UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the year ended December 31, 20082009

or

For the transition period fromto

Commission File Number 0-27958

FLANDERS CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

Title of each class

Common Stock, $.001 per share par value

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

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

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

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

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

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

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

As of December 31, 2008,June 30, 2009, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $116.8$119.6 million.

As of March 16, 2009,22, 2010, the number of shares outstanding of the registrant’s common stock was 25,524,07426,132,838 shares.

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

FLANDERS CORPORATION

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 20082009

TABLE OF CONTENTS

PART I

OVERVIEW

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

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

GENERAL DEVELOPMENT OF BUSINESS AND AVAILABILITY OF INFORMATION

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

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

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

STRATEGY

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

INTRODUCE NEW PRODUCTS

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

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

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

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

IMPROVE OPERATING EFFICIENCY

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

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

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

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

Strategic Acquisitions. We will continue to evaluate acquisition opportunities, however, it is not likely we will make any acquisitions in 20092010 as we continue to focus on improving core competencies rather than making acquisitions.

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

INCREASE MARKET SHARE

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

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

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

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

AIR FILTER MARKET BACKGROUND

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

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

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

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

RECENT TRENDS

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

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

Semiconductor Downturn and Economic Recovery. Sales of air filtration products for semiconductor facilities, historically a major market, are expected to be slow againbegin recovery during 2009,2010 with most analysts pushing recovery for this sector out until 2010.continued improvement during 2011.

Indoor Air Quality and Health. We believe there is an increase in public concern regarding the effects of indoor air quality on employee productivity and health, as well as an increase in interest in standards for detecting and solving IAQ problems. For example, the American Society of Heating Refrigeration and Air-Conditioning Engineers (ASHRAE) recently established certain minimum standards for ventilation and indoor air quality for commercial and industrial settings. The World Health Organization has recently been studying the effects of air quality on human health, We are seeing a greater interest in upgrading residential filtration systems as well as commercial systems to address both energy savings and better indoor quality.

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

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

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

MARKETING

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

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

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

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

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

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

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

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

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

PRODUCTS

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

MANUFACTURING

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

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

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

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

SOURCE AND AVAILABILITY OF RAW MATERIALS

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

COMPETITION

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

PATENTS, TRADEMARKS AND LICENSES

The Company and its subsidiaries currently holds approximately (30) Thirtyfour (4) patents relatingrelated to filtration technology including patents relating to HEPAisolation workstations, deodorizing air filters and fabrication methods, filter leak testing methods, filter assembly, laminar flow cleanrooms, and componentsmethod of isolation barriersfabricating deodorizing filters.

In addition, the Company maintains twenty-four (24)twenty-three (23) trademark registrations including the following: FLANDERS®FLANDERS^®, PRECISIONAIRE®PRECISIONAIRE^®, EZ FLOW®FLOW^®, AIRVELOPE®AIRVELOPE^®, CHANNEL-CEIL®CHANNEL-CEIL^®, PUREFORM®PUREFORM^®, ECONO-CELL®ECONO-CELL^®, GAS-PAK®GAS-PAK^®, PUREFRAME®PUREFRAME^®, DIMPLE PLEAT®PLEAT^®, BLU-JEL®BLU-JEL^®, VLSI®VLSI^®, KWIK KUT®KUT^®, SUPER-FLOW®SUPER-FLOW^®, NATURALAIRE®NATURALAIRE^®, AIRPURE®AIRPURE^®, PURESEAL®PURESEAL^®, FLANDERS ABSOLUTE ISOLATION®ISOLATION^®, FLANDERS/CSC®CSC^®, TECH-SORB®TECH-SORB^®, DUSTGARD®DUSTGARD^®, E-Z GREEN®, VAPORCLEAN®VAPORCLEAN^®, and NATURALAIRE FILTER FRANGRANCE®PRECISIONCELL^®. Although management believes that the patents and trademarks associated with our various product lines and subsidiaries are valuable, we do not consider any of them to be essential to our business.

CUSTOMERS

We are not dependent upon any single customer. One customer, The Home Depot, Inc., accounted for 14%20%, 16%14% and 16% of net sales during 2009, 2008 and 2007, respectively. Lowe’s, accounted for 10% and 2006,5% of net sales during 2009 and 2008, respectively. Wal-Mart Stores, Inc., accounted for 5%, 10.4%5% and 13%10.4% of net sales during 2009, 2008 2007 and 2006,2007, respectively. No other single customer accounted for 10% or more of net sales during the past three years. Other significant customers include Texas Instruments, Lowe’s, Glaxo, Merck & Co., Inc., Upjohn Co., Westinghouse Electric Corp., Ace, True Value, Intel and several U.S. government agencies.

