Edgar Filing: FLANDERS CORP

SECURITIES AND EXCHANGE COMMISSION

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

Commission File Number. 000-27958

FLANDERS CORPORATION

(Exact name of registrant as specified in its charter)

North Carolina		13-3368271
(State or other jurisdiction of incorporation or organization.)		(IRS Employer ID Number)

2399 26th Avenue North, St. Petersburg, Florida		33713
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES

NO __

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES___

NO Ö

The number of shares outstanding of the registrant’s common stock, as of July 31, 2007 was 26,624,079.

FLANDERS CORPORATION

FORM 10-Q

FOR QUARTER ENDED June 30, 2007

PART I - FINANCIAL INFORMATION

Page

Item 1 -

Financial Statements

Consolidated Condensed Balance Sheets for June 30, 2007 (unaudited) and

December 31, 2006

Consolidated Condensed Statements of Earnings (unaudited) for the three and six

months ended June 30, 2007 and 2006

Consolidated Condensed Statements of Stockholders’ Equity for the six months

ended June 30, 2007 (unaudited) and the year ended December 31, 2006

Consolidated Condensed Statements of Cash Flows (unaudited) for the three and six

months ended June 30, 2007 and 2006

Notes to Consolidated Condensed Financial Statements

Item 2 -

Management’s Discussion and Analysis of Financial Condition and

Results of Operations

Item 3 -

Quantitative and Qualitative Disclosures About Market Risk

Item 4 -

Controls and Procedures

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

Item 1A – Risk Factors

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

Item 3 - Defaults Upon Senior Securities

Item 4 - Submission of Matters to a Vote of Security Holders

Item 5 - Other Information

Item 6 - Exhibits

SIGNATURES

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands)

				June 30,	December 31,
ASSETS				2007	2006
				(unaudited)
Current assets
	Cash and cash equivalents			$ 1,422	$ 568
	Receivables:
		Trade, less allowance:
			6/30/2007 $3,939; 12/31/2006 $4,313	60,944	53,740
		Other		1,256	1,200
	Inventories			57,064	58,939
	Deferred taxes			3,179	3,332
	Other current assets			6,668	3,472
			Total current assets	130,533	121,251
Related party receivables				437	428
Property and equipment, less accumulated depreciation: 6/30/2007
	$68,514; 12/31/2006 $64,604			76,485	77,297
Intangible assets, less accumulated amortization: 6/30/2007
	$839; 12/31/2006 $1,256			5,910	5,975
Other assets				1,991	2,153
				$ 215,356	$ 207,104
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
	Current maturities of long-term debt and capital lease obligations			$ 4,256	$ 5,075
	Accounts payable			34,075	29,442
	Accrued expenses			27,902	18,767
			Total current liabilities	66,233	53,284
Long-term capital lease obligations, less current maturities				1,090	1,372
Long-term debt, less current maturities				29,887	36,433
Long-term liabilities, other				958	1,164
Minority Interest				161	161
Deferred taxes				7,424	7,311
Commitments and contingencies
Stockholders' equity
	Preferred stock, $.001par value, 10,000 shares authorized; none issued			-	-
	Common stock, $.001 par value; 50,000 shares authorized; issued and
		outstanding:26,624 and 26,343 shares in June 2007 and
		December 2006, respectively		26	26
	Additional paid-in capital			92,420	90,872
	Notes receivable - secured by common shares			(7,679)	(7,441)
	Accumulated other comprehensive loss			(575)	(698)
	Retained earnings			25,411	24,620
				109,603	107,379
				$ 215,356	$ 207,104

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(unaudited)

			Three Months Ended		Six Months Ended
			June 30,		June 30,
			2007	2006	2007	2006
Net sales			$ 64,285	$ 60,765	$ 124,533	$ 111,637
Cost of goods sold			52,662	46,960	103,888	86,338
		Gross profit	11,623	13,805	20,645	25,299
Operating expenses			11,118	11,178	22,101	20,216
		Operating income (loss)	505	2,627	(1,456)	5,083
Nonoperating income (expense):
	Other income, net		631	365	1,604	1,410
	Interest expense		(643)	(495)	(1,269)	(949)
			(12)	(130)	335	461

		Earnings (Losses) before income taxes and extraordinary item	493	2,497	(1,121)	5,544
Provision (Benefit) for income taxes			193	855	(448)	1,918

		Income (Loss) before extraordinary item	300	1,642	(673)	3,626
	Extraordinary gain on Fire (net of taxes)		502	894	1,464	894
		Net earnings	$ 802	$ 2,536	$ 791	$ 4,520
Income (Loss) before extraordinary item Basic earnings per share			$ 0.01	$ 0.07	$ (0.03)	$ 0.14
Extraordinary item			$ 0.02	$ 0.03	$ 0.06	$ 0.03
Net earnings per share			$ 0.03	$ 0.10	$ 0.03	$ 0.17

