FLANDERS CORP, 424B1, 1997-10-20

FLANDERS CORP
424B1, 1997-10-20
INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFING EQUIP

Previous: STANDISH AYER & WOOD INVESTMENT TRUST, 497, 1997-10-20

Next: ADVO INC, S-8, 1997-10-20

<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-35635

PROSPECTUS

6,400,000 SHARES

[FLANDERS CORPORATION LOGO]

FLANDERS CORPORATION

COMMON STOCK
------------------------
Of the 6,400,000 shares of Common Stock (the "Shares") offered hereby (the
"Offering"), 6,000,000 Shares are being sold by Flanders Corporation (the
"Company" or "Flanders") and 400,000 Shares are being sold by a shareholder of
the Company (the "Selling Shareholder"). See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the sale of
Shares by the Selling Shareholder.

The Company's Common Stock is quoted on the Nasdaq National Market
("Nasdaq") under the symbol "FLDR." On October 15, 1997, the last reported sale
price of the Common Stock was $7 5/16 per share. See "Price Range of Common
Stock."

------------------------

SEE "RISK FACTORS" ON PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
==============================================================================================================
UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNTS(1) COMPANY(2) SHAREHOLDER
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $7.00 $.42 $6.58 $6.58
- --------------------------------------------------------------------------------------------------------------
Total(3)......................... $44,800,000 $2,688,000 $39,480,000 $2,632,000
==============================================================================================================
</TABLE>

(1) Does not include additional compensation to the representatives of the
Underwriters (the "Representatives") of warrants entitling the
Representatives to purchase up to 400,000 shares of Common Stock (the
"Representative Warrants") for a period of four years, commencing one year
from the date of this Prospectus, at 120% of the public offering price per
share of Common Stock. Additionally, the Company and the Selling Shareholder
have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated expenses of $700,000 payable by the Company.
(3) The Company and the Selling Shareholder have granted to the Underwriters an
option (the "Over-Allotment Option"), exercisable for a period of 30 days
after the date of this Prospectus, to purchase up to an additional 960,000
shares of Common Stock upon the same terms and conditions set forth above,
solely to cover over-allotments, if any. The Company and the Selling
Shareholder will each provide one-half of the Over-Allotment Option. If the
Over-Allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts, Proceeds to Company and Proceeds to Selling
Shareholder will be increased to $51,520,000, $3,091,200, $42,638,400 and
$5,790,400, respectively. See "Underwriting."

------------------------

The Common Stock is being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and subject
to approval of certain legal matters by their counsel and subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify the Offering and to reject any order in whole or in part. It is expected
that delivery of the Shares offered hereby will be made against payment, at the
offices of Raymond James & Associates, Inc., St. Petersburg, Florida, on or
about October 21, 1997.

RAYMOND JAMES & ASSOCIATES, INC. CLEARY GULL REILAND & MCDEVITT INC.

The date of this Prospectus is October 16, 1997.
<PAGE> 2

[4/C PROCESS]

---------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON NASDAQ, IN THE OVER-THE-COUNTER
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.

---------------

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. This Prospectus includes
forward-looking statements that are subject to risks and uncertainties and
actual results may differ materially. Prospective investors should carefully
consider the factors set forth under the caption "Risk Factors." Except where
the context requires otherwise, Flanders Corporation, its predecessor, Elite
Acquisitions, Inc., ("Elite"), together with its subsidiaries, including
Flanders Filters, Inc. ("FFI"), Air Seal Filter Housings, Inc. ("Air Seal"),
Charcoal Service Corporation ("CSC"), Precisionaire, Inc. ("Precisionaire"),
Flanders Airpure Products Company, LLC ("Airpure"), Flanders International Pte,
Ltd. ("FIL") and Airseal West, Inc. ("Airseal West") are referred to as the
"Company." Except as otherwise specified, information in this Prospectus assumes
no exercise of the Underwriters' Over-Allotment Option.

THE COMPANY

The Company designs, manufactures and markets a broad range of air
filtration products, including (i) high efficiency particulate air ("HEPA")
filters, with at least 99.97% efficiency, and absolute isolation barriers
("Absolute Isolation Barriers") for the creation of synthesized atmospheres to
control manufacturing environments and for the absolute control and containment
of contaminants and toxic gases in certain manufacturing processes, (ii)
mid-range filters for individual and commercial use, which fall under
specifications categorized by efficiency ratings established by the American
Society of Heating, Refrigeration and Air Conditioning Engineers ("ASHRAE"), and
(iii) standard-grade, low cost filters with efficiency ratings below 30% sold
typically off-the-shelf for standard residential and commercial furnace and air
conditioning applications. Approximately 55% of the Company's net sales are from
products with high replacement potential. The Company's air filtration products
are utilized by many industries, including those associated with commercial and
residential heating, ventilation and air conditioning systems (commonly known as
"HVAC" systems), semiconductor manufacturing, ultra-pure materials,
biotechnology, pharmaceuticals, synthetics, nuclear power and nuclear materials
processing. The Company also designs and manufactures its own production
equipment to allow for highly automated manufacturing of these products.
Furthermore, the Company produces glass-based filter media for many of its
products to maintain control over the quality and composition of such media. The
Company's customers include Abbott Laboratories, Home Depot, Inc., Motorola,
Inc., Merck & Co., Inc., Upjohn Co., Wal-Mart Stores, Inc., Westinghouse
Electric Corp., and several large computer chip manufacturers.

Frost & Sullivan, a leading industry analyst, estimates that the total
domestic industrial air filtration market was approximately $960 million in 1996
and is projected to be approximately $1.02 billion in 1997. In addition,
management believes the domestic market for retail and wholesale off-the-shelf
air filters and related products used in residential and commercial HVAC
applications exceeded $500 million in 1996. The forces driving the air
filtration market have evolved over the past decade from concerns related to the
preservation of machinery and equipment to industry goals of maintaining
productivity, and present day concerns and governmental requirements related to
employee health. In this regard, ASHRAE has also recommended certain minimum
standards for ventilation and indoor air quality. The Company believes that the
air filtration industry will continue to grow in both the industrial and
residential markets, as the use of cleanrooms is becoming essential to the
production of many electronics and pharmaceutical products, and as increased
public awareness of the benefits of indoor air quality ("IAQ") will accelerate
demand for residential filters and commercial air filtration products. By using
the Company's solutions, the air within buildings and residences may be cleansed
of impurities such as second-hand smoke, allergens and other particles which
provoke asthma, hay fever and similar health conditions. Management believes
that as public awareness of the benefits of living and working in clean
environments increases, the markets for the Company's products will further
expand.

Although the Company has specialized in high-end (HEPA) and mid-range
filters, the Company has recently positioned itself to offer to its customers a
full range of air filtration products. In 1996, the Company diversified its
product line by implementing a strategy of growth by acquisition through the
purchase of three
3
<PAGE> 4

other companies: CSC, which specializes in charcoal filtration systems for the
removal of gaseous contaminants; Air Seal, which specializes in filter housings
and customized industrial HVAC equipment, and Precisionaire, which specializes
in the manufacture and sale of filter products ranging from mid-range through
standard-grade filters. As a result of the Company's diversified product line,
the Company expects to benefit from growth in all air filtration markets.

Due primarily to the Company's acquisitions, net sales for the year ended
December 31, 1996 increased by $34,420,000 to $73,056,000 from $38,636,000 for
the year ended December 31, 1995, representing an increase of 89.1%. Pro forma
net sales were $128,221,000 for 1996, when revenues from the acquisitions for
the full year are considered. In addition, net income increased $2,448,000 to
$3,594,000 for the year ended December 31, 1996 from approximately $1,146,000
for the prior year, representing an increase of 213.6%. Net sales for the six
months ended June 30, 1997 increased by $35,009,000 to $61,250,000 from
$26,241,000 for the six months ended June 30, 1996, representing an increase of
133.4% and net income increased $1,317,000 to $2,665,000 for the six months
ended June 30, 1997 from approximately $1,348,000 for the comparable period for
the prior year, representing an increase of 97.7%.

BUSINESS STRATEGY

The Company's business strategy is designed to enhance the Company's
presence as a manufacturer and supplier of air filtration products by increasing
its market share, expanding its markets through the introduction of new products
and improving its operating efficiency.

INCREASE MARKET SHARE

The Company intends to increase its market share by (i) continued strategic
acquisitions of synergistic businesses, (ii) taking advantage of certain
cross-selling opportunities due to a newly expanded product line, and (iii)
continued expansion both domestically and internationally.

- Strategic Acquisitions. The Company is continuously seeking and
evaluating acquisition opportunities in which the acquisition candidate
has a dominant position in a defined market and whose operating efficiency
can be improved through automation. The Company focuses on acquisition
targets which complement its existing technology, broaden its product
offerings and provide it with additional manufacturing facilities and
access to related markets. In addition, the Company seeks companies which
provide vertical integration opportunities.

- Increase Sales to Existing and New Customers. The Company sells the
majority of its products through manufacturers' representatives who
historically have only sold certain of the Company's products. With the
recent expansion of the Company's product lines through acquisition, those
representatives can now purchase from the Company a full line of air
filtration products instead of buying a mix of air filtration products
from a range of manufacturers, and thereby use the Company as a "one stop"
purchasing source. The Company will also continue to emphasize the product
quality that has allowed the Company's sales to grow in several
high-technology industries in recent years in all of its product lines.

- Domestic and International Expansion. The Company has recently
established certain facilities in the western and mid-western United
States and plans to establish other facilities in strategically located
geographical locations to increase its accessibility in various markets
and decrease shipping expenses. Additionally, the Company plans to expand
capacity at several of its existing locations to take advantage of market
demand. The Company also intends to manufacture and continue to market its
products in foreign markets. In April 1996, the Company established a
sales office in Singapore, and the Company intends to begin manufacturing
operations there by the end of 1997.
4
<PAGE> 5

EXPAND MARKET WITH NEW PRODUCTS

The Company intends to develop new markets, and products for those markets,
by applying existing technology developed for high-technology niche markets to
new applications. For each new application, the Company will first endeavor to
develop a line of products to meet the needs of the specific application, and
through trade shows, technical publications, mass marketing, distributor
education and other appropriate methods, will promote demand for the application
in the new target market. In the pharmaceutical industry, for example, the
Company has already focused on the need for completely isolated and secure
environments in which to manufacture certain drugs and products, and has
developed and prototyped its Absolute Isolation Barriers in partnership with
several major pharmaceutical companies. In addition, Absolute Isolation Barriers
have been successfully tested in containment systems for the manipulation of
viruses and bacteria using genetic engineering techniques. The Company has also
focused on IAQ diagnosis and solutions for industrial, commercial and
residential application. The Company intends to continue to concentrate its
efforts on these and other products with high replacement potential.

IMPROVE OPERATING EFFICIENCY

The Company intends to improve operating efficiency by increasing
automation, eliminating redundancy between facilities, deleting the duplication
of selling and administrative efforts of subsidiaries, and cross-applying
technology and expertise among subsidiaries.

- Automation. In an effort to increase gross margins, the Company recently
commenced a program to automate portions of its production lines at FFI,
Precisionaire and Airpure using technology developed at Precisionaire and
FFI. Currently, approximately 20% of the Company's production lines
incorporate the new automated equipment designs. The Company plans to
implement additional automated equipment designs into various other
production lines one at a time to minimize down time.

- Eliminate Redundancy. The Company is continuing to increase the
manufacturing focus of its individual subsidiaries so that each subsidiary
only produces a single category of product. The Company expects to reduce
costs by eliminating redundant part and required lot tracking between
subsidiaries.

- Centralize Overhead Functions. The Company has begun to implement plans
to centralize and eliminate duplication of efforts of its subsidiaries in
the following areas: purchasing, production planning, shipping
coordination, marketing, accounting, personnel management, risk management
and benefit plan administration.

- Cross-Apply Technology and Expertise. The Company plans to evaluate the
manufacturing technologies used by its various subsidiaries and to
cross-apply such technologies to create greater efficiencies in each
manufacturing line.

The Company's principal executive offices are located at 531 Flanders
Filters Road, Washington, North Carolina 27889, and its telephone number is
(919) 946-8081.
5
<PAGE> 6

THE OFFERING

Common Stock Offered by the Company... 6,000,000 shares

Common Stock Offered by the Selling
Shareholder........................... 400,000 shares

Common Stock Outstanding after the
Offering(1)........................... 24,016,103 shares

Use of Proceeds....................... New facilities, expansion and
equipping of existing facilities,
automation, repayment of debt and
general corporate purposes. See "Use
of Proceeds."

Risk Factors.......................... Prospective investors of the Shares
should carefully consider the matters
set forth herein under "Risk
Factors."

Nasdaq Symbol......................... FLDR
- ---------------

(1) Excludes (i) 960,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any, (ii) 7,652,920 shares
of Common Stock issuable upon exercise of outstanding stock options, (iii)
2,486,800 shares of Common Stock reserved for future issuance under the
Company's Long-Term Incentive Plan and Director Option Plan, (iv) 640,000
shares of Common Stock reserved for issuance upon conversion of certain
convertible promissory notes, (v) 175,256 shares of Common Stock issuable
upon exercise of outstanding warrants, and (vi) 400,000 shares of Common
Stock issuable upon exercise of Representative Warrants. See
"Management -- Long-Term Incentive Plan," "Management -- Director Option
Plan," "Description of Capital Stock" and "Underwriting."
6
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
--------------------------------------------- -------------------------
ACTUAL PRO FORMA(1) ACTUAL
------------------------------ ------------ -------------------------
12/30/94 12/31/95 12/31/96 12/31/96 06/30/96 06/30/97
-------- -------- -------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SELECTED HISTORICAL OPERATIONS DATA:
Net sales............................. $26,706 $38,636 $73,056 $128,221 $26,241 $61,250
Gross profit.......................... 7,861 9,682 19,459 33,058 6,468 15,944
Operating income...................... 622 2,419 5,999 9,796 1,919 4,090
Income before income taxes............ 171 1,830 5,771 8,921 2,166 4,175
Net income (loss)..................... (5) 1,146 3,594 5,677 1,348 2,665
Earnings per weighted average common
and common equivalent shares
outstanding:
Primary............................. $ -- $ 0.12 $ 0.21 $ 0.30 $ 0.09 $ 0.12
Fully diluted....................... $ -- $ 0.12 $ 0.21 $ 0.30 $ 0.08 $ 0.12
Weighted average common and common
equivalent shares outstanding:
Primary............................. 9,693 9,832 17,042 18,745 15,252 21,680
Fully diluted....................... 9,693 9,832 18,072 20,458 15,860 22,436
</TABLE>

- ---------------

(1) The unaudited pro forma statement of operations includes all 1996
acquisitions as if they had occurred at the beginning of the period and are
presented for informational purposes only. They do not purport to represent
what the results of operations would have been for the applicable period had
the acquisitions, in fact occurred at the beginning of the period, or to
project the results of operations for any future period.

<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
----------- -----------
12/30/94 12/31/95 12/31/96 06/30/97 06/30/97(1)
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SELECTED HISTORICAL BALANCE SHEET DATA:
Working capital..................................... $ 349 $ 4,108 $22,570 $19,977 $ 57,098
Total assets........................................ 14,414 18,529 86,518 90,804 127,925
Long-term obligations(2)............................ 1,892 1,761 42,156 13,050 11,391
Total stockholders' equity.......................... 3,953 8,208 25,353 52,665 91,445
</TABLE>

- ---------------

(1) As adjusted to reflect the receipt and initial application of the estimated
net proceeds from the sale of 6,000,000 shares of Common Stock offered
hereby.
(2) Long-term obligations includes notes payable (1996 and 1997 only), current
maturities of long-term debt, long-term debt, convertible debt and committed
capital.
7
<PAGE> 8

RISK FACTORS

Investment in the Shares offered hereby involves a high degree of risk
including, but not limited to, the risk factors described below. Prospective
investors should carefully consider, among other things, the following factors
concerning the business of the Company and the Offering, and should consult
independent advisors as to the technical, tax, business and legal considerations
regarding an investment in the Shares.

INTEGRATION OF ACQUIRED COMPANIES

Prior to their acquisition by the Company in 1996, CSC, Air Seal and
Precisionaire operated under different management philosophies, management teams
and marketing strategies. These companies' operations are currently being
integrated into the Company's and there can be no assurance that the Company's
systems, procedures and controls will be adequate to accommodate integration of
these companies. Failure to successfully integrate these companies could
materially adversely affect the Company's business and results of operation. See
"Business -- Business History."

MANAGEMENT OF GROWTH

With the Company's recent acquisitions, the Company's net sales increased
by approximately 173.6% from the year ended December 30, 1994 to the year ended
December 31, 1996, and approximately 133.4% from the six months ended June 30,
1996 to the same period ended June 30, 1997. There can be no assurance that the
Company will continue to expand at this rate, or at all. Additionally, the
Company plans to continue opening new facilities and has recently opened two new
facilities. If the Company continues to grow, the additional growth will place
burdens on management to manage such growth while maintaining the Company's
profitability. Additional growth may require the Company to recruit and train
additional management personnel in the areas of corporate management, sales,
accounting, marketing, research and development and operations. There can be no
assurance that the Company will be able to do so. Both the Company's growth by
acquisition and expansion may also significantly strain the Company's
management, financial and other resources. There can be no assurance that the
Company's systems, procedures and controls will be adequate to support the
Company's operations and growth. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

ACQUISITION STRATEGY

The Company's strategy of growth through acquisition exposes the Company to
the potential risks inherent in assessing the value, strengths, weaknesses,
contingent or other liabilities and potential profitability of acquisition
candidates and in integrating the operations of acquired companies.
Additionally, an essential component of the Company's acquisition strategy is
improving the operating efficiency, output and capacity of each acquired company
and the facilities they operate. This process may include the repair or
replacement of outdated and inefficient equipment to improve operations and
output. Although the Company generally has been successful in pursuing these
acquisition targets, there can be no assurance that acquisition opportunities
will continue to be available, that the Company will have access to the capital
required to finance potential acquisitions, that the Company will continue to
acquire businesses or that any business acquired will be integrated successfully
or prove profitable. The Company has no specific agreements with respect to
future acquisitions, but is continuing to investigate potential acquisition
opportunities. See "Business -- Strategies."

NEED FOR ADDITIONAL FINANCING FOR FUTURE ACQUISITIONS

The Company believes that the revenues from current operations along with
the proceeds from this Offering will provide the Company with sufficient capital
to fund continuing operations for the foreseeable future. However, to continue
its growth through acquisition, substantial additional debt or equity financing
may be needed. There can be no assurance that the Company will be able to obtain
additional debt or equity capital to meet its future requirements on
satisfactory terms, if at all. Failure to obtain sufficient capital could
materially adversely affect the Company's acquisition strategy. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

8
<PAGE> 9

NEED FOR TECHNICAL EMPLOYEES

The Company's future operating results depend in part upon its ability to
retain and attract qualified engineering, manufacturing, technical, sales and
support personnel for its operations. Competition for such personnel is intense,
and there can be no assurance that the Company will be successful in attracting
or retaining such personnel. The failure to attract or retain such persons could
materially adversely affect the Company's business and results of operations.

TECHNOLOGICAL CHANGE; NEW PRODUCT INTRODUCTION

As of December 31, 1996, approximately 30% of the Company's net sales
resulted from sales of high-end filtration products which are especially
vulnerable to new technology development. The Company's ability to remain
competitive will depend in part upon its ability to anticipate technological
changes, to develop new and enhanced filtration systems and to introduce these
systems at competitive prices in a timely and cost-efficient manner. There can
be no assurance that the Company will successfully anticipate future
technological changes or that technologies or systems developed by others will
not render the Company's technology obsolete. The Company also plans to develop
new products as part of its strategy to increase the size and customer base of
the air filtration market. There can be no assurance that the Company will be
successful in developing the new products or that any product developed will be
commercially viable. See "Business."

ACQUIRING AND MAINTAINING EQUIPMENT

The Company designs, manufactures and assembles the majority of the
automatic production equipment used in its facilities. The Company also uses
other technologically advanced equipment, for which manufacturers may have
limited production capability or service experience, which could result in
delays in the acquisition and installation of such equipment or extended periods
of down-time in the event of malfunction or equipment failure. Any such extended
period of down-time for any critical equipment could have a material adverse
impact on the Company, its financial condition and operations.

FLUCTUATION OF QUARTERLY OPERATING RESULTS

Historically, the Company's business has been seasonal, with a substantial
percentage of its sales occurring during the first quarter and fourth quarter of
each year. The Company's recent acquisitions appear to be counter cyclical, with
a greater percentage of sales occurring in the summer months. In addition,
approximately 20% of the Company's net sales in 1996 was attributable to
high-end products sold for use in the semiconductor industry. The Company
believes that new fabricated plant construction for the semiconductor
manufacturing industry is in a periodic slowdown and that sales of high-end
products will be less than previous quarters through the end of 1997. The
Company believes period-to-period comparisons of its quarterly financial results
are not necessarily meaningful and should not be relied upon as an indication of
future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

POTENTIAL ENVIRONMENTAL RISKS

The Company's business and products may be significantly influenced by the
constantly changing body of environmental laws and regulations, which require
that certain environmental standards be met and impose liability for the failure
to comply with such standards. While the Company endeavors at each of its
facilities to assure compliance with environmental laws and regulations, there
can be no assurance that the Company's operations or activities, or historical
operations by others at the Company's locations, will not result in civil or
criminal enforcement actions or private actions that could have a materially
adverse effect on the Company.

9
<PAGE> 10

Illinois Property has worked extensively with the Illinois Environmental
Protection Agency ("IEPA") with regard to the environmental matters, and the
Company has completed Phase I and Phase II environmental surveys with respect to
the property, and it appears that the environmental matters have been resolved,
except for certain monitoring procedures required by the IEPA. However,
resolution of state issues has no effect on any potential federal or common law
claims, and there can be no assurance that such claims will not be made. See
"Business -- Legal Proceedings."

PRODUCT LIABILITY

The Company is subject to possible liability for damages arising from
filter failure and failure of a new product to perform as specified. Any such
liability could damage the Company's reputation and/or have a material adverse
effect on the Company's business and/or financial condition.

COMPETITION

The Company currently faces significant competition in its business
activities, and this competition may increase as new competitors enter the
market. Several of these competitors may have longer operating histories and
greater financial, marketing and other resources than the Company. There can be
no assurance that the Company will be able to compete successfully with existing
or new entrant companies. In addition, new product introductions or enhancements
by the Company's competitors could cause a decline in sales or loss of market
acceptance of the Company's existing products. Increased competitive pressure
could also lead to intensified price-based competition resulting in lower prices
and profit margins, which could materially adversely affect the Company's
business and results of operations. See "Business -- Competition."

DEPENDENCE ON KEY PERSONNEL

The Company's success will depend in significant part upon the continued
contributions of its officers and key personnel, many of whom would be difficult
to replace. The Company has entered into employment agreements with Robert R.
Amerson, its President, Steven K. Clark, its Chief Financial Officer and Gustavo
Hernandez, its Vice President of Operations. The loss of any key person could
have a material adverse effect on the business, financial condition and results
of operations of the Company. The Company maintains $2,000,000 worth of "key
man" life insurance on Robert R. Amerson and Steven K. Clark. See "Management."

CONTROL BY MANAGEMENT

Immediately following the completion of the Offering, the directors and
executive officers of the Company will beneficially own approximately 48% of the
outstanding Common Stock of the Company. Such shareholders may effectively
control the business and affairs of the Company. Furthermore, Robert R. Amerson
and Steven K. Clark have options to purchase an aggregate of 5,335,035 or 87% of
the shares of Common Stock of the Company beneficially owned by A. Russell
Allan, III and Thomas T. Allan (representing approximately 22% of the Company's
outstanding shares after the Offering). Additionally, management currently owns
options, which if exercised, will result in management owning an aggregate of
approximately 61% of the outstanding Common Stock of the Company prior to the
Offering. See "Principal and Selling Shareholders."

NO DIVIDENDS

The Company has not declared or paid, and does not plan to declare or pay,
any cash or other dividends in the foreseeable future. It is anticipated that
any earnings will be retained to finance the Company's operations and growth.
Additionally, under the terms of its revolving credit line with NationsBank,
N.A. ("NationsBank"), the Company is prohibited from paying dividends without
NationsBank's prior written consent. See "Dividend Policy."

10
<PAGE> 11

VOLATILITY OF MARKET PRICE FOR COMMON STOCK

The Company believes factors such as quarterly fluctuations in results of
operations, announcements of new orders by the Company and changes in either
earnings estimates of the Company or investment recommendations by stock market
analysts may cause the market price of the Company's stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market in general has
experienced extreme price fluctuations, and such extreme price fluctuations may
continue. These broad market and industry fluctuations may adversely affect the
market price of the Company's Common Stock.

EXERCISE OF OPTIONS AND WARRANTS

As of August 29, 1997, there were stock options and warrants outstanding to
purchase an aggregate of 7,828,176 shares of the Company's Common Stock ranging
in price from $1.00 to $14.725 per share. Of the 7,828,176 options and warrants
outstanding, management owns options to purchase 6,578,600 shares of the
Company's Common Stock at prices ranging from $1.00 to $7.50. For the life of
such options and warrants, the holders are given the opportunity to profit from
a rise in the market price of such underlying stock without assuming the risk of
ownership. So long as such options and warrants remain unexercised, the terms
under which the Company could obtain additional equity financing may be
adversely affected. Moreover, the holders of such options and warrants may be
expected to exercise them at a time when the Company could in all likelihood be
able to obtain any needed capital by a new offering of its securities on terms
more favorable than those provided by such options and warrants. If the options
and warrants are exercised, the interests of the Company's shareholders may be
diluted proportionately.

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS AND STATE LAW

The Company's Articles of Incorporation ("Articles") and Bylaws may
discourage certain types of transactions that involve an actual or threatened
change in control of the Company, unless approved by the Board. See "Description
of Capital Stock." Additionally, the Company is subject to the Control Shares
Acquisition Act of the State of North Carolina, which 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
provide. See "Anti-Takeover Effects of the Company's Articles and Bylaws."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have 24,016,103 shares
of Common Stock outstanding, of which 14,544,402 shares are freely tradable
without restriction under the Securities Act. The remaining 9,471,701 shares are
deemed "restricted shares" under Rule 144 of the Securities Act. All of such
shares are currently eligible or will be eligible within one year for sale
pursuant to Rule 144.

Steven R. Clark and Robert R. Amerson, officers and directors, who will
beneficially own an aggregate of 13,524,773 shares of Common Stock following the
completion of this Offering, have agreed that, for a period of 180 days after
the date of this Prospectus, they will not, without the prior written consent of
Raymond James & Associates, Inc., offer, sell, offer to sell, solicit an offer
to buy, contract to sell, pledge or grant any option to purchase or otherwise
transfer or dispose (or announce any of the foregoing) of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, except, in the case of the Company, for the issuance of stock
options under stock option plans in existence on the date hereof or the issuance
or sale of Common Stock by the Company upon exercise of outstanding options or
warrants to purchase Common Stock.

11
<PAGE> 12

warrants outstanding to purchase an aggregate of 175,256 shares of Common Stock,
of which 35,256 warrants are currently exercisable, and the remaining 140,000
warrants will be exercisable in January 1998. Furthermore, additional shares of
the Company's Common Stock may be issued in connection with (i) the conversion
of the Company's 10% Convertible Notes, (ii) the exercise of Representative
Warrants, and (iii) the exchange of Airseal West Common Stock.

The Company makes no prediction as to the effect, if any, that future sales
of shares or the availability of shares for future sale will have on the
prevailing market price of the Common Stock. Sales of substantial amounts of the
Company's Common Stock in the public market or the perception that such sales
could occur could have an adverse effect on the prevailing market price of the
Common Stock. See "Description of Capital Stock" and "Shares Eligible for Future
Sale."

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

This Prospectus contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including,
among others (i) results of operations (including expected changes in the
Company's gross margin and general, administrative and selling expenses), (ii)
the Company's business strategy for automation, new plant locations and
expanding its market share of the air filtration industry, (iii) the Company's
strategy to increase the size and customer base of the air filtration market,
and (iv) the Company's ability to distinguish itself from its current and future
competitors.

These forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to the other risks described elsewhere in this "Risk Factors"
discussion, important factors to consider in evaluating such forward-looking
statements include (i) the shortage of reliable market data regarding the
filtration market, (ii) changes in external competitive market factors or in the
Company's internal budgeting process which might impact trends in the Company's
results of operations, (iii) anticipated working capital or other cash
requirements, (iv) changes in the Company's business strategy or an inability to
execute its strategy due to unanticipated changes in the market, (v) product
obsolescence due to the development of new technologies, and (vi) various
competitive factors that may prevent the Company from competing successfully in
the marketplace. In light of these risks and uncertainties, many of which are
described in greater detail elsewhere in this "Risk Factors" discussion, there
can be no assurance that the events contemplated by the forward-looking
statements contained in this Prospectus will in fact occur.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 6,000,000 Shares
offered hereby are estimated to be approximately $38,780,000 (approximately
$41,938,000 if the Over-Allotment Option is exercised in full) after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company will not receive any proceeds from the sale, if any, of Shares by the
Selling Shareholder. See "Principal and Selling Shareholders."

