SPAN AMERICA MEDICAL SYSTEMS INC, 10-K, 1997-12-24

SPAN AMERICA MEDICAL SYSTEMS INC
10-K, 1997-12-24
ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended September 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period
from _________ to _________.

Commission File Number 0-11392

SPAN-AMERICA MEDICAL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)

South Carolina 57-0525804
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)

70 Commerce Center
Greenville, South Carolina 29615
(Address of principal executive offices)

Registrant's telephone number, including area code: (864) 288-8877
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Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of exchange on which registered
- ----------------------------------------------------------------------------
None None

Securities registered pursuant to Section 12(g) of the Act:
Title of each class
- ------------------------------------------
Common Stock, no par value
- ------------------------------------------------------------------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates
of the registrant computed by reference to the last price at which the stock was
sold on December 17, 1997 was $19,375,098.

The number of shares of the registrant's common stock, no par value,
outstanding as of December 15, 1997 was 3,097,838.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 1997 Annual Report to Shareholders are incorporated by
reference into Parts I and II, and portions of the Company's Definitive Proxy
Statement for the annual shareholder's meeting to be held February 3, 1998 are
incorporated by reference into Part III.
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PART I

Item 1. Business
BACKGROUND

Span-America Medical Systems, Inc. (the "Company" or "Span-America"),
was incorporated under the laws of the state of South Carolina on September 21,
1970. The Company manufactures and distributes a variety of polyurethane foam
products and contract packaging products for the medical, consumer and
industrial markets.

Span-America commenced operations in 1975 as a manufacturer of
polyurethane foam patient positioners. During the next several years, the
Company expanded its product lines to produce lapidus (flat foam) and convoluted
foam mattress overlays for the wound care market. Wound care products aid in the
treatment or prevention of decubitus ulcers, commonly known as bed sores or
pressure ulcers. In the late 1970's the Company also began producing foam
products for industrial applications, primarily to utilize excess manufacturing
capacity. In 1985, the Company introduced its patented Geo-Matt mattress overlay
in the health care market which became the Company's leading product. At the
same time, the Company began selling its mattress overlay products to the
consumer market segment. Span-America's foam products (including replacement
mattresses described below) made up approximately 81% of the Company's total net
sales in fiscal 1997.

To diversify its operations and to capitalize upon its familiarity and
contacts within the health care industry, Span-America entered the contract
packaging business in 1987. These initial contract packaging operations were
based on a three-year commitment to supply Baxter Healthcare Corporation
("Baxter") with all of its contract packaging requirements. This agreement
expired during the first quarter of fiscal 1991. The Company currently provides
contract packaging services to a variety of customers throughout the United
States. During fiscal 1997, contract packaging products accounted for
approximately 19% of total net sales.

The Company entered the replacement mattress segment of the pressure
ulcer care market in fiscal 1992 through the acquisition of Healthflex, Inc. The
Company is currently marketing the PressureGuard line of replacement mattresses
directly to hospitals, long-term care facilities, and home health care dealers.

The Company's long-term strategy is to become a leading health care
manufacturer specializing in wound care products used
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in the prevention and treatment of pressure ulcers. A majority of the Company's
medical products are currently directed toward wound care applications, and the
Company is actively seeking to develop or acquire new products which are in this
market segment. The Company also seeks to further develop and manufacture
consumer and industrial applications of its medical products.

The Company's products are distributed primarily in the United States
and to a lesser degree in several foreign countries. Total export sales during
fiscal 1997 were approximately $1,300,000 or 4% of total net sales.

INDUSTRY SEGMENT DATA

The industry segment data included in Note 15 to the Company's audited
consolidated financial statements for the year ended September 27, 1997,
presented on pages 20 - 21 of the 1997 Annual Report is incorporated herein by
reference.

MEDICAL PRODUCTS

Span-America's principal medical products consist of support surfaces
(polyurethane foam mattress overlays, non-powered therapeutic replacement
mattresses, and powered therapeutic replacement mattresses), patient
positioners, a.nd seating products. These products are marketed to all health
care settings, including acute care hospitals, long term care facilities, and
home health care providers. The company also sells these products on a limited
basis in Canada. Sales of medical products represented 45% of sales in 1997,
1996, and 1995 respectively.

MATTRESS OVERLAYS. Span-America produces a variety of foam mattress
overlays, including convoluted and lapidus foam pads and its patented
Geo-Matt(R) overlay. Mattress overlays comprised approximately 25% of the
Company's total net sales in fiscal 1997. These products are designed to provide
patients with greater comfort and assist in treating patients suffering from
burns or pressure ulcers. Span-America's overlay products are mattress pads as
compared to complete mattresses and are marketed as less expensive alternatives
to generally higher priced air and water mattresses. The mattress overlays are
designed for single patient use.

The Geo-Matt mattress overlay, which was introduced in 1985, represents
the Company's single largest product in terms of revenues. Geo-Matt was designed
in conjunction with clinical studies performed by the Institute for
Rehabilitation and Research at the Baylor College of Medicine. The product's
patented design includes over 800 individual cells which are cut
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to exacting tolerances on computer controlled equipment to create a
sophisticated and clinically effective mattress surface.

The Company's mattress overlays disperse body heat, increase air
circulation beneath the patient, and reduce moisture build-up in order to
prevent the development or promote the healing of pressure ulcers. Their
convoluted or geometrically contoured construction also significantly reduces
shearing faces while evenly distributes the patient's body weight, thereby
minimizing the pressure that causes ulcers.

REPLACEMENT MATTRESSES. Span-America's non-powered therapeutic
replacement mattresses (as distinguished from overlays) are of two types.
Geo-Mattress(R) products are single density or multi-layered foam mattresses
topped with the same segmented Geo-Matt surface used in the Company's overlays.
These mattresses are sold as an alternative to standard inner-spring and
all-foam mattresses found facility-wide in acute and long term care settings. A
version is also made specifically for use in home health care.

The Company's more complex non-powered replacement mattresses consist
of products from the PressureGuard(R) Series. The PressureGuard design was
acquired through the acquisition of Healthflex in February 1992. The original
design combines a polyurethane foam shell and static air cylinders to form a
replacement mattress that incorporates the comfort and pressure relieving
features of both mattress overlays and more sophisticated dynamic mattresses.
This original design, which the company later used as the basis for powered
versions (see below) was further refined via a complete technical upgrade of all
PressureGuard components in November 1997. In conjunction with this upgrade,
some models were renamed to better reflect their function.

In addition to the non-powered, static PressureGuard(R) Renew
(formerly PressureGuard II), the company also offers the PressureGuard(R) CFT.
This model incorporates patented design principles of constant force technology.
First introduced as the CustomCare mattress in June of 1995, the PressureGuard
CFT is unique in that it is a dynamic support surface that rivals very expensive
powered surfaces, yet requires no power source of any kind.

The company's powered therapeutic replacement mattresses consist of the
remaining models in the PressureGuard Series. In November 1993, the Company
received FDA 510K marketing approval for its PressureGuard(R) IV mattress
system. Building on the comfort and support of the original PressureGuard
design, PressureGuard IV was designed as a sophisticated, powered system

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for providing pressure reduction and patient comfort, with the added ability to
turn the patient. The system was designed to automatically sense the patient's
weight and position, and to continually adjust the pressures appropriately while
slowly and quietly repositioning the patient at angles up to 30 degrees in
cycles of up to two hours. The newly upgraded version, renamed the
PressureGuard(R) TurnSelect, incorporates all of these capabilities, as well as
several additional features. Of particular note is a pendant-operated,
microprocessor-controlled motion system built into the mattress, instead of
hanging on the bed frame as a separate unit.

Another powered system in the PressureGuard line is the
PressureGuard(R) APM, a simpler but very effective alternating pressure
mattress. Originally introduced as the DynaGuard, in November 1994, the APM is
targeted primarily at the home care market. The latest addition to the
PressureGuard line, launched in November 1997, is the PressureGuard(R) Site
Select. The Site Select includes many of the features of the Turn Select,
including the built in microprocessor-controlled motion system. However, instead
of turning the patient, the Site Select is designed to give the caregiver the
ability to selectively adjust the pressure at particular body sites based on
patient need. Like the Turn Select, it is completely programmable through a
hand-held pendant. All of the powered products in the PressureGuard Series are
sold primarily through home health care equipment dealers for daily rental in
acute, long term, and home care settings. During fiscal 1997, replacement
mattresses and related products made up approximately 12% of total net sales.

PATIENT POSITIONERS. Span-America's specialty line of patient
positioners is sold primarily under the trademark Span-Aids(R). Span-Aids
accounted for approximately 11% of the Company's net sales in fiscal 1997. This
is the original product line of the Company and consists of over 300 different
foam items which aid in relieving the basic patient positioning problems of
elevation, immobilization, muscle contracture, foot drop and foot or leg
rotation. Span-Aids patient positioners hold the patient's body in
orthopedically correct positions, provide greater patient comfort and tend to
promote healing for long-term comatose patients or those with a flaccid or
immobilized condition. The positioners also aid in the prevention of pressure
ulcers by promoting more effective dispersion of pressure, heat and moisture.
Span-Aids are intended for single-patient use throughout the patient's entire
treatment program. Among the Span-Aids products presently marketed are abduction
pillows, body aligners, head supports, limb elevators and various foot and wrist
positioners.

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Span-America's patient positioners are sold primarily to hospitals and
long-term care facilities by several national medical products distributors.
Span-Aids are believed by the Company to be one of the most effective patient
positioning devices available in the health care market, as compared to pillows,
rolled towels and other similar materials traditionally used by nursing
personnel to position immobilized patients. Span-Aids are constructed of
open-cell polyurethane foam which allows air to circulate next to the patient's
skin, thereby reducing extensive heat and moisture build-up.

Most Span-Aids body positioners are pressure packaged to reduce the
amount of storage space required by hospitals and other facilities which utilize
them. This patented packaging method reduces the package size by as much as 75%
while protecting the positioners from dust and contamination during
transportation and storage.

SEATING PRODUCTS. The final category of medical products made by
Span-America consists of seating cushions and related products that address the
needs of the patient when in the seated position. The Company's offerings can be
subdivided into three main types. Seating products made specifically as an aid
to wound healing include the ISCH-DISH(R) and SACRAL DISH(R) pressure relief
cushions. Seating products made for patient positioning and general pressure
management include the ISCH-DISH Thin and the Geo-Matt Contour cushion,
introduced in June 1997, which combines positioning aid with the Company's
proprietary Geo-Matt anti-shearing surface. Seating products designed to address
pressure management without additional positioning benefits include the Gel-T(R)
cushion and the Geo-Matt(R) and Geo-Matt(R) PRT wheelchair cushions. The Gel-T
is a gel/foam combination cushion popular with elderly patients. The Geo-Matt
and Geo-Matt PRT cushions incorporate the Geo-Matt surface.

DISTRIBUTOR RELATIONSHIP. During fiscal 1997, approximately 29% of the
Company's medical foam products were sold to Allegiance Health Care Corporation
which distributes these products to hospitals nationwide. Span-America has
maintained a distribution relationship with Allegiance (formerly Baxter) for 18
years. In September 1996, Baxter spun off its healthcare distribution and cost
management business to create Allegiance. The Company's distribution agreement
has been transferred to Allegiance, and management expects the change to have no
negative impact on the Company's sales to Allegiance.

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CONSUMER PRODUCTS

Span-America's consumer products consist primarily of convoluted
mattress overlays and specially designed pillows for the consumer bedding
market. The Company's principal consumer mattress overlays are produced under
private labels for J.C. Penney and Target Stores. The majority of the Company's
consumer bedding products are marketed by Pillowtex, which sells the products to
department stores and mass merchandisers throughout the United States. From 1986
until 1996 the Company had an exclusive agreement with Pillowtex for the
distribution of certain of its consumer foam products. That agreement was
terminated October 31, 1996. The termination agreement provides that Pillowtex
will continue to sell the Company's products on an exclusive basis to existing
customers through October 1998. After that time, Pillowtex is free to sell
competing products to the Company's existing customers and Span-America is free
to sell its consumer products through other distributors. Management believes
its current relationship with Pillowtex is good, and does not expect the
termination of the agreement to result in reduced sales to Pillowtex in fiscal
1998. Although the Company plans to continue its present relationship with
Pillowtex indefinitely, management cannot currently predict the impact on sales
to Pillowtex in fiscal 1999 and beyond, following the end of the termination
period. See "Major Customers" for further information on Pillowtex.

In 1990, Span-America introduced its TerryFoam(R) comfort products
which are designed to be used on all types of outdoor furniture. Formerly
produced by contract manufacturers according to the Company's specifications,
these products are now manufactured by the Company. They are being sold and
distributed directly by Span-America to retailers nationwide.

Consumer products represented approximately 27% of the Company's total
net sales in fiscal 1997 as compared to 24% in 1996 and 23% in 1995.

INDUSTRIAL PRODUCTS

Span-America's industrial products consist primarily of foam packaging
and cushioning materials. The Company also produces foam products which are used
for flotation, sound insulation and gasketing purposes. The majority of these
products are made to order according to customer specifications instead of being
made to stock. To date, most of the Company's industrial sales have been in the
specialty packaging segment of the industrial foam market. The Company currently
has one full-time sales

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representative and several manufacturers representatives selling its foam
fabrication capabilities to the industrial market. Its customers represent a
wide variety of markets, including the photographic film, durable goods,
electronics and sports equipment industries. The industrial foam segment of the
business made up approximately 10% of the Company's net sales in fiscal 1997,
10% in 1996 and 12% in 1995.

CONTRACT PACKAGING PRODUCTS

Span-America's contract packaging products are principally single-use
flexible packettes containing various chemicals which are used for cleaning,
sterilizing or lubricating purposes. Approximately 19% of the Company's fiscal
1997 sales were contract packaging products as compared to 21% in 1996 and 1995.
Contract packaging products are generally foil pouches containing a piece of
non-woven cloth which has been saturated with substances such as alcohol or
iodine. The Company markets its contract packaging capabilities principally to
large health care and pharmaceutical companies. Since the Company's main
function is that of a contract manufacturer, it primarily relies on the
distribution networks of its customers.

The Company's contract manufacturing facilities include a high quality
water filtration system, liquid/gel blending facilities and equipment which
fills flexible packettes with a variety of chemicals, powders, gels, swab sticks
and other products. Span-America utilizes high-speed horizontal and vertical
"form, fill and seal" packaging machines to produce a significant portion of the
contract packaging products. The Company also provides bottle (liquid) filling
services to its customers.

Although Span-America functions primarily as a contract manufacturer of
flexible packaging products, it also produces a line of such products under its
own Span-Care brand, consisting principally of single-use towelettes, swabs and
gels. The Company employs one sales representative and a manufacturers
representative to sell this Span-Care line to hospitals and alternate site
facilities, including long-term care facilities and home health care
distributors.