Income (Loss) before extraordinary item Diluted earnings per share			$ 0.01	$ 0.06	$ (0.02)	$ 0.13
Extraordinary item			$ 0.02	$ 0.03	$ 0.05	$ 0.03
Net earnings per share			$ 0.03	$ 0.09	$ 0.03	$ 0.16
Weighted average common shares outstanding
	Basic		26,743	26,338	26,501	26,339
	Diluted		27,585	27,950	27,343	27,891

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

				Accumulated
		Additional		Other
	Common	Paid-In	Notes	Comprehensive	Retained
	Stock	Capital	Receivable	(Loss)	Earnings	Total
Balance, January 1, 2006	$ 26	$ 90,758	$ (6,987)	$ (833)	$ 22,570	$ 105,534
Stock Option award compensation	-	114	-			114
Accrued interest on notes receivable secured by common shares	-	-	(454)	-	-	(454)
Purchase & Retirement of Common Shares	-	(148)	-	-	-	(148)
Common Shares issued from exercise of stock options	-	148	-	-	-	148
Comprehensive earnings
Net Earnings	-	-	-	-	2,050	2,050
Gain on cash flow hedges	-	-	-	135	-	135
Total comprehensive earnings, net of tax	-	-	-	-	-	2,185
Balance, December 31, 2006	26	90,872	(7,441)	(698)	24,620	107,379
Stock Option award compensation		94				94
Accrued interest on notes receivable secured by common shares	-	-	(238)	-	-	(238)
Purchase & Retirement of Common Shares	-	(401)				(401)
Common Shares issued from exercise of stock options	-	401				401
Common Shares issued in lieu of trade accounts payable	-	1,454				1,454
Comprehensive earnings
Net earnings	-	-	-	-	791	791
Income on cash flow hedges	-	-	-	123	-	123
Total comprehensive earnings, net of tax	-	-	-	-	-	914
Balance, June 30, 2007 (unaudited)	$ 26	$ 92,420	$ (7,679)	$ (575)	$ 25,411	$ 109,603

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

					Three Months Ended		Six Months Ended
					June 30,		June 30,
					2007	2006	2007	2006
CASH FLOWS FROM OPERATING ACTIVITIES
			Net cash provided by (used in) operating activities		$ 3,710	$ 410	$ 8,171	$ 354
CASH FLOWS FROM INVESTING ACTIVITIES
	Acquisition, net of cash acquired				-	-	-	(154)
	Purchase of property and equipment				(1,069)	(2,602)	(3,300)	(7,814)
	Proceeds from sale of property and equipment				19	16	474	56
	Proceeds from insurance claim				-	2,903	3,000	2,903
	Increase in notes receivables				(7)	6	(9)	(13)
	(Increase) Decrease in other assets				169	66	164	165
	Purchase of technology				-	-	-	-
		Net cash provided by (used in) investing activities			(888)	389	329	(4,857)
CASH FLOWS FROM FINANCING ACTIVITIES
	Principal payments on long-term borrowings				(810)	(1,018)	(1,624)	(1,676)
	Net (payments on) proceeds from revolving credit agreement				(1,677)	(16)	(6,022)	6,382
		Net cash provided by (used in) financing activities			(2,487)	(1,034)	(7,646)	4,706
				Net increase in cash and cash equivalents	335	(235)	854	203
CASH AND CASH EQUIVALENTS
			Beginning of period		1,087	1,133	568	695
			End of period		$ 1,422	$ 898	$ 1,422	$ 898
SUPPLEMENTAL DISCLOSURES OF
	CASH FLOW INFORMATION
		Cash paid during the period for:
			Income taxes		$ 40	$ 118	$ 86	$ 144
			Interest		$ 614	$ 433	$ 1,221	$ 794

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
	AND FINANCING ACTIVITIES
		Note receivable in lieu of account receivable trade			$ -	$ -	$ -	$ 20
		Line of credit converted to a term note			$ -	$ 4	$ -	$ 4
		Stock issued in lieu of trade accounts payable			$ -	$ -	$ 1,454	$ -
ACQUISITION OF COMPANIES
		Working Capital surplus (deficit) acquired, net of cash
			and cash equivalents received		-	-	-	(113)
		Fair value of other assets acquired, principally property
			and equipment		-	-	-	79
		Goodwill			-	-	-	295
		Minority interest			-	-	-	-
		Long-term debt assumed			-	-	-	(107)
					$ -	$ -	$ -	$ 154

Note A.

Nature of Business and Interim Financial Statements

Nature of business:

The Company designs, manufactures and markets air filters and related products, and is focused on providing environmental filtration systems for end uses ranging from controlling contaminants in residences and commercial office buildings through specialized manufacturing environments for semiconductors, pharmaceuticals and nuclear related activities. The Company also designs and manufactures much of its own production equipment to automate processes to decrease labor costs associated with its standard products. The Company also produces various fiber and glass-based air filter media for many of its products. These medias include various grades of HEPA media, pleat media and Modigliani glass media. The vast majority of the Company’s current revenues come from the sale of after-market replacement filters, since air filters are typically placed in equipment designed to last much longer than the filters.

