The following discussions should be read in conjunction with our Consolidated Condensed Financial Statements and the notes thereto presented in "Item 1 - Financial Statements" and our audited financial statements and the related Management's Discussion and Analysis of Financial Condition and Results of Operations included in our report on Form 10-K for the year ended December 31, 2007. The information set forth in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements that involve risks and uncertainties. Many factors, including those discussed below under "Factors That May Affect Future Results" and "Outlook" could cause actual results to differ materially from those contained in the forward-looking statements below.

Overview

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

Critical Accounting Policies

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

We maintain allowances for estimated losses resulting from the inability of our customers to make required payments. We base our estimates on the aging of our accounts receivable balances and our historical write-off experience, net of recoveries. Actual results could differ materially from this estimate, making it reasonably possible that a change in this estimate could occur in the near term.

We value our inventories at the lower of cost or market. We write down inventory balances for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. 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.

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

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

Results of Operations for Three Months Ended June 30, 2008 Compared to June 30, 2007

The following table summarizes our results of operations as a percentage of net sales for the three months ended June 30, 2008 and 2007.

                                                              Three Months Ended
                                                                   June 30,
                                                            2008               2007

Net sales                                             $ 57,269   100.0 % $ 64,285   100.0 %
Gross profit                                             8,496    14.8     11,623    18.1
Operating expenses                                       9,313    16.3     11,118    17.3
Operating income (loss)                                   (817 )  (1.4 )      505     0.8
Nonoperating income (expense)                              950     1.7        (12 )  (0.0 )
Provision for income taxes                                  53     0.1        193     0.3
Extraordinary gain on Fire and Flood (net of taxes)      6,802    11.9        502     0.8
Net earnings (loss)                                      6,882    12.0        802     1.2

Net sales: Net sales for the second quarter of 2008 decreased by $7,016, or 10.9%, to $57,269 from $64,285 for the second quarter of 2007. Sales were down during the second quarter of 2008 compared to the second quarter of 2007 due to the release of our EnergyAire and nested products during the second quarter of 2007 as well as a general downturn in the economy. Additionally, our ability to produce enough product and ship to our customers was negatively impacted by the fire which destroyed our Florida manufacturing facility in 2007.

Gross Profit: Gross profit for the second quarter of 2008 decreased by $3,127, or 26.9%, to $8,496, which represented 14.8% of net sales, from $11,623, which represented 18.1% of net sales for the second quarter of 2007. Cost increases have continued 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. Also, our media producing facility was producing for part of the period which contributed to lower margins. Additionally, the reduction of sales created certain manufacturing inefficiencies during the period. The manufacturing facilities increased their level of production later in the period which should help correct some of these inefficiencies in the near term.

Operating expenses: Operating expenses for the second quarter of 2008 decreased by $1,805, or 16.2%, to $9,313, representing 16.3% of net sales, from $11,118, representing 17.3% of net sales, for the second quarter of 2007. The decrease in operating expenses as a percentage of sales is primarily due to decreased royalty expenses, rent expenses and wage expenses. Royalty expenses are a function of sales of our Arm & Hammer product line. Rent expense decreased due to the sale of certain direct offices while wage expense decreased due to initiatives to reduce headcount.

Nonoperating income (expense): Net nonoperating income (expense) for the second quarter of 2008 increased by $962, to $950 representing 1.7% of net sales, from $(12), representing (0.0 %) of net sales, for the second quarter of 2007 due to the Company selling a direct office and its media producing facility during the period.

Provision for income taxes:

The IRS is currently examining the Company's federal income tax returns of 2002, 2003, 2004, 2005, and 2006. To date the IRS has proposed certain changes for the 2002, 2003, 2004, 2005, and 2006 examinations, resulting in additional liabilities due. The Company has submitted a petition to the IRS for a redetermination of the changes with the U.S. Tax Court. These liabilities have been included in the Company's FIN 48 liability which is included in other current liabilities. Our provision for the six months of 2008 and 2007 were a blended state and federal rate of approximately 40% of pretax earnings and losses.

Extraordinary gain on Fire (net of taxes): The extraordinary gain of $6,802 was calculated as the gain on the costs that were attributable to these natural disasters ($612) that were less than the insurance proceeds ($11,950), net of taxes of $4,536.

Results of Operations for Six Months Ended June 30, 2008 Compared to June 30, 2007

The following table summarizes our results of operations as a percentage of net sales for the six months ended June 30, 2008 and 2007.