The Company also manufactures contract packaging products for the
consumer market segment. These items consist mainly of health and beauty aid
products such as towelettes, lotions and powders. Span-America acts as a
contract manufacturer of these products, blending and packaging them according
to customer specifications. They are sold and distributed by Span-America's
customers to a variety of retail outlets in the United States.

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COMPETITION

MEDICAL. In the medical market segment, the Company faces significant
competition for sales of its foam mattress overlays. The competition for
convoluted mattress overlays is primarily based on price and delivery. For other
foam mattress overlay products (such as the Geo-Matt overlay), the competition
is based mainly on product performance and quality. However, to a lesser extent,
the competition for Geo-Matt type overlays is also based on price and delivery.
Competition with respect to the Company's Span-Aid products is primarily based
on price. However, a secondary source of competition for patient positioners
results from alternative methods such as the use of pillows and other devices to
position patients.

The Company believes that it is among the top five suppliers of foam
mattress overlays and patient positioners to the health care market. The
Company's primary competitors in the health care market include Bio Clinic
(division of Sunrise Medical), Dermacare, and Medline.

The competition in the therapeutic replacement mattress market is based
on product performance, price and durability. Potential customers typically
select a product based on these criteria after conducting a formal clinical
evaluation of sample mattresses for periods of one to six months. A secondary
source of competition results from alternative products such as mattress
overlays which are significantly less expensive than replacement mattresses.

The market for therapeutic replacement mattresses has developed
principally during the last seven years and is currently dominated by five
suppliers: BG Industries, Hill-Rom, Comfortex, DermaCare, and Bio Clinic. BG
Industries utilizes Allegiance to distribute its mattresses primarily to
hospitals. The other competitors use their own sales representatives to sell
directly to hospitals, distributors, and long-term care facilities nationwide.

Many of the Company's competitors in the health care segment are larger
and have greater resources than Span-America.

CONSUMER. In the consumer market segment, Span-America has encountered
significant competition for its mattress pad and pillow products. The
competition is principally based on price, which is largely determined by foam
density and thickness. However, competition also exists due to variations in
product design and packaging. There are presently a number of companies with the
manufacturing capability to produce similar bedding products. The Company's
primary competitors in this market are

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Crain Industries, ER Carpenter and Foamex, all of which are larger than
Span-America.

INDUSTRIAL. The Company also has a number of competitors in the
industrial foam market, including UFP Technology, Hibco and Foam Design. Some of
these competitors are larger and have greater resources than Span-America. The
competition for industrial foam products is largely based on price. In some
instances, however, design and delivery capabilities are as important as the
price of the product.

CONTRACT PACKAGING. A significant level of competition has been
experienced in the markets into which the medical contract packaging products
are sold. This competition is based mainly on price, quality and manufacturing
capability. Many of the contract packaging products have the characteristics of
commodity products and thus can be produced at several manufacturing facilities
in the United States. The Company's chief competitors in this market are
PDI/Nice Pak, Packaging Coordinators, Paco, Marietta Packaging and Clinipad.

There is also significant competition for the Company's contract
packaging products sold in the consumer market. The main bases for this
competition are quality, capacity and breadth of manufacturing capabilities.
There are currently many companies, some larger and with greater resources than
Span-America, which have the capability to produce equivalent products.

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MAJOR CUSTOMERS

The Company has a business relationship with Allegiance Health Care
Corporation ("Allegiance"), formerly Baxter Healthcare Corporation, to
distribute certain of its foam and contract packaging products. In fiscal 1997
sales to Allegiance amounted to approximately 13% of the Company's total net
sales and approximately 29% of the Company's sales to the medical foam segment.
Span-America also has a relationship with Pillowtex Corporation to distribute
certain of its consumer foam products. Sales to Pillowtex during fiscal 1997
made up approximately 15% of the Company's net sales and approximately 57% of
sales in the consumer foam segment. The Company has a relationship with another
customer to manufacture specific contract packaging products for the consumer
market segment. Sales to this customer comprised approximately 4% of the
Company's fiscal 1997 net sales and 23% of the contract packaging segment sales
during the same period.

The loss of any of the customers described above could have a material
adverse effect on the Company. See "Distributor Relationship" on page 5,
"Consumer Products" on page 6, and "Competition" on pages 7 and 9 for more
information on major customers.
SEASONAL TRENDS

Some seasonality can be identified in certain of the Company's medical
foam, consumer foam and contract packaging products. However, the fluctuations
have minimal effect on the Company's operations because of offsetting trends
among these product lines. Span-America has not experienced any seasonal
fluctuations in its industrial segment.

The most seasonal of the Company's products is the TerryFoam line of
chaise and chair pads. Demand for shipments of these products generally is
highest in January through April of each year as retail stores begin stocking
their summer merchandise. The impact of this seasonality on the Company will
depend largely on the volume of sales achieved for this product line. During
previous fiscal years, the seasonality of TerryFoam products has had only a
minor impact on the Company's operations.

PATENTS AND TRADEMARKS

The Company holds 36 federally registered trademarks, including
SPAN-AMERICA, SPAN-AIDS, GEO-MATT, SPAN-CARE, PRESSUREGUARD, and ISCH DISH.
Other federal registration applications are presently pending. The Company
believes that these trademarks are readily identifiable in their respective
markets and add value to the Company's product lines.

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The Company also holds 52 United States patents and 5 foreign patents
relating to various components of its patient positioners, mattress overlays,
and replacement mattresses. Additional patent applications have been filed.
Management believes that these patents are important to the Company. However,
while the Company has a number of products covered by patents, there are
competitive alternatives available which are not covered by these patents.
Therefore, the Company does not rely solely on its patents to maintain its
competitive position in the marketplace.

Span-America's principal patents include the patents on its
PressureGuard and CustomCare replacement mattress, its Geo-Matt overlay and its
Span-Aids patient positioners. The Company's Geo-Matt and PressureGuard patents
have remaining lives of 10 and 12 years, respectively. The Company's Span-Aids
patents have remaining lives ranging from 1 to 12 years.

RAW MATERIALS AND BACKLOG

Polyurethane foam, foil packaging, various chemical solutions and
non-woven cloth account for approximately 80% of Span-America's raw materials.
In addition, the Company uses corrugated shipping cartons, polyethylene plastic
packaging material and hook-and-loop fasteners. The Company believes that its
basic raw materials are in adequate supply and are available from many suppliers
at competitive prices.

As of September 27, 1997, Span-America had unshipped orders of
approximately $2.6 million which represents a 13% increase compared to a backlog
of $2.3 million at fiscal year end 1996. All orders in the current backlog will
be filled in the 1998 fiscal year.

EMPLOYEES

On September 27, 1997, the Company had 255 full-time employees,
including 6 officers. Of these employees, 29 were executive or management
personnel, 14 were administrative and clerical personnel, 15 were sales
personnel and 191 were manufacturing employees. The Company is not a party to
any collective bargaining agreement, and has never experienced an interruption
or curtailment of operations due to labor controversy. Management believes that
its relations with its employees are good.

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SUPERVISION AND REGULATION

The Federal Food, Drug and Cosmetic Act, and regulations issued or
proposed thereunder, provide for regulation by the Food and Drug Administration
(the "FDA") of the marketing, manufacture, labeling, packaging and distribution
of medical devices, including the Company's products. These regulations require,
among other things, that medical device manufacturers register with the FDA,
list devices manufactured by them, and file various types of reports. In
addition, the Company's manufacturing facilities are subject to periodic
inspections by regulatory authorities and must comply with "good manufacturing
practices" as required by the FDA and state regulatory authorities. The Company
believes that it is in substantial compliance with applicable regulations and
does not anticipate having to make any material expenditures as a result of FDA
or other regulatory requirements.

ENVIRONMENTAL MATTERS

The Company's manufacturing operations are subject to various
government regulations pertaining to the discharge of materials into the
environment. Span-America believes that it is in compliance with applicable
regulations. The Company does not anticipate that continued compliance will have
a material effect on the Company's capital expenditures, earnings or competitive
position.

Item 2. Properties

The Company's principal office and manufacturing facility is owned by
the Company and located in Greenville, South Carolina. This facility contains
approximately 125,000 square feet and is located on a 13 acre site. The Company
also leases approximately 60,000 square feet of warehouse space in Greenville
for $12,500 per month until the lease expires in May 1998.

The Company produces foam mattress overlays for the medical and
consumer markets in a 40,000 square foot facility in Norwalk, California. The
lease rate is $15,615 per month and expires in December 1997. Management expects
to renew this lease effective January 1, 1998.

The South Carolina and California facilities are considered suitable
and adequate for their intended purposes.

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Item 3. Legal Proceedings

From time to time the Company is a party to various legal actions
arising in the normal course of business. However, management believes that as a
result of legal defenses and insurance arrangements with parties believed to be
financially capable, there are no proceedings threatened or pending against the
Company that, if determined adversely, would have a material adverse effect on
the business or financial position of the Company.

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

No matters were submitted to a vote of security holders during the
fourth quarter of the Company's 1997 fiscal year.

PART II

Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters

The stock price information contained under "Quarterly Financial Data"
within the table and the information set forth below the table on page 7 of the
Company's 1997 Annual Report is incorporated herein by reference. In addition,
the information under "Stock Information" on the inside back cover of the
Company's 1997 Annual Report is incorporated herein by reference.

Item 6. Selected Financial Data

The information contained in the "Selected Financial Information" on
page 6 of the Company's 1997 Annual Report is incorporated herein by reference.

Item 7. Management's Discussion and Financial Analysis

Management's Discussion and Financial Analysis on pages 8 through 10 of
the Company's 1997 Annual Report are incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data

The financial statements of the Company included on pages 11 through 22
of the Company's 1997 Annual Report are incorporated herein by reference.

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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

Information required under Items 10, 11, 12 and 13 of Part III is
incorporated herein by reference to portions of the definitive Proxy Statement
filed or to be filed with the Securities and Exchange Commission on or prior to
120 days following the end of the Company's 1997 fiscal year under the headings
"Election of Directors," "Business Experience of Nominees and Directors,"
"Executive Officers," "Compensation of Directors and Executive Officers,"
"Certain Transactions," and "Security Ownership of Certain Beneficial Owners and
Management."

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) (1) and (2) Financial Statements and Financial Statement Schedules

The response to this portion of Item 14 is submitted as a separate
section of this report beginning on page F-1.

(3) Listing of Exhibits

3.1 Amendment to the Company's by-laws dated April 25, 1995:
Incorporated by reference to Exhibit 3(ii) to the Company's
quarterly report on Form 10-Q for the quarter ended
July 1, 1995.

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4.1 Specimen of Common Stock certificate: Incorporated by reference to
Exhibit 1 to the Form S-8, Commission File No. 33-32896.

4.2 The Registrant hereby agrees to furnish to the Securities and
Exchange Commission upon request a copy of any instrument with
respect to long-term debt not being registered in a principal
amount less than 10% of the total assets of the Registrant on
a consolidated basis.

10.1 Patent Assignment and Royalty Agreement between Donald C.
Spann and the Company, with letter amendment thereto:
Incorporated by reference to Exhibit 10(c) to the Form S-18.

10.2 1987 Stock Option Plan: Incorporated by reference to Exhibit
10 to the Company's Annual Report on Form 10-K for the fiscal
year ended October 2, 1987, Commission File No. 0-11392.

10.3 Employee Stock Ownership Plan - Summary Plan Description: Incorporated
by reference to Exhibit 10.6 to the 1990 10-K.

10.4 1991 Stock Option Plan: Incorporated by reference to Exhibit 10.6 to
the 1991 10-K.

10.5 Retirement Agreement dated February 6, 1991 between the Company and
Donald C. Spann: Incorporated by reference to Exhibit 10.7 to the
1991 10-K.

10.6 Contract between the Company and Healthflex, Inc. dated February 28,
1992: Incorporated by reference to Exhibit 2.1 to the February 28, 1992
Form 8-K.

10.7 Contract between the Company and BriGam, Inc. dated October 16, 1992
terminating a royalty agreement: Incorporated by reference to Exhibit
10.10 to the Company's annual report on Form 10-K for the fiscal year
ended October 3, 1992, Commission File No. 0-11392.

10.8 Voluntary Resignation Agreement dated July 30, 1993 between the Company
and Donald C. Spann: Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
July 3, 1993.

10.9 Employment Agreement dated February 28, 1992 between the Company and
John W. Wilkinson: Incorporated by

15
<PAGE>

reference to Exhibit 28A to the Current Report on Form 8-K (the
"February 28, 1992 Form 8-K") filed by the Company with the Commission
on February 28, 1992.

10.10 Consulting Agreement dated August 1, 1994 between the Company and John
W. Wilkinson: Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
July 2, 1994.

10.11 Agreement for Sale and Purchase of Assets By and Among Span-America
Medical Systms, Inc., Embracing Concepts, Inc. and Edmund K. Maier
February 6, 1996 Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 30, 1996.

10.12 Resignation Agreement dated September 1, 1996 between the Company and
Charles B. Mitchell. Incorporated by reference to exhibit 10.12 to the
1996 10-K.

10.13 License and Distribution Agreement dated October 22, 1996 between the
Company and Pillowtex Corporation. Incorporated by reference to Exhibit
10.13 to the 1996 10-K.

10.14 1997 Stock Option Plan

10.15 1997 Long Term Incentive Stock Option Plan

13.1 1997 Annual Report to Shareholders.

23.0 Consent of Ernst and Young LLP.

27.0 Financial Data Schedule (For SEC Use Only)

(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter of the fiscal year ended September 27, 1997.

(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this report beginning on page F-1.

16
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

SPAN-AMERICA MEDICAL SYSTEMS, INC.

By: /s/ Brien Laing December 12, 1997
Brien Laing, Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities on the date indicated.

/s/ James D. Ferguson President, Chief Executive Officer
James D. Ferguson (Principal Executive Officer)

/s/ Richard C. Coggins Chief Financial Officer and Director
Richard C. Coggins (Principal Financial Officer)

/s/ Gwendolyn L. Randolph Controller
Gwendolyn L. Randolph

/s/ Roy W. Black Director
Roy W. Black

/s/ Thomas F. Grady, Jr. Director
Thomas F. Grady, Jr.

/s/ Thomas D. Henrion Director
Thomas D. Henrion

/s/ Douglas E. Kennemore __ Director
Douglas E. Kennemore, M.D.

/s/ Brien Laing Director
Brien Laing

/s/ J. Ernest Lathem _ Director
J. Ernest Lathem, M.D.

/s/ James M. Shoemaker, Jr. Director
James M. Shoemaker, Jr.

/s/ Robert A. Whitehorne _ Director
Robert A. Whitehorne
December 12, 1997

17
<PAGE>

Annual Report on Form 10-K

Items 14 (a) (1) and (2), (c) and (d)

List of Financial Statements and Financial Statement Schedules

Certain Exhibits

Financial Statement Schedules

Year Ended September 27, 1997

Span-America Medical Systems, Inc.