The Company's acquisition strategy has been to acquire companies with the
intent of improving the efficiency, output and capacity of each acquired company
through modernizing facilities and repairing and replacing outdated and
inefficient equipment. This strategy, combined with the Company's internal
expansion, requires continuing capital investment. Consequently, the Company
intends to use approximately $12 million of the net proceeds for new plants and
equipment, approximately $8 million to expand and equip existing facilities,
approximately $10 million of the net proceeds to automate facilities and
approximately $6 million of the net proceeds to purchase or develop and install
equipment at certain of the Company's mid-range manufacturing facilities.
Additionally, the net proceeds will be used to pay off the Company's credit line
(prime plus 1% revolving credit agreement due September 1998) with NationsBank,
which had an outstanding balance of approximately $1,659,000, bearing interest
at the rate of 9.50% per annum, as of June 30, 1997. Any funds remaining will be
used for working capital and general corporate purposes.

12
<PAGE> 13

Pending the uses as set forth above, the net proceeds of this Offering will
be invested in government securities or in short-term, investment-grade,
interest-bearing securities.

If the Company does not use all of the net proceeds from the Offering in
the manner described above, the remaining net proceeds will be available for
working capital; however, the Company believes that it has sufficient funds
available for working capital from operations and cash on hand to continue the
operations of the Company for the foreseeable future. In addition to the net
proceeds raised in this Offering, in order for the Company to continue its
acquisition strategy, substantial additional debt or equity financing may be
needed.

PRICE RANGE OF COMMON STOCK

The following table sets forth, for the periods indicated, the high and low
closing prices of the Company's Common Stock as reported by the Nasdaq National
Market, the Nasdaq Small-Cap Market and OTC Bulletin Board. Such quotations do
not include retail mark-ups, mark-downs, or other fees or commissions. The
Company was listed on the Nasdaq National Market on November 11, 1996. Prior to
that time, the Company's Common Stock was traded on the Nasdaq Small-Cap Market
from April 8, 1996 to November 8, 1996. From February 27, 1996 through April 7,
1996, the Company=s Common Stock was listed on the OTC Bulletin Board. Prior to
February 27, 1996, there was no public market in the Company's Common Stock.

<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
FISCAL YEAR 1996
First Quarter ended March 31, 1996.......................... $ 5.00 $2.50
Second Quarter ended June 30, 1996.......................... 10.00 5.00
Third Quarter ended September 30, 1996...................... 10.50 9.00
Fourth Quarter ended December 31, 1996...................... 10.25 8.75
FISCAL YEAR 1997
First Quarter ended March 31, 1997.......................... $12.00 $9.38
Second Quarter ended June 30, 1997.......................... 9.88 5.88
Third Quarter ended September 30, 1997...................... 8.25 6.75
Fourth Quarter (through October 15, 1997)................... 8.19 7.31
</TABLE>

On October 15, 1997, the closing price for the stock was $7.3125. As of
October 15, 1997, there were approximately 400 holders of record of the
Company's Common Stock; the Company estimates there are in excess of 600
beneficial owners of the Company=s Common Stock.

DIVIDEND POLICY

The Company has not declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. Any future determination to
pay cash dividends will be made by the Board in light of the Company's earnings,
financial position, capital requirements and such other factors as the Board
deems relevant. Under the terms of its revolving credit line with NationsBank,
the Company cannot pay dividends without the prior written consent of
NationsBank.

13
<PAGE> 14

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at June 30, 1997, and as adjusted to reflect the use of the net proceeds
of this Offering as described under "Use of Proceeds."

<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term obligations, including notes
payable................................................... $ 594 $ 594
Long-term debt, less current portion........................ 9,256 7,597
Convertible debt............................................ 3,200 3,200
Stockholders' equity:
Preferred stock, authorized 10,000,000 shares of $0.001
par value, 0 shares issued and outstanding............. -- --
Common Stock, authorized 50,000,000 shares of $0.001 par
value, 18,016,103 shares issued and outstanding(1);
24,016,103 shares issued and outstanding as
adjusted(1)(2)......................................... 18 24
Additional paid-in capital................................ 41,609 80,383
Retained earnings......................................... 11,038 11,038
------- --------
Total stockholders' equity........................ 52,665 91,445
------- --------
Total capitalization.............................. $65,715 $102,836
======= ========
</TABLE>

- ---------------

14
<PAGE> 15

SELECTED CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following Selected Consolidated Financial Data is qualified by
reference to and should be read in conjunction with the consolidated financial
statements of the Company and related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere in this Prospectus. The following selected consolidated financial data
of the Company for the fiscal years ended December 31, 1992, December 31, 1993,
December 30, 1994, December 31, 1995 and December 31, 1996 have been derived
from the audited consolidated financial statements of the Company which were
audited by McGladrey & Pullen, LLP, independent auditors. The selected
consolidated financial data for the six months ended June 30, 1996 and June 30,
1997 have been derived from the Company's unaudited financial statements, which,
in the opinion of management, reflect all adjustments which are of a normal
recurring nature necessary for a fair presentation of the results of operations
for such periods. The results of the interim period are not necessarily
indicative of the results of a full year.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
---------------------------------------------------- -------------------------
12/31/92 12/31/93 12/30/94 12/31/95 12/31/96 06/30/96 06/30/97
-------- -------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED HISTORICAL OPERATIONS
DATA:
Net sales........................ $20,757 $20,569 $26,706 $38,636 $73,056 $26,241 $61,250
Cost of goods sold............... 14,682 14,065 18,845 28,953 53,597 19,774 45,306
Gross profit..................... 6,075 6,504 7,861 9,682 19,459 6,468 15,944
Operating expenses............... 5,411 6,695 7,239 7,263 13,460 4,548 11,853
Operating income................. 915 356 622 2,419 5,999 1,919 4,090
Income before income taxes....... 451 25 171 1,830 5,771 2,166 4,175
Income taxes..................... 207 15 176 685 2,178 818 1,510
Income (loss) from continuing
operations..................... 244 10 (5) 1,146 3,594 1,348 2,665
Cumulative effect of accounting
changes........................ -- 307 -- -- -- -- --
Extraordinary items.............. 89 -- -- -- -- -- --
Net Income (loss)................ $ 333 $ 317 $ (5) $ 1,146 $ 3,594 $ 1,348 $ 2,665
Earnings from continuing
operations per weighted average
common and common equivalent
shares outstanding:
Primary........................ $ 0.03 $ -- $ -- $ 0.12 $ 0.21 $ 0.09 $ 0.12
Fully diluted.................. $ 0.03 $ -- $ -- $ 0.12 $ 0.21 $ 0.08 $ 0.12
Earnings per weighted average
common and common equivalent
shares outstanding(1):
Primary........................ $ 0.03 $ 0.03 $ -- $ 0.12 $ 0.21 $ 0.09 $ 0.12
Fully diluted.................. $ 0.03 $ 0.03 $ -- $ 0.12 $ 0.21 $ 0.08 $ 0.12
Weighted average common and
common equivalent shares
outstanding:
Primary........................ 9,654 9,654 9,693 9,832 17,042 15,252 21,680
Fully diluted.................. 9,654 9,654 9,693 9,832 18,072 15,860 22,436
</TABLE>

- ---------------

(1) Supplemental Earnings Per Share. Assuming the Offering and the repayment of
debt from the proceeds thereof had occurred on January 1, 1997, net income
for the six months ended June 30, 1997, would have been approximately
$2,710,000, or $0.12 per share ($0.12 per share fully diluted), on
21,937,629 (22,692,219 fully diluted) common and common equivalent shares
outstanding. Assuming the Offering and the repayment of debt from the
proceeds thereof had occurred on January 1, 1996, net income for the twelve
months ended December 31, 1996, would have been approximately $3,683,000, or
$0.21 per share ($0.20 per share fully diluted), on 17,298,610 (18,328,950
fully diluted) common and common equivalent shares outstanding.

<TABLE>
<CAPTION>
12/31/92 12/31/93 12/30/94 12/31/95 12/31/96 06/30/97
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SELECTED HISTORICAL BALANCE SHEET DATA:
Working capital............................. $ 788 $ 675 $ 349 $ 4,108 $22,570 $ 19,977
Total assets................................ 11,026 12,213 14,414 18,529 86,518 90,804
Long-term obligations(1).................... 2,258 1,803 1,892 1,761 42,156 13,050
Total stockholders' equity.................. 3,612 3,967 3,953 8,208 25,353 52,665
</TABLE>

- ---------------
(1) Long-term obligations includes notes payable (1996 and 1997 only), current
maturities of long-term debt, long-term debt, convertible debt and committed
capital.

15
<PAGE> 16

SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS

The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1996 presents the combined results of the Company as
though the acquisitions of Precisionaire, CSC and Air Seal (the "Acquisitions")
had occurred at January 1, 1996, and includes only adjustments directly
attributable to the Acquisitions, such as additional depreciation from the
write-up of assets attributable to the purchase, additional amortization due to
recognition of goodwill from the Acquisitions, decrease in rental expense for
certain land and buildings leased by the acquired companies which were acquired
as part of the Acquisitions, additional interest expense from financing the
Acquisitions, and decrease in compensation expense due to non-recurring salaries
paid to former shareholders of the acquired companies. The Unaudited Pro Forma
Condensed Consolidated Statement of Operations is presented for informational
purposes only and does not purport to represent what the results of operations
for the year ended December 31, 1996 would have been had the Acquisitions, in
fact, occurred at January 1, 1996, or project the results of operations for any
future period. The Acquisitions have been accounted for as "purchases" for
accounting and reporting purposes.

FISCAL YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
PRE-ACQUISITION PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA PRO FORMA
HISTORICAL CSC & CSC & W/CSC & HISTORICAL PRECISIONAIRE TOTAL
COMPANY AIR SEAL AIR SEAL AIR SEAL PRECISIONAIRE ADJUSTMENTS PRO FORMA
---------- --------------- ----------- ---------- ------------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $73,056 $2,203 $ -- $75,259 $52,962 $ -- $128,221
Cost of goods sold.......... 53,597 1,681 -- 55,278 39,885 -- 95,163
------- ------ ---- ------- ------- ----- --------
Gross profit.............. 19,459 522 -- 19,981 13,077 -- 33,058
General and administrative
expenses.................. 13,460 481 (67)(1) 13,874 9,874 (486)(2) 23,262
------- ------ ---- ------- ------- ----- --------
Operating income............ 5,999 41 67 6,107 3,203 486 9,796
Nonoperating income
(expense):
Interest income........... -- 1 -- 1 -- -- 1
Other income.............. 975 7 -- 982 418 -- 1,400
Interest expense.......... (1,203) (3) -- (1,206) (212) (858)(3) (2,276)
------- ------ ---- ------- ------- ----- --------
(228) 5 -- (223) 206 (858) (875)
------- ------ ---- ------- ------- ----- --------
Income before income
taxes..................... 5,771 46 67 5,884 3,409 (372) 8,921
Income taxes................ 2,177 19 25 2,221 1,163 (140) 3,244
------- ------ ---- ------- ------- ----- --------
Net income................ $ 3,594 $ 27 $ 42 $ 3,663 $ 2,246 $(232) $ 5,677
======= ====== ==== ======= ======= ===== ========
Earnings per weighted
average common and common
equivalent shares
outstanding:
Primary................... $ 0.21 $ 0.30
======= ========
Fully diluted............. $ 0.21 $ 0.30
======= ========
Weighted average common and
common equivalent shares
outstanding:
Primary................... 17,042 1,703(4) 18,745
======= ===== ========
Fully diluted............. 18,072 2,386(4) 20,458
======= ===== ========
</TABLE>

- ---------------

(1) Consists of $21,542 and $22,396 of additional depreciation for the write-up
of fixed assets to market value of Air Seal and CSC, respectively; $9,000
and $1,877 of additional amortization of goodwill for Air Seal and CSC,
respectively; $33,315 and $43,314 of reduced rents due to property acquired
as part of the acquisition of Air Seal and CSC, respectively; and $44,718 of
non-recurring compensation paid to a shareholder of Air Seal not actively
involved in the business, whose position was contractually removed in the
purchase agreement with the intent that no replacement would be hired for
the position. Adjustments are for five months and three months of operations
prior to the acquisition of Air Seal and CSC, respectively. The Company
recognized $1,173,750 and $716,179 of goodwill with respect to the
acquisition of Air Seal and CSC, respectively. Goodwill for both
transactions is being amortized on a straight-line basis over 40 years.

16
<PAGE> 17

(2) Consists of $374,840 of additional depreciation due to write-up of fixed
assets to market value, $126,947 of additional amortization of write-up of
intangible assets to market value and goodwill from the acquisition of
Precisionaire, $273,067 of reduced rental expense to reflect the purchase of
the Terrell, Texas facility, and $714,415 of reduced compensation expense to
reflect the non-recurring salaries of previous Precisionaire shareholders,
whose positions were contractually removed in the purchase agreement with
the stated intent that no replacements would be hired. The Company
recognized $9,534,286 of goodwill with respect to the acquisition of
Precisionaire. Goodwill from the acquisition of Precisionaire is being
amortized on a straight-line basis over 40 years.
(3) Interest was calculated by assuming that the Acquisitions and the financings
had been completed, and the NationsBank credit facility had been in place at
January 1, 1996. The interest rates used were the weighted average prime
rate for NationsBank (8.5%) over the year plus 1.5% and 1.0% for the
$6,500,000 term loan and the $25,000,000 revolving credit line,
respectively; 10.0% for the 10% Convertible Notes; and 18.0% for the Series
A Convertible Subordinated Debentures.
(4) Assuming that the shares issued in the private offerings and the
Acquisitions were issued on January 1, 1996, leads to the following
increases in weighted average common and common equivalent shares
outstanding:

<TABLE>
<CAPTION>
INCREASE IN
NUMBER OF SHARES
-------------------------
TRANSACTION PRIMARY FULLY DILUTED
----------- --------- -------------
<S> <C> <C>
Private placement of 500,000 shares completed on January 24,
1996...................................................... 32,787 32,787
Purchase of CSC............................................. -0- 41,530
Private placement of 1,537,000 shares completed on June 3,
1996...................................................... 650,915 650,915
Purchase of Air Seal........................................ -0- 68,443
Purchase of Precisionaire................................... -0- 573,393
Private placement of 900,000 shares completed on September
30, 1996.................................................. 673,770 673,770
Private placement of 434,000 shares completed on October 17,
1996...................................................... 345,066 345,066
--------- ---------
1,702,538 2,385,904
========= =========
</TABLE>

17
<PAGE> 18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data," and the Company's Consolidated Financial
Statements and the notes thereto, all included elsewhere herein. The information
set forth in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" includes forward-looking statements that involve
risks and uncertainties. Many factors could cause actual results to differ
materially from those contained in the forward-looking statements below. See
"Risk Factors -- Forward-Looking Statements and Associated Risks."

OVERVIEW

The Company 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 certain related products and
services. The Company focuses on those products with high replacement potential.
The Company designs and manufactures its own production equipment and also
produces glass-based media for many of its products. During 1996 and the first
quarter of 1997, the Company experienced significant growth from the acquisition
of other air filtration related companies. The Company acquired both CSC and Air
Seal as of May 31, 1996 and Precisionaire as of September 30, 1996. CSC
specializes in the manufacture of high-end charcoal filters and containment
environments, and has a service arm. Air Seal produces customized mid-range
housings and HVAC equipment. Precisionaire manufactures air filters and related
products for commercial and residential air conditioning and heating systems.
The Company also established two new subsidiaries in 1996: FIL and Airpure
Products West, Inc. ("Airpure West"). FIL is a Singapore-based sales and
marketing subsidiary marketing the Company's products to customers in the
Pacific Rim. In 1997, Airpure West's operations were moved to the Company's
newly opened Henderson, Nevada, manufacturing and distribution facility. As of
March 1997, the Company acquired the majority of the assets of Intermountain
Paint and Sub-Assembly, Inc. and BB&D Manufacturing, Inc. (collectively "BB&D")
and placed them in a newly formed, majority owned subsidiary, Airseal West.
Airseal West sells, manufactures and distributes specialty and standard air
filter housings and HVAC systems in the western United States. The results of
operations for the acquired businesses are included in the Company's financial
statements only from the applicable date of acquisition. As a result, the
Company's historical results of operations for the periods presented should be
evaluated specifically in the context of the Acquisitions. Additionally, the
historical results of operations do not fully reflect the operating efficiencies
and improvements expected from upgrading and integrating the acquired businesses
into the Company's operations. There can be no guarantee that the Company will
be able to achieve these objectives and gains in efficiency. The Company
believes the Acquisitions will have a positive impact on its future results of
operations.

RESULTS OF OPERATIONS

Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996

The following table summarizes the Company's results of operations as a
percentage of net sales for the six months ended June 30, 1997 and 1996 (dollars
in thousands).

<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------
JUNE 30, 1997 JUNE 30, 1996
--------------- ---------------
<S> <C> <C> <C> <C>
Net sales................................................... $61,250 100.0% $26,241 100.0%
Gross profit................................................ 15,944 26.0 6,468 24.6
Operating expenses.......................................... 11,853 19.4 4,548 17.3
Operating income............................................ 4,090 6.7 1,919 7.3
Income before income taxes.................................. 4,175 6.8 2,166 8.3
Income taxes................................................ 1,510 2.5 818 3.1
Net income.................................................. 2,665 4.4 1,348 5.1
</TABLE>

Net sales: Net sales for the six months ended June 30, 1997 increased by
$35,009,000, or 133.4%, to $61,250,000 from $26,241,000 for the six months ended
June 30, 1996. The increase was primarily due to the

18
<PAGE> 19

Acquisitions and establishment of new subsidiaries, which contributed
approximately $40,681,000 of net sales. Comparable sales from the Company's
business at June 30, 1997, which included the operations of FFI, CSC and Airpure
were down approximately $5,695,000, or 21.9%, compared to the prior year period.
The Company attributes this decrease to a cyclical slowdown in capital spending
for new semiconductor facilities.

Gross Profit: Gross profit for the six months ended June 30, 1997
increased by $9,476,000, or 146.5%, to $15,944,000, which represented 26.0% of
net sales, from $6,468,000, which represented 24.6% of net sales for the six
months ended June 30, 1996. The primary reasons for the increase in gross profit
margin were improvements in operating efficiency associated with focusing each
manufacturing facility on a particular type of product, which reduced direct
costs in the following areas (i) reduced down time due to switching lines
between products, (ii) eliminated individual lot inventory tracking at the
Company's Washington, North Carolina facility required by regulations governing
the manufacture of nuclear and biological containment environments by moving all
containment environment manufacturing operations to CSC's plant in Bath, North
Carolina, (iii) the automation of additional production lines at several
Precisionaire facilities, and (iv) reduced training and coordination time at
each location by reducing the number of certification and training hours
required of employees by producing fewer types of products at each facility.
Other factors affecting gross profit margins included lower profit margins from
newly started subsidiaries and differences in timing of orders and product mix
during the respective periods.

Operating expenses: Operating expenses for the six months ended June 30,
1997 increased by $7,305,000, or 160.6%, to $11,853,000, representing 19.4% of
net sales, from $4,548,000, representing 17.3% of net sales, for the six months
ended June 30, 1996. The primary reasons for the overall increase in operating
expenses were the Acquisitions and the establishment of new subsidiaries, which
accounted for an increase of $7,192,000 compared to the prior year period.
Operating expenses increased as a percentage of net sales compared to the prior
year period, primarily because FFI's sales volume was down compared to the prior
year period while its operating expenses remained relatively flat.

Net income: Net income for the six months ended June 30, 1997 increased by
$1,317,000, or 97.7%, to $2,665,000, or $0.12 per share, from $1,348,000, or
$0.09 per share, for the six months ended June 30, 1996.

Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31,
1995

The following table summarizes the Company's results of operations as a
percentage of net sales for the fiscal years ended December 31, 1996 and 1995
(dollars in thousands).

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------------- -----------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $73,056 100.0% $128,221 100.0% $38,636 100.0% $107,984 100.0%
Gross profit............................ 19,459 26.6 33,058 25.8 9,682 25.1 26,939 24.9
Operating expenses...................... 13,460 18.4 23,262 18.1 7,263 18.8 20,438 18.9
Operating income ....................... 5,999 8.2 9,796 7.6 2,419 6.3 6,642 6.2
Income before income taxes.............. 5,771 7.9 8,921 7.0 1,830 4.7 4,501 4.2
Income taxes............................ 2,177 3.0 3,244 2.5 684 1.8 1,782 1.7
Net income.............................. 3,594 4.9 5,677 4.4 1,146 3.0 2,719 2.5
</TABLE>

To aid in the evaluation of the effect of the Acquisitions, certain pro
forma financial information has been included in the text of this discussion;
this pro forma information has been prepared by combining the historical results
of operations of the various subsidiaries as though the Acquisitions had
occurred at January 1, 1995, and includes adjustments directly attributable to
the Acquisitions, such as additional depreciation from the write-up of assets to
market value from book value, additional amortization due to recognition of
goodwill from the Acquisitions, decrease in rental expense for certain land and
buildings leased by the acquired companies which were acquired as part of the
Acquisitions, additional interest expense from financing the Acquisitions, and
decrease in compensation expense to account for the elimination of non-recurring
salaries paid to former shareholders of the acquired companies. These figures
are presented herein for informational purposes only, and do not purport to
represent the operations of the Company had the Acquisitions, in fact, occurred
on January 1, 1995.

19
<PAGE> 20

Net Sales: Net sales for 1996 increased by $34,420,000, or 89.1%, to
$73,056,000, from $38,636,000 for 1995. The increase in net sales was due to (i)
the Acquisitions, which contributed approximately $23,360,000 of net sales, (ii)
two new subsidiaries, Airpure West and FIL, whose combined sales accounted for
$1,570,000 of the increase, and (iii) the Company's success in attracting work
and expanding its original core business, which grew by approximately 24.6%
between 1996 and 1995 and contributed an additional $9,490,000 to net sales.
Examining the Company on a pro forma basis by adding the operating results of
the acquired companies as though the Acquisitions had been completed on January
1, 1995, combined net sales would have increased $20,237,000, or 18.7%, to
$128,221,000 for 1996, compared to $107,984,000 for 1995. This increase is due
to the success of each of the Company's subsidiaries in capturing additional
market share and increasing production.

Gross Profit: Gross profit for 1996 increased $9,777,000, or 101.0%, to
$19,459,000, which represented 26.6% of net sales, compared to $9,682,000, which
represented 25.1% for 1995. Considered on a pro forma basis by adding the
operating results of the acquired companies as though the Acquisitions had been
completed on January 1, 1995, pro forma gross profit for 1996 increased
$6,119,000, or 22.7%, to $33,058,000, which represented 25.8% of pro forma net
sales, compared to $26,939,000, which represented 24.9% of pro forma net sales
for 1995. The primary reasons for the increase in gross profit margin were
improvements in operating efficiency associated with focusing each manufacturing
facility on a particular type of product, which reduced direct costs in the
following areas (i) reduced down time due to switching lines between products,
(ii) eliminated individual lot inventory tracking at the Company's Washington,
North Carolina facility required by regulations governing the manufacture of
nuclear and biological containment environments, by moving all containment
environment manufacturing operations to CSC's plant in Bath, North Carolina, and
(iii) reduced training and coordination time at each location as a result of
reducing the number of certification and training hours required of employees by
producing fewer types of products at each facility. Other factors affecting
gross profit margins included low profit margins from the newly started
subsidiaries Airpure West and FIL, which averaged 9.3% of their net sales, and
the Company's ongoing automation project for stock product lines.

Operating Expenses: Operating expenses during 1996 increased $6,197,000,
or 85.3% to $13,460,000, representing 18.4% of net sales, compared to $7,263,000
for 1995, which represented 18.8% of net sales. The majority of the increase in
operating expenses was due to the Acquisitions, which accounted for $5,306,000
of the increase. Other factors increasing 1996 operating expenses compared to
1995 include increased commissions resulting from increased sales and costs
associated with the establishment of Airpure West and FIL, which averaged 41.1%
of their net sales.

Net Income: Net income for 1996 increased $2,448,000, or 213.6%, to
$3,594,000, or $0.21 per share, compared to $1,146,000, or $0.12 per share, for
1995. Considered on a pro forma basis, as though the Acquisitions had been
completed on January 1, 1995, pro forma net income for 1996 increased
$2,959,000, or 108.8%, to $5,678,000, or $0.30 per share, compared to
$2,719,000, or $0.20 per share, for 1995.

Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December 30,
1994

The following table summarizes the Company's results of operations as a
percentage of net sales for the fiscal years ended December 31, 1995 and
December 30, 1994 (dollars in thousands).

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
DECEMBER 31, 1995 DECEMBER 30, 1994
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales............................................... $38,636 100.0% $26,706 100.0%
Gross profit............................................ 9,682 25.1 7,861 29.4
Operating expenses...................................... 7,263 18.8 7,239 27.1
Operating income........................................ 2,419 6.3 622 2.3
Income before income taxes.............................. 1,830 4.7 171 0.6
Income taxes............................................ 684 1.8 176 0.7
Net income.............................................. 1,146 3.0 (5) --
</TABLE>

20
<PAGE> 21

Net Sales: Net sales for 1995 increased by $11,930,000, or 44.7% to
$38,636,000 compared to $26,706,000 in 1994. This increase was due primarily to
increased overall demand for the Company's products, several large contracts for
end users, building facilities for semiconductor manufacturing, and
approximately $4,500,000 of increased net sales from Airpure, a subsidiary
established in 1994.

Gross Profit: Gross profit for 1995 represented 25.1% of net sales,
compared to 29.4% of net sales in 1994. The primary reasons for the decrease in
gross profit margin percentage were (i) the consolidation of operations of
Airpure, whose products had been priced at lower margins (an average of 18.8%)
in order to achieve entry into the mid-level ASHRAE products market, accounting
for 1.1% of the decrease in gross profit margin percentage and (ii) a price
increase in an essential component of the filtration media caused by resource
scarcity which increased these costs to approximately $370,000 over budget for
the year. The Company does not anticipate that shortages in these materials will
result in any significant increased costs in the foreseeable future because the
Company has increased the number of suppliers from which it purchases such
materials, and the number of suppliers in the industry has also increased. Other
normal fluctuations in materials prices and product mix accounted for the
remainder of the change in gross margin percentage.

Operating Expenses: Operating expenses during 1995 increased 0.3% to
$7,263,000, representing 18.8% of net sales, compared to $7,239,000 in 1994,
which represented 27.1% of net sales. Operating expenses included $375,000 and
$150,000 in 1995 and 1994, respectively, of costs from settlement of lawsuits in
December 1995 with two insurance companies, indemnified by certain officers and
shareholders of the Company. See "Certain Relationships and Related Party
Transactions." Because these officers are deemed affiliates, this
indemnification was deemed to be a capital contribution to offset expenses
incurred by the Company, rather than as a decrease in expense, and was recorded
as a debit to accrued liabilities and a credit to paid-in capital. There was no
effect upon the cash flows from operations for recording this indemnification.
If the settlement had been indemnified by non-affiliates, operating expenses
during 1995 would have declined 5.2%, to $6,888,000, or 17.9% of net sales, from
$7,089,000, or 26.5% of net sales, during 1994, income tax expense would have
increased approximately $146,000 and $58,000, respectively, and total
stockholders' equity would have decreased approximately $204,000 and $58,000,
respectively.

Net Income (Loss): Net income for 1995 was $1,146,000, or $0.12 per share,
compared to a net loss of $5,000, or $0.00 per share, for 1994. Net income was
decreased by $229,000 (after consideration of a tax benefit of $146,000) and
$92,000 (after consideration of a tax benefit of $58,000) during 1995 and 1994,
respectively, by the indemnified lawsuit settlement. Without these indemnified
settlement expenses, net income would have been $1,375,000, or $0.14 per share,
for 1995, compared to $87,000, or $0.01 per share, for 1994.

LIQUIDITY AND CAPITAL RESOURCES

Working capital was $19,977,000 at June 30, 1997. This includes cash, cash
equivalents and other short-term investments of $2,635,000.

Trade receivables increased $2,936,000, or 16.4%, to $20,843,000 at June
30, 1997 from $17,907,000 at December 31, 1996. The increase was due to the
greater volume of sales during the period ended June 30, 1997. The majority of
the Company's sales are on terms ranging from 30 to 90 days, and the typical
days outstanding for payment of the Company's invoices ranges from 65 to 90
days.

Net cash provided by operating activities was $1,613,000 for the year ended
December 31, 1996, and the Company's investing activities consumed $33,028,000.
The investing activities primarily included the Company's acquisitions of CSC,
Air Seal and Precisionaire. Net cash provided by financing activities for the
year ended December 31, 1996 aggregated $30,832,000, primarily from private
placements of the Company's Common Stock, incurrence of debt and the issuance of
convertible debentures.

Net cash provided by operating activities was $3,208,000 for the six months
ended June 30, 1997, and the Company's investing activities consumed $7,082,000.
The investing activities included (i) the Company's acquisition, through its
majority owned subsidiary, Airseal West, of the majority of the assets of BB&D
and (ii) the purchase of equipment for certain of the Company's manufacturing
facilities. Net cash provided by

21
<PAGE> 22

financing activities for the six months ended June 30, 1997, was $3,825,000,
resulting primarily from proceeds from the Company's underwritten public
offering dated January 16, 1997, of 1,840,000 shares of the Company's Common
Stock at $9.50 per share and the use of such proceeds to pay down long-term and
convertible debt. Net proceeds to the Company after deducting commissions and
expenses from the offering totaling approximately $1,884,000 amounted to
$15,596,000.

The Company has arranged a credit facility with NationsBank consisting of a
working capital revolving credit facility in the maximum principal amount of
$25,000,000 which bears interest at the prime rate as established by
NationsBank, plus 1% per annum and any outstanding balance is due and payable in
full on September 30, 1998. The revolving credit facility is secured by
substantially all of the Company's assets. As of June 30, 1997, the Company had
used approximately $1,659,000 of the revolving credit facility.