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

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

Interim financial statements:

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

Other comprehensive income (loss):

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

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

Balance at December 31, 2006	$(698)
Net change during the period related to cash flow hedges	123
Balance at June 30, 2007	$(575)

Accounts receivable:

The majority of the Company's accounts receivable are due from large retail, wholesale, construction and other companies. Credit is extended based on evaluation of the customers' financial condition. Accounts receivable terms are within normal time frames for the respective industries. The Company maintains allowances for doubtful accounts for estimated losses, which are reviewed regularly by management. The estimated losses are based on the aging of accounts receivable balances and historical write-off experience, net of recoveries. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Principles of consolidation:

The consolidated financial statements include the accounts and operations of the Company and its subsidiaries, all of which are wholly owned except for Superior Diecutting, Inc. of which 50% is owned by two officers and directors and 50% is owned by other shareholders unrelated to the Company or any of its officers and directors and Air Filter Sales and Service, Inc. which is consolidated in accordance with FIN 46. The Company is the primary beneficiary of Superior Diecutting, Inc. and Air Filter Sales and Service, Inc., which both qualify as a variable interest entity. Accordingly, the assets and liabilities and revenues and expenses of both companies have been included in the accompanying consolidated financial statements. Superior Diecutting, Inc. is a manufacturer of the cardboard frame around some of the Company’s air filtration products. This frame provides the air filter media with additional stability. Air Filter Sales and Service, Inc. is a direct sales office of the Company which sells air filtration products of the Company to end users. As of June 30, 2007, Superior Diecutting, Inc. and Air Filter Sales and Service, Inc. had assets of $9,653 and $793, liabilities of $5,436 and $704, revenues of $10,712 and $1,415, and expenses of $10,114 and $1,406, respectively. Creditors and beneficial holders of Superior Diecutting, Inc. and Air Filter Sales and Service, Inc have no recourse to the assets or general credit of the Company.

Note A.

Nature of Business and Interim Financial Statements - continued

Derivative financial instruments:

The Company has two interest rate swap agreements to hedge against the potential impact on earnings from increases in market interest rates of two variable rate bonds. Under the interest rate swap agreements, the Company receives or makes payments on a monthly basis, based on the differential between 5.14% and a tax exempt interest rate as determined by a remarketing agent. These interest rate swap agreements are accounted for as a cash flow hedge in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Hedging Activities -- an Amendment to FASB Statement No. 133." The tax affected fair market value of the interest rate swaps of $575 at June 30, 2007 is included in other comprehensive loss. The interest rate swap contracts expire in 2013 and 2015.

Revenue recognition:

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

Advertising costs:

Advertising costs are charged to operations when incurred and are included in operating expenses. Advertising costs for the quarters ended June 30, 2007 and 2006 were, $1,229 and $792, respectively.

Impact of Recently Issued Accounting Pronouncements

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

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

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities - Including an Amendment of FASB Statement No. 115". SFAS No. 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses, arising subsequent to adoption, are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS No. 159, if elected, on its Consolidated Condensed Financial Statements.

Stock Options and Warrants:

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

						Weighted Average
				Exercise Price		Exercise Price
			Stock	per Share		per Share
		Warrants	Options	Warrants	Options	Warrants	Options
Outstanding at January 1, 2006		-	5,792	-	$1.50 - 11.10	-	$ 6.04
	Granted	-	20	-	11.72 - 11.72	-	11.72
	Exercised	-	(38)	-	2.40 - 5.21	-	3.90
	Canceled or expired	-	(22)	-	2.50 - 2.50	-	2.50
Outstanding at December 31, 2006		-	5,752	-	1.50 - 11.72	-	6.08
	Granted	-	30	-	9.52 - 9.52	-	9.52
	Exercised	-	(115)	-	2.00 - 5.21	-	3.04
	Canceled or expired	-	-	-	-	-	-
Outstanding at June 30, 2007		-	5,667	-	1.50 - 11.72	-	$ 6.15
Exercisable at June 30, 2007		-	5,667	-	1.50 - 11.72	-	$ 6.15

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

Share-Based Compensation

Under SFAS 123R for the three and six months ended June 30, 2007, was an increase of $0 and $94 to selling, general and administrative expenses.

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

The following table represents our nonvested stock option activity for the six months ended June 30, 2007:

		Weighted Average
	Number of	Grant Date
	Options	Fair Value

Nonvested options - December 31, 2006	-	$ -

Granted	-	$ -
Vested	-	$ -
Forfeited	-	$ -

Nonvested options - June 30, 2007	-	$ -

The aggregate intrinsic value of options outstanding at June 30, 2007, based on the Company’s closing stock price of $7.67 as of the last business day of the period ended June 30, 2007, which would have been received by the optionees had all options been exercised on that date was $11,754. The aggregate intrinsic value of options exercisable at June 30, 2007, based on the Company’s closing stock price of $7.67 as of the last business day of the period ended June 30, 2007, which would have been received by the optionees had all options exercisable been exercised on that date was $11,754. The aggregate intrinsic value of options exercised during the six months ended June 30, 2007 was $457. Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of the options.