BACKLOG

We had approximately $20.4$57.7 million of firm backlog on December 31, 2008,2009, compared to $25.1$20.4 million on December 31, 2007.2008. Firm backlog includes orders received and not yet begun and the unfinished, unbilled portion of special orders. Orders are typically not cancelable without penalty, except for certain stable filter supply contracts to nuclear facilities operated by the United States government. Backlog varies from week to week, based on the timing and mix of orders received. All backlog at December 31, 2008, is expected to be shipped by the end of the second quarter of 2009.

EMPLOYEES

The Company employed 2,0902,139 full-time employees on December 31, 2008; 1,8552009; 1,911 in manufacturing, 2241 in development and technical staff, 3137 in sales and marketing, and the remaining 182150 in support staff and administration. Approximately 221440 employees in Mexico are covered by government-mandated collective bargaining arrangements. Our operations have not been significantly affected by work stoppages and, in the opinion of management, employee relations are good. We are committed to continuous productivity improvement and we continue to evaluate opportunities to reduce fixed costs, simplify or improve processes, and eliminate excess capacity. As a consequence, we may, from time to time, transfer production from one manufacturing facility to another, outsource certain production or close certain manufacturing facilities. Such production transfers, outsourcing, and/or facility closures may result in a deterioration of employee relations at the impacted locations. We believe that our relationship with our employees is satisfactory.

GOVERNMENT REGULATION

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

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

and monitoring of occupational exposures. In general, we expect to increase our expenditures to comply with stricter

industry and regulatory safety standards such as those described above. Although such expenditures cannot be accurately estimated at this time, we do not believe that they will have future material adverse effect on our financial position, results of operations or cash flows.

SEASONALITY

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

EXPORT SALES

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

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

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

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

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

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

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

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

Our Business May Suffer If Our Competitive Strategy is Not Successful

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

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

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

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

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:

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

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

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

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

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

We may have additional tax liability.

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

Management Controls a Significant Percentage of Our Stock

As of December 31, 2008,2009, our directors and executive officers beneficially held approximately 35.50%31.73% of our outstanding common stock. As a result, such shareholders effectively control or significantly influence all matters requiring shareholder approval. These matters include the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control that may otherwise be advantageous to the non-affiliated shareholders.

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

We have granted options to purchase a total of 2,905,0001,860,000 shares of common stock to various parties with exercise prices ranging from $2.50$4.37 to $11.72 per share. The majority of theseThese options are currently exercisable. Additionally, if the option holders exercise their options, the interests of current shareholders may be diluted.

Even thoughWe recently elected to voluntarily delist our common stock is currently traded onfrom the NASDAQ Stock Market’s Global Select Market, it has less liquidity than many other stocks quotedterminate our status as a reporting company under the Exchange Act, and to commence trading on a national securities exchange.the OTCQX U.S. Premier Market.

The trading volume inOn January 12, 2010, we announced our intent to voluntarily delist shares of our common stock from the NASDAQ Global Market Select Marked and to terminate our status as a reporting company in Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our shares currently trade under the OTCQX U.S. Premier Market under the trading symbol “FLDR”. Although the OTCQX market place is generally viewed as the premier tier of the U.S. over-the-counter market, it may not offer certain benefits available on the NASDAQ Global Select Market has been relatively low when compared with larger companies listed onMarket.

We cannot predict the NASDAQ Global Select Market or other stock exchanges. Although we have experienced increased liquidity in our stock, we cannot say witheffect, if any, certainty that a more active and liquid trading market forfuture sales of our common stock, or the availability of shares of common stock for sale, will continuehave on the market price of our common stock. We can give no assurance that sales of substantial amounts of common stock, or the potential for large amounts of sales, would not cause the price of our common stock to develop. decline.

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

We cannot predictAs an issuer qualified for listing on the effect, if any, that future salesOTCQX U.S. Premier Tier, we must comply with, among other factors:

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

Our internal control over financialBecause we have elected to deregister as a reporting may have weaknesses or inadequacies that maycompany under Section 12(g) of the Exchange Act, we will no longer be material.subject to Section 404 of the Sarbanes-Oxley Act of 2002.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our internal control over financial reporting and our auditor to attest to such evaluation on an annual basis. Management concluded that our internal control over financial reporting was effective at December 31, 2008. Ongoing compliance2009. After the filing of this Form 10-K, we will not be subject to Section 404 of the Sarbanes-Oxley Act of 2002, we will not be filing periodic or other reports under the Exchange Act with these requirements is expectedthe SEC, and will not be required to be expensive and time-consuming and may negatively impact our results of operations. While our management did not identify or report any material weaknesses in our internal control over financial reporting at December 31, 2008 and concluded that our internal control over financial reporting was effective, we cannot make any assurances that material weaknesses in our internal control over financial reporting will not be identified in the future. If any material weaknesses are identified in the future, we may be required to make material changes in our internal control over financial reporting, which could negatively impact our results of operations. In addition, upon such occurrence, our management may not be able to conclude that our internal control over financial reporting is effective or our independent registered public accounting firm may not be able to attest that our internal control over financial reporting was effective. If we cannot conclude that our internal control over financial reporting is effective or if our independent registered public accounting firm is not able to attest that our internal control over financial reporting is effective, we may be subject to regulatory scrutiny, and a loss of public confidence in our internal control over financial reporting, which may cause the value of our common stock to decrease.reporting.

