SEPARATION AGREEMENT AND GENERAL RELEASE

SEPARATION AGREEMENT AND GENERAL RELEASE

This Separation Agreement and General Release (“Agreement”), dated August 2, 2007, is entered into by and between John Hodson (“Employee”) and Flanders Corporation (“Company”).

WHEREAS, Employee has been employed by Company as Chief Financial Officer under an employment agreement dated February 18, 2005 (the “Employment Agreement”) a copy of which is attached as Exhibit “1”; and

WHEREAS, Employee and Company by mutual agreement agree to terminate the employment agreement and end Employee’s employment relationship with the Company effective as of August 2, 2007 (the “Separation Date”).  For purposes of this Agreement, Employment’s separation form the Company is deemed a resignation, and thus, Employee acknowledges that he will not be entitled to any benefits under the Florida’s Unemployment Compensation Act; and

WHEREAS, the Company and Employee desire to set forth their understandings regarding the Employee’s ownership rights to the Company’s securities, which includes among other matters, agreements regarding the timing and method of disposing of shares of the Company’s common stock owned by Employee; and

WHEREAS, the Company and Employee desire to set forth their understandings regarding the agreed upon procedures and obligations to satisfy the Employee’s withholding tax obligations in connection with the exercise of non-qualified stock options exercised by Employee, and including among other matters, the Employee’s tax indemnity obligations to the Company for applicable withholding taxes, which shall be secured by certain shares of the Company’s common stock owned by Employee, which shall be held in escrow as security for the Employee’s withholding tax indemnity obligations pursuant to a Tax Indemnity and Stock Escrow Agreement, a copy of which is attached as Exhibit “A”.

NOW THEREFORE in consideration of the payments set forth below and the mutual promises contained herein, the parties agree as follows:

1.

Consideration:

(a)

The parties agree that the Employee’s gross accrued and unpaid wages and vacation pay total $5,076.92 and the Company will pay such amount to Employee in cash subject to normal withholding taxes simultaneously with the execution of this Agreement.

(b)

Company will pay Employee $30,000.00 (the “Separation Payment”).  Funds representing the Separation Payment will be immediately forwarded by the Company and held in escrow by Johnson, Pope, Bokor, Ruppel & Burns, LLP, attention Michael T. Cronin, Esq. (“Escrow Agent”) by wire transfer upon execution of this Agreement by all parties, execution of the Tax Indemnity and Stock Escrow Agreement by all parties and receipt of the Escrowed Shares of the Employee by the Escrow Agent, as more fully described in the Tax Indemnity and stock Escrow Agreement.  If the Employee does not revoke this Agreement during the seven (7) day revocation period as described in Section 14 below and further provided that the Employee has delivered the Escrowed Shares to the Escrow Agent pursuant to the Tax Indemnity and Stock Escrow Agreement, the Escrow Agent will promptly remit the Separation Payment to Employee upon expiration of the seven (7) day revocation period.

(c)

Employee will be issued a W-2 at the end of the year for the Separation Payment.  Employee agrees to pay all taxes on the $30,000.00 and agrees to defend, indemnify and hold harmless Company from any tax liability imposed by the IRS or any other taxing body on the $30,000.00    Employee agrees that but for the promises and releases he is making in this Agreement he is not otherwise entitled to the Separation Payment.

(d)

Employee will be released from all duties, obligations and responsibilities to the Company, including the restrictive covenants, as set forth in the Employment Agreement attached as Exhibit 1 and Company will be released from all duties, obligations and responsibilities to Employee and the Employment Agreement is hereby terminated upon execution of this Agreement.

(e)

For the 90 days after the Termination Date, Employee shall make himself reasonably available to consult with Company on such matters regarding Company business as may be reasonably requested by the Company.  The Company shall use its best efforts to give the Employee reasonable advance notice of any need for such consultation and understands and agrees that any obligations of Employee to and responsibilities with any new employer or business endeavor will take precedence over and may significantly limit Employee’s ability to make himself available to consult with Company under this Agreement.  The parties also agree that Employee’s consulting obligations to the Company under this Agreement, to the greatest extent practicable, may be fulfilled via telephone or email.  Employee agrees that other than the compensation set forth in (a) above, he will not be entitled to additional compensation for any time spent consulting under (c) so long as the time spent is reasonable.   