Continuing expansion of the Company will require substantial capital
investment for the manufacture of filtration products. Although the Company has
been able to arrange debt facilities or equity financing to date, there can be
no assurance that sufficient debt financing or equity will continue to be
available in the future, or that it will be available on terms acceptable to the
Company. Failure to obtain sufficient capital could materially adversely impact
the Company's acquisition strategy.

The Company recently purchased the Illinois Property for a new mid-range
manufacturing facility. The Company agreed to assume all risk of environmental
liability for past, present or future conditions on the Illinois Property except
liability related to ground water environmental problems. The Illinois Property
had certain environmental problems which required remediation under federal and
Illinois law. The seller of the Illinois Property has worked extensively with
the IEPA with regard to the environmental matters, and the Company has completed
both a Phase I and a Phase II environmental survey with respect to the property,
and it appears that the environmental matters have been resolved, except for
certain monitoring procedures required by the IEPA. However, resolution of state
issues has no effect on any potential federal or common law claims, and there
can be no assurance that such claims will not be made.

The Company's business and operations have not been materially affected by
inflation during the periods for which financial information is presented.

OUTLOOK

This Outlook contains many forward-looking statements. See "Risk
Factors -- Forward-Looking Statements and Associated Risks." Important factors
to consider in evaluating such forward-looking statements include (i) the
shortage of reliable market data regarding the air filtration market, (ii)
changes in external competitive market factors or in the Company's internal
budgeting process which might impact trends in the Company's results of
operations; (iii) anticipated working capital or other cash requirements, (iv)
changes in the Company's business strategy or an inability to execute its
strategy due to unanticipated changes in the market, (v) product obsolescence
due to the development of new technologies, and (vi) various competitive factors
that may prevent the Company from competing successfully in the marketplace. In
light of these risks and uncertainties, there can be no assurance that the
events contemplated by the forward-looking statements contained in this
Registration Statement will in fact occur.

Approximately 20% of the Company's net sales in 1996 were from high-end
products sold for use in the semiconductor industry. The Company believes that
new fabricated plant construction for the semiconductor manufacturing industry,
which typically occurs in large phases as new manufacturing capacity is brought
on line, is in a periodic slowdown. As such, the demand for the Company's
laminar flow HEPA products will be less than previous quarters through at least
the third and fourth quarters of 1997.

The Company has begun a program to increase its gross margins by automating
portions of its production lines at FFI, Precisionaire and Airpure using
technology developed at Precisionaire and FFI. Currently, approximately 20% of
the Company's production lines incorporate the new automated equipment designs.
The Company will continue to implement the additional automation for these
production lines one at a time, to minimize down time. The Company estimates the
total cost for automation of its facilities will be approximately $10,000,000.
See "Use of Proceeds."

22
<PAGE> 23

The Company intends to continue increasing building capacity for production
of air filtration products, and has announced plans to expand upon or build
facilities in the Asia/Pacific Basin. The Company has recently relocated its
Airpure West operations to a facility in Henderson, Nevada. Additionally, the
Company has recently opened a manufacturing facility in the Chicago area. These
new or expanded facilities, as well as the automation of existing production
lines, are part of the Company's growth strategies and will require substantial
continuing investment in capital equipment during 1997.

The Company intends to develop new markets and products for those markets
by applying existing technology developed for high-technology niche markets to
new applications. For each new application, the Company will first develop a
line of products to meet the needs of the specific application, and through
trade shows, technical publications, mass marketing, distributor education and
other appropriate methods, will create demand for the application in the new
target market. The Company has established the Absolute Isolation Division and
the Integrated Environmental Control Division to focus on (i) methods to
manufacture pharmaceutical and other products in synthesized atmospheres and
completely isolated and secure environments using Absolute Isolation Barriers
and (ii) IAQ diagnosis and solutions for commercial and public buildings and for
residential application. The Company believes there will be an increase in
interest in Absolute Isolation Barriers in the future because these products
prevent cross-contamination between different products and different lots of the
same product being manufactured at the same facility, as well as increase
production yields. Additionally, the Company believes there is an increase in
public concern regarding the effects of IAQ on employee productivity, as well as
an increase in interest in standards for detecting and solving IAQ problems. The
Company will continue to concentrate its efforts on these and other products
with high replacement potential.

NEW ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." This
statement establishes new standards for computing and presenting earnings per
share and simplifies the standards for computing earnings per share previously
found in APB No. 15, "Earnings Per Share" and makes them comparable to
international earnings per share standards. It replaces the presentation of
primary earnings per share with a presentation of basic earnings per share. It
also requires dual presentation of basic and diluted earnings per share for all
entities with complex capital structures. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to APB 15. This statement is
effective for financial statements issued for periods ending after December 15,
1997 and does not allow early application. The Company will adopt SFAS 128 in
the fourth quarter of 1997 which will require restatement of all prior-period
earnings per share data presented. The Company believes that this standard will
not have a material adverse effect on the Company's financial statements.

In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. Comprehensive income is the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. This statement is effective for fiscal years beginning
after December 15, 1997. Reclassification of the Company's financial statements
for earlier periods provided for comparative purposes will be required. The
Company believes that this standard will not have a material adverse effect on
the Company's financial statements.

23
<PAGE> 24

BUSINESS

OVERVIEW

The Company designs, manufactures and markets a broad range of air
filtration products, including (i) high-end (HEPA) filters, with at least 99.97%
efficiency, and Absolute Isolation Barriers for the creation of synthesized
atmospheres to control manufacturing environments and for the absolute control
and containment of contaminants and toxic gases in certain manufacturing
processes, (ii) mid-range filters for individual and commercial use, which fall
under specifications which are categorized by efficiency ratings established by
ASHRAE, and (iii) standard-grade, low cost filters with efficiency ratings below
30% sold typically off-the-shelf for standard residential and commercial furnace
and air conditioning applications. Approximately 55% of the Company's net sales
are from products with high replacement potential. The Company's air filtration
products are utilized by many industries, including those associated with
commercial and HVAC systems, semiconductor manufacturing, ultra-pure materials,
biotechnology, pharmaceuticals, synthetics, nuclear power and nuclear materials
processing. The Company also designs and manufactures its own production
equipment to allow for highly automated manufacturing of these products.
Furthermore, the Company produces glass-based filter media for many of its
products to maintain control over the quality and composition of such media. The
Company's customers include Abbott Laboratories, Home Depot, Inc., Motorola,
Inc., Merck & Co., Inc., Upjohn Co., Wal-Mart Stores, Inc., Westinghouse
Electric Corp., and several large computer chip manufacturers.

Although the Company historically has specialized in HEPA and mid-range
filters, the Company has positioned itself to offer to its customers a full
range of air filtration products. As a result of the Acquisitions and its
operation of various subsidiaries, the Company has the ability to design,
manufacture and market high-end, mid-range and standard-grade air filtration
products and related equipment and hardware. The Company's business strategy is
designed to enhance the Company's presence as a manufacturer and supplier of air
filtration products by (i) increasing the Company's market share, (ii) expanding
the Company's market through the introduction of new products, and (iii)
improving operating efficiencies. The Company intends to increase market share
by continued strategic acquisitions of synergistic businesses, by taking
advantage of certain cross-selling opportunities due to a newly expanded product
line, and by continued expansion both domestically and internationally. The
Company intends to develop new markets, and products for those markets, by
applying existing technology developed for high-technology niche markets to new
applications. The Company intends to improve operating efficiency through
increasing automation and by eliminating redundancy between facilities, by
deleting the duplication of selling and administrative efforts of subsidiaries,
and by cross-applying technology and expertise among subsidiaries.

INDUSTRY BACKGROUND

Frost & Sullivan, a leading industry analyst, estimates that the total
domestic industrial air filtration market was approximately $960 million in 1996
and is projected to be approximately $1.02 billion in 1997. Additionally,
management believes the domestic market for retail and wholesale off-the-shelf
air filters and related products used in residential and commercial HVAC
applications exceeded $500 million in 1996. The forces driving the air
filtration market have evolved over the past decade from concerns related to the
preservation of machinery and equipment to industry goals of maintaining
productivity and present day concerns and governmental requirements related to
employee health. Because of these requirements, air filtration products are
essential to many industries, including those associated with semiconductor
manufacturing, commercial and residential HVAC systems, ultra-pure materials
manufacturing, biotechnology, pharmaceuticals, synthetics, nuclear power and
nuclear materials processing. Increasingly, companies are devoting resources to
air filtration products to enhance efficiency and productivity.

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

Industrial. Air filtration products are used in standard industrial
settings to provide cleaner work environments; for example, auto makers use
air filtration systems to remove "oil mist" contaminants from the air in
their plants, and industrial paint booth users utilize air filtration to
remove paint particulates from the air.

24
<PAGE> 25

Semiconductor Manufacturing. Air filtration products are necessary to
meet the increasingly stringent manufacturing environment requirements of
semiconductor manufacturers. Laminar flow grade final filters are an
essential component of a semiconductor manufacturers' cleanrooms.

Pharmaceutical. Pharmaceutical companies are increasingly using
cleanrooms to prevent cross-contamination between different products and
different lots of the same products being manufactured at the same
facility.

Biotechnology. Containment systems for the manipulation of viruses
and bacteria using genetic engineering techniques are critical to the
biotechnology industry.

Nuclear Power and Materials Processing. Filtration systems are
necessary to radioactive containment procedures for all nuclear facilities.

Commercial and Residential HVAC Systems. Replacement filters are an
essential requirement for the efficient operation of commercial and
residential HVAC systems.

RECENT TRENDS

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

Indoor Air Quality and Health. The Company believes there is an
increase in public concern regarding the effects of IAQ on employee
productivity and health, as well as an increase in interest in standards
for detecting and solving IAQ problems. For example, ASHRAE has recently
recommended certain minimum standards for ventilation and indoor air
quality for commercial and industrial settings. The Company has had success
with prototype projects in luxury hotels combining air quality and flow
evaluation and diagnosis with IAQ units which incorporate HEPA filters and
certain bonded charcoal technology. The units cleanse impurities such as
second-hand smoke, allergens and particles which provoke asthma, hay fever
and similar health conditions. The Company believes these units may be used
in many different applications, including commercial office buildings,
public structures, resorts, general residences and structures that have
already been diagnosed as "sick" buildings. See "Strategies -- Expand
Market with New Products."

Synthesized Manufacturing Environments. State-of-the-art
manufacturing in the semiconductor, biotechnology and pharmaceutical
industries is increasingly being performed using processes requiring
non-standard atmospheres which must be completely separated from the
surrounding air. In particular, many new and contemplated pharmaceutical
processes involve either toxic gases, poisonous byproducts or potentially
hazardous genetically engineered microorganisms. Even process steps which
do not involve these hazards have been shown to have higher yields and
higher quality when isolated from potential cross-contaminants carried by
air currents from other processes in the manufacturing area. The Company
has recently developed, prototyped and favorably tested, in partnership
with major pharmaceutical companies, Absolute Isolation Barriers; these
products were developed and have been successfully utilized on a small
scale to contain the most sensitive process steps in pharmaceutical
production. The Company believes that the use of Absolute Isolation
Barriers or similar competing technologies to contain critical process
steps will become the norm for state-of-the-art pharmaceutical production
facilities during the next three years. The Company also believes its
Absolute Isolation Barriers, especially when coupled with gas-phase
filtration technologies, may be adaptable to processes in the semiconductor
industry.

Hazardous Working Environments. Several studies recognize that air
quality in working facilities has an impact upon human health. OSHA
regulations, in particular, have made IAQ a consideration in a wide variety
of industries, ranging from those industries using spray-paint booths to
those using automobile assembly lines.

Sick Building Syndrome. Sick Building Syndrome ("SBS"), which is
characterized by lethargy, frequent headaches, eye irritation and fatigue,
has recently been shown to be a valid concern, and is a

25
<PAGE> 26

major design consideration in new and renovated commercial and industrial
buildings. The identification of "sick" buildings, and the solutions to
SBS, involve complex issues which need to be examined on a case-by-case
basis by qualified engineers; solutions typically include improving the
HVAC and filtration systems of the "sick" buildings.

Hazardous Emission Regulation and Resultant Liability. Electrical
utilities became subject to emissions regulations under Title 4 of the
Clean Air Act. In addition, OSHA's Hazardous Communication Standard, the
Toxic Release Inventory and community "right to know" regulations regarding
liability for claims made by employees or neighboring communities have made
many industries, in particular the chemical and semiconductor industries,
more aware of clean air regulations. As a result, these industries have
taken voluntary steps, including the utilization of air filtration systems,
to bring emissions of potentially hazardous substances into line with
regulatory standards.

STRATEGIES

The Company's business strategy is to (i) increase the Company's market
share, (ii) expand the Company's market through the introduction of new products
with high replacement potential, and (iii) improve operating efficiencies.

Increase Market Share

Strategic Acquisitions. The Company will continue to increase its market
share through strategic acquisitions of synergistic businesses. The Company
seeks to identify potential acquisition targets with (i) dominant positions in
local or regional markets, (ii) underutilized capacity, (iii) operating
efficiencies which can be improved through automation, (iv) an ability to add
new product lines to the Company's business, and (v) significant asset value to
enable the Company to obtain debt financing or non-dilutive equity financing for
the acquisition. The Company is continuously evaluating acquisition
opportunities in light of the above criteria. The Company focuses on those
acquisition targets which complement the Company's existing technology, broaden
product offerings, provide additional manufacturing facilities and access
related markets. The Company also seeks acquisition targets which provide
vertical integration opportunities. Once a potential target is identified, the
Company commences an in-depth due diligence evaluation of the target's
operations, markets, profitability and examines all potential liabilities
including environmental liabilities and contingent liabilities. At the present
time, the Company has no specific agreements with respect to future
acquisitions, but is continually investigating potential acquisition prospects.

Increase Sales to Existing and New Customers. Currently, the Company sells
its products through a direct sales force and manufacturers' representatives.
Historically, the manufacturers' representatives have only sold certain of the
Company's products. With the recent expansion of the Company's product lines
through acquisition, those representatives can now purchase from the Company a
full line of air filtration products instead of buying a mix of air filtration
products from a range of manufacturers, and thereby use the Company as a "one
stop" purchasing source.

Establish Foreign Presence. The Company intends to manufacture and
continue to market its products in foreign markets. In April 1996, the Company
established a sales office, through FIL, a wholly owned subsidiary, in
Singapore. The Company intends to begin manufacturing ASHRAE-grade filters in
the region by the end of 1997, and has already begun sales of the Company's
products which are shipped from its domestic manufacturing sites.

Establish Facilities and Expand Manufacturing Capacity Throughout the
United States. The Company has recently established a facility in the Chicago
area which will manufacture mid-range and standard-grade filters and equipment.
See "Business -- Products." The Company has also relocated its Airpure West
facility from California to Henderson, Nevada. The Company plans to establish
other facilities in strategically located geographical locations to increase its
accessibility in various markets and decrease shipping expenses. The Company
also plans to increase capacity for its mid-range and standard grade filters by
automating its production lines.

26
<PAGE> 27

Continued Emphasis on Quality and Performance. The Company's continued
emphasis on product quality has allowed it to capture market share in several
high-technology industries in recent years. See "Business -- Products" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Expand Market with New Products

The Company has begun to develop products for emerging markets by applying
technology developed for high-technology niche markets to more generally useful
applications. The Company has established two separate divisions, the Absolute
Isolation Division and the Integrated Environmental Control Division to
concentrate on Absolute Isolation Barriers for pharmaceutical production and IAQ
diagnosis and solutions for commercial and public buildings, respectively. The
Company is also developing other applications for general commercial, industrial
and residential use. As part of the development of the market for these
applications, the Company may publish in technical publications, participate in
trade shows, or increase its program for mass marketing and consumer education.

Absolute Isolation. The Company believes that its Absolute Isolation
Barriers adopted from the Company's containment environments for the production
of genetically engineered microorganisms allow pharmaceutical manufacturers to
increase quality and obtain higher yields. Based upon response from two major
pharmaceutical manufacturers to the Company's pilot projects at their
facilities, the Company established a division focused on these products in May
1997.

Synthesized Manufacturing Environments. The Company intends to market its
Absolution Isolation Barriers, in combination with gas-phase filtration
technologies, to industries which require specialized environments, typically
involving oxygen-free or noble gas atmospheres. Several industries are already
using or are moving toward using these types of specialized environments for
their new products and processes. For example, the semiconductor industry is
considering using noble gas environments for processes to eliminate microscopic
flaws caused by oxidation and other chemical reactions with ambient air during
microcircuit production.

Integrated Environmental Control Systems. In response to concerns of IAQ
problems, the Company established a division in June 1997 focused on diagnosing,
solving and monitoring IAQ problems. These problems range from secondhand smoke
propagated through hotel ventilation systems to SBS syndrome. The Company is
currently participating in a prototype IAQ project at a major luxury hotel to
eliminate secondhand smoke and other airborne contaminants from the facility.

Increase Operating Efficiency

Automation. In an effort to increase gross margins, the Company recently
commenced a program to automate portions of its production lines at FFI,
Precisionaire and Airpure using technology developed at Precisionaire and FFI.
Currently, approximately 20% of the Company's product lines incorporate the new
automated equipment designs. The Company plans to implement additional automated
equipment designs into various other production lines one at a time to minimize
down time.

Eliminate Redundancy. The Company is continuing to increase the
manufacturing focus of its individual subsidiaries so that each subsidiary only
produces a single category of product. For example, the Company has reduced
costs by eliminating redundant part and lot tracking for its activated carbon
filter products between its FFI and CSC facilities by producing such products
exclusively at its site in Bath, North Carolina.

Centralize Overhead Functions. The Company has begun to implement plans to
centralize and eliminate duplication of efforts between its subsidiaries in the
following areas: purchasing, production planning, shipping coordination,
marketing, accounting, personnel management, risk management and benefit plan
administration.

27
<PAGE> 28

Cross-Apply Technology and Expertise. The Company plans to evaluate the
manufacturing technologies used by its various subsidiaries and to cross-apply
such technologies to create greater efficiencies in each manufacturing line. The
Company has already identified cost saving procedures used by FFI which, when
implemented, will enhance the efficiency at Precisionaire.

The Company's ability to achieve these objectives is subject to various
risks and uncertainties. See "Risk Factors."

MARKETING

The Company sells its products through manufacturers' representatives,
distributors and a direct sales force. Sales to the semiconductor, biotechnology
and general industrial markets are typically made through manufacturers'
representatives. The direct sales force sells primarily to wholesale
distributors, large retail chains, original equipment manufacturers, end users
and government organizations.

Each of the Company's subsidiaries has historically used manufacturers'
representatives for their respective product lines. Each representative
typically represents a group of end users with similar filtration needs, in a
relatively small geographical region. For example, FFI typically has at least
one "exclusive" representative with respect to its HEPA products in each major
urban center in the United States, whose customers are the high-technology firms
who use FFI's products, or the specialty HVAC contractors who serve these end
users. These representatives have historically also sold mid-range ASHRAE
filters, standard-grade filters and related products and housings from other
manufacturers to complete their product offerings. Now that the Company offers
all of these products, management believes that many of these representatives
will elect to offer the Company's line of products exclusively, and discontinue
offering other competitors' products; however, the Company currently has no such
exclusive agreements.

The Company is currently focused on expanding its business with each of
these representatives to include all of the Company's products. The Company
believes it will be successful with the majority of its current representatives
for the following reasons:

Product Quality. The Company manufacturers high performance air
filtration products. It currently offers filters of 99.999997% efficiency
on particles 0.1 microns or larger, which the Company believes is the
highest efficiency rating available anywhere. The Company has provided
eight Absolute Isolation Barriers which are currently in use for production
of cytotoxic and mutagenic drugs.

Name Recognition. The Company believes that each of its product lines
has high name recognition in its target markets. The Company's
representatives have indicated that they believe their sales will be
increased with additional products associated with the Company.

Single-Source Supplier. The Company provides a broad spectrum of air
filtration products. The ability to work with a single source for filters
will enable representatives to operate more efficiently, only needing to be
trained on one filtration system, maintain contacts with a single
organization and order from a central source.

Product Promotion and Innovation. The Company plans to introduce the
public to new applications it is developing for filtration products.
Representatives will be able to take advantage of the additional name
recognition and public knowledge associated with the marketing of the new
products; they see this as a competitive advantage to selling the Company's
products.

The Company is also seeking to consolidate its share of its direct
customers' business in the same fashion. For example, CSC has historically sold
high-end radiation containment filtration systems for radioactive containment
and exhaust purposes to United States Department of Energy nuclear facilities.
These facilities also use standard and industrial-grade filters for air intake
systems and control areas. The Company believes each of its subsidiaries will be
able to sell its direct customers additional products from the other
subsidiaries for many of the same reasons given above: perception of product
quality, convenience of a single-source supplier, name recognition, and public
knowledge of product innovations and technical superiority.

28
<PAGE> 29

PRODUCTS

The Company's products are high-end, mid-range and standard-grade air
filtration products and related equipment and hardware. These principal products
are divided into product lines and each product line is marketed separately
through a combination of direct sales and a network of regional distributors and
specialized technical representatives and contractors.

"High-End" Products

The Company manufactures and sells "high-end" air filtration products for
use in applications requiring HEPA filters, or absolute control of other
contaminants or toxic gases, with at least 99.97% efficiency. Set forth below is
a description of some of the Company's high-end products.

HEPA Filters. The Company manufactures a full line of commercial-grade and
specialty HEPA filters, in a variety of styles, including bag filters, fluid
seal filters and clamp-down ceiling filters. These filters are used to remove
extremely small particles from air and other gases for a variety of applications
ranging from removing radioactive particles in the event of a nuclear
containment breach to removing oil mist from the air of automobile plants to
meet OSHA requirements, to removing cigarette smoke from the air of smoking
areas at airport terminals before it is mixed with the general airport air. The
Company holds patents relating to certain of its HEPA filters and to certain
related proprietary particle scanning technologies used for testing such
products.

Laminar Flow Grade Filters. The Company manufactures an extensive line of
high-performance air filters designed to meet the additional requirements of
cleanrooms. Efficiencies for various laminar flow filter types range from 99.99%
to 99.999997% for particle removal. The performance of these product lines forms
the basis for the Company's reputation among high-end users. The Company
produces its own glass-based filter media so that it can maintain quality
control over the production of the media. Besides allowing more immediate and
effective product quality control, the Company has developed unique processes
which enable it to manufacture "completely separatorless" filters, while
competing filters use aluminum, tape, glue or strings to separate adjacent
pleats of the media which obstruct air flow and contribute to off-gassing and
particle generation. Laminar flow grade filters are essential for the production
of semiconductors, pharmaceuticals and many other high-technology products.

HEGA Products. High-efficiency gas absorbers ("HEGAs") collect gaseous
contaminants through "adsorption," or collecting contaminants in a condensed
form on a surface. HEGA filters are used to control or eliminate gaseous
contaminants, odors, bacteria and toxic chemicals. HEGA products typically
contain one of several forms of activated charcoal, selected to match the types
of contaminant which need to be filtered for the particular application. HEGA
filters, in combination with ASHRAE-grade and HEPA filters, are critical to many
applications, including the production and disposal of chemical and biological
warfare agents, the removal of radioactive gases from the exhaust of nuclear
facilities and the removal of volatile organic compounds generated by many
industries including hospital operating rooms.

Synthesized Manufacturing Environments. The Company manufactures
specialized containment environments, called Absolute Isolation Barriers, for a
variety of high technology applications. These environments typically combine
stainless steel housings with HEPA filters, activated carbon filters and
self-contained fan-filter units. Depending on the application, Absolute
Isolation Barriers generate specialized environments meeting requirements for a
combination of temperature, humidity, oxygen levels, air pressure, ambient noise
and chemical make-up. They typically also include measures to protect personnel
and equipment located outside the barriers from toxic chemicals, poisonous
atmospheres or infectious organisms contained within the environment. They are
currently used in applications including pharmaceutical development, recombinant
DNA research and contagion isolation in critical care and quarantine facilities.
The Company believes they will become the norm for state-of-the-art
pharmaceutical production facilities in the near future. The Company also
believes they offer semiconductor manufacturers sizable advantages over their
current productions methods. See "Business -- Strategies."

29
<PAGE> 30

"Mid-Range" Products

The Company also manufactures and sells products intended for "mid-range"
applications. These filters are also known as ASHRAE filters because they fall
under specifications and are categorized by efficiency ratings established by
the American Society of Heating, Refrigeration and Air-Conditioning Engineers.
These applications are generally characterized by requiring filtration of at
least 20% efficiency.

The Company's mid-range industrial grade products include Pureform(R)
Separatorless Filters, Separator-Type filters with corrugated aluminum
separators, high-temperature HEPA filters, and 95% dioctylphthalate ("DOP")
high-efficiency filters in a variety of styles, including nipple-connected,
square gasketed with gel-seal and round with or without faceguards. Other major
ASHRAE-rated products include Precision Pak(TM) extended surface area "bag" type
filters, Rigi-Pleat(TM) deep-pleated filters, Multi-Fold(TM) Collapsible medium
and high-efficiency air filter cartridges, and Multi-Cap and Multi-Flo
collapsible air filter cartridges for replacement of competitors' filters.

"Standard-Grade" Products

The Company manufactures and sells standard-grade products for use in
conventional commercial and residential HVAC systems. These products are
typically sold off-the-shelf to HVAC distributors, retail outlets, industrial
wholesalers and specialty contractors. These filters are characterized by their
low cost, and typically have efficiency ratings below 30%. The Company's product
lines in this category include a full range of filters and media for standard
residential and commercial furnace and air conditioning applications.

The Company's standard-grade filters are sold under more than 20 different
brand names, including Precisionaire Industrial Grade, Tri-Bond, E-Z Flow,
Dustgard, Kwik Kut, Smilie, Permaire, Kwik Kleen, Pre-Foam Kleen, Kwik Kleen
Synthetic, Pre-Pleat and Micro-Particle Pleated Home Air Filters.

Other Products and Services

In addition to filters, the Company also sells related products, including
filter housings, lay-in grid cleanroom ceilings, fans and blowers, isolation
dampers, adhesives, caulk, filter media and sealants. The Company also has a
limited number of service clients, where the Company will replace or recharge
media and perform related maintenance services.

The Company has recently adapted testing procedures and equipment developed
for the semiconductor industry, along with newly developed bonded carbon
filtration technology, to offer customized IAQ diagnosis, remediation, control
and monitoring for commercial and public buildings. The combined service and
product provided is currently being validated in prototype projects and will be
sold as Integrated Environmental Control Systems.

MANUFACTURING

The Company designs and manufactures air filters, housings, Absolute
Isolation Barriers and related equipment. Its products are manufactured at
several facilities in the United States, which range in size from 8,000 square
feet to over 200,000 square feet. Precisionaire has four separate manufacturing
facilities located in Bartow, Florida, Terrell, Texas and Auburn, Pennsylvania,
which produce medium efficiency and standard-grade filters in standard sizes.
FFI's facility in Washington, North Carolina, produces high-end HEPA products.
Management believes that FFI's ability to manufacture its own HEPA filter media
provides it with a significant competitive advantage, allowing more direct
control over quality and composition than is generally available with outside
suppliers. CSC, located in Bath, North Carolina, manufactures HEGA filters,
high-end containment environments, housings, custom filter assemblies and other
custom filtration products and systems which require extensive custom design,
production and lot tracking. For example, CSC's products are used in the
production and containment of potentially dangerous biologically engineered
microorganisms. Air Seal, located in Stafford, Texas, produces mid-range custom
filter housings. The Company's Selma, North Carolina, Momence, Illinois and
Henderson, Nevada facilities manufacture ASHRAE grade filters. In

30
<PAGE> 31

addition, the Company designs, manufactures and assembles the majority of its
own automation production equipment.

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

Each of the Company's manufacturing facilities utilize testing and design
strategies appropriate to the products manufactured. These range from standard
statistical process quality controls for standard-grade residential replacement
filters to individual testing and certification with patented proprietary
particle scanning technologies for each laminar-grade HEPA filter. The Company
believes that its ability to comprehensively test and certify its filters
provides it with a competitive advantage.

SOURCE AND AVAILABILITY OF RAW MATERIALS

The Company's principal raw materials are cardboard, fiberglass fibers,
extruded glass, sheet metal, extruded aluminum and wood. These raw materials are
readily available in sufficient quantities from many suppliers.

COMPETITION

The air-filtration market is fragmented and highly competitive. There are
many companies which compete in the Company's market areas. The Company believes
that the principal competitive factors in the air filtration business include
product performance, price, product knowledge, reputation, customized design,
timely delivery and product maintenance. The Company believes it competes
favorably in all of these categories. The Company's competitors include
successful companies with resources, assets, financial strength and market share
which may be greater than the Company's. Major competitors include American Air
Filter International, Farr Company, HEPA Corporation, Purolator Products Air
Filtration Company, Donaldson Corporation and Clark Corporation.

PATENTS, TRADEMARKS AND LICENSES

The Company currently holds 17 patents relating to filtration technology,
including patents relating to HEPA filters and fabrication methods, filter leak
testing methods and laminar flow cleanrooms. The Company has a patent pending
for its Absolute Isolation Barriers.

The Company has applied for federal trademark protection for the following
marks: Precisionaire(R), E-Z flow(R), Smilie(R), Airvelope(TM), Channel-Ceil(R),
Channel-Hood(TM), Pureform(TM), Econocell(TM) and Pureseal(R). Although
management believes that the patents and trademarks associated with the
Company's various product lines and subsidiaries are valuable to the Company, it
does not consider any of them to be essential to its business.