Greenville, South Carolina

F-1

<PAGE>

Span-America Medical Systems, Inc.

Form 10-K - Item 14(a)(1) and (2)

List of Financial Statements and Financial Statement Schedules

The following financial statements of Span-America Medical Systems, Inc.
included in the annual report of the registrant to its shareholders for the year
ended September 27, 1997 are incorporated by reference in Item 8:

Balance Sheets - September 27, 1997 and September 28, 1996.

Statements of Income - Years ended September 27, 1997,
September 28, 1996, and September 30, 1995.

Statements of Shareholders' Equity - Years ended September 27, 1997,
September 28, 1996, and September 30, 1995.

Statements of Cash Flows - Years ended September 27, 1997,
September 28, 1996, September 30, 1995

Notes to Financial Statements - September 27, 1997

The following financial statement schedule of Span-America Medical Systems,
Inc. is included in Item 14(d):

Schedule VIII - Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

F-2

<PAGE>

Schedule VIII - Valuation and Qualifying Accounts

Span-America Medical Systems, Inc.

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

COL. A COL. B COL. C COL. D. COL. E
ADDITIONS

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

Description Balance at (1) (2)
Beginning of Period Charged to Costs Charged to Other Deductions-Describe Balance at End
and Expenses Accounts - Describe of Period
- ------------------------------------------------------------------------------------------------------------------------------------

Year Ended September 27, 1997

Deducted from asset accounts:
Reserve for uncollectible
accounts $245,000 $217,000 $64,000(a) $398,000
Reserve for discounts 174,000 68,000(b) 242,000
-------------------------------------------------------------------------------------------------
Totals $419,000 $217,000 $68,000 $64,000 $640,000
=================================================================================================
Year Ended September 28, 1996

Deducted from asset accounts:
Reserve for uncollectible
accounts $205,000 $113,000 $73,000(a) $245,000
Reserve for discounts 150,000 24,000(b) 174,000
-----------------------------------------------------------------------------------------------
Totals $355,000 $113,000 $24,000 $73,000 $419,000
-----------------------------------------------------------------------------------------------
Year Ended September 30, 1995

Deducted from asset accounts:
Reserve for uncollectible
accounts $225,000 $ 24,000 $44,000(a) $205,000
Reserve for discounts 116,500 33,500(b) 150,000
------------------------------------------------------------------------------------------------
Totals $341,500 $24,000 $33,500 $44,000 $355,000
================================================================================================
</TABLE>

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

(a) Uncollectible accounts written off.
(b) Net increase in sales discounts charged to income as a reduction of sales.

SPAN-AMERICA MEDICAL SYSTEMS, INC.

1997 STOCK OPTION PLAN

1. PURPOSE

The purpose of the Span-America Medical Systems, Inc. 1997 Stock Option
Plan (the "Plan") is to promote the growth and profitability of Span-America
Medical Systems, Inc. (the "Company") and its subsidiaries ("Subsidiaries") from
time to time by increasing the personal participation of officers and key
employees in the financial performance of the Company, by enabling the Company
to attract and retain officers and key employees of outstanding competence and
by providing such officers and key employees with an equity opportunity in the
Company. This purpose will be achieved through the grant of stock options
("Options") to purchase shares of common stock of the Company, no par value per
share ("Common Stock").

2. ADMINISTRATION

The Plan shall be administered by the Company's Board of Directors
(the "Board") or by a committee of the Board (the "Committee") composed solely
of all members thereof who are "Non- Employee Directors" (as defined in Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended).

The Board or Committee shall have complete authority to: (i) interpret
all terms and provisions of the Plan consistent with law; (ii) select from the
group of officers and key employees eligible to participate in the Plan the
officers and key employees to whom Options shall be granted; (iii) within the
limits established herein, determine the number of shares to be subject to, the
exercise price of and the term of each Option granted to each of such officers
and key employees; (iv) prescribe the form of instrument(s) evidencing Options
granted under this Plan; (v) determine the time or times at which Options shall
be granted to officers or key employees; (vi) make special grants of Options to
officers or key employees when determined to be appropriate; (vii) provide, if
appropriate, for the exercisability of Options granted to officers or key
employees in installments or subject to specified conditions; (viii) determine
the method of exercise of Options granted to officers or key employees under the
Plan; (ix) adopt, amend and rescind general and special rules and regulations
for the Plan's administration; and (x) make all other determinations necessary
or advisable for the administration of this Plan.

Any action which the Board or Committee is authorized to take may be
taken without a meeting if all the members of the Board

<PAGE>

or Committee sign a written document authorizing such action to be taken, unless
different provision is made by the By-Laws of the Company or by resolution of
the Board or Committee.

The Board or Committee may designate selected Board or Committee
members or certain employees of the Company to assist the Board or Committee in
the administration of the Plan and may grant authority to such persons to
execute documents, including Options, on behalf of the Board or Committee;
subject in each such case to the requirements of Rule 16b-3.

No member of the Board or Committee or employee of the Company
assisting the Board or Committee pursuant to the preceding paragraph shall be
liable for any action taken or determination made in good faith.

3. STOCK SUBJECT TO PLAN

The stock to be offered under this Plan shall be authorized but
unissued shares of Common Stock, shares of Common Stock previously issued and
thereafter acquired by the Company, or any combination thereof. An aggregate of
200,000 shares are reserved for the grant under this Plan of Options. Any or all
of the options granted under Section 4 hereof may, at the Board's or Committee's
discretion, be intended to qualify as incentive stock options under Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"). The numbers of
shares which may be granted under this Plan and under Section 4 hereof,
respectively, may be adjusted to reflect any change in the capitalization of the
Company as contemplated by Section 10 of the Plan and occurring after the
adoption of this Plan. The Board or Committee will maintain records showing the
cumulative total of all shares subject to Options outstanding under this Plan.

4. ELIGIBILITY AND FACTORS TO BE CONSIDERED IN GRANTING
OPTIONS

The grant of Options under this Section 4 shall be limited to those
officers and key employees of the Company or any of its Subsidiaries who have
the greatest impact on the Company's long-term performance and are selected by
the Board or Committee. Members of the Company's Board of Directors who are also
officers or employees of the Company are eligible to receive Options under this
Section 4. In making any determination as to the officer(s) and key employee(s)
to whom Options shall be granted under this Section 4 and as to the number of
shares to be subject thereto, the Board or Committee shall take into account, in
each case, the level and responsibility of the person's position, the level of
the person's performance, the person's level of compensation, the assessed
potential of the person and such additional factors as the

<PAGE>

Board or Committee shall deem relevant to the accomplishment of the purposes of
the Plan.

Options may be granted under this Section 4 only for a reason
connected with an officer's or key employee's employment by the Company or any
Subsidiary.

a. Allotment of Shares

The Board or Committee may, in its sole discretion and
subject to the provisions of this Plan, grant to participants eligible
under this Section 4, on or after the date hereof, Options to purchase
shares of Common Stock. Options granted under this Section 4 may, at
the discretion of the Board or Committee, be: (i) Options which are
intended to qualify as incentive stock options under Section 422 of the
Code; (ii) Options which are not intended so to qualify under Section
422 of the Code; or (iii) both of the foregoing, if granted separately,
and not in tandem. Each Option granted under this Plan must be clearly
identified as to its status as an incentive stock option or not.

Options granted under this Section 4 may be allotted to
participants in such amounts, subject to the limitations specified in
this Plan, as the Board or Committee, in its sole discretion, may from
time to time determine.

In the case of Options intended to be incentive stock
options, the aggregate fair market value (determined at the time of the
Options' respective grants) of the shares with respect to which
incentive stock options are exercisable for the first time by a
participant hereunder during any calendar year (under all plans taken
into account pursuant to Section 422(d) of the Code) shall not exceed
$100,000. Options under this Section 4 not intended to qualify as
incentive stock options under Section 422 of the Code may be granted to
any Plan participant without regard to the Section 422(d) limita tions.

b. Option Price

The price per share at which each Option granted under this Section 4
may be exercised shall be such price as shall be determined by the
Board or Committee at the time of grant based on such criteria as may
be adopted by the Board or Committee at the time of grant in good
faith, taking into account, in each case, the

<PAGE>

market price of the Common Stock, the level and responsibility of the
person's position, the level of the person's performance, the person's
level of compensation, the assessed potential of the person, and such
additional factor or factors as the Board or Committee shall deem
relevant to the accomplishment of the purposes of the Plan; provided,
however, that in no event shall the exercise price per share of an
Option be less than 50% of the fair market value of the Company's
shares of Common Stock on the date the Option is granted. In the case
of an Option intended to qualify as an incentive stock option under
Section 422 of the Code, the exercise price per share shall not be less
than 100% (or 110% for owners of more than 10% of the total combined
voting power of all classes of stock of the Company or any Subsidiary)
of the fair market value of the Common Stock at the time such Option is
granted.

If the Company's shares of Common Stock are:

(1) actively traded on any national securities
exchange or NASDAQ system that reports their sales prices,
fair market value shall be the average of the high and the low
sales prices per share on the date the Board or Committee
grants the Option;

(2) otherwise traded over the counter, fair market
value shall be the average of the final bid and asked prices
for the shares of Common Stock as reported for the date the
Board or Committee grants the Option; or

(3) not traded, the Board or Committee shall
consider any factor or factors which it believes affects fair
market value, and shall determine fair market value without
regard to any restriction other than a restriction which by
its terms will never lapse.

c. Term of Option

The term of each Option granted under this Section 4 shall be
established by the Board or Committee, but shall not exceed 10 years
(or 5 years for owners of more than 10% of the total combined voting
power of all classes of stock of the Company or of a Subsidiary) from
the date of the grant.

d. Time of Granting Options

The date of grant of an Option under this Section 4 shall, for all
purposes, be the date on which the Board

<PAGE>

or Committee makes the determination of granting such Option. Notice of
the determination shall be given to each officer or key employee to
whom an Option is so granted within a reasonable time after the date of
such grant.

e. Cancellation and Replacement of Options

The Board or Committee may at any time or from time to time
permit the voluntary surrender by the holder of any outstanding Option
granted under this Section 4 where such surrender is conditioned upon
the granting under this Section 4 to such holder of new Option(s) for
such number of shares as the Board or Committee shall determine, or may
require such a voluntary surrender as a condition precedent to the
grant under this Section 4 of new Option(s) to such holder.

The Board or Committee shall determine the terms and
conditions of any such new Option(s), including the prices at and
periods during which they may be exercised, in accordance with the
provisions of this Plan, all or any of which may differ from the terms
and conditions of the Option(s) surrendered. Any such new Option(s)
shall be subject to all the relevant provisions of this Plan.

The shares subject to any Option so surrendered shall no
longer be charged against the limitation or limitations provided in
Section 3 of this Plan and may again become shares subject to the same
applicable limitations of this Plan.

The granting of new Option(s) in connection with the
surrender of outstanding Option(s) under this Plan shall be considered
for the purposes of the Plan as the grant of new Option(s) and not an
alteration, amendment or modification of the Plan or of the Option(s)
being surrendered.

5. NON-TRANSFERABILITY

An Option granted to a participant under this Plan shall not be
transferable by him or her except: (i) by will; (ii) by the laws of descent and
distribution; or (iii) pursuant to a qualified domestic relations order as
defined by the Code or in Title I of the Employee Retirement Income Security
Act, or the rules thereunder. In the case of an Option intended to be an
incentive stock option, such Option shall not be transferable by a participant
other than by will or the laws of descent and

<PAGE>

distribution and during the optionee's lifetime shall be exercisable only by him
or her.

6. EXERCISABILITY OF OPTIONS

Subject to the provisions of this Plan, an Option granted under
Section 4 hereof shall be exercisable at such time or times after the date of
grant thereof, according to such schedule and upon such conditions as may be
determined by the Board or Committee at the time of grant.

For a period of six months commencing on the date of grant of an
Option hereunder to a participant, such participant may not sell any share(s) of
Common Stock acquired upon exercise of such Option.

Any Option granted under this Plan shall terminate prior to the
expiration of its term on the date the optionee ceases to be an employee of the
Company or any Subsidiary of the Company, unless the optionee shall (a) die
while an employee of the Company or such Subsidiary, in which case the
participant's legatee(s) under his or her last will or the participant's
personal representative or representatives may exercise all or part of the
previously unexercised portion of the Option at any time within one year after
the participant's death to the extent the optionee could have exercised the
Option immediately prior to his or her death, (b) become permanently or totally
disabled within the meaning of section 22(e)(3) of the Code (or any successor
provision), in which case the participant or his or her personal representative
may exercise the previously unexercised portion of the Option at any time within
one year after termination of his or her employment or directorship to the
extent the optionee could have exercised the Option immediately prior to such
termination, or (c) resign or retire with the consent of the Company, in which
case the participant may exercise the previously unexercised portion of the
Option at any time within three months after the participant's resignation or
retirement to the extent the optionee could have exercised the Option
immediately prior to such resignation or retirement.

In no event may an Option be exercised after the expiration of
its fixed term.

7. METHOD OF EXERCISE

Each Option granted under the Plan shall be deemed exercised when the
holder (a) shall indicate the decision to do so in writing delivered to the
Company, (b) shall at the same time tender to the Company payment in full in
cash (or in the case of an option granted under Section 4 hereof, if the Board
or Committee so

<PAGE>

determines at the time of grant, in shares of Common Stock at the fair market
value of such shares at the time of exercise) of the exercise price for the
shares for which the Option is exercised, (c) shall tender to the Company
payment in full in cash of the amount of all federal and state withholding or
other employment taxes applicable to the taxable income, if any, of the holder
resulting from such exercise, and (d) shall comply with such other reasonable
requirements as the Board or Committee may establish.

No person, estate or other entity shall have any of the rights of a
shareholder with reference to shares subject to an Option until a certificate
for the shares has been delivered.

An Option granted under this Plan may be exercised for any lesser
number of shares than the full amount for which it could be exercised. Such a
partial exercise of an Option shall not affect the right to exercise the Option
from time to time in accordance with this Plan for the remaining shares subject
to the Option.

8. TERMINATION OF OPTIONS

An Option granted under this Plan shall be considered terminated in
whole or part, to the extent that, in accordance with the provisions of this
Plan and such Option, it can no longer be exercised for any shares originally
subject to the Option. The shares subject to any Option or portion thereof,
which terminates, shall no longer be charged against the applicable limitation
or limitations provided in Section 3 of this Plan and may again become shares
available for the purposes, and subject to the same applicable limitations, of
this Plan.

