air quality in working facilities has an impact upon human health. OSHA regulations, in particular, have made IAQ a consideration in a wide variety of industries, ranging from those industries using spray-paint booths to those using automobile
assembly lines. We are encouraged by the awareness and increased interest in improving indoor air quality in working environments.

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

MARKETING

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



| | 1. | Institutional to enhance Flanders image by educating on the depth of knowledge and expertise Flanders has in air filtration.
| | -- | ----------------------------------------------------------------------------------------------------------------------------



| | 2. | Persuade that our products have want-satisfying capabilities
| | -- | --------------------------------------------------------------



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

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



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

A marketing strategy for prospects will include opening and penetrating new retail market segments. In 2008 we introduced our new self
supported media residential air filters that have been placed in a large national retailer moving us from the low end price points into higher, better margin price points and placing our product head to head with other competitors who previously
dominated these higher price points.

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

Direct interaction will consist primarily through Regional Managers and Management contact with the customer base. Regional Managers covering the United
States, Mexico and Canada, supporting the existing customer base as well as new prospects with product expertise, experience, and support in the filtration industry.

Education and visual presence will be achieved with actively being involved through professional memberships such as NAFA, ASHRAE, IEST, CETA, ABSA, CBSA, ANS and HARDI. Emphasis will continue to be
placed on securing product specifications on all products through specifying engineering firms.

Tradeshows will continue only on a selective
nature. Market-share will be gained by increasing factory-support with educated staff, improved stocking programs, decreased lead-times, as well as new and improved products from our R&D Department. In 2008 and 2009 our R&D costs were not
considered material. Non-personal advertising will be increased to promote and increase our presence in the filtration industry primarily in the industry journals and magazines.

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

PRODUCTS

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



| |  |  | Residential heating and air conditioning filters, typically sold through retailers under the Flanders~Precisionaire brand name.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Residential air cleaners, developed in 2000, which offer different filtration types ranging from single-room HEPA units which clean the air in a room
to near-cleanroom levels to in-duct electrostatic precipitators which remove large quantities of airborne contaminants from entire residences without negatively impacting the efficiency of HVAC systems.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Industrial specialty filters which fall under specifications that are categorized by efficiency ratings established by ASHRAE and used in a wide
variety of industries, including paint facilities, automobile factories, chemical treatment plants, mushroom farms, coal mines, oil refineries and power plants.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Commercial and industrial filters for use in office and general manufacturing environments, typically sold through wholesalers and distributors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | High Efficiency Particulate Air (HEPA) filters (at least 99.97% efficient to 99.999997% efficient) in various grades, for use in semiconductor
facilities, nuclear containment vessels, disease containment facilities, and other critical applications.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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| |  |  | Carbon filters, both in bonded panels, various impregnated medias, and activated charcoal beds, used to remove gaseous contaminants, odors and toxic
chemical vapors in various commercial and industrial applications.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Specialized air filter housings for use in multi-stage filtration applications.
| | - |  | -------------------------------------------------------------------------------



| |  |  | Other related products, including ductwork and equipment cleaning chemicals, custom air handlers and specialized filter housings.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Surface finishing filters for any paint booth or surface finishing application in the overall surface finishing market.
| | - |  | -----------------------------------------------------------------------------------------------------------------------

MANUFACTURING

We manufacture air
filters, housings, Absolute Isolation Barriers and related equipment at several facilities in the United States and Mexico. The major plants are:



| |  |  | Manufacturing and warehousing facilities located in Washington, North Carolina; Bartow, Florida; Momence, Illinois; Smithfield, North Carolina (2
locations); Tijuana, Mexico; Matamoros, Mexico; Salt Lake City, UT and Dallas, Texas, produce a broad range of HEPA, commercial, residential and industrial filters.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other facilities in Washington, North Carolina, and Rosenberg, Texas, manufacture HEGA filters, high-end containment environments, housings, custom
filter assemblies and other custom filtration products and systems which require extensive custom design, production and lot tracking, including products used in the production and containment of potentially dangerous biologically engineered
microorganisms.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Certain other facilities spread across the U.S. provide a distribution point as well as light manufacturing.
| | - |  | ------------------------------------------------------------------------------------------------------------

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

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

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

SOURCE AND AVAILABILITY OF RAW MATERIALS

Our principal raw materials are cardboard,
fiberglass fibers, recyclable waste-glass, extruded glass, sheet metal, extruded aluminum, stainless steel, various grades of mild rolled steel, adhesives, resins and wood. All of these raw materials are readily available in sufficient quantities
from many suppliers.

COMPETITION

The air filtration market is fragmented and highly competitive. There are many companies which compete in our market areas. We believe that the principal competitive factors in the air filtration business include product performance, name
recognition, price, product knowledge, reputation, customized design, timely delivery and product maintenance. We believe that we compete favorably in all of these categories. Competitors include companies with resources, assets, financial strength
and market share which may be greater than ours. Major competitors include American Air Filter International, Camfil Farr Company, Donaldson Company, Inc., 3M and Clarcor Inc.



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PATENTS, TRADEMARKS AND LICENSES

The Company and its subsidiaries currently holds four (4) patents related to filtration technology including patents relating to isolation workstations, deodorizing air filters and method of
fabricating deodorizing filters.

In addition, the Company maintains twenty-three (23) trademark registrations
including the following: FLANDERS®, PRECISIONAIRE®, EZ FLOW®, AIRVELOPE®, CHANNEL-CEIL®, PUREFORM®, ECONO-CELL®, GAS-PAK®, PUREFRAME®, DIMPLE
PLEAT®, BLU-JEL®, VLSI®, KWIK KUT®, SUPER-FLOW®, NATURALAIRE®, AIRPURE®, PURESEAL®, FLANDERS ABSOLUTE ISOLATION®, FLANDERS/CSC®,
TECH-SORB®, DUSTGARD®, VAPORCLEAN®, and
PRECISIONCELL®. 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.

CUSTOMERS

We are not dependent upon any single customer. One customer, The Home Depot, Inc., accounted for 20%, 14% and 16% of net sales during 2009, 2008 and 2007,
respectively. Lowes, accounted for 10% and 5% of net sales during 2009 and 2008, respectively. Wal-Mart Stores, Inc., accounted for 5%, 5% and 10.4% of net sales during 2009, 2008 and 2007, respectively. No other single customer accounted for
10% or more of net sales during the past three years. Other significant customers include Texas Instruments, Glaxo, Merck & Co., Inc., Upjohn Co., Westinghouse Electric Corp., Ace, True Value, Intel and several U.S. government agencies.

BACKLOG

We had
approximately $57.7 million of firm backlog on December 31, 2009, compared to $20.4 million on December 31, 2008. Firm backlog includes orders received and not yet begun and the unfinished, unbilled portion of special orders. Orders are
typically not cancelable without penalty, except for certain stable filter supply contracts to nuclear facilities operated by the United States government. Backlog varies from week to week, based on the timing and mix of orders received.

EMPLOYEES

The Company employed 2,139
full-time employees on December 31, 2009; 1,911 in manufacturing, 41 in development and technical staff, 37 in sales and marketing, and the remaining 150 in support staff and administration. Approximately 440 employees in Mexico are covered by
government-mandated collective bargaining arrangements. Our operations have not been significantly affected by work stoppages and, in the opinion of management, employee relations are good. We are committed to continuous productivity improvement and
we continue to evaluate opportunities to reduce fixed costs, simplify or improve processes, and eliminate excess capacity. As a consequence, we may, from time to time, transfer production from one manufacturing facility to another, outsource certain
production or close certain manufacturing facilities. Such production transfers, outsourcing, and/or facility closures may result in a deterioration of employee relations at the impacted locations. We believe that our relationship with our employees
is satisfactory.

GOVERNMENT REGULATION

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

We are also subject to the requirements of OSHA and comparable state statutes. We believe we are
in material compliance with OSHA and state requirements, including general industry standards, record keeping requirements



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and monitoring of occupational exposures. In general, we expect to increase our expenditures to comply with stricter industry and regulatory safety standards such as those described above.
Although such expenditures cannot be accurately estimated at this time, we do not believe that they will have future material adverse effect on our financial position, results of operations or cash flows.

SEASONALITY

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

EXPORT SALES

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



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

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

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

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

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



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



| |  |  | manage production and inventory levels to meet product demand,
| | - |  | --------------------------------------------------------------



| |  |  | manage and improve production quality,
| | - |  | --------------------------------------



| |  |  | expand both the range of customers and the geographic scope of our customer base, and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | improve financial and management controls, reporting systems and procedures.
| | - |  | ----------------------------------------------------------------------------

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

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

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



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Our Business May Suffer If Our Competitive Strategy is Not Successful

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



| |  |  | increasing our market share,
| | - |  | ----------------------------



| |  |  | expanding our market through the introduction of new products which require periodic replacement, and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | improving operating efficiencies.
| | - |  | ---------------------------------

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

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

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



| |  |  | increase public awareness of the issues surrounding indoor air quality,
| | - |  | -----------------------------------------------------------------------



| |  |  | adequately address the unknown requirements of the potential customer base,
| | - |  | ---------------------------------------------------------------------------



| |  |  | develop new products that are competitive in terms of price, performance and quality, and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | avoid significant increases in current expenditure levels in development, marketing and consumer education.
| | - |  | -----------------------------------------------------------------------------------------------------------

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

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

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

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



| |  |  | purchasing,
| | - |  | -----------



| |  |  | production planning,
| | - |  | --------------------



| |  |  | shipping coordination,
| | - |  | ----------------------



| |  |  | marketing,
| | - |  | ----------



| |  |  | accounting,
| | - |  | -----------



| |  |  | personnel management,
| | - |  | ---------------------



| |  |  | risk management, and
| | - |  | --------------------



| |  |  | benefit plan administration.
| | - |  | ----------------------------

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



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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, and technical sales and support personnel for our operations. Competition for such personnel, particularly qualified engineers, is intense, and
there can be no assurance that we will be successful in attracting or retaining such personnel. Our failure to attract or retain such persons could have a material adverse effect on our business, financial condition and results of operations.

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

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

We may have additional tax liability.

We are subject to complex income tax and other taxing regulations. Significant judgment is required in the determination of a provision for income taxes.
In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by taxing authorities. Although we believe our tax estimates are reasonable, the
final outcome of tax audits in any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals. Based on the status of a given tax audit or related litigation, a material effect on
our income tax provision or net income may result in a period or periods from initial recognition in our reported financial results to the final closure that tax auditor settlement of related litigation when the ultimate tax and related cash flow is
known with certainty.

Management Controls a Significant Percentage of Our Stock

As of December 31, 2009, our directors and executive officers beneficially held approximately 31.73% of our outstanding common stock. As a result, such
shareholders effectively control or significantly influence all matters requiring shareholder approval. These matters include the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have
the effect of delaying or preventing a change in control that may otherwise be advantageous to the non-affiliated shareholders.

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

We have granted options to purchase a total of
1,860,000 shares of common stock to various parties with exercise prices ranging from $4.37 to $11.72 per share. These options are currently exercisable. Additionally, if the option holders exercise their options, the interests of current
shareholders may be diluted.

We recently elected to voluntarily delist our common stock from the NASDAQ Global Select Market, terminate
our status as a reporting company under the Exchange Act, and to commence trading on the OTCQX U.S. Premier Market.

On January 12,
2010, we announced our intent to voluntarily delist shares of our common stock from the NASDAQ Global Market Select Marked and to terminate our status as a reporting company in Section 12(g) of the Securities Exchange Act of 1934, as amended
(the Exchange Act). Our shares currently trade under the OTCQX U.S. Premier Market under the trading symbol FLDR. Although the OTCQX market place is generally viewed as the premier tier of the U.S. over-the-counter market, it
may not offer certain benefits available on the NASDAQ Global Select Market.

We cannot predict the effect, if any, that future sales of our
common stock, or the availability of shares of common stock for sale, will have on the market price of our common stock. We can give no assurance that sales of substantial amounts of common stock, or the potential for large amounts of sales, would
not cause the price of our common stock to decline.



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Because of this, it may be more difficult for shareholders to sell a substantial number of shares for the
same price at which shareholders could sell a smaller number of shares.

As an issuer qualified for listing on the OTCQX U.S. Premier Tier, we
must comply with, among other factors:



| |  |  | posting of ongoing quarterly and audited annual financial reports posted on the OTCQX website;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | inclusion in the Standard and Poors Corporation Records or Merchant Manuals, which satisfies the blue sky requirements for secondary trading
under certain states blue sky laws;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | DAD ongoing confirmation that we have made the information publicly available to maintain our OTCQX U.S. Premier Tier inclusion requirements.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------

The market price of our common stock has fluctuated significantly, and may fluctuate in the future. These fluctuations may
be unrelated to our performance. General market or industry price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.

Because we have elected to deregister as a reporting company under Section 12(g) of the Exchange Act, we will no longer be subject to
Section 404 of the Sarbanes-Oxley Act of 2002.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to perform an
evaluation of our internal control over financial reporting and our auditor to attest to such evaluation on an annual basis. Management concluded that our internal control over financial reporting was effective at December 31, 2009. After the
filing of this Form 10-K, we will not be subject to Section 404 of the Sarbanes-Oxley Act of 2002, we will not be filing periodic or other reports under the Exchange Act with the SEC, and will not be required to identify or report any material
weaknesses in our internal control over financial reporting.

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

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 in certain circumstances. The North Carolina Shareholder Protection Act requires the affirmative vote
of 95% of our voting shares to approve a business combination with any entity that beneficially owns 20% of the outstanding voting shares of the corporation unless the fair price provisions of the Act are satisfied. These provisions
could deprive shareholders of opportunities to realize takeover premiums for their shares or other advantages that large accumulations of stock would typically provide.

Our Business Can be Significantly Affected by Environmental Laws

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



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Fire disruptions may adversely affect our business

Our raw materials and manufacturing process involve a risk of fire loss or disruption. We have recently experienced three fires. In April 2006, a
manufacturing facility in Texas was destroyed by fire. In July 2007, a manufacturing facility in Bartow, Florida was destroyed by fire. In 2008 a manufacturing facility in Auburn, Pennsylvania was damaged by fire. To date we have been able to
mitigate the effects of fires and floods by transferring manufacturing, warehousing and shipping to other facilities. Our management has advised us that to date we have been insured against the losses caused by such fires. Although we intend to
increase security and increase fire protection equipment at our facilities, another major fire could occur and materially affect our operations. Furthermore, there is no assurance that we will be able to maintain business interruption, loss of
income and physical damage insurance in sufficient amounts to fully recoup losses caused by fire or other natural disasters. It is an event of default under our credit facility with Bank of America if we are not fully insured for any loss, theft,
damage or destruction to our assets, subject to agreeable insurance deductibles, that exceeds $200,000.

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

Certain
covenants in our credit facility with Bank of America restrict the types and amounts of additional indebtedness that we may incur. In addition, the credit facility contains specific financial covenants. These restrictions could inhibit our ability
to improve and expand our operations. Our credit facility with Bank of America matures in October 2011. There is no assurance that we will be able to maintain covenant compliance, negotiate extensions to this credit facility or find a replacement
credit facility on comparable terms. We pledged substantially all of our assets as security for the Bank of America credit facility.

A
significant amount of our leased physical facilities are owned by an affiliate of Mr. Amerson and a substantial number of our shares are pledged to a financial institution.

We are currently the lessee under a series of four (4) real estate operating leases for approximately 1,100,000 square feet of warehousing, shipping and manufacturing facilities, expiring between
2019 and 2029 with Wal-Pat II, LLC (Wal-Pat), an entity owned by Robert R. Amerson. Mr. Amerson is our former CEO and former Chairman of our Board of Directors and beneficially owns approximately 26.4% of our outstanding common
shares as of December 31, 2009. Mr. Amerson acquired Mr. Clarks interest in Wal-Pat as part of the Settlement and Mutual Release with Mr. Clark, as described below.

Our aggregate monthly base lease payment obligation to Wal-Pat is approximately $237,000. Our total remaining aggregate obligation under the Wal-Pat
operating leases is approximately $50,642,000. These amounts exclude any obligations for payment of real estate taxes and repairs and maintenance, which are our responsibility as the lessee.

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

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

In October 2007, we entered
into a Settlement Agreement and Mutual Release, effective as of September 30, 2007 (Settlement Agreement), by and between Mr. Clark, our former CFO, Mr. Amerson, Mr. Smith and Wal-Pat. A copy of the Settlement
Agreement was filed as an exhibit to our Form 8-K, dated October 5, 2007, to which reference is hereby made. In connection with the Settlement Agreement, Mr. Smith and Mr. Amerson each acquired 755,183 of our common shares from
Mr. Clark at a purchase price of $4.60 per share. Mr. Smith and Mr. Amerson pledged these shares to BB&T, who provided financing for the acquisition of these shares.



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##### Table of Contents

A default by either Mr. Amerson or Mr. Smith under their loan obligations to BB&T could result
in BB&T foreclosing upon our shares, which could adversely affect the market price of our common stock and substantially reduce our key managements equity ownership interest.

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



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

Not
applicable.



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

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



|                                  |  |                            |  |                                  |   |  |                |         |   |            |        |  
|--------------------------------- |  | -------------------------- |  | -------------------------------- | - |  | -------------- | ------- | - | ---------- | ------ | -
|Principal Facility                |  | Location                   |  | Approximate FloorSpace (sq.
ft.) |   |  | MonthlyPayment |         |   | Lease/Type |       
|                                  |  |                            |  |                                 
|Manufacturing and office facility |  | Washington, North Carolina |  | 285,000                          |   |  |                | N/A     |   |            | Owned  |  
|                                  |  |                            |  |                                 
|Manufacturing plant               |  | Bartow, Florida            |  | 275,000                          |   |  | $              | 114,583 | 1 |            | Leased | 3
|                                  |  |                            |  |                                 
|Warehouse                         |  | Terrell, Texas             |  | 75,000                           |   |  |                | N/A     |   |            | Owned  |  
|                                  |  |                            |  |                                 
|Manufacturing plant               |  | Momence, Illinois          |  | 211,000                          |   |  | $              | 136,019 | 2 |            | Owned  |  
|                                  |  |                            |  |                                 
|Sales office and warehouse        |  | Singapore                  |  | 3,800                            |   |  | $              | 2,100   |   |            | Leased |  
|                                  |  |                            |  |                                 
|Manufacturing and warehouse       |  | Smithfield, North Carolina |  | 415,000                          |   |  | $              | 84,677  |   |            | Leased | 3
|                                  |  |                            |  |                                 
|Manufacturing plant               |  | Smithfield, North Carolina |  | 474,000                          |   |  | $              | 4,869   | 4 |            | Owned  |  
|                                  |  |                            |  |                                 
|Warehouse                         |  | Salt Lake City, Utah       |  | 88,000                           |   |  | $              | 25,520  |   |            | Leased |  
|                                  |  |                            |  |                                 
|Manufacturing plant               |  | Tijuana, Mexico            |  | 127,000                          | 5 |  | $              | 46,651  |   |            | Leased |  
|                                  |  |                            |  |                                 
|Manufacturing plant               |  | Washington, North Carolina |  | 120,000                          |   |  | $              | 17,000  |   |            | Owned  |  
|                                  |  |                            |  |                                 
|Direct Sales Office & Warehouse   |  | Philadelphia, Pennsylvania |  | 26,000                           |   |  | $              | 12,188  |   |            | Owned  |  
|                                  |  |                            |  |                                 
|Manufacturing Plant               |  | Matamoros, Mexico          |  | 86,651                           |   |  | $              | 30,328  |   |            | Leased |  
|                                  |  |                            |  |                                 
|Manufacturing Plant               |  | Matamoros, Mexico          |  | 107,323                          |   |  | $              | 37,563  |   |            | Leased |  
|                                  |  |                            |  |                                 
|Direct Sales Office & Warehouse   |  | Dallas, Texas              |  | 120,000                          |   |  | $              | 34,257  |   |            | Leased |  
|                                  |  |                            |  |                                 
|Warehouse                         |  | Brownsville, Texas         |  | 60,000                           |   |  | $              | 23,400  |   |            | Leased | 3
|                                  |  |                            |  |                                 
|Warehouse                         |  | Clarkton, North Carolina   |  | 350,000                          |   |  | $              | 14,491  |   |            | Leased | 3
|                                  |  |                            |  |                                 
|Manufacturing Plant               |  | Rosenburg, Texas           |  | 50,000                           |   |  | $              | 24,900  |   |            | Owned  |  



|1 | Property was destroyed by fire in 2007 and sold to Wal-Pat in 2008. Lease commenced in March 2009.
|- | --------------------------------------------------------------------------------------------------

|2 | Property is pledged as security for an Economic Development Revenue Bond with a face value of $6,000,000. The obligation is paid quarterly rather than
monthly by paying a portion of principal and interest on the entire amount. The payment shown above is for the entire fourth quarter of 2009.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | The property and building is owned by Wal-Pat.
|- | ----------------------------------------------

|4 | The property is used as security for two Industrial Revenue Bonds with face value of $4,500,000 and $4,000,000. Monthly payments are for interest only
on the bonds, and vary from month to month based on the interest rate during the period.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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##### Table of Contents

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

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



|Item 4. | Reserved
|------- | --------



17



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##### Table of Contents

PART II



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

PRICE RANGE OF COMMON STOCK

As of December 31, 2009, our common stock was listed on
the Nasdaq Global Select Market under the symbol FLDR. On February 1, 2010, our common stock commenced trading as an OCTQX U.S. Premier security. Accordingly, our historical price ranges are not necessarily indicative of the future
quotations of our common stock due to the change of trading markets. The following table sets forth, for the periods indicated, the high and low sale prices of the Companys common stock as reported by the Nasdaq Global Select Market. Such
quotations do not include retail mark-ups, mark-downs, or other fees or commissions.



|                                       |  |      |      |     |   |     
|-------------------------------------- |  | ---- | ---- | --- | - | ----
|                                       |  | High |      | Low
|2009                                   |  |      |      |     |   |     
|Fourth Quarter ended December 31, 2009 |  | $    | 5.57 |     | $ | 3.79
|Third Quarter ended September 30, 2009 |  | $    | 6.76 |     | $ | 5.00
|Second Quarter ended June 30, 2009     |  | $    | 6.44 |     | $ | 4.18
|First Quarter ended March 31, 2009     |  | $    | 5.37 |     | $ | 3.62
|                                       |  |     
|2008                                   |  |      |      |     |   |     
|Fourth Quarter ended December 31, 2008 |  | $    | 6.35 |     | $ | 4.39
|Third Quarter ended September 30, 2008 |  | $    | 7.22 |     | $ | 5.20
|Second Quarter ended June 30, 2008     |  | $    | 7.70 |     | $ | 5.86
|First Quarter ended March 31, 2008     |  | $    | 6.70 |     | $ | 5.06
|                                       |  |     
|2007                                   |  |      |      |     |   |     
|Fourth Quarter ended December 31, 2007 |  | $    | 6.86 |     | $ | 4.53
|Third Quarter ended September 30, 2007 |  | $    | 8.20 |     | $ | 4.39
|Second Quarter ended June 30, 2007     |  | $    | 7.67 |     | $ | 6.31
|First Quarter ended March 31, 2007     |  | $    | 9.52 |     | $ | 7.07

EQUITY COMPENSATION PLAN
INFORMATION

The following table provides information about our Equity Compensation Plans as of December 31, 2009.



|                                                                |  |                                                                     |  |                                            |      |                                                            |          
|--------------------------------------------------------------- |  | ------------------------------------------------------------------- |  | ------------------------------------------ | ---- | ---------------------------------------------------------- | ---------
|Plan Category                                                   |  | Number of securitiesto be issued uponexercise of outstandingoptions |  | Weightedaverage price ofoutstandingoptions |      | Number of securitiesremaining
availablefor future issuance
|Equity Incentive plan approved by security holders              |  | 675,000                                                             |  | $                                          | 5.08 |                                                            | 1,310,000
|Equity Incentive plan not approved by security holders          |  |                                                                    |  |                                            |     |                                                            |         
|Long Term Incentive plan approved by security holders           |  | 125,000                                                             |  | $                                          | 9.79 |                                                            |         
|Long Term Incentive plan not approved by security holders       |  |                                                                    |  |                                            |     |                                                            |         
|Directors and Officers plan approved by security holders        |  | 60,000                                                              |  | $                                          | 5.54 |                                                            |         
|Directors and Officers plan not approved by security holders    |  |                                                                    |  |                                            |     |                                                            |         
|Other equity compensation plan approved by security holders     |  | 1,000,000                                                           |  | $                                          | 7.50 |                                                            |         
|Other equity compensation plan not approved by security holders |  |                                                                    |  |                                            |     |                                                            |         



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ISSUER PURCHASES OF EQUITY SECURITIES



|                       |  |                                               |  |                                          |  |                                                                                              |  |                                                                                                                       
|---------------------- |  | --------------------------------------------- |  | ---------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------
|Period                 |  | (a) Total Numberof Shares
(orUnits) Purchased |  | (b) AveragePrice Paid perShare (or Unit) |  | (c) Total Numberof Shares (or Units)Purchased as Partof PubliclyAnnounced Plansor Programs * |  | (d) Maximum Number(or Approximate DollarValue) of Shares (orUnits) that May Yet BePurchased Under thePlans or Programs
|Oct. 1  Oct. 31, 2009 |  |                                              |  |                                         |  |                                                                                             |  | 1,147,465                                                                                                             
|Nov. 1  Nov. 30, 2009 |  |                                              |  |                                         |  |                                                                                             |  | 1,147,465                                                                                                             
|Dec. 1  Dec. 31, 2009 |  |                                              |  |                                         |  |                                                                                             |  | 1,147,465                                                                                                             
|Total                  |  |                                              |  |                                         |  |                                                                                             |  | 1,147,465                                                                                                             



|* | Plan announced September 22, 2000 authorizing up to 2 million shares of common stock to be repurchased.
|- | -------------------------------------------------------------------------------------------------------

APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

As of December 31, 2009, there were approximately 215 holders of record of the Companys common stock.

