SPAN AMERICA MEDICAL SYSTEMS INC, 10-K, 1998-12-29

SPAN AMERICA MEDICAL SYSTEMS INC
10-K, 1998-12-29
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 October 3, 1998
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

70 Commerce Center
Greenville, South Carolina 29615
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(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
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None None

Securities registered pursuant to Section 12(g) of the Act:
Title of each class
--------------------------
Common Stock, no par value
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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, 1998 was $13,442,330.

The number of shares of the registrant's common stock, no par value,
outstanding as of December 17, 1998 was 2,617,929.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 1998 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 January 28, 1999 are
incorporated by reference into Part III.
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<PAGE>
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 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.

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 management products used 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 1998 were approximately $549,000 or 2% of total net sales.

INDUSTRY SEGMENT DATA

On February 27, 1998 the Company sold substantially all of the assets of
its contract packaging business unit. The Company's results for all periods
presented have been restated to reflect the sale of the contract packaging
business as a discontinued operation.

The industry segment data included in Note 17 to the Company's audited
financial statements for the year ended October 3, 1998, presented on pages 20 -
21 of the 1998 Annual Report is incorporated herein by reference.

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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, and 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 57% of sales in 1998, 55%
in 1997, and 57% in 1996 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 28% of the
Company's total net sales in fiscal 1998. 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 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 distributing 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 innerspring 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

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November 1997. In conjunction with this upgrade, some models were renamed to
better reflect their function.

In addition to the non-powered, static PressureGuard Renew(R)
(formerly PressureGuard II), the company also offers the PressureGuard CFT(R).
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 IV mattress system.
Building on the comfort and support of the original PressureGuard design,
PressureGuard IV was designed as a sophisticated, powered system 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 Turn Select(R),
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
APM(R), a simpler but very effective alternating pressure mattress. Originally
introduced as the DynaGuard(R), 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 Site Select(R). 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 1998, replacement mattresses and related
products made up approximately 14% 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 14% of the Company's net sales in fiscal 1998. 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

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products presently marketed are abduction pillows, body aligners, head supports,
limb elevators and various foot and wrist positioners.

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 and Geo-Matt PRT(R) 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 1998, approximately 26% of the
Company's medical foam products were sold to Allegiance Healthcare Corporation
which distributes these products to hospitals nationwide. Span-America has
maintained a distribution relationship with Allegiance (formerly Baxter) for 19
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.

CONSUMER PRODUCTS

Span-America's consumer products consist primarily of convoluted mattress
overlays and specially designed pillows for the consumer bedding market. Through
fiscal 1998, the Company's principal consumer mattress overlays were produced
under private labels for Target and J.C. Penney. Products sold to these
customers were distributed through Pillowtex Corporation, a national
manufacturer and marketer of bedding products. In October 1998, the Company
discontinued these two foam overlay product lines because of reduced profit
margins caused by competitive pricing pressures. Sales of the discontinued
product lines represented approximately $4.2 million of the Company's total
sales in fiscal 1998. Management expects to

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offset the majority of these lost sales with increases in sales of other product
lines. The Company will continue to manufacture and market consumer foam
mattress overlays and consumer foam mattress components to other customers.

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 29% of the Company's total net
sales in fiscal 1998 as compared to 33% in 1997 and 30% in 1996.

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 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 14% of the Company's net sales in
fiscal 1998, 12% in 1997 and 13% in 1996.

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 overlay and positioner markets are Sunrise
Medical and Graphic Controls.

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.

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The market for therapeutic replacement mattresses has developed
principally during the last eight years and is currently dominated by BG
Industries and Hill-Rom. BG Industries utilizes Allegiance to distribute its
mattresses primarily to hospitals. Hill-Rom uses their own sales representatives
to sell directly to hospitals, distributors, and long-term care facilities
nationwide.

Most 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 Foamex and ER Carpenter, both 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.

MAJOR CUSTOMERS

The Company has a business relationship with Allegiance Healthcare
Corporation ("Allegiance"), formerly Baxter Healthcare Corporation, to
distribute certain of its medical foam products. In fiscal 1998 sales to
Allegiance amounted to approximately 15% of the Company's total net sales and
approximately 26% of the Company's sales to the medical foam segment.
Span-America also had a relationship with Pillowtex Corporation to distribute
certain of its consumer foam products. Sales to Pillowtex during fiscal 1998
made up approximately 15% of the Company's net sales and approximately 52% of
sales in the consumer foam segment.

See "Distributor Relationship" on page 4, and "Competition" on pages 5 and
6 for more information on major customers.

SEASONAL TRENDS

Some seasonality can be identified in certain of the Company's medical and
consumer foam 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

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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 39 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.

The Company also holds 57 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 9 and 11 years, respectively. The Company's Span-Aids patents
have remaining lives ranging from 1 to 11 years.

RAW MATERIALS AND BACKLOG

Polyurethane foam and nylon/vinyl mattress covers and tubes 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 October 3, 1998, Span-America had unshipped orders of approximately
$1.2 million, which represents a 100% increase compared to a backlog of $600,000
at fiscal year end 1997. All orders in the current backlog will be filled in the
1999 fiscal year.

EMPLOYEES

On October 3, 1998, the Company had 201 full-time employees, including 6
officers. Of these employees, 24 were executive or management personnel, 17 were
administrative and clerical personnel, 18 were sales personnel and 136 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 produces foam mattress overlays for the medical and consumer
markets in a 40,000 square foot facility in Norwalk, California. The lease rate
is $16,000 per month and increases annually over the term of the lease to
$17,000 per month until the lease expires in December 2000.

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

Item 3. Legal Proceedings

The company is a defendant in a legal action involving a claim relating to
a terminated employee. The ultimate outcome or range of potential loss of this
litigation is not presently predictable.

In addition to the case mentioned above, from 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

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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 1998 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 1998 Annual Report is incorporated herein by reference. In addition,
the information under "Stock Information" on page 24 of the Company's 1998
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 1998 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 1998 Annual Report are incorporated herein by reference.

Item 7a. Qualitative and Quantitative Disclosures About Market Risk

The information contained in the section titled "Market Risk" on page 10
of the Company's 1998 Annual Report is 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 1998 Annual Report are incorporated herein by reference.

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

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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 1998 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.

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.

10.2.1 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.

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10.2.2 Amendment No. 1 to the 1987 Stock Option Plan.

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

10.4.1 1991 Stock Option Plan: Incorporated by reference to Exhibit 10.6 to
the 1991 10-K.

10.4.2 Amendment No. 1 to the 1991 Stock Option Plan.

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 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 Systems, Inc., Embracing Concepts, Inc. and Edmund K. Maier
dated 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.

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10.14.1 1997 Stock Option Plan: Incorporated by reference to Exhibit 10.14
to the 1997 10-K.

10.14.2 Amendment No. 1 to the 1997 Stock Option Plan.

10.15 1997 Long Term Incentive Stock Option Plan: Incorporated by
reference to Exhibit 10.15 to the 1997 10-K.

13.1 1998 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 October 3, 1998.

(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.

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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/ J. Ernest Lathem December 17, 1998
- --------------------------
J. Ernest Lathem, M.D.
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
--------------------------- (Principal Executive Officer)
James D. Ferguson

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

/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.

December 17, 1998

13
<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 October 3, 1998

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 October 3, 1998 are incorporated by reference in Item 8:

Balance Sheets - October 3, 1998 and September 27, 1997.

Statements of Income - Years ended October 3, 1998, September 27, 1997,
and September 28, 1996.

Statements of Shareholders' Equity - Years ended October 3, 1998,
September 27, 1997, and September 28, 1996.