9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION

In the event of any change in the outstanding Common Stock of the
Company by reason of a stock dividend, stock split, stock consolidation,
recapitalization, reorganization, merger, split up or the like, the shares
available for purposes of this Plan, the shares to be covered by subsequent
grants under Section 5 hereof and the number and kind of shares under option in
outstanding option agreements pursuant to this Plan and the option price under
such agreements shall be appropriately adjusted so as to preserve, but not
increase, the benefits of this Plan to the Company and the benefits to the
holders of such Options; provided in the case of incentive stock options that,
in the case of a corporate merger, consolidation, acquisition of property or
stock, separation, reorganization or liquidation, the excess of the aggregate
fair market value of the shares subject to any Option immediately after such
event over the aggregate option price of such shares is not more than the excess
of the aggregate fair

<PAGE>

market value of all shares subject to the Option immediately before such event
over the aggregate option price of such shares.

Adjustments under this Section shall be made by the Board or
Committee, whose determination as to what adjustments shall be made and the
extent thereof, shall be final, binding and conclusive.

10. COMPLIANCE WITH SECURITIES LAWS AND OTHER REQUIREMENTS

No certificate(s) for shares shall be executed and delivered upon
exercise of an Option until the Company shall have taken such action, if any, as
is then required to comply with the provisions of the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, the South Carolina
Uniform Securities Act, as amended, any other applicable state securities law(s)
and the requirements of any exchange on which the Common Stock may, at the time,
be listed.

In the case of the exercise of an Option by a person or estate
acquiring the right to exercise the Option by bequest or inheritance, the Board
or Committee may require reasonable evidence as to the ownership of the Option
and may require such consents and releases of taxing authorities as it may deem
advisable.

11. NO RIGHT TO EMPLOYMENT

Neither the adoption of the Plan nor its operation, nor any document
describing or referring to the Plan, or any part thereof, shall confer upon any
employee participant under the Plan any right to continue in the employ of the
Company, or shall in any way affect the right and power of the Company to
terminate the employment or position with the Company of any participant under
this Plan at any time with or without assigning a reason therefor, to the same
extent as the Company might have done if this Plan had not been adopted.

12. AMENDMENT AND TERMINATION

The Board or Committee may at any time suspend, amend or terminate
this Plan. The Board or Committee may make such modifications of the terms and
conditions of a holder's Option as it shall deem advisable. No Option may be
granted during any suspension of the Plan or after such termination.
Notwithstanding the foregoing provisions of this Section, no amendment,
suspension or termination shall, without the consent of the holder of an Option,
alter or impair any rights or obligations under any Option theretofore granted
under the Plan.

In addition to Board or Committee approval of an

<PAGE>

amendment, if the amendment would: (i) materially increase the benefits accruing
to participants; (ii) increase the number of securities issuable under this Plan
(other than an increase pursuant to Section 9 hereof); (iii) change the class or
classes of individuals eligible to receive Options; or (iv) otherwise materially
modify the requirements for eligibility, then such amendment must be approved by
the holders of a majority of the Company's outstanding capital stock present or
represented by proxy and entitled to vote at a meeting duly held of the
stockholders of the Company.

13. USE OF PROCEEDS

The proceeds received by the Company from the sale of shares pursuant
to Options granted under the Plan shall be used for general corporate purposes
as determined by the Board.

14. INDEMNIFICATION OF BOARD OR COMMITTEE

In addition to such other rights of indemnification as they may have
as members of the Board, the members of the Board or Committee shall, to the
fullest extent permitted by law, be indemnified by the Company against the
reasonable expenses, including attorney's fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Option granted thereunder, and against all amounts paid by them in
settlement thereof (provided the settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such Board
member or Committee member is liable for gross negligence or misconduct in the
performance of his duties; provided that within 60 days after institution of any
such action, suit or proceeding the Board member or Committee member shall in
writing offer the Company the opportunity, at its own expense, to handle and
defend the same.

15. EFFECTIVE DATE OF THE PLAN

This Plan was adopted by the Board of the Company on October 21, 1997
and shall be effective as of October 21, 1997, subject to its approval by the
appropriate shareholder vote at the next ensuing annual meeting of shareholders
of the Company.

<PAGE>

16. DURATION OF THE PLAN

Unless previously terminated by the Board or Committee, this Plan
shall terminate at the close of business on October 20, 2007, and no Option
shall be granted under it thereafter, but such termination shall not affect any
Option theretofore granted under this Plan.

<PAGE>

,199

Dear :

In accordance with the 1997 Stock Option Plan (the "Plan") of
Span-America Medical Systems, Inc. (the "Company"), you, as an officer or a key
employee of the Company or its subsidiaries, and in order to give you an added
proprietary interest in the Company and an additional incentive to advance the
interest of the Company, were granted on , 199 , an option to purchase shares of
the Common Stock of the Company upon the following terms and conditions:

(1) The exercise price shall be $ ( % of the fair market value of
a share on the date of grant , 199 );

(2) This Option will become exercisable according to the following
schedule:

(3) Once exercisable, this Option may be exercised until ,
, subject to the terms and conditions of the
Plan, a copy of which is attached hereto and incorporated
herein by reference. This Option is granted subject to the
Plan and shall be construed in accordance with the Plan.

<PAGE>

Page Two
, 199

(4) This Option is [is not] intended to be treated as an
"incentive stock option" for purposes of Section 422 of the
Internal Revenue Code.

This Option is not transferable except pursuant to the terms and
conditions of the Plan.

Very truly yours, SPAN-AMERICA
MEDICAL SYSTEMS, INC.

By:

Title:

I hereby accept the within Stock Option and acknowledge receipt of a copy of the
Plan.

Optionee

Date:

<PAGE>

Exhibit 10.15

SPAN-AMERICA MEDICAL SYSTEMS, INC.

1997 LONG-TERM INCENTIVE STOCK OPTION PLAN

1. PURPOSE

The purpose of the Span-America Medical Systems, Inc. 1997 Long-Term
Incentive Stock Option Plan (the "Plan") is to promote the growth and
profitability of Span-America Medical Systems, Inc. (the "Company") and its
subsidiaries ("Subsidiaries") from time to time by increasing the personal
participation of officers and key employees in the financial performance of the
Company and by providing such officers and key employees with an equity
opportunity in the Company. This purpose will be achieved through the grant of
stock options ("Options") to purchase shares of common stock of the Company
("Common Stock"), subject to achieving certain performance standards.

2. ADMINISTRATION

The Plan shall be administered by the Company's Board of Directors
(the "Board"). The Board shall have complete authority to: (i) interpret all
terms and provisions of the Plan consistent with law; (ii) select from the group
of officers and key employees eligible to participate in the Plan the officers
and key employees to whom Options shall be granted; (iii) within the limits
established herein, determine the number of shares to be subject to, the
exercise price of and the term of each Option granted to each of such officers
and key employees; (iv) prescribe the form of instrument(s) evidencing Options
granted under this Plan; (v) determine the time or times at which Options shall
be granted to officers or key employees; (vi) make special grants of Options to
officers or key employees when determined to be appropriate; (vii) provide, if
appropriate, for the exercisability of Options granted to officers or key
employees in installments or subject to specified conditions; (viii) determine
the method of exercise of Options granted to officers or key employees under the
Plan; (ix) adopt, amend and rescind general and special rules and regulations
for the Plan's administration; and (x) make all other determinations necessary
or advisable for the administration of this Plan.

3. STOCK SUBJECT TO PLAN

<PAGE>

first granted from the 60,000 shares remaining for grant under the Company's
1987 Stock Option Plan and the remaining shares, 10,800 shares, shall be granted
from shares available for grant under the Company's 1991 Stock Option Plan. All
of the options granted under this Plan shall be non-qualified stock options. The
numbers of shares granted under this Plan may be adjusted to reflect any change
in the capitalization of the Company as contemplated by the Plan and occurring
after the adoption of this Plan. The Board will maintain records showing the
cumulative total of all shares subject to Options outstanding under this Plan.

4. ELIGIBILITY AND FACTORS TO BE CONSIDERED IN GRANTING
OPTIONS

The grant of Options shall be limited to those officers and key
employees of the Company or any of its Subsidiaries who have the greatest impact
on the Company's long-term performance and are selected by the Board. In making
any determination as to the officer(s) and key employee(s) to whom Options shall
be granted and as to the number of shares to be subject thereto, the Board shall
take into account, in each case, the level and responsibility of the person's
position, the level of the person's performance, the person's level of
compensation, the assessed potential of the person and such additional factors
as the Board shall deem relevant to the accomplishment of the purposes of the
Plan. Options may be granted only for a reason connected with an officer's or
key employee's employment by the Company or any Subsidiary.

5. OPTION PRICE

The price per share at which each Option granted under this Plan may be
exercised shall be such price as shall be determined by the Board at the time of
grant based on such criteria as may be adopted by the Board in good faith,
taking into account, in each case, the market price of the Common Stock, the
level and responsibility of the person's position, the level of the person's
performance, the person's level of compensation, the assessed potential of the
person, and such additional factor or factors as the Board shall deem relevant
to the accomplishment of the purposes of the Plan; provided, however, that in no
event shall the exercise price per share of an Option be less than 50% of the
fair market value of the Company's shares of Common Stock on the date the Option
is granted.

6. TERMS OF OPTION

The term of each Option granted under this Plan shall be established by
the Board, but shall not exceed 10 years from the date of the grant.

<PAGE>

7. TIME OF GRANTING OPTIONS

The date of grant of an Option under this Plan shall, for all purposes,
be the date on which the Board makes the determination of granting such Option.
Notice of the determination shall be given to each officer or key employee to
whom an Option is so granted within a reasonable time after the date of such
grant.

8. OPTIONS GRANTED INITIALLY AND OPTION PRICE

Effective March 26, 1997, options as set forth on Schedule A are hereby
granted.

9. VESTING SCHEDULE

The employees to whom options are initially granted will have zero (0%)
percent vesting through December 31, 1999. If both performance goals (as defined
below) are met by fiscal year end 1999, the employees to whom options are
granted herein will become one hundred (100%) percent vested on January 1, 2000.
If both of the performance goals (as defined below) are not met by fiscal year
end 1999, the participants will remain zero (0%) percent vested through December
31, 2001 and shall become one hundred (100%) percent vested on January 1, 2002
whether or not either or both performance goals are met.

10. PERFORMANCE GOALS

The Company must accomplish an operating profit margin of ten (10%)
percent and a return on beginning shareholders' equity of twelve (12%) percent
in order for vesting to occur on January 1, 2000. All accounting terms used
herein will be defined by GAAP and numbers used in the calculation will be
derived from the Company's fiscal 1999 audited financial statements. The
definition of operating profit margin and return on beginning shareholders'
equity are as follows: (a) operating profit margin shall mean operating profit
for fiscal 1999 divided by net sales for fiscal 1999; and (b) return on
beginning shareholders' equity shall mean net income for fiscal 1999 divided by
total shareholders' equity at the beginning of fiscal 1999.

Ratios shall be rounded to the nearest tenth of a percentage point; for
example, a calculated operating profit margin of 9.951% will be rounded to 10.0%
(in which event the performance goal would be met). A calculated operating
profit margin of 9.949% will be rounded to 9.90% and the performance goal would
not be met.

In its discretion, the Board may determine to exclude the effects of
material transactions not in the ordinary course of business, such as stock
repurchases or offerings, gain or loss on

<PAGE>

the sale of a business unit and similar transactions.

11. NON-TRANSFERABILITY

12. EXERCISABILITY OF OPTIONS

Subject to the provisions of this Plan, an Option granted hereunder
shall be exercisable at such time or times after the date of grant thereof,
according to such schedule and upon such conditions as may be determined by the
Board at the time of grant.

Any unexercised Option granted under this Plan shall terminate prior
to the expiration of its term on the date the optionee ceases to be an employee
of the Company or any Subsidiary of the Company, unless the optionee shall (a)
die while an employee of the Company or an employee of the Company or such
Subsidiary, in which case the participant's legatee(s) under his or her last
will or the participant's personal representative or representatives may
exercise all or part of the previously unexercised portion of the Option at any
time within one year after the participant's death to the extent the optionee
could have exercised the Option immediately prior to his or her death, (b)
become permanently or totally disabled within the meaning of section 22(e)(3) of
the Code (or any successor provision), in which case the participant or his or
her personal representative may exercise the previously unexercised portion of
the Option at any time within one year after termination of his or her
employment or directorship to the extent the optionee could have exercised the
Option immediately prior to such termination, or (c) resign or retire with the
consent of the Company, in which case the participant may exercise the
previously unexercised portion of the Option at any time within three months
after the participant's resignation or retirement to the extent the optionee
could have exercised the Option immediately prior to such resignation or
retirement.

In no event may an Option be exercised after the expiration of
its fixed term.

13. METHOD OF EXERCISE

Each Option granted under the Plan shall be deemed exercised when the
holder (a) shall indicate the decision to do so in writing delivered to the
Company, (b) shall at the same

<PAGE>

time tender to the Company payment in full in cash of the exercise price for the
shares for which the Option is exercised, (c) shall tender to the Company
payment in full in cash of the amount of all federal and state withholding or
other employment taxes applicable to the taxable income, if any, of the holder
resulting from such exercise, and (d) shall comply with such other reasonable
requirements as the Board may establish.

No person, estate or other entity shall have any of the rights of a
shareholder with reference to shares subject to an Option until a certificate
for the shares has been delivered.

14. TERMINATION OF OPTIONS

An Option granted under this Plan shall be considered terminated in
whole or part, to the extent that, in accordance with the provisions of this
Plan and such Option, it can no longer be exercised for any shares originally
subject to the Option. In the event employee is terminated by the Company for
cause, any unexercised option shall immediately be terminated. Cause shall be
defined to mean (a) the commission by employee of any felony, (b) the commission
by employee of any crime or other activity involving dishonesty or moral
turpitude, (c) the engagement by employee in any act of fraud, misappropriation
or similar misfeasance, (d) the engagement by employee in any activity deemed by
the Board of Directors to constitute disloyalty to the Company or otherwise
result in a material adverse effect on the Company or; (e) repeated
non-attentiveness by employee to his assigned duties by officers of the Company.

15. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION

Adjustments under this Section shall be made by the Board, whose
determination as to what adjustments shall be made

<PAGE>

and the extent thereof, shall be final, binding and conclusive.

16. COMPLIANCE WITH SECURITIES LAWS AND OTHER REQUIREMENTS

17. NO RIGHT TO EMPLOYMENT

Neither the adoption of the Plan nor its operation, nor any document
describing or referring to the Plan, or any part thereof, shall confer upon any
employee participant under the Plan any right to continue in the employ of the
Company or shall in any way affect the right and power of the Company to
terminate the employment or position with the Company of any participant under
this Plan at any time with or without assigning a reason therefor, to the same
extent as the Company might have done if this Plan had not been adopted.

18. RIGHTS UPON CONSOLIDATION OR MERGER

If the Company is to be consolidated or merged with another corporation
and the Company's directors do not constitute a majority of the directors of the
surviving company, each Option hereunder, which at the time of such
consolidation or merger is not yet vested shall be vested (either in full or on
a pro rata basis at the Board's discretion) prior to the effective date of such
merger or consolidation; provided, however, that such vesting shall be made only
if the Board determines, in its sole discretion, that substantial compliance
with the Performance Goals has been achieved. Without limiting the foregoing,
the Board may determine to grant options subject to consummation of the
contemplated change of control transaction.

