UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

| |     |                                                                                          
| | --- | -----------------------------------------------------------------------------------------
| | [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) 
 OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30,
2007
Commission File Number. 000-27958

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

|                                                                |  |                         
|--------------------------------------------------------------- |  | ------------------------
|North Carolina                                                  |  | 13-3368271              
|                                                                |  |                         
|(State or other jurisdiction of incorporation or organization.) |  | (IRS Employer ID Number)
|                                                                |  |                         
|2399 26th Avenue North, St. Petersburg, Florida                 |  | 33713                   
|                                                                |  |                         
|(Address of principal executive offices)                        |  | (Zip Code)              

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

Indicate
by check mark whether the issuer (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 Ö    NO                                                                                                                                                                    
| |                                                                                                                                                                                
| | Indicate by
 check mark whether the registrant is a large accelerated filer, an
 accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2) of
 the Exchange Act.

| |                          |                      |  |                      
| | ------------------------ | -------------------- |  | ---------------------
| | Large
 accelerated filer | Accelerated filer  Ö |  | Non-accelerated filer

| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | Indicate by
 check mark whether the registrant is a shell company (as defined in Rule
 12b-2 of the Exchange Act).
| |                                                                                                                   
| | YES     NO Ö                                                                                                      
| |                                                                                                                   
| | The number
 of shares outstanding of the registrants common stock, as of September 30,
 2007 was 25,896,729.     

Page 1

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FLANDERS CORPORATION 
FORM 10-Q 
FOR QUARTER ENDED September 30, 2007

|                                                                                                                                                          |  |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|                                                                                                                                                          |  | Page
|                                                                                                                                                          |  |      | 
|PART I - FINANCIAL INFORMATION                                                                                                                            |  |      | 
|                                                                                                                                                          |  |      | 
|Item 1
-                                                                                                                                                  |  |      | 
|                                                                                                                                                          |  |      | 
|Financial Statements                                                                                                                                      |  |      | 
|                                                                                                                                                          |  |      | 
|Consolidated
Condensed Balance Sheets for
 September 30, 2007 (unaudited) and December 31, 2006                                                           |  | 3    | 
|                                                                                                                                                          |  |      | 
|Consolidated
Condensed Statements of
 Earnings (unaudited) for the three and nine months ended September 30, 2007
 and 2006                               |  | 4    | 
|                                                                                                                                                          |  |      | 
|Consolidated
Condensed Statements of
 Stockholders Equity for the nine months ended September 30, 2007 (unaudited)
 and the year ended December 31, 2006 |  | 5    | 
|                                                                                                                                                          |  |      | 
|Consolidated
Condensed Statements of Cash
 Flows (unaudited) for the three and nine months ended September 30, 2007 and
 2006                             |  | 6    | 
|                                                                                                                                                          |  |      | 
|Notes to Consolidated Condensed
Financial Statements                                                                                                      |  | 7    | 
|                                                                                                                                                          |  |      | 
|Item 2
-                                                                                                                                                  |  |      | 
|                                                                                                                                                          |  |      | 
|Managements Discussion
and Analysis of
 Financial Condition and Results of Operations                                                                    |  | 11   | 
|                                                                                                                                                          |  |      | 
|Item 3
-                                                                                                                                                  |  |      | 
|                                                                                                                                                          |  |      | 
|Quantitative and Qualitative
Disclosures
 About Market Risk                                                                                               |  | 16   | 
|                                                                                                                                                          |  |      | 
|Item 4
-                                                                                                                                                  |  |      | 
|                                                                                                                                                          |  |      | 
|Controls and
Procedures                                                                                                                                   |  | 17   | 
|                                                                                                                                                          |  |      | 
|PART II - OTHER
 INFORMATION                                                                                                                              |  |      | 
|                                                                                                                                                          |  |      | 
|Item 1 - Legal
Proceedings                                                                                                                                |  | 17   | 
|                                                                                                                                                          |  |      | 
|Item 1A 
Risk Factors                                                                                                                                    |  | 17   | 
|                                                                                                                                                          |  |      | 
|Item 2 -
Unregistered Sales of Equity
 Securities and Use of Proceeds                                                                                     |  | 21   | 
|                                                                                                                                                          |  |      | 
|Item 3 
Defaults Upon Senior Securities                                                                                                                  |  | 21   | 
|                                                                                                                                                          |  |      | 
|Item 4 -
Submission of Matters to a Vote of
 Security Holders                                                                                             |  | 21   | 
|                                                                                                                                                          |  |      | 
|Item 5 - Other
Information                                                                                                                                |  | 21   | 
|                                                                                                                                                          |  |      | 
|Item 6 -
Exhibits                                                                                                                                         |  | 22   | 
|                                                                                                                                                          |  |      | 
|SIGNATURES                                                                                                                                                |  | 23   | 

Page 2

---



PART I -
FINANCIAL INFORMATION

|        |                       
|------- | ----------------------
|Item 1. | Financial
  Statements

FLANDERS CORPORATION AND SUBSIDIARIESCONSOLIDATED CONDENSED BALANCE SHEETS(In
thousands)

|                                                                                                                                                                |  |                      |         |                     |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------- | ------------------- | - | ------- | -
|ASSETS                                                                                                                                                          |  | September 30,
  2007 |         | December 31,
  2006 |  
|                                                                                                                                                                |  |                      |         |                     |  
|                                                                                                                                                                |  | (unaudited)          |         |                     |  
|Current
  assets                                                                                                                                                |  |                      |         |                     |   |         |  
|Cash and cash
equivalents                                                                                                                                       |  | $                    | 687     |                     | $ | 568     |  
|Receivables:                                                                                                                                                    |  |                      |         |                     |   |         |  
|Trade, less
allowance:                                                                                                                                          |  |                      |         |                     |   |         |  
|9/30/2007 $11,323; 12/31/2006
$4,313                                                                                                                            |  |                      | 52,222  |                     |   | 53,740  |  
|Other                                                                                                                                                           |  |                      | 1,289   |                     |   | 1,200   |  
|Inventories                                                                                                                                                     |  |                      | 50,874  |                     |   | 58,939  |  
|Deferred taxes                                                                                                                                                  |  |                      | 7,287   |                     |   | 3,332   |  
|Other current assets                                                                                                                                            |  |                      | 9,322   |                     |   | 3,472   |  
|                                                                                                                                                                |  |                      |         |                     |   |         |  
|Total current
assets                                                                                                                                            |  |                      | 121,681 |                     |   | 121,251 |  
|Related
  party receivables                                                                                                                                     |  |                      | 314     |                     |   | 428     |  
|Property
  and equipment, less
  accumulated depreciation: 9/30/2007                                                                                            |  |                      |         |                     |   |         |  
|$55,345; 12/31/2006
$64,604                                                                                                                                     |  |                      | 66,897  |                     |   | 77,297  |  
|Intangible
  assets, less
  accumulated amortization: 9/30/2007                                                                                                 |  |                      |         |                     |   |         |  
|$871; 12/31/2006
$1,256                                                                                                                                         |  |                      | 3,904   |                     |   | 5,975   |  
|Other
  assets                                                                                                                                                  |  |                      | 4,418   |                     |   | 2,153   |  
|                                                                                                                                                                |  |                      |         |                     |   |         |  
|                                                                                                                                                                |  | $                    | 197,214 |                     | $ | 207,104 |  
|                                                                                                                                                                |  |                      |         |                     |   |         |  
|LIABILITIES
  AND STOCKHOLDERS EQUITY                                                                                                                          |  |                      |         |                     |   |         |  
|                                                                                                                                                                |  |                      |         |                     |   |         |  
|Current
  liabilities                                                                                                                                           |  |                      |         |                     |   |         |  
|Current maturities of long-term
debt and capital lease obligations                                                                                              |  | $                    | 3,867   |                     | $ | 5,075   |  
|Accounts payable                                                                                                                                                |  |                      | 35,142  |                     |   | 29,442  |  
|Accrued expenses                                                                                                                                                |  |                      | 24,471  |                     |   | 18,767  |  
|                                                                                                                                                                |  |                      |         |                     |   |         |  
|Total current
liabilities                                                                                                                                       |  |                      | 63,480  |                     |   | 53,284  |  
|                                                                                                                                                                |  |                      |         |                     |   |         |  
|Long-term
  capital lease obligations, less current maturities                                                                                                  |  |                      | 979     |                     |   | 1,372   |  
|Long-term
  debt, less current maturities                                                                                                                       |  |                      | 37,043  |                     |   | 36,433  |  
|Long-term
  liabilities, other                                                                                                                                  |  |                      | 1,116   |                     |   | 1,164   |  
|Minority
  Interest                                                                                                                                             |  |                      | 160     |                     |   | 161     |  
|Deferred
  taxes                                                                                                                                                |  |                      | 5,344   |                     |   | 7,311   |  
|Commitments
  and contingencies                                                                                                                                 |  |                      |         |                     |   |         |  
|                                                                                                                                                                |  |                      |         |                     |  
|Stockholders
  equity                                                                                                                                          |  |                      |         |                     |   |         |  
|Preferred stock, $.001par
value, 10,000 shares authorized; none issued                                                                                          |  |                      | -       |                     |   | -       |  
|Common stock, $.001 par value;
50,000 shares authorized; issued and
  outstanding: 25,897 and 26,343 shares in September 2007 and December 2006,
  respectively |  |                      | 26      |                     |   | 26      |  
|Additional paid-in
capital                                                                                                                                      |  |                      | 86,975  |                     |   | 90,872  |  
|Notes receivable - secured by
common shares                                                                                                                     |  |                      | (2,355  | )                   |   | (7,441  | )
|Accumulated other comprehensive
loss                                                                                                                            |  |                      | (670    | )                   |   | (698    | )
|Retained earnings                                                                                                                                               |  |                      | 5,116   |                     |   | 24,620  |  
|                                                                                                                                                                |  |                      |         |                     |   |         |  
|                                                                                                                                                                |  |                      | 89,092  |                     |   | 107,379 |  
|                                                                                                                                                                |  |                      |         |                     |   |         |  
|                                                                                                                                                                |  | $                    | 197,214 |                     | $ | 207,104 |  
|                                                                                                                                                                |  |                      |         |                     |   |         |  