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

We are subject to the Control Shares Acquisition Act of the State of North Carolina. This act provides that any person who acquires “control shares” of a publicly held North Carolina corporation will not have voting rights with respect to the acquired shares in certain circumstances. The North Carolina Shareholder Protection Act requires the affirmative vote of 95% of our voting shares to approve a business combination with any entity that beneficially owns 20% of the outstanding voting shares of the corporation unless the “fair price” provisions of the Act are satisfied. These provisions could deprive shareholders of opportunities to realize takeover premiums for their shares or other advantages that large accumulations of stock would typically provide.

Our Business Can be Significantly Affected by Environmental Laws

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

Fire disruptions may adversely affect our business

Our raw materials and manufacturing process involve a risk of fire loss or disruption. We have recently experienced three fires. In April 2006, a manufacturing facility in Texas was destroyed by fire. In July 2007, a manufacturing facility in Bartow, Florida was destroyed by fire. In 2008 a manufacturing facility in Auburn, Pennsylvania was damaged by fire. To date we have been able to mitigate the effects of fires and floods by transferring manufacturing, warehousing and shipping to other facilities. Our management has advised us that to date we have been insured

against the losses caused by such fires. Although we intend to increase security and increase fire protection equipment at our facilities, another major fire could occur and materially affect our operations. Furthermore, there is no assurance that we will be able to maintain business interruption, loss of income and physical damage insurance in sufficient amounts to fully recoup losses caused by fire or other natural disasters. It is an event of default under our credit facility with Bank of America if we are not fully insured for any loss, theft, damage or destruction to our assets, subject to agreeable insurance deductibles, that exceeds $200.$200,000.

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

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

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

We are currently the lessee under a series of six (6)four (4) real estate operating leases for approximately 1,031,0001,100,000 square feet of warehousing, shipping and manufacturing facilities, expiring between 20252019 and 20282029 with Wal-Pat II, LLC (“Wal-Pat”), an entity owned by Robert R. Amerson. Mr. Amerson is our former CEO and former Chairman of our Board of Directors and beneficially owns approximately 29.4%26.4% of our outstanding common shares as of December 31, 2008.2009. Mr. Amerson acquired Mr. Clark’s interest in Wal-Pat as part of the Settlement and Mutual Release with Mr. Clark, as described below.

Our aggregate monthly base lease payment obligation to Wal-Pat is approximately $228,000.$237,000. Our total remaining aggregate obligation under the Wal-Pat operating leases is approximately $48,098,000.$50,642,000. These amounts exclude any obligations for payment of real estate taxes and repairs and maintenance, which are our responsibility as the lessee.

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

A default by us under the terms of any of these leases or a default by Wal-Pat, or Mr. Amerson, as guarantor on their obligations to BB&T, the financial institution which holds mortgages and deeds of trust on these properties, could adversely affect our leasehold interests in these properties. Mr. Amerson has pledged 5,128,103 of our common shares as security to BB&T in order to facilitate the financings to Wal-Pat, other personal loans, and the acquisition of Mr. Clark’s shares.

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

A default by either Mr. Amerson or Mr. Smith under their loan obligations to BB&T could result in BB&T foreclosing upon our shares, which could adversely affect the market price of our common stock and substantially reduce our key management’s equity ownership interest. We filed a Form S-3 registering 5,118,103 shares of our common stock pledged to BB&T by Mr. Amerson. We are not currently aware of any events of default under the financial documents between Wal-Pat, Mr. Amerson, Mr. Smith, and BB&T.

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.

We received a comment letter dated November 24, 2008 in connection with a Form S-3 filing. The staff reviewed our Form 10-K for December 31, 2007 and issued several comments requesting changes to our future Form 10-K filings. We do not believe that there are any material unresolved comments in connection with the staff’s review of our Form 10-K for December 31, 2007. We have attempted to address the staff’s comments in this Form 10-K.Not applicable.