Note B.

Inventories

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

	6/30/2007	12/31/2006

Finished goods	$ 31,795	$ 31,786
Work in progress	4,084	5,535
Raw materials	22,766	23,241
	58,645	60,562
Less allowances	1,581	1,623
	$ 57,064	$ 58,939

Note C.

Pledged Assets and Debt

In June 2006 the Company entered into a term note with Bank of America for $4 million with an interest rate of LIBOR plus 2.5% to 3.0% dependent on the fixed charge coverage ratio. The note is due in monthly payments of $83.3 beginning in August 2006 and due in full by October 2008. The proceeds were used to pay down the line of credit. Substantially all of the Company’s assets are pledged to Bank of America as security for this credit facility. As of June 30, 2007 the Company’s total obligations to Bank of America were approximately $18,395. All obligations to Bank of America mature in October 2008.

Note D.

Extraordinary Gain on Fire

In April 2006, a manufacturing facility in Texas was destroyed by fire and in June of 2006, another manufacturing facility was damaged by flood. The extraordinary gain of $1,464 was calculated as the gain on the insurance proceeds ($5,500) that exceeded additional costs that were attributeable to these natural disasters ($3,060), net of taxes of $976. This extraordinary item will be subject to change as the insurance claims process progresses for the claim.

Note E.

Income Taxes

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

Note F.

Litigation

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

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

Note G.

Subsequent Event

On July 10, 2007 the Company's manufacturing facility in Bartow, Florida was destroyed in a fire. The Company has not yet determined the amount of loss which will be recorded.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussions should be read in conjunction with our Consolidated Condensed Financial Statements and the notes thereto presented in "Item 1 – Financial Statements" and our audited financial statements and the related Management's Discussion and Analysis of Financial Condition and Results of Operations included in our report on Form 10-K for the year ended December 31, 2006. The information set forth in this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements that involve risks and uncertainties. Many factors, including those discussed below under "Factors That May Affect Future Results" and “Outlook” could cause actual results to differ materially from those contained in the forward-looking statements below.

Overview

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

Critical Accounting Policies

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

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, 2007 Compared to June 30, 2006

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

	Three Months Ended
	June 30,
	2007		2006

Net sales	$ 64,285	100.0%	$ 60,765	100.0%
Gross profit	11,623	18.1	13,805	22.7
Operating expenses	11,118	17.3	11,178	18.4
Operating income	505	0.8	2,627	4.3
Nonoperating expense	(12)	(0.0)	(130)	(0.2)
Provision for income taxes	193	0.3	855	1.4
Extraordinary gain on Fire and Flood (net of taxes)	502	0.8	894	1.5
Net earnings	802	1.2	2,536	4.2

Net sales: Net sales for the second quarter of 2007 increased by $3,520, or 5.8%, to $64,285 from $60,765 for the second quarter of 2006. Sales growth increased during the second quarter 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.

Gross Profit: Gross profit for the second quarter of 2007 decreased by $2,182, or 15.8%, to $11,623, which represented 18.1% of net sales, from $13,805, which represented 22.7% of net sales, for the second quarter of 2006. The US economy experienced cost increases due to inflation including increases in in-bound shipping costs due to increased fuel costs and raw material costs, especially in the cost of metal. These costs were partially offset by vertical integration of certain manufacturing processes. The gross profit during the quarter has decreased due to the start up of three new plants in Clarkton, North Carolina, Dallas, Texas and Matamoros, Mexico as well as new production lines for the EnergyAire and nested filters. In addition, the success of the nested flat panel filter continues to have a negative impact on product mix and consequently gross margins. The plant fire in Texas and the plant flood in Auburn, Pennsylvania increased the overall cost of production. Additionally, the product mix has shifted towards lower margin items.

Operating expenses: Operating expenses for the second quarter of 2007 decreased by $60, or 0.0%, to $11,118, representing 17.3% of net sales, from $11,178, representing 18.4% of net sales, for the second quarter of 2006. The decrease as a percentage of sales was primarily due to decreased professional fees and bad debts expense.

Nonoperating expense: Net nonoperating expense for the second quarter of 2007 decreased by $118, or 90.8%, to $12, representing 0.0% of net sales, from $130, representing .2 % of net sales, for the second quarter of 2006 due to a North Carolina grant income of $250 offset by increased interest expense of approximately $148 .

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

Extraordinary gain on Fire (net of taxes): The extraordinary gain of $502 was calculated as the gain on the insurance proceeds ($2,500) that exceeded additional costs that were attributable to these natural disasters ($1,664), net of taxes of $334. This extraordinary item will be subject to change as the insurance claims process progresses for the claim.