---



FLANDERS CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS(In
thousands, except per share data)
(unaudited)

|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|------------------------------------------------------------------ |  | ---------------------------------- | ------- | --------------------------------- | - | ------ | - | ---- | ------- | - | - | ------- | -
|                                                                   |  | Three Months Ended
  September 30, |         | Nine Months Ended
  September 30, |  
|                                                                   |  |                                    |         |                                   |  
|                                                                   |  | 2007                               |         | 2006                              |   | 2007   |   | 2006 |        
|                                                                   |  |                                    |         |                                   |   |        |   |      |        
|Net sales                                                          |  | $                                  | 62,578  |                                   | $ | 66,400 |   | $    | 187,111 |   | $ | 178,037 |  
|Cost of goods sold                                                 |  |                                    | 56,017  |                                   |   | 52,948 |   |      | 159,905 |   |   | 139,286 |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|Gross profit                                                       |  |                                    | 6,561   |                                   |   | 13,452 |   |      | 27,206  |   |   | 38,751  |  
|Operating expenses                                                 |  |                                    | 21,751  |                                   |   | 10,756 |   |      | 43,852  |   |   | 30,972  |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|Operating income
(loss)                                            |  |                                    | (15,190 | )                                 |   | 2,696  |   |      | (16,646 | ) |   | 7,779   |  
|                                                                   |  |                                    |         |                                   |  
|Nonoperating income (expense):                                     |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|Other income (expense),
net                                        |  |                                    | (3,265  | )                                 |   | 562    |   |      | (1,661  | ) |   | 1,972   |  
|Interest expense                                                   |  |                                    | (743    | )                                 |   | (540   | ) |      | (2,012  | ) |   | (1,489  | )
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|                                                                   |  |                                    | (4,008  | )                                 |   | 22     |   |      | (3,673  | ) |   | 483     |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|Earnings (Losses) before
income taxes and
  extraordinary item     |  |                                    | (19,198 | )                                 |   | 2,718  |   |      | (20,319 | ) |   | 8,262   |  
|Provision (Benefit) for income taxes                               |  |                                    | (7,680  | )                                 |   | 937    |   |      | (8,128  | ) |   | 2,855   |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|Income (Loss) before
extraordinary item                            |  |                                    | (11,518 | )                                 |   | 1,781  |   |      | (12,191 | ) |   | 5,407   |  
|Extraordinary gain (loss) on
Fire (net of taxes)                   |  |                                    | (4,697  | )                                 |   | 4,453  |   |      | (3,233  | ) |   | 5,347   |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|Net Earnings
(Loss)                                                |  | $                                  | (16,215 | )                                 | $ | 6,234  |   | $    | (15,424 | ) | $ | 10,754  |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|Income (Loss) before extraordinary item Basic
earnings per share   |  | $                                  | (0.43   | )                                 | $ | 0.07   |   | $    | (0.46   | ) | $ | 0.21    |  
|Extraordinary item                                                 |  | $                                  | (0.18   | )                                 | $ | 0.17   |   | $    | (0.12   | ) | $ | 0.20    |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|Net earnings (loss) per share                                      |  | $                                  | (0.61   | )                                 | $ | 0.24   |   | $    | (0.58   | ) | $ | 0.41    |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|Income (Loss) before extraordinary item Diluted
earnings per share |  | $                                  | (0.43   | )                                 | $ | 0.07   |   | $    | (0.46   | ) | $ | 0.20    |  
|Extraordinary item                                                 |  | $                                  | (0.18   | )                                 | $ | 0.16   |   | $    | (0.12   | ) | $ | 0.19    |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|Net earnings (loss) per share                                      |  | $                                  | (0.61   | )                                 | $ | 0.23   |   | $    | (0.58   | ) | $ | 0.39    |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|                                                                  
|Weighted average common shares
outstanding                         |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|Basic                                                              |  |                                    | 26,774  |                                   |   | 26,340 |   |      | 26,542  |   |   | 26,190  |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  
|Diluted                                                            |  |                                    | 26,774  |                                   |   | 27,654 |   |      | 26,542  |   |   | 27,563  |  
|                                                                   |  |                                    |         |                                   |   |        |   |      |         |   |   |         |  

Page 4

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|                                                         
|---------------------------------------------------------
|FLANDERS CORPORATION AND SUBSIDIARIES                    
|CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS EQUITY
|(In thousands)                                           

|                                                              |  |                |    |                                |   |                    |   |                                              |        |                     |   |       |   |   |         |   |   |         |  
|------------------------------------------------------------- |  | -------------- | -- | ------------------------------ | - | ------------------ | - | -------------------------------------------- | ------ | ------------------- | - | ----- | - | - | ------- | - | - | ------- | -
|                                                              |  | Common
  Stock |    | Additional
  Paid-In
  Capital |   | Notes
  Receivable |   | Accumulated
  Other
  Comprehensive
  (Loss) |        | Retained
  Earnings |   | Total |  
|                                                              |  |                |    |                                |   |                    |   |                                              |        |                     |   |       |  
|Balance, January 1, 2006                                      |  | $              | 26 |                                | $ | 90,758             |   | $                                            | (6,987 | )                   | $ | (833  | ) | $ | 22,570  |   | $ | 105,534 |  
|Stock Option award compensation                               |  |                | -  |                                |   | 114                |   |                                              | -      |                     |   |       |   |   |         |   |   | 114     |  
|Accrued interest on notes receivable secured by
common shares |  |                | -  |                                |   | -                  |   |                                              | (454   | )                   |   | -     |   |   | -       |   |   | (454    | )
|Purchase & Retirement of Common
Shares                        |  |                | -  |                                |   | (148               | ) |                                              | -      |                     |   | -     |   |   | -       |   |   | (148    | )
|Common Shares issued from exercise of stock
options           |  |                | -  |                                |   | 148                |   |                                              | -      |                     |   | -     |   |   | -       |   |   | 148     |  
|Comprehensive earnings                                        |  |                |    |                                |   |                    |   |                                              |        |                     |   |       |   |   |         |   |   |         |  
|Net Earnings                                                  |  |                | -  |                                |   | -                  |   |                                              | -      |                     |   | -     |   |   | 2,050   |   |   | 2,050   |  
|Gain on cash flow hedges                                      |  |                | -  |                                |   | -                  |   |                                              | -      |                     |   | 135   |   |   | -       |   |   | 135     |  
|                                                              |  |                |    |                                |   |                    |   |                                              |        |                     |   |       |   |   |         |   |   |         |  
|Total comprehensive earnings, net of tax                      |  |                | -  |                                |   | -                  |   |                                              | -      |                     |   | -     |   |   | -       |   |   | 2,185   |  
|                                                              |  |                |    |                                |   |                    |   |                                              |        |                     |   |       |   |   |         |   |   |         |  
|Balance, December 31, 2006                                    |  |                | 26 |                                |   | 90,872             |   |                                              | (7,441 | )                   |   | (698  | ) |   | 24,620  |   |   | 107,379 |  
|Stock Option award compensation                               |  |                |    |                                |   | 94                 |   |                                              |        |                     |   |       |   |   |         |   |   | 94      |  
|Accrued interest on notes receivable secured by
common shares |  |                | -  |                                |   | -                  |   |                                              | (360   | )                   |   | -     |   |   | -       |   |   | (360    | )
|Purchase & Retirement of Common
Shares                        |  |                | -  |                                |   | (2,900             | ) |                                              |        |                     |   |       |   |   |         |   |   | (2,900  | )
|Common Shares issued from exercise of stock
options           |  |                | 1  |                                |   | 2,900              |   |                                              |        |                     |   |       |   |   |         |   |   | 2,901   |  
|Common Shares issued in lieu of trade accounts
payable        |  |                | -  |                                |   | 1,454              |   |                                              |        |                     |   |       |   |   |         |   |   | 1,454   |  
|Common Shares received in lieu of equity note
receivable      |  |                | (1 | )                              |   | (5,445             | ) |                                              | 5,446  |                     |   |       |   |   |         |   |   | -       |  
|Loss of controlling interest in affiliate                     |  |                |    |                                |   | -                  |   |                                              | -      |                     |   |       |   |   | (4,080  | ) |   | (4,080  | )
|Comprehensive earnings                                        |  |                |    |                                |   |                    |   |                                              |        |                     |   |       |   |   |         |   |   |         |  
|Net earnings (loss)                                           |  |                | -  |                                |   | -                  |   |                                              | -      |                     |   | -     |   |   | (15,424 | ) |   | (15,424 | )
|Income on cash flow hedges                                    |  |                | -  |                                |   | -                  |   |                                              | -      |                     |   | 28    |   |   | -       |   |   | 28      |  
|                                                              |  |                |    |                                |   |                    |   |                                              |        |                     |   |       |   |   |         |   |   |         |  
|Total comprehensive earnings, net of tax                      |  |                | -  |                                |   | -                  |   |                                              | -      |                     |   | -     |   |   | -       |   |   | (15,396 | )
|                                                              |  |                |    |                                |   |                    |   |                                              |        |                     |   |       |   |   |         |   |   |         |  
|Balance, September 30, 2007 (unaudited)                       |  | $              | 26 |                                | $ | 86,975             |   | $                                            | (2,355 | )                   | $ | (670  | ) | $ | 5,116   |   | $ | 89,092  |  
|                                                              |  |                |    |                                |   |                    |   |                                              |        |                     |   |       |   |   |         |   |   |         |  