Statements of Cash Flows - Years ended October 3, 1998, September 27,
1997, and September 28, 1996.

Notes to Financial Statements - October 3, 1998.

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.
<TABLE>
<CAPTION>
<S> <C>
====================================================================================================================================
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 October 3, 1998

Deducted from asset accounts:
Reserve for uncollectible accounts $368,000 $106,000(a) $262,000
Reserve for discounts 242,000 75,000(c) 167,000
-------- -------- --------

Totals $610,000 $181,000 $429,000
======== ======== ========

Year Ended September 27, 1997

Deducted from asset accounts:
Reserve for uncollectible accounts $205,000 $227,000 $ 64,000(a) $368,000
Reserve for discounts 174,000 68,000(b) 242,000
-------- -------- -------- -------- --------

Totals $379,000 $227,000 $ 68,000 $ 64,000 $610,000
======== ======== ======== ======== ========

Year Ended September 28, 1996

Deducted from asset accounts:
Reserve for uncollectible accounts $182,000 $ 96,000 $ 73,000(a) $205,000
Reserve for discounts 150,000 24,000(b) 174,000
-------- -------- -------- -------- --------

Totals $332,000 $ 96,000 $ 24,000 $ 73,000 $379,000
======== ======== ======== ======== ========
</TABLE>
(a) Uncollectible accounts written off.
(b) Net increase in sales discounts charged to income as a reduction of sales.
(c) Net decrease in sales discounts charged to income as a reduction of sales.

EXHIBIT 10.2.2

AMENDMENT NO. 1
TO THE 1987 STOCK OPTION PLAN OF
SPAN-AMERICA MEDICAL SYSTEMS, INC.

The following provision is hereby added to the 1987 Stock Option Plan of
Span-America Medical Systems, Inc. to be effective as of July 22, 1998.

Not withstanding any other provision contained in this Plan, any presently
outstanding Option, with the consent of the holder thereof, or any Option
granted pursuant to this Plan following the date of addition of this provision
to the Plan, shall vest and become exercisable immediately prior to any change
in control of the Company. A change in control of the Company shall be deemed to
include, without limitation, each of the following:

(i) Any merger or consolidation to which the Company is a party in which
the Company is not the surviving entity or any merger or consolidation
to which the Company is a party in which the Company is the surviving
entity but in which the holders of 50% or more of the beneficial
ownership of the Company immediately following such merger or
consolidation are not identical to the holders of 50% or more of the
beneficial ownership of the Company immediately prior to such merger or
consolidation;

(ii) Any sale of 50% or more of the assets of the Company in one transaction
or a series of related transactions;

(iii) Any one transaction or series of related transactions in which the
Company delivers securities of its issue aggregating more than 50%
of the beneficial ownership of the Company in exchange or paymentfor any
properties or assets of any other business entity, or securities issued
by any other business entity, or in a merger of any subsidiary of the
Company (50% or more of the ownership interests of which is held by the
Company) with or into any other business entity;

(iv) Any transaction or series of related transactions in which any entity or
group acquires 50% or more of the beneficial ownership of the Company; or

(v) The liquidation of the Company.

EXHIBIT 10.4.2

AMENDMENT NO. 1
TO THE 1991 STOCK OPTION PLAN OF
SPAN-AMERICA MEDICAL SYSTEMS, INC.

The following provision is hereby added to the 1991 Stock Option Plan of
Span-America Medical Systems, Inc. to be effective as of July 22, 1998.

(i) Any merger or consolidation to which the Company is a party in which
the Company is not the surviving entity or any merger or consolidation
to which the Company is a party in which the Company is the surviving
entity but in which the holders of 50% or more of the beneficial ownership
of the Company immediately following such merger or consolidation are not
identical to the holders of 50% or more of the beneficial ownership of the
Company immediately prior to such merger or consolidation;

(ii) Any sale of 50% or more of the assets of the Company in one transaction or
a series of related transactions;

(iii) Any one transaction or series of related transactions in which the Company
delivers securities of its issue aggregating more than 50% of the
beneficial ownership of the Company in exchange or payment for any
properties or assets of any other business entity, or securities issued by
any other business entity, or in a merger of any subsidiary of the Company
(50% or more of the ownership interests of which is held by the Company)
with or into any other business entity;

(iv) Any transaction or series of related transactions in which any entity or
group acquires 50% or more of the beneficial ownership of the Company; or

(v) The liquidation of the Company.

EXHIBIT 10.14.2

AMENDMENT NO. 1
TO THE 1997 STOCK OPTION PLAN OF
SPAN-AMERICA MEDICAL SYSTEMS, INC.

The following provision is hereby added to the 1997 Stock Option Plan of
Span-America Medical Systems, Inc. to be effective as of July 22, 1998.

(i) Any merger or consolidation to which the Company is a party in which
the Company is not the surviving entity or any merger orconsolidation
to which the Company is a party in which the Company is the surviving
entity but in which the holders of 50% or more of the beneficial
ownership of the Company immediately following such merger or
consolidation are not identical to the holders of 50% or more of the
beneficial ownership of the Company immediately prior to such merger or
consolidation;

(ii) Any sale of 50% or more of the assets of the Company in one
transaction or a series of related transactions;

(iii) Any one transaction or series of related transactions in which the
Company delivers securities of its issue aggregating more than 50%
of the beneficial ownership of the Company in exchange or payment
for any properties or assets of any other business entity, or
securities issued by any other business entity, or in a merger of
any subsidiary of the Company (50% or more of the ownership
interests of which is held by the Company) with or into any other
business entity;

(iv) Any transaction or series of related transactions in which any
entity or group acquires 50% or more of the beneficial ownership of
the Company; or

(v) The liquidation of the Company.

SPAN-AMERICA

MEDICAL SYSTEMS, INC.

1 9 9 8

[Photo Appears Here]

A N N U A L R E P O R T

<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 custom foam and packaging
products for the consumer and industrial markets. Span-America's stock is
traded on the Nasdaq Stock Market's National Market under the symbol SPAN.

FINANCIAL SUMMARY

(Amounts in thousands except per share and percent data)

1998 1997* %Change
- --------------------------------------------------------------------------------

Net sales $28,346 $27,695 2%

Operating income 1,805 1,833 (2%)

Income from continuing operations 1,412 1,370 3%

Earnings per share from continuing operations:
Basic 0.48 0.43 12%
Diluted 0.47 0.43 9%

Return on net sales from
continuing operations 5.0% 4.9%

Working capital 8,749 9,393 (7%)

Total assets 19,412 22,626 (14%)

Shareholders' equity 15,696 16,980 (8%)

Return on ending shareholders' equity 10.0% 9.5%

Number of shares outstanding
at fiscal year end 2,820 3,125 (10%)

Book value per share 5.57 5.43 3%

* Restated to reflect the sale of the contract packaging business unit.

TABLE OF CONTENTS

Letter to Shareholders........................................................ 1
Selected Financial Information................................................ 6
Quarterly Financial Data...................................................... 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 Ernst & Young LLP, Independent Auditors.............................22
Directors and Officers........................................................23
Corporate Data................................................................24

Main cover graphic created by The AD Company, Columbia SC.

<PAGE>

EXHIBIT 13.1

1
LETTER TO THE SHAREHOLDERS

TO OUR SHAREHOLDERS:

Fiscal 1998 was a year of significant accomplishment for Span-America. We had
record sales and solid earnings growth during the year. Perhaps more importantly
though, we made several key strategic changes that will shape the future
direction of the company.