Results of Operations for Six Months Ended June 30, 2007 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, 2007 and 2006.

	Six Months Ended
	June 30,
	2007		2006

Net sales	$ 124,533	100.0%	$ 111,637	100.0%
Gross profit	20,645	16.6	25,299	22.7
Operating expenses	22,101	17.7	20,216	18.1
Operating income (loss)	(1,456)	(1.2)	5,083	4.6
Nonoperating income	335	0.3	461	0.4
Provision (Benefit) for income taxes	(448)	(0.4)	1,918	1.7
Extraordinary gain on Fire and Flood (net of taxes)	1,464	1.2	894	0.8
Net earnings	791	0.6	4,520	4.0

Net sales: Net sales for the first half of 2007 increased by $12,896, or 11.6%, to $124,533 from $111,637 for the first half of 2006. Sales growth increased during the first half 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 six months. The Company also introduced two new products, EnergyAire and our new nested product in the first half of 2007.

Gross Profit: Gross profit for the first half of 2007 decreased by $4,654, or 18.4%, to $20,645, which represented 16.6% of net sales, from $25,299, which represented 22.7% of net sales, for the first half of 2006. The US economy experienced cost increases due to inflation including increases in in-bound shipping costs due to increased fuel costs and raw material costs, especially in the cost of metal. These costs were partially offset by vertical integration of certain manufacturing processes. 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. Additionally, the plant fire in Texas increased overall cost of production.

Operating expenses: Operating expenses for the first half of 2007 increased by $1,885, or 9.3%, to $22,101, representing 17.7% of net sales, from $20,216, representing 18.1% of net sales, for the first half of 2006. The increase in operating expenses was primarily due to a higher volume of sales.

Nonoperating income: Net nonoperating income for the first half of 2007 decreased by $126, or 27.3%, to $335, representing .3% of net sales, from $461, representing .4% of net sales, for the first half of 2006. This decrease was due to an increase in interest expense of approximately $320 offset by a North Carolina grant income of $250.

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

Extraordinary gain on Fire (net of taxes): The extraordinary gain of $1,464 was calculated as the gain on the insurance proceeds ($5,500) that exceeded additional costs that were attributable to these natural disasters ($3,060), net of taxes of $976. This extraordinary item will be subject to change as the insurance claims process progresses for the claim.

Liquidity and Capital Resources

Our working capital was approximately $64,300 at June 30, 2007, compared to approximately $67,967 at December 31, 2006. This includes cash and cash equivalents of $1,422, at June 30, 2007 and $568 at December 31, 2006.

Our trade receivables increased $7,204, or 13.4%, to $60,944 at June 30, 2007, from $53,740 at December 31, 2006. Receivable levels are typically higher during the second and third quarters due to higher sales volume however, our sales volume typically decreases during the fourth and first quarters.

Inventories decreased $1,875, or 3.2%, to $57,064 at June 30, 2007 from $58,939 at December 31, 2006. The decrease in inventory was primarily due to the Company carrying higher levels of inventory at year end due to delayed orders and lower sales volume than expected at the end of the previous year.

Our continuing operations provided $3,710 and $410 of cash during the second quarter of 2007 and 2006, respectively. Historically, our business is seasonal, with our second and third quarters having higher sales than our first and fourth quarters. We attempt to moderate swings in labor requirements and product shortages due to this seasonal variance by increasing inventories in the first and second quarters. Larger inventories reduce the likelihood of stock shortages during our busy season and help smooth out our labor requirements. In general, we expect operations to consume cash, or generate substantially less cash during our first and second quarters because of increases in inventory.

Our financing activities consumed $2,487 of cash during the second quarter of 2007, primarily consisting of payments on the line of credit and payments on other long term borrowings from the cash generated from the Company’s operating activities. Our investing activities consumed $888 of cash during the second quarter of 2007, primarily due to purchase of property and equipment.

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

Mr. Clark and Mr. Amerson are personal guarantors on our credit facility with Bank America. It is an event of default under our credit facility if these individuals collectively own less than 37% of our outstanding shares. Superior Die Cutting, Inc., an entity owned by Mr. Amerson and Mr. Clark, is also a guarantor of this credit facility.

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, minimum tangible net worth, a maximum ratio of total liabilities to tangible net worth and a minimum fixed charge coverage ratio. The Company is currently in compliance with all debt covenants.

We are the lessee under a series of nine (9) real estate operating leases expiring in 2025 or 2026 with Wal-Pat II, LLC (“Wal-Pat”), an entity owned by Robert R. Amerson and Steven K. Clark (50% each). Mr. Amerson is the Chairman of our Board of Directors and beneficially owns approximately 26.5% of our outstanding common shares as of June 30, 2007. Mr. Clark is our Chief Executive Officer and a member of our Board of Directors. He beneficially owns approximately 22.5% of our outstanding common shares as of June 30, 2007.