Page 5

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|                                               
|-----------------------------------------------
|FLANDERS CORPORATION AND SUBSIDIARIES          
|CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
|(In
  thousands)                               
|(Unaudited)                                    

|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | --------------------------------- | - | ------ | - | ---- | ------ | - | - | ------- | -
|                                                                                                          |  | Three Months Ended
  September 30, |        | Nine Months Ended
  September 30, |  
|                                                                                                          |  |                                    |        |                                   |  
|                                                                                                          |  | 2007                               |        | 2006                              |   | 2007   |   | 2006 |       
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |       
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                      |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Net cash provided by (used in) operating
activities                                                       |  | $                                  | (7,993 | )                                 | $ | (1,052 | ) | $    | 178    |   | $ | (698    | )
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                      |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Acquisition, net of cash acquired                                                                         |  |                                    | -      |                                   |   | -      |   |      | -      |   |   | (154    | )
|Disposal, net of cash disposed                                                                            |  |                                    | (98    | )                                 |   | -      |   |      | (98    | ) |   | -       |  
|Purchase of property and equipment                                                                        |  |                                    | (1,907 | )                                 |   | (7,466 | ) |      | (5,207 | ) |   | (15,280 | )
|Proceeds from sale of property and
equipment                                                              |  |                                    | 8      |                                   |   | 241    |   |      | 482    |   |   | 297     |  
|Proceeds from insurance claim                                                                             |  |                                    | 2,500  |                                   |   | 5,785  |   |      | 5,500  |   |   | 8,688   |  
|Increase (Decrease) in notes receivables                                                                  |  |                                    | 123    |                                   |   | (7     | ) |      | 114    |   |   | (20     | )
|(Increase) Decrease in other assets                                                                       |  |                                    | (23    | )                                 |   | 120    |   |      | 141    |   |   | 285     |  
|Purchase of technology                                                                                    |  |                                    | -      |                                   |   | -      |   |      | -      |   |   | -       |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Net cash provided by (used in) investing
  activities                                                     |  |                                    | 603    |                                   |   | (1,327 | ) |      | 932    |   |   | (6,184  | )
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                      |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Principal payments on long-term
borrowings                                                                |  |                                    | (809   | )                                 |   | (1,301 | ) |      | (2,433 | ) |   | (2,977  | )
|Net proceeds from revolving credit
  agreement                                                            |  |                                    | 7,464  |                                   |   | 4,760  |   |      | 1,442  |   |   | 11,142  |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Net cash provided by (used in) financing
  activities                                                     |  |                                    | 6,655  |                                   |   | 3,459  |   |      | (991   | ) |   | 8,165   |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Net increase in cash and cash
equivalents                                                                 |  |                                    | (735   | )                                 |   | 1,080  |   |      | 119    |   |   | 1,283   |  
|CASH AND CASH EQUIVALENTS                                                                                 |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Beginning of period                                                                                       |  |                                    | 1,422  |                                   |   | 898    |   |      | 568    |   |   | 695     |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|End of period                                                                                             |  | $                                  | 687    |                                   | $ | 1,978  |   | $    | 687    |   | $ | 1,978   |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|SUPPLEMENTAL DISCLOSURES OF                                                                               |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|CASH FLOW INFORMATION                                                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Cash paid during the period for:                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Income taxes                                                                                              |  | $                                  | 53     |                                   | $ | 1,776  |   | $    | 139    |   | $ | 1,920   |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Interest                                                                                                  |  | $                                  | 784    |                                   | $ | 572    |   | $    | 2,005  |   | $ | 1,366   |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
  AND FINANCING ACTIVITIES                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Note receivable in lieu of account
  receivable trade                                                     |  | $                                  | -      |                                   | $ | -      |   | $    | -      |   | $ | 20      |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Common shares received in lieu of note                                                                    |  | $                                  | 5,446  |                                   | $ | -      |   | $    | 5,446  |   | $ | -       |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Line of credit converted to a term note                                                                   |  | $                                  | -      |                                   | $ | 4      |   | $    | -      |   | $ | 4       |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Stock issued in lieu of trade accounts
  payable                                                          |  | $                                  | -      |                                   | $ | -      |   | $    | 1,454  |   | $ | -       |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|ACQUISITION / DISPOSAL OF COMPANIES                                                                       |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|Working Capital surplus (deficit)
  acquired/disposed, net of cash and cash equivalents received/disposed |  |                                    | 3,880  |                                   |   | -      |   |      | 3,880  |   |   | (113    | )
|Fair value of other assets
  acquired/(disposed), principally property and equipment                      |  |                                    | (1,466 | )                                 |   | -      |   |      | (1,466 | ) |   | 79      |  
|Goodwill acquired / (disposed)                                                                            |  |                                    | (1,428 | )                                 |   | -      |   |      | (1,428 | ) |   | 295     |  
|Minority interest                                                                                         |  |                                    | -      |                                   |   | -      |   |      | -      |   |   | -       |  
|Long-term debt assumed                                                                                    |  |                                    | -      |                                   |   | -      |   |      | -      |   |   | (107    | )
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  
|                                                                                                          |  | $                                  | 986    |                                   | $ | -      |   | $    | 986    |   | $ | 154     |  
|                                                                                                          |  |                                    |        |                                   |   |        |   |      |        |   |   |         |  

Page 6

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|        |                                                    
|------- | ---------------------------------------------------
|Note A. | Nature of Business and Interim Financial Statements

Nature of business:

The Company
designs, manufactures and markets air filters and related products, and is
focused on providing environmental filtration systems for end uses ranging from
controlling contaminants in residences and commercial office buildings through
specialized manufacturing environments for semiconductors, pharmaceuticals and
nuclear related activities. The Company also designs and manufactures much of
its own production equipment to automate processes to decrease labor costs
associated with its standard products. The Company also produces various fiber
based air filter media for many of its products. These medias include various
grades of HEPA media and pleat media. 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
clean room contractors. These sales are accounted for as domestic sales. The
Company also sells products through foreign distributors, primarily in Europe,
the Pacific Rim and the Far East. Sales through foreign distributors and its
wholly owned foreign subsidiary total less than 5% of net sales. Assets held
outside the United States are negligible.