(f)

It is expressly understood and agreed that the consideration paid and other promises and releases by the Company provided under this Agreement are in addition to amounts to which the Employee is otherwise legally entitled, and that except for the amounts and representations, warranties and covenants set forth in this Agreement, Company is not otherwise indebted to Employee for any other wages, benefits, or reimbursements arising out of the employment relationship.  

2.

Unpaid Expenses .  Employee agrees that all business expenses incurred by Employee for which he is entitled to reimbursement have been submitted or will be submitted no later than 15 days following execution of this Agreement.  Company agrees to process promptly all such reimbursement submissions and to promptly make payment to Employee of all expense reimbursements to which he is entitled under customary Company policies and procedures, and in any event no later than seven days after submission.  Employee waives any claim for any unreimbursed business expenses except as referenced herein.

3.

Stock Options and Future Sale of Stock .  

(a)

The parties agree that the following table (“Option Table”) accurately sets forth information regarding non-qualified options to purchase Company stock issued to Employee and holdings of Company stock issued to Employee upon the exercise of said options.  

(b)

Employee and Company agree that all of the 77,035 shares of Company stock issued (or to be issued) to Employee upon the exercise options shown in the preceding table (the “Option Shares”) are “restricted securities” within the meaning of SEC Rule 144.  This includes the 23,577 shares issued in connection with the May 31, 2007 net cashless exercises at a $6.99 per share value.  Employee agrees that he will not dispose, assign, sell, hedge or margin any of the Company’s securities, including the Option Shares for a period of ninety (90) days after the Separation Date (“Lock-Up Period”).  After the Lock-Up Period, Employee may sell the Option Shares in accordance with the procedures and provisions of SEC Rule 144.  Assuming the Employee complies with provisions of Rule 144, and the other conditions of this Agreement and the related Tax Indemnity and Stock Escrow Agreement, the Company will not object to Employee’s sale or disposition of the Option Shares in accordance with SEC Rule 144 after the Lock-Up Period.

(c)

Company agrees that the Employee’s holding period for the Option Shares is accurately reflected in the “Date Exercised” column set forth in the above table.  Accordingly, after the Lock-Up Period, any Option Shares held by Employee for at least two (2) years after the “Date Exercised” in the Option Table, will be salable in accordance with the provisions of SEC Rule 144(k).  Any shares held greater than one (1) year but less than two (2) years after the “Date Exercised”, will be salable in accordance with the other applicable provisions of SEC Rule 144.

(d)

Employee represents he will comply with all applicable provisions of SEC Rule 144 regarding the sale of the Option Shares after the Lock-Up Period.  In order to facilitate the disposition of Option Shares pursuant to Rule 144, the Escrow Agent upon receipt of instructions from Employee and copies of underlying documents, forms and certificates in conformity with general industry standards and the compliance procedures of the brokerage firm used by Employee, will issue appropriate opinions of Counsel to the Company’s transfer agent and Employee’s Broker substantially in the form of the opinions set forth as Exhibits “B” and “C”, as applicable.  Escrow Agent will promptly provide Company with copies of his opinion and all instructions, documents, forms, and certificates received from Employee in connection with Employee’s SEC Rule 144 stock sales.  The opinions of counsel attached as Exhibits “B” and “C” and the industry standard certificates and documents referred to above will be sufficient to confirm compliance with Rule 144.  Employee shall not be required to provide any other opinion of counsel regarding Rule 144 compliance as a precondition to the Company’s approval of the sale and transfer of the Option Shares.

(e)

Withholding Taxes .  Employee understands that because of the “non-qualified” nature of the exercised stock options that he has a withholding tax obligation to the IRS in the applicable calendar quarter in which the options are exercised.  Employee represents he has paid or will pay when due all applicable withholding taxes for the option exercised on August 24, 2004 and January 1, 2006, as reflected in the Option Table.  In consideration of this Settlement Agreement and General Release, the Company and Employee have reached the following understandings as it relates to the options exercised by Employee during May 2007, as reflected in the Option Table.

