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(2003 ANNUAL REPORT COVER PAGE)





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CORPORATE PROFILE

Span-America Medical Systems, Inc. manufactures and markets a comprehensive
selection of pressure management products for the medical market, including
Geo-Matt®, PressureGuard®, Geo-Mattress®, Span-Aids®, and Isch-Dish® products.
The Company also supplies pillows and mattress overlays to the consumer bedding
market and various custom engineered products to the industrial market.
Span-Americas common stock trades on The Nasdaq Stock Market® under the symbol
SPAN.

PRODUCTS OVERVIEW

(PRODUCTS OVERVIEW PICTURES)





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FINANCIAL SUMMARY

(Amounts in thousands, except per share and percent data)
    
    2003
    
    2002
    
    % ChangeNet sales
    
    $
    41,575
    
    
    $
    33,536
    
    
    
    24
    %Operating income
    
    
    1,440
    
    
    
    1,717
    
    
    
    -16
    %Net income
    
    
    1,399
    
    
    
    1,658
    
    
    
    -16
    %Earnings per share:Basic
    
    
    0.55
    
    
    
    0.66
    
    
    
    -17
    %Diluted
    
    
    0.53
    
    
    
    0.64
    
    
    
    -17
    %Return on net sales
    
    
    3.4
    %
    
    
    4.9
    %Cash and securities
    
    
    5,955
    
    
    
    6,949
    
    
    
    -14
    %Current assets
    
    
    15,029
    
    
    
    14,331
    
    
    
    5
    %Total assets
    
    
    23,991
    
    
    
    21,906
    
    
    
    10
    %Current liabilities
    
    
    4,215
    
    
    
    3,273
    
    
    
    29
    %Shareholders equity
    
    
    18,525
    
    
    
    17,394
    
    
    
    7
    %Return on average shareholders equity
    
    
    7.8
    %
    
    
    9.9
    %Number of shares outstanding at fiscal year end
    
    
    2,552
    
    
    
    2,539
    
    
    
    1
    %Book value per share
    
    
    7.26
    
    
    
    6.85
    
    
    
    6
    %


(BAR CHARTS)

TABLE OF CONTENTS

LETTER TO SHAREHOLDERS 2  SELECTED FINANCIAL INFORMATION 8  QUARTERLY FINANCIAL DATA 9
MANAGEMENTS DISCUSSION AND FINANCIAL ANALYSIS 10  BALANCE SHEETS 16  STATEMENTS OF INCOME 17
STATEMENTS OF SHAREHOLDERS EQUITY 18  STATEMENTS OF CASH FLOWS 19  NOTES TO FINANCIAL STATEMENTS 20
REPORT OF ELLIOTT DAVIS, LLC, INDEPENDENT AUDITORS 31  DIRECTORS AND OFFICERS 32  CORPORATE DATA IBC

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(JAMES D. FERGUSON AND THOMAS D. HENRION)

TO OUR SHAREHOLDERS

Fiscal 2003 was a year of growth and investment for Span-America. Our
sales rose 24% to a record $41.6 million with both the medical and custom
products segments showing strong sales increases. Highlights for fiscal 2003
included earning ISO 9002 certification, a major accomplishment that attests to
the quality of our operations. The company was also ranked number 63 by Fortune
Small Business magazine in their annual list of 100 fastest growing publicly
traded small companies. We increased our quarterly dividend by 17%, and we are
pleased to report that Span-Americas stock provided a total return to
shareholders of 43% during the fiscal year.

We reported earnings of $1.4 million in fiscal 2003, down 16% from fiscal
2002. As we announced last year, we expected our earnings to be lower in fiscal
2003 because of our planned investments in the new Secure I.V. business. We
believe our development costs for Secure I.V. represent a solid investment in
Span-Americas future and expect to generate our first revenues from this
product line in fiscal 2004.

MEDICAL BUSINESS

Our medical business was a major contributor to growth and profitability
in fiscal 2003. Medical sales were up 8% to $21.3 million compared with fiscal
2002 and represented about 51% of total sales for fiscal 2003. We believe our
sales growth was very good for a market that became increasingly soft as
the year progressed. Medicare funding cuts in October 2002 began to impact
sales in the long-term care part of the market around April 2003, slowing our
medical sales growth rate in the last half of the fiscal year. We are
optimistic this trend will reverse due to the increased Medicare funding for
the long-term care market that took effect in October 2003. We hope the higher
funding will make it easier for our customers to purchase new products to
upgrade their facilities.