19. AMENDMENT AND TERMINATION

The Board may at any time suspend, amend or terminate this Plan. The
Board may make such modifications of the terms and conditions of a holder's
Option as it shall deem advisable;

<PAGE>

provided that an Option granted under this Plan may not be modified by the Board
with respect to any term or condition thereof. No Option may be granted during
any suspension of the Plan or after such termination. Notwithstanding the
foregoing provisions of this Section, no amendment, suspension or termination
shall, without the consent of the holder of an Option, alter or impair any
rights or obligations under any Option theretofore granted under the Plan.

20. INDEMNIFICATION OF BOARD OR COMMITTEE

In addition to such other rights of indemnification as they may have
as members of the Board, the members of the Board shall, to the fullest extent
permitted by law, be indemnified by the Company against the reasonable expenses,
including attorney's fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any Option
granted thereunder, and against all amounts paid by them in settlement thereof
(provided the settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such Board member is liable for
gross negligence or misconduct in the performance of his duties; provided that
within 60 days after institution of any such action, suit or proceeding the
Board member or Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.

21. DURATION OF THE PLAN

Unless previously terminated by the Board, this Plan shall terminate
at the close of business on January 2, 2002, and no Option shall be granted
under it thereafter, but such termination shall not affect any Option
theretofore granted under this Plan.

22. EFFECTIVE DATE OF THE PLAN

This Plan is adopted by the Board of the Company effective March 26,
1997.

<PAGE>

SCHEDULE A

Participant # Shares
----------- --------
Jim Ferguson 11,300
Richard Coggins 10,000
Rob Ackley 9,500
Clyde Shew 9,500
Ed Maier 9,000
Keith Mauldin 8,500
Melinda Gage 6,800
Wanda Totton 6,200
-------
Total 70,800

Each of these options is granted at an exercise price of $4.00 per share.

<PAGE>

SPAN-AMERICA MEDICAL SYSTEMS 1997 ANNUAL REPORT

any
Surface. (picture appears here.)

any Seat. (picture appears here.)

any Site. (picture appears here.)

any
Setting. (picture appears here.)

<PAGE>

about the company

Span-America Medical Systems, Inc. manufactures and markets products to the
health care industry for the prevention and treatment of pressure ulcers. The
Company is also a manufacturer and marketer of foam and contract packaging
products for the consumer and industrial markets. Span-America's stock trades on
the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol
SPAN.

financial summary

(Amounts in thousands except per share and percent data)

1997 1996 % Change
- --------------------------------------------------------------------------------

Net sales 34,116 31,474 8%
Operating income 2,181 584 273%
Net income 1,612 545 196%
Net income per share .51 .17 200%
Return on net sales 4.7% 1.7% -

Cash flow from operations 4,669 (514) 1,008%
Working capital 9,393 8,180 15%
Total assets 22,626 21,081 7%
Shareholders' equity 16,980 16,019 6%
Return on average shareholders' equity 9.8% 3.5% -

table of contents

Letter to Shareholders 1
Selected Financial Information 6
Quarterly FinancialData 7
Management's Discussion and Financial Analysis 8
Balance Sheets 11
Statements of Income 12
Statements of Shareholders' Equity 13
Statements of Cash Flows 14
Notes to Financial Statements 15
Report of Independent Auditors 22
Directors and Officers 23
Corporate Data 24

<PAGE>

letter to shareholder / 1

(any surface appears here
with picture.)

Major R&D advancements give the re-tooled PressureGuard(R) Series added
performance and flair, while its modularized components improve manufacturing
efficiencies and inventory control.

To Our Shareholders:

1997 was a great year for Span-America. We had a record year in sales and the
second best year ever in earnings. We attribute the turnaround to a new spirit
of enthusiasm and teamwork that permeates Span-America. All employees, from
manufacturing, to sales, to the management team contributed to our success.

We finished fiscal 1997 with sales of $34.1 million, up 8% over last year's
sales of $31.5 million. Earnings rose 196% to $1.6 million, or $.51 per share,
compared with $545,000, or $.17 per share last year. In short, we combined
higher sales with lower expenses to generate solid earnings performance.

We began 1997 with goals in three simple but critical areas: profitability,
stability, and new products. After several years of declining earnings, our
first priority was to restore Span-America to a reasonable level of
profitability - to rebuild the foundation for growth. We cut unproductive
expenses and refocused our sales and marketing efforts. The result was an almost
tripling of profits over the previous year. We achieved stability by setting a
plan and sticking to it. We made no major organizational or compensation
changes. We kept our promises. The payoff came in the form of focused, motivated
employees concentrating on the job at hand. In the area of new products, we
introduced a line of three therapeutic foam mattresses and a new positioning
seat cushion. Sales of these products got off to a good start in fiscal 1997,
and we expect them to continue to grow in future years.

Review of Business Segments
Our medical business unit performed very well in fiscal 1997. Sales were up 8%
to $15.3 million. The product line leaders were overlays, positioners, and foam
mattresses. Sales of our dynamic mattresses were down again in 1997 because of
the Medicare reimbursement change that took place in January 1996. We are
encouraged, however, that sales of dynamic mattress products began to improve in
our fourth fiscal quarter. We believe the Medicare change has now been fully
absorbed in the marketplace, and we hope to see a turnaround in dynamic mattress
sales in fiscal 1998.

New multi-phase retail
MEDICAL PRODUCT line paves the way for (picture of medical products
entry into emerging consumer appears here.)
oriented, non-traditional MEDICAL markets.

<PAGE>

letter to shareholder / 2

<TABLE>
<CAPTION>
<S> <C> <C>
Re-freshing the medical line - including several new products and design (picture of medical products
upgrades of existing products - has yielded more feature-rich versions of proven appears here.)
performers while increasing profit margins and cutting manufacturing cost.

Strengthened,
reconfigured North American sales force includes more efficient geographic (map appears here with the
regional coverage via new hires in key areas. following copy):
Sales Representation
The growth of our medical foam products this year was driven by our partnerships Manufacturing Plants
with several national distributors. We have focused our sales efforts on Corporate Headquarters
profitability and on business- to-business selling to a select group of key
national distributors and customers. With these customers, we promoted our
marketing vision of "any surface, any seat, any site, any setting," which refers
to our comprehensive line of clinically effective surface, seating, and
positioning products. We have geared our sales organization and distribution
network to follow patients, our ultimate customers, as they migrate from
traditional acute care hospitals to alternate site and home care settings. We
have successfully sold our products on the basis of their clinical
effectiveness, and we will continue to strengthen our clinical approach through
continuing education programs and additional clinical studies.

The consumer business unit enjoyed a record sales year in fiscal 1997. Consumer
sales increased 22% to $9.1 million from $7.5 million in fiscal 1996. Most of
the growth came in our line of convoluted foam mattress pads as a result of
several successful promotions with existing customers during the year. We also
benefited from sales of private- label products manufactured for Glenoit Mills
and Graco Children's Products. These OEM products were produced using
manufacturing technology originally developed for our TerryFoam product line. We
are pleased to offer these process capabilities to new customers.

We believe the foam portion of the consumer business profited from a shift in
strategy during fiscal 1997. Early in the year, we decided to focus on
cultivating strategic partnerships with selected distributors and wholesalers
rather than trying to sell our foam pads and pillows directly to retailers. This
strategy change was not the sole reason for the improvement in the consumer
business, but it allowed us to concentrate on our strengths. We also developed a
new covered mattress overlay for the consumer market, which combines the comfort
of foam with a fabric cover to

<PAGE>

enhance the traditional quilted mattress protector. The product will be
marketed in early fiscal 1998 under Springs Industries' Wamsutta(R) brand.
</TABLE>

letter to shareholders / 3

Sales to Top 10
Medical Customers
Dollars in Thousands

(graph appears here with the following plot points.)

8,952 11,359

FY1996 FY1997

A concentrated effort to
broaden its distributor base
has paid off handsomely for the
Medical segment:
Of the top ten medical customers
represented here, only three were
doing significant business
with Span-America
before 1994.

(picture of medical products appears here.)

Sales in the industrial business grew slightly in fiscal 1997 to $3.3 million, a
2% increase over the previous year. Although growth was low last year, we
believe the industrial segment has excellent future potential. In this part of
our business, we are offering customers specialized, high quality fabricating
capabilities. In the past, our industrial segment supplied only foam products,
but we have now demonstrated that our manufacturing processes can be
successfully used on other packaging materials as well. For example, we
purchased a new machine in late fiscal 1997 to produce a variety of plastic
packaging components for Fuji Photo Film in Greenwood, South Carolina. We expect
these new products to be meaningful contributors to industrial sales in fiscal
1998. In general, we continue to seek long-term supply relationships with
well-established companies who value our emphasis on quality, service and
customer support. In the contract packaging business, sales were down by 4% to
$6.4 million during fiscal 1997. The decline reflects our continued shift away
from medical disposable products toward consumer-related products where we can
provide more value-added services. We enjoyed healthy increases in business with
customers like Allergan, Bausch & Lomb, and Schering-Plough during the year. We
also gained several new pieces of business in our third and fourth fiscal
quarters, which should contribute to sales growth in fiscal 1998.

J. Ernest Lathem
Elected Board Chairman

We are pleased to report that the Board recently elected Dr. Ernie Lathem as its
chairman, beginning January 1, 1998. He will succeed Brien Laing who has been
the Company's chairman since late 1993. Mr. Laing initiated the appointment of a
new chairman to provide a smooth leadership transition prior to his anticipated
retirement from the Board in 1999. Mr. Laing will continue to serve as director
until the 1999 shareholders' meeting.

The Contract Packaging segment continues
to benefit from a customer shift toward leading marketers
of consumer-oriented products.

<PAGE>

letter to shareholder/4

(major corporations icon appears here w/ any Site.)

FUJIFILM

FRIGIDAIRE COMPANY

KEMET ELECTRONICS CORPORATION

DUPONT

IBM

PERCEPTION AQUATERRA

Dr. Lathem has been a director of Span-America since 1996 and has served as
vice-chairman since mid 1997. He retired in 1993 from 28 years in the private
practice of urological surgery in Greenville, SC. He serves as a director of
Southern National Corporation and one of its subsidiaries, BB&T of South
Carolina. Additionally, he serves as director of several closely held companies.

Strategy for the Future

Looking forward to fiscal 1998 and beyond, we are optimistic about
Span-America's future. Our primary strategic focus will continue to be on the
medical business. Span-America's medical business currently participates in only
one segment of the wound management market: providing surface, seating, and
positioning products designed to prevent or promote the healing of pressure
ulcers. We see opportunities for new products in this market and for growth of
our existing products, particularly as the U.S. population ages. But we also see
potential opportunities to expand our medical business in other parts of the
wound management market, including the areas of skin care, wound care, and
nutrition. We have no immediate plans to enter these new markets, but we will be
evaluating opportunities for growth as part of our ongoing strategic planning
process.

Although the medical business will be the core of Span-America, we will continue
to participate in the consumer, industrial and contract packaging markets as
long as we can do so profitably. But it will not be business as usual for our
non-medical segments. We will leverage our competencies in medical product
development and manufacturing technologies by seeking profitable applications of
these products and processes in other markets. The new project with Fuji Photo
Film is a good example of this strategy at work. Our medical business has given
us skills at cutting products with exacting tolerances in a clean manufacturing
environment. We can use these same capabilities to produce high quality plastic
packaging components for Fuji. In simple terms, we are expanding on what we do
best.
We will also continue to emphasize new product development. Already in the

The success of the Industrial segment has hinged on developing strong
relationships with major corporations who value Span-America's manufacturing
expertise.

<PAGE>

letter to shareholder/5

LOUISVILLE BEDDING OBUSFORME(R)

GRACO PILLOWTEX
CHILDREN'S PRODUCTS INC. ALL THE COMFORTS OF HOME. TM

A shift in the Consumer segment away from direct selling and toward partnerships
with established players in the market has fueled growth in both sales dollars
and profit margins.

Span-America's recent development efforts have extended beyond its core medical
products to include specialty items like this upscale mattress overlay,
scheduled for introduction into the Consumer market in 1998.

(picture of a bedding product appears here.)

We will also continue to emphasize new product development. Already in the first
quarter of fiscal 1998 we have introduced a completely reengineered line of
PressureGuard mattresses. This includes the introduction of the new
PressureGuard Site Select mattress which offers programmable, pendant controlled
pressure selection in four different zones within the mattress. We also recently
introduced a line of retail medical foam products which will be marketed to home
medical equipment dealers in the U.S. In the consumer business, we expect to
begin shipping the new fabric covered foam mattress protector in early 1998. In
addition, we are working with a consumer mattress company on the development of
a new bedding product. In the contract packaging business, we will be
manufacturing new products for several large consumer products companies.

Our operating goals for fiscal 1998 will again be simple: profitability, sales
growth, and improved technology. We believe that increased profitability and
return to shareholders is our first responsibility. We made great progress on
this front in 1997, but we recognize the need for sales growth to generate
sustained profit growth. We will also invest in new technology in fiscal 1998.
We plan to significantly enhance the electronic components of our computer aided
manufacturing equipment, automate two key manufacturing processes, upgrade our
internal computer systems, and increase our investment in people and equipment
for R & D.

In fiscal 1998, we will continue to build on the successes we had in 1997 while
we lay the foundation for future growth. We have a motivated team of employees,
excellent products, and many opportunities in dynamic markets. We look forward
to reporting to you on our progress.

Sincerely,

/s/ Jim Ferguson
James D. Ferguson
President and Chief Executive Officer

/s/ Brien Laing
Brien Laing
Chairman

<PAGE>

selected financial information/6

Five-Year Financial Summary
(Amounts in thousands, except per share and employee data)

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993*
- ---------------------------------------------------------------------------------------------------------------------------
For the year:
<S> <C> <C> <C> <C> <C>
Net sales $ 34,116 $ 31,474 $ 30,376 $ 31,129 $33,265
Gross profit 9,154 8,177 8,359 9,007 9,527
Operating income 2,181 584 1,254 2,282 1,596
Net income 1,612 545 978 1,640 1,095
Cash flow from operations 4,669 (514) 1,551 2,015 2,689
Capital expenditures 555 451 204 540 727

Earnings per share:
Net income $ 0.51 $ 0.17 $ 0.30 $ 0.49 $ 0.31
Cash dividends declared 0.10 0.10 0.10 0.10 0.10

At end of year:
Working capital $ 9,393 $ 8,180 $ 8,541 $ 7,652 $ 7,671
Property & equipment - net 4,722 5,074 5,457 6,251 6,689
Total assets 22,626 21,081 20,614 20,014 20,577
Long-term debt 0 0 286 357 428
Shareholders' equity 16,980 16,019 15,435 14,919 14,983
Book value per share 5.43 4.94 4.86 4.62 4.26
Number of employees 255 256 250 235 250

Key ratios:
Current ratio 3.3 3.4 3.8 3.7 3.5
Long-term debt to total capital 0.0% 0.0% 1.8% 2.3% 2.7%
Return on net sales 4.7% 1.7% 3.2% 5.3% 3.3%
Return on average shareholders' equity 9.8% 3.5% 6.4% 11.0% 7.7%
Return on average total assets 7.4% 2.6% 4.8% 8.1% 5.6%
</TABLE>

* Fiscal 1993 includes an after-tax charge of $623,000 or $.18 per share,
related to the retirement of the Company's former chairman and chief executive
officer. See Note 9 in Notes to Financial Statements.