DIVIDENDS

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



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##### Table of Contents

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

The following
financial data is derived from, and should be read in conjunction with, the Consolidated Financial Statements and notes thereto. Information concerning significant trends in the financial condition and results of operations is contained
in Managements Discussion and Analysis of Financial Condition and Results of Operations.

SELECTED HISTORICAL OPERATIONS
DATA(In thousands, except per share data)



|                                                               |  |                         |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        
|-------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | -------
|                                                               |  | Year Ended December 31,
|                                                               |  | 2009                    |         | 2008 |   |         | 2007 |  |   | 2006    |   |  | 2005
|Net sales                                                      |  | $                       | 222,380 |      | $ | 217,328 |      |  | $ | 244,941 |   |  | $    | 238,378 |   |  | $ | 229,276
|Gross profit                                                   |  |                         | 43,213  |      |   | 26,560  |      |  |   | 31,789  |   |  |      | 48,725  |   |  |   | 52,917 
|Operating expenses                                             |  |                         | 31,340  |      |   | 44,845  |      |  |   | 57,968  |   |  |      | 40,868  |   |  |   | 35,297 
|Goodwill Impaired                                              |  |                         | 0       |      |   | 2,442   |      |  |   | 543     |   |  |      | 0       |   |  |   | 0      
|Operating income (loss)                                        |  |                         | 11,873  |      |   | (20,727 | )    |  |   | (26,722 | ) |  |      | 7,857   |   |  |   | 17,620 
|Earnings (Loss) from continuing operations before income taxes |  |                         | 11,527  |      |   | (19,223 | )    |  |   | (28,691 | ) |  |      | 8,208   |   |  |   | 17,245 
|Provision (Benefit) for income taxes                           |  |                         | 4,563   |      |   | (6,060  | )    |  |   | (8,791  | ) |  |      | 2,683   |   |  |   | 4,739  
|Income (Loss) before extraordinary items                       |  |                         | 6,964   |      |   | (13,163 | )    |  |   | (19,900 | ) |  |      | 5,525   |   |  |   | 12,506 
|Extraordinary Gain (Loss)                                      |  |                         | 0       |      |   | 9,030   |      |  |   | 213     |   |  |      | (3,475  | ) |  |   |       
|Net earnings (loss)                                            |  | $                       | 6,964   |      | $ | (4,133  | )    |  | $ | (19,687 | ) |  | $    | 2,050   |   |  | $ | 12,506 
|                                                               |  |                         |         |      |  
|Income (Loss) per share before extraordinary items             |  |                         |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        
|Basic                                                          |  | $                       | .27     |      | $ | (0.51   | )    |  | $ | (0.75   | ) |  | $    | 0.21    |   |  | $ | 0.48   
|                                                               |  |                         |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        
|Diluted                                                        |  | $                       | .27     |      | $ | (0.51   | )    |  | $ | (0.75   | ) |  | $    | 0.20    |   |  | $ | 0.45   
|                                                               |  |                         |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        
|                                                               |  |                         |         |      |  
|Net earnings (loss) per share                                  |  |                         |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        
|Basic                                                          |  | $                       | .27     |      | $ | (0.16   | )    |  | $ | (0.75   | ) |  | $    | 0.08    |   |  | $ | 0.48   
|                                                               |  |                         |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        
|Diluted                                                        |  | $                       | .27     |      | $ | (0.16   | )    |  | $ | (0.75   | ) |  | $    | 0.07    |   |  | $ | 0.45   
|                                                               |  |                         |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        
|                                                               |  |                         |         |      |  
|Weighted average common shares outstanding                     |  |                         |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        
|Basic                                                          |  |                         | 25,779  |      |   | 25,693  |      |  |   | 26,362  |   |  |      | 26,340  |   |  |   | 26,309 
|                                                               |  |                         |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        
|Diluted                                                        |  |                         | 25,795  |      |   | 25,693  |      |  |   | 26,362  |   |  |      | 27,725  |   |  |   | 27,807 
|                                                               |  |                         |         |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        

SELECTED HISTORICAL BALANCE SHEET DATA (In thousands)



|                           |  |              |         |      |   |         |  |      |         |      |   |         |  |   |        
|-------------------------- |  | ------------ | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                           |  | December 31,
|                           |  | 2009         |         | 2008 |   | 2007    |  | 2006 |         | 2005
|Working capital            |  | $            | 39.705  |      | $ | 45,164  |  | $    | 50,251  |      | $ | 67,967  |  | $ | 60,595 
|Total assets               |  |              | 162,995 |      |   | 161,017 |  |      | 183,555 |      |   | 207,104 |  |   | 172,216
|Long-term obligations1     |  |              | 34,863  |      |   | 31,472  |  |      | 32,348  |      |   | 42,880  |  |   | 27,293 
|Total shareholders equity |  |              | 91,704  |      |   | 82,768  |  |      | 87,402  |      |   | 107,379 |  |   | 105,534



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



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

The following discussion should be read in conjunction with Item 6  Selected Financial Data and our Consolidated Financial
Statements, all included herein. The information set forth in this Managements Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements that involve risks and uncertainties.
Many factors, including but not limited to those discussed below could cause actual results to differ materially from those contained in these forward-looking statements.

OVERVIEW

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We base our estimates on the aging of our accounts receivable
balances and our historical write-off experience, net of recoveries. If the financial condition of our customers were to deteriorate, additional allowances may be required.

We maintain an allowance for estimated losses on our notes receivables based on the inability of the payors to meet the note obligations scheduled payments due.

We value our inventories at the lower of cost or market. We write down inventory balances for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. Inventories were written down to net realizable value during the fourth quarter of 2008. The company
reassessed its inventories due to the company selling certain facilities, transitioning away from direct sales offices and activities and due to the general downturn in the economy. Upon completion of the full examination of the companys
inventories, which began during the fourth quarter of 2008, management disposed of inventories that were of poor quality or damaged totaling approximately $4 million. If actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.

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

During the fourth quarter of 2008, because of the strategy to shed vertical integration, management adopted a plan to dispose of its remaining glass
equipment. As part of that plan, an impairment loss of $3.1 million was recognized, which is included in Operating expenses on the Consolidated Statements of Operations.



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Goodwill is reviewed for possible impairment at least annually or more frequently upon the occurrence of an
event or when circumstances indicate that the Companys carrying amount is greater than the fair value. In accordance with Accounting Standards Codification (ASC) 350, the Company examined goodwill for impairment and determined that
there were events that occurred in 2008 that impaired the goodwill. These events were the sale of certain direct sales division reporting units in which goodwill was attached. Accordingly, the Company recorded expense related to this impairment of
$2.4 million in the fourth quarter of 2008.

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

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

2009 Compared to 2008

The following table summarizes the Companys results of operations as a percentage of net sales for 2009 and 2008.



|                                                    |  |      |         |  |       |   |  |   |         |   |  |       |  
|--------------------------------------------------- |  | ---- | ------- |  | ----- | - |  | - | ------- | - |  | ----- | -
|                                                    |  | 2009 |         |  | 2008  |  
|Net sales                                           |  | $    | 222,380 |  | 100.0 | % |  | $ | 217,328 |   |  | 100.0 | %
|                                                    |  |      |         | 
|Gross profit                                        |  |      | 43,213  |  | 19.4  |   |  |   | 26,560  |   |  | 12.2  |  
|Operating expenses                                  |  |      | 31,340  |  | 14.1  |   |  |   | 44,845  |   |  | 20.6  |  
|Goodwill Impaired                                   |  |      | 0       |  | 0.0   |   |  |   | 2,442   |   |  | 1.1   |  
|Operating income (loss)                             |  |      | 11,873  |  | 5.3   |   |  |   | (20,727 | ) |  | (9.5  | )
|Non operating (income) expense                      |  |      | 346     |  | 0.2   |   |  |   | (1,504  | ) |  | 0.1   |  
|Earnings (Loss) from operations before income taxes |  |      | 11,527  |  | 5.2   |   |  |   | (19,223 | ) |  | (8.8  | )
|Provision (benefit) for income taxes                |  |      | 4,563   |  | 2.0   |   |  |   | (6,060  | ) |  | (2.8  | )
|Extraordinary items                                 |  |      | 0       |  | 0.0   |   |  |   | 9,030   |   |  | 4.2   |  
|Net earnings (loss)                                 |  |      | 6,964   |  | 3.1   |   |  |   | (4,133  | ) |  | (1.9  | )

Net
Sales: Net sales for 2009 increased by $5,052 or 2.3%, to $222,380, from $217,328 for 2008. Sales increased during the year of 2009 due to improvement in the Companys retail markets offset by lower sales from direct sales offices in 2008
directly related to the strategy to concentrate efforts on the manufacturing and designing of air filters and air filtration equipment rather than the wholesale distribution of our products. The company had additional decreases in net sales of
commercial and industrial markets as a result of the general downturn in the economy.

Gross Profit: Gross profit for
2009 increased $16,653 or 62.7%, to $43,213 which made up 19.4% of net sales, from $26,560 for 2008, which made up 12.2% of net sales. The increase is due to the increase in sales, discussed above, as well as the disposal of approximately $4 million
of inventory in 2008 due to a reassessment of inventory as a result of selling certain facilities, the impending sale of certain facilities, and changing facilities from manufacturing locations to distribution centers in 2008.

Operating Expenses: Operating expenses for 2009 decreased $13,505, or 30.1%, to $31,340, from $44,845 in 2008. Operating expenses as a
percentage of sales decreased in 2009 to 14.1% from 20.6% in 2008. The decrease in operating expenses was primarily due to a decrease in stock option compensation expense of $1.4 million, advertising and royalty fees of $1.2 million, amortization
expense of $584, bad debts expense of $1.8 million, freight out of $1.6 million, commissions of $1.2 million, and loss on asset impairments of $3.1 million.



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Impairment of GoodwillIn accordance with ASC 350, the Company examined goodwill
for impairment and determined there were events that occurred in 2008 that impaired the goodwill. These events were the sale of certain direct sales division reporting units in which goodwill was attached. Accordingly, the Company recorded expense
related to this impairment of $2.4 million in the fourth quarter of 2008.

Non operating (Income) Expenses:Non
operating expense increased approximately $1,851 to expense of $346 for 2009, compared to income of $1,504 in 2008. The increase in expense was primarily due to a decrease in income resulting from the sale of certain divisions of $1.4 million and
the settlement of accounts payable to a vendor for $1.5 million less than originally owed during 2008 offset by a decrease in interest expense of $230.

Provision for Income Taxes: Our effective state and federal tax rate, adjusted for the effect of certain credits and adjustments, was approximately 39% and 32% for 2009 and 2008, respectively.

Extraordinary Items: In 2006, a warehouse in Terrell, Texas was destroyed by a fire. In 2007, a warehouse in Bartow,
Florida was destroyed by a fire. In 2006, a warehouse in Auburn, Pennsylvania was damaged by a flood. The extraordinary gain of $9,030 during 2008 was calculated as the gain on the costs that were attributable to the Bartow fire and the Auburn flood
($1,587) that were less than the insurance proceeds ($15,479), net of taxes of $4,862.

2008 Compared to 2007

The following table summarizes the Companys results of operations as a percentage of net sales for 2008 and 2007.



|                                           |  |      |         |   |      |       |   |  |   |         |   |  |       |  
|------------------------------------------ |  | ---- | ------- | - | ---- | ----- | - |  | - | ------- | - |  | ----- | -
|                                           |  | 2008 |         |   | 2007 |      
|Net sales                                  |  | $    | 217,328 |   |      | 100.0 | % |  | $ | 244,941 |   |  | 100.0 | %
|Gross profit                               |  |      | 26,560  |   |      | 12.2  |   |  |   | 31,789  |   |  | 13.0  |  
|Operating expenses                         |  |      | 44,845  |   |      | 20.6  |   |  |   | 57,968  |   |  | 23.7  |  
|Goodwill Impaired                          |  |      | 2,442   |   |      | 1.1   |   |  |   | 543     |   |  | .2    |  
|Operating Loss                             |  |      | (20,727 | ) |      | (9.5  | ) |  |   | (26,722 | ) |  | (10.9 | )
|Non operating (income) expense             |  |      | (1,504  | ) |      | .1    |   |  |   | 1,969   |   |  | (0.1  | )
|Losses from operations before income taxes |  |      | (19,223 | ) |      | (8.8  | ) |  |   | (28,691 | ) |  | (11.7 | )
|Benefit for income taxes                   |  |      | (6,060  | ) |      | (2.8  | ) |  |   | (8,791  | ) |  | (3.6  | )
|Extraordinary items                        |  |      | 9,030   |   |      | 4.2   |   |  |   | 213     |   |  | .1    |  
|Net loss                                   |  |      | (4,133  | ) |      | (1.9  | ) |  |   | (19,687 | ) |  | (8.0  | )

Net
Sales: Net sales for 2008 decreased by $27,613 or 11.3%, to $217,328, from $244,941 for 2007. Sales decreased during the year of 2008 due to lower sales from direct sales offices in 2008 directly related to the strategy to concentrate efforts on
the manufacturing and designing of air filters and air filtration equipment rather than the wholesale distribution of our products. The company had additional decreases in net sales through the retail distribution and commercial and industrial
markets as a result of the general downturn in the economy.

Gross Profit: Gross profit for 2008 decreased $5,229 or
16.4%, to $26,560 which made up 12.2% of net sales, from $31,789 for 2007, which made up 13.0% of net sales. The decrease is due to the reduction in sales for 2008 along with a reassessment of inventory as a result of selling certain facilities, the
impending sale of certain facilities, changing facilities from manufacturing locations to distribution centers and due to the downturn in the economy. This analysis resulted in the disposal of inventory of approximately $4 million. Additionally, the
US economy experienced cost increases due to inflation including increases in in-bound shipping costs due to increased fuel costs and raw material costs, especially in the cost of metal.

Operating Expenses: Operating expenses for 2008 decreased $13,123, or 22.6%, to $44,845, from $57,968 in 2007. Operating expenses as a
percentage of sales decreased in 2008 to 20.6% from 23.7% in 2007. The decrease in operating expenses was primarily due to a decrease in expense related to the company



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recording bad debts expense of approximately $8.1 million in 2007 and a decrease in operating expenses of $3.6 million were due to the cessation of direct sales activities in 2008. Royalty
expense decreased in 2008 as compared to 2007 due to a decline in sales of our Arm & Hammer product line during 2008. Freight expense for outgoing shipments and commissions expense also decreased during 2008 due to the decrease in sales.
This decrease in 2008 was offset by an increase in 2008 loss on asset impairments of $3.1 million compared to $2.5 million in 2007.

Impairment of GoodwillIn accordance with ASC 350, the Company examined goodwill for impairment and determined there were events that occurred in 2008 that impaired the goodwill. These events were the sale of certain direct
sales division reporting units in which goodwill was attached. Accordingly, the Company recorded expense related to this impairment of $2.4 million in the fourth quarter of 2008. In 2007 impairment of goodwill was $543.

Non operating (Income) Expenses:Non operating income increased approximately $3,473 to $1,504 for 2008, compared to expense of $1,969
in 2007. The increase in income was primarily due to a decrease in interest expense in 2008 of approximately $700 thousand as well as the sale of certain divisions of $1.4 million and the settlement of accounts payable to a vendor for $1.5 million
less than originally owed.

Provision for Income Taxes: Our effective state and federal tax rate, adjusted for the
effect of certain credits and adjustments, was approximately 32% and 38% for 2008 and 2007, respectively. As of the end of 2008, the IRS was examining the Companys federal income tax returns of 2004, 2005, and 2006. This examination was
resolved at the end of 2009.

Extraordinary Items: In 2006, a warehouse in Terrell, Texas was destroyed by a fire. In
2007, a warehouse in Bartow, Florida was destroyed by a fire. In 2006, a warehouse in Auburn, Pennsylvania was damaged by a flood. The extraordinary gain of $9,030 during 2008 was calculated as the gain on the costs that were attributable to the
Bartow fire and the Auburn flood ($1,587) that were less than the insurance proceeds ($15,479), net of taxes of $4,862. The extraordinary gain of $213 during 2007 was calculated as the gain on the costs that were attributable to the Bartow and
Terrell fires ($16,373) that were less than the insurance proceeds ($16,728), net of taxes of $142.

EFFECTS OF INFLATION

During 2009, the US economy experienced cost increases due to inflation including increases in in-bound shipping costs due to increased fuel costs and raw
material costs, especially in the cost of metal. This has had a negative impact on our margins.

LIQUIDITY AND CAPITAL RESOURCES(dollar amounts in thousands)

Working capital was $39,705 at December 31, 2009, compared to $45,164 at December 31, 2008.
This included cash and cash equivalents of $260 and $404 at December 31, 2009 and 2008, respectively. The primary reason for the decrease in working capital was the reduction of accounts receivable as well as a reduction of inventory. Typically
the company needs to maintain strategic inventory levels in order to satisfy the demand of on time delivery to its customers.

Trade
receivables decreased $4,523, or 12.0% at December 31, 2009 from $37,682 at December 31, 2008. The decrease in accounts receivable is primarily attributable to improvement in the Companys efforts to more efficiently manage the
accounts receivable process and collection efforts with its customers.

Inventories decreased $2,134 or 6.8% to $29,415 at December 31,
2009 from $31,549 at December 31, 2008. The decrease in inventory was due to management efforts to strategically lower inventory levels, primarily through better supply chain management techniques.

Continuing operations generated $13,910 of cash in 2009, compared to $14,103 of cash in 2008. The decrease in cash flows was primarily related to the
decrease in proceeds received from insurance claims, decrease in extraordinary gain, decrease in cash received from inventory, decrease in accrued expenses, offset by an increase in net earnings from 2008 to 2009. Investing activities for continuing
operations consumed $12,904 of cash during



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2009, compared to consuming $9,223 during 2008. The increase in cash consumed by investing activities was primarily attributable to the decrease in the proceeds received in 2009 from disposed
equipment. Financing activities consumed $1,150 of cash in 2009, compared to $4,974 of cash in 2008, consisting primarily of payments on the revolving credit agreement and other long term borrowings offset by the tax impact of stock options
exercised.

On October 17, 2002, we signed agreements for a credit facility with Fleet Capital Corporation, now known as Bank of America
through acquisition, which replaced and repaid our previous $30 million revolving credit facility. The new $36 million facility has up to $13 million of letters of credit and a $23 million revolving credit line, which expires on October 17,
2011. The facility is collateralized by substantially all of the Companys assets. The line of credit agreement restricts capital expenditures, dividends and share repurchases. Unless this credit facility is renewed, it will expire on
October 17, 2011. There are no prepayment penalties on any of the credit facilities with Bank of America.

Effective September 23,
2009, we entered into an amendment to our BOA credit facility, which granted consent to a stock repurchase and modified certain aspects of the borrowing base. Reference is hereby made to the 21st Amendment to Loan and Security Agreement, attached as
an exhibit to this Form 10-K for additional information.

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

As of December 31, 2009 we had the following fixed obligations and commitments



|                        |  |                  |  |                |  |                |  |                           
|----------------------- |  | ---------------- |  | -------------- |  | -------------- |  | --------------------------
|Year ended December 31, |  | Operating leases |  | Capital leases |  | Long-term debt |  | Other long-termobligations
|2010                    |  | 4,901            |  | 366            |  | 685            |  |                          
|2011                    |  | 4,560            |  | 77             |  | 15,823         |  |                          
|2012                    |  | 4,151            |  | 70             |  | 714            |  |                          
|2013                    |  | 3,812            |  | 11             |  | 9,945          |  |                          
|2014                    |  | 3,385            |  | 0              |  | 459            |  |                          
|Thereafter              |  | 28,989           |  | 0              |  | 6,713          |  |                          

We believe that our cash
on hand, cash generated by operations, and cash available from our existing credit facilities is sufficient to meet the capital demands of our current operations during the 2010 fiscal year. Any major increases in sales, particularly in new
products, may require substantial capital investment for the manufacture of filtration products. Failure to obtain sufficient capital could materially adversely impact our growth potential.

In 1998, the Board of Directors authorized the repurchase of up to two million shares of our common stock, which repurchase was completed in September 2000.
On September 22, 2000, the Board of Directors authorized the repurchase of up to an additional two million shares of common stock through open market or negotiated transactions. Further repurchases under this program are restricted under our
current line of credit agreement, and require prior consent of Bank of America. As of February 27, 2009 approximately 658,000 shares had been repurchased in the open market under this authorization.

Outlook

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



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

Sales of air filtration products for semiconductor facilities,
historically a major market, are expected to begin recovery during 2010 with continued improvement during 2011.

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

Our most common products, in terms of 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.