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

Interim financial statements:

The interim
consolidated condensed financial statements presented herein are unaudited and
have been prepared in accordance with the instructions to Form 10-Q and Article
10 of Regulation S-X. These statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in our
annual report on Form 10-K for the year ended December 31, 2006. In the opinion
of management the interim statements include all adjustments (consisting only
of normal recurring adjustments) necessary to summarize fairly our financial
position, results of operations, and cash flows. The results of operations and
cash flows for the three and nine months ended September 30, 2007 may not be
indicative of the results that may be expected for the year ending December 31,
2007.

Other comprehensive income (loss):

Other
comprehensive income (loss) is defined as the change in equity during a period,
from transactions and other events not included in net earnings, excluding
changes resulting from investments by owners (e.g., supplemental stock
offerings) and distributions to owners (e.g., dividends).

As of
September 30, 2007, accumulated comprehensive loss consisted of the following:

| |                                                           |  |   |      |  
| | --------------------------------------------------------- |  | - | ---- | -
| | Balance at
 December 31, 2006                             |  | $ | (698 | )
| | Net change
 during the period related to cash flow hedges |  |   | 28   |  
| |                                                           |  |   |      |  
| | Balance at
 September 30, 2007                            |  | $ | (670 | )
| |                                                           |  |   |      |  

Accounts receivable:

The majority
of the Companys accounts receivable are due from large retail, wholesale,
construction and other companies. Credit is extended based on evaluation of the
customers financial condition. Accounts receivable terms are within normal
time frames for the respective industries. The Company maintains allowances for
doubtful accounts for estimated losses, which are reviewed regularly by management.
The estimated losses are based on the aging of accounts receivable balances and
historical write-off experience, net of recoveries, however, during the third
quarter of 2007 the Company changed its methodology and certain assumptions
relating to the allowance for doubtful accounts. The effect of these changes on
net loss for 2007 is an increase of $8,109. If the financial condition of the
Companys customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.

Principles of consolidation:

Page 7

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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. which is consolidated in accordance with FIN 46.
The Company is the primary beneficiary of Air Filter Sales and Service, Inc.,
which qualifies as a variable interest entity. Accordingly, the assets and
liabilities and revenues and expenses of this company have been included in the
accompanying consolidated financial statements. Air Filter Sales and Service,
Inc. is a direct sales office of the Company which sells air filtration
products of the Company to end users. As of September 30, 2007, Air Filter Sales
and Service, Inc. had assets of $768, liabilities of $743, revenues of $2,135,
and expenses of $2,190. Creditors and beneficial holders of Air Filter Sales
and Service, Inc have no recourse to the assets or general credit of the
Company.

During the
quarter ended September 30, 2007, as a result of the Settlement Agreement and
Mutual Release between Steve Clark (former CEO) and Robert Amerson (current
CEO), the Company deconsolidated Superior Diecutting, Inc. from our
Consolidated Condensed Financial Statements because Flanders is no longer
considered a primary beneficiary. Under Generally Accepted Accounting
Principles the Company should reflect the deconsolidation prospectively and,
accordingly, the Company did not restate prior period amounts.

Derivative financial instruments:

The Company
has two interest rate swap agreements to hedge against the potential impact on
earnings from increases in market interest rates of two variable rate bonds.
Under the interest rate swap agreements, the Company receives or makes payments
on a monthly basis, based on the differential between 5.14% and a tax exempt
interest rate as determined by a remarketing agent. These interest rate swap
agreements are accounted for as a cash flow hedge in accordance with SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133)
as amended by SFAS 138, Accounting for Certain Derivative Instruments and
Hedging Activities -- an Amendment to FASB Statement No. 133. The tax affected
fair market value of the interest rate swaps of $670 at September 30, 2007 is
included in other comprehensive loss. The interest rate swap contracts expire
in 2013 and 2015.

Revenue recognition:

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.

Advertising costs:

Advertising
costs are charged to operations when incurred and are included in operating
expenses. Advertising costs for the quarters ended September 30, 2007 and 2006
were $1,806 and $704, respectively.

Impact of Recently Issued Accounting Pronouncements

In July 2006,
the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). FIN 48 is an interpretation of FASB Statement No.
109, Accounting for Income Taxes, and it seeks to reduce the diversity in
practice associated with certain aspects of measurement and recognition in
accounting for income taxes. In addition, FIN 48 provides guidance on
de-recognition, classification, interest and penalties, and accounting in
interim periods and requires expanded disclosure with respect to the
uncertainty in income taxes. FIN 48 is effective as of the beginning of the
Companys 2007 fiscal year. The cumulative effect, if any, of applying FIN 48
is to be reported as an adjustment to the opening balance of retained earnings
in the year of adoption. Adoption on January 1, 2007 did not have a material
effect on the Company.

In September
2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) 157 Fair Value Measurements. SFAS 157 defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP) and expanded disclosures about fair value
measurements. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. We are currently evaluating the
impact of adopting SFAS No. 157 on our result of operations and financial
position.

In February 2007, the FASB issued SFAS No. 159, The Fair Value
Option for  Financial  Assets and  Liabilities  - Including an Amendment of FASB
Statement No. 115.  SFAS No. 159 permits  entities to choose to measure certain
financial assets and liabilities at fair value.

Page 8

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Unrealized
gains and losses, arising subsequent to adoption, are reported in earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.
The Company is currently evaluating the impact of adopting SFAS No. 159, if
elected, on its Consolidated Condensed Financial Statements.

Stock Options and Warrants:

The following
table summarizes the activity related to all Company stock options and warrants
for the nine months ended September 30, 2007 and the year ended December 31,
2006:

|                                  |  |          |   |         |       |          |                            |         |                                              |          |   |                |  |  |   |  |   |       | 
|--------------------------------- |  | -------- | - | ------- | ----- | -------- | -------------------------- | ------- | -------------------------------------------- | -------- | - | -------------- |  |  | - |  | - | ----- | 
|                                  |  |          |   |         | Stock |          | Exercise
 Price
 per Share |         | Weighted
 Average
 Exercise Price
 per Share |         
|                                  |  |          |   |         |       |          |                            |         |                                              |         
|                                  |  | Warrants |   | Options |       | Warrants |                            | Options |                                              | Warrants |   | Options        | 
|                                  |  |          |   |         |       |          |                            |         |                                              |          |   |                | 
|Outstanding at January 1, 2006    |  |          | - |         |       | 5,792    |                            |         | -                                            |          | $ | 1.50
 - 11.10  |  |  | - |  | $ | 6.04  | 
|Granted                           |  |          | - |         |       | 20       |                            |         | -                                            |          |   | 11.72
 - 11.72 |  |  | - |  |   | 11.72 | 
|Exercised                         |  |          | - |         |       | (38      | )                          |         | -                                            |          |   | 2.40
 - 5.21   |  |  | - |  |   | 3.90  | 
|Canceled or expired               |  |          | - |         |       | (22      | )                          |         | -                                            |          |   | 2.50
 - 2.50   |  |  | - |  |   | 2.50  | 
|                                  |  |          |   |         |       |          |                            |         |                                              |          |   |                |  |  |   |  |   |       | 
|Outstanding at December 31, 2006  |  |          | - |         |       | 5,752    |                            |         | -                                            |          |   | 1.50
 - 11.72  |  |  | - |  |   | 6.08  | 
|Granted                           |  |          | - |         |       | 30       |                            |         | -                                            |          |   | 9.52
 - 9.52   |  |  | - |  |   | 9.52  | 
|Exercised                         |  |          | - |         |       | (1,115   | )                          |         | -                                            |          |   | 1.50
 - 5.21   |  |  | - |  |   | 2.56  | 
|Canceled or expired               |  |          | - |         |       | -        |                            |         | -                                            |          |   | -              |  |  | - |  |   | -     | 
|                                  |  |          |   |         |       |          |                            |         |                                              |          |   |                |  |  |   |  |   |       | 
|Outstanding at September 30, 2007 |  |          | - |         |       | 4,667    |                            |         | -                                            |          |   | 1.77
 - 11.72  |  |  | - |  | $ | 6.93  | 
|                                  |  |          |   |         |       |          |                            |         |                                              |          |   |                |  |  |   |  |   |       | 
|Exercisable at September 30, 2007 |  |          | - |         |       | 4,667    |                            |         | -                                            |          |   | 1.77
 - 11.72  |  |  | - |  | $ | 6.93  | 
|                                  |  |          |   |         |       |          |                            |         |                                              |          |   |                |  |  |   |  |   |       | 

The options
expire at various dates ranging from January 2008 through January 2017.