(graph appears here with the following plot points.)

Net Sales 93 94 95 96 97
(In Thousands) 33,265 31,129 30,367 31,474 34,116

Net Income 93 94 95 96 97
(In Thousands) 1,095 1,640 978 545 1,612

Earnings Per Share 93 94 95 96 97
(In Cents Per Share) 31 49 30 17 51

<PAGE>

quarterly financial data/7
<TABLE>
<CAPTION>

Quarterly Financial Data
(Unaudited)
(Amounts in thousands, except per share data)

First Second Third Fourth Year
- ---------------------------------------------------------------------------------------------------------------------------
For Fiscal 1997
<S> <C> <C> <C> <C> <C>
Net sales $ 7,739 $ 8,561 $ 8,707 $ 9,109 $34,116
Operating income 476 562 547 596 2,181
Net income 350 399 399 464 1,612
Earnings per share 0.11 0.12 0.13 0.15 0.51
Stock price data
High 5 5 29/32 5 5/8 6 1/4 6 1/4
Low 4 4 4 1/2 4 1/2 4
For Fiscal 1996
Net sales $ 7,049 $ 7,471 $ 8,753 $ 8,201 $31,474
Operating income (loss) 365 (139) 169 189 584
Net income (loss) 280 (45) 154 156 545
Earnings per share 0.09 (0.01) 0.05 0.05 0.17
Stock price data
High 6 3/8 7 7 6 7/16 7
Low 4 5/8 6 4 5/8 4 1/4 4 1/4

</TABLE>

The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol SPAN.

At September 27, 1997, there were 3,125,338 common shares outstanding. As of
December 5, 1997, there were approximately 415 shareholders of record and
approximately 1,400 beneficial shareholders. The closing price of Span America's
stock on December 5, 1997, was $7 5/8.

In November 1991, the Board of Directors authorized a quarterly cash dividend of
$.025 per share. Future dividend payments will depend upon the Company's
earnings and liquidity position.

(graph appears here with the following plot points.)

Working Capital 93 94 95 96 97
(In Thousands) 7,671 7,652 8,541 8,180 9,393

Cash Flow From Operations 93 94 95 96 97
(In Thousands) 2,689 2,015 1,551 (514) 4,669

Shareholders' Equity 93 94 95 96 97
(In Thousands) 14,983 14,919 15,435 16,019 16,980

<PAGE>

management's discussion and financial analysis/8

Results of Operations Fiscal 1997 vs. 1996

SUMMARY
Net sales increased 8% to $34.1 million in fiscal 1997 compared with $31.5
million in fiscal 1996. This increase in revenues resulted from growth in
medical, consumer and industrial foam products. Sales of contract packaging
products declined compared with the prior year. Net income for fiscal 1997 rose
196% to $1.6 million, or $0.51 per share, compared with earnings of $545,000, or
$0.17 per share, in fiscal 1996. The Company's improved earnings were due to
higher sales volume combined with an 8% decrease in selling, marketing and
administrative expenses compared with the prior year.

SALES
The Company's medical sales increased by 8% during fiscal 1997 to $15.3 million
compared with $14.1 million in fiscal 1996. The increase was the result of
higher volumes of the Company's mattress overlays, patient positioners, and
static replacement mattresses. Management expects that medical sales will
increase slightly during fiscal 1998.

Consumer product sales increased 22% during fiscal 1997 to $9.1 million from
$7.5 million in fiscal 1996 resulting from higher sales volumes of convoluted
foam mattress pads and private label products. Management believes that consumer
sales in fiscal 1998 will be similar to those of fiscal 1997.

Sales of industrial foam products increased by 2% during fiscal 1997 to $3.3
million. The increase was primarily the result of higher unit sales to existing
customers. Management expects that industrial foam sales in fiscal 1998 will be
higher than in fiscal 1997.

The Company's contract packaging sales decreased by 4% during fiscal 1997 to
$6.4 million compared with $6.7 million in fiscal 1996 due mainly to lower
volumes of certain medical disposable products. Contract packaging sales are
expected to increase slightly during fiscal 1998.

GROSS PROFIT
The Company's gross profit increased by 12% to $9.2 million during fiscal 1997
from $8.2 million in fiscal 1996. The gross profit margin percentage increased
slightly to 26.8% in fiscal 1997 from 26.0% in fiscal 1996. The increases in
gross profit level and gross margin percentage during fiscal 1997 were caused by
the higher sales volume and a slightly lower rate of increase in manufacturing
costs. Management expects the gross margin percentage during fiscal 1998 to
increase slightly compared with fiscal 1997.

S G & A EXPENSES
Sales and marketing expenses decreased 11% to $4.5 million, or 13.3% of sales,
in fiscal 1997 compared with $5.1 million, or 16.2% of sales, in fiscal 1996.
The decreases occurred primarily in travel, compensation, and consumer marketing
expenses. Management expects that total sales and marketing expenses in fiscal
1998 will be higher than 1997 levels.

General and administrative expenses declined by 3% to $2.4 million in fiscal
1997 compared with $2.5 million in fiscal 1996 due primarily to the termination
of the Company's ESOP and to smaller reductions in various administrative
expense categories. General and administrative expenses for 1998 are expected to
be higher than 1997 levels.

OTHER
Non-operating income increased by 25% to $398,000 in fiscal 1997 compared with
$318,000 in fiscal 1996. The majority of the increase was due to a gain on the
sale of equipment and higher interest income on marketable securities.
Management expects non-operating income in fiscal 1998 to be less than that of
fiscal 1997.

During fiscal 1997, the Company paid dividends of $320,242, or 20% of net
income, for the year. This amount represented four quarterly dividends of $.025
per share.

The statements contained in "Results of Operations" and "Liquidity and Capital
Resources" which are not historical facts are forward-looking statements that
involve risks and uncertainties. Management wishes to caution the reader that
these forward-looking statements such as the Company's expectations for future
sales increases or expense reductions compared to previous periods are
forecasts. Actual events or results may differ materially as a result of risks
facing the Company. Such risks include but are not limited to: the loss of a
major distributor of the Company's medical or consumer products, the inability
to achieve anticipated

<PAGE>

management's discussion and financial analysis/9

sales volume of medical products, changes in relationships with large customers,
the impact of competitive products and pricing, government reimbursement changes
in the medical market, D. A. regulation of medical device manufacturing, raw
material cost increases, and other risks referenced in the Company's Annual
Report on Form 10-K.

Results of Operations Fiscal 1996 vs. 1995

SUMMARY
Net sales for fiscal 1996 increased 4% to $31.5 million compared with $30.4
million in fiscal 1995. This increase in revenues resulted from growth in
medical, consumer and contract packaging products. Sales of industrial foam
products declined compared with the prior year. Net income decreased to
$545,000, or $.17 per share, during fiscal 1996 compared with $978,000, or $.30
per share, in fiscal 1995. The earnings decline was caused by a less profitable
product mix and higher selling and marketing expenses.

SALES
The Company's medical sales increased by 4% during fiscal 1996 to $14.1 million
compared with $13.6 million in fiscal 1995. The increase was the result of
higher unit volume of foam overlays and positioners, which offset a decrease in
mattress sales. Sales of the Company's dynamic mattress products were affected
by a tightening of Medicare reimbursement criteria, which became effective on
January 1, 1996.

The Company's consumer product sales increased 8% during fiscal 1996 to $7.5
million from $6.9 million in fiscal 1995 due to sales of a new bathmat product.

Sales of industrial foam products decreased by 9% during fiscal 1996 to $3.3
million from $3.6 million in fiscal 1995. The decrease was primarily the result
of lower sales to existing customers in the first and second quarters of the
year.

The Company's contract packaging sales increased by 6% during fiscal 1996 to
$6.7 million compared with $6.3 million in fiscal 1995 due to a higher demand
for contract packaging products.

GROSS PROFIT
The Company's gross profit decreased by 2% to $8.2 million during fiscal 1996
from $8.4 million in fiscal 1995. The gross profit margin percentage declined
slightly to 26.0% in fiscal 1996 from 27.5% in fiscal 1995. The reduction in
gross profit level and gross margin percentage during fiscal 1996 was due to a
less profitable product mix and higher manufacturing costs.

S G & A EXPENSES
Sales and marketing expenses increased 11% to $5.1 million, or 16.2% of sales,
in fiscal 1996 compared with $4.6 million, or 15.1% of sales, in fiscal 1995.
The majority of the increase was caused by the implementation of new marketing
programs for the Company's medical mattress products.

General and administrative expenses declined by 1% to $2.5 million in fiscal
1996.

OTHER
Non-operating income decreased by 3% to $318,000 in fiscal 1996 compared with
$328,000 in fiscal 1995. The majority of the decrease was due to lower interest
income.

During fiscal 1996, the Company paid dividends of $323,224, or 59% of net
income, for the year. This amount represented four quarterly dividends of $.025
per share.

Liquidity and Capital Resources
The Company generated cash from operations of approximately $4.7 million during
fiscal 1997, which was used to fund its investing and financing activities. Cash
flow was unusually high during fiscal 1997 because of larger than normal
decreases in accounts receivable and inventory balances during the year.
Management expects cash flow from operations in fiscal 1998 to be lower than the
1997 level.

The Company's working capital increased 15% in fiscal 1997 to $9.4 million
compared with $8.2 million at the end of the prior

<PAGE>

year. The current ratio of 3.3 remained approximately level for the fiscal years
ended 1997 and 1996.

Accounts receivable, net of allowances, decreased 14% during fiscal 1997 to $4.9
million compared with $5.7 million at the end of fiscal 1996. The Company's
average collection time decreased

<PAGE>

management's discussion and financial analysis/10

to 57 days during fiscal 1997 compared with 59 days in fiscal 1996. Management
expects collection times to be similar in fiscal 1998 to those in 1997. All of
the Company's accounts receivable are unsecured.

Inventory decreased by 11% during fiscal 1997 to $3.1 million from $3.5 million
at the end of fiscal 1996. The decrease was due mainly to planned reductions in
medical and consumer raw material inventory. Management expects inventory levels
in fiscal 1998 to be slightly higher than those of fiscal 1997.

Net property and equipment decreased by approximately $350,000, or 7%, during
fiscal 1997. The change resulted primarily from the combination of capital
expenditures of $555,000 and normal depreciation expense. Management expects
that capital expenditures during fiscal 1998 will be similar to those incurred
during fiscal 1997.

The Company's trade accounts payable increased 12% to $2.4 million in fiscal
1997 compared with $2.1 million at the end of fiscal 1996. The increase was due
mainly to normal monthly fluctuations in accounts payable balances. Accrued and
sundry liabilities increased by 82% to $1.8 million in fiscal year 1997. The
change in accrued liabilities was mainly attributable to higher accrued
incentive compensation, warranty reserves, income taxes payable, and accrued
medical insurance at year-end 1997.

Management believes that funds on hand, funds generated from operations, and
funds available under the Company's $2.5 million unused line of credit are
adequate to finance operations and expected capital requirements during fiscal
1998.

IMPACT OF INFLATION
Inflation was not a significant factor for the Company during fiscal 1997.
Higher inflation rates could impact the Company through higher manufacturing
costs. The Company's profit margin could be adversely affected to the extent
that the Company is unable to pass cost increases along to its customers due to
competitive conditions.

YEAR 2000
The Company has assessed the potential impact of the year 2000 on its key
financial, operations and information systems. Management does not believe that
the Company will encounter significant systems problems related to the year
2000. The financial impact of making required systems changes is not expected to
be material to the Company's financial position, results of operations or cash
flows. Management expects that system changes for year 2000 compliance will be
completed during fiscal 1998.

IMPACT OF SFAS 128
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which must be adopted by the Company and reflected in
its financial statements for the periods ending on or after December 27, 1997.
Beginning in the first quarter of fiscal 1998, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded.

The impact of Statement 128 is not expected to result in a change to primary
earnings per share for fiscal years 1997 or 1996. Fully diluted earnings per
share for fiscal 1997 would decrease by $.01 per share and would not change for
fiscal 1996.

<PAGE>

balance sheets/11

Balance Sheets
September 27, September 28,
1997 1996
-------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,605,474 $ 925,370
Securities available for sale (Note 3) 3,493,430 1,194,068
Accounts receivable, net of allowances of
$640,000 (1997) and $419,000 (1996) 4,914,460 5,733,810
Inventories (Note 4) 3,076,329 3,463,637
Prepaid expenses and deferred income taxes 419,044 226,959
-------------------------------------------
Total current assets 13,508,737 11,543,844

Property and equipment, net (Note 5) 4,721,580 5,074,106
Cost in excess of fair value of net assets
acquired, net of accumulated amortization
of $438,073 (1997) and $290,650 (1996) 2,513,823 2,491,635
Other assets (Note 6) 1,882,174 1,971,010
--------------------------------------------
$ 22,626,314 $21,080,595

Liabilities and Shareholders' Equity Current liabilities:
Accounts payable $ 2,364,097 $ 2,117,643
Accrued and sundry liabilities (Note 7) 1,751,310 960,011
Current portion of debt (Note 8) - 286,344
Total current liabilities 4,115,407 3,363,998

Deferred income taxes (Note 11) 457,000 540,000
Deferred compensation (Note 9) 1,074,398 1,157,282
Shareholders' equity (Note 10)
Common stock, no par value; 20,000,000 shares
authorized; issued and outstanding shares
3,125,338 (1997) and 3,241,042 (1996) 3,991,745 4,516,895
Additional paid-in capital 53,160 145,834
Retained earnings 12,934,604 11,642,930
--------------------------------------------
16,979,509 16,305,659
Less guaranteed ESOP obligations (Note 12) - 286,344
--------------------------------------------
Total shareholders' equity 16,979,509 16,019,315
$ 22,626,314 $21,080,595
Contingencies (Note 17)

</TABLE>

See accompanying notes.