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

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

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

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



| |  |  | the shortage of reliable market data regarding the air filtration market,
| | - |  | -------------------------------------------------------------------------



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



| |  |  | anticipated working capital or other cash requirements,
| | - |  | -------------------------------------------------------



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| |  |  | changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the market,
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | product obsolescence due to the development of new technologies, and
| | - |  | --------------------------------------------------------------------



| |  |  | various competitive factors that may prevent us from competing successfully in the marketplace.
| | - |  | -----------------------------------------------------------------------------------------------

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



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

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

The fair value of the Companys total long-term debt, including capital leases and current maturities of long-term debt, at
December 31, 2009 was $34,863. 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, 2009. Although most of the interest on the Companys debt is indexed to a market rate, there would be no material effect on the future earnings or cash flows related to the Companys total debt for such a
hypothetical change.

We have only a limited involvement with derivative financial instruments. We have three interest-rate swap agreements to
hedge against the potential impact on earnings from increases in market interest rates of two variable rate bonds and one variable rate note. Under the interest rate swap agreements for the bonds, we receive or make payments on a monthly basis,
based on the differential between 5.49% and a tax exempt interest rate as determined by a remarketing agent. Under the interest rate swap agreement for the note, we receive or make payments on a monthly basis, based on the differential between 5.86%
and LIBOR plus 1.75%. These interest rate swaps are accounted for as a cash flow hedge in accordance with SFAS 133 and SFAS 138 (included in ASC 815). Gains or losses related to inefficiencies of the cash flow hedge were included in net
income during the period related to hedge ineffectiveness. The tax affected fair market value of the interest rate swaps of $908 is included in Accumulated other comprehensive loss on the balance sheet. The interest rate swap contracts
on the bonds expire in 2013 and 2015 and the interest rate swap on the note expires in 2013.

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



|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

Beginning at page F-1.



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

Not applicable



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

Evaluation
of Disclosure Controls and Procedures

Our management carried out an evaluation, under the supervision and with the participation of
our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of our year ended December 31, 2009 pursuant to Exchange Act Rule 13a-15(b). Based upon
that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of our year ended December 31, 2009 our disclosure controls and procedures were effective.



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

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the year ended December 31, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.

MANAGEMENTS ANNUAL REPORT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management, under the supervision and with the participation of our President and
Chief Executive Officer and our Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Our management has assessed the
effectiveness of our internal control over financial reporting as of December 31, 2009. Managements evaluation was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:



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

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

Based
on the COSO criteria and our managements evaluation, our management believes our internal control over financial reporting as of December 31, 2009 was effective.

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



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Important Considerations

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



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

Not applicable



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PART III



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

IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

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



|                    |  |     |  |                                                  
|------------------- |  | --- |  | -------------------------------------------------
|Name                |  | Age |  | Title                                            
|                    |  |    
|Harry L. Smith, Jr. |  | 40  |  | Chief Executive Officer and Chairman of the Board
|                    |  |    
|John Oakley         |  | 42  |  | Chief Financial Officer                          
|                    |  |    
|David M. Mock       |  | 57  |  | Independent Director                             
|                    |  |    
|Kirk Dominick       |  | 42  |  | Independent Director                             
|                    |  |    
|Robert R. Amerson   |  | 59  |  | Director                                         

Harry L. Smith, Jr.Mr. Smith, age
40, has a long history in the air filtration industry. He has worked at Flanders since 1997, holding roles of increasing responsibility including working with the Flanders direct offices; ARW Wholesale Division; FSS-Filter Sales and Service;
FFI-Flanders Filters, Inc.; CSC-Charcoal Services, Inc., and AirSeal Filter Housings. Mr. Smith received his Bachelor of Science degree in Business Administration from East Carolina University in 1992. Mr. Smith was appointed our Chief
Operating Officer in August 2007, Chief Executive Officer in November 2008, and Chairman of the Board in May 2009.

John Oakley.Mr. Oakley, age 42, most recently served as Chief Financial Officer of Nexxus Lighting, Inc. Prior to starting with Nexxus Lighting in June 2007, he held several posts of increasing responsibility with Home Meridian International and its
subsidiary Pulaski Furniture Corporation, including Director and CFO of Home Meridian and Senior Vice President and Chief Financial Officer of Pulaski Furniture, having joined the company in 2001. Earlier in his career, Mr. Oakley served as
Corporate Controller for Collins and Aikman Floorcoverings, Inc. and Senior Auditor for Arthur Andersen. Mr. Oakley was appointed our Senior Vice President of Operations and Chief Financial Officer in December 2008.

David M. Mock. Mr. Mock, age 57, has served as an independent director of Flanders Corporation since August 2003. He serves on the Compensation
Committee and Audit Committee. Mr. Mock is currently a General Partner in Sand Hill Factory, LLC, a consulting group providing operational, marketing, financial and strategic services to start-up technology companies. He is a General Partner
with GMG Capital Partners, a New York-based investment firm, which he co-founded in 1997. Mr. Mock has extensive operations and private investment experience with respect to technology and natural resource companies. Mr. Mock has
co-founded over 25 companies in the last two decades. He has served in a variety of management positions in all of these companies. These include chief operational officer, chief financial officer, chairman of the board, and director. Mr. Mock
received his B.S. in Accounting from the University of Utah.

Kirk Dominick. Mr. Dominick, age 42, has served as an independent
director of the Company since December 2007 and serves on the Compensation Committee and Audit Committee. For the last 17 years, Mr. Dominick served in various executive capacities with Boys & Girls Clubs of America. He currently
serves as Executive Vice President for Boys & Girls Clubs of America, where he oversees the delivery of services to over 4,300 local affiliates across the United States and on military installations overseas. Prior to his involvement with Boys
& Girls Clubs of America, Mr. Dominick served as President of DNS Associates, a privately owned consulting firm specializing in strategy development, organizational restructuring, management consulting, and board and resource development.
In addition, Mr. Dominick is a partner in InnerBanks Capital, a private equity firm focused on real estate development in emerging growth markets. Mr. Dominick holds a Bachelor of Science in Criminal Justice from East Carolina University.



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Robert R. Amerson. Mr. Amerson, age 59, has been President and Chief Executive Officer of the
Company since 1987 but retired from these positions in December 2004 and served as Chairman of the Board of Directors until August 13, 2007, when he assumed the additional positions of Chief Executive Officer and President. Mr. Amerson was
Chairman of the Board from November 2008 until April 2009. Mr. Amerson has been a Director since 1988. Mr. Amerson has a Bachelor of Science degree in Business Administration from Atlantic Christian College.

Our Corporate Governance Practices

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



|                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Adopting Governance Guidelines                  |  | The Board of Directors has adopted a set of corporate governance guidelines to establish a framework within which it will conduct its business and to guide management in its running
of your Company. The governance guidelines can be found on our website at www.flanderscorp.com and are summarized below.                                                                                                                                                                                                                                                                                                     
|                                                | 
|Monitoring Board Effectiveness                  |  | It is important that our Board of Directors and its Committees are performing effectively and in the best interest of the Company and its stockholders. The Board of Directors and
each Committee are responsible for annually assessing their effectiveness in fulfilling their obligations. In addition, our Nominating and Governance Committee is charged with annually reviewing the Board of Directors and its
membership.                                                                                                                                                                                   
|                                                | 
|Conducting Formal Independent Director Sessions |  | At the conclusion of each regularly scheduled Board meeting, the independent Directors meet without Flanders Corporation management or any non-independent
Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                | 
|Hiring Outside Advisors                         |  | The Board and each of its Committees may retain outside advisors and consultants of their choosing at the Companys expense, without managements consent.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                | 
|Avoiding Conflicts of Interest                  |  | Flanders Corporation expects its Directors, executives and employees to conduct themselves with the highest degree of integrity, ethics and honesty. Flanders Corporations
credibility and reputation depend upon the good judgment, ethical standards and personal integrity of each Director, executive and employee. In order to provide assurances to Flanders Corporation and its stockholders, Flanders Corporation has
implemented standards of business conduct which provide clear conflict of interest guidelines to its employees, as well as an explanation of reporting and investigatory procedures.
|                                                | 
|Providing Transparency                          |  | Flanders Corporation believes it is important that stockholders understand our governance practices. In order to help ensure transparency of our practices, we have posted
information regarding our corporate governance procedures on our website at www.flanderscorp.com.                                                                                                                                                                                                                                                                                                                                       
|                                                | 
|Communications with the Board of Directors      |  | Although Flanders Corporation does not have a formal policy regarding communications with the Board of Directors, stockholders may communicate with the Board of Directors by writing
to the Company at Flanders Corporation, Attention: Investor Relations, 531 Flanders Filters Road, Washington, NC 27889. Stockholders who would like their submission directed to a member of the Board may so specify, and the communication will be
forwarded, as appropriate.                                                                                                                                              



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|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                     | 
|Standards of Business Conduct        |  | The Board of Directors has adopted a Code of Business Conduct and Ethics for all of the Companys employees and Directors, including the Companys principal executive and
senior financial officers. You can obtain a copy of our Code of Business Conduct and Ethics via our website at www.flanderscorp.com, or by making a written request to the Company at Flanders Corporation, Attention: Investor Relations, 531
Flanders Filters Road, Washington, NC 27889. We will disclose any amendments to the Code of Business Conduct and Ethics, or waiver of a provision there from, on our website at the same address.                                
|                                     | 
|Ensuring Auditor Independence        |  | Flanders Corporation has taken a number of steps to ensure the continued independence of our outside auditors. Our independent auditors report directly to the Audit Committee, which
also has the ability to pre-approve or reject any non-audit services proposed to be conducted by our outside auditors.                                                                                                                                                                                                                                                                                                                                               
|                                     | 
|Voluntary OCTQX Governance Standards |  | We have decided to adopt voluntarily certain corporate governance procedures for 2010 and 2011, including the retention of two independent board members, providing audited annual
financial statements and requiring board ratification and related party transactions. We also intend to continue to hold annual shareholders meetings and to make current public information available through our website (www.flanderscorp.com).
These corporate governance guidelines may be updated from time to time as we transition from an issuer that previously had its securities listed on the NASDAQ Global Select Market to the OTCQX U.S. Premier Market.

Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities Exchange Act of 1934 requires the Companys
officers and directors, and persons who own more than ten percent of a registered class of the Companys equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers and
directors are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms filed. Based solely upon review of copies of such forms, or written representations that there were no unreported holdings or transactions,
the Company believes that for the fiscal year ending December 31, 2009 all Section 16(a) filing requirements applicable to its officers and directors were complied with on a timely basis with the exception of two late Form 4 filings by
Robert Amerson. There were a total of nine transactions that were not reported on a timely basis.

Code of Ethics for Senior Financial
Officers

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

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



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



| | 2. | Will make reasonable efforts to comply with rules and regulations of federal, state, provincial and local governments, and other appropriate private and public
regulatory agencies as known to them and will make reasonable efforts to maintain or obtain a professional level of knowledge of applicable rules and regulations.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing ones independent judgment to be
subordinated.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Respect the confidentiality of information acquired in the course of ones work except when authorized or otherwise legally obligated to disclose. Confidential
information acquired in the course of ones work will not be used for personal advantage.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

COMPENSATION
DISCUSSION AND ANALYSIS

Overview

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

Compensation Objectives

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

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

We allocate compensation between cash compensation and equity based compensation. We provide cash compensation in
the form of base salaries to meet competitive salary norms and reward performance on an annual basis, if warranted. Base salary and bonus are designed to reward annual achievements and be commensurate with the executives scope of
responsibilities, demonstrated leadership abilities, and management experience and effectiveness. Our other elements of compensation focus on motivating and challenging the executive to achieve superior, longer-term, sustained results. We provide
non-cash compensation in the form of equity incentive arrangements to retain and attract key individuals and to reward performance against specific objectives and long-term strategic goals.

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



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Implementing Our Objectives

During 1996, the Company adopted the Long Term Incentive Plan (LTI Plan) to assist the Company in securing and retaining key employees and consultants. The LTI Plan authorizes grants of incentive stock
options, nonqualified stock options, stock appreciation rights (SARs), restricted stock performance shares and dividend equivalents to officers and key employees and outside consultants. In December 2007 our shareholders approved the
2007 Equity Incentive Plan, which reserves up to 2,000,000 shares for issuance. Our 1996 Long-Term Incentive Plan had a life of ten (10) years. There are no more shares available for issuance under the 1996 Long-Term Incentive Plan. Therefore,
we adopted the 2007 Equity Incentive Plan as discussed above. We believe that reserving 2,000,000 shares under the 2007 Equity Incentive Plan is a reasonable number of shares for the foreseeable future.

Equity Incentive Plan

During 2007, the
Company adopted the Equity Incentive Plan (the Plan) to assist the Company in securing and retaining key employees and consultants. The Plan authorizes grants of incentive stock options, non-qualified stock options, restricted stock and stock
appreciation rights (awards) to officers, directors, outside consultants and key employees of the Company. There are 2,000,000 shares of Common Stock reserved for award under the Plan. During 2009 the Company awarded options to purchase
15,000 shares of Common Stock under the Plan which are fully vested and not subject to performance or service requirements.

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

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

Other Equity Incentives. The 2007 Equity Incentive Plan also allows for the issuance of stock appreciation rights, performance shares, restricted stock awards, dividend equivalents, and other forms
of equity incentive arrangements. Historically, we have utilized stock options as the primary method of rewarding and compensating employees under our equity incentive arrangements. However, if the need arises, we have the flexibility to utilize
other equity incentive instruments besides stock options under the 2007 Equity Incentive Plan. During 2008, the Company awarded stock warrants to purchase 15,000 shares of Common Stock under the Plan.

Restricted Stock Awards. The Compensation Committee is authorized under the Plan to issue shares of restricted common stock to eligible participants
on such terms and conditions and subject to such restrictions, if any, outstanding under the Plan. As of December 31, 2009, no restricted shares have been awarded.

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

General

The Compensation Committee of the Board of Directors is currently composed of our two independent directors, Messrs. Mock and Dominick who have no
interlocking relationships (as defined by the SEC).

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.



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Executive Compensation

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

Base and Bonus Compensation

Base compensation amounts for our executive officers are set
pursuant to arms-length negotiation and written employment agreements. When setting base salary, we review a number of factors, including but not limited to executives of similar position, responsibility, experience, qualifications and performance,
which allows us to recruit and retain the based qualified executives and provide our executives with reasonable predictability regarding their basic annual standard of living. Base salaries of executives are reviewed annually by our Compensation
Committee, as part of our annual review process and in light of the executives individual performance and our performance during the year, and the then current competitive conditions.

Prior to our year ending 2008, we did not have in place formal incentive or cash bonus plans. Beginning in 2008, the Compensation Committee reviews,
approves and communicates, clear and measurable individual and company performance objectives against which the Compensation Committee evaluates performance of executives at the end of the fiscal year. In general, annual performance goals are
intended to be challenging yet attainable. Generally, the Compensation Committee establishes bonus target amounts as a percentage of base salary for each of our executive officers, which currently ranges from 20% to 100% of base salary. The
Compensation Committee may establish or take into account additional subjective performance criteria in evaluating an individuals executive performance during a given fiscal year in establishing an executives actual bonus amount for a
given fiscal year.

In 2009, we rewarded Harry Smith, our Chief Executive Officer, with a $350,000 bonus, which represented 100% of his base
salary. We also awarded John Oakley, our Chief Financial Officer, a bonus of $130,000, which represented approximately 66% of Mr. Oakleys base salary. These were significantly higher bonuses as a percentage of base salary than we have
paid our NEOs in prior years. However, our Compensation Committee felt that Mr. Smith and Mr. Oakley were entitled to these bonuses because we were able to translate our ongoing restructuring and centralization efforts into
significantly improved earning results, which were substantially greater on a percentage basis than the percentage amount of our NEOs bonuses compared to base compensation. Our annual net income for 2009 was $7 million, compared to a 2008 net
loss of $4.1 million. Our Compensation Committee felt that in light of these financial results, our NEOs earned and were deserving of their cash bonus payments. Each of these individuals also met their individual goals supporting these cash
bonus payments in 2009.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the preceding Compensation Disclosure and Analysis with management, and based on such review and discussion, the Compensation Committee recommended to
the board of directors that the Compensation Disclosure and Analysis be included in this Form 10-K.

Compensation Committee

Kirk Dominick

David Mock

REPORT OF THE AUDIT COMMITTEE

General

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

The Audit Committee reviews the results and scope of the audit and other services provided by the Companys independent auditors, reviews and evaluates the Companys internal audit and control
functions, and monitors transactions between the Company and its employees, officers and directors.



35



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Audit Committee Charter

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



| |  |  | Serve as an independent and objective party to monitor the Companys financial reporting processes and internal control systems.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | Review and appraise the audit efforts of the Companys independent accountants and internal finance department.
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Provide an open avenue of communication between the independent accountants, financial and senior management, the internal finance department, and the
Board of Directors.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Review quarterly and annual financial statements submitted to the Securities and Exchange Commission, or the public, including any certification,
opinion or review rendered by the Companys independent accountants.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Review of Annual Results

The Audit Committee reviewed and discussed the Companys financial statements for the year ended December 31, 2009 with the Companys
management. The Audit Committee also discussed the statements with the Companys independent auditors. In particular, the Audit Committee discussed with the independent auditors the matters required by SAS 114.

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

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

Based on its review and the discussions noted above, the Audit Committee recommended to the Board of Directors that the Companys Consolidated
Financial Statements for the years ended December 31, 2009, 2008 and 2007 be included in the Companys Annual Report on Form 10-K for 2009.



Respectfully submitted,David M. MockKirk Dominick




36



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##### Table of Contents

SUMMARY COMPENSATION TABLE

The following table sets forth the aggregate cash compensation paid by the Company for services rendered during the last three years to the Companys Named Executive Officers.



|                                                                                   |      |          |   |         |                |         |           |   |                 |           |                  |  |   |                                          |   |                                                                        |   |                          |           |               
|---------------------------------------------------------------------------------- | ---- | -------- | - | ------- | -------------- | ------- | --------- | - | --------------- | --------- | ---------------- |  | - | ---------------------------------------- | - | ---------------------------------------------------------------------- | - | ------------------------ | --------- | --------------
|Name and Principal Position                                                        |      | Year     |   |         | Salary ($)     |         | Bonus ($) |   | StockAwards ($) |           | OptionAwards ($) |  |   | Non-EquityIncentive PlanCompensation ($) |   | Change in PensionValue
andNonqualifiedDeferredCompensationEarnings ($) |   | All OtherCompensation($) |           | Total         
|                                                                                   |      |          |   |         |                |         |           |   |                
|Steven K. ClarkFormer Chief Executive Officer (Former Principal Executive Officer) |      | 2007     | 1 |         | 255,770        |         |          |   |                |           |                 |  |   |                                         |   |                                                                       |   | 6,073                    |           | 261,843       
|Robert
AmersonFormer Chief Executive Officer                                       |      | 2009     |   |         | 121,154        |         |          |   |                |           |                 |  |   |                                         |   |                                                                       |   |                         |           | 121,154       
|                                                                                   | 2008 |          |   | 356,731 |                |        |           |  |                 |          |                  |  |  |                                          |  |                                                                        |  |                          | 356,731  
|                                                                                   | 2007 | 1        |   | 350,000 |                |        |           |  |                 |          |                  |  |  |                                          |  |                                                                        |  |                          | 350,000  
|Harry
SmithChief Executive Officer                                                 |      | 2009     |   |         | 350,000        |         | 350,000   |   |                |           |                 |  |   |                                         |   |                                                                       |   |                         |           | 700,000       
|                                                                                   | 2008 |          |   | 236,538 |                | 175,000 |           |  |                 | 1,267,117 | 3                |  |  |                                          |  |                                                                        |  |                          | 1,678,655
|                                                                                   | 2007 |          |   | 140,095 |                |        |           |  |                 | 333,269   | 2                |  |  |                                          |  |                                                                        |  |                          | 473,364  
|                                                                                   |      |          |   |         |                |         |           |   |                
|John OakleyChief Financial Officer                                                 |      | 2009     |   |         | 197,692        |         | 130,000   |   |                |           |                 |  |   |                                         |   |                                                                       |   |                         |           | 327,692       
|                                                                                   |      |          |   |         |                |         |           |   |                
|John W. HodsonFormer Chief Financial Officer (Former Principal Financial Officer)  |      | 2007     |   |         | 75,500         |         |          |   |                |           |                 |  |   |                                         |   |                                                                       |   | 2,241                    |           | 77,741        
|Cully Bohush(Former
Chief Accounting Officer)                                      |      | 20082007 |   |         | 142,131117,145 |         | 50,000   |   |               |           |                |  |   |                                        |   |                                                                      |   |   1,004                 |           | 192,131118,149
|                                                                                   |      |          |   |         |                |         |           |   |                
|James B. Buddy Mercer(Former Vice President Operations)                          |      | 2007     |   |         | 115,877        |         |          |   |                |           |                 |  |   |                                         |   |                                                                       |   |                         |           | 115,877       



|1 | Mr. Amerson and Mr. Clark each had an annual salary of $350,000, plus a possible bonus each year, under their respective Employment
Agreements, as amended. Mr. Clark was removed from CEO in during 2007 and Mr. Amerson resigned in 2009.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | This is grant date fair value of 100,000 vested stock options computed in accordance with ASC 718.
|- | --------------------------------------------------------------------------------------------------

|3 | This is grant date fair value of 400,000 stock options that vested in 2008 computed in accordance with ASC 718.
|- | ---------------------------------------------------------------------------------------------------------------

GRANTS OF PLAN BASED AWARDS TABLE

The
following tables set forth the number of securities underlying stock options granted to the named executive officers under the Companys stock option plans during the year ended December 31, 2009.