Share-Based Compensation

As of
September 30, 2007, total unrecognized stock-based compensation expense related
to non-vested stock options was $0 as all options granted are also exercisable.

The following
table represents our non-vested stock option activity for the nine months ended
September 30, 2007:

|                                       |  |                    |   |                                          |   |   | 
|-------------------------------------- |  | ------------------ | - | ---------------------------------------- | - | - | 
|                                       |  | Number of
 Options |   | Weighted Average
 Grant Date
 Fair Value |  
|                                       |  |                    |   |                                          |  
|                                       |  |                    |   |                                          |   |   | 
|Nonvested options - December 31, 2006  |  |                    | - |                                          | $ | - | 
|                                       |  |                    |   |                                          |   |   | 
|Granted                                |  |                    | - |                                          | $ | - | 
|Vested                                 |  |                    | - |                                          | $ | - | 
|Forfeited                              |  |                    | - |                                          | $ | - | 
|                                       |  |                    |   |                                          |   |   | 
|Nonvested options - September 30, 2007 |  |                    | - |                                          | $ | - | 
|                                       |  |                    |   |                                          |   |   | 

The aggregate
intrinsic value of options outstanding at September 30, 2007, based on the
Companys closing stock price of $4.59 as of the last business day of the
period ended September 30, 2007, which would have been received by the
optionees had all options been exercised on that date was $2,349. The aggregate
intrinsic value of options exercisable at September 30, 2007, based on the
Companys closing stock price of $4.59 as of the last business day of the
period ended September 30, 2007, which would have been received by the
optionees had all options exercisable been exercised on that date was $2,349.
The aggregate intrinsic value of options exercised during the nine months ended
September 30, 2007 was $2,557. Intrinsic value is the amount by which the fair
value of the underlying stock exceeds
the exercise price of the options.

Page 9

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Options on 422
and 384 shares of common stock were not included in computing diluted EPS for
the quarter and nine month period ended September 30, 2007, respectively,
because their effects were antidilutive.

|        |            
|------- | -----------
|Note B. | Inventories

Inventories
consist of the following at September 30, 2007 and December 31, 2006:

|                 |  |   |           |  |   |            | 
|---------------- |  | - | --------- |  | - | ---------- | 
|                 |  |   | 9/30/2007 |  |   | 12/31/2006 | 
|                 |  |   |           |  |  
|                 |  |   |           |  |   |            | 
|Finished goods   |  | $ | 28,697    |  | $ | 31,786     | 
|Work in progress |  |   | 4,775     |  |   | 5,535      | 
|Raw materials    |  |   | 22,520    |  |   | 23,241     | 
|                 |  |   |           |  |   |            | 
|                 |  |   | 55,992    |  |   | 60,562     | 
|Less allowances  |  |   | 5,118     |  |   | 1,623      | 
|                 |  |   |           |  |   |            | 
|                 |  | $ | 50,874    |  | $ | 58,939     | 
|                 |  |   |           |  |   |            | 

|        |                        
|------- | -----------------------
|Note C. | Pledged Assets and Debt

In June 2006
the Company entered into a term note with Bank of America for $4 million with
an interest rate of LIBOR plus 2.5% to 3.0% dependent on the fixed charge
coverage ratio. The note is due in monthly payments of $83.3 beginning in
August 2006 and due in full by October 2008. The proceeds were used to pay down
the line of credit. Substantially all of the Companys assets are pledged to
Bank of America as security for this credit facility. As of September 30, 2007
the Companys total obligations to Bank of America were approximately $25,259.
All obligations to Bank of America mature in October 2009. The Company is
currently in process of changing its debt covenants which will be effective
beginning October 2007.

|        |                           
|------- | --------------------------
|Note D. | Extraordinary Loss on Fire

In April 2006,
a manufacturing facility in Texas was destroyed by fire and in June of 2006,
another manufacturing facility was damaged by flood. In July 2007 another
manufacturing facility in Florida was destroyed by fire. The extraordinary loss
of $3,233 was calculated as the loss on the costs that were attributeable to
these natural disasters ($12,888) that exceeded the insurance proceeds
($7,500), net of taxes of $2,155. This extraordinary item will be subject to
change as the insurance claims process progresses for the claim.

|        |                     
|------- | --------------------
|Note E. | Settlement Agreement

Steve Clark,
former CEO, satisfied his obligation 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 are valued at $4.60, which is the 30-day average market value of
Flanders shares. Such shares were retired.

|        |             
|------- | ------------
|Note F. | Income Taxes

The IRS
examined the Companys federal income tax returns for the calendar years 2002,
2003, and 2004. The IRS has proposed certain changes resulting in additional
liabilities due. The Company disagrees with the proposed changes and is
vigorously contesting these proposed changes and believes any final changes
will be immaterial. The IRS is also examining the Companys federal income tax
returns for the calendar years 2005 and 2006.

|        |           
|------- | ----------
|Note G. | Litigation

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

In the opinion
of management, although the outcome of any legal proceeding cannot be predicted
with certainty, the ultimate liability of

Page 10

---



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.

|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial Condition and
 Results of Operations

The following
discussions should be read in conjunction with our Consolidated Condensed
Financial Statements and the notes thereto presented in Item 1  Financial
Statements and our audited financial statements and the related Managements
Discussion and Analysis of Financial Condition and Results of Operations
included in our report on Form 10-K for the year ended December 31, 2006. 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 those
discussed below under Factors That May Affect Future Results and Outlook
could cause actual results to differ materially from those contained in the
forward-looking statements below.

Overview

Flanders is a
full-range air filtration product company engaged in designing, manufacturing
and marketing high performance, mid-range and standard-grade air filtration
products and 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 and produce various grades of HEPA media
and pleat media for many of our air filtration products.

Critical Accounting
Policies

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. In the ordinary course of accounting for items such
as allowance for doubtful accounts, inventory valuation, and other items
mentioned above, we make changes in estimates as appropriate in the
circumstances. Such changes and refinements in estimation methodologies are
reflected in report results of operations and, if material, the approximate
effects of changes in estimates are disclosed in the Notes to our Consolidated
Financial Statements. We believe that the following critical accounting
policies reflect our more significant judgments and estimates used in
preparation of our consolidated financial statements.

We maintain allowances for estimated losses resulting from the
inability of our customers to make required payments. We base our estimates on
the aging of our accounts receivable balances and our historical write-off
experience, net of recoveries. Significant changes were made to the Companys
estimate of allowance for doubtful accounts during the third quarter of 2007 as
a result of the Company changing its methodology and assumptions of estimating
this allowance. The impact of this change is discussed in Note A. Accounts
Receivable above. Actual results could differ materially from this estimate,
making it reasonably possible that a change in this estimate could occur in the
near term.

We value our inventories at the lower of cost or market. We write down
inventory balances for estimated obsolescence or unmarketable inventory equal
to the difference between the cost of the inventory and the estimated market
value based upon assumptions about future demand and market conditions.
Inventories were written down to net realizable value during the third quarter
of 2007. The effect of this write down to net realizable value on
net loss for 2007 is an increase of $3,394. This was due mainly to discontinued
product lines as well as discovery of some damaged inventory. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required.

During the third quarter of 2007, the Company applied the provisions of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. SFAS No. 121 requires assets be valued on
an asset by asset basis at the lower of carrying amount or fair value less
costs to sell. In applying those provisions, in association with the shut down
of our facility in Salt Lake City,

Page 11

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Utah, the Company determined it had impaired plant equipment totaling
$2,463 which is shown in the Nonoperating Income (Expense) section of the
Companys Consolidated Condensed Statements of Earnings.

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.

Poor operating
performance of the business activities related to intangible assets or
long-lived assets could result in future cash flows of these assets declining
below carrying values, which could require a write-down of the carrying value
of these assets, which would adversely affect operating results.