The most visible change was our sale of the contract packaging business last
February. We sold the unit to increase focus on our core medical business - the
largest and most profitable part of the company. As a result of the sale, we
have restated the financial results in this report to show the contract
packaging business as a discontinued operation.

After taking out the contract packaging results, our net sales increased 2% to a
record $28.3 million in fiscal 1998. Income from continuing operations increased
3% to $1.4 million, and earnings per share from continuing operations rose 9% to
47 cents a diluted share. Although we are pleased to have set another sales
record in 1998 and to have increased earnings, we are not satisfied with these
growth rates. We will be working hard to improve those numbers going forward.

REVIEW OF BUSINESS SEGMENTS

Span-America's medical business segment was an excellent performer in fiscal
1998. Net sales rose 6% to $16.1 million on the strength of foam mattress,
patient positioner and seating product lines. We are especially pleased with the
sales performance of the new Geo-Mattress(TM) product line, which was
introduced just over a year ago. This has become our fastest growing new product
line since the introduction of the PressureGuard(TM) powered mattresses n
fiscal 1994. We believe the Geo-Mattress Max, Plus & Pro products (pictured on
the cover) have exciting growth potential. They are designed especially for
customers in acute care hospitals and long term care facilities and are priced
to appeal to nursing home operators under Medicare's new Prospective Payment
System (PPS).

PPS is creating major changes in the long term care industry. Under the new
system, Medicare will reimburse nursing home

1998 SALES GROWTH BY MARKET SEGMENT
(compared to 1997 totals)

Home Health Care Long Term/Subacute Care
---------------- -----------------------
15.9% 24.7%

GROWTH IN THE LONG TERM CARE AND HOME HEALTH CARE SEGMENTS WAS BOLSTERED BY
STRONG SALES OF THE GEO-MATTRESS PRODUCT LINE.

<PAGE>
2
LETTER TO THE SHAREHOLDERS

[GRAPHIC]

DEDICATED RESOURCES IN CORPORATE-TO-CORPORATE SELLING SETS THE STAGE FOR LONG
TERM SUCCESS.

operators at fixed daily rates depending on several factors. As a result,
products that provide high levels of clinical care at low prices should do
particularly well in the PPS environment. We believe many of our patient
positioners, overlays and mattresses are ideally suited for this market. Over
the next several years, we expect our medical sales in the long term care and
home care markets to grow faster than sales to acute care hospitals.

Our sales force is well positioned to take advantage of this expected growth and
to expand our substantial base of acute care business. We will continue to
devote a large part of our medical sales and marketing resources to supporting
our national distributors and corporate accounts. We enjoyed much success from
those efforts in fiscal 1998. We had over $500,000 in new sales to corporate
customers, including SunRise Healthcare and Centennial/PTS. We also added our
medical products to the formularies of Vencor, Inc. and Mariner Health Group. In
addition, one of our distributors recently signed long term supply agreements to
provide Span-America products to Premier, Inc. and Kaiser Permanente.

We are also pleased with the performance of the PressureGuard Turn Select and
Site Select products, our newest dynamic mattresses rolled out earlier this
year. We received FDA 510k marketing approval for the products in February, and
market acceptance has been very good. We credit the introduction of those
products with stopping the decline in dynamic mattress sales, which we had
experienced since a Medicare reimbursement change in 1996. With the product
launch behind us and a full sales year ahead, we expect to show growth in that
category in fiscal 1999.

Our consumer business unit saw dramatic changes during fiscal 1998. Consumer
sales fell 11% for the year, with most of the decline happening in our fourth
quarter. There were two reasons for the drop. First, we saw a decrease in sales
of a private label bath mat product because our

[GRAPHIC]

The launch of the programmable, microprocessor-controlled PressureGuard(R) Turn
Select(TM) and Site Select(TM) has helped revitalize sales of specialty support
surfaces.

<PAGE>
3

[GRAPHIC]

EFFICIENCY-BUILDING UNDERTAKINGS IN 1998 INCLUDED FURTHER UPGRADING OF THE
COMPANY-WIDE COMPUTER NETWORK.

customer stopped selling the line to a major retailer. Second, and more
significant, sales of our convoluted foam pads declined by 10% for the year.

The decline in consumer convoluted foam sales marks a strategic shift for
Span-America. In late June this year, we reduced the sales price on several of
our consumer convoluted foam products to meet a competitive pricing situation.
We continued to ship these products at the lower price during July and August.
However, our profit margin at the new price was too low to justify remaining in
the business. We therefore decided to discontinue the affected product lines,
which represented about $4.2 million of our total sales in fiscal 1998. Although
we would like to have had the additional sales volume, we did not see any
long-term strategic value in continuing to invest capital in low-margin,
commodity products. We expect to offset the majority of the lost sales with
increases in sales of other product lines.

The industrial business unit was our fastest growing segment in fiscal 1998.
Industrial sales grew by 23% to a record $4.1 million. The majority of the
growth came from expanded relationships with our largest customers. Our emphasis
in this segment is to leverage our medical manufacturing competencies to produce
precision packaging and other components for a variety of industrial
applications. We have developed an excellent reputation as an innovative,
high-quality supplier in this market, and we expect further growth in our
industrial business.

A LOOK AHEAD

We believe the future is bright for Span-America. During fiscal 1998 we made
several key changes that will benefit the company. First, as mentioned earlier,
was the sale of the contract packaging business. That sale created an
opportunity for the second major change, the closing of our consumer products
plant in Greer, SC and its consolidation into our Greenville plant shortly after
the end of fiscal 1998. We expect the plant consolidation to lower our

[GRAPHIC]

SALE OF THE CONTRACT PACKAGING BUSINESS FACILITATES PLANT CONSOLIDATION AND
STREAMLINING OF THE MANUFACTURING OPERATION.

<PAGE>
4
LETTER TO THE SHAREHOLDERS

[GRAPHIC]

Photo courtesy of BMW Manufacturing Corp.

UNDER THE NEW HEADING OF "CUSTOM PRODUCTS", WE CONTINUE TO PRODUCE ITEMS USED IN
DOZENS OF OEM PRODUCTS, INCLUDING COMPONENTS FOR AUTOMOBILES PRODUCED AT THE
NEARBY BMW MANUFACTURING CORP. FACILITY.

manufacturing costs and improve our efficiencies. In addition to combining the
plants physically, we also combined the consumer and industrial businesses into
one strategic business unit called custom products. Each of these changes has a
common strategic thread - to focus our resources on higher margin, more
value-added products. After much study, we found that we had too many resources
committed to businesses or product lines that were not providing sufficient
return on our investment. We believe these changes will focus more of our
resources on higher return areas of our business.

We understand, however, that eliminating less profitable parts of the business
is a limited means of increasing the value of our company. Value creation and
growth at Span-America can only take place through sustained sales growth at
reasonable profit margins. We believe the selective pruning done in fiscal 1998
has the potential to produce new sales growth in more profitable parts of the
company.

Our main strategic focus will be on the medical business unit. Within that
segment, we have several initiatives. We will accelerate our penetration into
the long term care and home care markets, while protecting our base of business
in the acute care market. We will develop and introduce new seating, surface and
positioning products to fill out and refresh existing product lines. We will
continue to build on our body of clinical documentation, demonstrating the
effectiveness of our products. We will seek to broaden our product offerings by
developing or licensing wound management products that incorporate leading edge
technologies. We will also evaluate licensing arrangements or acquisitions that
can strengthen our medical business. In addition, we plan to leverage our
medical core competencies by using them as the foundation for building our
custom products business.