37



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##### Table of Contents

|     |  |           |  |                                                               |  |                                                            |  |            |  |               |  |           |  |            |  |                                                          |  |                                                           |  |                                            
|---- |  | --------- |  | ------------------------------------------------------------- |  | ---------------------------------------------------------- |  | ---------- |  | ------------- |  | --------- |  | ---------- |  | -------------------------------------------------------- |  | --------------------------------------------------------- |  | -------------------------------------------
|     |  |           |  | Estimated Future Payouts UnderNon-Equity Incentive PlanAwards |  | Estimated Future Payouts UnderEquity
Incentive Plan Awards |  |            |  |               |  |          
|Name |  | GrantDate |  | Threshold($)                                                  |  | Target($)                                                  |  | Maximum($) |  | Threshold(#)6 |  | Target(#) |  | Maximum(#) |  | All OtherStockAwards:Number ofShares ofStock orUnits (#) |  | All OtherOptionAwards:Number ofShares ofStock orUnits (#) |  | Exerciseor BasePrice ofOptionAwards($ / Sh)
|None |  |           |  |                                                               |  |                                                            |  |            |  |               |  |           |  |            |  |                                                          |  |                                                           |  |                                            

OPTION EXERCISES AND STOCK VESTED TABLE

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



|            |  |                                        |  |                             |   |                                       |   |                             |   |  
|----------- |  | -------------------------------------- |  | --------------------------- | - | ------------------------------------- | - | --------------------------- | - | -
|            |  | Option Awards                          |  | Stock Awards               
|Name        |  | Number ofSharesAcquired onExercise (#) |  | ValueRealized onExercise($) |   | Number ofSharesAcquired onVesting (#) |   | ValueRealized onVesting ($)
|            |  |                                        |  |                            
|Harry Smith |  |                                       |  | $                           |  |                                       |  |                             | $ | 
|John Oakley |  |                                       |  | $                           |  |                                       |  |                             | $ | 

OUTSTANDING EQUITY
AWARDS AT FISCAL YEAR END TABLE

The following table discloses information regarding outstanding awards under stock option plans as of
December 31, 2009. The table omits any Stock Award columns because the Company does not have any Stock Award Plans.



|            |  |                                                                |  |                                                                  |  |                                                                                        |  |                         |      |                      |         
|----------- |  | -------------------------------------------------------------- |  | ---------------------------------------------------------------- |  | -------------------------------------------------------------------------------------- |  | ----------------------- | ---- | -------------------- | --------
|Name        |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Exercisable |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Unexercisable |  | Equity Incentive Planawards: Number
ofSecurities UnderlyingUnexercisedUnearned
Options |  | OptionExercisePrice ($) |      | OptionExpirationDate
|Harry Smith |  | 50,000                                                         |  |                                                                 |  |                                                                                       |  | $                       | 8.85 |                      | 07/01/10
|            |  | 500,000                                                        |  |                                                                 |  |                                                                                       |  | $                       | 4.99 |                      | 10/16/17
|John Oakley |  | 50,000                                                         |  |                                                                 |  |                                                                                       |  | $                       | 4.69 |                      | 12/31/13

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

COMPENSATION OF DIRECTORS

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

Upon initial appointment to the Board, a director receives an option to purchase 50,000 shares
of the Companys common stock exercisable at the fair market value as of that date. All independent directors with a minimum of six (6) months on the Board are automatically granted an additional 5,000 options to purchase Company common
stock each year thereafter for so long as the director remains on the Board. We currently pay our independent directors a $5,000 quarterly fee. Independent directors will be entitled to 5,000 options after a minimum of six (6) months of service
on an annual basis. In addition, we will pay our independent directors $500 for each board of directors meeting personally attended plus reimbursement of associated out-of-pocket costs.



|6 | The terms of the awards below do not provide for target or maximum amounts.
|- | ---------------------------------------------------------------------------



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DIRECTOR COMPENSATION TABLE

The following table sets forth all material Director compensation information during the year ended December 31, 2009.



|              |  |                                 |  |                 |  |                   |  |                       |   |  |        |       
|------------- |  | ------------------------------- |  | --------------- |  | ----------------- |  | --------------------- | - |  | ------ | ------
|Name          |  | Fees Earned orPaid in Cash ($)1 |  | Stock Awards($) |  | Option Awards($)2 |  | All OtherCompensation |   |  | Total3
|David Mock    |  | 15,000                          |  |                |  | 15,302            |  |                      |   |  | $      | 30,302
|Jeff Korn     |  | 15,000                          |  |                |  | 15,302            |  | 24,000                | 4 |  | $      | 54,302
|Kirk Dominick |  | 15,000                          |  |                |  | 15,302            |  |                      |   |  | $      | 30,302



|1 | This column reports the amount of cash compensation earned in 2009 for Board and committee service.
|- | ---------------------------------------------------------------------------------------------------

|2 | This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2009 fiscal year for the fair value
of stock options granted to the directors in 2009. The fair value was estimated using the Black-Scholes option-pricing model in accordance with SFAS 123R (included in ASC 718).
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | The Non-Equity Incentive Plan Compensation and the Change in Pension Value and Nonqualified Deferred Compensation columns are not applicable and are
omitted from this table.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4 | Compensation represents compensation for being lead director. Mr. Korn resigned as a director on December 15, 2009.
|- | -------------------------------------------------------------------------------------------------------------------

EMPLOYMENT AGREEMENTS

Mr. Smith has an employment agreement effective as of December 1, 2008 (Employment Agreement). The Employment Agreement provides for an annual base salary of $350,000 and terminates
on November 30, 2011. Mr. Smith will also be entitled to receive a bonus of $37,500 per quarter upon meeting targets established and agreed to by the Compensation Committee of the Board of Directors. The Employment Agreements also provide
that the executive shall be entitled to the following termination payments: (i) pay to Executive an amount equal to Executives compensation, discussed above, from the Company for the previous 18 months, plus the value of any accrued or
unused vacation and (ii) provide acceleration and immediate vesting of all of Executives stock options from the Company which have not yet vested at that time, and such accelerated options as well as any other options which have vested
and are then exercisable shall be exercisable for a period of three (3) months following the date of termination and shall then expire and be of no further force or effect.

Mr. Oakley has an employment agreement effective as of January 28, 2009 (Employment Agreement). The Employment Agreement provides for an annual base salary of $200,000 and terminates
on January 27, 2012. Mr. Oakley will also be entitled to receive a bonus of 50% of base salary upon meeting targets established and agreed to by the Chief Executive Officer. The Employment Agreements also provide that the executive shall
be entitled to the following termination payments: (i) pay to Executive an amount equal to Executives compensation, discussed above, from the Company for the previous 12 months, plus the value of any accrued or unused vacation and
(ii) provide acceleration and immediate vesting of all of Executives stock options from the Company which have not yet vested at that time, and such accelerated options as well as any other options which have vested and are then
exercisable shall be exercisable for a period of three (3) months following the date of termination and shall then expire and be of no further force or effect.

OTHER INFORMATION REGARDING THE BOARD OF DIRECTORS

Board Meetings and Committees

The Nominating Committee and Corporate Governance Committee were established in 2004. It oversees the qualification and nomination process for
potential director candidates, reviews the continued qualification of existing directors and is responsible for corporate governance oversight. Our Nominating Committee and Corporate Governance Committee consist of our two independent directors,
Messrs. Mock, and Dominick.



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##### Table of Contents

In the course of reviewing potential director candidates, the Nominating Committee and Corporate Governance
Committee will consider nominees recommended by security holders of the Company. When considering a potential candidate for membership on the Board of Directors, the Nominating Committee and Corporate Governance Committee may consider, in addition
to the minimum qualifications and other criteria for Board membership approved by the Board of Directors, all facts and circumstances that the Nominating Committee and Corporate Governance deems appropriate or advisable, including, among other
things, the skills of the proposed Director candidate, his or her availability, depth and breadth of business experience or other background characteristics, his or her independence and the needs of the Board of Directors. At a minimum, each
nominee, whether proposed by a stockholder or any other party, is expected to have the highest personal and professional integrity, shall demonstrate sound judgment and shall be expected to effectively interact with other members of the Board of
Directors to serve the short and long-term interests of the Company and its stockholders. In addition, the Nominating Committee and Corporate Governance Committee may consider whether the nominee has direct experience in the Companys industry
or in the markets in which the Company operates and whether the nominee, if elected, assists in achieving a mix of Board members that represents a diversity of background and experience.

During 2009, the Board of Directors met six times and also executed various consent resolutions and written actions in lieu of meetings. Additionally, all directors were present, either in person or by
proxy, at the Fiscal 2008 Annual Meeting of the Shareholders held in September of 2009.

The Board of Directors currently has an Audit
Committee and a Compensation Committee. The Audit Committee reviews the results and scope of the audit and other services provided by the Companys independent auditors, reviews and evaluates the Companys internal audit and control
functions, monitors transactions between the Company and its employees, officers and directors, and completes other functions as required by the Public Company Accounting Reform and Investor Protection Act (the Sarbanes-Oxley Act) passed
in 2002. David Mock is considered the audit committee financial expert. The Compensation Committee administers the Companys equity incentive plans and designates compensation levels for executive officers and directors of the Company. The
Audit Committee met three times during 2009. The Compensation Committee met four times during 2009.

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

There is no family relationship between the directors, executive officers or persons nominated or appointed by the board to become directors or executive
officers. Directors are independent in accordance with the rules of NASDAQ. Each director attended at least 75% of (a) the total number of meetings of the board of directors, and (b) the total number of meetings of all
committees of the board of directors on which he served for Fiscal Year 2009. Our policy is to encourage board members to attend the annual meeting of stockholders. All of our directors attended the previous annual meeting.

On December 15, 2009, Jeffrey Korn resigned as a director. As a result, we received a NASDAQ staff deficiency letter confirming that we failed to
comply with the NASDAQ listing rules because we no longer had at least three (3) Audit Committee members and because we did not have a majority of independent directors. The effect of Mr. Korns resignation was that our Audit
Committee only had two (2) members and our board was left with two (2) independent directors and two (2) non-independent directors. These matters were disclosed pursuant to a Form 8-K, filed on December 28, 2009.



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

The following table sets forth all individuals known by the Company to beneficially own 5% or more of the Companys common stock, and all officers and directors of the registrant, with the amount and
percentage of stock beneficially owned, as of December 31, 2009. 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.



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##### Table of Contents

|                                                                                                                  |  |                                         |  |                                                    |  
|----------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- |  | -------------------------------------------------- | -
|Name and Address of Beneficial Owner                                                                              |  | Shares of CommonStock BeneficiallyOwned |  | Percentage ofOutstanding Shares ofCommon Stock (1) |  
|                                                                                                                  |  |                                        
|Robert R. Amerson(2) 531 Flanders Filters Road Washington, NC 27889                                               |  | 6,911,276                               |  | 26.44                                              | %
|                                                                                                                  |  |                                        
|Harry Smith(3) 531 Flanders Filters Road Washington, NC 27889                                                     |  | 1,176,927                               |  | 4.50                                               | %
|                                                                                                                  |  |                                        
|Kirk Dominick(4)                                                                                                  |  | 55,000                                  |  | *                                                  |  
|                                                                                                                  |  |                                        
|David Mock(5)                                                                                                     |  | 100,700                                 |  | *                                                  |  
|                                                                                                                  |  |                                        
|John Oakley(6)                                                                                                    |  | 50,000                                  |  | *                                                  |  
|Rutabaga Capital Management 64 Broad Street, 3rdFloor Boston, MA 02109                                            |  | 1,395,521                               |  | 5.34                                               | %
|                                                                                                                  |  |                                        
|Heartland Advisors 789 North Water Street Milwaukee, WI 53202                                                     |  | 2,950,986                               |  | 11.29                                              | %
|                                                                                                                  |  |                                        
|Royce & Associates, LLC 1414 Avenue of the Americas New York, NY 10019                                            |  | 1,781,519                               |  | 6.81                                               | %
|                                                                                                                  |  |                                        
|Bank of America Corporation 100 North Tryon Street, Floor 25 Bank of America Corporate Center Charlotte, NC 28255 |  | 1,418,808                               |  | 5.42                                               | %
|                                                                                                                  |  |                                        
|Officers and Directors as a group (5 persons)(2), (3), (4), (5), (6)                                              |  | 8,293,903                               |  | 31.73                                              | %



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

|(1) | Applicable percentage of ownership is based on 26,132,838 shares of common stock outstanding as of December 31, 2009, together with all applicable
options for unissued securities for such shareholders exercisable within 60 days. Shares of common stock subject to options exercisable within 60 days are deemed outstanding for computing the percentage ownership of the person holding such options,
but are not deemed outstanding for computing the percentage of any other person.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes 1,000,000 shares which are subject to an option to purchase such shares from the Company at $7.50 per share. These options expire in 2011.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 50,000 shares which are subject to an option to purchase such shares from the Company at $8.85 per share. These options expire in 2010. Also
includes 500,000 shares which are subject to an option to purchase such shares from the Company at $4.99 per share. These options expire in 2017.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 50,000 shares which are subject to an option to purchase such shares from the Company at $5.55 per share. These options expire in 2017. Also
includes 5,000 shares which are subject to an option to purchase such shares from the Company at $4.60 per share. These options expire in 2019
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 50,000 shares which are subject to an option to purchase such shares from the Company at $4.37 per share. These options expire in 2013. Also
includes 5,000 shares which are subject to an option to purchase such shares from the Company at $11.01 per share. These options expire in 2010. Also includes 5,000 shares which are subject to an option to purchase such shares from the Company at
$11.72 per share. These options expire in 2011. Also includes 5,000 shares which are subject to an option to purchase such shares from the Company at $9.52 per share. These options expire in 2017. Also includes
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | 5,000 shares which are subject to an option to purchase such shares from the Company at $5.71 per share. These options expire in 2018. Also includes 5,000 shares which are subject to an option to
purchase such shares from the Company at $4.60 per share. These options expire in 2019.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes 50,000 shares which are subject to an option to purchase such shares from the Company at $4.69 per share. These options expire in 2013.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



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

Review and Approval of Related Person Transactions.

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



| |  |  | the nature of the related persons interest in the transaction;
| | - |  | ---------------------------------------------------------------



| |  |  | the material terms of the transaction, including, without limitation, the amount and type of transaction;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | the importance of the transaction to the related person;
| | - |  | --------------------------------------------------------



| |  |  | the importance of the transaction to the company;
| | - |  | -------------------------------------------------



| |  |  | whether the transaction would impair the judgment of a director or executive officer to act in the best interest of the company; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any other matters the committee deems appropriate.
| | - |  | --------------------------------------------------

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

Related party transactions

As of December 31, 2009 the Company has entered
into four operating leases expiring between 2019 and 2029 with Wal-Pat II. Wal-Pat II is owned by Robert R. Amerson, one of the Companys Directors. The monthly payments to Wal-Pat II total approximately $237,000. The Company made payments to
Wal-Pat II of approximately $3,039,000, $3,402,000 and $3,372,000 in 2009, 2008 and 2007, respectively. The Company believes these leases are at prevailing market rates and our audit committee has ratified our current leases.

The Company paid a limited liability company owned equally by Harry Smith and Robert Amerson $240,000 and $253,000 in 2009 and 2008, respectively, for use
of this entitys corporate aircraft. Our Audit Committee has ratified our reimbursements to this entity. On a monthly basis, we are provided an invoice, which sets forth the details of each use of this aircraft by management, including the
business purpose, the passengers, and the destination of each flight.



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In November 2008, we redeemed a total of 200,000 common shares (100,000 common shares each for
Mr. Amerson and Mr. Smith) at $6.00 per share. Mr. Amerson and Mr. Smith used these proceeds to satisfy installment obligations on their personal obligations to BB&T, which are secured by a pledge of our shares they own. See
Risk Factors  A significant amount of our leased physical facilities are owned by an affiliate of Mr. Amerson and a substantial number of our shares are pledged to a financial institution. Our Audit Committee ratified these
transactions.



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

Audit Fees

Our principal accountants billed us an aggregate of approximately
$308,000 and $241,000 in fees and expenses for professional services rendered in connection with the audits of our financial statements for the calendar years ended December 31, 2009 and 2008, respectively, and reviews of the financial
statements included in our quarterly reports on Form 10-Q during such calendar years.

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

Tax Fees

Our principal accountants
billed us an aggregate of approximately $78,000 and $115,000 in fees and expenses for tax compliance, tax advice and tax planning during calendar years ended December 31, 2009 and 2008, respectively.

All Other Fees

Our principal
accountants billed us an aggregate of approximately $0 and $11,000 in fees and expenses during calendar years ended December 31, 2009 and 2008, respectively, for products and services other than those products and services described above.

Audit Committee Pre-Approval Process, Policies and Procedures

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



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##### Table of Contents

PART IV



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

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



|       |  |                                                                                                                                                                                                                                                                                                                                                                                                               |  |     
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|(a)(1) |  | Financial Statements: Financial Statements are included beginning at page F-1 as follows:                                                                                                                                                                                                                                                                                                                     |  |     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                       |  | F-2 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Managements Report on Internal Control Over Financial Reporting                                                                                                                                                                                                                                                                                                                                              |  | F-3 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                       |  | F-4 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Consolidated Balance Sheets at December 31, 2009 and 2008                                                                                                                                                                                                                                                                                                                                                     |  | F-5 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007                                                                                                                                                                                                                                                                                                                    |  | F-6 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Consolidated Statements of Stockholders Equity for the years ended December 31, 2009, 2008 and 2007                                                                                                                                                                                                                                                                                                          |  | F-7 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007                                                                                                                                                                                                                                                                                                                    |  | F-8 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                    |  | F-10
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|(a)(2) |  | Financial Statement Schedules                                                                                                                                                                                                                                                                                                                                                                                 |  |     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Report of Independent Registered Public Accounting Firm on schedule                                                                                                                                                                                                                                                                                                                                           |  | F-35
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Schedule II. Valuation and Qualifying Accounts                                                                                                                                                                                                                                                                                                                                                                |  | F-34
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | 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.                                                                                                                                                                                                                             |  |     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|(b)    |  | Exhibits:                                                                                                                                                                                                                                                                                                                                                                                                     |  |     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|3.1    |  | Articles of Incorporation for Flanders Corporation, filed with the Form 8-A dated March 8, 1996, incorporated herein by reference.                                                                                                                                                                                                                                                                            |  |     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|3.2    |  | Bylaws of Flanders Corporation, filed with the Form 8-A dated March 8, 1996, incorporated herein by reference.                                                                                                                                                                                                                                                                                                |  |     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|10.1   |  | Loan and Security Agreement, dated October 9, 2002, by and among Fleet Capital Corporation, Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters, Inc., Flanders/CSC
Corporation, Precisionaire, Inc., Precisionaire of Utah, Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc. and Flanders Realty Corp., filed with the Form 8-K/A dated October 21, 2002.                       |  |     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|10.2   |  | First Amendment to Loan and Security Agreement, dated October 18, 2002, by and among Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters, Inc., Flanders/CSC
Corporation, Precisionaire, Inc., Precisionaire of Utah, Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc., Flanders Realty Corp. and Fleet Capital Corporation, filed with the Form 8-K/A dated October 21, 2002.   |  |     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|10.3   |  | Second Amendment to Loan and Security Agreement, dated November 19, 2002, by and among Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters, Inc., Flanders/CSC
Corporation, Precisionaire, Inc., Precisionaire of Utah, Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc., Flanders Realty Corp. and Fleet Capital Corporation, filed with the Form 8-K/A dated October 21, 2002. |  |     



44



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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                        
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|10.3.1 |  | Third Amendment to Loan and Security Agreement, dated September 6, 2003 by and among Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters, Inc., Flanders/CSC
Corporation, Precisionaire, Inc., Precisionaire of Utah, Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc., Flanders Realty Corp. and Fleet Capital Corporation filed with Form 10-K dated December 31, 2007. 
|       | 
|10.3.2 |  | Fourth Amendment to Loan and Security Agreement, dated December 8, 2003, by and among Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters, Inc., Flanders/CSC
Corporation, Precisionaire, Inc., Precisionaire of Utah, Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc., Flanders Realty Corp. and Fleet Capital Corporation filed with Form 10-K dated December 31, 2007.
|       | 
|10.3.3 |  | Eleventh Amendment to Loan and Security Agreement, dated September 20, 2007, by and among Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters, Inc., Flanders/CSC
Corporation, Precisionaire, Inc., Precisionaire of Utah, Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc., Flanders Realty Corp. and Bank of America filed with Form 10-K dated December 31, 2007.      
|       | 
|10.4   |  | Support Agreement and Guaranty dated October 18, 2002, between Fleet Capital Corporation and Steven K. Clark, filed with the Form 8-K/A dated October 21, 2002.                                                                                                                                                                                                                                        
|       | 
|10.5   |  | Support Agreement and Guaranty dated October 18, 2002, between Fleet Capital Corporation and Robert Amerson, filed with the Form 8-K/A dated October 21, 2002.                                                                                                                                                                                                                                         
|       | 
|10.6   |  | Continuing Guaranty Agreement dated October 18, 2002, between Fleet Capital Corporation and Superior Diecutting, Inc., filed with the Form 8-K/A dated October 21,
2002.                                                                                                                                                                                                                               
|       | 
|10.7   |  | Amended and Restated Continuing Guaranty dated November 26, 2002, between Fleet Capital Corporation and Superior Diecutting, Inc., filed with the Form 8-K/A dated October 21, 2002.                                                                                                                                                                                                                   
|       | 
|10.8   |  | Loan Agreement between Will-Kankakee Regional Development Authority and Flanders Corporation dated December 15, 1997, filed with the December 31, 1997 Form 10-K, and incorporated
herein by reference.                                                                                                                                                                                                
|       | 
|10.9   |  | Loan Agreement between Flanders Corporation and the Johnston County Industrial Facilities and Pollution Control Financing Authority, dated April 1, 1998, filed with the Form 10-Q
dated March 31, 1998, and incorporated herein by reference.                                                                                                                                                         
|       | 
|10.10  |  | Loan Agreement between Flanders Corporation and the Johnston County Industrial Facilities and Pollution Control Financing Authority, dated March 1, 2000, filed with the Form 10-K
dated December 31, 1999, and incorporated herein by reference.                                                                                                                                                      
|       | 
|10.11  |  | Flanders Corporation 1996 Director Option Plan, filed with the Form 10-K dated December 31, 1995, and incorporated herein by reference.                                                                                                                                                                                                                                                                
|       | 
|10.12  |  | Employment Agreement between Elite Acquisitions, Inc., Flanders Filters, Inc., and Steven K. Clark, filed with the December 31, 1995 Form 10-K, incorporated herein by reference.                                                                                                                                                                                                                      
|       | 
|10.13  |  | Amendment to Employment Agreement between Elite Acquisitions, Inc., Flanders Filters, Inc., and Steven K. Clark, filed with Form S-1 dated October 21, 1996 (Reg. No. 333-14655) and
incorporated herein by reference.                                                                                                                                                                                 
|       | 
|10.14  |  | Amendment to Employment Agreement between Elite Acquisitions, Inc., Flanders Filters, Inc., and Steven K. Clark, filed with the Form 10-K dated December 31, 1997 and incorporated
herein by reference.                                                                                                                                                                                                
|       | 
|10.15  |  | Amendment to Employment Agreement between Elite Acquisitions, Inc., Flanders Filters, Inc., and Steven K. Clark, filed with the Form 10-K dated December 31, 1999, and incorporated
herein by reference.                                                                                                                                                                                               
|       | 
|10.16  |  | Employment Agreement between Elite Acquisitions, Inc., Flanders Filters, Inc. and Robert R. Amerson, filed with the December 31, 1995 Form 10-K, incorporated herein by reference.                                                                                                                                                                                                                     



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|      |  |                                                                                                                                                                                                                         
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.17 |  | Amendment to Employment Agreement between Elite Acquisitions, Inc., Flanders Filters, Inc., and Robert R. Amerson, filed with Form S-1 dated October 21, 1996 (Reg. No.
333-14655) and incorporated herein by reference.
|      | 
|10.18 |  | Amendment to Employment Agreement between Elite Acquisitions, Inc., Flanders Filters, Inc., and Robert R. Amerson, filed with the Form 10-K dated December 31, 1997 and incorporated
herein by reference.               
|      | 
|10.19 |  | Amendment to Employment Agreement between Elite Acquisitions, Inc., Flanders Filters, Inc., and Robert R. Amerson, filed with the Form 10-K dated December 31, 1999, and incorporated
herein by reference.              
|      | 
|10.20 |  | Stock Option Agreement between Flanders Corporation and Robert R. Amerson dated February 22, 1996, filed with Form S-8 on July 21, 1997, incorporated herein by
reference.                                              
|      | 
|10.21 |  | Amendment to Stock Option Agreement between Flanders Corporation and Robert R. Amerson dated December 22, 1999, filed with the Form 10-K dated December 31, 1999, and incorporated
herein by reference.                 
|      | 
|10.22 |  | Stock Option Agreement between Flanders Corporation and Robert R. Amerson dated November 7, 2001, filed with Form 10-K for December 31, 2001, incorporated herein by
reference.                                         
|      | 
|10.23 |  | Stock Option Agreement between Flanders Corporation and Steven K. Clark dated February 22, 1996, filed with Form S-8 on July 21, 1997, incorporated herein by
reference.                                                
|      | 
|10.24 |  | Amendment to Stock Option Agreement between Flanders Corporation and Steven K. Clark dated December 22, 1999, filed with the Form 10-K dated December 31, 1999, and incorporated
herein by reference.                   
|      | 
|10.25 |  | Stock Option Agreement between Flanders Corporation and Steven K. Clark dated November 7, 2001, filed with Form 10-K dated December 31, 2001, incorporated by
reference.                                                
|      | 
|10.26 |  | Note Agreement between Steven K. Clark and Flanders Corporation, dated April 24, 1999, filed with the Form 10-K dated December 31, 1999, and incorporated herein by
reference.                                          
|      | 
|10.27 |  | Note Agreement between Robert R. Amerson and Flanders Corporation, dated April 24, 1999, filed with the Form 10-K dated December 31, 1999, and incorporated herein by
reference.                                        
|      | 
|10.28 |  | Stock Option Agreement between Flanders Corporation and Steven K. Clark dated August 24, 2004, filed with Form 10-K dated December 31, 2004, incorporated by
reference.                                                 
|      | 
|10.29 |  | Stock Option Agreement between Flanders Corporation and Steven K. Clark dated December 7, 2005, filed with Form 10-K dated December 31, 2005, incorporated by
reference.                                                
|      | 
|10.30 |  | Settlement Agreement and Mutual Release between Steven K. Clark and Flanders Corporation dated October 3, 2007, filed with Form 8-K dated October 5, 2007, incorporated by reference.                                   
|      | 
|10.31 |  | Master Lease Amendment between Wal-Pat, LLC and Flanders Corporation dated September 6, 2007, filed with Form 8-K dated September 7, 2007, incorporated by
reference.                                                   
|      | 
|10.32 |  | Separation Agreement and General Release between John Hodson and Flanders Corporation dated August 2, 2007, filed as an exhibit to Form 10-Q dated August 7, 2007, incorporated by
reference.*                          
|      | 
|10.33 |  | 2007 Equity Incentive Plan filed as an exhibit to the 2006 Proxy Statement dated November 13, 2007, incorporated by reference.*                                                                                         
|      | 
|10.34 |  | Employment Agreement between Registrant and Harry Smith dated November 21, 2008, filed as an exhibit to Form 8-K dated November 24, 2008, incorporated by
reference.*                                                   
|      | 
|10.35 |  | Employment Agreement between Registrant and John Oakley dated January 28, 2009, filed as an exhibit to Form 8-K dated January 30, 2009, incorporated by reference.*                                                     
|      | 
|10.36 |  | Asset Purchase Agreement and Supply Agreement between Registrant and Superior Filters, LLC relating to sale of Media Supply Assets, filed as exhibits to Form 8-K dated June 20,
2008, incorporated by reference.       