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

Manufacturing and warehouse		Smithfield, North Carolina		415,000			$84,677				Leased3
Manufacturing plant		Smithfield, North Carolina		474,000			$	4,869	4		Owned
Manufacturing and office facility		Fort Bend, Texas		60,000				30,850			Leased3
Warehouse		Salt Lake City, Utah		88,000				25,520			Leased
Manufacturing plant		Tijuana, Mexico		127,000	5		$	46,651			Leased
Manufacturing plant		Washington, North Carolina		120,000			$	27,000			Leased3
Direct Sales Office & Warehouse		Philadelphia, Pennsylvania		26,000			$	13,250			Leased3
Manufacturing Plant		Matamoros, Mexico		86,651			$	30,328			Leased
Manufacturing Plant		Matamoros, Mexico		107,323			$	37,563			Leased
Direct Sales Office & Warehouse		Dallas, Texas		120,000			$	34,257			Leased
Warehouse		Brownsville, Texas		60,000			$	23,400			Leased3
Warehouse		Clarkton, North Carolina		350,000			$	49,321			Leased3

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

Item 4.

Submission of Matters to a Vote of Security HoldersReserved

The Company held its annual meeting of shareholders on December 11, 2008. During the meeting, holders of 23,102,046 shares, representing eighty-eight percent (88%) of the 25,724,074 shares outstanding on the record date, attended either in person or by proxy. Below is a tabulation of the votes:

As a result of the meeting, Messrs. Amerson, Smith, Dominick, Korn, and Mock were elected for an additional one-year term as directors.

PART II

PRICE RANGE OF COMMON STOCK

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

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about our Equity Compensation Plans as of December 31, 2008.2009.

ISSUER PURCHASES OF EQUITY SECURITIES

APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

As of December 31, 2008,2009, there were approximately 129215 holders of record of the Company’s common stock.

DIVIDENDS

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

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

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

SELECTED HISTORICAL BALANCE SHEET DATA (In thousands)

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

OVERVIEW

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

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

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

Goodwill is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the Company’s carrying amount is greater than the fair value. In accordance with SFAS 142,Accounting Standards Codification (“ASC”) 350, the Company examined goodwill for impairment and determined that there were events that occurred in 2008 that impaired the goodwill. These events were the sale of certain direct sales division reporting units in which goodwill was attached. Accordingly, the Company recorded expense related to this impairment of $2.4 million in the fourth quarter of 2008.

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

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

2009 Compared to 2008

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

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

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

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

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

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

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

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

2008 Compared to 2007

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

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

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

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

recording bad debts expense of approximately $8.1 million in 2007 and a decrease in operating expenses of $3.6 million were due to the cessation of direct sales activities in 2008. Royalty expense decreased in 2008 as compared to 2007 due to a decline in sales of our Arm & Hammer product line during 2008. Freight expense for outgoing shipments and commissions expense also decreased during 2008 due to the decrease in sales. This decrease in 2008 was offset by an increase in 2008 loss on asset impairments of $3.1 million compared to $2.5 million in 20072007.

Impairment of Goodwill—In accordance with SFAS 142,ASC 350, the Company examined goodwill for impairment and determined there were events that occurred in 2008 that impaired the goodwill. These events were the sale of certain direct sales division reporting units in which goodwill was attachedattached. Accordingly, the Company recorded expense related to this impairment of $2.4 million in the fourth quarter of 2008. In 2007 impairment of goodwill was $543.

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

Provision for Income Taxes: Our effective state and federal tax rate, adjusted for the effect of certain credits and adjustments, was approximately 32% and 38% for 2008 and 2007, respectively. TheAs of the end of 2008, the IRS is currentlywas examining the Company’s federal income tax returns of 2004, 2005, and 2006. To dateThis examination was resolved at the IRS has not proposed any material adjustments for the 2004 through 2006. For the 2002 and 2003 examination, the IRS has proposed certain changes, resulting in additional liabilities due. The Company has submitted a petition for a redeterminationend of the changes with the U.S. Tax Court.2009.

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

2007 Compared to 2006

The following table summarizes the Company’s results of operations as a percentage of net sales for 2006 and 2005.

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

Gross Profit: Gross profit for 2007 decreased $16,936 or 34.8%, to $31,789 which made up 13.0% of net sales, from $48,725 for 2006, which made up 20.4% of net sales. The US economy experienced cost increases due to inflation including increases in in-bound shipping costs due to increased fuel costs and raw material costs, especially in the cost of metal. In addition, gross profit during the last six months has decreased due to the start up of new production lines for the EnergyAire and nested filters. Also, the success of the nested flat panel filter continues to have a negative impact on product mix and consequently gross margins. The Company also increased its reserve for obsolete inventory during the third quarter of 2007 by $3.1 million.

