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 September 30, 2008 Compared to
September 30, 2007

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


                                                          Three Months Ended
                                                             September 30,

                                                   2008                       2007


Net sales                                   $ 61,070      100.0 %    $  62,578        100.0 %
Gross profit                                  10,818       17.7          6,561         10.5
Operating expenses                             9,418       15.4         24,214         38.7
Operating income (loss)                        1,400        2.3        (17,653 )      (28.2 )
Nonoperating income (expense)                     90        0.1         (1,545 )       (2.5 )
Provision (Benefit) for income taxes             596        1.0         (7,680 )      (12.3 )
Extraordinary loss on Fire and Flood
(net of taxes)                                     -          -         (4,697 )       (7.5 )
Net earnings (loss)                              894        1.5        (16,215 )      (25.9 )

Net sales: Net sales for the third quarter of 2008 decreased by $1,508, or 2.4%, to $61,070 from $62,578 for the third quarter of 2007. Sales were down during the third quarter of 2008 compared to the third quarter of 2007 due to the general downturn in the economy.

Gross Profit: Gross profit for the third quarter of 2008 increased by $4,257, or 64.9%, to $10,818, which represented 17.7% of net sales, from $6,561, which represented 10.5% of net sales for the third quarter of 2007. The gross profit increased during the third quarter of 2008 due to certain inefficiencies related to the start up of three new plants in Clarkton, North Carolina, Dallas, Texas, and Matamoros, Mexico as well as new production lines for the EnergyAire and nested filters during the third quarter of 2007. The Company also increased its reserve for obsolete inventory during the third quarter of 2007. In 2008 the Company has had certain price increases which have increased the gross profit in 2008.

Operating expenses: Operating expenses for the third quarter of 2008 decreased by $14,796, or 61.1%, to $9,418, representing 15.4% of net sales, from $24,214, representing 38.7% of net sales, for the third quarter of 2007. The decrease in operating expenses as a percentage of sales is primarily due to an increase in management's estimate of allowance for doubtful accounts during the third quarter 2007. Additionally, the Company disposed of assets considered impaired during the third quarter of 2007. There was also a decline in sales of our Arm & Hammer product line during the third quarter 2008 which reduced our royalty expenses.

Nonoperating income (expense): Net nonoperating income (expense) for the third quarter of 2008 increased by $1,635, to $90 representing .1% of net sales, from $(1,545), representing (2.5)% of net sales, for the third quarter of 2007 due to the sale of certain sales divisions for a loss as well as the Company disposing of goodwill during the third quarter 2007.

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 three months of 2008 and 2007 were a blended state and federal rate of approximately 40% of pretax earnings and losses.

Extraordinary loss on Fire and Flood (net of taxes): The extraordinary loss of $4,697 in 2007 was calculated as the loss on the costs that were attributable to these natural disasters ($9,828) that exceeded the insurance proceeds ($2,000), net of taxes $3,131.

Results of Operations for Nine Months Ended September 30, 2008 Compared to
September 30, 2007

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


                                                           Nine Months Ended
                                                             September 30,

                                                    2008                       2007


Net sales                                   $ 167,533      100.0 %    $ 187,111        100.0 %
Gross profit                                   28,038       16.7         27,206         14.5
Operating expenses                             28,007       16.7         46,315         24.8
Operating income (loss)                            31        0.0        (19,109 )      (10.2 )
Nonoperating income (expense)                   3,010        1.8         (1,210 )       (0.6 )
Provision (Benefit) for income taxes            1,216        0.7         (8,128 )       (4.3 )
Extraordinary gain (loss) on Fire and
Flood (net of taxes)                            8,335        5.0         (3,233 )       (1.7 )
Net earnings (loss)                            10,160        6.1        (15,424 )       (8.2 )

Net sales: Net sales for the first nine months ended September 30, 2008 decreased by $19,578, or 10.5%, to $167,533 from $187,111 for the first nine months ended September 30, 2007. Sales growth decreased during the first nine months ended September 30, 2008 due to the release of two new products, our EnergyAire and nested products during 2007. Additionally, during the first nine months of 2007 the Company released its new Microparticle Plus product at Home Depot. During 2008 there has also been a general downturn in the economy.