<PAGE>

statements of income/12

Statements of Income
Years Ended
-------------------------------------------------
September 27, September 28, September 30,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $34,115,689 $31,473,826 $30,376,242
Cost of goods sold 24,961,211 23,296,656 22,016,763
-------------------------------------------------
Gross profit 9,154,478 8,177,170 8,359,479

Selling and marketing expenses 4,545,742 5,088,646 4,586,602
General and administrative expenses 2,428,184 2,504,970 2,518,902
------------------------------------------------------
6,973,926 7,593,616 7,105,504
----------------------------------------------------
Income from operations 2,180,552 583,554 1,253,975

Other (expense) income:
Interest expense - (29,170) (17,313)
Investment income and other 398,364 317,670 328,421
---------------------------------------------------------
398,364 288,500 311,108
----------------------------------------------------

Income before income taxes 2,578,916 872,054 ,565,083

Provision for income taxes (Note 11) 967,000 327,000 587,000
------------------------------------------------------
Net income $ 1,611,916 $ 545,054 $ 978,083
======================================================

Earnings per share of common stock $ .51 $ .17 $ .30

Weighted average shares outstanding 3,188,397 3,227,966 3,244,075
=====================================================

</TABLE>

See accompanying notes.

<PAGE>

statements of shareholders' equity/13
<TABLE>
<CAPTION>

Statements of Shareholders' Equity
Additional Guaranteed
Common Stock Paid-in Retained ESOP
Shares Amount Capital Earnings Obligation Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1994 3,226,997 $4,432,931 $ 145,834 $ 10,767,609 ($ 427,094) $ 14,919,280
Net income for the 1995 fiscal year 978,083 978,083
ESOP loan repayments 70,375 70,375
Common stock purchased and retired (96,300) (454,536) (454,536)
Common stock issued based on
Healthflex acquisition agreement 37,740 210,852 210,852
Cash dividends paid or declared
($.10 per share) (324,592) (324,592)
Common stock issued to Directors 7,000 35,875 35,875
- ---------------------------------------------------------------------------------------------------------------------------

Balance at September 30, 1995 3,175,437 4,225,122 145,834 11,421,100 (356,719) 15,435,337
Net income for the 1996 fiscal year 545,054 545,054
ESOP loan repayments 70,375 70,375
Common stock purchased and retired (5,566) (33,484) (33,484)
Common stock issued on exercise of
stock options 15,000 50,250 50,250
Common stock issued to Directors 6,000 38,250 38,250
Common stock issued based on
Healthflex acquisition agreement 50,171 236,757 236,757
Cash dividends paid or declared
($.10 per share) (323,224) (323,224)
- ---------------------------------------------------------------------------------------------------------------------------

Balance at September 28, 1996 3,241,042 4,516,895 145,834 11,642,930 (286,344) 16,019,315
Net income for the 1997 fiscal year 1,611,916 1,611,916
ESOP termination (42,875) (193,670) (92,674) 286,344 -
Common stock purchased and retired (113,303) (542,343) (542,343)
Common stock issued to Directors 9,000 41,250 41,250
Common stock issued based on
Healthflex acquisition agreement 31,474 169,613 169,613
Cash dividends paid or declared
($.10 per share) (320,242) (320,242)
- ---------------------------------------------------------------------------------------------------------------------------

Balance at September 27, 1997 3,125,338 $3,991,745 $ 53,160 $ 12,934,604 $ - $ 16,979,509
- ---------------------------------------------------------------------------------------------------------------------------

</TABLE>

See accompanying notes.

<PAGE>

statements of cash flows/14

Statements of Cash Flows
Years Ended
- ---------------------------------------------------------------------------------------------------------------------------
September 27, September 28, September 30,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Operating activities:
<S> <C> <C> <C>
Net income $ 1,611,916 $ 545,054 $ 978,083
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation 767,925 825,043 905,688
Amortization 311,267 280,844 217,419
Provision for losses on accounts receivable 217,000 113,000 24,000
Provision for deferred income taxes (247,000) (139,000) (89,000)
(Gains)/Losses on sale and disposal of
property, plant and equipment (40,463) 15,475 28,807
Gain on sale of other assets (3,640)
Increase in cash value of life insurance (4,954) (98,737) (235,740)
Deferred compensation ( 82,884) (61,236) 75,024
Changes in operating assets and liabilities:
Accounts receivable 716,834 (1,390,242) (587,571)
Inventory 387,308 (622,021) (77,920)
Prepaid expenses and other assets (5,225) 17,616 90,366
Accounts payable and accrued expenses 1,037,753 525 225,932
- ---------------------------------------------------------------------------------------------------------------------------

Net cash provided by/(used for) operating activities 4,669,477 (513,679) 1,551,448

Investing activities:
Acquisition of Embracing Concepts, Inc. (592,435)
Purchases of marketable securities (4,241,072) (2,476,757) (1,408,432)
Proceeds from sales of marketable securities 1,962,226 4,145,785 513,707
Purchases of property, plant and equipment (554,935) (450,601) (203,912)
Proceeds from sale of property,
plant and equipment 45,000 63,200
Payments for other assets (51,663) (122,881) (55,779)
Proceeds from sale of other assets 3,750
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used for)/provided by investing activities (2,840,444) 503,111 (1,087,466)

Financing Activities:
Dividends paid (320,242) (323,224) (324,592)
Common stock issued upon exercise of options 50,250
ESOP termination (286,344)
Purchase and retirement of common stock (542,343) (33,484) (454,536)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (1,148,929) (306,458) (779,128)
Increase/(decrease) in cash and cash equivalents 680,104 (317,026) (315,146)
Cash and cash equivalents at beginning of year 925,370 1,242,396 1,557,542
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,605,474 $ 925,370 $1,242,396

</TABLE>

See accompanying notes.

<PAGE>

notes to financial statements/15

Notes to Financial Statements
September 27, 1997

1. Significant Accounting Policies

DESCRIPTION OF BUSINESS
The Company manufactures and distributes replacement mattresses, mattress
overlays, patient positioners and seating cushions for the medical market;
pillows, cushions and mattress pads for the consumer market; various foam
products for the industrial market; and contract packaging products for the
medical and consumer markets throughout the United States and Canada.
Receivables from the sale of such products are unsecured.

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

DEPRECIATION
Depreciation is computed using the straight-line method. Estimated useful lives
for buildings and land improvements range from 15 to 35 years. The estimated
useful lives of all other property and equipment range from 3 years to 15 years.
For income tax purposes, principally all depreciation is computed using
accelerated methods.

AMORTIZATION
Amortization is computed using the straight-line method. Costs of patents are
amortized over periods ranging from 10 to 17 years, and trademarks are amortized
over periods of 5 or 10 years. Loan costs are amortized using the straight-line
method over the terms of the related debt. Costs in excess of the fair value of
net assets acquired are amortized over 30-year and 10-year periods. Terminated
contract rights are being amortized over the period expected to be benefited of
5 years. Accumulated amortization of intangible assets at September 27, 1997,
and September 28, 1996, was approximately $1,020,000 and $1,008,000,
respectively.

REVENUE RECOGNITION
Revenue is recognized by the Company when goods are shipped and title passes to
the customer.

ADVERTISING COSTS
Advertising costs are expensed as incurred.

FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, cash value of life insurance, securities
available for sale, accounts payable and debt approximate their fair values. The
fair values of the Company's securities available for sale are based on quoted
market prices, where available, or quoted market prices of financial instruments
with similar characteristics.

EARNINGS PER COMMON SHARE
Earnings per common share are computed based on the weighted average number of
shares outstanding during each period. The effect of common stock equivalents on
earnings per share is not material.

FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to September 30. The
1997, 1996 and 1995 fiscal years were all 52-week years.

CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The Company maintains a
centralized cash management program whereby its excess cash balances are
invested in commercial paper and are considered cash equivalents. At times, cash
balances in the Company's accounts may exceed federally insured limits.

INCOME TAXES
In accordance with SFAS No. 109, the liability method is used in accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

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 amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual results.

<PAGE>

notes to financial statements/16

1. Significant Accounting Policies - continued

RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share", which must be adopted by the
Company and reflected in its financial statements for the periods ending on or
after December 27, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded.

The impact of SFAS 128 is not expected to result in a change in primary
earnings per common share for fiscal year 1997 or 1996. Fully diluted earnings
per share for fiscal 1997 would decrease by $.01 per share and would not change
for fiscal 1996.

The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income," which is effective for financial statements for fiscal
years ending after December 31, 1997. This standard establishes standards for
the reporting and display of comprehensive income which is defined under SFAS
No. 130 as "the change in equity (net assets) during a period from transactions
and other events and circumstances from nonowner sources." Under SFAS No. 130,
the Company has several choices in the disclosure of the components of other
comprehensive income. The Company will be required to include unrealized gains
and losses on available for sale securities as a component of comprehensive
income. The Company plans to implement SFAS No. 130 during the first quarter of
fiscal year 1999, and management anticipates that such adoption will have no
material effect on the Company's financial condition or results of operations.

The Financial Accounting Standards Board has also issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which is
effective for financial statements for fiscal years beginning after December 15,
1997. This statement changes the reporting of segment information from the
"industry segment approach" to a "management approach." Under this new approach
the Company will be required to report financial and descriptive information
about its operating segments in the same manner that management organizes the
segments in order to make decisions and assess performance. Management feels
that the Company's segment information shown in Note 15 meets the requirements
under the new statement. Therefore, the implementation of SFAS No. 131 during
the first quarter of fiscal 1999 will have no material effect on the Company's
financial condition or results of operations.

2. Acquisitions

On February 28, 1992, the Company acquired substantially all of the assets of
Healthflex, Inc., a Vermont-based company which produced specialty mattress
products used in the prevention and treatment of pressure ulcers. The Healthflex
acquisition agreement (as amended) provided that the Company issue more shares
of common stock as additional consideration depending on actual sales of
Healthflex products and the market price of the Company's common stock when
issued. The value of any subsequently issued shares was allocated to cost in
excess of the fair value of net assets acquired. Accordingly, the Company issued
31,474 (1997), 50,171 (1996) and 37,740 (1995) shares of its common stock valued
at $170,000, $237,000, and $211,000, respectively, resulting in corresponding
increases in cost in excess of the fair value of the net assets acquired. No
further consideration is required pursuant to the agreement.

On September 23, 1995, Healthflex Corporation was merged with Span-America
Medical Systems, Inc.

On February 8, 1996, the Company acquired the assets of Embracing Concepts,
Inc., a privately held manufacturer of therapeutic seating cushions
headquartered in Rochester, New York. Including the effects of purchase
accounting adjustments, excess of cost over fair value of net assets acquired of
approximately $680,000 was recorded.

<PAGE>

notes to financial statements/17

3. Securities Available for Sale

Securities available for sale are carried at the lower of aggregate cost or
market.

The components of securities available for sale are as follows:

1997 1996
- --------------------------------------------------------------------------------
Commercial paper variable
rate demand notes $ 3,001,708 $ 700,395
U.S. government
agency securities 491,722 493,673
- --------------------------------------------------------------------------------
$ 3,493,430 $ 1,194,068

4. Inventories

The components of inventories are as follows:

1997 1996
- -------------------------------------------------------------------------------
Raw materials $ 2,404,945 $ 2,788,443
Work in process 32,918 28,043
Finished goods 638,466 647,151
- -------------------------------------------------------------------------------
$ 3,076,329 $ 3,463,637

5. Property and Equipment

Property and equipment, at cost, is summarized by major classification as
follows:

1997 1996
- -------------------------------------------------------------------------------
Land $ 317,343 $317,343
Land improvements 240,016 240,016
Buildings 3,613,966 3,613,966
Machinery and equipment 8,548,795 8,372,358
Furniture and fixtures 625,778 625,169
Vehicles 9,520 9,520
Leasehold improvements 66,006 92,420
- -------------------------------------------------------------------------------
13,421,424 13,270,792
Less accumulated depreciation 8,699,844 8,196,686
- -------------------------------------------------------------------------------
$ 4,721,580 $ 5,074,106

6. Other Assets

Other assets consist of the following:

1997 1996
- --------------------------------------------------------------------------------
Patents and trademarks,
net of accumulated
amortization of $581,501 in
1997 and $478,077 in 1996 $ 613,275 $ 665,035
Cash value of life insurance 1,118,447 1,113,493
Terminated contract rights,
net of accumulated
amortization of $233,824
in 1996 - 58,456
Other 150,452 134,026
- --------------------------------------------------------------------------------
$ 1,882,174 $ 1,971,010

7. Accrued and Sundry Liabilities

Accrued and sundry liabilities consist of the following:

1997 1996
- --------------------------------------------------------------------------------
Salaries, bonuses and
other compensation $ 826,418 $ 492,530
Federal and state
income taxes 165,830 15,822
Payroll taxes accrued
and withheld 63,492 18,428
Property taxes 121,860 130,000
Medical insurance 129,461 43,327
Customer refund due 139,276 -
Customer deposits 65,335 43,773
Royalties 76,828 96,548
Other 162,810 119,583
- --------------------------------------------------------------------------------
$ 1,751,310 $ 960,011

8. Long-Term Debt

At September 28, 1996, debt consisted of two ESOP notes payable to a bank (See
Note 12) in the amounts of $120,094 and $166,250 at an effective interest rate
for fiscal 1996 of 9%.

<PAGE>

notes to financial statements/18

8. Long-Term Debt - continued

At September 27, 1997, the Company had available an unused line of credit with a
bank for unsecured short-term borrowings up to $2,500,000.

The Company paid no interest expense in fiscal 1997 but paid $27,894 in 1996 and
$17,313 in 1995.

9. Deferred Compensation

The Company is obligated to make payments under a retirement agreement to its
founder and former chief executive officer over his remaining life. The Company
has fully accrued the present value of the expected payments due over the
executive's estimated life expectancy. The Company recognized expenses of
approximately $96,000 in 1997, $97,000 in 1996 and $91,000 in 1995 related to
this agreement.

The Company entered into a deferred compensation agreement with an executive
providing for post-retirement payments, contingent on certain conditions,
beginning in 2002. The Company recognized approximately $107,000 and $121,000 of
expense in 1996 and 1995, respectively, to accrue the present value of estimated
future retirement payments over the period from the date of the agreement to the
retirement date. In 1996 the executive resigned from the Company and will not be
eligible for the retirement benefits. Accordingly, the Company eliminated the
accrual and recognized approximately $228,000 of income in the fourth quarter of
1996 related to this agreement. However, the Company also recognized
approximately $166,000 of severance costs in the fourth quarter of 1996 related
to this executive.

10. Shareholders' Equity

The Board of Directors of the Company adopted in March 1987 the 1987 Stock
Option Plan ("Plan"). The Plan authorized the Board of Directors to grant
options to key officers and employees for an aggregate of 200,000 shares of the
Company's Common Stock. Options were granted at the fair market value on the
date of grant. The options that become exercisable accumulate in an amount not
to exceed 20% annually of the total grant. As of September 27, 1997, 62,000
shares authorized under this plan were fully exercisable.