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MEDICAL BUSINESS (continued)

Total mattress sales jumped by 24% during the year. The majority of
our medical sales growth was generated by our Geo-Mattress® and
PressureGuard® therapeutic mattresses. These products have proven highly
effective at preventing or promoting the healing of pressure ulcers in
at-risk patients. We believe our mattresses provide comfort to patients and excellent clinical performance to our customers 
at very competitive prices. Our product leaders during the year were the
PressureGuard APM2® alternating pressure mattress and the newer
PressureGuard Easy Air® low-air-loss mattress. We introduced an upgraded version of the
APM2® in April called the Deuce Deluxe. Market reception for the Deuce
has been outstanding, and we expect continued success in our mattress
business in fiscal 2004.

In other medical product lines, sales of our Span-Aids® patient
positioners grew by 8%, and sales of Selan® skin care products increased
6%. We introduced the new Selan Herbal in June, and we are planning another
Selan line extension for 2004. Sales of our mattress overlays, including
Geo-Matt®, were down 10% in fiscal 2003 as customers continue a long-term
trend of switching from overlays to therapeutic replacement mattresses.
Sales of seating products dropped 24% compared with fiscal 2002 due to a
large one-time sale in fiscal 2002.

Overall, we are pleased with the solid performance of the medical
segment in fiscal 2003. We believe that medical sales will likely be soft
in the first half of fiscal 2004. However, our long-term view of the
medical business remains positive, and we expect it to be a major
contributor to Span-Americas future value.

(GEO-MATTRESS WITH WINGS)

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CUSTOM PRODUCTS BUSINESS

The custom products segment was the main engine for our sales growth
in fiscal 2003. Sales of custom products were up by 46% to $20.2 million as
a result of strong sales to Wal-Mart through our marketing partner,
Louisville Bedding Company, the exclusive distributor for our consumer foam
products in the United States. They are also one of the largest makers and
sellers of bedding products in North America. Our companies have highly
complimentary skills, and we are pleased with our partnership.

We established new sales programs with several national retailers
during fiscal 2003. Sales of consumer bedding products were up 57% last
year primarily due to new business with Wal-Mart. Our goal for consumer
products is to combine Span-Americas skills with those of Louisville
Bedding to provide retailers with fresh and innovative foam bedding
products at competitive prices and best-in-class quality and service. We
have enjoyed excellent success with this strategy since joining forces in
1999. We look forward to continued growth in consumer bedding sales,
although at a slower rate than we experienced in fiscal 2003.

The other part of our custom products segment includes industrial foam
products. The industrial product line consists of a wide variety of custom
engineered foam products ranging from kayak components to automotive parts
to returnable packaging products. Industrial sales were up 3% last year to
$2.9 million. In this specialty business, we provide design and fabrication
expertise for foam products to a variety of manufacturers in the southeast.
We expect continued sales growth in the industrial product lines over the
long term, subject to cycles affecting the regional manufacturing economy.

(GEO-SYSTEMS)

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(SECURE I.V.)

SECURE IV BUSINESS

We acquired the Secure I.V.® line of safety catheters in July 2002.
Secure I.V. is a unique catheter that includes a patented valve that
eliminates the flow of blood back through the catheter as it is inserted in
the vein. This allows for bloodless I.V. starts without vein occlusion,
giving healthcare workers maximum protection from blood and body fluids.
The product has FDA 510(k) marketing approval and is protected by numerous
U.S. and foreign patents.

We have been working diligently since the acquisition to complete
product development, design and build the automated production process, and
set up a distribution network. We have made tremendous progress to date and
are now rigorously testing and validating the manufacturing process to
ensure the quality and safety of each product. We expect to begin selling
Secure I.V. in the first half of 2004. Pre-market interest in the product
has been extremely high. We continue to believe that Secure I.V. is an
exciting product line, providing an excellent growth opportunity for
Span-America.

(SECURE I.V.)

FINANCIAL RESULTS

Our financial performance for fiscal 2003 was somewhat mixed with sales
jumping 24% to $41.6 million and earnings declining 16% to $1.4 million. Our
results were very close to our expectations for the year.

Earnings were down in fiscal 2003 for several reasons. First, we received
two price increases for foam, our single largest expense category. We
anticipated some of the increases and worked to mitigate them by raising

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sales prices as the market permitted. Second, expenses for Secure I.V.
increased by $446,000 during the year. This included costs for design,
development and pre-production of the new product line. Third, we incurred
expenses of $286,000 for professional fees and other expenses related to
renewal of our shareholder rights plan, which was set to expire this year,
and the proposed tender offer and subsequent lawsuit by shareholder Jerry
Zucker. We have settled the lawsuit and are in discussions with Mr. Zucker
regarding his interests as outlined in his 13-D filing with the SEC.
Finally, fiscal 2002 earnings included two one-time gains: a payment we
received from settlement of a patent infringement lawsuit, the terms of
which remain confidential; and a gain of $84,000 as a result of stock
received from the demutualization of Prudential Insurance Company. Without
these unusual or one-time items, earnings from our core medical and custom
products business would have been up by 25% for fiscal 2003. Our employees
stepped up and delivered solid results in a tough business environment.