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
for Three Months Ended September 30, 2007 Compared to September 30, 2006

The following
table summarizes our results of operations as a percentage of net sales for the
three months ended September 30, 2007 and 2006.

|                                                           |  |                                     |         |      |  |       |   |   |        |  |  |       |  
|---------------------------------------------------------- |  | ----------------------------------- | ------- | ---- |  | ----- | - | - | ------ |  |  | ----- | -
|                                                           |  | Three
 Months Ended 
 September 30, |        
|                                                           |  |                                     |        
|                                                           |  | 2007                                |         | 2006 | 
|                                                           |  |                                     |         |      | 
|                                                           |  |                                     |         |      |  |       |   |   |        |  |  |       |  
|Net sales                                                  |  | $                                   | 62,578  |      |  | 100.0 | % | $ | 66,400 |  |  | 100.0 | %
|Gross profit                                               |  |                                     | 6,561   |      |  | 10.5  |   |   | 13,452 |  |  | 20.3  |  
|Operating expenses                                         |  |                                     | 21,751  |      |  | 34.8  |   |   | 10,756 |  |  | 16.2  |  
|Operating income (loss)                                    |  |                                     | (15,190 | )    |  | (24.3 | ) |   | 2,696  |  |  | 4.1   |  
|Nonoperating income (expense)                              |  |                                     | (4,008  | )    |  | (6.4  | ) |   | 22     |  |  | 0.0   |  
|Provision (Benefit) for income taxes                       |  |                                     | (7,680  | )    |  | (12.3 | ) |   | 937    |  |  | 1.4   |  
|Extraordinary gain (loss) on Fire and Flood (net of taxes) |  |                                     | (4,697  | )    |  | (7.5  | ) |   | 4,453  |  |  | 6.7   |  
|Net earnings (loss)                                        |  |                                     | (16,215 | )    |  | (25.9 | ) |   | 6,234  |  |  | 9.4   |  

Net sales: Net sales
for the third quarter of 2007 decreased by $3,822, or 5.8%, to $62,578 from
$66,400 for the third quarter of 2006. Sales growth decreased during the third
quarter due to the fire which destroyed our Florida manufacturing facility.
This created difficulty in our ability to produce enough product and ship to
our customers.

Gross Profit: Gross
profit for the third quarter of 2007 decreased by $6,891, or 51.2%, to $6,561,
which represented 10.5% of net sales, from $13,452, which represented 20.3% of
net sales, for the third quarter of 2006. 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. The gross profit during the quarter has also decreased due to the start
up of three new plants in Clarkton, North Carolina, Dallas, Texas and
Matamoros, Mexico as well as new production lines for the EnergyAire and nested
filters. In addition, the success of the nested flat panel filter continues to
have a negative impact on product mix and consequently gross margins.
Additionally, the product mix has shifted towards lower margin items. The
Company also increased its reserve for obsolete inventory during the third
quarter of 2007 as discussed in the Critical Accounting Policies section above.
New management has discovered that vertical integration has created a drag in
margins, hence, management is moving away from verticality.

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Operating expenses:
Operating expenses for the third quarter of 2007 increased by $10,995, or
102.2%, to $21,751, representing 34.8% of net sales, from $10,756, representing
16.2% of net sales, for the third quarter of 2006. The increase as a percentage
of sales was primarily due to an increase in managements estimate of allowance
for doubtful accounts as discussed in the Critical Accounting Policies section
above.

Nonoperating income (expense):
Net nonoperating income (expense) for the third quarter of 2007 decreased by
$4,030, to ($4,008), representing 6.4% of net sales, from $22, representing 0.0
% of net sales, for the third quarter of 2006 due to the Company disposing of
assets considered impaired, including goodwill.

Provision for income taxes:
Our income tax provision for the quarter ended September 30, 2007 included the
realization of tax credits and adjustments. Excluding the realization of tax
credits and adjustments, our provision for the three months of 2007 and 2006
were a blended state and federal rate of approximately 40% of pretax earnings
and losses.

Extraordinary gain on Fire (net of taxes):
The extraordinary loss of $4,697 was calculated as the loss on the costs that
were attributable to these natural disasters ($9,828) that exceeded the
insurance proceeds ($2,000), net of taxes $3,131. This extraordinary item will
be subject to change as the insurance claims process progresses for the claim.

Results of Operations
for Nine Months Ended September 30, 2007 Compared to September 30, 2007

The following
table summarizes our results of operations as a percentage of net sales for the
nine months ended September 30, 2007 and 2006.

|                                                           |  |                                    |         |      |  |       |   |   |         |  |  |       |  
|---------------------------------------------------------- |  | ---------------------------------- | ------- | ---- |  | ----- | - | - | ------- |  |  | ----- | -
|                                                           |  | Nine
 Months Ended 
 September 30, |        
|                                                           |  |                                    |        
|                                                           |  | 2007                               |         | 2006 | 
|                                                           |  |                                    |         |      | 
|                                                           |  |                                    |         |      | 
|Net sales                                                  |  | $                                  | 187,111 |      |  | 100.0 | % | $ | 178,037 |  |  | 100.0 | %
|Gross profit                                               |  |                                    | 27,206  |      |  | 14.5  |   |   | 38,751  |  |  | 21.8  |  
|Operating expenses                                         |  |                                    | 43,852  |      |  | 23.4  |   |   | 30,972  |  |  | 17.4  |  
|Operating income (loss)                                    |  |                                    | (16,646 | )    |  | (8.9  | ) |   | 7,779   |  |  | 4.4   |  
|Nonoperating income (expense)                              |  |                                    | (3,673  | )    |  | (2.0  | ) |   | 483     |  |  | 0.3   |  
|Provision (Benefit) for income taxes                       |  |                                    | (8,128  | )    |  | (4.3  | ) |   | 2,855   |  |  | 1.6   |  
|Extraordinary gain (loss) on Fire and Flood (net of taxes) |  |                                    | (3,233  | )    |  | (1.7  | ) |   | 5,347   |  |  | 3.0   |  
|Net earnings (loss)                                        |  |                                    | (15,424 | )    |  | (8.2  | ) |   | 10,754  |  |  | 6.0   |  

Net sales: Net sales
for the first nine months of 2007 increased by $9,074, or 5.1%, to $187,111
from $178,037 for the first nine months of 2006. Sales growth increased during
the first nine months of 2007 in the retail sector primarily due to the release
of our new Microparticle Plus product at Home Depot. Our commercial and
industrial sales have also attributed to the increase. The overall market
demand increased during the last nine months. The Company also introduced two
new products, EnergyAire and our new nested product in the first half of 2007.

Gross Profit: Gross
profit for the first nine months of 2007 decreased by $11,545, or 29.8%, to
$27,206, which represented 14.5% of net sales, from $38.751, which represented
21.8% of net sales, for the first nine months of 2006. The US economy
experienced cost increases due to inflation including increases in in-bound
shipping costs due to increased fuel costs and raw material costs, especially
in the cost of metal. In addition, gross profit during the last six months has
decreased due to the start up of new production lines for the EnergyAire and
nested filters. Also, the success of the nested flat panel filter continues to
have a negative impact on product mix and consequently gross margins. The
Company also increased its reserve for obsolete inventory during the third
quarter of 2007 as discussed in the Critical Accounting Policies section above.

Page 13

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Operating expenses:
Operating expenses for the first nine months of 2007 increased by $12,880, or
41.6%, to $43,852, representing 23.4% of net sales, from $30,972, representing
17.4% of net sales, for the first nine months of 2006. The increase in
operating expenses was primarily due to an increase in managements estimate of
allowance for doubtful accounts, as discussed in the Critical Accounting
Policies section above, as well as an increase in fuel costs. Additionally, an
increase in operating expenses is expected with a higher volume of sales.

Nonoperating income (expense):
Net nonoperating income (expense) for the first nine months of 2007 decreased
by $4,156, or 860.4%, to $(3,673), representing 2.0% of net sales, from $483,
representing .3% of net sales, for the first nine months of 2006. This decrease
was due to the Company disposing of assets considered impaired, including
goodwill.

Provision for income taxes:
Our income tax provision for the quarter ended September 30, 2007 included the
realization of tax credits and adjustments. Excluding the realization of tax
credits and adjustments, our provision for the nine months of 2007 and 2006
were a blended state and federal rate of approximately 40% of pretax earnings
and losses.

Extraordinary gain (loss) on Fire (net of
taxes): The extraordinary loss of $3,233 was
calculated as the loss on the costs that were attributable to these natural
disasters ($12,888) that exceeded the insurance proceeds ($7,500), net of taxes
of $2,155. This extraordinary item will be subject to change as the insurance
claims process progresses the claim.

Liquidity and Capital
Resources

Our working
capital was approximately $58,201 at September 30, 2007, compared to
approximately $67,967 at December 31, 2006. This includes cash and cash
equivalents of $687, at September 30, 2007 and $568 at December 31, 2006.

Our trade
receivables decreased $1,518, or 2.8% to $52,222 at September 30, 2007, from
$53,740 at December 31, 2006. Receivable levels are typically higher during the
second and third quarters due to higher sales volume however, our sales volume
typically decreases during the fourth and first quarters. In addition, the
Company increased its bad debt expense by $8,109 to increase the allowance for
doubtful accounts as discussed in the Critical Accounting Policies section
above.