The Board of Directors adopted, effective November 8, 1991, the 1991 Stock
Option Plan. The plan gives the Board of Directors the right to grant awards of
up to 200,000 shares of Common Stock to officers and key employees and 50,000
shares to directors who are neither officers nor employees of the Company. The
Board of Directors has granted options for 194,800 shares under this plan as of
September 27, 1997, none of which have been exercised. Options were granted at
the fair market value on the date of grant. Shares under the 1991 plan become
exercisable each year as defined in the agreements entered into with each
employee, but at a minimum of 1,000 shares per year. As of September 27, 1997,
options for 92,800 of the 194,800 shares authorized under the plan were fully
exercisable.

The options under the 1987 and 1991 plans which have not been exercised expire
10 years from the date of grant.

A summary of the activity in the Company's stock option plans is as follows:

Option Price Available
Per Share Outstanding For Grant
- --------------------------------------------------------------------------------
At September 30, 1995 $2.75 to $8.37 161,000 225,000
Granted $5.50 to $6.03 82,000 (82,000)
Exercised $2.75 to $3.75 (15,000) -
Terminated - (13,000) 13,000
- --------------------------------------------------------------------------------

At September 28, 1996 $2.75 to $8.37 215,000 156,000
Granted $4.00 to $4.81 126,800 (126,800)
Terminated - (25,000) 25,000
- --------------------------------------------------------------------------------

At September 27, 1997 $2.75 to $8.37 316,800 54,200
- --------------------------------------------------------------------------------

Under specific circumstances, tax benefits arising from the difference in market
value between the date of grant and the date of issuance of common stock upon
exercise are recorded as a credit to additional paid-in capital.

<PAGE>

notes to financial statements/19

10. Shareholders' Equity - continued

In March 1997 the Board of Directors approved the 1997 Long-Term Incentive Stock
Option Plan for certain executives of the Company based on achievement of
specified financial goals by fiscal year end 1999. As of September 27, 1997, the
Company has accrued $6,000 for these incentives based on current estimates of
financial goals.

The Company accounts for and will continue to account for stock options under
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees." The application of Financial Accounting Standards Board Statement
No. 123 "Accounting for Stock Based Compensation," which was adopted in 1997,
would not materially affect net income and earnings per share for 1997, 1996 and
1995.

11. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of September 27, 1997, and
September 28, 1996, are as follows:
1997 1996
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 745,000 $ 840,000
Intangible assets 105,000 140,000
Other 113,000 77,000
- --------------------------------------------------------------------------------
Total deferred tax liabilities 963,000 1,057,000

Deferred tax assets:
Deferred compensation 393,000 433,000
Accrued expenses 230,000 130,000
Other 156,000 63,000
- --------------------------------------------------------------------------------
Total deferred tax assets 779,000 626,000

Net deferred tax liabilities $ 184,000 $ 431,000
- --------------------------------------------------------------------------------

The Company made income tax payments, net of refunds, of $1,064,000, $620,000
and $657,000 in the 1997, 1996 and 1995, fiscal years, respectively.

Federal and state income tax provisions consist of the following:
1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $1,092,000 $ 416,000 $ 602,000
State 122,000 50,000 74,000
- --------------------------------------------------------------------------------
1,214,000 466,000 676,000
Deferred:
Federal (223,000) (127,000) (79,000)
State (24,000) (12,000) (10,000)
- --------------------------------------------------------------------------------
(247,000) (139,000) (89,000)
Income tax expense $ 967,000 $ 327,000 $ 587,000

Income tax expense differs from the amounts computed by applying the Federal tax
rate to income before income taxes as follows:

1997 1996 1995
- --------------------------------------------------------------------------------
Computed tax at the
statutory rate $ 877,000 $ 296,000 $ 532,000
Increases (decreases):
State income taxes,
net of Federal
tax benefit 65,000 25,000 43,000
Tax-exempt investment
income (22,000) (30,000) (24,000)
Other, net 47,000 36,000 36,000
- --------------------------------------------------------------------------------
Income tax expense $ 967,000 $ 327,000 $ 587,000

12. Employee Benefit and Incentive Plans

The Company has an employee savings and investment plan (401(k) plan) available
to the Company's employees meeting eligibility requirements. The Company matches
a percentage of the employee contributions, with certain limitations.
Contributions by the Company amounted to approximately $63,000, $52,000 and
$52,000 for the 1997, 1996, 1995 fiscal years, respectively.

The Company previously had an Employee Stock Ownership Plan (the "ESOP") for the
benefit of its employees. The ESOP was terminated effective September 30, 1996,
the end of the 1996 plan year. In connection with this termination, all
participants became fully vested in the allocated shares on that date. In
December 1996, the Company purchased from the ESOP 42,875 remaining

<PAGE>

notes to financial statements/20

12. Employee Benefit and Incentive Plans - continued

unallocated shares of common stock for approximately $194,000 ($4.52 per share),
the fair market value on the purchase date. The ESOP used the proceeds of this
sale of unallocated shares to reduce the principal balance of two bank loans
which had been used to fund the ESOP's stock purchase. These loans were
guaranteed by the Company.

At September 28, 1996, the Company had reflected the guaranteed ESOP borrowings
as current debt on its balance sheet. The ESOP borrowings was secured by the
unallocated shares of Common Stock purchased. A corresponding amount of
"Guaranteed ESOP Obligations" was recorded as a reduction of shareholders'
equity. The Company's contributions to the ESOP were approximately $99,000 in
1996 and $88,000 in 1995. Interest payments for fiscal 1996 and 1995 of
approximately $28,000 and $35,000, respectively, were partially funded by
dividends received by the ESOP of approximately $18,000 (1995).

13. Related-Party Transactions

The Company has patents and patent rights acquired from its former chairman of
the board of directors and major shareholder. As consideration, the Company paid
royalties equal to three percent of gross sales on all manufactured products
covered by the patents through December 1995. For the 1996 and 1995 fiscal
years, royalties totaled approximately $15,000 and $55,000, respectively.

The Company paid approximately $51,000 in 1997, $68,000 in 1996 and $41,000 in
1995 in legal fees to a firm having a member who is also a director of the
Company.

14. Major Customers

The Company has a business relationship with a customer to distribute certain of
its foam and contract packaging health care products to hospitals throughout the
United States. Sales generated by this customer amounted to approximately 13% of
net sales in fiscal 1997, 10% in 1996, and 13% in 1995.

The Company has a business relationship with another customer to distribute
certain of its consumer products. Sales to this customer for the 1997, 1996 and
1995 fiscal years amounted to approximately 15%, and 13% and 14% of the
Company's net sales, respectively.

15. Operations and Industry Segments

The Company operates in four industry segments: medical, consumer, industrial,
and contract packaging. These industry segments correspond to the markets in the
United States for which the Company manufactures and distributes its
polyurethane foam and contract packaging products.

The following table summarizes certain information on industry segments:

September 27, September 28,September 30,
1997 1996 1995
- --------------------------------------------------------------------------------
Net sales:
Medical foam $15,266,832 $14,077,224 $13,585,122
Consumer foam 9,100,278 7,489,833 6,939,897
Industrial foam 3,328,287 3,253,232 3,563,206
Contract packaging 6,420,292 6,653,537 6,288,017
- --------------------------------------------------------------------------------

Total $34,115,689 $31,473,826 $30,376,242
- -------------------------------------------------------------------------------
Operating profit:
Medical foam $ 2,11,143 $ 1,011,870 $ 1,496,028
Consumer foam 141,497 (137,870) (116,979)
Industrial foam 34,326 78,022 328,789
Contract packaging 182,085 238,764 211,076
- --------------------------------------------------------------------------------

Total $2,469,051 $1,190,786 $1,918,914
- --------------------------------------------------------------------------------

Corporate expense (288,499) (607,232) (664,939)
Interest expense - (29,170) (17,313)
Other income 398,364 317,670 328,421
- --------------------------------------------------------------------------------

Income before
income taxes $ 2,578,916 $ 872,054 $1,565,083

<PAGE>

notes to financial statements/21

15. Operations and Industry Segments - continued

September 27, September 28,September 30,
1997 1996 1995
- --------------------------------------------------------------------------------
Identifiable assets:
Medical foam $ 7,364,290 $ 8,156,756 $ 5,859,805
Consumer foam 2,871,173 3,626,439 3,141,929
Industrial foam 1,322,691 924,348 1,308,267
Contract packaging 4,844,399 5,133,711 5,166,317
Corporate 6,223,761 3,239,341 5,137,385
- --------------------------------------------------------------------------------
$22,626,314 $21,080,595 $20,613,703

Depreciation and amortization expenses:
Medical foam $ 410,486 $ 412,704 $ 392,210
Consumer foam 213,473 219,049 189,370
Industrial foam 35,486 41,598 60,181
Contract packaging 418,067 426,737 479,378
Corporate 1,680 5,799 1,968
- --------------------------------------------------------------------------------
$ 1,079,192 $ 1,105,887 $ 1,123,107

Capital expenditures:
Medical foam $ 177,324 $ 139,985 $ 95,819
Consumer foam 34,759 215,808 67,206
Industrial foam 291,854 32,965 14,115
Contract packaging 50,998 61,843 26,772
- --------------------------------------------------------------------------------
$ 554,935 $ 450,601 $ 203,912

Total sales by industry segment include sales from unaffiliated customers, as
reported in the Company's statements of income. In computing operating profit,
non-allocable general corporate expenses, interest expense, other income, and
income taxes are not included, while certain corporate operating expenses
incurred for the benefit of all segments are included on an allocated basis.

Identifiable assets are those assets that are used in the operations of each
segment on an allocated basis. Amounts shown for corporate assets consist
primarily of cash, marketable securities, and cash surrender value of life
insurance.

The Company has three customers whose sales represent a significant portion of
sales in their respective business segments. Sales to one of these customers
were in excess of 29% in 1997, 23% in 1996, and 27% in 1995 of net sales in the
medical segment. Sales to another customer accounted for 57% of net sales in the
consumer segment in 1997, 55% of net sales in 1996, and 64% of net sales in
1995. Sales to a third customer accounted for approximately 23% of net sales in
the contract packaging segment in 1997, 29% in 1996, and 25% in 1995.

16. Operating Leases

The Company leases truck equipment and manufacturing and warehousing facilities
located in South Carolina and California. All of the leases require the Company
to pay insurance and maintenance costs.

Rental expense for all operating leases was $346,000 (1997), $331,000 (1996) and
$327,000 (1995).

Future minimum lease payments under noncancelable operating leases with initial
terms of one year or more were $147,000 for the 1998 fiscal year at September
27, 1997.

17. Contingencies

From time to time the Company is a defendant in legal actions involving claims
arising in the normal course of business. The Company believes that, as a result
of legal defenses, insurance arrangements and indemnification provisions with
parties believed to be financially capable, none of these actions should have a
material effect on its operations or financial condition.

<PAGE>

report of independent auditors/22

Ernst & Young LLP,

Report of Independent Auditors

Shareholders and Board of Directors
Span-America Medical Systems, Inc.

We have audited the accompanying balance sheets of Span-America Medical Systems,
Inc. as of September 27, 1997 and September 28, 1996 and the related statements
of income, shareholders' equity, and cash flows for each of the three years in
the period ended September 27, 1997. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Span-America Medical Systems,
Inc. at September 27, 1997 and September 28, 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
September 27, 1997, in conformity with generally accepted accounting principles.

Ernst & Young LLP

Greenville, S.C.
October 17, 1997

<PAGE>

directors and officers/23

DIRECTORS
Brien Laing
Chairman of the Board
Retired Corporate Vice President
Baxter Healthcare Corporation
Deerfield, Illinois

Roy W. Black
Retired Vice-Chairman
Johnson and Johnson Professional, Inc.
Retired Vice President
Johnson and Johnson International, Inc.
Boston, Massachusetts

Richard C. Coggins
Chief Financial Officer
Treasurer and Secretary

Thomas F. Grady, Jr.
Vice President
International Paper
Montvale, New Jersey

Thomas D. Henrion
President and Chief Executive Officer
FoodService Purchasing Cooperative, Inc.
Louisville, Kentucky

Douglas E. Kennemore, M.D.
Neurosurgeon
Greenville, South Carolina

J. Ernest Lathem, M.D.
Retired Urological Surgeon
Greenville, South Carolina

James M. Shoemaker, Jr.
Member
Wyche, Burgess, Freeman & Parham, P.A.
Greenville, South Carolina

Robert A. Whitehorne
Senior Lecturer & Director of
Business Relations
Graduate School of Business
College of William & Mary
Williamsburg, Virginia

OFFICERS
James D. Ferguson
President and Chief Executive Officer

Robert E. Ackley
Vice President - Consumer Sales

Richard C. Coggins
Chief Financial Officer
Treasurer and Secretary

Melinda J. Gage
Vice President - Human Resources

Edmund K. Maier
Vice President - Marketing/R&D

Clyde A. Shew
Vice President - Medical Sales

<PAGE>

corporate data/24

CORPORATE OFFICE
Span-America
Medical Systems, Inc.
70 Commerce Center
Greenville, South Carolina 29615
(864) 288-8877

Mailing Address:
P.O. Box 5231
Greenville, SC 29606

STOCK INFORMATION
The common stock of Span-America Medical Systems, Inc. trades on the National
Market tier of the Nasdaq Stock Market under the symbol SPAN.

STOCK TRANSFER AGENT
Wachovia Shareholder Services
P.O. Box 8218
Boston, MA 02266-8218
(800) 633-4236

Inquiries regarding stock transfers, lost certificates or address changes should
be directed to the Stock Transfer Agent at the address above.

GENERAL COUNSEL
Wyche, Burgess, Freeman & Parham, P.A.
P.O. Box 728
Greenville, South Carolina 29602

AUDITORS
Ernst & Young LLP
P.O. Box 10647
Greenville, South Carolina 29603

SHAREHOLDER INQUIRIES AND AVAILABILITY OF FORM 10-K REPORT
A copy of the Company's Annual Report on 10-K for the year ended September 27,
1997 is available without charge to shareholders upon written request from the
following:

Secretary
Span-America Medical Systems, Inc.
P.O. Box 5231
Greenville, South Carolina 29606

<PAGE>

SPAN-AMERICA
MEDICAL SYSTEMS, INC.

70 Commerce Center
Greenville, South Carolina 29615

EXHIBIT 23

Consent of Independent Auditors

We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Span-America Medical Systems, Inc. of our report dated October 17, 1997,
included in the 1997 Annual Report to Shareholders of Span-America Medical
Systems, Inc.

Our audits, also included the financial statement schedule of Span-America
Medical Systems, Inc. listed in Item 14(a). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole presents fairly, in all material respects, the information set forth
therein.

We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-32896) pertaining to the Span-America Medical Systems, Inc.
1987 Stock Option Plan and in the Registration Statement (Form S-8 No. 33-84374)
pertaining to the Span-America Medical Systems, Inc. 1991 Stock Option Plan of
our report dated October 17, 1997, with respect to the financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of Span-America Medical Systems, Inc.

ERNST & YOUNG LLP

Greenville, South Carolina
December 22, 1997

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