The Company currently licenses some of its manufacturing products to
specialty HVAC and ASHRAE filter manufacturers who produce products under their
own name and with their own identifying labels.

CUSTOMERS

The Company is not dependent upon any single customer, and no single
customer accounted for net sales equal to or greater than ten percent of the
total net sales of the Company. The Company's significant customers include
Abbott Laboratories, Home Depot, Inc., Motorola, Inc., Merck & Co., Inc., Upjohn
Co., Wal-Mart Stores, Inc., Westinghouse Electric Corp., and several large
computer chip manufacturers.

31
<PAGE> 32

BACKLOG

The Company had approximately $17,800,000 in firm backlog on June 30, 1997,
compared to $13,872,000 at December 31, 1996, and $16,537,000 at December 31,
1995 (the figure for December 31, 1995 includes backlog from the Acquisitions at
that date). Firm backlog includes orders received and not begun and the
unfinished and unbilled portion of contracts in progress. Orders are typically
not cancelable without penalty, except for certain stable filter supply
contracts to nuclear facilities operated by the United States government.
Backlog varies from week to week, based on the timing and mix of orders
received. All backlog at June 30, 1997 is expected to be shipped by the end of
the fourth quarter of 1997.

EMPLOYEES

The Company employed 1,380 full-time employees on June 30, 1997; 1,113 in
manufacturing, 47 in development and technical staff, 51 in sales and marketing,
and the remaining 169 in support staff and administration. The Company's
employees are not represented by a labor union. The Company believes that its
relationship with its employees is satisfactory. Manufacturers' representatives
are not employees of the Company.

FACILITIES

The following table lists the principal facilities owned or leased by the
Company.

<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
FLOOR SPACE MONTHLY TYPE OF
PRINCIPAL FACILITY LOCATION (SQ. FT.) PAYMENT HOLDING
- ------------------ -------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Headquarters and manufacturing
facility(1)..................... Washington, 220,000 $13,775 Owned
North Carolina
Manufacturing, service and office
facility........................ Bath, North Carolina 44,282 N/A Owned
Plant and office facility(1)...... Selma, North Carolina 100,000 $ 9,737 Owned
Manufacturing plant(1)............ Bartow, Florida 175,000 $29,121 Owned
Warehouse......................... Lakeland, Florida 40,000 $ 6,559 Lease
Manufacturing plant............... Bartow, Florida 30,000 $10,783 Monthly Lease
Manufacturing plant(1)............ Terrell, Texas 146,256 $29,858 Owned
Manufacturing plant(1)............ Auburn, Pennsylvania 91,000 $ 7,097 Owned
Office Space...................... St. Petersburg, Florida 12,000 N/A Owned
R&D; Cafeteria.................... St. Petersburg, Florida 6,000 N/A Owned
Warehouse......................... South Holland, Illinois 33,226 $ 8,307 Lease
Manufacturing plant............... Henderson, Nevada 100,000 $26,000 Lease
Manufacturing plant............... Stafford, Texas 8,000 $ 1,800 Monthly Lease
Manufacturing plant............... Momence, Illinois 210,000 N/A Owned
Sales Office, Warehouse........... Singapore 10,000 $ 3,350 Lease
Manufacturing plant............... Salt Lake City, Utah 70,805 $21,963 Lease
Office Space; Manufacturing
Plant........................... Stafford, Texas 18,000 N/A Owned
</TABLE>

- ---------------

(1) This property is encumbered by a mortgage.

32
<PAGE> 33

RESEARCH AND DEVELOPMENT

The Company's research and development is focused in the following areas:

- Automated equipment design to increase the efficiency and profitability
of production lines used for mass production of off-the-shelf filters;

- Alternative filtration media types, including evaluation of new synthetic
media products, which might either increase efficiency or decrease media
costs;

- Improved media production techniques, particularly at FFI's plant in
Washington, North Carolina, where the Company produces its Dimple-Pleat
media and other media for high-end HEPA products; during the past ten
years, the Company has increased the efficiency of its filters through
advances in media formulation and production techniques from 99.97% to
99.999997%;

- Application development, where new methods and products are developed
from existing technologies. See "Business -- Strategies -- Expand Market
with New Products."

Research and development costs, for fiscal years 1996, 1995 and 1994 were
approximately $460,000, $120,000 and $158,000, respectively. Research and
development costs were expensed and included in general and administration
expenses during the period incurred.

GOVERNMENT REGULATION

The Company's operations are subject to certain federal, state and local
requirements relating to environmental, waste management, health and safety
regulations. The Company believes its business is operated in compliance with
all applicable government, environmental, waste management, health and safety
regulations and that its products meet standards from applicable government
agencies. See "Business -- Legal Proceedings." However, there can be no
assurance that future regulations will not require the Company to modify its
products to meet revised particulate or other requirements.

BUSINESS HISTORY

Elite, the predecessor of the Company, was incorporated on July 2, 1986, in
the State of Nevada. FFI was started in 1950 by A.R. Allan, Jr. in Riverhead,
New York. FFI moved its entire plant and office from New York to Washington,
North Carolina in 1968. Effective December 29, 1995, Elite acquired FFI in a
stock for stock exchange. Prior to the acquisition of FFI, Elite was a "public
shell" company with no significant operations or assets. The acquisition of FFI
was accounted for as a reverse acquisition meaning that for accounting purposes
FFI is treated as having acquired Elite and the historical financial statements
of FFI became the historical financial statements of Elite. Therefore, all
references to the historical activities of the Company refer to the historical
activities of FFI. In January 1996, Elite formed a new subsidiary under the laws
of North Carolina, and changed its domicile to North Carolina through a
reincorporation merger with and into the Company. As part of the reincorporation
merger, Elite changed its name to Flanders Corporation. The reincorporation
merger did not result in any material change in the Company's business,
management, assets, liabilities or net worth.

In February 1994, the Company organized Airpure, as a 63% owned subsidiary
of FFI. Airpure manufactures and markets industrial and commercial bags, pleats
and industrial grade HEPA filters. In March 1996, the Company formed a wholly
owned subsidiary of FFI, Airpure West, to manufacture Airpure's products for the
western United States. In May 1997, Airpure West's operations were moved to the
Company's new facility in Henderson, Nevada.

In March 1996, pursuant to a stock purchase agreement, the Company acquired
all of the outstanding stock of CSC, a charcoal filter manufacturer based in
North Carolina specializing in activated charcoal filters and containment
environments. The purchase price for CSC was $4,435,690 in cash and up to
100,000 shares of the Company's Common Stock currently issued and held in escrow
to be released if certain performance criteria are met, subject to a
post-closing purchase price adjustment. The acquisition of CSC has been

33
<PAGE> 34

accounted for as a purchase. As of June 30, 1997, 20,000 shares have been
released from escrow to the CSC sellers.

In June 1996, pursuant to a stock purchase agreement, the Company acquired
all of the outstanding stock of Air Seal, a mid-range custom filter housing
manufacturer based in Stafford, Texas. The total cost of acquisition was
$2,150,000 and up to 150,000 shares of the Company's Common Stock currently
issued and held in escrow to be released if certain performance criteria are
met. The acquisition of Air Seal has been accounted for as a purchase. As of
June 30, 1997, no shares have been released. Also in June 1996, the Company
formed a wholly owned subsidiary in Singapore, FIL, to market and eventually
manufacture the Company's products in the Pacific Rim.

In September 1996, pursuant to a stock purchase agreement, the Company
acquired all of the outstanding stock of Precisionaire, a manufacturer of air
filter products for commercial and residential HVAC systems, headquartered in
St. Petersburg, Florida. The purchase price was $25,123,425, subject to a post-
closing purchase price adjustment, and up to 786,885 shares of Company Common
Stock currently issued and held in escrow to be released if certain performance
criteria are met. The acquisition of Precisionaire has been accounted for as a
purchase. As of June 30, 1997, 262,295 shares were released from escrow to the
Precisionaire sellers.

In February 1997, the Company organized Airseal West, a 60% owned
subsidiary of Flanders. In March 1997, pursuant to an acquisition agreement the
Company acquired, through Airseal West, the majority of the assets of BB&D. The
acquired assets included fixed assets, inventory and the unbilled and
uncompleted portion of ongoing orders. As consideration for such assets, the
Company paid $403,000 and BB&D received 40% of the outstanding stock of Airseal
West. BB&D has the right to exchange its Airseal West common stock for shares of
the Company's Common Stock based on an exchange rate to be determined by Airseal
West's pre-tax earnings for the year prior to such exchange. Airseal West
manufactures specialty and standard housings for air filtration and HVAC
systems, as well as integrated custom industrial-grade HVAC systems and other
specialty products for sale and distribution in the western United States.

LEGAL PROCEEDINGS

The Company recently purchased the Illinois Property for a new mid-range
manufacturing facility. The Company agreed to assume all risk of environmental
liability for past, present or future conditions on the Illinois Property except
for any liability related to ground water environmental problems. The Illinois
Property had certain environmental problems which required remediation under
federal and Illinois law. The seller of the Illinois Property has worked
extensively with the IEPA with regard to the environmental matters. The Company
has completed both a Phase I and a Phase II environmental survey with respect to
the property and it appears that the environmental matters have been resolved,
except for certain monitoring procedures required by the IEPA. However,
resolution of state issues has no effect on any potential federal or common law
claims, and there can be no assurance that such claims will not be made.

The Company is currently being monitored by the United States Environmental
Protection Agency ("EPA") for possible environmental contamination at one of its
main facilities. The Company is currently negotiating with the EPA to resolve
issues related to monthly monitoring of groundwater. The Company estimates the
monitoring will last from 3-5 years, and believes the total cost will not exceed
$45,000. The Company has received a limited indemnification from Thomas T.
Allan, Robert R. Amerson and Steven K. Clark (directors, officers and
shareholders of the Company) of approximately $975,000 with respect to the
claims of the EPA; however, there can be no assurance that the amount of this
indemnification will be sufficient to cover the aggregate of liabilities
asserted by the EPA. See "Certain Relationships and Related Party Transactions."

Additionally, from time to time, the Company is a party to various legal
proceedings incidental to its business. None of these proceedings is material to
the conduct of the Company's business, operations and financial condition.

34
<PAGE> 35

MANAGEMENT

The Company's directors and executive officers are as follows:

<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Thomas T. Allan...... 60 Chairman of the Board
Robert R. Amerson.... 47 President, Chief Executive Officer and Director
Steven K. Clark...... 44 Vice President of Finance/Chief Financial Officer and Director
Gustavo Hernandez.... 63 Vice President of Operations and Director
Steven D. Klocke..... 37 Vice President of Engineering
Knox Oakley.......... 39 Vice President of Corporate Marketing and Sales
William H. Clark..... 54 Director
William M. Claytor... 56 Director
</TABLE>

Directors are elected annually and serve until their successor is elected
and qualified or until earlier resignation.

THOMAS T. ALLAN. Mr. Allan is Chairman of the Board of the Company, a
position he has held since 1989. Mr. Allan has been with the Company since 1964,
and is familiar with all aspects of the Company's business. Mr. Allan holds a
Bachelor of Arts degree in Journalism from the University of Pennsylvania.

ROBERT R. AMERSON. Mr. Amerson has been President and Chief Executive
Officer of the Company since 1987. Mr. Amerson is also a Director, a position he
has held since 1988. Mr. Amerson joined the Company in 1987 as Chief Financial
Officer. Mr. Amerson has a Bachelor of Science degree in Business Administration
from Atlantic Christian College.

STEVEN K. CLARK. Mr. Clark was named as Vice President and Chief Financial
Officer of the Company as of December 15, 1995, and a Director of the Company as
of December 29, 1995. Mr. Clark acted as a consultant to the Company from
November 15, 1995 through December 15, 1995. From July 1992 through October
1995, he was the Chief Financial Officer of Daw Technologies, Inc., a specialty
cleanroom contractor and major customer of the Company. While Chief Financial
Officer of Daw Technologies, Mr. Clark was late in filing a Form 3 amendment and
certain Form 4s and Form 5s. He agreed to a cease and desist order with respect
to these violations. No violations other than the timeliness of filing those
reports were alleged by the SEC. Prior to this he was a senior partner of Miller
and Clark, an accounting and management services firm. Mr. Clark spent four
years with Price Waterhouse, and an additional four years with Arthur Andersen,
both accounting firms. He is a Certified Public Accountant, has Bachelor of Arts
degrees in Accounting and Political Science and a Master of Business
Administration Degree, all from the University of Utah.

GUSTAVO HERNANDEZ. Mr. Hernandez has been President of Precisionaire since
1979, and became a Director and Vice President of Operations of the Company
contemporaneously with the Company's acquisition of Precisionaire in September
1996. Mr. Hernandez joined Precisionaire in 1969 as Vice President of Finance.
Mr. Hernandez has a Bachelor of Arts degree in Accounting from the University of
South Florida.

STEVEN D. KLOCKE. Mr. Klocke has been Vice President of Engineering for
the Company since March 1997. He is responsible for all aspects of filter and
equipment design, directs the engineering staff and is directly in charge of all
product and technical literature. Mr. Klocke is a member of the Institute of
Environment Science, the primary technical standards body for this industry,
where he has chaired many of the committees which make filtration and cleanroom
standards. He has been with the Company since 1986 serving in various
engineering capacities. Mr. Klocke received a Bachelor of Science degree in
Mechanical Engineering from the University of Kentucky and a Bachelor of Arts
degree in Physics from Thomas Moore College.

KNOX OAKLEY. Mr. Oakley has been the Vice President of Corporate Marketing
and Sales of the Company since 1996 and has worked for the Company since 1994.
Mr. Oakley oversees all marketing and sales efforts of the Company. From 1989
through June 1994, Mr. Oakley was Director of North American Sales for Snyder
General Corp. (now AAF International). Mr. Oakley received his Bachelor of
Science degree in Biology from the Citadel.

35
<PAGE> 36

WILLIAM H. CLARK. Mr. Clark has been an outside Director of the Company
since June 1996. He is and has been since 1977, the President and owner of Bill
Clark Construction Co., Inc., a construction company located in Greenville,
North Carolina specializing in residential development. He is currently a member
of the Business Advisory Council of the East Carolina University School of
Business. Mr. Clark has a Bachelor of Arts degree and a Masters of Business
Administration degree, both from East Carolina University.

WILLIAM M. CLAYTOR. Mr. Claytor has been an outside Director of the
Company since 1990. He is a partner in the law firm of Baucom, Claytor, Benton,
Morgan, Wood & White, P.A., and has held such position since 1973. Mr. Claytor
graduated from Memphis State University School of Law in 1969 and from the
University of Missouri in 1963.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee reviews the results and scope of the audit and other
services provided by the Company's independent auditors, reviews and evaluates
the Company's internal audit and control functions, and monitors transactions
between the Company and its employees, officers and directors. The Compensation
Committee administers the Company's equity incentive plans and designates
compensation levels for officers and directors of the Company.

The members of the Audit Committee are Mr. W.H. Clark and Mr. Claytor. The
members of the Compensation Committee are Mr. Claytor and Mr. Allan. Both Mr.
Claytor and Mr. W. H. Clark are non-employee directors. Mr. Allan is the
Chairman of the Board; his compensation is fixed at $71,000 per year, and he is
not eligible for bonuses.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with Messrs. Amerson and
S. K. Clark effective as of December 15, 1995 ("Employment Agreements"). The
Employment Agreements, as amended, provide for an annual base salary of $250,000
for both Mr. Amerson and Mr. Clark. The Employment Agreements each have an
initial five year term. The Employment Agreements also provide that the
executive shall be entitled to the following termination payments (i) 100% of
his current base salary if the employment is terminated as a result of his death
or disability, (ii) up to 200% of his current base salary, if the employment is
terminated by the Company for any reason other than death, disability or for
Cause (as defined in his Employment Agreement), or (iii) up to 250% of the
executive's gross income during the year preceding his termination if the
Employment Agreement is terminated by the executive for Good Reason (as defined
in the Employment Agreement) or by the Company for any reason other than death,
disability or cause and the termination occurs within two years after a Change
of Control (as defined in the Employment Agreement) of the Company has occurred.

The Company has also entered into an employment agreement with Mr.
Hernandez effective September 23, 1996. This agreement currently provides for a
base salary of $250,000 and has an initial five year term. The employment
agreement also provides that the executive shall be entitled to the following
termination payments (i) 100% of his current base salary if the employment is
terminated as a result of his death or disability and (ii) up to 200% of his
current base salary, if the employment is terminated by the Company for any
reason other than death, disability or for cause (as defined in his employment
agreement).

COMPENSATION OF DIRECTORS

Directors who are Company employees receive no additional or special
remuneration for serving as directors. The Company's non-employee directors are
paid $500 plus out-of-pocket expenses for each meeting of the Board of Directors
and certain outside directors receive options to purchase shares of Common Stock
of the Company pursuant to the Director Option Plan described below.

36
<PAGE> 37

DIRECTOR OPTION PLAN

The 1996 Director Option Plan provides for the grant of stock options to
outside directors of the Company who were elected or appointed after February 1,
1996, and who were not existing directors on the effective date of the plan.
Each such outside director who is serving as a director on January 1 of each
calendar year will automatically be granted an option to acquire up to 5,000
shares of Common Stock at an exercise price per share not less than the fair
market value per share of Common Stock on such date, assuming such outside
director had been serving for at least six months prior to the date of grant.

Payment of the exercise price for options granted under the Director Option
Plan may be made in cash, check or in shares of the Company's Common Stock.
Options under the Director Option Plan are fully exercisable upon six months of
the anniversary of receipt. Options granted under the Director Option Plan are
not transferrable, except under limited circumstances. If the outside director
optionee ceases to be an outside director other than by reason of death or
disability, all unexercised options terminate three months thereafter.

The Company has reserved 500,000 shares of its Common Stock for issuance
under the Director Option Plan. The Director Option Plan terminates in 2006. On
July 21, 1997, the Company filed a registration statement on Form S-8
registering the shares underlying the options under the Director Option Plan,
which means that upon exercise of the options under the Director Option Plan the
holders will receive Common Stock which may be sold in compliance with Rule 144
volume limitations and the Company's insider trading policy. As of August 29,
1997, the Company has granted options to purchase 5,000 shares of Common Stock
under the Director Option Plan.

LONG-TERM INCENTIVE PLAN

In 1996, the Company adopted the Long-Term Incentive Plan ("LTI Plan") to
assist the Company in securing and retaining key employees and consultants. The
LTI Plan authorizes grants of incentive stock options, nonqualified stock
options, stock appreciation rights ("SARs"), performance shares, restricted
stock awards, dividend equivalents or other stock-based awards to individuals
who are officers, key employees or outside consultants of the Company. There are
1,986,800 shares of Common Stock reserved for award under the LTI Plan. On July
21, 1997, the Company filed a registration statement on Form S-8 registering the
shares underlying the options under the LTI Plan, which means that upon exercise
of the options granted under the LTI Plan (i) certain holders will receive
unrestricted stock, which may be sold at any time so long as the sale is in
compliance with the Company's insider trading policy, if applicable and (ii)
certain holders will receive Common Stock which may be sold in compliance with
Rule 144 volume limitations and the Company's insider trading policy.

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

Stock Option Grants. The Compensation Committee has the authority to
select individuals who are to receive options under the LTI Plan and to specify
the terms and conditions of each option so granted (incentive or nonqualified),
the exercise price (which must be at least equal to the fair market value of the
Common Stock on the date of grant with respect to incentive stock options), the
vesting provisions and the option term. Unless otherwise provided by the
Compensation Committee, any option granted under the LTI Plan expires the
earlier of ten years from the date of grant or, three months after the
optionee's termination of service with the Company if the termination of
employment is attributable to (i) disability, (ii) retirement, or (iii) any
other reason, or 15 months after the optionee's death. As of August 29, 1997,
the Company has granted options to purchase 332,120 shares of Common Stock under
the LTI Plan, 19,200 of which have been exercised or canceled.

Stock Appreciation Rights. The Compensation Committee may grant SARs
separately or in tandem with a stock option award. A SAR is an incentive award
that permits the holder to receive (per share covered thereby) an amount equal
to the amount by which the fair market value of a share of Common Stock on the

37
<PAGE> 38

date of exercise exceeds the fair market value of such share on the date the SAR
was granted (the "base price"). Under the LTI Plan, the Company may pay such
amount in cash, in Common Stock or a combination of both. Unless otherwise
provided by the Compensation Committee at the time of grant, the provisions of
the LTI Plan relating to the termination of employment of a holder of a stock
option will apply equally, to the extent applicable, to the holder of a SAR. A
SAR granted in tandem with a related option will generally have the same terms
and provisions as the related option with respect to exercisability. A SAR
granted separately will have such terms as the Compensation Committee may
determine, subject to the provisions of the LTI Plan. As of August 29, 1997, no
SARs have been granted under the LTI Plan.

Performance Shares. The Compensation Committee is authorized under the LTI
Plan to grant performance shares to selected employees. Performance shares are
rights granted to employees to receive cash, stock, or other property, the
payment of which is contingent upon achieving certain performance goals
established by the Compensation Committee. As of August 29, 1997, no performance
shares have been awarded under the LTI Plan.

Restricted Stock Awards. The Compensation Committee is authorized under
the LTI Plan to issue shares of restricted Common Stock to eligible participants
on such terms and conditions and subject to such restrictions, if any, as the
Compensation Committee may determine. As of August 29, 1997, no restricted stock
awards have been granted under the LTI Plan.

Dividend Equivalents. The Compensation Committee may also grant dividend
equivalent rights to participants subject to such terms and conditions as may be
selected by the Compensation Committee. Dividend equivalent rights entitle the
holder to receive payments equal to dividends with respect to all or a portion
of the number of shares of stock subject to an option award or SARs, as
determined by the Committee. As of August 29, 1997, no dividend equivalents have
been awarded under the LTI Plan.

401(K) PLAN

The Company has a defined contribution 401(k) salary reduction plan
("401(k) Plan"). Company employees who are at least 21 years of age are eligible
to participate in the 401(k) Plan after six months of service. Eligible
employees become participants in the 401(k) Plan on the earlier of the first day
of the plan year or the first day of the seventh month of the plan year
coinciding with or next following the date on which the employee meets the
401(k) Plan's eligibility requirements. By electing to defer a portion of his or
her compensation, a participating employee may make pre-tax contributions to the
401(k) Plan, subject to limitations under the Internal Revenue Code of 1986, as
amended, of up to 15% of his or her total compensation. The Company may make
matching contributions to the 401(k) Plan at the discretion of its Board of
Directors, up to the first 4% of compensation deferred. Participant
contributions and earnings are 100% vested, while Company matching contributions
vest in increments over a six-year period. Participants may alter their
contribution amounts as of January 1st, April 1st, July 1st or October 1st of
any year. Contributions may be withdrawn only after the participant reaches the
age of 59 1/2 or in the event of retirement, death, disability, termination of
service or financial hardship, with possible penalties for certain early
withdrawals. The Company pays all expenses associated with administration of the
401(k) Plans.

EXECUTIVE COMPENSATION

The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors. The role of the Compensation
Committee is to review and approve salaries and other compensation of the
executive officers of the Company, to administer the Executive Officer Bonus
Plan (the "Bonus Plan") and stock option plans, and to review and approve stock
option grants to all employees including the executive officers of the Company.

General Compensation Philosophy

The Company's compensation philosophy is that total cash compensation
should vary with the performance of the Company and any long-term incentive
should be closely aligned with the interest of the stockholders.

38
<PAGE> 39

Total cash compensation for the executive officers consists of the
following components:

- Base salary

- An executive officer bonus that is related to growth in sales and
operating earnings of the Company

Long-term incentive is realized through the granting of stock options to
executives and key employees through the LTI Plan, which was adopted by the
Board and approved by a majority of the Company's shareholders in January of
1996. The Company also has granted certain non-qualified options to its
executive officers. The Company has no other long-term incentive plans for its
officers and employees.

Base Salary and Executive Officer Bonus Target

Current base salaries for the executive officers of the Company were
determined by arms' length negotiations with the Board of Directors. Certain
executive officers have employment contracts with the Company. See
"Management -- Employment Agreements."

Stock Options

Stock options are granted to aid in the retention of executive and key
employees and to align the interests of executive and key employees with those
of the stockholders. The level of stock options granted (i.e., the number of
shares subject to each stock option grant) is based on the employee's ability to
impact future corporate results. An employee's ability to impact future
corporate results depends on the level and amount of job responsibility of the
individual. Therefore, the level of stock options granted is proportional to the
Compensation Committee's evaluation of each employee's job responsibility. For
example, Robert R. Amerson, as the Chief Executive Officer, has the highest
level of responsibility and would typically be awarded the highest level of
stock options. Stock options are granted at a price not less than the fair
market value on the date granted.

Summary Compensation Table

The following table sets forth the aggregate cash compensation paid by the
Company for services rendered during the last three years to the Company's Chief
Executive Officer and to each of the Company's other executive officers whose
annual salary, bonus and other compensation exceeded $100,000 in 1996.

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ---------------------- -------
OTHER RESTRICTED
ANNUAL STOCK LTIP
NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS COMPENSATION(2) AWARDS OPTIONS PAYOUTS
- ------------------------------ ---- -------- ----- --------------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert R. Amerson............. 1996(3) $212,550 -- -- -- 2,000,000 --
President 1995 128,846 -- $137,077 -- 1,150,000 --
1994 100,000 -- 124,500 -- -- --
Steven K. Clark............... 1996(4) 150,192 -- -- -- 2,000,000 --
Chief Financial Officer 1995 15,000 -- -- -- 1,150,000 --
1994 -- -- -- -- -- --
</TABLE>

- ---------------

(1) Gustavo Hernandez, a Director of the Company, is the President of
Precisionaire. He commenced his employment with the Company in September
1996. Mr. Hernandez will receive an annual salary of $250,000, plus a
possible bonus, commencing in September 1996, under his Employment
Agreement. See "Management -- Employment Agreements." During 1996, Mr.
Hernandez was paid a total of $292,269 by the Company and Precisionaire and
during 1995 and 1994, Mr. Hernandez was paid $218,049 and $188,714,
respectively by Precisionaire.
(2) Represents compensation paid by the Company to Flanders Equity Corporation,
a company owned principally by Messrs. Allan and Amerson.

39
<PAGE> 40

(3) Robert R. Amerson's annual salary is $250,000, plus a possible bonus each
year, under his Employment Agreement, as amended. See
"Management -- Employment Agreements."
(4) Steven K. Clark commenced his employment with the Company as of December 15,
1995. Mr. Clark's annual salary is $250,000, plus a possible bonus each
year, under his Employment Agreement, as amended. See
"Management -- Employment Agreements."

Options Granted in Last Fiscal Year

The following table sets forth the aggregate number and value of stock
options granted by the Company for services rendered during 1996 to the
Company's Chief Executive Officer and to each of the Company's other executive
officers whose annual salary, bonus and other compensation exceeded $100,000.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
GRANTED TO EXERCISE OR FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
- ---- --------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert R. Amerson............. 1,000,000 23.6% $2.50 02/01 $ 708,397 $1,613,272
1,000,000 23.6 7.50 06/01 2,125,190 4,839,817
Steven K. Clark............... 1,000,000 23.6 2.50 02/01 708,397 1,613,272
1,000,000 23.6 7.50 06/01 2,125,190 4,839,817
</TABLE>

- ---------------

(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded rates of
appreciation on the Common Stock over the term of the options.

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

The following table sets forth the aggregate number and value of stock
options exercised during the last year by the Company's Chief Executive Officer
and by each of the Company's other executive officers whose annual salary, bonus
and other compensation exceeded $100,000.

<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---- --------------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
Robert R. Amerson......................... -- -- 3,150,000/-- $18,381,250/--
Steven K. Clark........................... -- -- 3,150,000/-- 18,381,250/--
</TABLE>

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In November 1995, Thomas T. Allan, Robert R. Amerson and Steven K. Clark
entered into an Indemnity Agreement with Flanders whereby Messrs. Allan, Amerson
and Clark agreed to collectively deposit up to $1,500,000 into an escrow fund to
indemnify the Company for the payment of any claims, judgments, and expenses
arising from potential environmental claims made by the EPA, and $525,000 due
for the settlement of the following lawsuits against the Company: Hartford
Casualty Insurance Co. v. Flanders Filters, Inc., and St. Paul Fire and Marine
Insurance Co. v. Flanders Filters, Inc. The Company waived the escrow fund
requirement. The indemnification is limited to $1,500,000 and in no event will
any of the individuals named be required to contribute more than $500,000 each.
Messrs. Allan, Amerson and Clark have complied with the Indemnity Agreement
whereby payments of $525,000 were made to the respective insurance companies who
are the plaintiffs in the above-described lawsuits. Messrs. Allan, Amerson and
Clark have collectively borrowed $327,039 from the Company to make payments due
under the Indemnity Agreement; the parties have paid the remainder in cash.

40
<PAGE> 41

In November 1995, Steven K. Clark and Robert R. Amerson entered into an
option to acquire 5,535,035 shares of Common Stock of the Company (representing
approximately 80% of the Common Stock of the Company owned by Thomas T. Allan
and A. Russell Allan, III) for an aggregate price of approximately $13,838,000.

As of April 1997, the Company purchased certain property located in Selma,
North Carolina from ABB Partnership for $250,000 and assumed approximately
$622,000 in debt related to the property. ABB Partnership is controlled by
Robert R. Amerson, President of the Company. The purchase was entered into on
terms believed by the Company to be fair and reasonable and generally reflective
of market conditions.