Inventories
decreased $8,065, or 13.7%, to $50,874 at September 30, 2007 from $58,939 at
December 31, 2006. The decrease in inventory was primarily due to the Company
carrying higher levels of inventory at year end due to delayed orders and lower
sales volume than expected at the end of the previous year. In addition the
Company increased its inventory valuation reserve by $3,394 as discussed in the
Critical Accounting Policies section above.

Our continuing
operations consumed $7,993 and $1,052 of cash during the third quarter of 2007
and 2006, respectively. Historically, our business is seasonal, with our second
and third quarters having higher sales than our first and fourth quarters. We
attempt to moderate swings in labor requirements and product shortages due to
this seasonal variance by increasing inventories in the first and second
quarters. Larger inventories reduce the likelihood of stock shortages during
our busy season and help smooth out our labor requirements. In general, we
expect operations to consume cash, or generate substantially less cash during
our first and second quarters because of increases in inventory.

Our financing
activities provided $603 of cash during the third quarter of 2007, primarily
consisting of payments on the line of credit and payments on other long term
borrowings from the cash generated from the Companys operating activities. Our
investing activities provided $6,655 of cash during the third quarter of 2007,
primarily due to purchase of property and equipment.

We currently
have a credit facility with Bank of America. The $44 million facility consists
of a $7 million term loan, a $4 million term loan and a $33 million revolving
credit line, all of which expire on October 17, 2008. The term loan bears
interest, at our option, at either (i) LIBOR plus between 2.5% and 3%,
dependent on the Companys fixed charge coverage during the prior twelve
months; or (ii) the greater of the Federal Funds Effective Rate plus 0.5% or
Bank of Americas base rate, plus between 0.5% and 1%, dependent on the
Companys fixed charge coverage during the prior twelve months. The $33 million
revolving credit facility bears interest at 0.25% less than the term loan. Up
to $11 million of the revolving credit facility may be used to issue letters of
credit. The facility is collateralized by substantially all of the Companys
assets. The line of credit agreement requires maintenance of certain financial
ratios, and restricts dividends and share repurchases. There are no prepayment
penalties on any of the credit facilities with Bank of America Corporation.

In connection with the working
capital credit facility and notes payable to a regional development authority
and bank, the Company and its

Page 14

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majority owned
subsidiaries have 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. The Company is currently in
process of changing its debt covenants which will be effective beginning October
2007.

William
Mitchum, one of our independent directors, owns a vendor, Mercer Glass, which
supplies glass to us. During fiscal
2006 and during the first three quarters of 2007, we purchased approximately
$60 and $35, respectively, from this entity, owned by Mr. Mitchum. In addition, Mr. Mitchums wife is an
independent sales representative for an unrelated corrugated box vendor,
Package Craft. We believe she receives a
sales commission of 3% from this vendor.
During calendar year ended 2006 and the first three quarters of 2007, we
acquired approximately $854 and $714 of materials from this vendor,
respectively.

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 2007 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.

Outlook

Global
Containment Systems, Inc. (GCS) is a wholly-owned subsidiary of Flanders
Corporation, which manufactures critical environments for the nuclear,
pharmaceutical and semi conductor industries. Our expansion related to these
industries is currently on hold until demand for these critical products
exceeds our current capacity.

Additionally,
during 2004, the Company formed Flanders Complete Service Division (Flanders
CSD), an air filtration service provider.  Flanders CSD offers weekly,
monthly and quarterly service contracts for clean room and glove box
certification; commercial, industrial, retail and residential surveys; and
complete filtration management.

During the
past three years, we have captured additional market share among big box
retailers like The Home Depot and Wal-Mart, capitalizing on our ability to
service national accounts from regional distribution centers and our improved
on-time delivery performance. 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.

We have
adapted our bio-containment products for use as part of a system for hardening
government buildings, commercial office complexes and public venues against
airborne bio-weapons such as anthrax and smallpox. Any interest towards
hardening these types of facilities against airborne bio-weapons could have a
significant impact on our business.

Sales of air
filtration products for semiconductor facilities, historically a major market,
are expected to be slow again during 2007, with most analysts pushing recovery
for this sector out until 2008.

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

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

We believe
there is currently a gradually increasing public awareness of the issues
surrounding indoor air quality and that this trend will continue for the next
several years. We also believe there is an increase in public concern regarding
the effects of indoor air quality on employee productivity, as well as an
increase in interest by standards-making bodies in creating specifications and
techniques for

Page 15

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

This Outlook
section, and other portions of this Form 10-Q, 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 Factors That May Affect Future Results
in our Form 10-K for 2006 and in Managements Discussion and Analysis of
Financial Condition and Results of Operations and Notes to Consolidated Financial
Statements in our 2006 Annual Report and in this Form 10-Q as well as:

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

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-Q will
in fact occur.

|        |                                                           
|------- | ----------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk

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 September 30, 2007 was approximately $41,889.
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 September 30,
2007. Although most of the interest on the Companys debt is indexed to a
market rate, there would be no material effect on the future earnings or cash
flows related to the Companys total debt for such a hypothetical change.

The Company has only a limited involvement with derivative financial
instruments. The Company has two interest rate swap agreements to hedge against
the potential impact on earnings from increases in market interest rates of two
variable rate bonds. Under the interest rate swap agreements, the Company
receives or make payments on a monthly basis, based on the differential between
5.14% and a tax exempt interest rate as determined by a remarketing agent.
These agreements are accounted for as a cash flow hedge in accordance with SFAS
133 and SFAS

Page 16

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138. The tax effected fair market value of the interest rate swap of
$670 is included in Accumulated other comprehensive loss on the balance
sheet. The interest rate swap contracts expire in 2013 and 2015.

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

|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

Under the supervision and with the participation of the Companys
management, including the Companys principal executive officer and principal
financial officer, the Company conducted an evaluation of the effectiveness of
the design and operations of its disclosure controls and procedures, as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act), as of the end of the period
covered by this report. Based on their
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective such that
the material information required to be included in our Securities and Exchange Commission (SEC)
reports (i) is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms and (ii) is accumulated
and communicated to the Companys management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.

Changes in Internal Control Over Financial
Reporting

There were no
changes in the Companys internal control over financial reporting during the
third quarter of 2007, which were identified in connection with managements
evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the
Exchange Act, that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting with
the exception of:

| |     |                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) | During the
 third quarter 2007, a control issue became known as a result of a management
 override of a control in prior periods that would have impacted the operating
 results of those periods. This amount has been deemed immaterial for prior
 period restatement, however, current management has taken corrective action
 to ensure this control is not violated in the future.

PART II - OTHER
INFORMATION

|        |                   
|------- | ------------------
|Item 1. | Legal Proceedings.

From time to
time, we are a party to various legal proceedings incidental to our business.
None of the current proceedings in which we are involved are material to our
business, operations or financial condition.

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

Our business, financial
condition, operating results and cash flows can be impacted by a number of
factors, including, but not limited to those set forth below, any one of which
could cause our actual results to vary materially from recent results or from
our anticipated future results. For a discussion identifying additional risk
factors and important factors that could cause actual results to differ
materially from those anticipated, see the discussion in Factors That May
Affect Future Results in our Form 10-K for 2006 and in Managements
Discussion and Analysis of Financial Condition and Results of Operations and
Notes to Consolidated Financial Statements in our 2006 Annual Report and in
this Form 10-Q.

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,

Page 17

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| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | 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.

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.

Fire disruptions may
adversely affect our business

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

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

Certain covenants in our
credit facility with Bank of America restrict the types and amounts of
additional indebtedness that we may incur. In addition, the credit facility
contains specific financial covenants. These restrictions could inhibit our
ability to improve and expand our operations. Our credit facility with Bank of
America matures in October 2008. 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.

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

In the past
several years we have significantly increased our market share by acquiring
synergistic businesses. Although we intend to continue to increase our market
share in this manner, we also anticipate that future acquisition opportunities
will be available, and do anticipate that future acquisitions will be of a size
that could be significant to our business. These types of transactions may
result in potentially dilutive issuances of equity securities, the incurrence
of additional debt and other acquisition-related expenses, all of which could
adversely affect our profitability or cash flows. Our strategy of growth
through acquisition also exposes us to the potential risks inherent in
assessing the value, strengths, weaknesses, and potential profitability of
acquisition candidates and in integrating the operations of acquired companies.
We do not currently have any binding agreements with respect to future
acquisitions.

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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.

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

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

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

Management
Controls a Significant Percentage of Our Stock

As of November
8, 2007, our directors and executive officers beneficially held approximately
37.5% of our outstanding common stock. As a result, such shareholders
effectively control or significantly influence all matters requiring
shareholder approval. These matters

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include the election of directors and
approval of significant corporate transactions. Such concentration of ownership
may also have the effect of delaying or preventing a change in control.