                                                                Six Months Ended
                                                                    June 30,
                                                            2008                2007

Net sales                                             $ 106,463   100.0 % $ 124,533   100.0 %
Gross profit                                             17,220    16.2      20,645    16.6
Operating expenses                                       18,589    17.5      22,101    17.7
Operating loss                                           (1,369 )  (1.3 )    (1,456 )  (1.2 )
Nonoperating income                                       2,920     2.7         335     0.3
Provision (Benefit) for income taxes                        620     0.6        (448 )  (0.4 )
Extraordinary gain on Fire and Flood (net of taxes)       8,335     7.8       1,464     1.2
Net earnings                                              9,266     8.7         791     0.6

Net sales: Net sales for the first half of 2008 decreased by $18,070, or 14.5%, to $106,463 from $124,533 for the first half of 2007. Sales growth decreased during the first half of 2008 due to the release of our EnergyAire and nested products during the second quarter of 2007 as well as a general downturn in the economy. Additionally, our ability to produce enough product and ship to our customers was negatively impacted by the fire which destroyed our Florida manufacturing facility in 2007.

Gross Profit: Gross profit for the first half of 2008 decreased by $3,425, or 16.6%, to $17,220, which represented 16.2% of net sales, from $20,645, which represented 16.6% of net sales, for the first half of 2007. Cost increases have continued 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. Also, our media producing facility was producing for most of the period which contributed to lower margins. Additionally, the reduction of sales created certain manufacturing inefficiencies during the period. The manufacturing facilities increased their level of production later in the period which should help correct some of these inefficiencies in the near term.

Operating expenses: Operating expenses for the first half of 2008 decreased by $3,512, or 15.9%, to $18,589, representing 17.5% of net sales, from $22,101, representing 17.7% of net sales, for the first half of 2007. Operating expenses as a percentage of sales remained consistent, however, there was a decrease in operating expenses attributable to headcount reduction initiatives and rent expense due to the sale of certain direct offices.

Nonoperating income: Net nonoperating income for the first half of 2008 increased by $2,585, or 771.6%, to $2,920, representing 2.7% of net sales, from $335, representing .3% of net sales, for the first half of 2007. This increase was due to the Company settling trade accounts payable with Superior Diecutting, Inc. for less than what was owed combined with the sale of three direct offices and its media production facility.

Provision for income taxes:

The IRS is currently examining the Company's federal income tax returns of 2002, 2003, 2004, 2005, and 2006. To date the IRS has proposed certain changes for the 2002, 2003, 2004, 2005, and 2006 examinations, resulting in additional liabilities due. The Company has submitted a petition to the IRS for a redetermination of the changes with the U.S. Tax Court. These liabilities have been included in the Company's FIN 48 liability which is included in other current liabilities. Our provision for the six months of 2008 and 2007 were a blended state and federal rate of approximately 40% of pretax earnings and losses.

Extraordinary gain on Fire (net of taxes): The extraordinary gain of $8,335 was calculated as the gain on the costs that were attributable to these natural disasters ($1,587) that were less than the insurance proceeds ($15,479), net of taxes of $5,557.

Liquidity and Capital Resources

Our working capital was approximately $55,015 at June 30, 2008, compared to approximately $50,251 at December 31, 2007. This includes cash and cash equivalents of $349, at June 30, 2008 and $498 at December 31, 2007.

Our trade receivables decreased $1,877, or 3.8% to $47,217 at June 30, 2008, from $49,094 at December 31, 2007. Receivable levels decreased during the first six months. The sales decrease during the first half of 2008 has resulted in a reduced trade receivables balance. Trade receivables are typically higher during the second and third quarters due to higher sales volume; however, our sales volume typically decreases during the fourth and first quarters.

Inventories decreased $482, or 1.0%, to $46,754 at June 30, 2008 from $47,236 at December 31, 2007. The decrease in inventory was primarily due to the increase in the reserve estimate for bad inventory during the fourth quarter of 2007 offset by the Company typically carrying higher inventory levels at year end due to delayed orders and lower sales volume than expected at the end of the previous year.

Our continuing operations provided $1,818 and $3,710 of cash during the second quarter of 2008 and 2007, respectively. The decrease in cash flows from operating activities was primarily due to an increase in accounts receivable levels, deferred taxes, accrued expenses, and gain on sale of subsidiaries offset by a decrease in other assets and inventory levels.

Our financing activities generated $315 of cash during the second quarter of 2008, primarily consisting of proceeds on the line of credit, net of payments on other long term borrowings. Our investing activities consumed $2,706 of cash during the second quarter of 2008, primarily due to purchase of property and equipment.