As of June 1997, the Company purchased certain property located in Auburn,
Pennsylvania from LHB Realty for $910,000. As of August 1997, the Company
purchased certain property located in Bartow, Florida from POF Realty for
$2,975,000. As of August 1997, the Company purchased certain property located in
St. Petersburg, Florida from Gustavo and Ana Hernandez for $150,000. Gustavo
Hernandez, a director of the Company, is a principal of POF Realty and LHB
Realty. These purchases were entered into as part of the Precisionaire
acquisition on terms believed by the Company to be fair and reasonable and
generally reflective of market conditions.

At June 30, 1997, Steven K. Clark, an officer and director of the Company,
owed the Company $359,013 which he borrowed to settle claims and to make certain
payments under the Indemnity Agreement described above. To evidence the amount
owed, effective February 11, 1997, Mr. Clark issued a note to the Company in the
amount of $109,013 with interest at the variable rate of LIBOR plus 1.25% per
annum (6.9% at September 5, 1997), calculated on the basis of a 360-day year and
a 30-day month. Both the interest and principal due under the note are payable
on February 10, 1999. Mr. Clark also issued a note to the Company in the amount
of $250,000 at the same interest rate on April 25, 1997 and both the interest
and principal due under the note are payable on April 24, 1999.

At June 30, 1997, Robert R. Amerson, an officer and director of the
Company, owed the Company $359,013 which he borrowed to settle claims and to
make certain payments under the Indemnity Agreement described above. To evidence
the amount owed, effective February 11, 1997, Mr. Amerson issued a note to the
Company in the amount of $109,013 with interest at the variable rate of LIBOR
plus 1.25% per annum, calculated on the basis of a 360-day year and a 30-day
month. Both the interest and principal due under the note are payable on
February 10, 1999. Mr. Amerson also issued a note to the Company in the amount
of $250,000 at the same interest rate on April 25, 1997 and both the interest
and principal due under the note are payable on April 24, 1999.

At June 30, 1997, Thomas T. Allan, a director of the Company, owed the
Company $759,013 which he borrowed to settle claims and to make certain payments
under the Indemnity Agreement described above and for personal purposes. To
evidence the amount owed, effective July 3, 1996, Mr. Allan issued a note to the
Company in the amount of $650,000 at an interest rate of 7% per annum. Both the
interest and principal due under the note were payable on July 3, 1997, which
payment date was extended by the Company until July 3, 1999. Effective February
11, 1997, Mr. Allan also issued a note in the amount of $109,013 with interest
at the variable rate of LIBOR plus 1.25% per annum, calculated on the basis of a
360-day year and a 30-day month. Both interest and principal due under the note
are payable on February 10, 1999. On September 5, 1997, the combined principal
and interest due on Mr. Allan's notes was $819,500. On such date, Mr. Clark and
Mr. Amerson each assumed $409,750 of Mr. Allan's notes in consideration for the
exercise of 163,900 options under the option agreements described above. The
interest rate due on the assumed loans is at the variable rate of LIBOR plus
1.25% per annum, and both the principal and interest due are payable on
September 4, 1999.

The Board of Directors of the Company has adopted a policy of not entering
into additional transactions with officers or directors or their affiliates,
unless the independent directors make a specific finding that such transactions
are in the best interest of the Company and its public shareholders and that the
terms thereof are no less favorable to the Company than those that could be
obtained from unaffiliated parties.

41
<PAGE> 42

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, as of August 29, 1997, and as adjusted
to reflect the sale of the 6,400,000 Shares offered hereby, with respect to (i)
each person known by the Company to own beneficially more than 5% of the Common
Stock, (ii) each of the Company's directors, (iii) each of the executive
officers, (iv) each Selling Shareholder, and (v) all directors and executive
officers of the Company as a group. This table assumes that the Over-Allotment
Options granted to the Underwriters has not been exercised.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES TO BE AFTER OFFERING
------------------------- SOLD -------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(1) IN OFFERING NUMBER PERCENT(8)
- ------------------------------------ ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
A. Russell Allan, III(2)............ 957,844 5.32% -- 957,844 3.99%
531 Flanders Filters Road
Washington, NC 27889
Thomas T. Allan(2)(4)............... 5,607,367 30.87 400,000 5,207,367 21.55
531 Flanders Filters Road
Washington, NC 27889
Robert R. Amerson(2)(3)............. 8,160,759 38.56 -- 8,160,759 30.04
531 Flanders Filters Road
Washington, NC 27889
Steven K. Clark(2)(3)............... 5,364,014 25.34 -- 5,364,014 19.75
531 Flanders Filters Road
Washington, NC 27889
Gustavo Hernandez(5)................ 65,393 * -- 65,393 *
2399 26th Avenue North
St. Petersburg, FL 33734
Steven Klocke(6).................... 109,427 * -- 109,427 *
531 Flanders Filters Road
Washington, NC 27889
Knox Oakley(6)...................... 94,525 * -- 94,525 *
531 Flanders Filters Road
Washington, NC 27889
William H. Clark.................... 12,101 * -- 12,101 *
531 Flanders Filters Road
Washington, NC 27889
William M. Claytor(7)............... 164,172 * -- 164,172 *
531 Flanders Filters Road
Washington, NC 27889
Officers and Directors as a
Group(2)(3)(4)(5)(6)(7)........... 15,035,058 61.14% 400,000 14,635,058 47.84%
</TABLE>

- ---------------
* Represents less than 1% of the total issued and outstanding shares of Common
Stock.

(1) Applicable percentage of ownership is based on 18,016,103 shares of Common
Stock outstanding as of August 29, 1997, together with all applicable
options for unissued securities for such stockholders exercisable within 60
days. Shares of Common Stock subject to options exercisable within 60 days
are deemed outstanding for computing the percentage ownership of the person
holding such options, but are not deemed outstanding for computing the
percentage of any other person.
(2) Shares beneficially owned include shares subject to an original option in
favor of Messrs. Amerson and Clark (3,321,021 shares and 2,214,014 shares,
respectively), from Thomas T. Allan and A. Russell Allan, III (4,713,000
shares and 822,035 shares, respectively). Messrs. Amerson and Clark have

42
<PAGE> 43

exercised 100,000 options each under the above option agreement;
collectively 170,300 from Thomas T. Allan and 29,700 from A. Russell Allan,
III.
(3) Includes 1,150,000 shares which are subject to an option to purchase such
shares from the Company at $1.00 per share, 1,000,000 shares which are
subject to an option to purchase such shares from the Company at $2.50 per
share; and 1,000,000 shares which are subject to an option to purchase such
shares from the Company at $7.50 per share.
(4) Includes 150,000 shares which are subject to an option to purchase such
shares from the Company at $1.00 per share.
(5) Includes 46,791 shares which will be released from escrow only if
Precisionaire meets certain revenue targets during the next two years.
(6) Includes 16,800 shares which are subject to an option to purchase such
shares from the Company at $2.50 per share, 10,000 shares which are subject
to an option to purchase such shares from the Company at $7.50 per share,
and 10,000 shares which are subject to an option to purchase such shares
from the Company at $7.125 per share.
(7) Includes 50,000 shares which are subject to an option to purchase such
shares from the Company at $1.00 per share.
(8) Applicable percentage of ownership is based on 24,016,103 shares of Common
Stock together with all applicable options for unissued securities for such
stockholders exercisable within 60 days. Shares of Common Stock subject to
options exercisable within 60 days are deemed outstanding for computing the
percentage ownership of the person holding such options, but are not deemed
outstanding for computing the percentage of any other person.

DESCRIPTION OF CAPITAL STOCK

The following statements are subject to the detailed provisions of the
Company's Articles and Bylaws, and are qualified in their entirety by reference
thereto.

AUTHORIZED SHARES

Under the Company's Articles, the authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock, par value $.001 per share, and
10,000,000 shares of preferred stock, par value $.001 per share. As of August
29, 1997 there are 18,016,103 shares of Common Stock issued and outstanding. No
shares of preferred stock have been issued.

COMMON STOCK

Holders of Common Stock are entitled to one vote for each share on all
matters voted upon by shareholders and have no preemptive or other rights to
subscribe for additional securities of the Company. The shares of Common Stock
when issued, are fully paid and non-assessable, and no shareholder will be
personally liable for any obligations of the Company solely by reason of being a
shareholder of the Company.

Each share of Common Stock has an equal and ratable right to receive
dividends when, as and if declared by the Board out of assets legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock will be entitled to share equally and
ratably in the assets available for distribution after the payment of
liabilities, subject only to any preferential distributions to holders of
preferred stock, if applicable.

PREFERRED STOCK

The Company's Articles authorize the Board, without any vote or action by
the holders of Common Stock, to issue preferred stock from time to time in one
or more series. The Board is authorized to determine the number of shares and
designation of any series of preferred stock and the dividend rights, dividend
rate, conversion rights and terms, voting rights, redemption rights and terms,
liquidation preferences and sinking

43
<PAGE> 44

fund terms of any series of preferred stock. Depending upon the terms of
preferred stock established by the Board, any or all series of preferred stock
could have preference over the Common Stock with respect to dividends and other
distributions and upon liquidation of the Company. Issuance of any such shares
with voting powers, or issuance of additional shares of Common Stock, would
dilute the voting power of the outstanding Common Stock. The potential issuance
of preferred stock may have the effect of delaying, deterring or preventing a
change in control of the Company, may discourage bids for the Common Stock at a
premium over the market price of the Common Stock and may adversely affect the
market price of, and the voting and other rights of the holders of the Common
Stock.

10% CONVERTIBLE NOTES

In September 1996, the Company sold $4,000,000 principal amount of 10%
Convertible Notes pursuant to Regulation S to certain unrelated offshore
investors. The 10% Convertible Notes are due and payable on September 20, 1999
and are convertible at any time commencing 41 days after issuance into shares of
the Company's Common Stock at a conversation price equal to the lower of (i) 82%
of the average closing bid price for the seven trading days immediately
preceding the conversion date or (ii) $9.00; provided, however, that in no event
shall the conversion price be less than $5.00; provided further, that in no
event shall the holder of the 10% Convertible Notes be entitled to convert any
portion of such notes if such action would result in beneficial ownership by a
holder and its affiliates of more than 4.9% of the outstanding shares of Common
Stock of the Company. If the average closing bid price of the Company's Common
Stock over any continuous seven day trading period is less than $7.38 per share,
the Company may redeem the notes at a price equal to 115% of the outstanding
principal amount of the notes. As of August 29, 1997, such holders have
converted $800,000 of the Convertible Notes, for an aggregate of 102,555 shares
of Common Stock.

In connection with the 10% Convertible Notes, the holders thereof were
given a contractual right to receive, on the date of the conversion of the notes
into Common Stock, warrants to purchase such number of shares of Common Stock
equal to 10% of the number of common shares issued upon any such conversion. The
exercise price of the warrants is equal to the amount per share at which the 10%
Convertible Notes were converted into Common Stock. As of August 29, 1997, the
Company has issued warrants to purchase 10,256 shares of Common Stock. These
warrants are exercisable until February 2000 at exercise prices ranging between
$8.11 and $8.16.

OTHER WARRANTS

In September 1996, the Company sold $2,500,000 principal amount of Series A
Subordinated Convertible Debentures to certain unrelated investors. Such
debentures were paid in January 1997. In connection with the debentures, the
holders thereof acquired warrants to purchase 25,000 shares of Common Stock at
an exercise price of $9.63 per share. These warrants expire in September 1999.

In January 1997, the Company issued certain warrants pursuant to the
underwriting agreement relating to the Company's Form S-1 Registration Statement
which was effective January 1997. Such warrants enable the holders thereof to
purchase an aggregate of 140,000 shares of Common Stock at the initial exercise
price of $14.725 per share at any time commencing January 6, 1998 until their
expiration on January 6, 2002. The exercise price and number of shares
purchasable upon exercise of the warrants are subject to adjustment upon the
occurrence of certain events.

In connection with the Offering, the Company has agreed to issue and sell
to the Representative and/or its designees, at the closing of the proposed
underwriting, for nominal consideration, Representative Warrants to purchase
400,000 shares of Common Stock for a period of four years commencing one year
from the date of this Prospectus at 120% of the public offering price per share
of Common Stock. The exercise price and number of shares purchasable upon
exercise of the Representative Warrants are subject to adjustment upon the
occurrence of certain events. See "Underwriting."

44
<PAGE> 45

STOCK OPTIONS

The Company has reserved (i) 1,986,800 shares of Common Stock under its LTI
Plan and (ii) 500,000 shares of Common Stock under its 1996 Director Option
Plan, for issuance in respect of stock options granted under such plans. As of
August 29, 1997, there were 317,920 outstanding options under the
above-mentioned plans.

The Company has reserved a total of 6,500,000 shares of Common Stock for
issuance upon the exercise of stock options granted to various officers and
directors. The Company has reserved 3,150,000 of the 6,500,000 shares for Robert
R. Amerson's exercise of the following stock options: 1,150,000 shares at an
exercise price of $1.00; 1,000,000 shares at an exercise price of $2.50; and
1,000,000 shares at an exercise price of $7.50. The Company has reserved
3,150,000 of the 6,500,000 shares for Steven K. Clark's exercise of the
following stock options: 1,150,000 shares at an exercise price of $1.00;
1,000,000 shares at an exercise price of $2.50; and 1,000,000 shares at an
exercise price of $7.50. The Company has reserved 150,000 of the 6,500,000
shares for Thomas T. Allan's exercise of 150,000 stock options at an exercise
price of $1.00. The Company has reserved 50,000 of the 6,500,000 shares for
William M. Claytor's exercise of 50,000 stock options at an exercise price of
$1.00.

On July 21, 1997, the Company filed a registration statement on Form S-8
registering shares underlying options under the Company's Long-Term Incentive
Plan, Director Option Plan and certain option grants issued pursuant to certain
employment agreements (collectively, the "Plans"). A total of 8,800,000 shares
of Common Stock underlying such options have been registered on Form S-8. As of
August 29, 1997, a total of 6,637,120 options have been granted under the Plans,
19,200 of which have been either exercised or canceled. Upon exercise of the
options under the Plans, certain non-affiliates of the Company may sell the
related shares without restriction, other than any necessary compliance with the
Company's insider trading policy. Affiliates of the Company may sell the shares
obtained upon exercise of the options pursuant to Rule 144 and the Company's
insider trading policy.

REGISTRATION RIGHTS

Holders of 262,295 shares of Common Stock, and holders of 1,210,256 options
or warrants to purchase Common Stock are entitled to certain rights with respect
to registration of such shares under the Securities Act. Under the terms of an
agreement between the Company and such holders, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or the account of other security holders exercising registration rights,
the holders are entitled to notice of such registration and are entitled to
include shares of such Common Stock therein; the registration rights provide,
however, among other conditions, that the underwriters of any offering have the
right to limit the number of such shares included in such registration. In
addition, the shareholders benefiting from these rights may require the Company,
on not more than one occasion, to file a registration statement under the
Securities Act with respect to such shares, on Form S-3, if such Form is
available to the Company, subject to certain conditions and limitations. Certain
minority shareholders of Airseal West and various other individuals who were
sellers in Flanders= acquisition of Precisionaire and Air Seal will receive
registration rights if and when they acquire Flanders Common Stock pursuant to
the terms of their agreements with Flanders.

TRANSFER AGENT AND REGISTRAR

OTC Stock Transfer, Inc. is the transfer agent and registrar for the Common
Stock.

ANTI-TAKEOVER EFFECTS OF THE COMPANY'S ARTICLES AND BYLAWS

The Company's Articles and Bylaws may discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company and they encourage any person who might seek to acquire control of the
Company to negotiate with the Company's Board of Directors. Management of the
Company believes that generally the interests of the Company's shareholders
would be served best if any

45
<PAGE> 46

change in control results from negotiations with its Board of Directors on the
proposed terms, such as the price to be paid, the form of consideration and the
anticipated tax effects of the transaction.

The provisions described herein are designed to reduce the vulnerability of
the Company to an unsolicited proposal for a takeover of the Company that does
not contemplate the acquisition of all its outstanding shares of capital stock
at an adequate price or that is otherwise unfair to its shareholders or an
unsolicited proposal for the restructuring or sale of all or part of the
Company. Management of the Company believes that, as a general rule, such
proposals would not be in the best interest of the Company and its shareholders.
However, to the extent that these provisions do discourage takeover attempts,
they could make it more difficult to accomplish transactions that are opposed by
the incumbent Board and could deprive shareholders of opportunities to realize
temporary takeover premiums for their Shares or other advantages that large
accumulations of stock would provide.

The description below is a summary only and is qualified in its entirety by
reference to the Company's Articles and Bylaws filed as exhibits to the
Company's S-1 Registration Statement of which this Prospectus is a part.

NUMBER OF DIRECTORS; REMOVAL; VACANCIES

The Company's Bylaws provide that the number of directors shall not be less
than four nor more than nine. The exact number of directors is set in accordance
with the Bylaws by resolution from time to time by a majority of the entire
Board. Interim vacancies on the Board, or vacancies created by an increase in
the number of directors, may be filled by vote of a majority of the directors
then in office.

SHAREHOLDER ACTION

The Bylaws of the Company also provide that special meetings of
shareholders may only be called by the Board of Directors or by any person or
committee expressly so authorized by the Board of Directors and by the holders
of at least 10% of all shares entitled to vote at the proposed special meeting.

The provisions limiting the ability of minority shareholders to call a
special meeting may have the effect of delaying consideration of a shareholder
proposal until the next annual meeting of the shareholders unless a special
meeting is called for such purpose.

Any call for a special meeting must specify the matters to be acted upon at
the meeting. Shareholders are not permitted to submit additional matters or
proposals for consideration of any special meeting.

SHAREHOLDER PROPOSALS

The Company's Bylaws establish an advance notice procedure for nominations
(other than by or at the direction of the Board) of candidates for election as
directors at, and for proposals to be brought before, an annual meeting of
shareholders of the Company. Subject to any other applicable requirements, only
such nominations may be considered and such business may be conducted at an
annual meeting as has been brought before the meeting by or at the direction of
the Board or by a shareholder who has given to the Secretary of the Company
timely written notice, in proper form, of the same.

PREFERRED STOCK AND ADDITIONAL COMMON STOCK

Under the Company's Articles, the Board has authority to provide by
resolution for issuance of shares of one or more series of preferred stock. The
Board is authorized to fix by resolution the terms and conditions of each
series. See "Description of Capital Stock -- Preferred Stock."

The Company believes that the availability of preferred stock will provide
the Company with increased flexibility to facilitate possible future financings
and acquisitions and to meet other corporate needs that might arise. The
authorized shares of preferred stock will be available for issuance without the
expense and delay of shareholder action, unless shareholder action is required
by applicable law or the rules of any stock exchange or organization on which
any class of stock of the Company may then be quoted or listed.

46
<PAGE> 47

These provisions give the Board of Directors the power to approve the
issuance of a series of preferred stock with terms that could either impede or
facilitate the completion of a merger, tender offer or other takeover attempt.
For example, the issuance of new shares might impede a business combination if
the terms of those shares include series voting rights that would enable the
holder to block business combinations or the issuance of new shares might
facilitate a business combination if those shares have general voting rights
sufficient to cause an applicable percentage vote requirement to be satisfied.
The Board will make any determination regarding issuance of additional shares
based on its judgment as to the best interest of its shareholders, customers,
employees or other constituencies.

CONTROL SHARE ACQUISITION STATUTE

The Control Share Acquisition Act provides that any person or entity that
acquires control shares of a publicly held North Carolina corporation shall not
have voting rights with respect to the acquired shares unless a majority of the
disinterested shareholders of the corporation votes to grant such voting rights.
The Control Share Acquisition Act provides that a person or entity acquires
"control shares" whenever it acquires shares that, but for the operation for the
Control Share Acquisition Act, would bring its voting power within any of the
following three ranges (i) one-fifth of all voting power, (ii) one-third of all
voting power, or (iii) a majority of all voting power. A "control share
acquisition" is generally defined as the direct or indirect acquisition of
either ownership or voting power associated with issued and outstanding control
shares; however, an acquisition pursuant to an agreement to which the
corporation is a party (which would require affirmative action on the part of
the Board and which is conducted pursuant to the merger provisions of North
Carolina law, which generally requires shareholder approval, is not considered a
"control share acquisition" and is therefore exempt from the provisions of the
Control Share Acquisition Act.

Under the Control Share Acquisition Act, a person or entity that acquires
control shares pursuant to a control share acquisition acquires voting rights
with respect to those shares only to the extent granted by a majority of
disinterested shareholders of each class of capital stock outstanding prior to
the acquisition. The shareholders of the corporation must consider the status of
those voting rights at the next annual or special meeting of shareholders. The
acquiror may accelerate the decision and require the corporation to hold a
special meeting of shareholders for the purpose of considering the status of
those rights if the acquiror (i) files an "acquiring person statement" with the
corporation and (ii) agrees to pay all expenses of the meeting. Unless otherwise
provided in the articles of incorporation or bylaws of a corporation,
shareholders have the right to have their shares redeemed by the corporation at
fair market value if the control shares are accorded full voting rights and the
acquiror has obtained a majority or more control shares.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have 24,016,103 shares
of Common Stock outstanding (assuming no exercise of the Over-Allotment Option).
Of these shares, 14,544,402 shares (including the 6,400,000 Shares sold in this
Offering and the 4,773,519 shares of Common Stock registered in the Company's
Form S-3 filed July 3, 1997) are freely tradable without restriction under the
Securities Act. The remaining 9,471,701 shares are deemed "restricted shares"
under Rule 144 of the Securities Act; all such shares are currently eligible or
will be eligible within one year for sale pursuant to Rule 144.

Steven K. Clark and Robert R. Amerson, officers and directors, who will
beneficially own an aggregate of 13,524,773 shares of Common Stock following the
completion of this Offering have agreed that, for a period of 180 days after the
date of this Prospectus, they will not, without the prior written consent of
Raymond James & Associates, Inc., offer, sell, offer to sell, solicit an offer
to buy, contract to sell, pledge or grant any option to purchase or otherwise
transfer or dispose (or announce any of the foregoing) of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, except, in the case of the Company, for the issuance of stock
options under stock option plans in existence on the date hereof or the issuance
or sale of Common Stock by the Company upon exercise of outstanding warrants to
purchase Common Stock.

47
<PAGE> 48

As of August 29, 1997, there were stock options outstanding to purchase an
aggregate of 7,652,920 shares of Common Stock, of which 7,552,320 options are
currently exercisable. Additionally, 6,617,920 of the outstanding options were
registered on a Form S-8 which was effective upon filing. As of August 29, 1997,
there were warrants outstanding to purchase an aggregate of 175,256 shares of
Common Stock, of which 35,256 warrants are currently exercisable. In addition,
the Company has agreed to sell to the Representative or its designees, for
nominal consideration, the Representative Warrants to purchase certain shares of
Common Stock. See "Underwriting."

The holders of the Company's 10% Convertible Notes can convert such notes
into Common Stock at the lesser of 82% of the average closing bid price for the
immediately preceding seven trading days or $9.00. As of August 29, 1997, such
holders have converted $800,000 of the $4,000,000 principal amount of
Convertible Notes, for an aggregate of 102,555 shares of Common Stock. On the
date of such conversion, the holders received warrants to purchase 10,256 shares
of Common Stock.

Certain minority shareholders of Airseal West, a majority owned subsidiary
of the Company, have the right to exchange their Airseal West common stock for
shares of Company Common Stock based on an exchange rate to be determined by
Airseal West's pre-tax earnings for the year prior to such exchange.

Holders of approximately 262,295 shares of Common Stock, and holders of
1,210,256 options or warrants to purchase Common Stock are entitled to certain
rights with respect to the registration of such shares under the Securities Act.
Under the terms of an agreement between the Company and such holders, if the
Company proposes to register any of its securities under the Securities Act,
either for its own account or the account of other security holders exercising
registration rights, the holders are entitled to notice of such registration and
are entitled to include shares of such Common Stock therein; the registration
rights provide, however, among other conditions, that the underwriters of any
offering have the right to limit the number of such shares included in such
registration. In addition, the shareholders benefiting from these rights may
require the Company, on not more than one occasion, to file a registration
statement under the Securities Act with respect to such shares, on Form S-3, if
such Form is available to the Company, subject to certain conditions and
limitations. The minority shareholders of Airseal West described above and
various other individuals who were sellers in Flanders' acquisition of
Precisionaire and Air Seal, will receive registration rights if and when they
acquire Company Common Stock pursuant to the terms of their agreements with the
Company. A total of 674,590 shares will become eligible for registration if
earned by the Precisionaire and Air Seal sellers.

On July 3, 1997, the Company filed a registration statement on Form S-3,
which was declared effective on September 3, 1997, registering 4,773,519 shares
of Common Stock for resale by certain selling securityholders pursuant to the
Company's obligation contained in written agreements with such selling
securityholders. The selling securityholders may sell the registered shares
without restriction and they are not restricted as to the price or prices at
which they may sell their Common Stock. Sales of the shares at less than market
prices may depress the market price of the Company's Common Stock. Moreover, the
selling securityholders are not restricted as to the number of shares which may
be sold at any one time, and it is possible that a significant number of shares
could be sold at the same time.

On July 21, 1997, the Company filed a registration statement on Form S-8
registering shares underlying options under the Plans. A total of 8,800,000
shares of Common Stock underlying such options are registered on the Form S-8
which was effective upon filing. As of August 29, 1997, a total of 6,637,120
options have been granted under the Plans, 19,200 of which have been exercised
or canceled. Upon exercise of the options under the Plans, certain
non-affiliates of the Company may sell the related shares without restriction
other than any necessary compliance with the Company's insider trading policy.
Additionally, certain affiliates of the Company may sell the shares obtained
upon exercise of the options pursuant to Rule 144 and the Company's insider
trading policy.

The Company makes no prediction as to the effect, if any, that future sales
of shares or the availability of shares for future sale will have on the
prevailing market price of the Common Stock. Sales of substantial amounts of the
Company's Common Stock in the public market or the perception that such sales
could occur could have an adverse affect on the prevailing market price of the
Common Stock.

48
<PAGE> 49

UNDERWRITING

The Underwriters named below (the "Underwriters"), for whom Raymond James &
Associates, Inc. and Cleary Gull Reiland & McDevitt Inc. are acting as
Representatives, have agreed, subject to the terms and conditions contained in
the Underwriting Agreement (the "Underwriting Agreement") to purchase, and the
Company and the Selling Shareholder have agreed to sell to the Underwriters, on
a firm commitment basis, the respective number of Shares set forth opposite
their names:

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Raymond James & Associates, Inc............................. 3,630,000
Cleary Gull Reiland & McDevitt Inc.......................... 1,210,000
Bear, Stearns & Co. Inc..................................... 130,000
Cowen & Company............................................. 130,000
A.G. Edwards & Sons, Inc.................................... 130,000
Hambrecht & Quist LLC....................................... 130,000
Lehman Brothers Inc......................................... 130,000
NationsBanc Montgomery Securities, Inc...................... 130,000
Oppenheimer & Co., Inc...................................... 130,000
PaineWebber Incorporated.................................... 130,000
Schroder & Co. Inc.......................................... 130,000
Brean Murray & Co., Inc..................................... 65,000
First Analysis Securities Corporation....................... 65,000
Interstate/Johnson Lane Corporation......................... 65,000
Piper Jaffray Inc........................................... 65,000
The Robinson-Humphrey Company, LLC.......................... 65,000
Wheat, First Securities, Inc................................ 65,000
---------
Total Underwriters (17)........................... 6,400,000
=========
</TABLE>

The Underwriters are committed to purchase 6,400,000 Shares offered hereby,
if any of the Shares are purchased. The Underwriting Agreement provides that the
obligations of the several Underwriters are subject to the conditions precedent
specified therein.

The Company has been advised by the Representatives that the Underwriters
initially propose to offer the Shares to the public at the public offering price
set forth on the cover page of this Prospectus and may allot to certain dealers
who are members of the National Association of Securities Dealers, Inc. ("NASD")
concessions not in excess of $.24 per Share, of which amount a sum of not in
excess of $.10 per Share may in turn be reallowed by such dealers to other
dealers. After the commencement of the Offering, the public offering price,
concessions and reallowances may be changed. The Representatives have informed
the Company that they do not expect sales to discretionary accounts by the
Underwriters to exceed five percent of the securities offered by the Company
hereby.

The Company and Selling Shareholder have granted to the Underwriters an
option, exercisable within 30 days of the date of the Offering to purchase from
the Company and Selling Shareholder an additional 960,000 shares on the same
terms and conditions of the Offering for the sole purpose of covering over-
allotments, if any.

The Company has agreed to indemnify the Underwriters against certain
liabilities.

Steven R. Clark and Robert R. Amerson, officers and directors of the
Company, have agreed not to, directly or indirectly, issue, offer to sell, sell,
grant an option for the sale of, transfer, assign, or otherwise dispose of any
securities issued by the Company, including shares of Common Stock or securities
convertible into or exchangeable or exercisable for or evidencing any right to
purchase or subscribe for any shares of Common Stock for a period of 180 days
from the effective date of the Registration Statement (the "Lock-Up Period"),
without the prior written consent of Raymond James & Associates, Inc. An
appropriate legend shall be marked on the face of certificates representing all
such securities. The Company has also agreed, for a period of 180 days from the
effective date of the Registration Statement, not to issue, offer to sell, sell
or grant options to purchase securities of the Company, other than pursuant to
the LTI Plan or Director Option Plan,

49
<PAGE> 50

or except in connection with an acquisition, without the prior written consent
of Raymond James & Associates, Inc.

