Flanders (FLDR)

Share-Based Compensation

As of March 31, 2009, there was no unrecognized stock-based compensation expense related to non-vested stock options.

The aggregate intrinsic value of options outstanding at March 31, 2009, based on the Company’s closing stock price of $4.04 as of the last business day of the period ended March 31, 2009, which would have been received by the optionees had all options been exercised on that date was $1,540. The aggregate intrinsic value of options exercisable at March 31, 2009, based on the Company’s closing stock price of $4.04 as of the last business day of the period ended March 31, 2009, which would have been received by the optionees had all options exercisable been exercised on that date was $1,540. The aggregate intrinsic value of options exercised during the three months ended March 31, 2009 was $0. Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of the options.

Options on 1,900 shares of common stock were not included in computing diluted EPS for the quarter period ended March 31, 2009, because their effects were anti-dilutive.

Inventories consist of the following at March 31, 2009 and December 31, 2008:

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As of March 31, 2009 the Company’s total obligations to Bank of America were approximately $16,901. During March 2009, the Company entered into an amendment to the credit facility with its bank. The new current revolving credit agreement with the bank provides a maximum line of credit of $36 million (subject to availability) and bears interest at (i) LIBOR plus 3.75%; or (ii) the bank’s base rate plus 2.75%. The revolving credit agreement is part of a combined facility with a bank that also includes a $12 million facility to guarantee letters of credit. The line of credit is due in 2011. The combined facility is collateralized by substantially all of the Company’s assets and restricts capital expenditures, payment of dividends and share repurchases. As of March 31, 2009 the Company is in compliance with its financial covenants.

In April 2006, a manufacturing facility in Texas was destroyed by fire and in June of 2006, another manufacturing facility was damaged by flood. In July 2007 another manufacturing facility in Florida was destroyed by fire. The extraordinary gain as of March 31, 2008 of $1,533 was calculated as the gain on the costs that were attributable to these natural disasters ($975) that were less than the insurance proceeds ($3,529), net of taxes of $1,021.

In September 2008, the warehouse in Auburn, Pennsylvania was partially destroyed by fire. All anticipated losses resulting from this fire are expected to be covered by insurance.

The IRS is currently examining the Company’s federal income tax returns of 2002, 2003, 2004, 2005, and 2006. To date the IRS has proposed certain changes for the 2002, 2003, 2004, 2005, and 2006 examinations, resulting in additional liabilities due. The Company has submitted a petition to the IRS for a redetermination of the changes with the U.S. Tax Court. These liabilities have been included in the Company’s FIN 48 liability which is included in other current liabilities.

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

In the opinion of management, although the outcome of any legal proceeding cannot be predicted with certainty, the ultimate liability of the Company in connection with its legal proceedings will not have a material adverse effect on the Company’s financial position, but could be material to the results of operations in any one future accounting period.

In August 2008, the Company sold its Bartow property to Wal-Pat II, LLC, a related party. The property was sold for $3.7 million and part of the proceeds were used to pay down the existing debt on this property in the amount of approximately $1.8 million. The Company has leased this property back in March 2009. The Company has recorded a deferred gain on the sale which will be amortized to rent expense over the lease term of 10 years.

The above terms and amounts are not necessarily indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent parties.

The following discussions should be read in conjunction with our Consolidated Condensed Financial Statements and the notes thereto presented in “Item 1 – Financial Statements” and our audited financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our report on Form 10-K for the year ended December 31, 2008. The information set forth in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements that involve risks and uncertainties. Many factors, including those discussed below under “Factors That May Affect Future Results” and “Outlook” could cause actual results to differ materially from those contained in the forward-looking statements below.

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Share-Based Compensation

As of March 31, 2008, total unrecognized stock-based compensation expense related to non-vested stock options was $1,031.

The following table represents our non-vested stock option activity for the three months ended March 31, 2008:

The aggregate intrinsic value of options outstanding at March 31, 2008, based on the Company’s closing stock price of $6.09 as of the last business day of the period ended March 31, 2008, which would have been received by the optionees had all options been exercised on that date was $4,343. The aggregate intrinsic value of options exercisable at March 31, 2008, based on the Company’s closing stock price of $6.09 as of the last business day of the period ended March 31, 2008, which would have been received by the optionees had all options exercisable been exercised on that date was $3,931. The aggregate intrinsic value of options exercised during the three months ended March 31, 2008 was $402. Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of the options.

Options on 1,180 shares of common stock were not included in computing diluted EPS for the quarter period ended March 31, 2008, because their effects were anti-dilutive.

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Inventories consist of the following at March 31, 2008 and December 31, 2007:

As of March 31, 2008 the Company’s total obligations to Bank of America were approximately $15,016. All obligations to Bank of America mature in October 2009. The Company is in compliance with its debt covenants on all notes as of March 31, 2008.

In April 2006, a manufacturing facility in Texas was destroyed by fire and in June of 2006, another manufacturing facility was damaged by flood. In July 2007 another manufacturing facility in Florida was destroyed by fire. The extraordinary gain of $1,533 was calculated as the gain on the costs that were attributable to these natural disasters ($975) that were less than the insurance proceeds ($3,529), net of taxes of $1,021. This extraordinary item will be subject to change as the insurance claims process progresses for the claim.

The IRS is currently examining the Company’s federal income tax returns of 2002, 2003, 2004, 2005, and 2006. To date the IRS has not proposed any material adjustments for the 2004 through 2006, however, for the 2002 and 2003 examination, the IRS has proposed certain changes, resulting in additional liabilities due. The Company has submitted a petition to the IRS for a redetermination of the changes with the U.S. Tax Court. These liabilities have been included in the Company’s FIN 48 liability which is included in other current liabilities.

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

In the opinion of management, although the outcome of any legal proceeding cannot be predicted with certainty, the ultimate liability of the Company in connection with its legal proceedings will not have a material adverse effect on the Company’s financial position, but could be material to the results of operations in any one future accounting period.