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|      |  |                                                                                                                                                                                                                                                                                                                                                                             
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.37 |  | Form of un-amended lease between Wal-Pat, LLC and the Registrant, filed as an exhibit to Form 8-K dated September 8, 2007, incorporated by reference.                                                                                                                                                                                                                       
|      | 
|10.38 |  | Nineteeth Amendment to Loan and Security Agreement, dated March 13, 2009, by and among Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters, Inc., Flanders/CSC
Corporation, Precisionaire, Inc., Precisionaire of Utah, Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc., Flanders Realty Corp. and Bank of America, incorporated by reference.
|      | 
|10.39 |  | Twentieth Amendment to Loan and Security Agreement, dated July 29, 2009, by and among Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters, Inc., Flanders/CSC
Corporation, Precisionaire, Inc., Precisionaire of Utah, Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc., Flanders Realty Corp. and Bank of America, incorporated by reference. 
|      | 
|10.40 |  | Twenty First Amendment to Loan and Security Agreement, dated September 23, 2009, by and among Flanders Corporation, Flanders/Precisionaire Corp., Flanders Filters, Inc.,
Flanders/CSC Corporation, Precisionaire, Inc., Precisionaire of Utah, Inc., Eco-Air Products, Inc., Air Seal Filter Housings, Inc., Flanders Realty Corp. and Bank of America, (filed herewith).  
|      | 
|21    |  | Subsidiaries of the Registrant filed as an exhibit to December 31, 2007 Form 10-K.                                                                                                                                                                                                                                                                                          
|      | 
|24    |  | Power of Attorney (included on Signature page of this report).                                                                                                                                                                                                                                                                                                              
|      | 
|31    |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13A-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302
of The Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                     
|      | 
|32    |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (filed
herewith).                                                                                                                                                                             
|      | 
|      |  | * Represents a current management contract or compensatory plan or arrangement                                                                                                                                                                                                                                                                                              
|      | 
|(c)   |  | Financial Statement Schedules: See (a) (2) above.                                                                                                                                                                                                                                                                                                                           



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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 22nd day of March, 2010.



FLANDERS CORPORATIONBy

/s/ Harry SmithHarry SmithChief Executive Officer / (Principal Executive Officer)By

/s/ John OakleyJohn OakleyChief Financial Officer / (Principal Financial Officer)


KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears below constitutes and appoints John Oakley, 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/ Harry L. Smith, Jr. |  | Chief Executive Officer / (Principal |  | March 22, 2010
|Harry L. Smith, Jr.     |  | Executive Officer)                   |  |               
|                        |  |                                     
|/s/ John Oakley         |  | Chief Financial Officer / (Principal |  | March 22, 2010
|John Oakley             |  | Financial Officer)                   |  |               
|                        |  |                                     
|/s/ Robert Amerson      |  | Director                             |  | March 22, 2010
|Robert Amerson          |  |                                      |  |               
|                        |  |                                     
|/s/ Kirk Dominick       |  | Director                             |  | March 22, 2010
|Kirk Dominick           |  |                                      |  |               
|                        |  |                                     
|/s/ David M. Mock       |  | Director                             |  | March 22, 2010
|David M. Mock           |  |                                      |  |               



48



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FLANDERS CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2009, 2008 and 2007



F-1



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

Board of Directors

Flanders
Corporation and Subsidiaries

Washington, North Carolina

We have audited the accompanying consolidated balance sheets of Flanders Corporation and Subsidiaries (the Company) as of December 31, 2009 and December 31, 2008 and the related
consolidated statements of operations, stockholders equity, and cash flows for the years ended December 31, 2009, 2008, and 2007. The Companys management is responsible for these financial statements. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2009 and 2008 and the consolidated results of its
operations and its cash flows for the years ended December 31, 2009, 2008, and 2007 in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 22, 2010 expressed an
unqualified opinion.

Pender Newkirk & Company, LLP

Certified Public Accountants

Tampa, Florida

March 22, 2010



F-2



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##### Table of Contents

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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



| |  |  | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the
Company;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that
could have a material effect on the financial statements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

The Companys management assessed the effectiveness of the Companys
internal control over financial reporting as of December 31, 2009. In making this assessment, the Companys management used the criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

Based on our assessment, management believes that, as of December 31, 2009, the
Companys internal control over financial reporting is effective based on those criteria.

Our internal control over
financial reporting as of December 31, 2009 has been audited by Pender Newkirk and

Company, LLP, independent registered
public accounting firm, as stated in their report which is included herein.



F-3



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

Board of Directors

Flanders
Corporation and Subsidiaries

Washington, North Carolina

We have audited internal control over financial reporting of Flanders Corporation and Subsidiaries (the Company) as of December 31, 2009, based on criteria established in
Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying report Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Companys internal control over financial reporting based on our audit.

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

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

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

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets and the related statements of operations, stockholders
equity and cash flows of the Company and our report dated March 22, 2010 expressed an unqualified opinion thereon.

Pender
Newkirk & Company, LLP

Certified Public Accountants

Tampa, Florida

March 22, 2010



F-4



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,

(In thousands, except per share data)



|                                                                                                                                                  |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                  |  | 2009 |         |   | 2008 |  
|                                                                                                                                                  |  |     
|ASSETS                                                                                                                                            |  |      |         |   |      |   |         |  
|Current assets                                                                                                                                    |  |      |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                         |  | $    | 260     |   |      | $ | 404     |  
|Receivables:                                                                                                                                      |  |      |         |   |      |   |         |  
|Trade, less allowance for doubtful accounts: $2,172 in 2009 and $3,683 in 2008                                                                    |  |      | 33,159  |   |      |   | 37,682  |  
|Other                                                                                                                                             |  |      | 407     |   |      |   | 280     |  
|Inventories                                                                                                                                       |  |      | 29,415  |   |      |   | 31,549  |  
|Deferred taxes                                                                                                                                    |  |      | 2,566   |   |      |   | 4,285   |  
|Income taxes                                                                                                                                      |  |      | 2,698   |   |      |   | 10,048  |  
|Other current assets                                                                                                                              |  |      | 5,436   |   |      |   | 4,714   |  
|                                                                                                                                                  |  |      |         |   |      |   |         |  
|Total current assets                                                                                                                              |  |      | 73,941  |   |      |   | 88,962  |  
|Property and equipment, net                                                                                                                       |  |      | 71,263  |   |      |   | 57,156  |  
|Intangible assets, net                                                                                                                            |  |      | 280     |   |      |   | 295     |  
|Notes Receivable and Other assets                                                                                                                 |  |      | 17,511  |   |      |   | 14,604  |  
|                                                                                                                                                  |  |      |         |   |      |   |         |  
|                                                                                                                                                  |  | $    | 162,995 |   |      | $ | 161,017 |  
|                                                                                                                                                  |  |      |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                              |  |      |         |   |      |   |         |  
|Current liabilities                                                                                                                               |  |      |         |   |      |   |         |  
|Current maturities of long-term debt and capital lease obligations                                                                                |  | $    | 1,051   |   |      | $ | 1,307   |  
|Accounts payable                                                                                                                                  |  |      | 19,353  |   |      |   | 22,795  |  
|Accrued expenses                                                                                                                                  |  |      | 13,334  |   |      |   | 13,517  |  
|Other current liabilities                                                                                                                         |  |      | 498     |   |      |   | 6,179   |  
|                                                                                                                                                  |  |      |         |   |      |   |         |  
|Total current liabilities                                                                                                                         |  |      | 34,236  |   |      |   | 43,798  |  
|Long-term capital lease obligations, less current maturities                                                                                      |  |      | 150     |   |      |   | 554     |  
|Long-term debt, less current maturities                                                                                                           |  |      | 33,662  |   |      |   | 29,611  |  
|Long-term liabilities, other                                                                                                                      |  |      | 3,085   |   |      |   | 4,286   |  
|Deferred taxes                                                                                                                                    |  |      | 158     |   |      |   | 0       |  
|Commitments and contingencies                                                                                                                     |  |      |         |   |      |   |         |  
|Stockholders equity                                                                                                                              |  |      |         |   |      |   |         |  
|Preferred stock, $.001 par value, 10,000 shares authorized; none issued                                                                           |  |      |         |   |      |   |        |  
|Common stock, $.001 par value; 50,000 shares authorized; issued and outstanding: 26,133 and 25,524 as of December 31, 2009
and 2008, respectively |  |      | 26      |   |      |   | 26      |  
|Additional paid-in capital                                                                                                                        |  |      | 88,902  |   |      |   | 87,253  |  
|Accumulated other comprehensive loss                                                                                                              |  |      | (908    | ) |      |   | (1,231  | )
|Retained earnings (deficit)                                                                                                                       |  |      | 3,684   |   |      |   | (3,280  | )
|                                                                                                                                                  |  |      |         |   |      |   |         |  
|                                                                                                                                                  |  |      | 91,704  |   |      |   | 82,768  |  
|                                                                                                                                                  |  |      |         |   |      |   |         |  
|                                                                                                                                                  |  | $    | 162,995 |   |      | $ | 161,017 |  
|                                                                                                                                                  |  |      |         |   |      |   |         |  



The accompanying notes are an integral part of these financial statements

F-5



---

##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,

(In thousands, except per share data)



|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                         |  | 2009 |         |   | 2008 |   |         | 2007 | 
|                                                                                                         |  |      |        
|Net sales                                                                                                |  | $    | 222,380 |   |      | $ | 217,328 |      |  | $ | 244,941 |  
|Cost of goods sold                                                                                       |  |      | 179,167 |   |      |   | 190,768 |      |  |   | 213,152 |  
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                         |  |      |        
|Gross profit                                                                                             |  |      | 43,213  |   |      |   | 26,560  |      |  |   | 31,789  |  
|                                                                                                         |  |      |        
|Operating expenses                                                                                       |  |      | 31,340  |   |      |   | 44,845  |      |  |   | 57,968  |  
|Goodwill Impaired                                                                                        |  |      | 0       |   |      |   | 2,442   |      |  |   | 543     |  
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                         |  |      |        
|Operating income (loss)                                                                                  |  |      | 11,873  |   |      |   | (20,727 | )    |  |   | (26,722 | )
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                         |  |      |        
|Non operating income (expense)                                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Other income, net                                                                                        |  |      | 1,517   |   |      |   | 3,598   |      |  |   | 774     |  
|Interest expense                                                                                         |  |      | (1,863  | ) |      |   | (2,094  | )    |  |   | (2,743  | )
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                         |  |      | (346    | ) |      |   | 1,504   |      |  |   | (1,969  | )
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Earnings (Losses) from operations before income taxes                                                    |  |      | 11,527  |   |      |   | (19,223 | )    |  |   | (28,691 | )
|                                                                                                         |  |      |        
|Provision (Benefit) for income taxes                                                                     |  |      | 4,563   |   |      |   | (6,060  | )    |  |   | (8,791  | )
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Income (Loss) before extraordinary items                                                                 |  |      | 6,964   |   |      |   | (13,163 | )    |  |   | (19,900 | )
|Extraordinary Items:                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Extraordinary Gain  Flood loss (net of taxes $0 in 2009, $174 in 2008, and $0 in 2007)                  |  |      | 0       |   |      |   | 324     |      |  |   | 0       |  
|Extraordinary Gain  Fire loss (net of taxes $0, $4,688, and $142 for 2009, 2008 and 2007, respectively) |  |      | 0       |   |      |   | 8,706   |      |  |   | 213     |  
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                         |  |      |        
|Net earnings (loss)                                                                                      |  |      | 6,964   |   |      | $ | (4,133  | )    |  | $ | (19,687 | )
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                         |  |      |        
|Income (Loss) before extraordinary items Basic earnings per share                                        |  | $    | .27     |   |      | $ | (.51    | )    |  | $ | (.75    | )
|Extraordinary items                                                                                      |  | $    | 0       |   |      | $ | .35     |      |  | $ | 0       |  
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Net earnings (loss) per share                                                                            |  | $    | .27     |   |      | $ | (.16    | )    |  | $ | (.75    | )
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                         |  |      |        
|Income (Loss) before extraordinary items Diluted earnings per share                                      |  | $    | .27     |   |      | $ | (.51    | )    |  | $ | (.75    | )
|Extraordinary items                                                                                      |  | $    | 0       |   |      | $ | .35     |      |  | $ | 0       |  
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Net earnings (loss) per share                                                                            |  | $    | .27     |   |      | $ | (.16    | )    |  | $ | (.75    | )
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                         |  |      |        
|Weighted average common shares outstanding                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Basic                                                                                                    |  |      | 25,779  |   |      |   | 25,693  |      |  |   | 26,362  |  
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Diluted                                                                                                  |  |      | 25,795  |   |      |   | 25,693  |      |  |   | 26,362  |  
|                                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  



The accompanying notes are an integral part of these financial statements

F-6



---

##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Years Ended December 31, 2009, 2008 and 2007

(In thousands)



|                                                                  |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   |         |  
|----------------------------------------------------------------- |  | ----------- | -- | - | ------------------------ | - | ------ | --------------- |  | - | --------------------------------- | - |  | ---------------- | ------ | - | ----- | - | ------- | - |  | - | ------- | -
|                                                                  |  | CommonStock |    |   | AdditionalPaid-InCapital |   |        | NotesReceivable |  |   | AccumulatedOtherComprehensiveLoss |   |  | RetainedEarnings |        |   | Total |  
|Balance, January 1, 2007                                          |  | $           | 26 |   |                          | $ | 90,872 |                 |  | $ | (7,441                            | ) |  | $                | (698   | ) |       | $ | 24,620  |   |  | $ | 107,379 |  
|Stock option award compensation                                   |  |             |    |   |                          |   | 859    |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   | 859     |  
|Accrued interest on notes receivable secured by common shares     |  |             |   |   |                          |   |       |                 |  |   | (360                              | ) |  |                  |       |   |       |   |        |   |  |   | (360    | )
|Proceeds from notes receivable secured by common stock            |  |             |   |   |                          |   |       |                 |  |   | 2,355                             |   |  |                  |       |   |       |   |        |   |  |   | 2,355   |  
|Purchase and retirement of 826 shares of common stock             |  |             | (1 | ) |                          |   | (4,327 | )               |  |   |                                  |   |  |                  |       |   |       |   |        |   |  |   | (4,328  | )
|Issuance of 1,159 shares of common stock upon exercise of options |  |             | 1  |   |                          |   | 2,958  |                 |  |   |                                  |   |  |                  |       |   |       |   |        |   |  |   | 2,959   |  
|Common shares issued for satisfaction of trade accounts payable   |  |             |   |   |                          |   | 1,454  |                 |  |   |                                  |   |  |                  |       |   |       |   |        |   |  |   | 1,454   |  
|Common shares received in lieu of Equity note receivable          |  |             |   |   |                          |   | (5,445 | )               |  |   | 5,446                             |   |  |                  |       |   |       |   |        |   |  |   | 1       |  
|Loss of controlling interest in affiliate                         |  |             |   |   |                          |   |       |                 |  |   |                                  |   |  |                  |       |   |       |   | (4,080  | ) |  |   | (4,080  | )
|Tax Benefit from Stock Options                                    |  |             |   |   |                          |   | 934    |                 |  |   |                                  |   |  |                  |       |   |       |   |        |   |  |   | 934     |  
|Comprehensive earnings                                            |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   |         |  
|Net earnings                                                      |  |             |   |   |                          |   |       |                 |  |   |                                  |   |  |                  |       |   |       |   | (19,687 | ) |  |   | (19,687 | )
|Loss on cash flow hedges                                          |  |             |   |   |                          |   |       |                 |  |   |                                  |   |  |                  | (84    | ) |       |   |        |   |  |   | (84     | )
|                                                                  |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   |         |  
|Total comprehensive earnings, net of tax                          |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   | (19,771 | )
|                                                                  |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   |         |  
|Balance, December 31, 2007                                        |  | $           | 26 |   |                          | $ | 87,305 |                 |  | $ | (0                                | ) |  | $                | (782   | ) |       | $ | 853     |   |  | $ | 87,402  |  
|Stock option award compensation                                   |  |             |   |   |                          |   | 1,426  |                 |  |   |                                  |   |  |                  |       |   |       |   |        |   |  |   | 1,426   |  
|Purchase and retirement of 306 shares of common stock             |  |             | (1 | ) |                          |   | (1,904 | )               |  |   |                                  |   |  |                  |       |   |       |   |        |   |  |   | (1,905  | )
|Issuance of 138 shares of common stock upon exercise of options   |  |             | 1  |   |                          |   | 426    |                 |  |   |                                  |   |  |                  |       |   |       |   |        |   |  |   | 427     |  
|Comprehensive earnings                                            |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   |         |  
|Net earnings                                                      |  |             |   |   |                          |   |       |                 |  |   |                                  |   |  |                  |       |   |       |   | (4,133  | ) |  |   | (4,133  | )
|Loss on cash flow hedges                                          |  |             |   |   |                          |   |       |                 |  |   |                                  |   |  |                  | (449   | ) |       |   |        |   |  |   | (449    | )
|                                                                  |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   |         |  
|Total comprehensive earnings, net of tax                          |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   | (4,582  | )
|                                                                  |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   |         |  
|Balance, December 31, 2008                                        |  | $           | 26 |   |                          | $ | 87,253 |                 |  | $ | (0                                | ) |  | $                | (1,231 | ) |       | $ | (3,280  | ) |  | $ | 82,768  |  
|Stock option award compensation                                   |  |             |   |   |                          |   | 46     |                 |  |   |                                  |   |  |                  |       |   |       |   |        |   |  |   | 46      |  
|Purchase and retirement of 391 shares of common stock             |  |             | (1 | ) |                          |   | (2,500 | )               |  |   |                                  |   |  |                  |       |   |       |   |        |   |  |   | (2,501  | )
|Issuance of 1,000 shares of common stock upon exercise of options |  |             | 1  |   |                          |   | 2,499  |                 |  |   |                                  |   |  |                  |       |   |       |   |         |   |  |   | 2,500   |  
|Tax Benefit from Stock Options                                    |  |             |    |   |                          |   | 1,604  |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   | 1,604   |  
|Comprehensive earnings                                            |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   |         |  
|Net earnings                                                      |  |             |   |   |                          |   |       |                 |  |   |                                  |   |  |                  |       |   |       |   | 6,964   |   |  |   | 6,964   |  
|Gain on cash flow hedges                                          |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  | 323    |   |       |   |         |   |  |   | 323     |  
|                                                                  |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   |         |  
|Total Comprehensive earnings, net of tax                          |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   | 7,287   |  
|                                                                  |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   |         |  
|Balance, December 31, 2009                                        |  | $           | 26 |   |                          | $ | 88,902 |                 |  | $ | (0                                | ) |  | $                | (908   | ) |       | $ | 3,684   |   |  | $ | 91,704  |  
|                                                                  |  |             |    |   |                          |   |        |                 |  |   |                                   |   |  |                  |        |   |       |   |         |   |  |   |         |  