In connection with the Offering, the Company has agreed to issue and sell
to the Representatives and/or their designees, at the closing of the proposed
underwriting, for nominal consideration, five year Representative Warrants to
purchase 400,000 shares of Common Stock. The Representative Warrants are
exercisable at any time during a period of four years commencing one year from
the effective date of the Registration Statement at a price of 120% of the
initial public offering price per share of Common Stock and are restricted from
sale, transfer, hypothecation for a period of twelve months from the effective
date of the Registration Statement, except to officers of the Representatives.
The Representative Warrants contain anti-dilution provisions providing for
adjustment of the number of shares of Common Stock and exercise price under
certain circumstances. The Representative Warrants grant to the holders thereof
and to the holders of the underlying securities certain rights of registration
of the securities underlying the Representative Warrants.

The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreements which are filed as exhibits to the Registration
Statement. See "Available Information."

In connection with this Offering, certain Underwriters and selling group
members or their affiliates that currently act as market makers for the Common
Stock may engage in "passive market making" in the Common Stock on the Nasdaq
National Market in accordance with Rule 10b-6A under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Rule 10b-6A permits, upon the
satisfaction of certain conditions, Underwriters and selling group members
participating in a distribution that are also Nasdaq market makers in the
security being distributed to engage in limited market making transactions
during the period when Rule 10b-6A under the Exchange Act would otherwise
prohibit such activity. In general, under Rule 10b-6A any Underwriter or selling
group member engaged in passive market making in the Common Stock (i) may not
effect transactions in, or display bids for, the Common Stock at a price that
exceeds the highest bid for the Common Stock displayed on Nasdaq by a market
maker that is not participating in the distribution of the Common Stock, (ii)
may not have net daily purchases of the Common Stock that exceed 30% of its
average daily trading volume in the Common Stock for the two full consecutive
calendar months immediately preceding the filing date of the Registration
Statement of which this Prospectus forms a part, and (iii) must identify its
bids as bids made by a passive market maker.

EXPERTS

The consolidated financial statements and schedules of the Company for the
periods indicated, included in this Prospectus and Registration Statement, have
been audited by McGladrey & Pullen, LLP, independent auditors, for the periods
indicated, in their reports which appear elsewhere herein and in the
Registration Statement, and are included herein in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing. The
Financial Statements and schedules of Precisionaire included in this Prospectus
and Registration Statement have been audited by Arthur Andersen & Co., LLP,
independent auditors, for the periods indicated in their reports which appear
elsewhere herein and in the Registration Statement and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.

LEGAL MATTERS

The law firm of Snell & Wilmer L.L.P., Salt Lake City, Utah, has acted as
counsel to the Company in connection with this Offering and will render an
opinion as to the legality of the Shares being offered hereby. Schifino &
Fleischer, P.A., Tampa, Florida, has acted as counsel to the Underwriters in
connection with the Offering.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth

50
<PAGE> 51

Street, N.W., Washington, D.C. 20549, and at its regional offices located at 7
World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission also maintains a web site (http://www.sec.gov) that contains reports,
proxy statements and other information regarding registrants, such as the
Company, that file electronically with the Commission. The Company's Common
Stock is traded on Nasdaq, and information concerning the Company may be
inspected and copied at the offices of the National Association of Securities
Dealers, Inc., located at 1735 K Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a Registration Statement under
the Securities Act of 1933, as amended, relating to this Prospectus. This
Prospectus does not contain all of the information set forth in the Registration
Statement, and the exhibits thereto, certain parts of which are omitted in
accordance with the Rules and Regulations of the Commission. For further
information pertaining to the Shares hereby offered and to the Company,
reference is made to the Registration Statement, including exhibits filed as
part thereof, copies of which may be obtained from the Public Reference Section
of the Commission, Washington, D.C. 20549 at prescribed rates.

The Company intends to furnish each year to its shareholders an annual
report containing financial statements audited by its certified public
accountants. The Company may, from time to time, also furnish to its
shareholders interim reports, as determined by management.

51
<PAGE> 52

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements of Flanders Corporation
Independent Auditor's Report.............................. F-2
Audited Consolidated Financial Statements................. F-3
Independent Auditors Report on the Supplemental
Schedule............................................... F-23
Supplemental Schedule II.................................. F-24
Unaudited Consolidated Condensed Interim Financial
Statements............................................. F-25

Financial Statements of Precisionaire, Inc.
Report of Independent Certified Public Accountants........ F-32
Audited Financial Statements.............................. F-33
</TABLE>

F-1
<PAGE> 53

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
Flanders Corporation
Washington, North Carolina

We have audited the accompanying consolidated balance sheets of Flanders
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Flanders
corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.

/s/ MCGLADREY & PULLEN, LLP
--------------------------------------
McGladrey & Pullen, LLP
New Bern, North Carolina
February 7, 1997, except for the
second paragraph of Note 8 and
the first paragraph of Note 23 as to
which the date is March 10, 1997
and the second paragraph
of Note 23 as to which
the date is September 11, 1997.

F-2
<PAGE> 54

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,390,411 $ 2,973,797
Restricted cash (Note 2).................................. 8,000,005 --
Receivables:
Trade, less allowance for doubtful accounts: 1996
$346,480; 1995 $148,000 (Note 8)..................... 17,906,879 7,243,557
Related party (Note 17) 905,930 --
Other.................................................. 786,811 321,356
Inventories (Notes 3 and 8)............................... 9,894,707 2,321,367
Deferred taxes (Note 13).................................. 920,520 137,961
Other current assets...................................... 687,524 46,586
----------- -----------
Total current assets.............................. 41,492,787 13,044,624
----------- -----------
Other assets (Note 4)....................................... 909,307 333,542
Intangible assets (Notes 5 and 8)........................... 14,016,691 --
Property and equipment, net (Notes 6 and 8)................. 30,099,626 5,151,063
----------- -----------
$86,518,411 $18,529,229
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable (Note 8)..................................... $ -- $ 3,890,425
Current maturities of long-term debt (Note 8)............. 4,379,973 454,181
Accounts payable (Note 9)................................. 11,002,587 3,425,022
Accrued expenses (Note 10)................................ 3,540,110 1,166,639
----------- -----------
Total current liabilities......................... 18,922,670 8,936,267
----------- -----------
Long-term debt, less current maturities (Note 8)............ 25,776,295 1,306,584
Convertible debt (Note 11).................................. 4,000,000 --
Deferred taxes (Note 13).................................... 4,466,676 77,961
Committed capital (Notes 2 and 12).......................... 8,000,005 --
Commitments and contingencies (Notes 8, 14, 15, 16, 18, 20
and 22)
Stockholders' equity (Notes 12, 17, 20 and 23)
Preferred stock, no par value, 10,000,000 shares
authorized; none issued................................ -- --
Common stock, $.001 par value; 50,000,000 shares
authorized; issued and outstanding: 1996 15,951,548;
1995 11,433,979........................................ 15,952 11,434
Additional paid-in capital................................ 16,964,713 3,418,671
Retained earnings......................................... 8,372,100 4,778,312
----------- -----------
25,352,765 8,208,417
----------- -----------
$86,518,411 $18,529,229
=========== ===========
</TABLE>

See Notes to Consolidated Financial Statements

F-3
<PAGE> 55

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 30, 1994

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................... $73,056,197 $38,635,810 $26,706,404
Cost of goods sold (Notes 15, 16, 17 and 18)............ 53,597,621 28,953,729 18,845,385
----------- ----------- -----------
Gross profit....................................... 19,458,576 9,682,081 7,861,019
----------- ----------- -----------
Operating expenses (Notes 15, 16, 17 and 18)............ 13,459,721 7,262,668 7,238,609
----------- ----------- -----------
Operating income................................... 5,998,855 2,419,413 622,410
----------- ----------- -----------
Nonoperating income (expense):
Other income.......................................... 975,750 43,852 26,371
Interest expense...................................... (1,203,226) (633,029) (477,822)
----------- ----------- -----------
(227,476) (589,177) (451,451)
----------- ----------- -----------
Income before income taxes......................... 5,771,379 1,830,236 170,959
Income taxes (Note 13).................................. 2,177,591 684,582 176,402
----------- ----------- -----------
Net income (loss).................................. $ 3,593,788 $ 1,145,654 $ (5,443)
=========== =========== ===========
Earnings per weighted average common and common
equivalent share outstanding (Note 21)
Primary............................................... $ 0.21 $ 0.12 $ --
=========== =========== ===========
Fully diluted......................................... $ 0.21 $ 0.12 $ --
=========== =========== ===========
Weighted average common and common equivalent shares
outstanding:
Primary............................................... 17,041,931 9,831,996 9,693,478
=========== =========== ===========
Fully diluted......................................... 18,072,271 9,831,996 9,693,478
=========== =========== ===========
</TABLE>

See Notes to Consolidated Financial Statements

F-4
<PAGE> 56

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 30, 1994

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------- ------------ ----------
<S> <C> <C> <C>
Balance, January 1, 1994................................... $ 9,656 $ 319,348 $3,638,435
Issuance of 49,274 shares of common stock................ 49 21,740 --
Purchase and retirement of 61,630 shares of common
stock................................................. (62) (30,347) --
Net loss................................................. -- -- (5,443)
------- ------------ ----------
Balance, December 30, 1994................................. 9,643 310,741 3,632,992
Issuance of 378,411 shares of common stock............... 378 165,543 --
Issuance of 1,100,000 shares of common stock related to
December 11, 1995 Private Placement................... 1,100 2,429,004 --
Reverse acquisition of Elite Acquisitions, Inc........... 334 -- (334)
Purchase and retirement of 21,197 shares of common
stock................................................. (21) (11,617) --
Indemnification of claim by Stockholders................. -- 525,000 --
Net income............................................... -- -- 1,145,654
------- ------------ ----------
Balance, December 31, 1995................................. 11,434 3,418,671 4,778,312
Issuance of 3,371,204 shares of common stock related to
the Private Offerings................................. 3,372 18,760,986 --
Less committed capital (Note 2).......................... -- (8,000,005) --
Issuance of 1,036,885 shares of common stock related to
the Acquisitions...................................... 1,037 (1,037) --
Valuation and release from escrow of 282,295 shares of
common stock related to the Acquisitions.............. -- 2,681,803 --
Issuance of 96,280 shares of common stock upon exercise
of warrants........................................... 96 240,604 --
Issuance of 13,200 shares of common stock upon exercise
of options............................................ 13 32,987 --
Income tax benefit from stock options exercised.......... -- 37,433 --
Fair value of warrants issued with convertible debt...... -- 33,971 --
Receivables secured by stock related to exercise of
warrants.............................................. -- (240,700) --
Net income............................................... -- -- 3,593,788
------- ------------ ----------
Balance, December 31, 1996................................. $15,952 $ 16,964,713 $8,372,100
------- ------------ ----------
</TABLE>

See Notes to Consolidated Financial Statements

F-5
<PAGE> 57

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 30, 1994

<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................... $ 3,593,788 $ 1,145,654 $ (5,443)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 1,485,740 636,178 631,476
Stock compensation................................ -- -- 12,500
Provision for doubtful accounts................... (120,423) 108,000 (25,500)
Allowance for obsolete inventory.................. (115,000) (45,000) (69,134)
(Gain) loss on sale of property and equipment..... (54,002) -- 18,091
(Gain) loss on disposition of cash value of life
insurance....................................... (24,600) -- --
Realized gain on sale of marketable securities.... 12,123 -- (32,941)
Deferred income taxes............................. (113,520) 160,000 70,000
Indemnification of claim by stockholders.......... -- 375,000 --
Change in assets and liabilities:
Receivables..................................... (871,440) (1,937,752) (1,730,577)
Inventories..................................... (504,576) 790,947 (1,209,802)
Other current assets............................ (520,092) 77,763 (95,573)
Accounts payable................................ (997,168) (339,999) 1,443,504
Accrued expenses................................ 302,682 158,591 (511,765)
Income tax payable.............................. (460,334) 481,157 (65,307)
------------ ----------- -----------
Net cash provided by (used in) operating
activities................................. 1,613,178 1,610,539 (1,570,471)
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired................... (31,971,448) -- --
Purchase of equipment................................ (2,501,308) (611,713) (1,052,669)
Proceeds from sale of marketable equity securities... 823,396 -- 580,918
Proceeds from sale of property and equipment......... 226,234 -- 82,620
Proceeds from disposition of cash value of life
insurance......................................... 884,895 -- --
Disbursements on notes receivables, stockholders..... (905,930) -- --
Proceeds from repayment of notes receivable,
stockholders...................................... 458,428 -- --
Disbursements on trademarks and trade names.......... (17,246) -- --
Disbursement on deferred debt expense................ -- -- (9,600)
Purchase of real estate held for sale................ -- -- (60,486)
Increase in cash value of life insurance............. (25,272) (52,524) --
------------ ----------- -----------
Net cash used in investing activities........ (33,028,251) (664,237) (459,217)
------------ ----------- -----------
</TABLE>

--continued--
See Notes to Consolidated Financial Statements

F-6
<PAGE> 58

FLANDERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 30, 1994

<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on revolving credit agreement............. (58,637,083) (38,562,227) (27,064,360)
Proceeds from revolving credit agreement........... 67,618,777 38,329,791 28,369,813
Proceeds from long-term borrowings................. 9,340,200 -- 526,932
Principal payments on long-term borrowings......... (2,782,871) (481,147) (437,786)
Proceeds from issuance of common stock, net of
committed capital............................... 11,894,353 2,596,024 9,289
Disbursement of loan origination fees.............. (634,689) -- --
Purchase of common stock for retirement............ -- (11,638) (30,409)
Proceeds from exercise of options and warrants..... 33,000 -- --
Proceeds from issuance of convertible debt......... 4,000,000 -- --
------------ ------------ ------------
Net cash provided by financing activities....... 30,831,687 1,870,803 1,373,479
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents................................... (583,386) 2,817,105 (656,209)
CASH AND CASH EQUIVALENTS
Beginning.......................................... 2,973,797 156,692 812,901
------------ ------------ ------------
Ending............................................. $ 2,390,411 $ 2,973,797 $ 156,692
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest........................................ $ 732,976 $ 667,117 $ 446,019
============ ============ ============
Income taxes.................................... $ 2,293,555 $ 43,425 $ 188,934
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Fair value of warrants issued with convertible
debt.......................................... $ 33,971 $ -- $ --
============ ============ ============
Issuance of common stock as compensation........ $ -- $ -- $ 12,500
============ ============ ============
Valuation and release from escrow of 282,295
shares of common stock related to the
Acquisitions.................................. $ 2,681,803 $ -- $ --
============ ============ ============
Commissions payable on gross proceeds from
issuance of common stock...................... $ 1,130,000 $ -- $ --
============ ============ ============
Issuance of 96,280 shares of common stock upon
exercise of warrants in exchange for
receivable.................................... $ 240,700 $ -- $ --
============ ============ ============
Capital lease obligation incurred for use of
property and equipment........................ $ 284,250 $ 350,000 $ --
============ ============ ============
Indemnification of claims by Officers and
Directors (Note 17)............................. $ -- $ 525,000 $ --
============ ============ ============
ACQUISITION OF COMPANIES (Note 14)
Working capital acquired, net of cash and cash
equivalents of $468,204....................... $ 4,677,588 $ -- $ --
Fair value of other assets, acquired,
principally property and equipment............ 25,152,612 -- --
Goodwill........................................ 10,823,053 -- --
Long-term debt assumed.......................... (8,681,805) -- --
------------
$ 31,971,448 $ -- $ --
============ ============ ============
</TABLE>

See Notes to Consolidated Financial Statements

F-7
<PAGE> 59

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of business: Flanders Corporation (the "Company") primarily
designs, manufactures and markets a broad range of air filtration products
ranging from high performance laminar flow High Efficiency Particulate Air
filters and charcoal filters for semiconductor manufacturing facilities, to
residential furnace filters. The Company's air filtration products are utilized
by many industries, including those associated with commercial and residential
heating, ventilation and air conditioning systems (commonly known as "HVAC"
systems), semiconductors, ultra-pure materials processing, biotechnology,
pharmaceuticals, synthetics, nuclear power and nuclear materials processing. The
Company also provides installation supervision, filter testing, and
certification services for installed systems. The Company sells its products
primarily to cleanroom contractors, industrial users, heating, ventilation and
air-conditioning wholesalers and retailers in North America, based on credit
terms established for individual customers.

Principles of consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries, all of which are wholly owned.
One of the Company's subsidiaries has a subsidiary which was 63.0 percent owned
for the years ended December 31, 1996 and 1995. All material intercompany
accounts and transactions have been eliminated in consolidation.

Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and cash equivalents: The Company maintains its cash in bank deposit
accounts, which at times may exceed federally insured limits. The Company has
not experienced any losses in such accounts. The Company believes it is not
exposed to any significant credit risk on cash and cash equivalents. For
purposes of reporting cash flows, the Company considers all cash accounts which
are not subject to withdrawal restrictions and certificates of deposit which
have an original maturity of three months or less to be cash equivalents.

Inventories: Inventories are valued at lower of cost (first-in, first-out
method) or market.

Goodwill: The Company has classified as goodwill the cost in excess of
fair value of the net assets (including tax attributes) of companies acquired in
purchase transactions. Goodwill is being amortized on a straight line basis over
40 years. At each balance sheet date, the Company evaluates goodwill for
impairment by comparing expectations of non-discounted future cash flows
excluding interest costs with the carrying value of goodwill for each subsidiary
having a material goodwill balance. Based upon its most recent analysis, the
Company believes that no impairment of goodwill exists at December 31, 1996.

Trademarks and trade names: Trademarks and trade names are being amortized
on a straight line basis over 17 years. At each balance sheet date, the Company
evaluates the value of trademarks and tradenames for impairment by comparing
expectations of non-discounted future cash flows excluding interest costs with
the carrying value of trademarks and trade names for each trademark or trade
name having a material unamortized balance. Based upon its most recent analysis,
the Company believes that no impairment of trademarks and trade names exists at
December 31, 1996.

Property and equipment: Property and equipment are stated at cost.
Depreciation is computed by the straight-line method over estimated useful
lives. Amortization of capital leases is included in depreciation expense. The
carrying amount of all long-lived assets is evaluated periodically to determine
if adjustment to the depreciation and amortization period or to the unamortized
balance is warranted. Based upon its most recent analysis, the Company believes
that no impairment of property and equipment exists at December 31, 1996.

Revenue recognition: All sales are recognized when shipments are made to
customers.

F-8
<PAGE> 60

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Export sales: The Company sells some products for end users outside of the
United States through domestic specialty cleanroom contractors. These sales are
accounted for as domestic sales. The Company also sells products through foreign
distributors, primarily in Europe, and a wholly owned subsidiary, which sells to
customers in the Far East. Sales through foreign distributors and its wholly
owned subsidiary total less than 5% of net sales.

Self insurance expenses: The Company has elected to self-insure its
employees' health and accident insurance up to a maximum of $30,000 to $80,000
per occurrence, depending on the subsidiary. Expenses related to health claims
are accrued during the period when the Company is notified of a claim or
probable claim under the policy, including incurred but not reported claims, and
adjusted when the actual claim is submitted.

Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.

Research and development: Research and development expenses and ongoing
costs associated with improving existing products and manufacturing processes
are expensed in the period incurred. Costs associated with research and
development amounted to approximately $460,000, $120,000 and $158,000 for the
years ended December 31, 1996, December 31, 1995 and December 30, 1994,
respectively.

Reclassifications: Certain account balances for the years ended December
31, 1995 and December 30, 1994 have been reclassified with no effect on net
income (loss) or retained earnings to be consistent with the classification
adopted for the year ended December 31, 1996.

NOTE 2. RESTRICTED CASH AND COMMITTED CAPITAL

At December 31, 1996, $8,000,005 of cash which was raised through a private
placement in September and October of 1996 was held in escrow and was subject to
a potential right of rescission in favor of two investors if a Registration
Statement under the Securities Act of 1933 registering certain shares held by
the two investors was not declared effective by January 15, 1997. This amount is
reflected on the balance sheet at December 31, 1996 as "Restricted cash" and
"Committed capital." The $8,000,005 was reclassified to "Cash" and "Additional
paid-in capital" on January 6, 1997, the date such registration was declared
effective.

NOTE 3. INVENTORIES

Inventories consists of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Finished goods.............................................. $3,321,713 $ 198,607
Work in progress............................................ 1,490,438 879,987
Raw materials............................................... 5,127,556 1,302,773
---------- ----------
9,939,707 2,381,367
Less allowance for obsolete raw materials................... 45,000 60,000
---------- ----------
$9,894,707 $2,321,367
========== ==========
</TABLE>

F-9
<PAGE> 61

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4. OTHER ASSETS

Other assets consist of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Real estate held for sale................................... $266,486 $266,486
Cash value of officers' life insurance...................... 77,796 52,524
Deferred expenses, net of accumulated amortization of
$104,962 for 1996 and $17,814 for 1995.................... 565,025 14,532
-------- --------
$909,307 $333,542
======== ========
</TABLE>

NOTE 5. INTANGIBLE ASSETS

Intangible assets consist of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Goodwill, net of accumulated amortization of $85,901........ $13,012,439 $ --
Trademarks and trade names, net of accumulated amortization
of $17,098................................................ 1,004,252 --
----------- -----------
$14,016,691 $ --
=========== ===========
</TABLE>

NOTE 6. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 1996 and
1995:

<TABLE>
<CAPTION>
ESTIMATED
1996 1995 USEFUL LIVES
----------- ---------- ------------
<S> <C> <C> <C>
Land............................................. $ 638,465 $ 125,595
Buildings, including assets acquired under
capital lease: 1996 $2,974,000; 1995 $0........ 15,049,245 5,534,094 15-30 years
Machinery and equipment, including assets
acquired under capital lease: 1996 $779,321;
1995 $20,906................................... 16,640,939 3,637,497 10 years
Office equipment............................... 2,718,124 1,106,730 5 years
Vehicles....................................... 557,988 201,065 5 years
Construction in progress....................... 1,361,682 136,759
----------- ----------
36,966,443 10,741,740
Less accumulated depreciation, including
amortization applicable to assets acquired
under capital lease: 1996 $129,152; 1995
$20,906..................................... 6,866,817 5,590,677
----------- ----------
$30,099,626 $5,151,063
=========== ==========
</TABLE>

Total depreciation expense charged to operations totaled $1,382,741,
$633,226 and $628,524 for the years ended December 31, 1996, December 31, 1995
and December 30, 1994, respectively.

NOTE 7. NOTE PAYABLE

The Company had prime plus 0.75 percent and prime plus 1.00 percent
revolving loan agreements with a bank, which provided for maximum borrowings
based on the lesser of defined borrowing bases and $5,000,000 and $1,500,000,
respectively, at December 31, 1995. The weighted average interest rate at
December 31, 1995 was 9.3 percent. The lender's prime rate at December 31, 1995
was 8.50 percent.

F-10
<PAGE> 62

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8. PLEDGED ASSETS AND LONG-TERM DEBT

A summary of the Company's long-term debt, and collateral pledged thereon,
consists of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
18% subordinated debentures, interest and principal due and
payable on the earlier of September 17, 1999 or the
release of $4,000,005 of cash to the Company which was
held in escrow at December 31, 1996 pending the
effectiveness of a registration statement of the Company
on or before January 15, 1997. The registration statement
was declared effective on January 6, 1997. See Notes 2 and
23........................................................ $ 2,500,000 $ --
Prime plus 1.0 percent revolving credit agreement with a
bank due September 1998, collateralized by a first
security interest on receivables, inventory, substantially
all machinery and equipment, securities and general
intangibles.(A)........................................... 15,942,145 --
Prime plus 1.5 percent note payable to a bank due in
quarterly payments of $641,700 plus interest due September
1998, collateralized by a first security interest on
receivables, inventory, substantially all machinery and
equipment, securities, common stock of subsidiaries and
general intangibles. This note is subject to mandatory
prepayment provisions as provided in the loan
document.(A).............................................. 4,869,130 --
Prime plus 0.25% notes payable to a mortgage company due in
monthly payments of $23,110 including interest through
January 2006, at which time all unpaid principal is due,
collateralized by a deed of trust on land and buildings
with a carrying value of $3,777,408....................... 2,154,497 --
10.125 percent note payable to a mortgage company, due in
monthly payments of $13,775, including interest through
July 2004, collateralized by a first deed of trust on real
property with a carrying value of $1,106,805 and a second
security interest in certain machinery and equipment...... 864,953 938,576
Note payable to a bank with interest at the One Month London
Interbank Offered Rate (LIBOR) plus 2.67%, due in monthly
payments of $5,670 plus interest through March 2001,
collateralized by equipment with a carrying value of
$316,983.................................................. 289,170 --
7.058 percent fixed rate capital lease obligation, due in
monthly payments of $34,429, including interest through
September 2006, collateralized by land and buildings with
a carrying value of $2,924,433............................ 2,906,202 --
</TABLE>

F-11
<PAGE> 63

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Various contracts payable including capital lease
obligations; interest rates from 5.9 percent to 10.25
percent and 7 percent to 10 percent at December 31, 1996
and 1995, respectively, collateralized by certain
equipment; due in monthly payments of approximately
$24,000 including interest at December 31, 1996 and
monthly and quarterly payments of approximately $2,000 and
$2,665, respectively, including interest at December 31,
1995 and expiring at various times through September
2001...................................................... 630,170 822,189
----------- ----------
30,156,268 1,760,765
Less current maturities..................................... 4,379,973 454,181
----------- ----------
$25,776,295 $1,306,584
=========== ==========
</TABLE>

- ---------------

(A) The lender's prime rate at December 31, 1996 was 8.25 percent. The revolving
credit agreement provides for maximum borrowings based on the lesser of
defined borrowing bases and $25,000,000 at December 31, 1996. The term loan
agreement with the same bank provides for maximum borrowings of $6,500,000.
The weighted average interest rate at December 31, 1996 was 9.4 percent. The
agreements expire in September 1998. Both notes are collateralized by a
first security interest on receivables, inventory, substantially all
machinery and equipment, securities, general intangibles and common stock of
the subsidiaries. Balances due on the revolving loan agreement and the term
loan agreement have been classified as long-term debt according to the
provisions of Statement of Financial Accounting Standards No. 6,
Classification of Short-Term Obligations Expected to be Refinanced, since
subsequent to December 31, 1996, the Company completed an underwritten
public offering for the purpose of repaying the debt on these loan
agreements (Note 23). In connection with the revolving and term loan
agreements, the Company has agreed to certain restrictive covenants which
include, among other things, the lender's approval to pay dividends and
maintenance of certain financial ratios at December 31, 1996, including
tangible net worth of $20,290,000, debt to worth ratio of not more than 2.5
to 1.0, and various net worth covenants for the individual subsidiaries.

The Company was in violation of certain covenants with its lenders as of
December 31, 1996; however, these violations have been waived by the lenders
through January 1, 1998.

Aggregate maturities required on long-term debt as of December 31, 1996 are
due in future years as follows:

<TABLE>
<CAPTION>
FISCAL YEARS ENDING
- -------------------
<S> <C>
1997................................................... $ 4,379,973
1998................................................... 20,306,761
1999................................................... 637,460
2000................................................... 649,116
2001................................................... 565,988
Later years............................................ 3,616,970
-----------
$30,156,268
===========
</TABLE>

F-12
<PAGE> 64

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a schedule of future minimum lease payments under the
capital leases together with the present value of the net minimum lease payments
as of December 31, 1996:

<TABLE>
<CAPTION>
FISCAL YEARS ENDING
-------------------
<S> <C>
1997........................................................ $ 747,076
1998........................................................ 538,790
1999........................................................ 534,306
2000........................................................ 498,030
2001........................................................ 438,811
Later years................................................. 1,964,581
----------
Total minimum lease payments................................ 4,721,594
Less amounts representing interest.......................... 1,206,747
----------
$3,514,847
==========
</TABLE>

NOTE 9. ACCOUNTS PAYABLE

Accounts payable consist of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Accounts payable, trade.................................... $ 8,655,757 $2,940,716
Commissions payable........................................ 2,007,761 460,092
Customer deposits.......................................... 339,069 24,214
----------- ----------
$11,002,587 $3,425,022
=========== ==========
</TABLE>

NOTE 10. ACCRUED EXPENSES

Accrued expenses consists of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Payroll (Note 15).......................................... $ 966,465 $ 277,911
Insurance, including workers compensation.................. 1,118,711 --
Management fees, related party (Note 17)................... -- 50,000
Sales and use taxes........................................ 98,307 92,940
Interest................................................... 502,134 31,884
Income taxes payable (Note 13)............................. 478,713 481,157
Other...................................................... 375,781 232,747
----------- ----------
$ 3,540,110 $1,166,639
=========== ==========
</TABLE>

NOTE 11. CONVERTIBLE NOTES

In September 1996, the Company issued $4,000,000 of 10% Convertible Notes
pursuant to Regulation S to certain unrelated offshore investors. The notes are
payable on September 20, 1999 and are convertible at any time commencing
forty-one (41) days after issuance into shares of common stock at a conversion
price equal to the lower of (i) eighty-two percent (82%) of the average closing
bid price for the seven (7) trading days immediately preceding the conversion
date, or (ii) $9.00; provided, however, that in no event shall the conversion
price be less than $5.00; provide further, that in no event shall the holder of
the 10% Convertible Notes be entitled to convert any portion of such notes if
such action would result in beneficial ownership by a holder and its affiliates
of more than 4.9% of the outstanding shares of common stock. If the average
closing bid price of the common stock over any continuous seven day trading
period is less than $7.38 per share, the Company may redeem the convertible
notes at a price equal to 115% of the outstanding principal amount of

F-13
<PAGE> 65

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the notes. As of December 31, 1996, no notes had been converted. In connection
with the 10% Convertible Notes, certain unrelated offshore investors were given
a contractual right to receive, on the date of the conversion of the Notes into
common stock, warrants to purchase such number of shares of common stock equal
to ten percent (10%) of the number of common shares issued upon any such
conversion. The exercise price of the warrants is equal to the amount per share
at which the 10% Convertible Notes were converted into common stock.