Span-Americas financial condition remains strong. We finished fiscal
2003 with excellent liquidity, no bank debt and $18.5 million in
shareholders equity. Cash flow for the year was a healthy $1.1 million.
But it was down 23% from 2002 mostly because of increases in accounts
receivable and inventory to support our higher sales levels. Even though
receivables and inventory were up, both our collection time and inventory
turnover improved for the year. Our capital expenditures for 2003 were $1.6
million, which was up significantly from the past several years. Most of
the capital was invested for new tooling and equipment for the Secure I.V.
product line. We believe our strong balance sheet provides us with a
competitive advantage in volatile markets and we plan to work hard to
maintain that edge while we search for additional growth and investment
opportunities.

FUTURE OUTLOOK

We believe the outlook for Span-America is bright. We expect growth in sales
and earnings in fiscal 2004
compared with 2003, although sales are not expected to reach the 24% growth
rate of the past year.

We think our core medical business is well positioned for long-term
growth and above average returns. The demographics of our country should
provide a steadily increasing customer base for our medical products for
many years to come. Our challenge will be to maintain and improve our
medical market share by continuing to introduce innovative new products
that meet our customers needs and exceed their expectations. We hope to
expand our market presence by strengthening relationships with corporate
accounts and group purchasing organizations. We will also explore private
label opportunities with large customers. We hope our medical business will
benefit from the recent increase in Medicare funding particularly in the
long term care market. Export sales (mostly to Canada) doubled in fiscal
2003, and we will continue to look beyond our borders for sales growth
opportunities for the medical business.

The custom products business has shown tremendous growth in the last
four years due to our partnership with Louisville Bedding Company. The
consumer market for our foam pads and pillows is large and filled with
opportunity. To prosper in this market, we must provide a constant stream of
innovative new products and creative packaging at very competitive prices 
all backed by top flight quality, delivery and service. We have to deliver
these benefits while at the same time continuing to focus on improving our
margins in this price sensitive business.

Fiscal 2004 will be an important year for the Secure I.V. business. We
expect to start up the automated production line and bring the product to
market in the first half of 2004. Based on pre-market reaction to the
product, we are optimistic about the growth opportunities for the safety
catheter segment. We do not expect the Secure I.V. segment to begin
contributing to earnings until fiscal 2005. We believe the Secure I.V.
business is a good example of our efforts to redeploy cash for future
growth. We will continue to look for similar opportunities to add value to
Span-America.

6



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We made a number of improvements in our manufacturing operations in fiscal 2003
that we believe will lower costs and improve efficiencies and customer service
in 2004 and beyond. We automated two key production processes that reduced
manufacturing costs and increased our capacity at the same time. We streamlined
a key packaging process that significantly lowered labor costs. We also
increased on-time shipping performance in several areas to improve service to
our customers.

We are very proud of earning the prestigious ISO 9002 and ISO
13488 certifications in fiscal 2003 and expect to reap continued benefits from
the certification process. The ISO 9002 certification allowed us to extend our
sales for powered mattress products in Canada, a growing market for
Span-America. We also instituted new disciplines in our business that enhanced
our focus on quality and processes. We plan to extend these practices
throughout our business in 2004 to improve our operations and further reduce
our costs.

Span-America is a healthy and vibrant company. We have a broad line of
high quality, cost effective products backed by an efficient manufacturing
operation, an experienced sales and marketing group and a dedicated team of
employees. We plan to devote all our energies and resources to building
value for our customers and investors. We appreciate your interest and
trust in Span-America. We look forward to reporting to you on our progress.