The custom products business is a combination of the consumer and industrial
businesses, but with a different strategy. We will de-emphasize the low margin,
commodity-

[GRAPHIC]

CONTINUOUS CLINICAL EDUCATION ACTIVITIES INCREASE BOTH OUR VISIBILITY AND OUR
CREDIBILITY WITHIN THE MEDICAL MARKETPLACE.

<PAGE>
5
[GRAPHIC]

THROUGH A GROWING NETWORK OF RELATIONSHIPS, THE CUSTOM PRODUCTS DIVISION PURSUES
CONSUMER MARKET APPLICATIONS FOR OUR CORE MEDICAL TECHNOLOGIES.

type product lines and instead will focus on more value-added products
that are derived from the design and manufacturing capabilities of the medical
business. Examples of success with this strategy are our expanding relationship
with Fuji Photo Film and our recent license agreement with Comfortaire, a
67-year old mattress manufacturer headquartered in Greenville, SC. We produce
precision packaging materials for Fuji, and we have licensed some of our medical
overlay and mattress products to Comfortaire for use in the consumer market. We
believe our business with these and other key custom products customers has
excellent growth potential.

We have made significant progress during the last two years in improving
profitability, eliminating marginal businesses or product lines, and focusing
our strategy for the future. But now the company must grow in order to increase
in value. We will not abandon our commitment to profitability, but revenue
growth will be our top priority. Our core business is strong, and our financial
condition is excellent. We will build on these strengths to grow the company.
Thank you for your support.

Sincerely,

/s/ James D. Ferguson
- ---------------------
James D. Ferguson
President and CEO

/s/ J. Ernest Lathem, M.D.
- --------------------------
J. Ernest Lathem, M.D.
Chairman

[GRAPHIC]

Ferguson (left) and Lathem (right)

<PAGE>
6

SELECTED FINANCIAL INFORMATION

FIVE-YEAR FINANCIAL SUMMARY
(Amounts in thousands, except per share and employee data)
(As restated for the sale of the contract packaging business unit. See Note 2 in
Notes to Consolidated Financial Statements.)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year:
Net sales $ 28,346 $ 27,695 $ 24,820 $ 24,088 $ 24,147
Gross profit 8,499 8,428 7,394 7,649 8,604
Operating income 1,805 1,833 164 856 2,160
Income from continuing operations 1,412 1,370 283 739 1,560
Cash flow from operations 364 4,669 (514) 1,551 2,015
Capital expenditures from continuing
operations 562 511 398 177 493

Per share:
Income from continuing operations:
Basic $ 0.48 $ 0.43 $ 0.09 $ 0.23 $ 0.46
Diluted 0.47 0.43 0.09 0.23 0.46
Cash dividends declared 0.10 0.10 0.10 0.10 0.10

At end of year:
Working capital $ 8,749 $ 9,393 $ 8,180 $ 8,541 $ 7,652
Property & equipment - net 3,822 3,773 3,669 3,801 4,171
Total assets 19,412 22,626 21,081 20,614 20,014
Long-term debt 0 0 0 286 357
Shareholders' equity 15,696 16,980 16,019 15,435 14,919
Book value per share 5.57 5.43 4.94 4.86 4.62
Number of employees - continuing operations 201 187 175 172 160

Key ratios:
Current ratio 4.3 3.3 3.4 3.8 3.7
Long-term debt to total capital 0.0% 0.0% 0.0% 1.8% 2.3%
Return on net sales (1) 5.0% 4.9% 1.1% 3.1% 6.5%
Return on ending shareholders' equity 10.0% 9.5% 3.4% 6.3% 11.0%
Return on average total assets 7.4% 7.4% 2.6% 4.8% 8.1%
</TABLE>

(1) Calculated using income from continuing operations.

DILUTED EARNINGS
INCOME FROM PER SHARE FROM
NET SALES CONTINUING OPERATIONS CONTINUING OPERATIONS
(Dollars in Thousands) (Dollars in Thousands) (Cents Per Share)

1994 - $ 24,147 1994 - $ 1,560 1994 - $ .46
1995 - $ 24,088 1995 - $ 739 1995 - $ .23
1996 - $ 24,820 1996 - $ 283 1996 - $ .09
1997 - $ 27,695 1997 - $ 1,370 1997 - $ .43
1998 - $ 28,346 1998 - $ 1,412 1998 - $ .47

<PAGE>
7

QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>

QUARTERLY FINANCIAL DATA
(Unaudited)
(Amounts in thousands, except per share data)

First Second Third Fourth Year
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR FISCAL 1998*
Net sales $ 6,354 $ 7,379 $ 7,397 $ 7,216 $28,346
Operating income 314 692 579 220 1,805
Income from continuing operations 271 496 431 214 1,412
Income from discontinued operations,
net of income taxes 141 13 154
Net income 412 509 431 214 1,566
Earnings per share
Basic 0.13 0.17 0.15 0.08 0.53
Diluted 0.13 0.16 0.15 0.07 0.52
Stock price data
High 8.25 8.13 9.00 8.13 9.00
Low 6.13 6.88 7.19 5.13 5.13

FOR FISCAL 1997*
Net sales $ 6,275 $ 7,213 $ 7,014 $ 7,193 $27,695
Operating income 395 638 445 355 1,833
Income from continuing operations 299 446 336 289 1,370
Income/(loss) from discontinued
operations, net of income taxes 50 (47) 63 176 242
Net income 350 399 399 464 1,612
Earnings per share:
Basic 0.11 0.12 0.13 0.15 0.51
Diluted 0.11 0.12 0.12 0.14 0.50
Stock price data
High 5.00 5.91 5.63 6.25 6.25
Low 4.00 4.00 4.50 4.50 4.00
</TABLE>

*As restated for the sale of the contract packaging business unit. See Note 2 in
Notes to Consolidated Financial Statements.

The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol SPAN. At October 3, 1998, there were
2,820,029 common shares outstanding. As of December 10, 1998, there were
approximately 370 shareholders of record and approximately 1,050 beneficial
shareholders. The closing price of Span-America's stock on December 10, 1998,
was $5.50. 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.
RETURN ON ENDING
WORKING CAPITAL BOOK VALUE PER SHARE SHAREHOLDERS' EQUITY
(Dollars in Thousands) (Dollars) (Percent)

1994 - $ 7,652 1994 - $ 4.62 1994 - 11.0%
1995 - $ 8,541 1995 - $ 4.86 1995 - 6.3%
1996 - $ 8,180 1996 - $ 4.94 1996 - 3.4%
1997 - $ 9,393 1997 - $ 5.43 1997 - 9.5%
1998 - $ 8,749 1998 - $ 5.57 1998 - 10.0%
<PAGE>
8

MANAGEMENT'S DISCUSSION AND FINANCIAL ANALYSIS

RESULTS OF OPERATIONS FISCAL 1998 VS 1997

SUMMARY
On February 27, 1998 the Company sold substantially all of the assets of its
contract packaging business unit. The Company's results for all periods
presented have been restated to reflect the sale of the contract packaging
business as a discontinued operation.

Net sales increased 2% to $28.3 million in fiscal 1998 compared with $27.7
million in fiscal 1997. This increase in revenues resulted from growth in the
medical and industrial business units which more than offset declines in the
consumer segment. Income from continuing operations for fiscal 1998 rose 3% to
$1.41million, or $.47 per diluted share, compared with earnings of $1.37
million, or $.43 per diluted share, in fiscal 1997. The Company's improved
earnings were due to higher sales volume, slightly lower administrative expenses
and higher investment income.

SALES
The Company's medical sales increased by 6% during fiscal 1998 to $16.1 million
compared with $15.3 million in fiscal 1997. The increase was the result of
higher volumes of the Company's foam mattresses, patient positioners, and
seating products. Management expects that medical sales will increase during
fiscal 1999.