Operating Expenses: Operating expenses for 2007 increased $17,643, or 43.2%, to $58,511, from $40,868 in 2006. Operating expenses as a percentage of sales increased in 2007 to 23.9% from 17.1% in 2006. The increase in operating expenses was primarily due to an increase in management’s estimate of allowance for doubtful accounts during the third quarter of 2007 by $8.1 million and the Company disposing of assets considered impaired of approximately $2.5 million, as well as an increase in fuel costs. Additionally, an increase in operating expenses is expected with a higher volume of sales.

Non operating Income (Expenses):Non operating expense increased approximately $2,320 to ($1,969) of expense for 2007, compared to $351 of income in 2006. The increase in expense was due to an increase of interest expense of approximately $700. Additionally, the balance in 2006 included an amount of $500 from favorable litigation. Additionally in 2007, the Company relocated from certain offices it was subleasing which reduced 2007 other income by $500 compared to 2006.

Provision (Benefit) for Income Taxes: Our effective state and federal tax rate, adjusted for the effect of certain credits and adjustments, was approximately 38% and 38% for 2007 and 2006, respectively. The IRS is currently examining the Company’s federal income tax returns of 2004, 2005, and 2006. To date the IRS has not proposed any material adjustments for the 2004 through 2006. For the 2002 and 2003 examination, the IRS has proposed certain changes, resulting in additional liabilities due. The Company has submitted a petition for a redetermination of the changes with the U.S. Tax Court.

Extraordinary Items: In 2006, a warehouse in Terrell, Texas was destroyed by a fire and a warehouse in Auburn, Pennsylvania was damaged by a flood. In 2007, a warehouse in Bartow, Florida was destroyed by a fire. The extraordinary gain of $213 during 2007 was calculated as the gain on the costs that were attributable to the Bartow and Terrell fires ($16,373) that were less than the insurance proceeds ($16,728), net of taxes of $142. The extraordinary loss of ($3,475) was calculated as the loss on the costs that were attributable to the Terrell fire and the Auburn flood ($16,792) that exceeded the insurance proceeds ($11,000), net of taxes of 2,317.

EFFECTS OF INFLATION

During 2008,2009, the US economy experienced cost increases due to inflation including increases in in-bound shipping costs due to increased fuel costs and raw material costs, especially in the cost of metal. This has had a negative impact on our margins.

LIQUIDITY AND CAPITAL RESOURCES(dollar amounts in thousands)

Working capital was $39,705 at December 31, 2009, compared to $45,164 at December 31, 2008, compared to $50,251 at December 31, 2007.2008. This included cash and cash equivalents of $404$260 and $498$404 at December 31, 20082009 and 2007,2008, respectively. The primary reason for the decrease in working capital was the reduction of accounts receivable as well as a reduction of inventory due to both strategic reasons and the disposal of certain inventories during the fourth quarter.inventory. Typically the company needs to maintain strategic inventory levels in order to satisfy the demand of on time delivery to its customers.

Trade receivables decreased $11,412,$4,523, or 23.2%12.0% at December 31, 20082009 from $49,094$37,682 at December 31, 2007.2008. The decrease in accounts receivable is primarily attributable to lower sales amountsimprovement in 2008 alongthe Company’s efforts to more efficiently manage the accounts receivable process and collection efforts with the timing differences in shipments and payments received.its customers.

Inventories decreased $15,687$2,134 or 33.3%6.8% to $29,415 at December 31, 2009 from $31,549 at December 31, 2008 from $47,236 at December 31, 2007.2008. The decrease in inventory was due to the reduction in sales as well as a strategic reduction ofmanagement efforts to strategically lower inventory levels, and the disposal of certain inventories during 2008.primarily through better supply chain management techniques.

Continuing operations generated $13,910 of cash in 2009, compared to $14,103 of cash in 2008, compared to $4,607 of cash in 2007.2008. The increasedecrease in cash flows was primarily related to the decrease in inventory combined with insurance proceeds received from insurance claims, decrease in 2008 as well as a reductionextraordinary gain, decrease in cash received from inventory, decrease in accrued expenses, offset by an increase in net lossearnings from 20072008 to 2008.2009. Investing activities for continuing operations consumed $9,223$12,904 of cash during 2008,

2009, compared to generating $4,869consuming $9,223 during 2007.2008. The decreaseincrease in cash providedconsumed by investing activities was primarily attributable to the increasedecrease in the company’s acquisition of equipment that was doneproceeds received in 2008.2009 from disposed equipment. Financing activities consumed $1,150 of cash in 2009, compared to $4,974 of cash in 2008, compared to $9,546 of cash in 2007, consisting primarily of payments on the revolving credit agreement and other long term borrowings.borrowings offset by the tax impact of stock options exercised.