Our aggregate monthly base lease payment obligation to Wal-Pat is approximately $271. Our total remaining aggregate obligation under the Wal-Pat operating leases is approximately $60,759. These amounts exclude payment of real estate taxes and repairs and maintenance, which are our responsibility as the lessee. There are certain risks associated with these and other arrangements with Mr. Clark and Mr. Amerson. See Risk Factors – “A significant amount of our leased physical facilities and a key vendor are owned by our affiliates. The notes due us by these affiliates are secured solely by a pledge of our shares”.

One of our manufacturing equipment vendors, Superior Diecutting, Inc., is owned 50% by Mr. Amerson and Mr. Clark. As of June 30, 2007, we owed this vendor $2.7 million. The accounts and operations of this entity are consolidated in our financial statements.

As of June 30, 2007, we were due $5,361 and $3,169 of principal and accrued interest owed to us by Mr. Clark and Mr. Amerson, respectively, relating to loans made to these individuals prior to adoption of the Sarbanes-Oxley Act of 2002. These notes bear interest at LIBOR plus 1%. These notes mature on December 31, 2010. These notes are payable on demand if either of these individuals terminate their employment with the Company.

William Mitchum, one of our independent directors, owns a vendor, Mercer Glass, which supplies glass to us. During fiscal 2006 and during the first two quarters of 2007, we purchased approximately $60 and $31, respectively, from this entity, owned by Mr. Mitchum. In addition, Mr. Mitchum’s wife is an independent sales representative for an unrelated corrugated box vendor, Package Craft. We believe she receives a sales commission of 3% from this vendor. During calendar year ended 2006 and the first two quarters of 2007, we acquired approximately $854 and $572 of materials from this vendor, respectively.

We believe that our cash on hand, cash generated by operations, and cash available from our existing credit facilities is sufficient to meet the capital demands of our current operations during the 2007 fiscal year. Any major increases in sales, particularly in new products, may require substantial capital investment for the manufacture of filtration products. Failure to obtain sufficient capital could materially adversely impact our growth potential.

On September 22, 2000, the Board of Directors authorized the repurchase of up to 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 Fleet Capital Corporation. As of August 6, 2007, 618,632 shares had been repurchased in the open market under this authorization.

Outlook

Global Containment Systems, Inc. (GCS) is a wholly-owned subsidiary of Flanders Corporation, which manufactures critical environments for the nuclear, pharmaceutical and semi conductor industries. Contingent on expanding demand for highly critical containment, we plan to expand our operations in Aiken, South Carolina. This facility could accommodate the requirements for various nuclear containment projects scheduled at the Westinghouse Savannah River Site in Aiken, South Carolina as well as other projects scheduled worldwide over the next ten years. Expansion into South Carolina would provide a state of the art facility with room necessary to provide in place testing, integration, process control verification and final testing and final installation which is expected to provide GCS a unique position in this developing market. This expansion is currently on hold until demand for these critical products exceeds our current capacity.

Additionally, during 2004, the Company formed Flanders Complete Service Division (Flanders CSD), an air filtration service provider. Flanders CSD offers weekly, monthly and quarterly service contracts for clean room and glove box certification; commercial, industrial, retail and residential surveys; and complete filtration management including mold remediation and analysis. The Company is currently negotiating several large contracts and if they are executed, the Company expects to have national coverage by the end of 2007.

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

During the past three years, we introduced air filtration products which use the Arm&Hammer® and Lysol™ brand name. These products are expected to contribute to our expansion in the retail marketplace, but the extent to which they will do so, and their impact on the bottom line, is currently indeterminable.

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. 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 again during 2007, with most analysts pushing recovery for this sector out until 2008.

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

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

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

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

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

This Outlook section, and other portions of this Form 10-Q, include certain “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including, among others, those statements preceded by, following or including the words “believe,” “expect,” “intend,” “anticipate” or similar expressions. These forward-looking statements are based largely on the current expectations of management and are subject to a number of assumptions, risks and uncertainties. Our actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include those discussed in “Factors That May Affect Future Results” in our Form 10-K for 2006 and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements” in our 2006 Annual Report and in this Form 10-Q as well as:

•

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

•

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

•

anticipated working capital or other cash requirements,

•

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

•

product obsolescence due to the development of new technologies, and

•

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

•

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

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

The fair value of the Company's total long-term debt, including capital leases and current maturities of long-term debt, at June 30, 2007 was approximately $35,234. 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 June 30, 2007. Although most of the interest on the Company's debt is indexed to a market rate, there would be no material effect on the future earnings or cash flows related to the Company's total debt for such a hypothetical change.

The Company has only a limited involvement with derivative financial instruments. The Company has two interest rate swap agreements to hedge against the potential impact on earnings from increases in market interest rates of two variable rate bonds. Under the interest rate swap agreements, the Company receives or make payments on a monthly basis, based on the differential between 5.14% and a tax exempt interest rate as determined by a remarketing agent. These agreements are accounted for as a cash flow hedge in accordance with SFAS 133 and SFAS 138. The tax effected fair market value of the interest rate swap of $575 is included in “Accumulated other comprehensive loss” on the balance sheet. The interest rate swap contracts expire in 2013 and 2015.