Consumer product sales decreased 11% during fiscal 1998 to $8.1 million from
$9.1 million in fiscal 1997 as a result of lower private label bath mat sales
and the Company's decision to discontinue two lines of low-margin mattress pads.
Management believes that consumer sales in fiscal 1999 will be significantly
less than those of fiscal 1998 as a result of this decision.

Sales of industrial foam products increased by 23% during fiscal 1998 to $4.1
million from $3.3 million. The increase was primarily the result of higher unit
sales to existing customers. Management expects that industrial foam sales in
fiscal 1999 will be higher than in fiscal 1998.

GROSS PROFIT
The Company's gross profit increased by 1% to $8.5 million during fiscal 1998
from $8.4 million in fiscal 1997. The gross profit margin percentage remained at
30%. Management expects the gross margin percentage during fiscal 1999 to
increase slightly compared with fiscal 1998.

S G & A EXPENSES
Sales and marketing expenses increased 3% to $4.4 million, or 15.5% of sales, in
fiscal 1998 compared with $4.3 million, or 15.5% of sales, in fiscal 1997. The
increases occurred in shipping, compensation, and training expenses. Management
expects that total sales and marketing expenses in fiscal 1999 will be higher
than 1998 levels.

General and administrative expenses declined by 1% to $2.3 million in fiscal
1998. General and administrative expenses for 1999 are expected to be similar to
1998 levels.

OTHER
Nonoperating income increased by 15% to $410,000 in fiscal 1998 compared with
$358,000 in fiscal 1997. The majority of the increase was due to higher interest
income on marketable securities. Management expects nonoperating income in
fiscal 1999 to be less than that of fiscal 1998.

During fiscal 1998, the Company paid dividends of $297,254, or 19% 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 risk 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 changes 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 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, FDA regulation of medical device
manufacturing, raw material cost increases, and other risks referenced in the
Company's Annual Report on Form 10-K.
<PAGE>
9
RESULTS OF OPERATIONS FISCAL 1997 VS 1996

SUMMARY
Net sales increased 12% to $27.7 million in fiscal 1997 compared with $24.8
million in fiscal 1996. This increase in revenues resulted from growth in
medical, consumer and industrial foam products. Income from continuing
operations for fiscal 1997 rose 384% to $1.4 million, or $.43 per diluted share,
compared with earnings of $283,000, or $.09 per diluted share, in fiscal 1996.
The Company's improved earnings were due to higher sales volume combined with a
9% 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.

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.

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.

GROSS PROFIT
The Company's gross profit increased by 14% to $8.4 million during fiscal 1997
from $7.4 million in fiscal 1996. The gross profit margin percentage increased
slightly to 30.4% in fiscal 1997 from 29.8% 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.

S G & A EXPENSES
Sales and marketing expenses decreased 11% to $4.3 million, or 15.5% of sales,
in fiscal 1997 compared with $4.8 million, or 19.4% of sales in fiscal 1996. The
decreases occurred primarily in travel, compensation, and consumer marketing
expenses.

General and administrative expenses declined by 4% to $2.3 million in fiscal
1997 compared with $2.4 million in fiscal 1996 due primarily to the termination
of the Company's ESOP and to smaller reductions in various administrative
expense categories.

OTHER
Nonoperating income increased by 13% to $358,000 in fiscal 1997 compared with
$318,000 in fiscal 1996. The majority of the increase was due to higher interest
income on marketable securities.

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.

LIQUIDITY AND CAPITAL RESOURCES

In connection with the Company's sale of its contract packaging business unit,
all assets relating to that business in fiscal 1997 have been reclassified as
assets or liabilities relating to discontinued operations. All assets and
liabilities discussed in this section relate to continuing operations.

The Company generated cash from operations of approximately $364,000 during
fiscal 1998. The Company's working capital decreased by $645,000 or 7% to $8.7
million during fiscal 1998 as a result of the sale of the contract packaging
business unit and the repurchase of stock as discussed below. The Company's
current ratio increased to 4.3 at October 3, 1998 from 3.3 at fiscal year end
1997.

Accounts receivable, net of allowances, increased 38% to $4.8 million at the end
of fiscal 1998 as compared to $3.5 million at the end of fiscal 1997 as a result
of a delinquent payment which was collected shortly after the fiscal year end.
All of the Company's accounts receivable are unsecured.

Inventory, net of reserves, remained level at $2.1million at October 3, 1998 as
compared to fiscal 1997. Management expects a slight decrease in inventory
levels by fiscal year end 1999.

Net property and equipment increased by $48,000, or 1%, during fiscal 1998. The
change resulted from the combination of capital expenditures of $562,000 and
normal depreciation expense. Management expects capital expenditures during
fiscal 1999 to be similar to those of 1998.

The Company's trade accounts payable decreased by $329,000 (18%) to $1.5 million
from $1.9 million during fiscal 1998. The decrease was due to normal monthly
fluctuations in accounts payable balances. Accrued and sundry liabilities
decreased by
<PAGE>
10

MANAGEMENT'S DISCUSSION AND FINANCIAL ANALYSIS

$605,000 (36%) to $1.1 million as compared to $1.7 million at
fiscal year end 1997 primarily due to decreases in accrued compensation and
income taxes payable.

In February 1998, the Company repurchased 280,579 shares, or 9.0%, of its common
stock for approximately $2.16 million ($7.70 per share) in a private transaction
from an unaffiliated shareholder. In other unrelated transactions during fiscal
year 1998, the Company repurchased 80,730 shares of its common stock for
approximately $637,000 ($7.89 per share). The repurchased shares were retired.

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
1999.

IMPACT OF INFLATION
Inflation was not a significant factor for the Company during fiscal 1998.
Higher inflation rates could impact the Company through higher raw material
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.

MARKET RISK
The Company's market risk exposure is the potential loss arising from changes in
interest rates and its impact on investments. As of October 3, 1998, short-term
investments of $2.6 million were held available for sale with acquired
maturities of less than 180 days. Short-term investments consist primarily of
high credit and highly liquid corporate commercial paper and municipal bonds. A
substantial reduction in overall interest rates would not have a material effect
on the financial position of the Company.

In addition, the Company's other assets at October 3, 1998 include $1.2 million
in cash value of life insurance, which is subject to market risk related to
equity pricing and interest rate changes. Management believes that substantial
fluctuations in equity markets and interest rates and the resulting changes in
cash value of life insurance would not have a material adverse effect on the
financial position of the Company.

YEAR 2000

The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.

The Company has fully completed its assessment and remediation of all
significant information technology systems that could be significantly affected
by the year 2000. The Company is in the process of completing the testing of
these changes and will be substantially complete by December 31, 1998 at which
time all changes will be implemented. Based on a review of its product lines,
the Company has determined that most of the products it has sold and will
continue to sell do not require modification to be Year 2000 compliant.

The Company has not incurred substantive Year 2000 costs and does not anticipate
any substantive Year 2000 costs in the future.

The Company has been in contact with suppliers and major customers to confirm
that they are or will be Year 2000 compliant. The Company does not directly
interface with any significant third party vendors. To date, the company is not
aware of any external agent with a Year 2000 issue that would materially impact
the Company's results of operations, liquidity or capital resources. However,
the Company has no means of ensuring that external agents will be Year 2000
ready. The inability of external agents to complete their Year 2000 resolution
process in a timely fashion could materially impact the Company. The effect of
non-compliance by external agents is not determinable.

Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. Disruptions to
the economy generally resulting from year 2000 could also materially adversely
affect the Company.