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

We have
granted options to purchase a total of 4,667,000 shares of common stock to
various parties with exercise prices ranging from $1.74 to $11.72 per share.
All of these options are currently exercisable. The exercise of these options
may result in the issuance of stock at prices lower than we might otherwise be
able to obtain. Additionally, if the option holders exercise their options, the
interests of current shareholders may be diluted.

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

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

Our Business
Can be Significantly Affected by Environmental Laws

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

A
significant amount of our leased physical facilities are owned by Mr. Amerson.
He has also pledged a substantial amount of our common shares as collateral for
personal loans.

We are the
lessee under a series of six (6) real estate operating leases for approximately
1,006,000 square feet of warehousing, shipping and manufacturing facilities,
expiring in 2025, 2026 or 2027 with Wal-Pat II, LLC (Wal-Pat), an entity
owned by Robert R. Amerson. Mr. Amerson is our CEO and Chairman of our Board of
Directors and beneficially owns approximately 30.2% of our outstanding common
shares as of September 30, 2007. Mr. Amerson acquired Mr. Clarks interest in
Wal-Pat as part of the Settlement and Mutual Release with Mr. Clark.

Our aggregate
monthly base lease payment obligation to Wal-Pat is approximately $221. Our
total remaining aggregate obligation under the Wal-Pat operating leases is
approximately $49,399. 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

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BB&T, the financial institution which holds
mortgages and deeds of trust on these properties, could adversely affect our
leasehold interests in these properties. Mr. Amerson has pledged 5,128,103 of
our common shares as security to BB&T in order to facilitate the financings
to Wal-Pat, other personal loans, and the acquisition of Mr. Clarks shares.

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

The preceding discussion should be read in conjunction
with our annual report on Form 10-K, which also includes additional Factors
That May Affect Future Results which are still applicable during the current
period.

|         |                                                               
|-------- | --------------------------------------------------------------
|Item
 2. | Unregistered
 Sales of Equity Securities and Use of Proceeds 

ISSUER
PURCHASES OF EQUITY SECURITIES

|                        |  |  |                                                 |  |  |                                             |   |  |                                                                                                   |  |   |                                                                                                                              |  |  |           |  | 
|----------------------- |  |  | ----------------------------------------------- |  |  | ------------------------------------------- | - |  | ------------------------------------------------------------------------------------------------- |  | - | ---------------------------------------------------------------------------------------------------------------------------- |  |  | --------- |  | 
|Period                  |  |  | (a) Total Number of Shares (or Units) Purchased |  |  | (b) Average Price Paid  per Share (or Unit) |   |  | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs * |  |   | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased
 Under the Plans or Programs | 
|July 1 
 July 31, 2007 |  |  |                                                |  |  |                                             |  |  |                                                                                                   |  |  |                                                                                                                              |  |  | 1,397,346 |  | 
|Aug 1  Aug
 31, 2007   |  |  |                                                |  |  |                                             |  |  |                                                                                                   |  |  |                                                                                                                              |  |  | 1,397,346 |  | 
|Sept 1 
 Sept 30, 2007 |  |  |                                                |  |  |                                             |  |  |                                                                                                   |  |  |                                                                                                                              |  |  | 1,397,346 |  | 
|Total                   |  |  |                                                |  |  |                                             |  |  |                                                                                                   |  |  |                                                                                                                              |  |  | 1,397,346 |  | 

* The Plan announced September 22, 2000 authorized the
repurchase of up to 2 million shares of common stock. This table excludes the
repurchase of 1,727,350 shares during the third quarter related to cashless
exercise of options and repurchase of shares in lieu of note receivable in accordance
with Steve Clarks separation agreement.

|         |                                                                                                      
|-------- | -----------------------------------------------------------------------------------------------------
|Item
 3. | Defaults
 Upon Senior Securities - None.                                                             
|         |                                                                                                      
|Item
 4. | Submission
 of Matters to a Vote of Security Holders - None.                                         
|         |                                                                                                      
|Item 5.  | Other Information  Steve Clark Settlement Agreement and Mutual Release; Repayment
 of Affiliate Note

On October 3, 2007 we entered into a Settlement
Agreement and Mutual Release, effective as of September 30, 2007 (Settlement
Agreement), by and between Steven K. Clark (Clark); Robert R. Amerson
(Amerson); Harry L. Smith, Jr. (Smith); Wal-Pat, LLC, a North Carolina
limited liability company (Wal-Pat); and Mercury Die Cutting, LLC, a Florida
limited liability company (Mercury). A copy of the Settlement Agreement was
attached as an exhibit to a Form 8-K, filed October 5, 2007, the terms of which
are incorporated herein by reference. In the event of any inconsistency between
the summary set forth herein and the body of the Settlement Agreement, the
terms of the Settlement Agreement are controlling. In summary, the Settlement
Agreement provides as follows:

| |   |                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Clark transfers his fifty percent (50%) membership
 interest in Wal-Pat to Amerson.                                                                                                                                                                                                                                                                      
| |  | Amerson transfers his fifty percent (50%) membership
 interest in Mercury to Clark.                                                                                                                                                                                                                                                                      
| |  | Clark exercises, 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 Clark. The 573,478 shares
 tendered by Clark to exercise this stock option will be canceled.
| |  | Clark transfers to Amerson 250,000 shares of common
 stock to satisfy previous obligations between Clark and Amerson.                                                                                                                                                                                                                                    
| |  | Clark satisfies his obligations under a promissory
 note due Flanders, which has an outstanding balance of $5,445,810.65                                                                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | as of September 30, 2007 in consideration of his
 surrendering 1,183,872 shares of Flanders common stock. These shares are
 valued at $4.60, which is the 30-day average market value of Flanders shares.
 Such shares revert to the status of treasury shares.                                                                                                                                                                                                                                      
| |  | Amerson and Smith purchase, in equal shares, all of
 the remaining common stock that Clark owns in Flanders at a purchase price of
 $4.60 per share. This equals 755,183 shares acquired by each of Amerson and
 Smith, respectively, for a total purchase price by each of $3,473,844,
 resulting in an aggregate consideration paid to Clark of approximately
 $6,947,688 for the 1,510,367 remaining Flanders common shares Clark owns
 after satisfaction of the promissory note discussed above.
| |  | Clarks remaining equity in Flanders consists of
 options to acquire up to an aggregate of 2,000,000 shares of Flanders common
 stock at exercise prices of $7.50 to $11.10 per share. All of such options
 expire 90-days after termination of his employment.                                                                                                                                                                                                                                      
| |  | Flanders transfers certain manufacturing assets from
 the Salt Lake City, Utah facility to Clark.                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Clark and Flanders mutually release each other from
 any obligations created under or related to Clarks employment agreements
 with Flanders. Clark is released from his noncompetition covenants set forth
 in his employment agreement.                                                                                                                                                                                                                                                           
| |  | Flanders subsidiary, Precisionaire Corp. and
 Mercury enter into a Supplier Agreement, which provides Mercury the right to
 supply Flanders requirements for certain products, including diecuts and
 inserts, subject to competitive pricing and terms.                                                                                                                                                                                                                                            
| |  | Clark resigns as a director as of October 4, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Each of the parties to the Settlement Agreement
 enter into mutual general releases except for the obligations and covenants
 set forth in the Settlement Agreement.                                                                                                                                                                                                                                                                                                                                 

The promissory note
previously due us by Mr. Amerson was a non-recourse note secured solely by
shares of our common stock. As of September 30, 2007, the total outstanding
amount due us under this note is approximately $2,355, however, Mr. Amerson
paid this balance in full in October 2007.

|         |         
|-------- | --------
|Item
 6. | Exhibits

|            |  |                                                                                                                                                                             | 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit No. |  | Description                                                                                                                                                                 | 
|            |  |                                                                                                                                                                             | 
|3.1         |  | Articles of Incorporation for Flanders Corporation,
 filed with Form 8-A dated March 8, 1996, incorporated herein by reference.                                            
|3.2         |  | Bylaws of Flanders Corporation, filed with Form 8-A
 dated March 8, 1996, incorporated herein by reference.                                                                
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a).                                                                                                       
|31.2        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a).                                                                                                       
|32          |  | Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
|99.1        |  | Separation Agreement and Mutual Release with Steve
 Clark effective September 30, 2007 (see Form 8-K filed on October 5, 2007).                                            

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SIGNATURES

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

Dated this 8th day of November, 2007.

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

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