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

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

(i)

Our Audit Committee now serves as our Disclosure Review Committee and is formalizing and improving our internal review processes relating to the preparation of our SEC reports and other public disclosures, and the review and approval of related party transactions, which includes independent directors, executive management and outside counsel.

(ii)

In May 2007, we approved an increase in the compensation of our 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 us by an independent compensation consultant. Retroactive to April 1, 2007, independent directors will be paid $9,625.00 per quarter. Quarterly compensation will be paid to independent directors no later than the fifteenth day following the beginning of each calendar quarter. We have authorized indemnification agreements for our directors, Chief Executive Officer and Chief Financial Officer.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

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

Item 1A.

Risk Factors

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

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

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

•

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

•

manage production and inventory levels to meet product demand,

•

manage and improve production quality,

•

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

•

improve financial and management controls, reporting systems and procedures.

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

Our Business May Suffer If Our Competitive Strategy is Not Successful

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

•

increasing our market share,

•

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

•

improving operating efficiencies.

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

Fire disruptions may adversely affect our business

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

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

Certain covenants in our credit facility with Bank of America restrict the types and amounts of additional indebtedness that we may incur. In addition, the credit facility contains specific financial covenants. These restrictions could inhibit our ability to improve and expand our operations. Our credit facility with Bank of America matures in October 2008. There is no assurance that we will be able to maintain covenant compliance, negotiate extensions to this credit facility or find a replacement credit facility on comparable terms. We pledged substantially all of our assets as security for the Bank of America credit facility.

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

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

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

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

•

increase public awareness of the issues surrounding indoor air quality,

•

adequately address the unknown requirements of the potential customer base,

•

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

•

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

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

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

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

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

•

purchasing,

•

production planning,

•

shipping coordination,

•

marketing,

•

accounting,

•

personnel management,

•

risk management, and

•

benefit plan administration.

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

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

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

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

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

Management Controls a Significant Percentage of Our Stock

As of August 6, 2007, our directors and executive officers beneficially held approximately 42.0% 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.

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 5,667,000 shares of common stock to various parties with exercise prices ranging from $1.50 to $11.72 per share. All of these options are currently exercisable. The exercise of these options may result in the issuance of stock at prices lower than we might otherwise be able to obtain. Additionally, if the option holders exercise their options, the interests of current shareholders may be diluted.

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

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

Our Business Can be Significantly Affected by Environmental Laws

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

A significant amount of our leased physical facilities and a key vendor are owned by our affiliates. The notes due us by these affiliates are secured solely by shares of our common stock

We lease approximately 1,019,600 square feet of warehousing, shipping and manufacturing facilities from Wal-Pat II, LLC (“Wal-Pat”), an entity owned by Robert R. Amerson and Steven K. Clark (50% each). A default by us under the terms of any of these leases or default by Wal-Pat, Mr. Clark or Mr. Amerson, as guarantors on their obligations to any financial institution or other party, which holds a mortgage or deed of trust on any of these properties, could adversely affect our leasehold interests in these properties.

Unforeseen repairs and maintenance for the leased Wal-Pat facilities could adversely affect our capital resources and liquidity. We are responsible to pay all ad valorem and real estate taxes on these properties. The failure to make timely payments of ad valorem taxes and other assessments could adversely affect our leasehold interests. We cannot predict the effects of future increases in real estate taxes and assessments by local jurisdictions.

In addition, Mr. Amerson and Mr. Clark own 50% of Superior Diecutting, Inc., a key vendor. We are dependent upon this vendor for the production of components relating to the manufacturing and production of our air filtration products. Although the results of operations of this entity are consolidated into our financial statements, an unforeseen event or circumstance affecting this vendor could negatively impact our future operations.

The promissory notes due us by Mr. Amerson and Mr. Clark are non-recourse notes secured solely by shares of our common stock. As of June 30, 2007, the total outstanding amount due us under these notes is approximately $8,529. The total number of shares of our common stock pledged as collateral for these notes is 794,365 shares. If for any reason either Mr. Amerson or Mr. Clark are unable or unwilling to repay these notes and if the aggregate market value of the shares of our common stock pledged as collateral for these notes is less than the unpaid principal amount and accrued interest relating to these notes as of the maturity date, our ability to fully recoup all amounts due under these notes is uncertain.

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

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds –

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs *	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Apr 1 – Apr 30, 2007	––	––	––	1,417,182
May 1 – May 31, 2007	45,917	6.85	45,917	1,371,265
Jun 1 – Jun 30, 2007	––	––	––	1,371,265
Total	45,917	6.85	45,917	1,371,265

* The Plan announced September 22, 2000 authorized the repurchase of up to 2 million shares of common stock.

Item 3.

Defaults Upon Senior Securities - None.