The Company has contingency plans for certain critical applications. These
contingency plans involve, among other actions, manual workarounds, increasing
inventories and adjusting staffing strategies.
<PAGE>
11

BALANCE SHEETS
<TABLE>
<CAPTION>

BALANCE SHEETS
OCTOBER 3, SEPTEMBER 27,
1998 1997
- --------------------------------------------------------------------------------------------
(Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,121,437 $ 1,605,474
Securities available for sale (Note 5) 2,602,056 3,493,430
Accounts receivable, net of allowances of
$429,000 (1998) and $610,000 (1997) 4,809,352 3,482,843
Inventories (Note 6) 2,117,994 2,117,871
Prepaid expenses and deferred income taxes 312,929 419,044
Income tax refund due 400,000
Current assets - discontinued operations 2,390,075
-------------- ------------
Total current assets 11,363,768 13,508,737

Property and equipment, net (Note 7) 3,821,735 3,773,380
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $585,496 (1998)
and $438,073 (1997) 2,366,400 2,513,823
Other assets (Note 8) 1,860,417 1,875,874
Property and equipment - discontinued operations 954,500
-------------- ------------
$19,412,320 $22,626,314
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,549,232 $ 1,877,893
Accrued and sundry liabilities (Note 9) 1,065,999 1,671,090
Current liabilities - discontinued operations 566,424
-------------- ------------
Total current liabilities 2,615,231 4,115,407

Deferred income taxes (Note 13) 33,000 457,000
Deferred compensation (Note 11) 1,067,681 1,074,398
Shareholders' equity (Note 12)
Common stock, no par value, 20,000,000 shares
authorized; issued and outstanding shares
2,820,029 (1998) and 3,125,338 shares (1997) 1,426,079 3,991,745
Additional paid-in capital 67,463 53,160
Retained earnings 14,202,866 12,934,604
-------------- ------------
Total shareholders' equity 15,696,408 16,979,509
Contingencies (Note 19)
$19,412,320 $22,626,314
============== ============
</TABLE>

See accompanying notes.
<PAGE>
12
STATEMENTS OF INCOME
<TABLE>
<CAPTION>

STATEMENTS OF INCOME
YEARS ENDED
--------------------------------------------
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
- ----------------------------------------------------------------------------------------------
(Restated) (Restated)
<S> <C> <C> <C>

Net sales $28,345,819 $27,695,397 $24,820,289
Cost of goods sold 19,847,035 19,267,151 17,426,620
-----------------------------------------
Gross profit 8,498,784 8,428,246 7,393,669

Selling and marketing expenses 4,405,339 4,291,179 4,817,595
General and administrative expenses 2,288,723 2,303,747 2,411,620
-----------------------------------------
6,694,062 6,594,926 7,229,215
-----------------------------------------
Operating income 1,804,722 1,833,320 164,454

Other income (expense):
Interest expense (29,170)
Investment income and other 410,264 357,901 317,670
-----------------------------------------
410,264 357,901 288,500
-----------------------------------------
Income before income taxes
and discontinued operations 2,214,986 2,191,221 452,954
Provision for income taxes (Note 13) 803,000 821,000 170,000
-----------------------------------------
Income from continuing operations 1,411,986 1,370,221 282,954

Income from discontinued operations,
net of income taxes of $91,000 (1998),
$146,000 (1997) and $157,000 (1996) 153,530 241,695 262,100
-----------------------------------------
Net income $1,565,516 $1,611,916 $ 545,054
=========================================
Earnings per share of common
stock (Note 3)
Income from continuing operations:
Basic $ .48 $ .43 $ .09
Diluted $ .47 $ .43 $ .09
Income from discontinued operations,
net of income taxes:
Basic $ .05 $ .08 $ .08
Diluted $ .05 $ .07 $ .08
Net income:
Basic $ .53 $ .51 $ .17
Diluted $ .52 $ .50 $ .17
=========================================
Dividends per common share $ .10 $ .10 $ .10
Weighted averages shares outstanding:
Basic 2,931,362 3,188,397 3,227,966
Diluted 3,038,350 3,223,927 3,264,699
=========================================
</TABLE>

See accompanying notes.
<PAGE>
13

STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL GUARANTEED
------------- PAID-IN RETAINED ESOP
SHARES AMOUNT CAPITAL EARNINGS OBLIGATION TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
($.10 per share) (320,242) (320,242)
-----------------------------------------------------------------------
Balance at September 27, 1997 3,125,338 3,991,745 53,160 12,934,604 16,979,509
Net income for the 1998 fiscal year 1,565,516 1,565,516
Common stock purchased and retired (361,309) (2,797,416) (2,797,416)
Common stock issued to Directors 8,000 55,000 55,000
Common stock issued on
exercise of stock options 48,000 176,750 176,750
Tax benefits for stock options
exercised 14,303 14,303
Cash dividends paid or declared
($.10 per share) (297,254) (297,254)
-----------------------------------------------------------------------
Balance at October 3 , 1998 2,820,029 $1,426,079 $67,463 $14,202,866 $ -- $ 15,696,408
=======================================================================
</TABLE>

See accompanying notes.
<PAGE>
14

STATEMENTS OF CASH FLOWS

STATEMENTS OF CASH FLOWS
YEARS ENDED
- --------------------------------------------------------------------------------------------
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,565,516 $ 1,611,916 $ 545,054
Adjustments to reconcile net income to net cash
provided by/(used for) operating activities:
Depreciation 641,504 767,925 825,043
Amortization 252,676 311,267 280,844
Provision for losses on accounts receivable 217,000 113,000
Provision for deferred income taxes (257,000) (247,000) (139,000)
(Gains)/Losses on sale and disposal of
property, plant and equipment (40,463) 15,475
Increase in cash value of life insurance (105,044) (4,954) (98,737)
Deferred compensation (6,717) (82,884) (61,236)
Changes in operating assets and liabilities:
Accounts receivable 108,796 716,834 (1,390,242)
Inventory (123) 387,308 (622,021)
Prepaid expenses and other assets 134,337 (5,225) 17,616
Income tax refund due (400,000)
Accounts payable and accrued expenses (1,569,873) 1,037,753 525
------------------------------------------
Net cash provided by/(used for) operating activities 364,072 4,669,477 (513,679)

INVESTING ACTIVITIES:
Sale of contract packaging business 1,842,300
Acquisition of Embracing Concepts, Inc. (592,435)
Purchases of marketable securities (3,577,696) (4,241,072) (2,476,757)
Proceeds from sales of marketable securities 4,465,382 1,962,226 4,145,785
Purchases of property, plant and equipment (625,502) (554,935) (450,601)
Proceeds from sale of property,
plant and equipment 45,000
Payments for other assets (34,673) (51,663) (122,881)
-------------------------------------------
Net cash provided by/(used for) investing
activities 2,069,811 (2,840,444) 503,111

FINANCING ACTIVITIES:
Dividends paid (297,254) (320,242) (323,224)
Common stock issued upon exercise of options 176,750 50,250
ESOP termination (286,344)
Purchase and retirement of common stock (2,797,416) (542,343) (33,484)
-------------------------------------------
Net cash used for financing activities (2,917,920) (1,148,929) (306,458)
-------------------------------------------
(Decrease)/increase in cash and cash equivalents (484,037) 680,104 (317,026)
Cash and cash equivalents at beginning of year 1,605,474 925,370 1,242,396
-------------------------------------------
Cash and cash equivalents at end of year $ 1,121,437 $ 1,605,474 $ 925,370
===========================================
</TABLE>

See accompanying notes.
<PAGE>
15

NOTES TO FINANCIAL STATEMENTS

NOTES TO FINANCIAL STATEMENTS
OCTOBER 3, 1998

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; and various foam
products for the industrial market 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. Costs in excess of the fair value of net assets
acquired are amortized over 30-year and 10-year periods. Accumulated
amortization of intangible assets at October 3, 1998, and September 27, 1997 was
approximately $1,272,000 and $1,020,000 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 in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share." See Note 3.

FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to September 30. The
1998, 1997 and 1996 fiscal years were 53, 52 and 52-week years, respectively.

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.

RECENT PRONOUNCEMENTS The financial Accounting Standards Board has issued SFAS
No. 130, "Reporting Comprehensive Income," which is effective for financial
statements for fiscal years beginning after December 15, 1997.
<PAGE>
16
NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 17 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. SALE OF CONTRACT PACKAGING BUSINESS UNIT

On February 27, 1998, the Company sold substantially all of the assets of its
contract packaging business unit. The purchase price for the contract packaging
assets was $2.3 million, with $1.84 million paid in cash at closing and the
remainder financed by Span-America over five years. No gain or loss was recorded
as a result of the sale. The Company's results for all periods presented have
been restated to reflect the sale of the contract packaging business as a
discontinued operation. The balance sheet at September 27, 1997 has been
restated to reflect the reclassification of all assets and liabilities relating
to the contract packaging operations as assets and liabilities related to
discontinued operations.

Operating results of the discontinued contract packaging operations are as
follows:

1998 1997 1996
- -----------------------------------------------------------
Net sales $ 3,170,055 $ 6,420,292 $ 6,653,537

Income before
income taxes 244,530 387,695 419,100

Provision for
income taxes 91,000 146,000 157,000
-------------------------------------

Income from dis-
continued operations $ 153,530 $ 241,695 $ 262,100
=====================================

3. EARNINGS PER COMMON SHARE

In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.

The following table sets forth the computation of basic and diluted earnings per
share:

1998 1997 1996
- -----------------------------------------------------------

Numerator for basic and diluted earnings per share:
Income from
continuing
operations $1,411,986 $1,370,221 $282,954

Income from
discontinued
operations,
net of
income taxes 153,530 241,695 262,100
-------------------------------------

Net income $1,565,516 $1,611,916 $545,054
=====================================
<PAGE>
17

1998 1997 1996
- -----------------------------------------------------------
Denominator:
Denominator for
Basic earnings
per share weighted
average shares 2,931,362 3,188,397 3,227,966
Effect of dilutive
securities:
employee and
board stock
options 106,988 35,530 36,733
- -----------------------------------------------------------
Denominator
for diluted
earnings per share:
adjusted weighted
average shares
and assumed
conversions 3,038,350 3,223,927 3,264,699
=====================================

Income per share from continuing operations:
Basic $.48 $.43 $.09
Diluted $.47 $.43 $.09

Income per share from discontinued operations,
net of income taxes:
Basic $.05 $.08 $.08
Diluted $.05 $.07 $.08

Net income per share:
Basic $.53 $.51 $.17
Diluted $.52 $.50 $.17

4. 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.

5. 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:

1998 1997
--------------------------------------------------------

Commercial paper variable
rate demand notes $2,095,611 $3,001,708
Municipal bonds 506,445 -
U.S. government
agency securities - 491,722
---------------------------
$2,602,056 $3,493,430
===========================

6. INVENTORIES

The components of inventories are as follows:

1998 1997
- -----------------------------------------------------------

Raw materials $1,568,262 $1,579,124
Finished goods 549,732 538,747
---------------------------
$2,117,994 $2,117,871
===========================

7. PROPERTY AND EQUIPMENT

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

1998 1997
- -----------------------------------------------------------

Land $ 317,343 $ 317,343
Land improvements 240,016 240,016
Buildings 3,642,151 3,613,966
Machinery and equipment 5,242,846 4,721,792
Furniture and fixtures 517,552 507,205
<PAGE>
18
NOTES TO FINANCIAL STATEMENTS

7. PROPERTY AND EQUIPMENT (CONTINUED)

1998 1997
- -----------------------------------------------------------
Vehicles 9,520 9,520
Leasehold improvements 66,006 66,006
--------------------------
10,035,434 9,475,848
Less accumulated
depreciation 6,213,699 5,702,468
--------------------------
$ 3,821,735 $ 3,773,380
--------------------------

8. OTHER ASSETS

Other assets consist of the following:

1998 1997
- -----------------------------------------------------------

Patents and trademarks,
net of accumulated
amortization of $686,755
in 1998 and $581,501
in 1997 $ 542,695 $ 613,275
Cash value of life insurance 1,223,491 1,118,447
Other 94,231 144,152
---------------------------
$1,860,417 $1,875,874
===========================

9. ACCRUED AND SUNDRY LIABILITIES

Accrued and sundry liabilities consist of the following:

1998 1997
- -----------------------------------------------------------
Salaries, bonuses and
other compensation $ 405,045 $ 807,142
Federal and state
income taxes 108,457 165,830
Payroll taxes accrued
and withheld 76,502 63,492
Property taxes 121,858 60,916
Medical insurance 23,402 129,461
Customer refund due 139,276
Customer deposits 76,599 65,335
Royalties 60,319 76,828
Other 193,817 162,810
---------------------------
$1,065,999 $1,671,090
===========================

10. LONG-TERM DEBT

At October 3, 1998, 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 1998 or 1997 and paid $27,894 in
1996.

11. 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 $95,000 in 1998, $96,000 in 1997, and $97,000 in 1996 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 of expense in
1996 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 in 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.

12. 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 October 3, 1998, 21,000 shares
of the 81,000 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
<PAGE>
19

Company. The Board of Directors has granted options for 206,000 shares under
this plan as of October 3, 1998, 7,000 shares 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
October 3, 1998, options for 119,440 shares authorized under the plan were fully
exercisable.

The Board of Directors adopted in 1997 the 1997 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 of the Company. The Board of
Directors has granted options for 24,800 shares under this plan as of October 3,
1998, none of which have been exercised. Options were granted at the fair market
value on the date of grant. Shares under the 1997 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 October 3, 1998, options for 5,360 of the 24,800
shares authorized under the plan were fully exercisable.

The options under the 1987, 1991 and 1997 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 Sept. 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 Sept. 27, 1997 $2.75 to $8.37 316,800 54,200
Avail. 1997 plan - 200,000
Granted $7.09 44,000 (44,000)
Exercised $2.75 to $6.88 (48,000) -
Terminated - (1,000) 1,000
-------------------------------------------
At Oct. 3, 1998 $2.75 to $8.37 311,800 211,200
===========================================

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.

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 October 3, 1998, the
Company has accrued $18,000 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 1998, 1997 and
1996.