The accompanying notes are an integral part of these financial statements

F-7



---

##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

(In thousands)



|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                      |  | 2009 |         |   | 2008 |   |         | 2007 | 
|                                                                                                                      |  |      |        
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net Earnings (Loss)                                                                                                   |  | $    | 6,964   |   |      | $ | (4,133  | )    |  | $ | (19,687 | )
|Adjustments to reconcile net earnings (loss) from continuing operations to net cash provided by operating
activities: |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                                                         |  |      | 5,778   |   |      |   | 6,396   |      |  |   | 7,415   |  
|Provision for doubtful accounts and notes                                                                             |  |      | 2,095   |   |      |   | 3,532   |      |  |   | 10,638  |  
|Provision for obsolete inventory                                                                                      |  |      | 0       |   |      |   | 0       |      |  |   | 3,133   |  
|Goodwill impairment                                                                                                   |  |      | 0       |   |      |   | 2,442   |      |  |   | 543     |  
|(Gain) Loss on sale of property and equipment                                                                         |  |      | (364    | ) |      |   | 3,441   |      |  |   | 3,152   |  
|Compensation expense                                                                                                  |  |      | 46      |   |      |   | 1,426   |      |  |   | 859     |  
|Tax impact of stock options exercised                                                                                 |  |      | (1,604  | ) |      |   | 0       |      |  |   | 0       |  
|Extraordinary (Gain) Loss                                                                                             |  |      | 0       |   |      |   | (9,030  | )    |  |   | (213    | )
|Proceeds from insurance claims                                                                                        |  |      | 1,135   |   |      |   | 17,479  |      |  |   | 11,228  |  
|(Gain) Loss on sale of subsidiaries                                                                                   |  |      | 0       |   |      |   | (1,616  | )    |  |   | 222     |  
|Write down of notes receivable                                                                                        |  |      | 0       |   |      |   | 694     |      |  |   | 0       |  
|Deferred taxes                                                                                                        |  |      | 1,704   |   |      |   | (5,866  | )    |  |   | (7,082  | )
|Minority interest                                                                                                     |  |      | 0       |   |      |   | 0       |      |  |   | (19     | )
|Accrued interest on notes receivable secured by common shares                                                         |  |      | 0       |   |      |   | 0       |      |  |   | (360    | )
|Change in working capital components:                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Receivables                                                                                                           |  |      | (10,420 | ) |      |   | (6,826  | )    |  |   | (10,344 | )
|Inventories                                                                                                           |  |      | 2,135   |   |      |   | 12,874  |      |  |   | 2,527   |  
|Other current assets and income tax receivable                                                                        |  |      | 5,946   |   |      |   | (4,085  | )    |  |   | (15,463 | )
|Increase in other assets                                                                                              |  |      | (143    | ) |      |   | 0       |      |  |   | 0       |  
|Accounts payable                                                                                                      |  |      | (3,443  | ) |      |   | (6,579  | )    |  |   | 5,441   |  
|Accrued expenses                                                                                                      |  |      | 10,366  |   |      |   | 3,529   |      |  |   | 6,069   |  
|Increase in Other Current Liabilities                                                                                 |  |      | (5,682  | ) |      |   | 300     |      |  |   | 5,880   |  
|Long Term Liabilities Other                                                                                           |  |      | (603    | ) |      |   | 125     |      |  |   | 668     |  
|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                                      |  |      |        
|Net cash provided by operating activities                                                                             |  |      | 13,910  |   |      |   | 14,103  |      |  |   | 4,607   |  
|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                                      |  |      |        
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Disposal of subsidiary and deconsolidation of VIE, net of cash disposed                                               |  |      | 0       |   |      |   | (11     | )    |  |   | (97     | )
|Purchase of property and equipment                                                                                    |  |      | (15,019 | ) |      |   | (14,445 | )    |  |   | (7,838  | )
|Proceeds from sale of property and equipment                                                                          |  |      | 259     |   |      |   | 3,457   |      |  |   | 6,004   |  
|Proceeds from insurance claim on building and equipment                                                               |  |      | 466     |   |      |   | 0       |      |  |   | 5,500   |  
|Cash received (paid) on notes receivables  related party                                                             |  |      | 0       |   |      |   | 0       |      |  |   | 428     |  
|Decrease in other assets and collections on notes receivable                                                          |  |      | 1,390   |   |      |   | 1,776   |      |  |   | 872     |  
|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used) in investing activities                                                                   |  |      | (12,904 | ) |      |   | (9,223  | )    |  |   | 4,869   |  
|                                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  

- Continued -



The accompanying notes are an integral part of these financial statements

F-8



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS  Continued

Years Ended December 31,

(In thousands)



|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                               |  | 2009 |        |   | 2008 |   |        | 2007 | 
|                                                                                                                               |  |      |       
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                                           |  |      |        |   |      |   |        |      |  |   |        |  
|Net proceeds from (payments on) revolving credit agreement                                                                     |  |      | 407    |   |      |   | (1,272 | )    |  |   | (4,847 | )
|Principal payments on long-term borrowings                                                                                     |  |      | (3,095 | ) |      |   | (2,224 | )    |  |   | (5,685 | )
|Purchase and retirement of common stock                                                                                        |  |      | 0      |   |      |   | (1,534 | )    |  |   | (1,369 | )
|Proceeds from sale of common stock                                                                                             |  |      | 0      |   |      |   | 56     |      |  |   | 0      |  
|Payment of debt issuance costs                                                                                                 |  |      | (66    | ) |      |   | 0      |      |  |   | 0      |  
|Tax impact of stock options exercised                                                                                          |  |      | 1,604  |   |      |   | 0      |      |  |   | 0      |  
|Proceeds from notes receivable secured by common shares                                                                        |  |      | 0      |   |      |   | 0      |      |  |   | 2,355  |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash used in financing activities                                                                                          |  |      | (1,150 | ) |      |   | (4,974 | )    |  |   | (9,546 | )
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Net decrease in cash and cash equivalents                                                                                      |  |      | (144   | ) |      |   | (94    | )    |  |   | (70    | )
|CASH AND CASH EQUIVALENTS                                                                                                      |  |      |        |   |      |   |        |      |  |   |        |  
|Beginning of year                                                                                                              |  |      | 404    |   |      |   | 498    |      |  |   | 568    |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|End of year                                                                                                                    |  | $    | 260    |   |      | $ | 404    |      |  | $ | 498    |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|                                                                                                                               |  |      |       
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Interest paid, net of $759, $45 and $239 interest capitalized to property and equipment for 2009, 2008 and 2007, respectively: |  | $    | 1,633  |   |      | $ | 2,108  |      |  | $ | 2,824  |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Income taxes paid                                                                                                              |  | $    | 877    |   |      | $ | 964    |      |  | $ | 179    |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Tax impact of Stock Options                                                                                                    |  | $    | 0      |   |      | $ | 0      |      |  | $ | 934    |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES                                                            |  |      |        |   |      |   |        |      |  |   |        |  
|Cashless exercise of common stock (Net)                                                                                        |  | $    | (2,500 | ) |      | $ | (370   | )    |  | $ | (738   | )
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Accounts receivable in exchange for notes receivable                                                                           |  | $    | 2,421  |   |      | $ | 677    |      |  | $ | 0      |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Stock issued in lieu of trade accounts payable                                                                                 |  | $    | 0      |   |      | $ | 0      |      |  | $ | 1,454  |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Sale of equipment or building for note receivable                                                                              |  | $    | 1,279  |   |      | $ | 913    |      |  | $ | 996    |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Common shares received in lieu of Equity note                                                                                  |  | $    | 0      |   |      | $ | 0      |      |  | $ | 5,446  |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Offset of accrued expenses against trade accounts receivable                                                                   |  | $    | 10,549 |   |      | $ | 13,678 |      |  | $ | 0      |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Offset of accrued expenses against other receivables                                                                           |  | $    | 0      |   |      | $ | 900    |      |  | $ | 0      |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Purchase of building for debt                                                                                                  |  | $    | 6,080  |   |      | $ | 2,619  |      |  | $ | 0      |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|                                                                                                                               |  |      |       
|ACQUISITION/DISPOSAL OF COMPANIES                                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Working Capital surplus acquired/disposed, net of cash and cash equivalents received                                           |  | $    | 0      |   |      | $ | 1,425  |      |  | $ | 3,880  |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Fair value of other assets acquired/(disposed), principally property and equipment                                             |  | $    | 0      |   |      | $ | (8,637 | )    |  | $ | (1,466 | )
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Goodwill acquired/(disposed)                                                                                                   |  | $    | 0      |   |      | $ | (589   | )    |  | $ | (1,428 | )
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Minority interest                                                                                                              |  | $    | 0      |   |      | $ | (141   | )    |  | $ | 0      |  
|                                                                                                                               |  |      |        |   |      |   |        |      |  |   |        |  



The accompanying notes are an integral part of these financial statements

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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

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

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



| | 1. | Nature of business
| | -- | ------------------

The
Company designs, manufactures and sells air filters and related products. It is focused on providing complete environmental filtration systems for uses ranging from controlling contaminants in residences and commercial office buildings through
specialized manufacturing environments for semiconductors and pharmaceuticals. The Company also designs and manufactures much of its own production equipment to automate processes to decrease labor costs associated with its standard products. The
vast majority of the Companys current revenues come from the sale of after-market replacement filters, since air filters are typically placed in equipment designed to last much longer than the filters.

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

The Company
has one reportable segment which is air filtration systems.



| | 2. | Principles of consolidation
| | -- | ---------------------------

The consolidated financial statements include the accounts and operations of the Company and its subsidiaries, all of which are wholly owned except for Air Filter Sales and Service, Inc. and Superior Diecutting, Inc. which were consolidated
in accordance with Accounting Standards Codification (ASC) 810. All intercompany transactions and balances are eliminated in consolidation.

Prior to February 1, 2008, the Company was the primary beneficiary of Air Filter Sales and Service, Inc., which qualified as a variable interest entity. Accordingly, the assets and liabilities and
revenues and expenses of this company have been included in the accompanying consolidated financial statements. As of February 1, 2008 Air Filter Sales and Service, Inc. ceased to be consolidated, due to the Stock Purchase Agreement which
resulted in the Company no longer qualifying as the primary beneficiary. The accompanying financial statements present the consolidated results including Air Filter Sales and Service, Inc. up until February 1, 2008 with all intercompany
transactions eliminated. After that date the financial statements do not include the financial results of Air Filter Sales and Service, Inc. As of December 31, 2008 and 2007, Air Filter Sales and Service, Inc. had assets of $0 and $836,
liabilities of $0 and $788, revenues of $254 and $2,871, and expenses of $216 and $2,903, respectively. Creditors and beneficial holders of Air Filter Sales and Service, Inc have no recourse to the assets or general credit of the Company.

Prior to September 30, 2007, Superior Diecutting, Inc. was 50% was owned by two officers and directors and 50% was owned
by other shareholders unrelated to the Company or any of its officers and directors. As of September 30, 2007 Superior Diecutting, Inc. ceased to be consolidated, due to the Settlement Agreement and Mutual Release filed on October 5, 2007,
which resulted in the Company no longer qualifying as the primary beneficiary. The accompanying financial statements present the consolidated result including Superior Diecutting, Inc. up until September 30, 2007 with all intercompany
transactions eliminated. After that date the financial statements do not include the financial results of Superior Diecutting, Inc. The revenues and expense of Superior Diecutting, Inc. through September 30, 2007 were $16,600 and $16,139,
respectively.



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



| | 3. | Significant customers
| | -- | ---------------------

Net sales for the years ended December 31, 2009, 2008 and 2007 included sales to the following major customers, together with the receivables due from those customers:



|           |  |                     |        |                                           |   |        |  |      |        |      |   |       |  |   |      
|---------- |  | ------------------- | ------ | ----------------------------------------- | - | ------ |  | ---- | ------ | ---- | - | ----- |  | - | -----
|           |  | Amount of Net Sales |        | Trade ReceivableBalanceAs of December 31,
|           |  | 2009                |        | 2008                                      |   | 2007   |  | 2009 |        | 2008
|Customer A |  | $                   | 12,156 |                                           | $ | 10,675 |  | $    | 25,679 |      | $ | 1,135 |  | $ | 972  
|Customer B |  | $                   | 44,623 |                                           | $ | 29,332 |  | $    | 38,431 |      | $ | 5,613 |  | $ | 5,398
|Customer C |  | $                   | 23,369 |                                           | $ | 11,109 |  | $    | 0      |      | $ | 2,958 |  | $ | 1,449



| | 4. | Use of estimates
| | -- | ----------------

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



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

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



| | 5. | Cash and cash equivalents
| | -- | -------------------------

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



| | 6. | Accounts receivable
| | -- | -------------------

The
Company provides an allowance for losses on trade receivables based on a review of the current status of existing receivables and managements evaluation of periodic aging of accounts. The Company charges off accounts receivable against the
allowance for losses when an account is deemed to be uncollectible. It is the Companys policy to accrue interest on past due receivables. The provision expensed for doubtful accounts and notes was $2,095, $3,532, and $10,638 for the years
ended December 31, 2009, 2008 and 2007, respectively.



| | 7. | Fair value of financial instruments
| | -- | -----------------------------------

The carrying amount of cash equivalents, trade receivables and trade payables approximates fair value at December 31, 2009 and 2008 because of the short maturity of these instruments. Based on the
borrowing rates currently available to the Company for bank loans with similar maturities and similar collateral requirements, the fair value of notes payable and long-term debt approximates the carrying amounts at December 31, 2009 and 2008.



| | 8. | Inventories
| | -- | -----------

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



| | 9. | Comprehensive income
| | -- | --------------------

Accounting Standards Codification (ASC) 220requires disclosure of comprehensive income in addition to the existing income statement. Other comprehensive income (loss) is defined as the change in equity during a period,
from transactions and other events, excluding changes resulting from investments by owners (e.g., supplemental stock offerings) and distributions to owners (e.g., dividends). An analysis of the changes in the components of accumulated comprehensive
income is presented in the consolidated statements of stockholders equity.



| | 10. | Derivative financial instruments
| | --- | --------------------------------

The Company follows Accounting Standards Codification (ASC) 815 to account for its derivative instruments. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings

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

The Company has only limited involvement with
derivative financial instruments. The Company has three interest-rate swap agreements to hedge against the potential impact on earnings from increases in market interest



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



rates of two variable rate bonds and one variable rate note. Under the interest rate swap agreements for the bonds, we receive or make payments on a monthly basis, based on the differential
between 5.49% and a tax exempt interest rate as determined by a remarketing agent. Under the interest rate swap agreement for the note, we receive or make payments on a monthly basis, based on the differential between 5.86% and LIBOR plus 1.75%.
These interest rate swaps are accounted for as a cash flow hedge in accordance with Accounting Standards Codification (ASC) 815. Gains or losses related to inefficiencies of the cash flow hedge were included in net income during
the period related to hedge ineffectiveness. The tax affected fair market value of the interest rate swaps of $908 and $1,231 are included in Accumulated other comprehensive loss at December 31, 2009 and 2008, respectively on the
balance sheet. This fair value was determined using level 2 inputs as defined in Accounting Standards Codification (ASC) 820. The interest rate swap contracts on the bonds expire in 2013 and 2015 and the interest rate swap on the
note expires in 2013.



| | 11. | Goodwill
| | --- | --------

Accounting
Standards Codification (ASC) 350 requires that goodwill be tested for impairment annually or more frequently if circumstances indicate potential impairment, by comparing the fair value of the asset to its carrying amount. Such
testing requires, as an initial step, that each of the Companys reporting units be identified and that the Companys assets and liabilities, including the existing goodwill and intangible assets, be assigned to those reporting units. The
Company has determined there were events that occurred in 2008 that impaired goodwill as of December 31, 2008. These events were the sale of certain direct sales division reporting units in which goodwill was attached. Accordingly, the Company
recorded expense related to this impairment of $2.4 million in 2008.

Goodwill is reviewed for possible impairment at least
annually or more frequently upon the occurrence of an event or when circumstances indicate that the Companys carrying amount is greater than the fair value. In accordance with Accounting Standards Codification (ASC) 350, the
Company examined goodwill for impairment and determined that there were events that occurred in 2008 that impaired the goodwill. These events were the sale of certain direct sales division reporting units in which goodwill was attached. Accordingly,
the Company recorded expense related to this impairment of $2.4 million in the fourth quarter of 2008.



|                                                   |  |        |  
|-------------------------------------------------- |  | ------ | -
|The change in balance for goodwill was as follows: |  | 2008   |  
|Beginning of the year                              |  | 3,031  |  
|Impairment                                         |  | (2,442 | )
|Effect of sale of reporting unit                   |  | (589   | )
|End of Year                                        |  | 0      |  



| | 12. | Trademarks and trade names
| | --- | --------------------------

Trademarks and trade names are being amortized on a straight line basis over 17 years. At each balance sheet date, the Company evaluates the value of trademarks and trade names for impairment. Based upon its most recent analysis, the
Company believes that no impairment of trademarks and trade names exists at December 31, 2009. These are included in intangible assets on the balance sheet.



| | 13. | Property and equipment
| | --- | ----------------------

Property and equipment are stated at cost. Depreciation is computed by the straight-line method over estimated useful lives. Amortization of property and equipment held under capital leases is included in depreciation expense. The carrying
amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or the unamortized balance is warranted. Based upon its analysis in 2008, because of the strategy to shed vertical
integration, management adopted a plan to dispose of its glass equipment. As part of that strategy the company recorded an impairment loss of $3.1 million in 2008 which is included in Operating expenses on the Consolidated Statements of Operations.



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



| | 14. | Debt issuance costs
| | --- | -------------------

The
costs related to the issuance of debt are capitalized and amortized on a straight-line basis over the term of the related debt, which approximates the effective interest method.



| | 15. | Revenue recognition
| | --- | -------------------

The
Companys products are sold with terms and conditions, which vary depending on particular business environments in which the Company operates. The standard policy of the Company is to recognize revenue in accordance with accounting principles
generally accepted in the United States of America; specifically SAB Topic 13A.

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



| | 16. | Income taxes
| | --- | ------------

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

The Company adopted the provisions of Accounting Standards Codification (ASC) 740which provides interpretative guidance
for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Effective with the Companys adoption, interest related to unrecognized tax benefits is now recognized in the financial
statements as a component of (provision) benefit for income taxes. Interest and penalties related to unrecognized tax benefits were previously recorded in management fees and other income (expense), net in the Companys statements of
operations.



| | 17. | Earnings per share
| | --- | ------------------

Basic
EPS is calculated by dividing earnings available to common shareholders by the weighted average number of common shares outstanding during each period. Diluted EPS is similarly calculated, except that the denominator includes common shares that may
be issued subject to existing rights with dilutive potential, except when their inclusion would be antidilutive.



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

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



| | 18. | Stock Options
| | --- | -------------

Accounting Standards Codification (ASC) 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the consolidated financial statements
based on their fair values. That expense will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

The value of each grant is estimated at the grant date using the Black-Scholes option model with the following weighted average assumptions
for options granted in 2009, 2008 and 2007: Dividend rate of 0%; risk-free interest rate of 3.75%, 1.50% and 4.75%, respectively; expected lives of 10, 5, and 5 years respectively; and expected price volatility of 52%, 52% and 50%, respectively.

The unrecognized stock-based compensation expense related to nonvested stock options was $0 for the years ended
December 31, 2009 and 2008. The Company has no unvested stock options as of December 31, 2009.

During 2009 and 2008,
there was $0 and $56 of cash received from the exercise of stock options.

The aggregate intrinsic value of options outstanding
at December 31, 2009, based on the Companys closing stock price of $4.46 as of the last business day of the period ended December 31, 2009, which would have been received by the optionees had all options been exercised on that date
was $4. The aggregate intrinsic value of options exercisable at December 31, 2009, based on the Companys closing stock price of $4.46 as of the last business day of the period ended December 31, 2009, which would have been received
by the optionees had all options exercisable been exercised on that date was $4. The aggregate intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 were $3,890, 439 and 2,646, respectively. Intrinsic
value is the amount by which the fair value of the underlying stock exceeds the exercise price of the options.



| | 19. | Outbound shipping expenses
| | --- | --------------------------

Outbound shipping expenses are included in operating expenses, not in cost of goods sold. Outbound shipping expenses were $8,606, $10,233, and $12,148 for the years ending December 31, 2009, 2008 and 2007,
respectively.



| | 20. | Advertising
| | --- | -----------

The costs of
advertising are expensed as incurred. Advertising expense was $3,880, $4,639, and $5,788 for the years ending December 31, 2009, 2008 and 2007, respectively.



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

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



| | 21. | Impact of Recently Issued Accounting Pronouncements
| | --- | ---------------------------------------------------

Effective January 1, 2009, the Company adopted new guidance to improve financial reporting about derivative instruments and hedging activities. This guidance requires enhanced disclosures to enable
investors to better understand their effects on an entitys financial position, financial performance, and cash flows. The Company has provided all of the required disclosures in its consolidated financial statements.

Effective January 1, 2009, the Company adopted new guidance to improve financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. In June 2009, the FASB issued
additional guidance which provides for the FASB Accounting Standards Codification (the Codification) to become the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles (GAAP). The
Codification did not change GAAP but reorganizes the literature. The Company adopted the additional guidance on July 1, 2009, which did not have a material impact on the Companys consolidated financial statements or condition.

In October 2008, the FASB issued new guidance to clarify the application of fair value in inactive markets and allows for
the use of managements internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. The adoption of the new guidance did not have a material impact on
the Companys consolidated financial statements or condition.

In June 2009, the FASB issued ASU No. 2009-17,
Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities(ASU No. 2009-17). ASU No. 2009-17 amends previously issued accounting guidance for the consolidation of variable interest entities to
require an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the
power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable
interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The new standard also amends existing literature to require ongoing reassessments of whether an enterprise is the
primary beneficiary of a variable interest entity. ASU No. 2009-17 is effective for all variable interest entities and relationships with variable interest entities existing as of January 1, 2010. The Company does not expect that the
adoption of ASU No. 2009-17 will have a material impact on its financial position or results of operations.

In September
2009, the FASB issued ASU No. 2009-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2009-06 amends certain disclosure requirements of Subtopic 820-10.
This ASU provides additional disclosures for transfers in and out of Levels I and II and for activity in Level III. This ASU also clarifies certain other existing disclosure requirements including level of desegregation and
disclosures around inputs and valuation techniques. The final amendments to the Accounting Standards Codification will be effective for annual or interim reporting periods beginning after December 15, 2009, except for the requirement to provide
the Level III activity disclosures for purchases, sales, issuances, and settlements on a gross basis. That requirement will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
The Company does not expect that the adoption of ASU No. 2009-06 will have a material impact on its financial position or results of operations.

Other recent accounting pronouncements issued by the FASB, the AICPA, and the SEC did not or are not believed by management to have a material impact on the Companys present or future financial
statements.



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



Note B. Inventories

Inventories consist of the following at December 31:



|                 |  |      |        |      |   |       
|---------------- |  | ---- | ------ | ---- | - | ------
|                 |  | 2009 |        | 2008
|Finished goods   |  | $    | 12,478 |      | $ | 14,579
|Work in progress |  |      | 1,373  |      |   | 1,924 
|Raw materials    |  |      | 16,338 |      |   | 15,820
|                 |  |      |        |      |   |       
|                 |  |     
|                 |  |      | 30,189 |      |   | 32,323
|Less allowances  |  |      | 774    |      |   | 774   
|                 |  |      |        |      |   |       
|                 |  |     
|                 |  | $    | 29,415 |      | $ | 31,549
|                 |  |      |        |      |   |       

Inventories were written down to net realizable value
during 2008. The company reassessed its inventories due to the company selling certain facilities, transitioning away from direct sales offices and activities and due to the general downturn in the economy. Upon completion of the full examination of
the companys inventories, which began during the fourth quarter of 2008, management disposed of inventories that were of poor quality or damaged totaling approximately $4 million. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.