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

Effective March 13,September 23, 2009, we entered into an amendment to our BOA credit facility, which waivesgranted consent to a stock repurchase and modified certain technical covenant defaults and resets various financial covenants including our consolidated fixed charge coverage ratio, consolidated total funded debt to consolidated EBITDA, and minimum EBITDA. Our blendedaspects of the borrowing rate is currently approximately 5%.base. Reference is hereby made to the 19th21st Amendment to Loan and Security Agreement, attached as an exhibit to this Form 10-K for additional information.

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

As of December 31, 20082009 we had the following fixed obligations and commitments

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 20092010 fiscal year. Any major increases in sales, particularly in new products, may require substantial capital investment for the manufacture of filtration products. Failure to obtain sufficient capital could materially adversely impact our growth potential.

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

Outlook

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

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

Sales of air filtration products for semiconductor facilities, historically a major market, are expected to be slow againbegin recovery during 2009,2010 with most analysts pushing recovery for this sector out until 2010.continued improvement during 2011.

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

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

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

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

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

We plan on occupying and leasing the newly built Bartow facility, which was destroyed by a fire in July 2007, by March 2009. The new facility will be a 265,000 square foot, state of the art filter manufacturing facility.

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

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

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk (dollar(dollar amounts in thousands)

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

The fair value of the Company’s total long-term debt, including capital leases and current maturities of long-term debt, at December 31, 20082009 was $31,472$34,863. Market risk was estimated as the potential decrease (increase) in future earnings and cash flows resulting from a hypothetical 10% increase (decrease) in the Company’s estimated weighted average borrowing rate at December 31, 2008.2009. Although most of the interest on the Company’s debt is indexed to a market rate, there would be no material effect on the future earnings or cash flows related to the Company’s total debt for such a hypothetical change.

We have only a limited involvement with derivative financial instruments. We have three interest-rate swap agreements to hedge against the potential impact on earnings from increases in market interest rates of two variable rate bonds and one variable rate note. Under the interest rate swap agreements for the bonds, we receive or make payments on a monthly basis, based on the differential between 5.49% and a tax exempt interest rate as determined by a remarketing agent. Under the interest rate swap agreement for the note, we receive or make payments on a monthly basis, based on the differential between 5.86% and LIBOR plus 1.75%. These interest rate swaps are accounted for as a cash flow hedge in accordance with SFAS 133 and SFAS 138.138 (included inASC 815). Gains or losses related to inefficiencies of the cash flow hedge were included in net income during the period related to hedge ineffectiveness. The tax affected fair market value of the interest rate swaps of $1,231$908 is included in “Accumulated other comprehensive loss” on the balance sheet. The interest rate swap contracts on the bonds expire in 2013 and 2015 and the interest rate swap on the note expires in 2013.

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

Beginning at page F-1.

Not applicable

Evaluation of Disclosure Controls and Procedures

Our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of our year ended December 31, 20082009 pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of our year ended December 31, 20082009 our disclosure controls and procedures were effective.

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

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the year ended December 31, 20082009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2008.2009. Management’s evaluation was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

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

Based on the COSO criteria and our management’s evaluation, our management believes our internal control over financial reporting as of December 31, 20082009 was effective.

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

Important Considerations

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

Item 9B.

Other

Not applicable

PART III

IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

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

Robert R. Amerson.Mr. Amerson, age 58, has been President and Chief Executive Officer of the Company since 1987 but retired from these positions in December 2004 and served as Chairman of the Board of Directors until August 13, 2007, when he assumed the additional positions of Chief Executive Officer and President. In November 2008 Mr. Amerson became Chairman of the Board. Mr. Amerson has been a director since 1988. Mr. Amerson has a Bachelor of Science degree in Business Administration from Atlantic Christian College.

Harry L. Smith, Jr.Mr. Smith, age 38,40, has a long history in the air filtration industry. He has worked at Flanders since 1997, holding roles of increasing responsibility including working with the Flanders direct offices; ARW –Wholesale Division; FSS-Filter Sales and Service; FFI-Flanders Filters, Inc.; CSC-Charcoal Services, Inc., and AirSeal Filter Housings. Mr. Smith received his Bachelor of Science degree in Business Administration from East Carolina University in 1992. Mr. Smith was appointed our Chief Operating Officer in August 2007, and our Chief Executive Officer in November 2008.2008, and Chairman of the Board in May 2009.

John Oakley.Mr. Oakley, age 41,42, most recently served as Chief Financial Officer of Nexxus Lighting, Inc. Prior to starting with Nexxus Lighting in June 2007, he held several posts of increasing responsibility with Home Meridian International and its subsidiary Pulaski Furniture Corporation, including Director and CFO of Home Meridian and Senior Vice President and Chief Financial Officer of Pulaski Furniture, having joined the company in 2001. Earlier in his career, Mr. Oakley served as Corporate Controller for Collins and Aikman Floorcoverings, Inc. and Senior Auditor for Arthur Andersen. Mr. Oakley was appointed our Senior Vice President of Operations and Chief Financial Officer in December 2008.