Gross Profit: Gross profit for the first nine months ended September 30, 2008 increased by $832, or 3.1%, to $28,038, which represented 16.7% of net sales, from $27,206, which represented 14.5% of net sales, for the first nine months of 2007. This increase in 2008 is partially due to the Company increasing its reserve for obsolete inventory in 2007. Additionally, in 2007, gross profit was down due to the start up of new production lines for the EnergyAire and nested filters. In 2008 the Company has had certain price increases which have increased the gross profit in 2008.

Operating expenses: Operating expenses for the first nine months ended September 30, 2008 decreased by $18,308, or 39.5%, to $28,007, representing 16.7% of net sales, from $46,315, representing 24.8% of net sales, for the first nine months ended September 30, 2007. The decrease in operating expenses was due primarily to an increase in management's estimate of allowance for doubtful accounts and the Company disposing of assets considered impaired during 2007. There was also a decline in sales of our Arm & Hammer product line during 2008 which reduced our royalty expenses. Freight out also decreased during 2008 which is attributable to the decrease in sales.

Nonoperating income (expense): Net nonoperating income for the first nine months ended September 30, 2008 increased by $4,220, or 348.8%, to $3,010, representing 1.8% of net sales, from $(1,210), representing (.6)% of net sales, for the first nine months ended September 30, 2007. The increase is due to the Company disposing of goodwill during the third quarter 2007 as well as the sale of certain sales divisions for a loss in 2007. Additionally, during the third quarter 2008, the Company sold its Clarkton media facility and a direct sales office for gains.

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 nine months of 2008 and 2007 were a blended state and federal rate of approximately 40% of pretax earnings and losses.

Extraordinary gain on Fire and Flood (net of taxes): The extraordinary gain of $8,335 during 2008 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. The extraordinary loss of $3,233 during 2007 was calculated as the loss on the costs that were attributable to these natural disasters ($12,888) that exceeded the insurance proceeds ($7,500), net of taxes of $2,155

Liquidity and Capital Resources

Our working capital was approximately $60,706 at September 30, 2008, compared to approximately $50,251 at December 31, 2007. This includes cash and cash equivalents of $798, at September 30, 2008 and $498 at December 31, 2007.

Our trade receivables decreased $2,572, or 5.2% to $46,522 at September 30, 2008, from $49,094 at December 31, 2007. The sales decrease during the nine months ended September 30, 2008 contributed to 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 increased $913, or 1.9%, to $48,149 at September 30, 2008 from $47,236 at December 31, 2007. The increase in inventory was primarily due to the increase in the reserve estimate for bad inventory during 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 used $3,003 and $7,993 of cash during the third quarter of 2008 and 2007, respectively. The increase in cash flows from operating activities was primarily due to a decrease in the provisions for inventory and accounts receivable, extraordinary losses, losses on disposal of property and equipment, and net loss, offset by a decrease in other current assets.

Our financing activities generated $2,419 of cash during the third quarter of 2008, primarily consisting of proceeds on the line of credit, net of payments on other long term borrowings. Our investing activities provided $1,033 of cash during the third quarter of 2008, primarily due to purchase of property and equipment offset by proceeds received along with the deferred gain on the Bartow property sale.

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 (i) LIBOR plus 2.25%; or (ii) the bank's base rate plus .5%. 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 September 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 September 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. We have received a Notification of Award for gloveboxes and are awaiting the relevant contract documents.

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, Lowe's and Wal-Mart. We utilize our ability to service national accounts from regional distribution centers and our excellent 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.

In an effort to reduce overhead costs, we are relocating the corporate office to our Washington, N.C. facility.

We are increasing marketing efforts including communicating to our customers through our website and via newsletters which will provide the customers with on demand information. We are also providing customers with technical literature to assist them in their daily sales activities. To obtain more customer insight, we are attending a Rep Council Meeting which consists of six top foremarket and aftermarket Flanders' distributors/rep's and four Flanders Corporation staff members.

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.