Note C. Notes Receivable and Other Assets

Other assets consist of the following at December 31:



|                             |  |      |        |      |   |       
|---------------------------- |  | ---- | ------ | ---- | - | ------
|                             |  | 2009 |        | 2008
|                             |  |     
|Real estate held for sale    |  | $    | 0      |      | $ | 52    
|Deposits                     |  |      | 444    |      |   | 543   
|Notes Receivable             |  |      | 16,430 |      |   | 13,493
|Deferred taxes  non current |  |      | 0      |      |   | 42    
|Deferred expenses            |  |      | 121    |      |   | 56    
|Other                        |  |      | 98     |      |   | 0     
|Investment, at cost          |  |      | 418    |      |   | 418   
|                             |  |      |        |      |   |       
|                             |  | $    | 17,511 |      | $ | 14,604
|                             |  |      |        |      |   |       

Notes receivable consists of the following at
December 31,



|                                                                                                                                                                    |  |       |  |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | -----
|                                                                                                                                                                    |  | 2009  |  | 2008 
|                                                                                                                                                                    |  |      
|Senior note receivable, which is interest free for first year and 6% per annum thereafter. $6.5 due each month beginning
January 31, 2005.                          |  | 222   |  | 211  
|                                                                                                                                                                    |  |      
|Junior note receivable, which is interest free. $5 due each quarter beginning March 31, 2005.                                                                       |  | 225   |  | 225  
|                                                                                                                                                                    |  |      
|Note Receivable, which bears interest at the rate of 6.5% per annum. $5.7 due each month beginning
October 14th,2007. Consolidated into note due
November 15, 2014. |  | 0     |  | 487  
|                                                                                                                                                                    |  |      
|Note Receivable, which bears interest at the rate of 6.5% per annum. $20 due each month beginning
December 4th, 2007.                                               |  | 1,508 |  | 1,649
|                                                                                                                                                                    |  |      
|Note Receivable, which bears interest at the rate of 6.5% per annum. $3.6 due each month beginning
December 4th, 2007.                                              |  | 278   |  | 299  



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FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



|                                                                                                                                                                                                                                                          |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                                                                                                                                          |  |  
|Note Receivable, which bears interest at the rate of prime plus 1.5%. $4.3 due each month beginning February 21st, 2003.                                                                                                                                  |  |   | 176    |   |  |   | 227    |  
|                                                                                                                                                                                                                                                          |  |  
|Note Receivable, which bears interest at the rate of 6.5% per annum. $6 due each month beginning May 31st, 2008. Consolidated into note due November 15,
2014.                                                                                            |  |   | 0      |   |  |   | 442    |  
|                                                                                                                                                                                                                                                          |  |  
|Note Receivable, which bears interest at the rate of 6.5% per annum. $6 due each month beginning May 31st, 2008. Consolidated into note due November 15,
2014.                                                                                            |  |   | 0      |   |  |   | 453    |  
|                                                                                                                                                                                                                                                          |  |  
|Note Receivable, which is interest free for one year, and bears interest at the rate of 5.35% per annum. $3 due each month
beginning Mar 15th, 2008.                                                                                                      |  |   | 456    |   |  |   | 470    |  
|                                                                                                                                                                                                                                                          |  |  
|Note Receivable, which bears interest at the rate of 8.5% per annum. $6 due each month beginning June 8th, 2006.                                                                                                                                          |  |   | 220    |   |  |   | 271    |  
|                                                                                                                                                                                                                                                          |  |  
|Note Receivable, which bears interest at the rate of libor plus 2.5%. $35 due each month beginning June 1st, 2008. Consolidated into note due November 15,
2014.                                                                                          |  |   | 0      |   |  |   | 627    |  
|                                                                                                                                                                                                                                                          |  |  
|Note Receivable, which bears interest at the rate of libor plus 2.5%. $35 due each month beginning October 1st, 2008. Consolidated into note due November 15,
2014.                                                                                       |  |   | 0      |   |  |   | 520    |  
|                                                                                                                                                                                                                                                          |  |  
|Note Receivable, which bears interest at the rate of 6% per annum. $2 due each month beginning July 2009                                                                                                                                                  |  |   | 195    |   |  |   | 0      |  
|                                                                                                                                                                                                                                                          |  |  
|Note Receivable, which bears interest at the rate of 6% per annum with escalating payments beginning in May 2010 with final
payment due November 15, 2014.                                                                                                |  |   | 5,072  |   |  |   | 0      |  
|                                                                                                                                                                                                                                                          |  |  
|Notes Receivable, one which bears interest at the rate of libor plus 2.25% and principle payments due quarterly starting
July 31st2010 with a maturity date of May 2018 and
the other is non-interest bearing monthly payment of $63 and is due May 2009. |  |   | 8,905  |   |  |   | 9,225  |  
|                                                                                                                                                                                                                                                          |  |  
|Various other notes receivable                                                                                                                                                                                                                            |  |   | 31     |   |  |   | 3      |  
|Less: Current portion of notes receivable                                                                                                                                                                                                                 |  |   | (608   | ) |  |   | (1,616 | )
|Less: Reserves on notes receivable                                                                                                                                                                                                                        |  |   | (250   | ) |  |   | 0      |  
|                                                                                                                                                                                                                                                          |  |   |        |   |  |   |        |  
|Total                                                                                                                                                                                                                                                     |  | $ | 16,430 |   |  | $ | 13,493 |  
|                                                                                                                                                                                                                                                          |  |   |        |   |  |   |        |  



F-18



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



Note D. Intangible Assets

Intangible assets consist of the following at December 31:



|                                                                                                                |  |      |     |      |   |    
|--------------------------------------------------------------------------------------------------------------- |  | ---- | --- | ---- | - | ---
|                                                                                                                |  | 2009 |     | 2008
|Trademarks and trade names, net of accumulated amortization of $1,510 and $1,449 in 2009 and 2008, respectively |  | $    | 280 |      | $ | 295
|                                                                                                                |  |      |     |      |   |    
|                                                                                                                |  | $    | 280 |      | $ | 295
|                                                                                                                |  |      |     |      |   |    

Amortization expense was $60, $644 and $131 in 2009,
2008 and 2007, respectively. Estimated amortization expense for each of the ensuing years through December 31, 2013 is as follows:



|     |  |     
|---- |  | ----
|2010 |  | $ 60
|2011 |  | $60 
|2012 |  | $60 
|2013 |  | $60 
|2014 |  | $40 

Note E. Property and Equipment

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



|                              |  |      |         |      |   |                       |  |            
|----------------------------- |  | ---- | ------- | ---- | - | --------------------- |  | -----------
|                              |  | 2009 |         | 2008 |   | EstimatedUseful Lives
|Land                          |  | $    | 837     |      | $ | 810                   |  |           
|Buildings                     |  |      | 44,622  |      |   | 31,953                |  | 15-40 years
|Machinery and equipment       |  |      | 60,452  |      |   | 58,261                |  | 5 -15 years
|Office equipment              |  |      | 11,591  |      |   | 10,867                |  | 5-7 years  
|Vehicles                      |  |      | 2,036   |      |   | 1,458                 |  | 5 years    
|Construction in progress      |  |      | 10,522  |      |   | 9,327                 |  |           
|                              |  |      |         |      |   |                       |  |            
|                              |  |      | 130,060 |      |   | 112,676               |  |            
|Less accumulated depreciation |  |      | 58,797  |      |   | 55,520                |  |            
|                              |  |      |         |      |   |                       |  |            
|                              |  |      |        
|                              |  | $    | 71,263  |      | $ | 57,156                |  |            
|                              |  |      |         |      |   |                       |  |            

Total depreciation expense charged to operations totaled $5,717, $5,751, and $7,073 for 2009, 2008
and 2007, respectively.



F-19



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



Note F. Accrued Expenses

Accrued expenses at December 31, 2009 and 2008 were as follows:



|                       |  |      |        |      |   |       
|---------------------- |  | ---- | ------ | ---- | - | ------
|                       |  | 2009 |        | 2008
|Customer Rebates       |  | $    | 2,068  |      | $ | 2,521 
|Bank overdraft         |  | $    | 954    |      | $ | 1,778 
|Other accrued expenses |  | $    | 10,312 |      | $ | 9,218 
|                       |  |      |        |      |   |       
|                       |  | $    | 13,334 |      | $ | 13,517
|                       |  |      |        |      |   |       

Note G. Pledged Assets and Debt

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



|                                                                                                                                                                                                                                                   |  |      |        |      |   |       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                                                                                                                                                                                                                                   |  | 2009 |        | 2008
|                                                                                                                                                                                                                                                   |  |     
|Long-term debt:                                                                                                                                                                                                                                    |  |      |        |      |   |       
|                                                                                                                                                                                                                                                   |  |     
|Prime plus 1.0% (4.25% at December 31, 2009) revolving line of credit. See discussion of terms below.                                                                                                                                              |  | $    | 15,154 |      | $ | 14,747
|                                                                                                                                                                                                                                                   |  |     
|6.5 percent note payable to a regional development authority, due in varying quarterly installments, plus interest, through
December 2017, collateralized by a security agreement and financing statement on real and personal property.           |  |      | 3,321  |      |   | 3,631 
|                                                                                                                                                                                                                                                   |  |     
|Note payable to a bank with interest at prime plus 0.25 percent, with rate adjusted annually (3.50% at December 31, 2009),
due in monthly payments of $7 including interest through June 2017, collateralized by a deed of trust on real property. |  |      | 0      |      |   | 529   
|                                                                                                                                                                                                                                                   |  |     
|Industrial revenue bond with a variable tax exempt interest rate as determined by a remarketing agent, with rate effectively
fixed at 5.49% by an interest-rate swap, balance due April 1, 2015, collateralized by a $4,000 letter of credit.      |  |      | 4,000  |      |   | 4,000 
|                                                                                                                                                                                                                                                   |  |     
|Industrial revenue bond with a variable tax exempt interest rate as determined by a remarketing agent, with rate effectively
fixed at 5.49% by an interest-rate swap, balance due April 1, 2013, collateralized by a $4,500 letter of credit.      |  |      | 4,500  |      |   | 4,500 
|                                                                                                                                                                                                                                                   |  |     
|Note payable to a bank with interest fixed at 6.575%, due in monthly payments with final balance due March 2021, collateralized
by property.                                                                                                       |  |      | 1,445  |      |   | 0     
|                                                                                                                                                                                                                                                   |  |     
|Note payable to a bank with a variable interest rate based on LIBOR, due in monthly payments of $25 with final balance due August
2013, collateralized by property.                                                                                |  |      | 3,254  |      |   | 0     
|                                                                                                                                                                                                                                                   |  |     
|Related Party note payable with an interest rate at 3.25% due in full in February 2010.                                                                                                                                                            |  |      | 126    |      |   | 0     
|                                                                                                                                                                                                                                                   |  |     
|Note with a variable interest rate with rate effectively fixed at 5.86% by an interest-rate swap, due in monthly payments of $16
with final balance due October 9, 2013, collateralized by property.                                               |  |      | 2,564  |      |   | 2,611 
|                                                                                                                                                                                                                                                   |  |     
|Various obligations under capital lease agreements                                                                                                                                                                                                 |  |      | 499    |      |   | 1,454 
|                                                                                                                                                                                                                                                   |  |      |        |      |   |       
|                                                                                                                                                                                                                                                   |  |     
|                                                                                                                                                                                                                                                   |  | $    | 34,863 |      | $ | 31,472
|                                                                                                                                                                                                                                                   |  |     
|Less current maturities                                                                                                                                                                                                                            |  |      | 1,051  |      |   | 1,307 
|                                                                                                                                                                                                                                                   |  |      |        |      |   |       
|                                                                                                                                                                                                                                                   |  |     
|                                                                                                                                                                                                                                                   |  |      | 33,812 |      |   | 30,165
|                                                                                                                                                                                                                                                   |  |     
|Less long-term capital lease obligations, less current maturities                                                                                                                                                                                  |  |      | 150    |      |   | 554   
|                                                                                                                                                                                                                                                   |  |      |        |      |   |       
|                                                                                                                                                                                                                                                   |  | $    | 33,662 |      | $ | 29,611
|                                                                                                                                                                                                                                                   |  |      |        |      |   |       



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



Aggregate maturities required on long-term debt and capital lease obligations as of
December 31, 2009 are due in future years as follows:



|                         |  |   |       
|------------------------ |  | - | ------
|Year Ending December 31, |  |  
|                         | 
|2010                     |  |   | 1,051 
|2011                     |  |   | 15,900
|2012                     |  |   | 784   
|2013                     |  |   | 9,956 
|2014                     |  |   | 459   
|Later years              |  |   | 6,713 
|                         |  |   |       
|                         | 
|                         |  | $ | 34,863
|                         |  |   |       

Revolving Line of Credit



| |  | On October 17, 2002, we signed agreements for a credit facility with Fleet Capital Corporation, now known as Bank of America through acquisition, which replaced
and repaid our previous $30 million revolving credit facility. The new $36 million facility has up to $13 million of letters of credit and a $23 million revolving credit line, which expires on October 17, 2011. The facility is collateralized by
substantially all of the Companys assets. The line of credit agreement restricts capital expenditures, dividends and share repurchases. Unless this credit facility is renewed, it will expire on October 17, 2011. There are no prepayment
penalties on any of the credit facilities with Bank of America.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In connection with the amended working capital
credit facility, the Company has agreed to certain restrictive covenants which include, among other things, not paying dividends or repurchasing its stock without prior written consent, and maintenance of certain financial ratios at all times
including: a maximum ratio of total liabilities to tangible net worth and a minimum fixed charge coverage ratio. The company was in compliance with all debt covenants as of December 31, 2009.



F-21



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



Note H. Leases

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



|                         |  |      |        |   |      |   |        |  
|------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                         |  | 2009 |        |   | 2008 |  
|                         |  |     
|Buildings                |  | $    | 3,700  |   |      | $ | 3,700  |  
|                         |  |     
|Machinery and equipment  |  |      | 356    |   |      |   | 640    |  
|                         |  |     
|Office equipment         |  |      | 768    |   |      |   | 972    |  
|Accumulated depreciation |  |      | (1,537 | ) |      |   | (1,571 | )
|                         |  |      |        |   |      |   |        |  
|                         |  |     
|                         |  | $    | 3,287  |   |      | $ | 3,741  |  
|                         |  |      |        |   |      |   |        |  

Future minimum payments, by year and in aggregate, under capital leases and operating leases consist of the
following at December 31, 2009:



|                                      |  |                |     |                  |   |       
|------------------------------------- |  | -------------- | --- | ---------------- | - | ------
|Year Ending December 31,              |  | Capital leases |     | Operating leases
|2010                                  |  | $              | 366 |                  | $ | 4,901 
|2011                                  |  |                | 77  |                  |   | 4,560 
|2012                                  |  |                | 70  |                  |   | 4,151 
|2013                                  |  |                | 11  |                  |   | 3,812 
|2014                                  |  |                | 0   |                  |   | 3,385 
|Later years                           |  |                | 0   |                  |   | 28,989
|                                      |  |                |     |                  |   |       
|                                      |  |               
|Total minimum lease payments          |  | $              | 524 |                  | $ | 49,798
|                                      |  |                |     |                  |   |       
|Less amount representing interest     |  |                | 25  |                  |   |       
|                                      |  |                |     |                  |   |       
|                                      |  |               
|Present value of net minimum payments |  |                | 499 |                  |   |       
|Current portion                       |  |                | 349 |                  |   |       
|                                      |  |                |     |                  |   |       
|                                      |  |               
|Long-term portion                     |  | $              | 150 |                  |   |       
|                                      |  |                |     |                  |   |       

Total rent expense charged to operations was approximately $6,352, $8,225, and $7,075 for 2009,
2008 and 2007, respectively.



F-22



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



Note I. Income Taxes

The Companys provision (benefit) for income taxes is as follows for the years ended December 31:



|                |  |      |       |      |   |        |      |  |   |        |  
|--------------- |  | ---- | ----- | ---- | - | ------ | ---- |  | - | ------ | -
|                |  | 2009 |       | 2008 |   |        | 2007 | 
|Current:        |  |      |       |      |   |        |      |  |   |        |  
|Federal         |  | $    | 3,517 |      | $ | (5,037 | )    |  | $ | (1,961 | )
|State           |  |      | 214   |      |   | 100    |      |  |   | (168   | )
|Foreign         |  |      | 165   |      |   | 184    |      |  |   | 285    |  
|                |  |      |       |      |   |        |      |  |   |        |  
|                |  |      | 3,896 |      |   | (4,753 | )    |  |   | (1,844 | )
|                |  |      |       |      |   |        |      |  |   |        |  
|Deferred:       |  |      |       |      |   |        |      |  |   |        |  
|Federal         |  |      | 360   |      |   | (1,203 | )    |  |   | (6,398 | )
|State           |  |      | 307   |      |   | (104   | )    |  |   | (549   | )
|                |  |      |       |      |   |        |      |  |   |        |  
|                |  |      |      
|                |  |      | 667   |      |   | (1,307 | )    |  |   | (6,947 | )
|                |  |      |       |      |   |        |      |  |   |        |  
|                |  |      |      
|Total provision |  | $    | 4,563 |      | $ | (6,060 | )    |  | $ | (8,791 | )
|                |  |      |       |      |   |        |      |  |   |        |  

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



|                                                 |  |      |       |   |      |   |        |      |  |   |         |  
|------------------------------------------------ |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                 |  | 2009 |       |   | 2008 |   |        | 2007 | 
|Income tax provision at statutory rate:          |  | $    | 3,919 |   |      | $ | (6,728 | )    |  | $ | (10,042 | )
|Increase (decrease) in income taxes due to:      |  |      |       |   |      |   |        |      |  |   |         |  
|Nondeductible expenses                           |  |      | (44   | ) |      |   | 758    |      |  |   | 72      |  
|                                                 |  |      |      
|State income taxes net                           |  |      | 344   |   |      |   | (58    | )    |  |   | (878    | )
|                                                 |  |      |      
|Foreign taxes/Non consolidated subs              |  |      | (52   | ) |      |   | (63    | )    |  |   | (111    | )
|                                                 |  |      |      
|Interest, Penalties, and Other tax contingencies |  |      | 528   |   |      |   | 265    |      |  |   | 1,335   |  
|                                                 |  |      |      
|Credits and adjustments                          |  |      | (132  | ) |      |   | (234   | )    |  |   | (812    | )
|Change in valuation allowance                    |  |      | 0     |   |      |   | 0      |      |  |   | 1,645   |  
|                                                 |  |      |       |   |      |   |        |      |  |   |         |  
|                                                 |  |      |      
|                                                 |  | $    | 4,563 |   |      | $ | (6,060 | )    |  | $ | (8,791  | )
|                                                 |  |      |       |   |      |   |        |      |  |   |         |  



F-23



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



Note I. Income Taxes  Continued

The components giving rise to the deferred tax assets and liabilities included in the accompanying consolidated balance sheets at
December 31, 2009 and December 31, 2008 were comprised of the following:



|                                               |  |      |        |   |      |   |        |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                               |  | 2009 |        |   | 2008 |  
|Deferred tax assets/(liabilities):             |  |      |        |   |      |   |        |  
|Accounts receivable allowance                  |  | $    | 714    |   |      | $ | 1,376  |  
|Inventory allowance and capitalization         |  |      | 1,069  |   |      |   | 1,256  |  
|Accrued expenses                               |  |      | 715    |   |      |   | 854    |  
|Deferred expenses                              |  |      | (83    | ) |      |   | (53    | )
|State credits                                  |  |      | 99     |   |      |   | 97     |  
|FIN 48 Interest  Current                      |  |      | 0      |   |      |   | 392    |  
|Foreign tax credit                             |  |      | 52     |   |      |   | 42     |  
|Federal net operating loss                     |  |      |       |   |      |   | 321    |  
|                                               |  |      |        |   |      |   |        |  
|Net Current Asset                              |  | $    | 2,566  |   |      | $ | 4,285  |  
|                                               |  |      |        |   |      |   |        |  
|Deferred tax assets/(liabilities):             |  |      |        |   |      |   |        |  
|Property and equipment                         |  | $    | (5,422 | ) |      | $ | (6,198 | )
|Stock Options                                  |  |      | 903    |   |      |   | 914    |  
|Interest rate swap                             |  |      | 605    |   |      |   | 821    |  
|State Tax expense                              |  |      | 65     |   |      |   | 235    |  
|FIN 48 Interest expense                        |  |      | 0      |   |      |   | 37     |  
|State net operating loss carry forwards        |  |      | 338    |   |      |   | 832    |  
|State credits (expiring between 2015 and 2021) |  |      | 3,353  |   |      |   | 3,401  |  
|                                               |  |      |        |   |      |   |        |  
|Net Noncurrent (Liability) Asset               |  | $    | (158   | ) |      | $ | 42     |  
|                                               |  |      |        |   |      |   |        |  
|                                               |  |     
|Current assets                                 |  | $    | 2,566  |   |      | $ | 4,285  |  
|Noncurrent (Liabilities) Assets                |  |      | (158   | ) |      |   | 42     |  
|                                               |  |      |        |   |      |   |        |  
|Total Deferred Tax                             |  | $    | 2,408  |   |      | $ | 4,327  |  
|                                               |  |      |        |   |      |   |        |  

Effective January 1, 2007, the Company adopted new guidance on income taxes. This guidance clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. It also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company is subject to income taxes in the U.S, Mexico and Singapore. Significant judgment is required in evaluating our tax positions and determining
our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company records unrecognized tax benefits for tax-related uncertainties
based on estimates of whether, and the extent to which, additional taxes will be due. These unrecognized tax benefits are established when we believe that certain positions might be challenged despite our belief that our tax return positions are
fully supportable. We adjust these unrecognized tax benefits in light of changing facts and circumstances, such as the outcome of tax audit. The provision for income taxes includes the impact of unrecognized tax benefits. Accruals for unrecognized
tax benefits are also provided for in accordance with the new guidance.



F-24



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



The reconciliation of our unrecognized tax benefits are as follows:



|                                                             |  |   |        |  
|------------------------------------------------------------ |  | - | ------ | -
|Balance at January 1, 2009                                   |  | $ | 5,337  |  
|Gross increases to tax positions in prior periods            |  |   | 0      |  
|Gross decreases to tax positions in prior periods            |  |   | (0     | )
|Gross increases to current period tax positions              |  |   | 0      |  
|Gross decreases to current period tax positions              |  |   | (0     | )
|Audit settlements during 2009                                |  |   | (5,147 | )
|Decreases related to the lapse of the statute of limitations |  |   | (0     | )
|                                                             |  |   |        |  
|                                                             | 
|Balance at December 31, 2009                                 |  | $ | 190    |  
|                                                             |  |   |        |  

As of December 31, 2009, we had $.2 million of unrecognized tax benefits of which $.2 million, if fully recognized,
would affect our effective tax.

Our policy is to include interest and penalties related to our unrecognized tax benefits in income tax
expense. As of December 31, 2009, the Companys unrecognized tax benefits had no accrued interest and penalties related to unrecognized tax benefits.

During 2009, we settled IRS audits for the years 2002 to 2006. This settlement of these audits resulted in a decrease of our federal unrecognized tax benefits by $4.7 million. In addition, our
unrecognized tax benefit for state tax decreased by $.5 million due to the settlement of the IRS audits.

We are under examination, or may be
subject to examination, by the Internal Revenue Service (IRS) for calendar years 2006 through 2008. We are under examination, or may be subject to examination, in the following major jurisdictions for the years specified: Mexico for 2004
through 2008, Singapore for 2002 through 2008, Florida for 2002 through 2008, and North Carolina for 2002 to 2008.

Note J. Commitments and
Contingencies



| | 1. | Employment Agreements
| | -- | ---------------------

Mr. Smith (Chief Executive Officer) has an employment agreement effective as of December 1, 2008 (Employment Agreement). The Employment Agreement provides for an annual base salary of $350,000 and terminates on
November 30, 2011. Mr. Smith will also be entitled to receive a bonus of $37,500 per quarter upon meeting targets established and agreed to by the Compensation Committee of the Board of Directors. The Employment Agreements also provide
that the executive shall be entitled to the following termination payments: (i) pay to Executive an amount equal to Executives compensation, discussed above, from the Company for the previous 18 months, plus the value of any accrued or
unused vacation and (ii) provide acceleration and immediate vesting of all of Executives stock options from the Company which have not yet vested at that time, and such accelerated options as well as any other options which have vested
and are then exercisable shall be exercisable for a period of three (3) months following the date of termination and shall then expire and be of no further force or effect.