David M. Mock. Mr. Mock, age 56,57, has served as an independent director of Flanders Corporation since August 2003. He serves on the Compensation Committee and Audit Committee. Mr. Mock is currently a General Partner in Sand Hill Factory, LLC, a consulting group providing operational, marketing, financial and strategic services to start-up technology companies. He is a General Partner with GMG Capital Partners, a New York-based investment firm, which he co-founded in 1997. Mr. Mock has extensive operations and private investment experience with respect to technology and natural resource companies. Mr. Mock has co-founded over 25 companies in the last two decades. He has served in a variety of management positions in all of these companies. These include chief operational officer, chief financial officer, chairman of the board, and director. Mr. Mock received his B.S. in Accounting from the University of Utah.

Kirk Dominick. Mr. Dominick, age 41,42, has served as an independent director of the Company since December 2007 and serves on the Compensation Committee and Audit Committee. For the last 17 years, Mr. Dominick served in various executive capacities with Boys & Girls Clubs of America. He currently serves as Executive Vice President for Boys & Girls Clubs of America, where he oversees the delivery of services to over 4,300 local affiliates across the United States and on military installations overseas. Prior to his involvement with Boys & Girls Clubs of America, Mr. Dominick served as President of DNS Associates, a full-serviceprivately owned consulting firm that specializesspecializing in strategy development, organizational restructuring, management consulting, and board and resource development. Prior to joining DNS, Mr. Dominick enjoyed a seventeen-year career with Boys & Girls Clubs of America, most recently in the Office of Government Relations in Washington, D.C. In addition, Mr. Dominick is a Partnerpartner in InnerBanks Capital, a private equity firm focused on real estate development in emerging growth markets. Mr. Dominick holds a Bachelor of Science in Criminal Justice from East Carolina University.

Robert R. Amerson. Mr. Dominick was appointed a DirectorAmerson, age 59, has been President and Chief Executive Officer of the Company since 1987 but retired from these positions in December 2007.

Jeffrey Korn.2004 and served as Chairman of the Board of Directors until August 13, 2007, when he assumed the additional positions of Chief Executive Officer and President. Mr. Korn, age 51,Amerson was Chairman of the Board from November 2008 until April 2009. Mr. Amerson has been a corporate attorneyDirector since 1982. He was originally1988. Mr. Amerson has a Bachelor of Science degree in private practice in Jacksonville, FloridaBusiness Administration from 1982-1999 in a commercial litigation and business practice. He was general counsel and a member of the board of directors of Prosoft Training (formerly a NASDAQ company now sold) from 1987-2005. Since 2003, Mr. Korn has served as general counsel in iMergent, Inc. (IIG, AMEX). Since 2001, Mr. Korn has maintained a private legal and corporate consulting practice. Mr. Korn was appointed a Director in December 2007.Atlantic Christian College.

Our Corporate Governance Practices

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

Communications with the Board of Directors		Although Flanders Corporation does not have a formal policy regarding communications with the Board of Directors, stockholders may communicate with the Board of Directors by writing to the Company at Flanders Corporation, Attention: Investor Relations, 531 Flanders Filters Road, Washington, NC 27889. Stockholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.

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

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

Code of Ethics for Senior Financial Officers

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

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

Item 11.

Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Overview

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

Compensation Objectives

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

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

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

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

Implementing Our Objectives

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

Equity Incentive Plan

During 2007, the Company adopted the Equity Incentive Plan (the Plan) to assist the Company in securing and retaining key employees and consultants. The Plan authorizes grants of incentive stock options, non-qualified stock options, restricted stock and stock appreciation rights (“awards”) to officers, directors, outside consultants and key employees of the Company. There are 2,000,000 shares of Common Stock reserved for award under the Plan. During 20082009 the Company awarded options to purchase 55,00015,000 shares of Common Stock under the Plan which are fully vested and not subject to performance or service requirements.

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

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

Other Equity Incentives. The 2007 Equity Incentive Plan also allows for the issuance of stock appreciation rights, performance shares, restricted stock awards, dividend equivalents, and other forms of equity incentive arrangements. Historically, we have utilized stock options as the primary method of rewarding and compensating employees under

our equity incentive arrangements. However, if the need arises, we have the flexibility to utilize other equity incentive instruments besides stock options under the 2007 Equity Incentive Plan. During 2008, the Company awarded stock warrants to purchase 15,000 shares of Common Stock under the Plan.