(i)

After the Separation Date, Company will cause to be remitted or paid to the IRS the sum of $89,400, which reflects the agreed upon amount of the Employee’s withholding tax obligations for the May 2007 option exercises at an assumed effective federal income tax rate of twenty-five percent (25%) (the “May 2007 Tax Obligations”) and the Company will be responsible for any interest or penalties relating to non-timely payment to the IRS of the May 2007 Tax Obligations;

(ii)

Employee will promptly remit to the Company an amount equal to the May 2007 Tax Obligations from the first proceeds received by Employee from sales of the Option Shares after the Lock-Up Period.  Company will use such proceeds to satisfy the May 2007 Tax Obligations.

(iii)

Employee will deliver to the Escrow Agent 23,577 shares of the Company’s stock as evidenced by Certificate No. 7408 from the May 2007 Option Exercises as security for the May 2007 Tax Obligations pursuant to the Tax Indemnity and Stock Escrow Agreement.  

(iv)

If Employee has not satisfied the May 2007 Tax Obligations within 110 days of this Agreement, said unpaid amount will accrue interest from the 110 ^th date forward at seven percent (7%) simple interest per annum until satisfied in full.

(v)

Employee is obligated to satisfy in full the May 2007 Tax Obligations on or before December 31, 2007, subject to Section 5(b) of the Tax Indemnification and Stock Escrow Agreement.

(f)

The Company represents and warrants that the Company’s stockholders and Board of Directors approved the Flanders Corporation 1996 Long Term Incentive Plan (the “Plan”).  All options to purchase Company stock granted to Employee under the Plan have satisfied the requirements of the Plan and the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 (the “Exchange Act”) and that transactions between the Company and Employee involving options issued under the Plan qualified for the exemption from Section 16(b) provided under Rule 16b-3 under the Exchange Act.

4.

General Release - Employee .  In consideration of the above payments, representations, warranties and covenants, and to be fully contingent  upon completion of all payments and compliance with all covenants detailed herein by Company and other valuable consideration, Employee for himself and his heirs, assigns, and personal representatives, except as indicated to the contrary below, hereby and forever waives and releases any and all claims, demands, rights, causes of action, or grievances of any kind or character which he may have accrued pursuant to common law, federal law, state laws including without limitation any and all state and federal and local  anti-discrimination statutes, laws and ordinances, and local laws and regulations.  Employee realizes there are many laws and regulations prohibiting employment discrimination pursuant to which he may have rights or claims.  These include, but are not limited to,  Title VII of the Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act of 1967, as amended; The Americans with Disabilities Act, as amended; the National Labor Relations Act, as amended; the Vietnam Era Veterans Readjustment Assistance Act; the Florida Civil Rights Act of 1977; Florida Whistleblower’s Act, §§448.101 – 105; Sarbanes-Oxley Act, 18 U.S.C. 1514 A, Title VIII Corporate and Criminal Fraud Accountability Act of 2002,  the Florida Unemployment Compensation Law; the Florida Workers’ Compensation Law; 42 U.S.C. 1981; or any other state, federal or local law concerning age, race, sex, religion, national origin, color, disability, handicap, marital status, or any other form of discrimination, or  any other state, federal or local law or regulation including, but not limited to, the Fair Labor Standards Act and Florida’s Minimum Wage Act.  Employee specifically releases Company from all payment obligations under the Employment Agreement dated February 18, 2005 as Employee is released from all obligations, liabilities and restrictive covenants thereunder.  Employee also understands that there are other statutes and laws of contract and tort otherwise related to his employment.  Employee intends to waive and release any rights he may have under these other laws.  Said release shall run to and be in favor of, and shall forever protect Company, and its parent and subsidiaries, as well as all officers, directors, employees, Board of Directors, attorneys, and agents of Company and its parent and subsidiaries.  This Agreement is intended to be a general full and complete waiver and shall be applicable to any and all such claims, demands, rights, wages, benefits, employment, causes of action, or grievances, whether claims for psychic injuries or any other injuries, which may be brought before an administrative agency, a court, a tribunal, an arbitrator, or otherwise, whether in law or equity, contract, or tort, and which are related, directly or indirectly, to Employee’s employment or the termination of employment with Company.  The foregoing release does not apply to Employee’s rights vis-à-vis Company under this Agreement and the Tax Indemnity and Stock Escrow Agreement, under that certain Indemnification Agreement between the Company and the Employee dated May 3, 2007, under the Plan or any outstanding options under the Plan, and none of the provisions of which are affected by the foregoing release and each of which will remain in full force and effect.