Mr. Oakley (Chief Financial Officer) has an employment agreement effective as of January 28, 2009 (Employment
Agreement). The Employment Agreement provides for an annual base salary of $200,000 and terminates on January 27, 2012. Mr. Oakley will also be entitled to receive a bonus of 50% of base salary upon meeting targets established and
agreed to by the Chief Executive Officer. The Employment Agreements also provide that the executive shall be entitled to the following termination payments: (i) pay to Executive an amount equal to Executives compensation, discussed above,
from the Company for the previous 12 months, plus the value of any accrued or unused vacation and (ii) provide acceleration and immediate vesting of all of Executives stock options from the Company which have not yet vested at that time,
and such accelerated options as well as any other options which have vested and are then exercisable shall be exercisable for a period of three (3) months following the date of termination and shall then expire and be of no further force or
effect.



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FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



Note J. Commitments and Contingencies  Continued



| | 2. | Litigation
| | -- | ----------

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



| | 3. | Self-Insurance
| | -- | --------------

During
all periods presented, workers compensation claims incurred by employees were fully insured through a high deductible policy with a policy year ending each May. The deductible per employee was $750 in 2009 and 2008, with no limit in the
aggregate. The Company continuously monitors and estimates the estimated costs of claims incurred based on historical loss information and other information provided by its carriers claims management personnel. Included in the liabilities in
the accompanying balance sheets are accrued workers compensation expenses of approximately $500 and $747 as of December 31, 2009 and 2008, respectively.

The Company provides medical benefits to its employees under a self-insured program. Through June 30, 2002, the Company paid for 100% of an employees health costs as the services were incurred. In
July 2002, the Company changed the program that provides medical benefits to its employees once certain deductibles are met. The benefits to the employees are limited to $35 per year with a $1,000 lifetime benefit. The Company estimates the amount
of incurred but unreported claims based on historical information. Included in the liabilities in the accompanying balance sheets are estimated accrued health insurance expenses of approximately $200 as of December 31, 2009 and 2008. The
employers portion of claims charged to operations totaled approximately $3,407, $1,103 and $974 for 2009, 2008 and 2007, respectively.



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FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



| | 4. | License and Royalty Agreements
| | -- | ------------------------------

During 2008, the Company had a secured licensing and royalty agreement with a company allowing the Company to use its trade names and brands on its products. Costs associated with this agreement are expensed as incurred. This agreement was
terminated as of December 31, 2008.

Note K. Employee Benefit Plans

The Company has a defined contribution 401(k) salary reduction plan intended to qualify under section 401(a) of the Internal Revenue Code of
1986 (Salary Savings Plan). The Salary Savings Plan allows eligible employees, as defined in the plan document, to defer up to fifteen percent of their eligible compensation, with the Company contributing an amount determined at the
discretion of the Companys Board of Directors. The Company contributed approximately $56, $89 and $96 to the Salary Savings Plan for the years ended December 31, 2009, 2008 and 2007, respectively.

During 1996, the Company adopted the Long Term Incentive Plan (LTI Plan) to assist the Company in securing and retaining key
employees and consultants. The LTI Plan authorizes grants of incentive stock options, nonqualified stock options, stock appreciation rights (SARs), restricted stock performance shares and dividend equivalents to officers, key employees
of the Company and outside consultants to the Company. In 2007, the Company adopted the 2007 Equity Incentive Plan which replaced this LTI Plan.

During 2007, the Company adopted the 2007 Equity Incentive Plan. The Company has reserved 2,000,000 shares of its Common Stock for issuance under the 2007 Equity Incentive Plan that expires in 2017.
During 2009 and 2008, the Company awarded options to purchase 15,000 and 55,000 shares of common stock under the 2007 Equity Incentive Plan, respectively.



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



Note L. Extraordinary Items

In 2006, a warehouse in Terrell, Texas was destroyed by a fire. In 2007, a warehouse in Bartow, Florida was destroyed by a fire. In 2006, a
warehouse in Auburn, Pennsylvania was damaged by a flood.

The extraordinary gain of $9,030 during 2008 was calculated as the
gain on the costs that were attributable to the Bartow fire and the Auburn flood ($1,587) that were less than the insurance proceeds ($15,479), net of taxes of $4,862.

The extraordinary gain of $213 during 2007 was calculated as the gain on the costs that were attributable to the Bartow and Terrell fires ($16,373) that were less than the insurance proceeds ($16,728),
net of taxes of $142.

In September 2008, the warehouse in Auburn, Pennsylvania was partially destroyed by fire. All
anticipated losses resulting from this fire are expected to be covered by insurance.

Note M. Related Party Transactions and Balances

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



| |  |  | Mr. Clark transfers his fifty percent (50%) membership interest in Wal-Pat to Mr. Amerson.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Mr. Clark exercised, on a cashless exercise basis, a stock option for 1,000,000 shares of Flanders common stock at an exercise price of
$2.50 per share by tendering 543,748 shares of Flanders common stock resulting in a net issuance of 426,522 shares to Mr. Clark. The 573,478 shares were then retired.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mr. Clark satisfied his obligations under a promissory note due Flanders, which had an outstanding balance of $5,446 as of
September 30, 2007 in consideration of his surrendering 1,183,872 shares of Flanders common stock. These shares were valued at $4.60, which was the 30-day average market value of Flanders shares. These shares were then retired.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mr. Clark and Flanders mutually release each other from any obligations created under or related to Mr. Clarks employment
agreements with Flanders. Mr. Clark is also released from his noncompetition covenants set forth in his employment agreement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Flanders transfers certain manufacturing assets with a net book value of approximately $250 from the Salt Lake City, Utah facility to
Mr. Clark.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mr. Clark resigned as a director as of October 4, 2007.
| | - |  | -------------------------------------------------------

As of December 31, 2009 the Company has entered into four operating leases expiring between 2019 and 2029 with Wal-Pat II. Wal-Pat II is
owned by Robert R. Amerson, one of the Companys Directors. The monthly payments to Wal-Pat II total $237. The Company made payments of $3,039, $3,402 and $3,372 in 2009, 2008 and 2007, respectively. The Company believes these leases are at
prevailing market rates.

The Company paid a limited liability company owned equally by Harry Smith and Robert Amerson $240 and
$253 in 2009 and 2008, respectively, for use of this entitys corporate aircraft. The Companys Audit Committee has ratified the reimbursements to this entity. On a monthly basis, we are provided an invoice, which sets forth the details of
each use of this aircraft by management, including the business purpose, the passengers, and the destination of each flight.



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



During the second quarter of 2009 the Company purchased a building in Folcroft,
Pennsylvania from Wal-Pat II, LLC by assuming a note payable for $1.5 million.

During the third quarter of 2009 the Company
purchased a building in Rosenburg, Texas from Wal-Pat III, LLC by assuming a note payable for $3.4 million from Wal-Pat III, LLC and by providing another note payable to Wal-Pat III, LLC for another $1.2 million.

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



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



Note N. Stock Options and Warrants

During 2009, the Company granted options to purchase: 15,000 shares of common stock under its 2007 Equity Incentive Plan at a weighted
average exercise price of $4.60 per share. All options granted during 2009 were non-qualified fixed price options.

The
following table summarizes the activity related to all Company stock options and warrants for 2009, 2008 and 2007:



|                                 |  |                       |  |         |                         |  |                                         |  |         |  |          |  |         |  |   |  |       |  |      |  |     
|-------------------------------- |  | --------------------- |  | ------- | ----------------------- |  | --------------------------------------- |  | ------- |  | -------- |  | ------- |  | - |  | ----- |  | ---- |  | ----
|                                 |  | Shares (In thousands) |  |         | Exercise Priceper
Share |  | Weighted AverageExercise Priceper Share
|                                 |  |                       |  | Stock   |                         |  |                                        
|                                 |  | Warrants              |  | Options |                         |  | Warrants                                |  | Options |  | Warrants |  | Options
|Outstanding at January 1, 2007   |  |                      |  | 5,752   |                         |  |                                         |  |        |  |          |  | 1.50    |  |  |  | 11.72 |  |     |  | 6.08
|Granted                          |  |                      |  | 620     |                         |  |                                         |  |        |  |          |  | 4.99    |  |  |  | 9.52  |  |     |  | 5.23
|Exercised                        |  |                      |  | (1,105  | )                       |  |                                         |  |        |  |          |  | 1.50    |  |  |  | 5.21  |  |     |  | 2.55
|Canceled or expired              |  |                      |  | (2,000  | )                       |  |                                         |  |        |  |          |  | 7.50    |  |  |  | 11.10 |  |     |  | 8.68
|                                 |  |                       |  |         |                         |  |                                         |  |         |  |          |  |         |  |   |  |       |  |      |  |     
|Outstanding at December 31, 2007 |  |                      |  | 3,267   |                         |  |                                         |  |        |  |          |  | 1.74    |  |  |  | 11.72 |  |     |  | 5.53
|Granted                          |  | 15                    |  | 55      |                         |  | 4.69                                    |  |        |  | 4.69     |  | 4.69    |  |  |  | 5.71  |  | 4.69 |  | 4.78
|Exercised                        |  |                      |  | (138    | )                       |  |                                         |  |        |  |          |  | 1.74    |  |  |  | 5.21  |  |     |  | 3.09
|Canceled or expired              |  |                      |  | (279    | )                       |  |                                         |  |        |  |          |  | 3.93    |  |  |  | 11.72 |  |     |  | 8.93
|                                 |  |                       |  |         |                         |  |                                         |  |         |  |          |  |         |  |   |  |       |  |      |  |     
|Outstanding at December 31, 2008 |  | 15                    |  | 2,905   |                         |  | 4.69                                    |  |        |  | 4.69     |  | 1.74    |  |  |  | 11.72 |  | 4.69 |  | 5.29
|Granted                          |  |                      |  | 15      |                         |  |                                         |  |        |  |          |  | 4.60    |  |  |  | 4.60  |  |     |  | 4.60
|Exercised                        |  |                      |  | (1,000  | )                       |  |                                         |  |        |  |          |  | 2.50    |  |  |  | 2.50  |  |     |  | 2.50
|Canceled or expired              |  |                      |  | (60     | )                       |  |                                         |  |        |  |          |  | 5.21    |  |  |  | 8.60  |  |     |  | 7.47
|                                 |  |                       |  |         |                         |  |                                         |  |         |  |          |  |         |  |   |  |       |  |      |  |     
|Outstanding at December 31, 2009 |  | 15                    |  | 1,860   |                         |  | 4.69                                    |  |        |  | 4.69     |  | 4.37    |  |  |  | 11.72 |  | 4.69 |  | 6.71
|                                 |  |                       |  |         |                         |  |                                         |  |         |  |          |  |         |  |   |  |       |  |      |  |     
|Exercisable at December 31, 2009 |  | 15                    |  | 1,860   |                         |  | 4.69                                    |  |        |  | 4.69     |  | 4.37    |  |  |  | 11.72 |  | 4.69 |  | 6.71
|                                 |  |                       |  |         |                         |  |                                         |  |         |  |          |  |         |  |   |  |       |  |      |  |     
|Exercisable at December 31, 2008 |  |                      |  | 2,905   |                         |  | 4.69                                    |  |        |  | 4.69     |  | 1.74    |  |  |  | 11.72 |  | 4.69 |  | 5.29
|                                 |  |                       |  |         |                         |  |                                         |  |         |  |          |  |         |  |   |  |       |  |      |  |     
|Exercisable at December 31, 2007 |  |                      |  | 2,867   |                         |  |                                         |  |        |  |          |  | 1.74    |  |  |  | 11.72 |  |     |  | 5.60
|                                 |  |                       |  |         |                         |  |                                         |  |         |  |          |  |         |  |   |  |       |  |      |  |     

The warrants and options expire at various dates ranging from January 2010 to January 2019. A
further summary of information related to options outstanding at December 31, 2009 is as follows:



|                        |  |                                 |  |                                                   |  |                                                        
|----------------------- |  | ------------------------------- |  | ------------------------------------------------- |  | -------------------------------------------------------
|Range of ExercisePrices |  | NumberOutstanding / Exercisable |  | Weighted AverageRemaining ContractualLife (Years) |  | Weighted AverageExercise
PriceOutstanding / Exercisable
|$4.37 to 4.99           |  | 615 / 615                       |  | 7.18                                              |  | $4.91 / 4.91                                           
|$5.55 to 7.50           |  | 1,105 / 1,105                   |  | 2.43                                              |  | $7.32 / 7.32                                           
|$8.85 to 11.72          |  | 140 / 140                       |  | .81                                               |  | $9.89 / 9.89                                           



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



Note O. Sale of Media Facility

Flanders Corporation closed on an Asset Purchase Agreement effective April 30, 2008 and related documents for our media supply business located in Clarkton, North Carolina (Media Supply
Assets). The closing of this transaction is part of Flanders focus of shedding verticality and making operations efficient and profitable.

The Media Supply Assets had a net book value of approximately $9,315. The Media Supply Assets sold consisted of the following:



|                                      |  |   |      
|------------------------------------- |  | - | -----
|     Inventory                       |  | $ | 804  
|     Building Improvements           |  | $ | 1,835
|     Manufacturing Equipment         |  | $ | 6,654
|     Office Equipment/ Miscellaneous |  | $ | 22   
|                                      |  |   |      
|                                      | 
|Total                                 |  | $ | 9,315
|                                      |  |   |      

The Media Supply Assets were sold to Superior Filters, LLC, an
unrelated party.

In consideration for the sale of the Media Supply Assets, we received promissory notes in the face amount totaling $10,065.
The majority of these promissory notes balances are secured by the Media Supply Assets. One promissory note has the term of 10 years, payable on a monthly basis, at a floating rate of interest tied to LIBOR plus 2.25% and the other promissory note
has a term of 1 year, payable on a monthly basis, interest free.

In connection with the sale of the Media Supply Assets, Flanders and
Superior Fibers, LLC entered into a Supply Agreement for fiberglass media and Ashrae media ordered by Flanders from Superior Fibers, LLC. The Supply Agreement provides that the prices to be paid by Flanders shall be competitive with the medium mean
market pricing for the specified products. If the supplier rejects any purchase order on the basis that it cannot economically produce and supply such products, then Flanders has the right to purchase such products from other sources.

Note P. Sale Leaseback of Property

In
August 2008, the Company sold its Bartow property to Wal-Pat II, LLC, a related party. The property was sold for $3.7 million and part of the proceeds were used to pay down the existing debt on this property in the amount of approximately $1.8
million. The Company has leased this property back as of March 2009. The Company has recorded a deferred gain, $1.4 million as of December 31, 2009, on the sale which will be amortized to rent expense over the lease term of ten years.

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

Note Q. Earnings per Share

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



|                                                                                           |  |        |  |        |  |       
|------------------------------------------------------------------------------------------ |  | ------ |  | ------ |  | ------
|                                                                                           |  | 2009   |  | 2008   |  | 2007  
|Common shares outstanding at beginning of year                                             |  | 25,524 |  | 25,691 |  | 26,343
|                                                                                           |  |        | 
|Net weighted average common shares issued and canceled during year                         |  | 255    |  | 2      |  | 19    
|                                                                                           |  |        |  |        |  |       
|                                                                                           |  |        | 
|Weighted average number of common shares used in basic EPS                                 |  | 25,779 |  | 25,693 |  | 26,362
|                                                                                           |  |        | 
|Dilutive effect of stock options and warrants                                              |  | 16     |  | 0      |  | 0     
|                                                                                           |  |        |  |        |  |       
|                                                                                           |  |        | 
|Weighted average number of common shares and dilutive potential shares used in diluted EPS |  | 25,795 |  | 25,693 |  | 26,362
|                                                                                           |  |        |  |        |  |       



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



As of December 31, 2009, 2008 and 2007, options and warrants to purchase 1,245,000,
1,285,000 and 1,385,000 shares, respectively, of the Companys common stock described in Note N were excluded from the computation of diluted EPS because the market price of the underlying stock was less than the exercise price.

Note R. Subsequent Events

Subsequent to year-end the companys Board of Directors resolved to grant 1 million shares of common stock to members of management for continued service in their respective positions. The company has not yet determined the timing or
source for the issuance of these shares which may be 2010 or possibly subsequent years.



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##### Table of Contents

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)



Note S. Quarterly Financial Data (Unaudited)



|                                                         |  |                |        |   |              |   |        |                   |  |                  |        |  |   |         |  
|-------------------------------------------------------- |  | -------------- | ------ | - | ------------ | - | ------ | ----------------- |  | ---------------- | ------ |  | - | ------- | -
|                                                         |  | Quarters Ended |       
|                                                         |  | March 31,2009  |        |   | June 30,2009 |   |        | September 30,2009 |  | December 31,2009 |       
|Net sales                                                |  | $              | 48,020 |   |              | $ | 58,727 |                   |  | $                | 60,426 |  | $ | 55,207  |  
|Gross profit                                             |  | $              | 9,905  |   |              | $ | 12,598 |                   |  | $                | 10,981 |  | $ | 9,729   |  
|Operating Income / (Loss)                                |  | $              | 2,370  |   |              | $ | 4,039  |                   |  | $                | 2,947  |  | $ | 2,517   |  
|Net Earnings / (Loss)                                    |  | $              | 1,800  |   |              | $ | 2,437  |                   |  | $                | 1,770  |  | $ | 957     |  
|                                                         |  |                |        |   |              |   |        |                   |  |                  |        |  |   |         |  
|Net Earnings / (Loss) per share:                         |  |                |        |   |              |   |        |                   |  |                  |        |  |   |         |  
|Basic                                                    |  | $              | .07    |   |              | $ | .10    |                   |  | $                | .07    |  | $ | .03     |  
|Diluted                                                  |  |                | .07    |   |              |   | .09    |                   |  |                  | .07    |  |   | .04     |  
|Common stock prices:                                     |  |                |        |   |              |   |        |                   |  |                  |        |  |   |         |  
|High                                                     |  | $              | 5.37   |   |              | $ | 6.44   |                   |  | $                | 6.76   |  | $ | 5.57    |  
|Low                                                      |  |                | 3.62   |   |              |   | 4.18   |                   |  |                  | 5.00   |  |   | 3.79    |  
|                                                         |  |                |        |  
|                                                         |  | March 31,2008  |        |   | June 30,2008 |   |        | September 30,2008 |  | December 31,2008 |       
|Net sales                                                |  | $              | 49,194 |   |              | $ | 57,269 |                   |  | $                | 61,070 |  | $ | 49,795  |  
|Gross profit                                             |  | $              | 8,724  |   |              | $ | 8,496  |                   |  | $                | 10,818 |  | $ | (1,478  | )
|Operating income                                         |  | $              | (552   | ) |              | $ | (817   | )                 |  | $                | 1,400  |  | $ | (20,758 | )
|Income (loss) before extraordinary items                 |  | $              | 851    |   |              | $ | 80     |                   |  | $                | 894    |  | $ | (14,988 | )
|Net Earnings                                             |  | $              | 2,384  |   |              | $ | 6,882  |                   |  | $                | 894    |  | $ | (14,293 | )
|                                                         |  |                |        |   |              |   |        |                   |  |                  |        |  |   |         |  
|Net Earnings (loss) before extraordinary item per share: |  |                |        |   |              |   |        |                   |  |                  |        |  |   |         |  
|Basic                                                    |  | $              | .03    |   |              | $ | .00    |                   |  | $                | .03    |  | $ | (.58    | )
|Diluted                                                  |  |                | .03    |   |              |   | .00    |                   |  |                  | .03    |  |   | (.58    | )
|Net Earnings per share:                                  |  |                |        |   |              |   |        |                   |  |                  |        |  |   |         |  
|Basic                                                    |  | $              | .09    |   |              | $ | .27    |                   |  | $                | .03    |  | $ | (.55    | )
|Diluted                                                  |  |                | .09    |   |              |   | .26    |                   |  |                  | .03    |  |   | (.55    | )
|                                                         |  |                |        |  
|Common stock prices:                                     |  |                |        |   |              |   |        |                   |  |                  |        |  |   |         |  
|High                                                     |  | $              | 6.70   |   |              | $ | 7.70   |                   |  | $                | 7.22   |  | $ | 6.35    |  
|Low                                                      |  |                | 5.07   |   |              |   | 5.86   |                   |  |                  | 5.20   |  |   | 4.39    |  



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##### Table of Contents

FLANDERS CORPORATION

FINANCIAL STATEMENT SCHEDULE

FLANDERS CORPORATION AND SUBSIDIARIES

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

Years Ended December 31, 2009, 2008 and 2007



|                                     |  |                              |       |                           |   |        |            |  |   |                        |      |  |   |      
|------------------------------------ |  | ---------------------------- | ----- | ------------------------- | - | ------ | ---------- |  | - | ---------------------- | ---- |  | - | -----
|                                     |  |                              |       | Additions                 |   |        |            |  |   |                       
|                                     |  | Balance atBeginningof Period |       | Charged toCost andExpense |   |        | Deductions |  |   | Balanceat Endof Period
|For the year ended December 31, 2009 |  |                              |       |                           |   |        |            |  |   |                        |      |  |   |      
|Allowance for doubtful accounts      |  | $                            | 3,683 |                           | $ | 1,845  |            |  | $ | (3,356                 | )(1) |  | $ | 2,172
|Allowance for inventory              |  |                              | 774   |                           |   | 0      |            |  |   | 0                      |      |  |   | 774  
|                                     |  |                              |       |                           |   |        |            |  |   |                        |      |  |   |      
|Total                                |  | $                            | 4,457 |                           | $ | 1,845  |            |  | $ | (3,356                 | )    |  | $ | 2,946
|                                     |  |                              |       |                           |   |        |            |  |   |                        |      |  |   |      
|                                     |  |                              |       |                          
|For the year ended December 31, 2008 |  |                              |       |                           |   |        |            |  |   |                        |      |  |   |      
|Allowance for doubtful accounts      |  | $                            | 3,662 |                           | $ | 3,532  |            |  | $ | (3,512                 | )(1) |  | $ | 3,683
|Allowance for inventory              |  |                              | 2,859 |                           |   | (124   | )          |  |   | (1,961                 | )    |  |   | 774  
|                                     |  |                              |       |                           |   |        |            |  |   |                        |      |  |   |      
|Total                                |  | $                            | 6,522 |                           | $ | 3,408  |            |  | $ | (5,473                 | )    |  | $ | 4,457
|                                     |  |                              |       |                           |   |        |            |  |   |                        |      |  |   |      
|                                     |  |                              |       |                          
|For the year ended December 31, 2007 |  |                              |       |                           |   |        |            |  |   |                        |      |  |   |      
|Allowance for doubtful accounts      |  | $                            | 4,313 |                           | $ | 10,638 |            |  | $ | (11,288                | )(1) |  | $ | 3,663
|Allowance for inventory              |  |                              | 1,623 |                           |   | 3,133  |            |  |   | (1,897                 | )    |  |   | 2,859
|                                     |  |                              |       |                           |   |        |            |  |   |                        |      |  |   |      
|Total                                |  | $                            | 5,936 |                           | $ | 13,771 |            |  | $ | (13,185                | )    |  | $ | 6,522
|                                     |  |                              |       |                           |   |        |            |  |   |                        |      |  |   |      



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



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON SCHEDULE

Board of Directors

Flanders Corporation

In connection with our audits of the consolidated financial statements of Flanders Corporation and Subsidiaries referred to in our report dated March 22, 2010, which is included in the Companys
Annual Report of Form 10-K for the year ended December 31, 2009 we have also audited Schedule II for each of the three years in the period ended December 31, 2009. In our opinion, this schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Pender Newkirk & Company, LLP

Pender Newkirk & Company, LLP

Certified Public Accountants

Tampa, Florida

March 22, 2010



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