During July 2008, we entered into an amendment to the credit facility with its bank. Our new current revolving credit agreement with the bank provides a maximum line of credit of $36 million (subject to availability) and bears interest at either (i) LIBOR plus between 1.75% and 2.25%, dependent on the Company's fixed charge coverage during the prior twelve months; or (ii) the bank's base rate, plus between 0% and .5%, dependent on the Company's fixed charge coverage during the prior twelve months. Up to $12 million of this credit facility may be used to issue letters of credit. The revolving credit agreement is part of a combined facility with a bank that also includes a $12 million facility to guarantee letters of credit. The line of credit is due in 2011. The combined facility is collateralized by substantially all of the Company's assets and restricts capital expenditures, payment of dividends and share repurchases. As of June 30, 2008 the Company is in compliance with its financial covenants.

In connection with the working capital credit facility and notes payable to a regional development authority and bank, the Company and its majority owned subsidiaries have agreed to certain restrictive covenants which include, among other things, not paying dividends or repurchasing its stock without prior written consent, and maintenance of certain financial ratios at all times including: a minimum current ratio; a minimum tangible net worth; a maximum ratio of total liabilities to tangible net worth; a minimum fixed charge coverage ratio; and a minimum earnings before interest, taxes, depreciation and amortization amount. As of June 30, 2008 the financial covenants of the Company are in compliance with the credit facility.

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 2008 fiscal year. Any major increases in sales, particularly in new products, may require substantial capital investment for the manufacture of filtration products. Failure to obtain sufficient capital could materially adversely impact our growth potential.

Outlook

Global Containment Systems, Inc. (GCS), which manufactures critical environments for the nuclear and pharmaceutical industries, was rolled into Charcoal Services Corporation, Inc., a wholly-owned subsidiary of Flanders Corporation during the first quarter of 2008. Our expansion related to these industries is currently on hold until demand for these critical products exceeds our current capacity.

Additionally, during the first quarter of 2008, the Company closed down Flanders Complete Service Division (Flanders CSD), an air filtration service provider. Flanders CSD offered weekly, monthly and quarterly service contracts for commercial, industrial, retail and residential surveys; and complete filtration management.

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

Sales of air filtration products for semiconductor facilities, historically a major market, are expected to be slow again during 2008, with most analysts pushing recovery for this sector out until 2009. We need to state that our sales to the Pharmaceutical Industry have been strong, since introducing several new cleanroom products.

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

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

Our most common products, in terms of both unit and dollar volume, are residential throw-away spun-glass and pleat filters. Any increase in consumer concern regarding air pollution, airborne pollens, allergens, and other residential airborne contaminants could result in replacement of some of these products with higher value products. Our higher value products include our NaturalAire® higher-efficiency filters for residential use, and our Arm&Hammer® co-branded product. 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 intend our new products to serve as high profile entrants with distributors and manufacturers' representatives, who can then be motivated to carry our complete product line.

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

The Company has secured a contract with Lowe's to sell its fiberglass and pleat filters and has begun shipping this account in May 2008.

The Company has reached an agreement with a software firm to purchase and install the latest version of ERP/LX. This Enterprise Resource Planning business software will provide a unified IT strategy starting with the database system and includes major applications that allow the engineer-to-order and repetitive manufacturing operations to merge to one IT platform. The structure of the database and system, selected as part of the IT strategy, will create a seamless link between all points of production, distribution, purchasing and service. ERP/LX will allow integration with a recently purchased 3D modeling application. This will enable engineering to automate the design and validation process while reducing engineering lead times and increasing engineering capacity. It will also provide us with a competitive edge by enabling us to supply value added solutions to engineering and consulting firms by providing them with 3D models of the products they purchase.

This Outlook section, and other portions of this Form 10-Q, include certain "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including, among others, those statements preceded by, following or including the words "believe," "expect," "intend," "anticipate" or similar expressions. These forward-looking statements are based largely on the current expectations of management and are subject to a number of assumptions, risks and uncertainties. Our actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include those discussed in "Factors That May Affect Future Results" in our Form 10-K for 2007 and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements" in our 2007 Annual Report and in this Form 10-Q as well as:

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

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

• anticipated working capital or other cash requirements,

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

• product obsolescence due to the development of new technologies,

• various competitive factors that may prevent us from competing successfully in the marketplace, and

• catastrophic losses due to fire, floods or other factors beyond our control.

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