5.

ADEA Release and Waiver .  Employee acknowledges that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act (ADEA), as amended, and that the waiver and release of these rights is knowing and voluntary.  Employee is waiving his rights under the ADEA for the consideration set forth above which is consideration in addition to that which Employee is legally entitled (i.e. wages for time worked and earned vacation pay benefits)   Employee and the Company agree that this waiver and release do not apply to any rights or claims that may arise after the date this Agreement is signed.

6.

General Release – Company .  Except for a breach by Employee of this Agreement and the related Tax Indemnity and Stock Escrow Agreement, or other acts or causes of action which are criminal in nature, from the date of this Agreement forward, Company and all subsidiary companies, shareholders, officers, directors and affiliates and all assigns and successors in interest (collectively, “Company Releasees”), hereby forever release and discharge Employee and his successors, heirs, assigns, representatives, attorneys and all persons acting by, through or in concert with him from any and all claims, demands, rights, charges, actions, interests, debts, liabilities, damages, costs and expenses, or causes of action of whatever type or nature, whether legal or equitable, whether known or unknown, whether in tort or in contract, which Company or any of the Company Releasees may now have against him either individually, jointly or severally, before any municipal, state or federal court or administrative agency, based upon acts which have occurred from the beginning of time to the date of this Agreement relating to his employment by Company or any subsidiaries or affiliates, his service as an officer of the Company or any subsidiaries or affiliates, or in any other capacity, or the termination of his employment with Company.

7.

Non-Disparagement .  Employee agrees not to criticize, denigrate or otherwise disparage Company, all subsidiary companies and affiliates, its operations, products, shareholders, employees, officers or directors.  Company, all subsidiary companies and affiliates, its shareholders, employees, officers and directors agree not to criticize, denigrate or otherwise disparage Employee.  Company covenants to us its best efforts to insure that its senior management, officers and directors comply with the foregoing obligations.

8.

Termination of Employment Agreement dated February 18, 2005.   By virtue of the execution of this Agreement, the parties desire to terminate the Employment Agreement previously entered into between Employee and the Company and executed on February 18, 2005.  Upon full execution of this Agreement, the Employment Agreement will terminate, is null and void and has no further effect at law or equity.  Employee and Company are each released from all of their respective liabilities, obligations, and restrictive covenants under the Employment Agreement.  Upon execution of this Agreement, this Agreement supersedes the Employment Agreement attached as Exhibit “1”.  Employee acknowledges that his release from the obligations, liabilities and restrictive covenants under the agreement is additional good and valid consideration.  

9.

Confidential Information.

(a)

Employee acknowledges that during the term of his employment with Company, Company disclosed confidential information to Employee which Company deems to be valuable and proprietary.  “Confidential information” as used herein shall mean any information of or about Company (or Company’s clients or customers, or the customers’ employees or any vendors), any financial information, which has been disclosed to the Employee or made available to him, which is not publicly available and which is maintained by Company in confidence.  Confidential information shall include information of or about Company in both oral and written form which is maintained by Company in confidence including, but not limited to, information about Company’s finances, personnel, products, clients, or strategic plans, c urrent and prospective customers, vendors, employees and independent contractors (including but not limited to customer and prospect needs and requirements); prospect lists; vendor lists; costs; pricing; client and vendor discounts and discount policies; profit margins; market analyses; self-analyses and analyses of competitors; business and marketing strategies, methods, and techniques; contracts; processes and manner of operations; finances; acquisitions strategies; product specifications; mailing lists; other lists of technical or commercial information; other Business lists; product analysis and research, services; technical information and/or know-how; source codes; computer programs, software, hardware and systems; databases; specialized training; operating techniques; trade secrets; confidential information or trade secrets of any third party provided to the Company in confidence or subject to other use or disclosure restrictions or limitations; other data and material utilized in or related to the Company or the Business; and any other information, written, oral, or electronic, which pertains to the Company or the Business, to persons or entities with whom the Company does business or seeks to do business, or to how the Company does business “Confidential Information” does not include information which in accordance with applicable law (1) is or becomes generally available to the public other than as a result of a disclosure in violation of this Agreement, (2) was avai