Item 4.

Submission of Matters to a Vote of Security Holders - None.

Item 5.

Other Information – Subsequent Events

Bartow Fire

On July 10th, the Company’s manufacturing facility in Bartow, Florida was destroyed in a fire. The warehouse annex across the street was unaffected. There were no injures related to the fire.

Temporarily, the Company has moved its Florida orders to other facilities. The orders are being handled by the following three plants, Washington, NC; Smithfield, NC; and Clarkton, NC. In order to maintain the core staff in Bartow, Florida, the Company has temporarily relocated 60 key employees into Clarkton, NC. The Bartow Annex is available for making limited shipments.

Flanders has secured 230,000 square feet of additional warehouse space in the Bartow/Lake Wales, Florida area. Delivery of the first high-speed production line to the new facility occurred on Monday July 30th, and should be operational shortly. The Company will alsol take delivery of three additional high-speed lines which are scheduled for delivery during the month of August. Additional equipment will be positioned in Bartow during the next three to four weeks to avoid additional shipping costs. The plant should be functional within the next 90 days.

In addition to securing new locations, management met with representatives from several key agencies, including the City of Bartow, Polk Works, and the Economic Development Council of Central Florida. In addition the Company met with the Polk County Unemployment Agency and Children and Family Services to arrange resources for our employees. A call number was established for employees to update them on the situation as well as resources available to them. The Company is committed to exhaust all resources available to fast track setting up temporary operations and minimize the loss for our employees and curtail delivery delays for our customers.

The Company is fully insured for this loss.

CFO Resignation

On May 18, 2007, the Company informed its Chief Financial Officer, John W. Hodson, that it did not intend to renew his Employment Agreement upon its expiration on December 31, 2007. The Company further informed Mr. Hodson that his employment after December 31 would be on an “at-will” basis.

On August 2, 2007, the Company entered into a Separation Agreement and General Release (the “Separation Agreement”) with Mr. Hodson, our former CFO, pursuant to which the parties mutually agreed to terminate Mr. Hodson’s employment with the Company, effective as of August 2, 2007. Although Mr. Hodson executed the Separation Agreement on July 23, 2007, his acceptance and resignation was conditional upon Flanders tendering the settlement payment of $30,000 and executing the Separation Agreement, which did not occur until August 2, 2007. The Separation Agreement terminated Mr. Hodson’s employment agreement dated February 18, 2005.

The Separation Agreement contains customary confidentiality and non-disparagement provisions, as well as a mutual release with respect to any claims or causes of action relating to Mr. Hodson’s employment with the Company. In consideration for the execution of the Separation Agreement, the Company agreed to pay Mr. Hodson $30,000, payable in lump sum on the expiration of the Revocation Period (as defined below).

During the 90-day period following the effective date of the Separation Agreement, Mr. Hodson is prohibited from selling 77,035 shares of the Company’s common stock that Mr. Hodson acquired via exercise of non-qualified stock options. Further, because of the non-qualified nature of the exercised stock options, Mr. Hodson has an income tax obligation to the Internal Revenue Service (the “Tax Obligation”). As part of the Separation Agreement, the Company has agreed to remit $89,400 to the Internal Revenue Service to satisfy Mr. Hodson’s Tax Obligation. Mr. Hodson has agreed to repay the Tax Obligation promptly and has agreed to apply the proceeds from the sale of any of the 77,035 shares of common stock against the outstanding balance of the Tax Obligation. If Mr. Hodson has not repaid the Tax Obligation within 110 days of the Separation Agreement, the unpaid amount will accrue interest at 7% per annum until satisfied in full. To secure his repayment of the Tax Obligation, Mr. Hodson has deposited 23,577 shares of the Company’s common stock into escrow pursuant to the terms of a Tax Indemnification and Stock Escrow Agreement of even date.

Mr. Hodson is entitled to revoke the Separation Agreement within 7 days following its execution. As such, the Separation Agreement will not become effective or enforceable by either party until August 9, 2007.

The foregoing description of the Separation Agreement is a summary and is qualified in its entirety by reference to the Separation Agreement, a copy of which will be filed with this Form 10-Q for the quarter ended June 30, 2007.

We have designated Mr. Clark as our Chief Financial Officer.

Item 6.

Exhibits

Exhibit No.		Description
3.1		Articles of Incorporation for Flanders Corporation, filed with Form 8-A dated March 8, 1996, incorporated herein by reference.
3.2		Bylaws of Flanders Corporation, filed with Form 8-A dated March 8, 1996, incorporated herein by reference.
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2		Certification of Chief Financial officer pursuant to Rule 13a-14(a).
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1		Separation Agreement and General Release with John Hodson effective August 2, 2007.

SIGNATURES

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

Dated this 6th day of August, 2007.

FLANDERS CORPORATION

By: /s/ Steven K. Clark

Steven K. Clark

Chief Executive Officer

Chief Financial Officer/ Principal Accounting Officer