13. 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 October 3, 1998, and
September 27, 1997, are as follows:

1998 1997
- -----------------------------------------------------------

Deferred tax liabilities:
Depreciation $ 504,000 $ 745,000
Intangible assets 64,000 105,000
Other 43,000 113,000
---------------------------
Total deferred tax liabilities 611,000 963,000

Deferred tax assets:
Deferred compensation 373,000 393,000
Accrued expenses 134,000 230,000
Deferred gain on sale 162,000
Other 99,000 156,000
---------------------------
Total deferred tax assets 768,000 779,000

Net deferred tax
(assets)/liabilities $(157,000) $184,000
---------------------------

The Company made income tax payments, net of refunds, of $1,678,000, $1,064,000,
and $620,000 in the 1998, 1997 and 1996, fiscal years, respectively.
<PAGE>
20
NOTES TO FINANCIAL STATEMENTS

13. INCOME TAXES (CONTINUED)

Federal and state income tax provisions consist of the following:
1998 1997 1996
- -------------------------------------------------------------------------
Current:
Federal $ 946,000 $ 964,000 $ 283,000
State 114,000 104,000 26,000
-----------------------------------------
1,060,000 1,068,000 309,000
Deferred:
Federal (224,000) (223,000) (127,000)
State (33,000) (24,000) (12,000)
-----------------------------------------
(257,000) (247,000) (139,000)
-----------------------------------------
Total income tax
expense on earnings
from continuing
operations 803,000 821,000 170,000
Tax expense of discon-
tinued operations 91,000 146,000 157,000
-----------------------------------------
Income tax expense $ 894,000 $ 967,000 $ 327,000
-----------------------------------------
Income tax expense from continuing operations differs from the amounts computed
by applying the Federal tax rate to income before income taxes as follows:
1998 1997 1996
- -------------------------------------------------------------------------
Computed tax at the
statutory rate $ 753,000 $ 745,000 $ 154,000
Increases (decreases):
State income taxes,
net of federal
tax benefit 55,000 54,000 11,000
Tax-exempt
investment income (48,000) (22,000) (30,000)
Other, net 43,000 44,000 35,000
-----------------------------------------
Income tax expense $ 803,000 $ 821,000 $ 170,000
=========================================

14. 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 $93,000, $63,000 and
$52,000 for the 1998, 1997 and 1996 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 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 were 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. Interest payments for fiscal 1996 were approximately $28,000.

15. 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. In 1996 royalties totaled
approximately $15,000.

The Company paid approximately $53,000 in 1998, $51,000 in 1997, and $68,000 in
1996 in legal fees to a firm having a member who is also a director of the
Company.

16. MAJOR CUSTOMERS

The Company has a business relationship with a customer to distribute certain of
its medical products to hospitals throughout the United States. Sales generated
by this customer amounted to approximately 15% of net sales in 1998, 16% in
1997, and 13% in 1996.

The Company had a business relationship with another customer to distribute
certain of its consumer products. Sales to this customer for the 1998, 1997 and
1996 fiscal years amounted to approximately 15%, 19% and 17% of the Company's
net sales, respectively.

17. OPERATIONS AND INDUSTRY SEGMENTS

The Company operates in three industry segments: medical, consumer and
industrial. These industry segments correspond to the markets in the United
States for which the Company manufactures and distributes its polyurethane foam
and packaging products.
<PAGE>
21

The following table summarizes certain information on
industry segments:
1998 1997 1996
- -------------------------------------------------------------------------

Net Sales:
Medical $16,146,008 $15,266,832 $14,077,224
Consumer 8,107,743 9,100,278 7,489,833
Industrial 4,092,068 3,328,287 3,253,232
-----------------------------------------

Total $28,345,819 $27,695,397 $24,820,289
=========================================
Operating profit:
Medical $ 2,067,740 $ 1,969,382 $ 889,010
Consumer (11,902) 147,511 (167,027)
Industrial 198,946 4,926 49,703
-----------------------------------------
Total $ 2,254,784 $ 2,121,819 $ 771,686

Corporate expense (450,062) (288,499) (607,232)
Interest expense - - (29,170)
Other income 410,264 357,901 317,670
-----------------------------------------
Income before
income taxes
and discontinued
operations $ 2,214,986 $ 2,191,221 $ 452,954
=========================================
Indentifiable assets:
Medical $ 8,135,341 $ 7,993,192 $ 8,736,425
Consumer 4,210,321 3,453,189 4,185,683
Industrial 1,714,983 1,611,596 1,206,239
Corporate 5,351,675 6,223,762 3,239,341
Contract packaging 3,344,575 3,712,907
-----------------------------------------
$19,412,320 $22,626,314 $21,080,595
=========================================
Depreciation and amortization expenses:
Operating:
Medical $ 450,473 $ 419,074 $ 421,684
Consumer 216,231 218,626 223,775
Industrial 95,867 37,360 43,646
Corporate 1,335 1,680 5,799
-----------------------------------------
$ 763,906 $ 676,740 $ 694,904
Other - discontinued
operations 130,274 402,452 410,983
-----------------------------------------
$ 894,180 $1,079,192 $ 1,105,887
=========================================
Capital expenditures:
Operating:
Medical $ 243,565 $ 181,042 $ 145,081
Consumer 148,307 36,990 218,490
Industrial 169,944 292,665 34,127
-----------------------------------------
561,816 510,697 397,698
Operating - discontinued
operations 63,686 44,238 52,903
-----------------------------------------
$ 625,502 $ 554,935 $ 450,601
=========================================

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 two customers whose sales represent a significant portion of
sales in their respective business segments. Sales to one of these customers
were in excess of 26% in 1998, 29% in 1997, and 23% in 1996, of net sales in the
medical segment. Sales to another customer accounted for 52% of net sales in the
consumer segment in 1998, 57% in 1997, and 55% in 1996.

18. OPERATING LEASES

The Company leases truck equipment and manufacturing and warehousing facilities
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 $343,000 (1998), $346,000 (1997),
and $331,000 (1996).

Future minimum lease payments under noncancelable operating leases with initial
terms of one year or more at October 3, 1998 were $196,500 for the 1999 fiscal
year, $202,500 for the 2000 fiscal year and $51,000 for the 2001 fiscal year.

19. CONTINGENCIES

The company is a defendant in a legal action involving a claim relating to a
terminated employee. The ultimate outcome or range of potential loss of this
litigation is not presently predictable.

In addition to the case mentioned above, 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 the parties believed to be
financially capable, none of these actions should have a material effect on its
operations or its financial condition.

<PAGE>
22
REPORT OF ERNST & YOUNG LLP, 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 October 3, 1998 and September 27, 1997 and the related statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended October 3, 1998. 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 in 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 October 3, 1998 and September 27, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
October 3, 1998, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP

Greenville, SC
November 11, 1998

<PAGE>
23

DIRECTORS AND OFFICERS

DIRECTORS OFFICERS
J. Ernest Lathem, M.D. James D. Ferguson
Chairman of the Board President and Chief Executive
Retired Urological Surgeon Officer
Greenville, South Carolina
Robert E. Ackley
James D. Ferguson Vice President - Operations
President and Chief Executive Officer
Richard C. Coggins
Roy W. Black Chief Financial Officer
Retired Vice-Chairman Treasurer and Secretary
Johnson and Johnson Professional, Inc.
Retired Vice President Melinda J. Gage
Johnson and Johnson International, Inc. Vice President - Human Resources
Boston, Massachusetts
Edmund K. Maier
Richard C. Coggins Vice President - Marketing/R&D
Chief Financial Officer
Treasurer and Secretary Clyde A. Shew
Vice President - Medical Sales
Thomas F. Grady, Jr.
Vice President
International Paper
Montvale, New Jersey

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

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

Brien Laing
Retired Corporate Vice President
Baxter Healthcare Corporation
Deerfield, Illinois

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

<PAGE>
24
CORPORATE DATA

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

Web Site:
www.spanamerica.com

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
Boston Equiserve, L.P.
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 an 10-K for the year ended October 3, 1998
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>

[Photo Appears Here]

SPAN-AMERICA

MEDICAL SYSTEMS, INC.

70 Commerce Center o PO Box 5231 o Greenville, SC 29606
Tel: 864.288.8877 o Fax: 864.288.8692

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 November 11, 1998,
included in the 1998 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 November 11, 1998, 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 23, 1998

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