NOTE 12. STOCKHOLDERS' EQUITY

During the year ended December 31, 1996, the Company raised $18,764,358
through the sale of 3,371,204 shares of common stock in three private placements
to accredited investors. Net proceeds, after commissions and expenses, for each
offering consisted of: (i) $10,352,131 from an offering of 1,333,889 shares of
its common stock at $9.00 per share completed in October 1996 (the "October
Offering"); (ii) $7,339,573 from an offering of 1,537,315 shares of its common
stock at $5.00 per share, completed in June 1996; and (iii) $1,072,654 from an
offering of 500,000 shares of its common stock at $2.50 per share completed in
January 1996. At December 31, 1996, $8,000,005 of the funds raised in the
October Offering was subject to certain potential rights of rescission in favor
of two investors, such that if a Registration Statement under the Securities Act
of 1933 registering certain shares held by the two investors was not declared
effective by January 15, 1997, the investors would have had the right to return
their shares to the Company for the original price of the shares; such a
Registration Statement was declared effective on January 6, 1997, and hence
these potential rights of rescission were never realized.

On December 29, 1995, the Company completed a private placement offering of
1,100,000 shares of the Company's common stock at $2.50 per share to accredited
investors. The net proceeds to the Company after commissions and expenses from
the offering totaling $319,896 amounted to $2,430,104.

The President and Vice President/Chief Financial Officer of the Company
have options to purchase 3,321,021 and 2,214,014 shares, respectively, of the
Company's common stock from two stockholders of the Company at an option price
of $2.50 per share. The options expire December 15, 1997.

NOTE 13. INCOME TAX MATTERS

The components of income tax expense for the years ended December 31, 1996,
December 31, 1995 and December 30, 1994 are as follows:

<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Current:
Federal......................................... $1,750,374 $419,492 $106,402
State........................................... 540,737 105,090 --
---------- -------- --------
2,291,111 524,582 106,402
---------- -------- --------
Deferred:
Federal......................................... (42,509) 130,000 40,000
State........................................... (71,011) 30,000 30,000
---------- -------- --------
(113,520) 160,000 70,000
---------- -------- --------
$2,177,591 $684,582 $176,402
========== ======== ========
</TABLE>

F-14
<PAGE> 66

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate of 34% to pretax income for years
ended December 31, 1996, December 31, 1995 and December 30, 1994 due to the
following:

<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense................... $1,962,269 $622,280 $ 58,126
Increase (decrease) in income taxes resulting
from:
Nondeductible expenses.......................... 33,158 50,980 140,037
State income taxes net of federal tax benefit... 152,460 89,159 19,818
Change in valuation allowance................... 22,822 (32,490) (23,680)
Exercise of stock options....................... (37,433) -- --
Benefit of income taxed at lower rates.......... -- -- (7,309)
Tax credits..................................... (10,914) (45,347) (10,590)
Other........................................... 55,229 -- --
---------- -------- --------
$2,177,591 $684,582 $176,402
========== ======== ========
</TABLE>

Net deferred tax assets and liabilities consist of the following components
as of December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
----------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance........................... $ 48,064 $ 46,150
Inventory allowances.................................... 284,930 107,786
Accrued expenses........................................ 541,314 --
Loss carryforwards...................................... 85,009 --
----------- --------
959,317 153,936
Less valuation allowance................................ 38,797 15,975
----------- --------
920,520 137,961
Deferred tax liabilities:
Property and equipment.................................. 4,466,676 77,961
$(3,546,156) $ 60,000
=========== ========
</TABLE>

The components giving rise to the net deferred tax assets and liabilities
described above have been included in the accompanying consolidated balance
sheets at December 31, 1996 and 1995 as follows:

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current assets.............................................. $ 920,520 $ 137,961
Noncurrent liabilities...................................... (4,466,676) (77,961)
----------- -----------
$(3,546,156) $ 60,000
=========== ===========
</TABLE>

NOTE 14. MERGERS AND ACQUISITIONS

On January 22, 1996, Elite Acquisitions, Inc. stockholders approved a
change of domicile reincorporation merger with Flanders Corporation, a newly
formed wholly-owned North Carolina company, whereby Elite Acquisitions, Inc.
would merge with Flanders Corporation in a share for share stock exchange with
Flanders Corporation being the surviving company. The Merger Agreement and
Articles of Merger were effective as of January 29, 1996. As a result of the
merger, the financial statements of Elite Acquisitions, Inc. have been presented
as those of Flanders Corporation and the authorized capitalization of Flanders
Corporation

F-15
<PAGE> 67

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

consisting of 50,000,000 shares of common stock, at a par value of $.001, and
10,000,000 shares of preferred stock, at a par value of $.001, has been
presented as the capital structure of the company.

On May 31, 1996, the Company completed the acquisition of all the
outstanding stock of Charcoal Service Corporation ("CSC"), a competing carbon
filter and containment manufacturer, as well as the land and building on which
CSC operates that was owned by the stockholders of CSC. The total cost of
acquisition, net of cash acquired, was approximately $4,497,000, and up to
100,000 shares of the Company's common stock, which are being held in escrow
pending the evaluation of certain future performance criteria. Upon achieving
certain performance criteria, the common stock will be released from escrow,
valued at the market price on the date of release and will be added to the
goodwill associated with the purchase transaction and amortized over the
remaining amortization period of the respective goodwill asset. The acquisition
was funded by private placement of the Company's common stock which were
completed in June 1996. The effective date of the acquisition is March 1, 1996,
and the Company's financial statements include the operating activities and
assets of CSC from that date. As of December 31, 1996, 20,000 CSC escrow shares
with a market value of $190,000 were released from escrow to the CSC sellers.

On June 15, 1996, the Company completed the acquisition of all the
outstanding stock of Air Seal Filter Housings, Inc. ("Airseal"), as well as the
land and building on which Airseal operates that was owned by the stockholders
of Airseal. The total cost of acquisition, net of cash acquired, was
approximately $2,270,000 and up to 150,000 shares of the Company's common stock,
which are being held in escrow pending the evaluation of certain future
performance criteria. Upon achieving certain performance criteria, the common
stock will be released from escrow, valued at the market price on the date of
release and will be added to the goodwill associated with the purchase
transaction and amortized over the remaining amortization period of the
respective goodwill asset. The acquisition was funded by a private placement of
the Company's common stock completed in June 1996. The effective date of the
acquisition was May 31, 1996, and the Company's financial statements include the
operating activities and assets of Airseal from that date.

On September 23, 1996, the Company acquired all the outstanding stock of
Precisionaire, Inc. ("Precisionaire"), a manufacturer of precision air filters,
containment systems and filtration equipment, as well as a tract of land and a
building on which Precisionaire operates that was owned effectively by the
majority stockholders of Precisionaire. The total cost of acquisition, net of
cash acquired, was approximately $25,205,000 with a post closing valuation
allowance of up to 786,885 shares of the Company's common stock, which are held
in escrow, to be released only if certain performance criteria are met. Upon
achieving certain performance criteria, the common stock will be released from
escrow, valued at the market price on the date of release and added to the
goodwill associated with the purchase transaction and amortized over the
remaining amortization period of the respective goodwill asset. The acquisition
of Precisionaire, Inc. was funded by a private placement of the Company's common
stock, subordinated debentures and convertible debt, closed on October 16, 1996,
a credit facility provided by NationsBank consisting of (1) a revolving credit
facility in the maximum principal amount of $25,000,000 and (2) a term loan
facility in the maximum principal amount of $6,500,000, and the assumption of
approximately $2,200,000 of debt associated with a mortgage on the purchased
land and building. The effective date of the acquisition for financial statement
purposes was September 30, 1996, and the Company's financial statements include
the operating activities and assets of Precisionaire from that date. As of
December 31, 1996, 262,295 Precisionaire escrow shares with a market value of
$2,491,803 were released from escrow to the Precisionaire sellers.

F-16
<PAGE> 68

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Summarized below are the unaudited pro forma results of operations of the
Company as though Precisionaire, CSC and Airseal had been acquired at the
beginning of the fiscal years ended December 31, 1996 and 1995.

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Revenues.................................................... $128,221,517 $107,983,759
============ ============
Net income.................................................. $ 5,678,195 $ 2,718,764
============ ============
Net income per common share, primary........................ $ 0.3 $ 0.20
============ ============
Net income per common share, fully diluted.................. $ 0.3 $ 0.18
============ ============
</TABLE>

NOTE 15. EMPLOYMENT AGREEMENTS AND DISCRETIONARY BONUSES

The Company has employment agreements with its President and Chief
Executive Officer, its Vice President Finance/Chief Financial Officer, and its
Vice President Operations, which expire on various dates from December 2000
through September 2001. In addition to a base salary, the agreements provide for
a termination payment ranging from one hundred to two hundred and fifty percent
of their base compensation in the event the officers' employment is terminated
under various circumstances.

The Company pays discretionary cash bonuses to its employees. The amount of
these cash bonuses included in cost of goods sold and operating expenses totaled
approximately $296,000, $50,000 and $30,000 for the years ended December 31,
1996, December 31, 1995 and December 30, 1994, respectively. During the year
ended December 30, 1994, the Company issued 28,543 shares of common stock with a
value of $12,500 to employees of the Company and charged to operating expenses
with credits to common stock for $28 and paid-in capital for $12,472.

NOTE 16. EMPLOYEE BENEFIT PLANS

Due to the Acquisitions, the Company currently has four defined
contribution 401(k) salary reduction plans intended to qualify under section
401(a) of the Internal Revenue Code of 1986, as amended: One for each of
Flanders Filters, Inc. ("FFI"), CSC, Airpure and Precisionaire (collectively,
the "401(k) Plans"). The Company is in the process of combining the 401(k) Plans
into a single plan. The 401(k) Plans allow employees to defer up to the lesser
of a plan defined limit ranging from 12 percent to 20 percent of their salary,
depending on which of the 401(k) plan the employees participate, or such amount
as determined by the U.S. Secretary of the Treasury, with the Company
contributing an amount determined by its Board of Directors each year. The
Company contributed approximately $44,000, $18,000 and $33,000 to the 401(k)
Plans for the years ended December 31, 1996, December 31, 1995 and December 30,
1994, respectively.

The Company employee benefit program also includes health, accident, dental
and life insurance and disability benefits. The Company has elected to
self-insure the health and accident insurance at an individual maximum of $1
million for several subsidiaries. The Company also maintains a stop loss policy
which covers 100 percent of liability from $30,000 to $1,000,000. A separate
subsidiary maintains a stop loss policy which covers 100 percent of liability
over $80,000 per occurrence. The employer's portion of claims charged to
operations for the years ended December 31, 1996, December 31, 1995 and December
30, 1994 totaled approximately $222,000, $314,000 and $251,000, respectively.

During the year ended December 31, 1996, the Company adopted the Long Term
Incentive Plan ("LTI Plan") to assist the Company in securing and retaining key
employees and consultants. The LTI Plan authorizes grants of incentive stock
options, nonqualified stock options, stock appreciation rights ("SARs"),
restricted stock performance shares and dividend equivalents to officers and key
employees of the Company and outside consultants to the Company. There are
2,000,000 shares of Common Stock reserved for award

F-17
<PAGE> 69

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

under the LTI Plan. During the year ended December 31, 1996, the Company awarded
options to purchase 236,520 shares of common stock under the LTI Plan. See Note
20.

During the year ended December 31, 1996, the Company also awarded options
to purchase a total of 4,000,000 shares of its common stock to two of its
officers and directors and options to purchase a total of 900,000 shares of its
common stock to consultants to the Company. See Note 20

As permitted under generally accepted accounting principles, grants under
the LTI Plan and other grants of options made during the year are accounted for
following APB Opinion No. 25 and related interpretations. Accordingly, no
compensation cost has been recognized for grants under the LTI Plan, since all
options granted had an exercise price at or above the market price of the
Company's common stock on the date of grant. Had compensation cost for the LTI
Plan been determined based on the grant date fair values of awards using the
Black-Scholes option pricing model (the method described in FASB Statement No.
123), reported net income and earnings per common share would have been reduced
to the pro forma amounts shown below for the years ended December 31, 1996 and
1995:

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net income:
As reported............................................... $3,593,788 $1,145,654
Pro forma................................................. $ 765,682 $ 843,243
Primary earnings per share:
As reported............................................... $ 0.21 $ 0.12
Pro forma................................................. $ 0.04 $ 0.09
Fully diluted earnings per share:
As reported............................................... $ 0.21 $ 0.12
Pro forma................................................. $ 0.04 $ 0.09
Weighted average fair value per option of options granted
during the year........................................... $ 0.89 $ 0.20
</TABLE>

In determining the pro forma amounts above, the value of each grant is
estimated at the grant date using the Black-Scholes option pricing method
prescribed in FASB Statement No. 123, with the following assumptions: Dividend
rate of 0%; risk-free interest rates based upon the zero-coupon rate on the date
of grant for the expected life of the option; and expected price volatility
based upon the trading history of a comparable public company during the period
ended on the date of grant. The weighted average for options granted in 1996
were as follows: Dividend rate of 0%; average risk-free interest rate of 5.46%;
average expected lives of 2.4 years; and average expected price volatility of
20.0%.

NOTE 17. RELATED PARTY TRANSACTIONS AND BALANCES

Three of the officers and directors of the Company entered into an
Indemnity Agreement with FFI whereby the officers and directors will
collectively deposit up to $1,500,000 into an escrow fund to indemnify FFI for
the payment of a $525,000 judgment arising from the lawsuits against FFI by
Hartford Casualty Insurance Co. v. Flanders Filters, Inc., case no.
92-CVS-07766; and St. Paul Fire and Marine Insurance Co. v. Flanders Filters,
Inc., case no. 93-CVS-2798, and potential environmental issues at FFI's facility
in Washington, North Carolina (See also Note 22). The indemnification is limited
to $1,500,000 and in no event will any of the individuals named be required to
contribute more than $500,000 each. The indemnification has been recorded as a
contribution to capital for all known amounts, during the period at which the
amount of the claims became known. The officers and directors have complied with
the Agreement whereby payments of $525,000 were made to the respective insurance
companies. Expenses related to the Insurance Companies' claims totaled $0,
$375,000 and $150,000 for the years ended December 31, 1996, December 31, 1995
and December 30, 1994, respectively.

F-18
<PAGE> 70

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ABB Partnership, as landlord, and Flanders Airpure Products, a subsidiary
of FFI, as tenant, entered into a Lease Agreement, dated July 31, 1995. ABB
Partnership is controlled by the president of the Company. The lease, which is a
month to month lease of $10,938 per month, was entered into on terms believed by
Airpure to be fair and reasonable and generally reflective of market conditions.
The expense for this lease for the years ended December 31, 1996 and 1995
amounted to $84,375 and $6,250, respectively.

LBH Realty, as landlord, and Precisionaire, as tenant, entered into a
year-to-year Lease Agreement. A Director of the Company is the managing partner
of LBH Realty. The year-to-year lease was entered into on terms believed by the
Company to be fair and reasonable and generally reflective of market conditions.
The expense for this lease for the year ended December 31, 1996 amounted to
approximately $49,000.

Transactions with Flanders Equity Corporation, a company affiliated through
common ownership, consisted of $0, $532,000 and $420,000 during the years ended
December 31, 1996, December 31, 1995 and December 30, 1994, respectively,
recorded as management fees expense. Liabilities at December 31, 1996 and 1995
included amounts owed to Flanders Equity Corporation of $0 and $50,000,
respectively, included on the balance sheet as accrued management fees (See
Note 10).

At December 31, 1996, the Company had notes receivable of $905,930 due from
various directors, officers and employees with interest thereon varying between
7% and 8.5%, maturing in 1997.

NOTE 18. LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE

Certain equipment and buildings are leased under agreements expiring
between 1997 and 2001. The following is a schedule for the total rental
commitments under these leases as of December 31, 1996:

<TABLE>
<CAPTION>
FISCAL YEARS ENDING
- -------------------
<S> <C>
1997................................................... $209,162
1998................................................... 156,789
1999................................................... 128,867
2000................................................... 92,246
2001................................................... 62,168
--------
$649,232
========
</TABLE>

The total rental expense charged to operations totaled approximately
$465,000, $148,000 and $208,000 for the years ended December 31, 1996, December
31, 1995 and December 30, 1994, respectively.

NOTE 19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

Cash equivalents: The carrying amount approximates fair value at December
31, 1996 and 1995 because of the short maturity of those instruments.

Notes receivable, related party: Based on the investing rates currently
available to the Company from financial institutions with similar maturities,
the fair value of notes receivable, related party, approximates the carrying
value.

Notes payable, long-term debt and convertible debt: Based on the borrowing
rates currently available to the Company for bank loans with similar maturities
and similar collateral requirements, the fair value of notes payable and
long-term debt approximates the carrying amounts at December 31, 1996 and 1995.

F-19
<PAGE> 71

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 20. STOCK OPTIONS AND WARRANTS

During the year ended December 31, 1996, the Company granted options to
purchase 236,520 shares of common stock under its LTI Plan, with exercise prices
ranging from $2.50 per share to $9.50 per share. The Company also issued 900,000
shares to consultants with exercise prices ranging from $2.50 per share to $3.50
per share, and 4,000,000 shares to officers and directors with exercise prices
ranging from $2.50 per share to $7.50 per share. All options granted during the
year ended December 31, 1996 were fixed price options, and were exercisable at
December 31, 1996.

The following table summarizes the activity related to the Company's stock
options and warrants for the years ended December 31, 1996 and 1995:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
-------------------- PER SHARE PER SHARE
STOCK ---------------------------- ------------------
WARRANTS OPTIONS WARRANTS OPTIONS WARRANTS OPTIONS
-------- --------- ------------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January
1, 1995.............. -- --
Granted.............. 61,280 2,500,000 $2.50 $1.00 $2.50 $1.00
Exercised............ -- --
Canceled or
expired........... -- --
------ ---------
Outstanding at December
31, 1995............. 61,280 2,500,000 $2.50 $1.00 $2.50 $1.00
Granted.............. 97,712 5,136,520 $2.50 - $9.63 $2.50 - $9.50 $5.29 $4.61
Exercised............ 96,280 13,200 $2.50 $2.50 $2.50 $2.50
Canceled or
expired........... 37,712 --
------ ---------
Outstanding at December
31, 1996............. 25,000 7,623,320 $9.63 $1.00 - $9.50 $9.63 $3.43
====== =========
Exercisable at December
31, 1996............. 25,000 7,623,320 $9.63 $1.00 - $9.50 $9.63 $3.43
====== =========
</TABLE>

The warrants and options expire at various dates ranging from December 1998
to February 2006. A further summary of information related to fixed options
outstanding at December 31, 1996 is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------- ---------------- ----------------
<C> <C> <C> <C>
$1.00 2,500,000 3.88 Years $1.00
2.50 2,806,320 3.35 2.50
3.50 200,000 2.00 3.50
6.94 to 7.50 2,077,000 4.42 7.49
9.50 40,000 4.50 9.50
</TABLE>

NOTE 21. EARNINGS PER SHARE

The computation of earnings per common share and common share equivalent is
done according to the treasury method, which is based upon the weighted average
number of common shares outstanding during the period. Earnings per common and
common equivalent share include the effect of the stock options and warrants
mentioned in Note 20 as if the options and warrants had been exercised at the
date the options and warrants were granted. The number of common shares
outstanding was increased by the number of shares issuable under the stock
options and warrants and this theoretical increase in the number of common
shares

F-20
<PAGE> 72

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

was reduced by the number of common shares which are assumed to have been
repurchased with the applicable portion of the proceeds from the exercise of the
options and warrants.

Primary earnings per common and common equivalent share for the years ended
December 31, 1996, December 31, 1995 and December 30, 1994 were calculated as
follows:

<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Net income (loss)................................ $ 3,593,788 $1,145,654 $ (5,443)
----------- ---------- -----------
Weighted average shares outstanding.............. 13,171,439 9,831,996 9,693,478
Add: weighted average shares related to
exercisable warrants and options reduced by
the shares that could be purchased with the
proceeds.................................... 3,870,492 -- --
----------- ---------- -----------
Adjusted weighted average shares outstanding..... 17,041,931 9,831,996 9,693,478
=========== ========== ===========
Net income per common share...................... $ 0.21 $ 0.12 $ --
=========== ========== ===========
</TABLE>

Fully diluted earnings per common and common equivalent share for the years
ended December 31, 1996, December 31, 1995 and December 30, 1994 were calculated
as follows:

<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Net income (loss)................................ $ 3,593,788 $1,145,654 $ (5,443)
Interest on convertible debt, net of taxes....... 148,110 -- --
----------- ---------- -----------
$ 3,741,898 $1,145,654 $ (5,443)
=========== ========== ===========
Weighted average shares outstanding.............. 13,762,092 9,831,996 9,693,478
Add: weighted average shares related to
exercisable warrants and options reduced by
the shares that could be purchased with the
proceeds.................................... 4,310,179 -- --
----------- ---------- -----------
Adjusted weighted average shares outstanding..... 18,072,271 9,831,996 9,693,478
=========== ========== ===========
Net income per common share...................... $ 0.21 $ 0.12 $ --
=========== ========== ===========
</TABLE>

NOTE 22. LITIGATION

The Company is currently being monitored by the United States Environmental
Protection Agency ("EPA") for possible environmental contamination at one of its
main facilities. The Company has entered into an agreement with the EPA to
conduct monthly monitoring of groundwater. The Company estimates the monitoring
will last from 3-5 years, with total cost not to exceed $45,000. The Company has
received a limited indemnification from certain directors, officers and
shareholders of the Company of approximately $975,000 with respect to the claims
by the EPA; however, there can be no assurance that the amount of this
indemnification will be sufficient to cover the aggregate of liabilities
asserted by the EPA (See also Note 17).

Additionally,from time to time, the Company is also a party to various
legal proceedings incidental to its business. Management believes none of these
proceedings are material to the conduct of the Company's business, operations or
financial condition.

NOTE 23. SUBSEQUENT EVENTS

On March 7, 1997, the Company completed the purchase of the majority of the
assets of BB&D Manufacturing, Inc., and Intermountain Painting and Subassembly,
Inc. Assets acquired included fixed assets, inventory and backlog. The assets
were placed in a newly formed subsidiary, Airseal West, Inc. ("Airseal

F-21
<PAGE> 73

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

West"), located in Salt Lake City, Utah. Airseal West will manufacture specialty
and standard housings for air filtration and HVAC systems, as well as integrated
custom industrial-grade HVAC systems.

During the third quarter of 1997, the Company purchased certain plant and
office facilities by utilizing their line of credit or entering into mortgages
with various financial institutions. The purchase price of the facilities was
approximately $5,885,000, and the amount of the debt incurred was approximately
$5,879,000; $1,851,000 drawn on the line of credit and $4,028,000 financed with
the property as collateral.

On January 22, 1997, the Company completed an underwritten public secondary
offering dated January 16, 1997, of 1,600,000 shares of the Company's common
stock at $9.50 per share (the "Offering"). Net proceeds to the Company after
deducting commissions and expenses from the offering totaling approximately
$1,720,000 amounted to $13,480,000. The Company utilized the entire amount of
the proceeds from the offering to repay long-term and convertible debt. On
January 31, 1997, the Underwriter of the exercised their over-allotment option
to purchase 240,000 shares of the Company's common stock at $9.50 per share. Net
proceeds to the Company after deducting commissions and expenses from the
over-allotment totaling approximately $164,000 amounted to $2,116,000. Net
proceeds from the Offering, including the over-allotment, were $15,596,000.

The following unaudited pro forma balance sheet sets forth the balance
sheet of the Company as of December 31, 1996, adjusted to reflect the receipt
and initial application of the proceeds of both the Offering and the
over-allotment option:

UNAUDITED SUMMARY PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996

<TABLE>
<S> <C>
ASSETS
Current assets.............................................. 33,892,787
Other assets................................................ 909,307
Intangible assets........................................... 14,016,691
Property and equipment, net................................. 30,099,626
-----------
$78,918,411
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities......................................... 18,522,670
Long-term debt, less current maturities..................... 2,980,261
Convertible debt............................................ 4,000,000
Deferred income taxes....................................... 4,466,676
Commitments and contingencies............................... --
Stockholders' equity........................................ 48,948,804
-----------
$78,918,411
===========
</TABLE>

F-22
<PAGE> 74

INDEPENDENT AUDITOR'S REPORT ON THE SUPPLEMENTAL SCHEDULE

To the Board of Directors
Flanders Corporation
Washington, North Carolina

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
Supplemental Schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.

McGladrey & Pullen, LLP

New Bern, North Carolina
February 7, 1997

F-23
<PAGE> 75

FLANDERS CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 30, 1994

<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COST AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD
- ----------------------------------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
For the year ended Dec. 31, 1996
Allowance for doubtful
accounts...................... $148,000 $ -- $318,903(1) $(120,423)(1)(2) $346,480
Allowance for inventory value.... 60,000 -- 100,000(2) (115,000)(2) 45,000
Valuation allowance for deferred
tax assets.................... 15,975 38,797 3,404(3) (19,379)(2) 38,797
-------- -------- -------- --------- --------
Total.................... $223,975 $ 38,797 $422,307 $(254,802) $430,277
======== ======== ======== ========= ========
For the year ended Dec. 31, 1995
Allowance for doubtful
accounts...................... $ 40,000 $121,799 $ -- $ (13,799)(1) $148,000
Allowance for inventory value.... 105,000 -- -- (45,000)(2) 60,000
Valuation allowance for deferred
tax assets.................... 48,465 -- -- (32,490)(2) 15,975
-------- -------- -------- --------- --------
Total.................... $193,465 $121,799 $ -- $ (91,289) $223,975
======== ======== ======== ========= ========
For the year ended Dec. 31, 1994
Allowance for doubtful
accounts...................... $ 65,500 $ -- $ -- $ (25,500)(1)(2) $ 40,000
Allowance for inventory value.... 174,134 -- -- (69,134)(2) 105,000
Valuation allowance for deferred
tax assets.................... 72,145 -- -- (23,680)(2) 48,465
-------- -------- -------- --------- --------
Total.................... $311,779 $ -- $ -- $(118,314) $193,465
======== ======== ======== ========= ========
</TABLE>

- ---------------

(1) Uncollected receivables written-off, net of recoveries.
(2) Reduction in valuation allowance.
(3) Increase due to acquisition of subsidiaries.