Restricted Stock Awards. The Compensation Committee is authorized under the Plan to issue shares of restricted common stock to eligible participants on such terms and conditions and subject to such restrictions, if any, outstanding under the Plan. As of December 31, 2008,2009, no restricted shares have been awarded.

Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers and directors are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms filed. Based solely upon review of copies of such forms, or written representations that there were no unreported holdings or transactions, the Company believes that for the fiscal year ending December 31, 2008 all Section 16(a) filing requirements applicable to its officers and directors were complied with on a timely basis.

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

General

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

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

Executive Compensation

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

Base and Bonus Compensation

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

Prior to our year ending 2008, we did not have in place formal incentive or cash bonus plans. Beginning in 2008, the Compensation Committee reviews, approves and communicates, clear and measurable individual and company performance objectives against which the Compensation Committee evaluates performance of executives at the end of the fiscal year. In general, annual performance goals are intended to be challenging yet attainable. Generally, the Compensation Committee establishes bonus target amounts as a percentage of base salary for each of our executive officers, which currently ranges from 20% to 50% of base salary.

In addition, in the event of exceptional performance, such bonus target percentages would be increased that result in actual bonuses being as high as 100% of base salary. The Compensation Committee may establish or take into account additional subjective performance criteria in evaluating an individual’s executive performance during a given fiscal year in establishing an executive’s actual bonus amount for a given fiscal year.

In 2008,2009, we rewarded Harry Smith, our Chief Executive Officer, with a $175,000$350,000 bonus, which represented 50%100% of his base salary. ThisWe also awarded John Oakley, our Chief Financial Officer, a bonus was awarded based onof $130,000, which represented approximately 66% of Mr. Oakley’s base salary. These were significantly higher bonuses as a percentage of base salary than we have paid our NEO’s in prior years. However, our Compensation Committee felt that Mr. Smith directingand Mr. Oakley were entitled to these bonuses because we were able to translate our continuing ongoing programrestructuring and centralization efforts into significantly improved earning results, which were substantially greater on a percentage basis than the percentage amount of our NEO’s bonuses compared to centralize functions and eliminate duplicationbase compensation. Our annual net income for 2009 was $7 million, compared to a 2008 net loss of efforts between subsidiaries.$4.1 million. Our Compensation Committee felt that Mr. Smith’s efforts during 2008 warranted ain light of these financial results, our NEO’s earned and were deserving of their cash bonus equal to 50%payments. Each of his base salary inasmuch as he surpassed the objects andthese individuals also met their individual goals for which he was responsible.

We awarded Cully Bohush a $50,000supporting these cash bonus. Prior to our retaining John Oakley as our new Chief Financial Officer,bonus payments in December 2008, Mr. Bohush served as our Chief Accounting Officer. He was also instrumental in consolidating and moving our administrative offices in St. Petersburg, Florida to Tampa, Florida. Accordingly, our Compensation Committee felt that he met his performance objectives for 2008, entitling him to a $50,000 cash bonus.2009.

Compensation Committee Report

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

Compensation Committee

Kirk Dominick

Jeffrey G. Korn

David Mock

REPORT OF THE AUDIT COMMITTEE

General

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

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

Audit Committee Charter

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

Review of Annual Results

The Audit Committee reviewed and discussed the Company’s financial statements for the year ended December 31, 20082009 with the Company’s management. The Audit Committee also discussed the statements with the Company’s independent auditors. In particular, the Audit Committee discussed with the independent auditors the matters required by SAS 61.114.

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

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

Based on its review and the discussions noted above, the Audit Committee recommended to the Board of Directors that the Company’s Consolidated Financial Statements for the years ended December 31, 2009, 2008 2007 and 20062007 be included in the Company’s Annual Report on Form 10-K for 2008.2009.

SUMMARY COMPENSATION TABLE

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

GRANTS OF PLAN BASED AWARDS TABLE

The following tables set forth the number of securities underlying stock options granted to the named executive officers under the Company’s stock option plans during the year ended December 31, 2008.2009.

OPTION EXERCISES AND STOCK VESTED TABLE

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

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END TABLE

The following table discloses information regarding outstanding awards under stock option plans as of December 31, 2008.2009. The table omits any Stock Award columns because the Company does not have any Stock Award Plans.

Name		Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Equity Incentive Plan awards: Number of Securities Underlying Unexercised Unearned Options		Option Exercise Price ($)			Option Expiration Date
Harry Smith		50,000		—		—		$	8.85		07/01/10
		500,000		—		—		$	4.99		10/16/17
John Oakley		50,000		—		—		$	4.69		12/31/13

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

COMPENSATION OF DIRECTORS

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

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

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

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

DIRECTOR COMPENSATION TABLE

The following table sets forth all material Director compensation information during the year ended December 31, 2008.2009.