F-24
<PAGE> 76

FLANDERS CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,340,535
Short-term investments.................................... 294,409
Receivables:
Trade, less allowance for doubtful accounts of $346,480
at June 30, 1997...................................... 20,843,497
Related party.......................................... 1,812,039
Other.................................................. 405,729
Inventories (See Note 2).................................. 13,541,869
Deferred taxes............................................ 962,000
Other current assets...................................... 1,090,305
-----------
Total current assets.............................. 41,290,383
-----------
Other assets................................................ 443,373
Intangible assets, net...................................... 13,721,111
Property and equipment, net of accumulated depreciation and
amortization of $8,296,519 at June 30, 1997............... 35,349,324
-----------
$90,804,191
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt...................... $ 593,724
Accounts payable.......................................... 13,916,799
Accrued expenses and other current liabilities............ 6,802,947
-----------
Total current liabilities......................... 21,313,470
-----------
Long-term debt, less current maturities..................... 9,255,864
Convertible debt............................................ 3,200,000
Deferred income taxes....................................... 4,370,000
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value, 10,000,000 shares
authorized; none issued................................ --
Common stock, $.001 par value; 50,000,000 shares
authorized; issued and outstanding: 18,016,103 at June
30, 1997............................................... 18,016
Additional paid-in capital................................ 41,609,338
Retained earnings......................................... 11,037,503
-----------
Total stockholders' equity........................ 52,664,857
-----------
$90,804,191
===========
</TABLE>

See Notes to Consolidated Condensed Financial Statements

F-25
<PAGE> 77

FLANDERS CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales................................................... $61,250,037 $26,241,260
Cost of goods sold.......................................... 45,306,412 19,773,754
----------- -----------
Gross Profit...................................... 15,943,625 6,467,506
----------- -----------
Operating expenses.......................................... 11,853,390 4,548,468
Operating income.................................. 4,090,235 1,919,038
----------- -----------
Nonoperating income (expense):
Other income (expense).................................... 535,862 392,375
Interest expense.......................................... (450,693) (145,568)
----------- -----------
85,169 246,807
----------- -----------
Income before income taxes........................ 4,175,404 2,165,845
Income taxes................................................ 1,510,000 817,876
----------- -----------
Net income........................................ $ 2,665,404 $ 1,347,969
----------- -----------
Earnings per weighted average common and common equivalent
share outstanding:
Primary................................................... $ 0.12 $ 0.09
=========== ===========
Fully diluted............................................. $ 0.12 $ 0.08
=========== ===========
Weighted average common and common equivalent shares
outstanding:
Primary................................................... 21,680,950 15,252,025
=========== ===========
Fully diluted............................................. 22,435,540 15,860,484
=========== ===========
</TABLE>

See Notes to Consolidated Condensed Financial Statements

F-26
<PAGE> 78

FLANDERS CORPORATION AND SUBSIDIARY

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1996................................. 15,952 16,964,713 8,372,100
Issuance of 102,555 shares of common stock upon
conversion of convertible debt........................ 102 817,174 --
Release of committed capital (Note 3).................... -- 8,000,005 --
Issuance of 1,897,000 shares of common stock............. 1,897 15,857,511 --
Issuance of 65,000 shares of common stock upon exercise
of options............................................ 65 162,435 --
Receivables secured by stock related to exercise of
warrants.............................................. -- (192,500) --
Net income (unaudited)................................... -- -- 2,665,404
------- ----------- -----------
Balance, June 30, 1997..................................... $18,016 $41,609,338 $11,037,504
======= =========== ===========
</TABLE>

See Notes to Consolidated Condensed Financial Statements

F-27
<PAGE> 79

FLANDERS CORPORATION AND SUBSIDIARY

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............ $ 3,207,937 $(2,148,729)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of assets from BB&D & IP...................... (403,000) --
Acquisitions, net of cash received........................ -- (6,707,955)
Purchase of equipment..................................... (6,679,400) (719,279)
------------ -----------
NET CASH (USED) BY INVESTING ACTIVITIES..................... (7,082,400) (7,427,234)
CASH FLOWS FROM FINANCING ACTIVITIES
Release of restricted cash from escrow.................... 8,000,005 --
Short-term investments.................................... 294,409 --
Net change in long-term borrowings........................ (20,351,282) (1,413,708)
Proceeds from issuance of common stock.................... 15,881,455 8,421,892
------------ -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ 3,824,587 7,008,184
------------ -----------
NET INCREASE (DECREASE) IN CASH............................. (49,876) (2,567,779)
CASH AT BEGINNING OF PERIOD................................. 2,390,411 2,973,797
------------ -----------
CASH AT END OF PERIOD....................................... $ 2,340,535 $ 406,018
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income taxes................................ $ 2,055,000 $ 754,033
============ ===========
Cash payments for interest................................ $ 952,827 $ 145,568
============ ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES
Conversion of debentures plus accumulated interest into
common stock........................................... $ 834,798 $ --
============ ===========
</TABLE>

See Notes to Consolidated Condensed Financial Statements

F-28
<PAGE> 80

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND INTERIM FINANCIAL STATEMENTS

Nature of business: Flanders Corporation (the "Company") is a leading
supplier of a broad range of air filtration products, including (i) high
efficiency particulate air ("HEPA") filters, typically with at least 99.97%
efficiency and absolute isolation barriers ("Absolute Isolation Barriers") for
the absolute control and containment of contaminants and toxic gases in certain
manufacturing processes, (ii) filters for individual and commercial use, which
fall under specifications which are categorized by efficiency ratings
established by the American Society of Heating, Refrigeration and Air
Conditioning Engineers ("ASHRAE"), and (iii) low cost filters with efficiency
ratings below 30% sold typically off-the-shelf for standard residential and
commercial furnace and air conditioning applications. The Company's air
filtration products are utilized by many industries, including those associated
with commercial and residential heating, ventilation and air conditioning
systems (commonly known as "HVAC" systems), semiconductor manufacturing,
ultra-pure materials, biotechnology, pharmaceuticals, synthetics, nuclear power
and nuclear materials processing. The Company also designs and manufactures its
own production equipment to allow for highly automated manufacturing of these
products. Furthermore, the Company produces glass-based fiber media for many of
its products to maintain control over the quality and composition of such media.

The Company is positioning itself to offer to its customers a full range of
air filtration products. Although the Company historically has specialized in
HEPA and medium efficiency filters and equipment, the Company implemented a
strategy of growth by acquisition in December 1995. As a result, in 1996, the
Company expanded its product line through the purchase of three other companies:
Charcoal Service Corporation ("CSC"), which specializes in charcoal filtration
systems for the removal of gaseous contaminants, Air Seal Filter Housings, Inc.
("Air Seal"), which specializes in filter housings and customized industrial
HVAC equipment, and Precisionaire, Inc. ("Precisionaire"), which specializes in
the manufacture and sale of filter products ranging from mid-range ASHRAE grade
filters through low cost residential furnace filters. Additionally, during the
first six months of 1997, the Company acquired the majority of the assets of
Intermountain Paint and Sub-Assembly, Inc., and B B & D Manufacturing, Inc.
(collectively "BB&D") and placed them in a newly formed, majority owned
subsidiary, Airseal West, Inc. ("Airseal West").

Interim financial statements: The interim financial statements presented
herein are unaudited and have been prepared in accordance with the instructions
to Form 10-Q. These statements should be read in conjunction with financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1996. The accompanying financial statements
have not been examined by independent accountants in accordance with generally
accepted auditing standards, but in the opinion of management such financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to summarize fairly the Company's financial position,
results of operations, and cash flows. The results of operations and cash flows
for the six month period ended June 30, 1997 may not be indicative of the
results that may be expected for the year ending December 31, 1997.

Earnings per Common Share: The computation of earnings per common share
and common share equivalent is done according to the treasury method, which is
based upon the weighted average number of common shares outstanding during the
period. Earnings per common and common equivalent share include the effect of
the stock options and warrants mentioned in Note 5 as if the options and
warrants had been exercised at the date the options and warrants were granted.
The number of common shares outstanding was increased by the number of shares
issuable under the stock options and warrants and this theoretical increase in
the number of common shares was reduced by the number of common shares which are
assumed to have been repurchased with the applicable portion of the proceeds
from the exercise of the options and warrants.

F-29
<PAGE> 81

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

Primary earnings per common and common equivalent share for the six month
periods ended June 30, 1997 and 1996 were calculated as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net income.............................................. $ 2,665,404 $ 1,347,969
Weighted average shares outstanding..................... 16,958,023 12,517,226
Add: exercise of weighted average warrants and options
reduced by the number of shares purchased with
proceeds........................................... 4,722,927 2,734,799
----------- -----------
Adjusted weighted average shares outstanding............ 21,680,950 15,252,025
=========== ===========
Net income per common share............................. $ 0.12 $ 0.09
----------- -----------
</TABLE>

Fully diluted earnings per common and common equivalent share for the six
month periods ended June 30, 1997 and 1996 were calculated as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net income.............................................. $ 2,665,404 $ 1,347,969
Weighted average shares outstanding..................... 17,712,613 12,547,446
Add: exercise of weighted average warrants and options
reduced by the number of shares purchased with
proceeds........................................... 4,722,927 3,313,038
----------- -----------
Adjusted weighted average shares outstanding............ 22,435,540 15,860,484
=========== ===========
Net income per common share............................. $ 0.12 $ 0.08
----------- -----------
</TABLE>

NOTE 2. INVENTORIES

Inventories consist of the following at June 30, 1997:

<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Finished goods.............................................. $ 4,070,188
Work in progress............................................ 952,313
Raw materials............................................... 8,564,368
-----------
13,586,869
Less allowance for obsolete raw materials................... 45,000
-----------
$13,541,869
===========
</TABLE>

NOTE 3. CAPITAL TRANSACTIONS

Secondary offering. On January 22, 1997, the Company completed an
underwritten public secondary offering dated January 16, 1997, of 1,600,000
shares of the Company's common stock at $9.50 per share (the "Offering"). Net
proceeds to the Company after deducting commissions and expenses from the
Offering totaling approximately $1,720,000 amounted to $13,480,000. The Company
utilized the entire amount of the proceeds from the Offering to pay down
long-term and convertible debt. On January 31, 1997, the Underwriters of the
Offering exercised their over-allotment option to purchase 240,000 shares of the
Company's common stock at $9.50 per share. Net proceeds to the Company after
deducting commissions and expenses from the over-allotment totaling
approximately $164,000 amounted to $2,116,000, which were also used to pay down
long-term debt. Net proceeds from the Offering, including the over-allotment,
were $15,596,000.

F-30
<PAGE> 82

FLANDERS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

Restricted cash. On January 6, 1997, a Registration Statement under the
Securities Act of 1933 was declared effective registering certain shares,
including those shares purchased by two investors through a private placement in
September and October 1996. Due to the effectiveness of the Registration
Statement, the potential right of rescission held by those two investors
expired, and $8,000,005 of cash which had been held in escrow was released to
the Company and used to pay down long-term debt.

NOTE 4. STOCK OPTIONS AND WARRANTS

The following table summarizes the activity related to the Company's stock
options and warrants for the six months ended June 30, 1997:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE EXERCISE PRICE
PER SHARE PER SHARE
STOCK ------------------------ ------------------
WARRANTS OPTIONS WARRANTS OPTIONS WARRANTS OPTIONS
-------- --------- ----------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 1996... 25,000 7,623,320 9.63 1.00-9.50 9.63 3.43
Granted....................... 150,256 95,100 8.11-14.73 7.13 14.28 7.13
Exercised..................... -- 65,000 2.50 2.50
Canceled or expired........... -- --
------- --------- ----------- ---------- ------ -----
Outstanding at June 30, 1997....... 175,256 7,653,420 $8.11-14.73 $1.00-9.50 $13.61 $3.48
------- --------- ----------- ---------- ------ -----
Exercisable at June 30, 1997....... 35,256 7,558,320 $ 8.11-9.63 $1.00-9.50 $ 9.19 $3.43
------- --------- ----------- ---------- ------ -----
</TABLE>

The warrants expire at various periods through January 2002. The options
expire at various times through February 2006.

NOTE 5. LITIGATION

The Company recently purchased property in Momence, County of Kankakee,
Illinois ("Illinois Property") for a new mid-range manufacturing facility. In
connection with such purchase, the Company agreed to assume all risk of
environmental liability for past, present or future conditions on the Illinois
Property except for any liability related to ground water environmental
problems. The Illinois Property had certain environmental problems which
required remediation under federal and Illinois law. The seller of the Illinois
Property has worked extensively with the Illinois Environmental Protection
Agency ("IEPA") with regard to the environmental matters, and the Company has
completed Phase I and Phase II environmental surveys with respect to the
property and it appears that the environmental matters have been resolved,
except for certain monitoring procedures required by the IEPA. However,
resolution of state issues has no effect on any potential federal or common law
claims, and there can be no assurance that such claims will not be made. There
were no material additions to, or changes in status of, any ongoing, threatened
or pending legal proceedings during the three months ended June 30, 1997, other
than the liabilities assumed in connection with the purchase of the Illinois
Property.

From time to time, the Company is a party to various legal proceedings
incidental to its business. None of these proceedings are material to the
conduct of the Company's business, operations or financial condition.

F-31
<PAGE> 83

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders of
Precisionaire, Inc.:

We have audited the accompanying balance sheets of Precisionaire, Inc. (a
Florida corporation) as of December 31, 1995 and 1994, and the related
statements of income and retained earnings and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Precisionaire, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Tampa, Florida,
March 8, 1996

F-32
<PAGE> 84

PRECISIONAIRE, INC.

BALANCE SHEETS -- DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 468,085 $ 219,239
Certificate of deposit (Note 5)........................... 276,168 272,305
Trade accounts and notes receivable, less allowances of
approximately $333,500 and $458,600 for doubtful
accounts, returns and credits at December 31, 1995 and
1994, respectively (Note 4)............................ 5,624,399 5,193,305
Inventories (Note 4)...................................... 4,115,158 3,661,201
Deferred tax assets (Note 3).............................. 535,000 435,119
Prepaid expenses and other current assets................. 13,500 191,080
----------- -----------
Total current assets.............................. 11,032,310 9,972,249
EQUIPMENT AND FURNISHINGS, net (Notes 2 and 4).............. 5,536,799 5,658,049
OTHER ASSETS (Notes 4 and 5)................................ 915,901 849,410
----------- -----------
$17,485,010 $16,479,708
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 4,549,695 $ 6,161,576
Accrued expenses and other liabilities.................... 2,114,618 1,515,899
Current maturities of long-term debt (Note 4)............. 1,283,593 2,277,461
----------- -----------
Total current liabilities......................... 7,947,906 9,954,936
LONG-TERM DEBT, less current maturities (Note 4)............ 2,317,264 1,029,800
DEFERRED TAX LIABILITY (Note 3)............................. 310,000 247,243
STOCK REPURCHASE OBLIGATION (Note 5)........................ 2,264,760 571,594
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Class A common stock, voting, $.10 par value, 10,000
shares authorized, 3,767 shares issued and
outstanding............................................ 377 377
Class B common stock, non-voting, $.10 par value, 90,000
shares authorized, 33,834 shares issued and
outstanding............................................ 3,383 3,383
Additional paid-in capital................................ 276,420 276,420
Retained earnings......................................... 4,364,900 4,395,955
----------- -----------
Total stockholders' equity........................ 4,645,080 4,676,135
----------- -----------
$17,485,010 $16,479,708
=========== ===========
</TABLE>

The accompanying notes are an integral part of these balance sheets.

F-33
<PAGE> 85

PRECISIONAIRE, INC.

STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES............................................... $61,809,501 $54,289,237 $50,747,523
COST OF SALES........................................... 47,202,625 42,149,288 39,583,348
----------- ----------- -----------
Gross profit.......................................... 14,606,876 12,139,949 11,164,175
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............ 11,497,186 10,897,308 9,683,643
----------- ----------- -----------
Operating income...................................... 3,109,690 1,242,641 1,480,532
INTEREST EXPENSE........................................ (391,400) (255,841) (251,828)
OTHER, net.............................................. 132,321 101,353 195,380
----------- ----------- -----------
INCOME BEFORE TAXES..................................... 2,850,611 1,088,153 1,424,084
INCOME TAX PROVISION (Note 3)........................... 1,170,803 439,702 521,736
----------- ----------- -----------
NET INCOME.............................................. 1,679,808 648,451 902,348
DIVIDENDS DECLARED...................................... (17,697) -- --
ACCRETION OF STOCK REPURCHASE OBLIGATION (Note 5)....... (1,693,166) (272,677) 3,246,478
RETAINED EARNINGS, beginning of year.................... 4,395,955 4,020,181 (128,645)
----------- ----------- -----------
RETAINED EARNINGS, end of year.......................... $ 4,364,900 $ 4,395,955 $ 4,020,181
=========== =========== ===========
NET INCOME PER SHARE.................................... $ 44.67 $ 17.25 $ 24.00
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-34
<PAGE> 86

PRECISIONAIRE, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $1,679,808 $ 648,451 $ 902,348
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 1,097,670 1,031,039 896,572
Loss on sale of equipment and furnishings........... 21,479 96,859 6,745
Deferred income taxes............................... (37,124) (42,685) (59,664)
(Increase) decrease in assets:
Trade accounts and notes receivable, net.......... (431,094) 84,518 272,186
Inventories....................................... (453,957) (274,388) (532,504)
Prepaid expenses and other current assets......... 177,580 (67,165) (99,916)
Other assets...................................... (66,491) (50,032) (34,709)
(Decrease) increase in liabilities:
Accounts payable.................................. (1,611,881) 358,221 928,908
Accrued expenses and other liabilities............ 592,986 (227,612) 418,283
---------- ----------- -----------
Net cash provided by operating activities...... 968,976 1,557,206 2,698,249
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (985,757) (2,023,230) (1,641,383)
Increase in certificate of deposit..................... (3,863) (10,473) (108,399)
Proceeds from sale of equipment and furnishings........ 24,668 24,914 35,035
---------- ----------- -----------
Net cash used in investing activities.......... (964,952) (2,008,789) (1,714,747)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............... 1,649,081 738,825 856,219
Principal payments on long-term debt................... (892,295) (693,054) (1,127,069)
Dividend payments...................................... (11,964) -- --
Principal payments on related party notes.............. -- (715,000) --
Net (payments) borrowings on line of credit............ (500,000) 1,200,000 (600,000)
---------- ----------- -----------
Net cash provided by (used in) financing
activities................................... 244,822 530,771 (870,850)
---------- ----------- -----------
NET INCREASE IN CASH..................................... 248,846 79,188 112,652
CASH, beginning of year.................................. 219,239 140,051 27,399
---------- ----------- -----------
CASH, end of year........................................ $ 468,085 $ 219,239 $ 140,051
========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest................................. $ 385,176 $ 242,543 $ 256,671
Cash paid for income taxes............................. $ 924,800 $ 556,248 $ 710,972
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Dividends declared included in accrued expenses and
other liabilities................................... $ 5,733 $ -- $ --
Accretion of Stock Repurchase Obligation............... $1,693,166 $ 272,677 $(3,246,478)
Equipment acquired by assumption of capital lease
obligation (trade-in value received in 1994 for
equipment -- $50,000)............................... $ 36,810 $ 293,952 $ --
</TABLE>

The accompanying notes are an integral part of these statements.

F-35
<PAGE> 87

PRECISIONAIRE, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

Precisionaire, Inc. (the Company) produces, distributes and sells air
filters and related products from several manufacturing and distributing
locations throughout the eastern United States. The Company's primary customers
are heating, ventilation and air-conditioning wholesalers, retailers,
supermarkets, mass merchandisers, filter sales and service companies, hardware
wholesalers and original equipment manufacturers.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.

REVENUE RECOGNITION

All sales are recognized when shipments are made to customers.

INVENTORIES

Inventories are stated at the lower of cost or market. The Company is using
the last-in, first-out (LIFO) method to determine the cost of its inventories.
If the first-in, first-out method had been used, inventories would have been
higher by approximately $56,000 and $35,000 at December 31, 1995 and 1994,
respectively.

During 1994, the Company liquidated certain LIFO inventories. The effect of
this liquidation on earnings was not material.

Inventories consisted of the following at December 31:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Raw materials............................................... $2,077,307 $1,702,595
Finished goods.............................................. 2,037,851 1,958,606
---------- ----------
$4,115,158 $3,661,201
========== ==========
</TABLE>

EQUIPMENT AND FURNISHINGS

Equipment and furnishings are recorded at cost. Depreciation and
amortization are calculated on a straight-line basis over the estimated useful
lives of the assets. Accelerated methods are used for income tax purposes.

The estimated useful lives used in computing depreciation and amortization
are as follows:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Plant machinery and transportation equipment................ 3-10
Office and computer equipment............................... 3-5
Leasehold improvements...................................... 5-10
Equipment under capital lease............................... 5
</TABLE>

F-36
<PAGE> 88

PRECISIONAIRE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. EQUIPMENT AND FURNISHINGS

The Company's equipment and furnishings consisted of the following at
December 31:

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Plant machinery and transportation equipment................ $ 8,388,297 $ 7,186,146
Leasehold improvements...................................... 2,277,468 2,256,748
Office and computer equipment............................... 1,770,123 1,595,683
Construction in progress.................................... 433,048 952,740
Equipment under capital lease............................... 330,648 293,952
----------- -----------
13,199,584 12,285,269
Less -- Accumulated depreciation and amortization........... (7,662,785) (6,627,220)
----------- -----------
Equipment and furnishings, net.................... $ 5,536,799 $ 5,658,049
=========== ===========
</TABLE>

3. INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 uses the liability method where deferred taxes are determined
based on the estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions of
enacted tax laws and tax rates.

Income tax provision consisted of the following for the years ended
December 31:

<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Current:
Federal............................................. $1,036,927 $401,387 $494,250
State............................................... 171,000 81,000 87,150
---------- -------- --------
Total current provision..................... 1,207,927 482,387 581,400
---------- -------- --------
Deferred:
Federal............................................. (33,411) (38,416) (53,698)
State............................................... (3,713) (4,269) (5,966)
---------- -------- --------
Total deferred benefit...................... (37,124) (42,685) (59,664)
---------- -------- --------
Total tax provision......................... $1,170,803 $439,702 $521,736
========== ======== ========
</TABLE>

F-37
<PAGE> 89

PRECISIONAIRE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Company provides deferred taxes on significant temporary differences
between income determined by different accounting methods for financial
reporting and income tax purposes. These differences result primarily from the
use of accelerated methods of depreciation for tax purposes and the timing of
the deduction of various accrual and reserve accounts for tax purposes and
financial reporting purposes. Significant components of the Company's deferred
tax assets and liabilities at December 31 were as follows:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Current deferred tax assets:
Reserves.................................................. $163,000 $172,000
Accruals.................................................. 372,000 263,119
-------- --------
Total current deferred tax assets................. 535,000 435,119
-------- --------
Noncurrent deferred tax liabilities:
Equipment and furnishings................................. 310,000 247,243
-------- --------
Total noncurrent deferred tax liabilities......... 310,000 247,243
-------- --------
Net deferred tax assets..................................... $225,000 $187,876
======== ========
</TABLE>

There was no valuation allowance at December 31, 1995 and 1994. The income
tax provisions differ from the amount of income tax determined by applying the
U.S. statutory federal income tax rate of 34 percent to pretax income due to the
following:

<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Expected tax provision................................ $ 969,000 $370,000 $484,000
Increase (decrease) in income tax provision resulting
from:
Nondeductible expenses.............................. 39,000 44,000 16,000
State income taxes, net of federal benefit.......... 116,000 53,000 41,000
Other............................................... 46,803 (27,298) (19,264)
---------- -------- --------
Total income tax provision.................. $1,170,803 $439,702 $521,736
========== ======== ========
</TABLE>

4. LONG-TERM DEBT

Long-term debt consisted of the following at December 31:

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C> <C>
(A) Borrowings under line of credit, limited to the lesser of
$2,500,000 or a percentage of qualifying receivables plus
interest at prime plus .25% (8.75% at December 31, 1995)
through May 1998, at which time all unpaid principal is
due, secured by all accounts receivable, inventory and
equipment, guaranteed by the stockholders of the Company.
The line restricts acquisition and disposition of assets,
restricts incurrence of additional indebtedness and
requires maintenance of certain financial ratios of which
the Company was in compliance or had obtained waivers for
noncompliance............................................. $ 1,200,000 $ 1,700,000
(B) Note payable, monthly payments of $55,556 plus interest at
prime plus .75% (9.25% at December 31, 1995) through May
1998, at which time all unpaid principal is due, secured
by all equipment, accounts receivable, inventory,
cross-collateralized with the line of credit and
guaranteed by the stockholders of the Company............. 1,591,565 --
</TABLE>

F-38
<PAGE> 90

PRECISIONAIRE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C> <C>
(C) Note payable, monthly payments of $4,000 plus interest at
prime (8.5% at December 31, 1995) through November 1996,
at which time all unpaid principal is due, secured by the
cash surrender value of life insurance (see Note 5)....... $ 331,953 $ 379,953
(D) Note payable, monthly payments of $10,278 plus interest at
prime plus .75% (9.25% at December 31, 1995) through
November 1997, at which time all unpaid principal is due,
secured by inventory and accounts receivable,
cross-collateralized with the line of credit, guaranteed
by the stockholders of the Company........................ 236,389 367,244
(E) Note payable, monthly payments of $6,084 plus interest at
prime plus .625% (9.125% at December 31, 1995) through
November 1996, at which time all unpaid principal is due,
secured by computer equipment............................. 66,892 139,900
(F) Notes payable, monthly payments totaling $10,704 plus
interest at prime plus 1.25% (9.75% at December 31, 1995)
through May 1995, at which time all unpaid principal was
consolidated into (A), above.............................. -- 200,600
(G) Note payable, monthly payments of $5,268 plus interest at
prime plus 1.25% (9.75% at December 31, 1995) through May
1995, at which time all unpaid principal was consolidated
into (A), above........................................... -- 142,230
(H) Note payable, monthly payments of $2,834 and $2,094 plus
interest at prime plus 1% (9.5% at December 31, 1995)
through May 1995, at which time all unpaid principal was
consolidated into (A), above.............................. -- 146,787
(I) Note payable, monthly payments of $413 plus interest at
prime plus 1% (9.5% at December 31, 1995) through December
1995, at which time the principal was paid, secured by
copy machines............................................. -- 6,192
(J) Capital lease obligation, monthly payments of $1,122,
including imputed interest at 5.9%, through April 1998.... 27,865 --
(K) Capital lease obligation, monthly payments of $7,473,
including imputed interest at 6.5%, through September
1997...................................................... 146,193 224,355
----------- -----------
3,600,857 3,307,261
Less -- Current maturities.................................. (1,283,593) (2,277,461)
----------- -----------
$ 2,317,264 $ 1,029,800
=========== ===========
</TABLE>

Principal payments due on long-term debt are as follows:

<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
1997........................................................ $ 855,555
1998........................................................ 1,461,709
----------
$2,317,264
==========
</TABLE>

5. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases certain buildings and equipment under noncancellable
operating leases and leases substantially all of its real property located in
Florida, Pennsylvania and Texas from key officers or

F-39
<PAGE> 91

PRECISIONAIRE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

stockholders. Total rent payments for these related party leases totaled
approximately $894,000, $888,000 and $839,000 for the years ended December 31,
1995, 1994 and 1993, respectively. The Company and stockholders have guaranteed
the lease payments under terms of the related party leases. These related party
leases, which have expiration dates ranging from February 1995 to January 2005,
are, in the opinion of the Company, at terms not less favorable than could have
been obtained if the properties were leased from unrelated parties.

The future minimum payments under these noncancellable operating leases are
as follows:

<TABLE>
<CAPTION>
YEAR ENDING RELATED OTHER
DECEMBER 31, PARTIES PARTIES
- ------------ ---------- --------
<S> <C> <C>
1996........................................................ $ 964,987 $251,597
1997........................................................ 887,576 129,597
1998........................................................ 720,444 34,521
1999........................................................ 644,934 8,000
2000........................................................ 633,684 --
Thereafter.................................................. 2,645,220 --
---------- --------
$6,496,845 $423,715
========== ========
</TABLE>

Total rent expense for all operating leases was approximately $1,210,000,
$1,132,000 and $1,019,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.

GUARANTY

The Company leases land and facilities in Florida from a related party
partnership whose partners are shareholders of the Company. The related party
financed the purchase of the land and facilities with proceeds from the sale of
an industrial development revenue bond (the Bond). The Company and the
stockholders have unconditionally guaranteed the repayment of the Bond which has
an outstanding balance of approximately $1.2 million at December 31, 1995.
Additionally, the Company has agreed to lease the land and facilities through
January 2005.

LETTER OF CREDIT

The Company had available $575,000 in a letter of credit to guarantee
payment of insurance claims. The letter of credit is partially collateralized by
the certificate of deposit and cross-collateralized with the line of credit. As
of December 31, 1995, no amount was outstanding under the letter of credit.

EMPLOYEE HEALTH INSURANCE CONVERSION

During 1995, the Company's health insurance carrier converted from a mutual
insurance company to a stock insurance company. In connection with this change,
the Company received approximately 17,000 shares of stock in the new stock
insurance company. Management intends to convert the stock to the benefit of the
employees.

STOCK REPURCHASE AGREEMENT

The Company has a stock restriction and repurchase agreement with the
holders of voting and nonvoting common stock which provides that the Company has
a right of first refusal if a stockholder desires to sell shares and requires
the Company to purchase the stock of a stockholder who dies, is totally disabled
or ceases to be an employee of the Company, as long as the Company is legally
able to do so. The purchase price shall be paid in cash, insurance proceeds or
by a promissory note. The purchase price is to be equal to one and one-

F-40
<PAGE> 92

PRECISIONAIRE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

half times the book value per share (which could aggregate to approximately
$10,365,000 at December 31, 1995).

The Company owns and is the beneficiary of term and whole life insurance
policies on the lives of certain key officers. As of December 31, 1995, the
total face value of these policies was approximately $8,100,000, and the cash
surrender value (included in other assets) was approximately $828,000. Of these
policies, approximately $1,600,000 of the term policies is unconditionally
assigned to the bank. The cash surrender value of the whole life policy is
collateral for the $331,953 note payable (see Note 4). Benefit proceeds from the
life insurance are to be distributed to the banks as assigned and then used to
redeem the Company stock in accordance with the stock repurchase agreement as
approved by the Board of Directors.

The stock repurchase obligation reflected in the accompanying balance
sheets is the difference between the calculated value of stock to be repurchased
by the Company and the face value of the insurance policies on the lives of the
stockholders.

6. EMPLOYEE BENEFIT PLANS

PROFIT SHARING PLAN

The Company maintains a contributory profit sharing plan covering all
eligible employees. The Company's contribution to the plan is discretionary and
is determined by the Board of Directors each year. The Company accrued $100,000
at December 31, 1995, to be contributed to the plan during 1996, and the Company
elected not to contribute to the plan for 1994. The Company contributed $100,000
to the plan in 1993.

401(K) SAVINGS PLAN

In July 1995, the Company started a 401(k) savings plan covering
substantially all employees. Employer contributions totaled approximately
$33,000 for the year ended December 31, 1995, and are included in selling,
general and administrative expenses in the accompanying statements of income.
The employee contribution included a maximum of 12 percent of plan compensation
per employee. The 401(k) employer matching contribution was 25 percent for the
first 4 percent of the employee's contribution up to $9,240 per employee per
year. Employees are eligible to participate in the plan on the January 1 or July
1 after the first year of employment, completion of at least 1,000 hours of
service and attaining 21 years of age.

F-41
<PAGE> 93
======================================================

NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 12
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Selected Unaudited Pro Forma Condensed
Consolidated Statement of
Operations.......................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 24
Management............................ 35
Certain Relationships and Related
Party Transactions.................. 40
Principal and Selling Shareholders.... 42
Description of Capital Stock.......... 43
Anti-Takeover Effects of the Company's
Articles and Bylaws................. 45
Shares Eligible for Future Sale....... 47
Underwriting.......................... 49
Experts............................... 50
Legal Matters......................... 50
Available Information................. 50
Index to Financial Statements......... F-1
</TABLE>

======================================================
======================================================

6,400,000 SHARES

[FLANDERS CORPORATION LOGO]

FLANDERS CORPORATION

COMMON STOCK

------------------------
PROSPECTUS
------------------------

RAYMOND JAMES &
ASSOCIATES, INC.

CLEARY GULL REILAND
& MCDEVITT INC.

OCTOBER 16, 1997

======================================================