Sincerely,

-s- James D. Ferguson
    
    -s- Thomas D. HenrionJAMES D. FERGUSON
    
    THOMAS D. HENRIONPresident and CEO
    
    Chairman


THE EQUALIZER

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SELECTED FINANCIAL INFORMATION

FIVE-YEAR FINANCIAL SUMMARY(Amounts in thousands, except per share and employee data)

2003
    
    2002
    
    2001
    
    2000
    
    1999For the year:Net sales
    
    $
    41,575
    
    
    $
    33,536
    
    
    $
    29,075
    
    
    $
    26,568
    
    
    $
    23,063Gross profit
    
    
    11,134
    
    
    
    10,175
    
    
    
    8,910
    
    
    
    7,621
    
    
    
    6,344Operating income (loss)
    
    
    1,440
    
    
    
    1,717
    
    
    
    1,297
    
    
    
    902
    
    
    
    (166
    )Net income
    
    
    1,399
    
    
    
    1,658
    
    
    
    1,260
    
    
    
    971
    
    
    
    498Cash flow from operations
    
    
    1,147
    
    
    
    1,486
    
    
    
    2,362
    
    
    
    1,483
    
    
    
    2,202Capital expenditures
    
    
    1,647
    
    
    
    559
    
    
    
    461
    
    
    
    413
    
    
    
    171Per share:Net income:Basic
    
    $
    0.55
    
    
    $
    0.66
    
    
    $
    0.50
    
    
    $
    0.39
    
    
    $
    0.19Diluted
    
    
    0.53
    
    
    
    0.64
    
    
    
    0.50
    
    
    
    0.39
    
    
    
    0.19Cash dividends declared
    
    
    0.14
    
    
    
    0.12
    
    
    
    0.12
    
    
    
    0.11
    
    
    
    0.10At end of year:Working capital
    
    
    10,814
    
    
    
    11,058
    
    
    
    9,844
    
    
    
    8,671
    
    
    
    7,858Property and equipment  net
    
    
    4,817
    
    
    
    3,632
    
    
    
    3,425
    
    
    
    3,346
    
    
    
    3,460Total assets
    
    
    23,991
    
    
    
    21,906
    
    
    
    20,185
    
    
    
    19,161
    
    
    
    17,679Shareholders equity
    
    
    18,525
    
    
    
    17,394
    
    
    
    15,928
    
    
    
    14,904
    
    
    
    14,180Book value per share
    
    
    7.26
    
    
    
    6.85
    
    
    
    6.33
    
    
    
    5.95
    
    
    
    5.68Number of employees(1)
    
    
    299
    
    
    
    254
    
    
    
    228
    
    
    
    216
    
    
    
    194Key ratios:Current ratio
    
    
    3.6
    
    
    
    4.4
    
    
    
    4.2
    
    
    
    3.8
    
    
    
    4.5Return on net sales
    
    
    3.4
    %
    
    
    4.9
    %
    
    
    4.3
    %
    
    
    3.7
    %
    
    
    2.2
    %Return on average shareholders equity
    
    
    7.8
    %
    
    
    9.9
    %
    
    
    8.2
    %
    
    
    6.7
    %
    
    
    3.3
    %Return on average total assets
    
    
    6.1
    %
    
    
    7.9
    %
    
    
    6.4
    %
    
    
    5.3
    %
    
    
    2.7
    %




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|(1) |  | Past fiscal years have been restated to include temporary employees at
fiscal year end.
|--- |  | ---------------------------------------------------------------------------------------

(BAR CHARTS)

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QUARTERLY FINANCIAL DATA

(Unaudited)
(Amounts in thousands, except per share data)

First
    
    Second
    
    Third
    
    Fourth
    
    YearFOR FISCAL 2003Net sales
    
    $
    7,892
    
    
    $
    10,839
    
    
    $
    10,609
    
    
    $
    12,235
    
    
    $
    41,575Gross profit
    
    
    2,506
    
    
    
    2,633
    
    
    
    2,907
    
    
    
    3,088
    
    
    
    11,134Operating income
    
    
    316
    
    
    
    177
    
    
    
    442
    
    
    
    505
    
    
    
    1,440Net income
    
    
    333
    
    
    
    226
    
    
    
    392
    
    
    
    448
    
    
    
    1,399Earnings per shareBasic
    
    
    0.13
    
    
    
    0.09
    
    
    
    0.15
    
    
    
    0.18
    
    
    
    0.55Diluted
    
    
    0.13
    
    
    
    0.09
    
    
    
    0.15
    
    
    
    0.17
    
    
    
    0.53Stock price dataHigh
    
    
    8.08
    
    
    
    8.29
    
    
    
    10.03
    
    
    
    12.32
    
    
    
    12.32Low
    
    
    6.53
    
    
    
    7.21
    
    
    
    7.86
    
    
    
    8.50
    
    
    
    6.53FOR FISCAL 2002Net sales
    
    $
    6,892
    
    
    $
    7,557
    
    
    $
    8,344
    
    
    $
    10,743
    
    
    $
    33,536Gross profit
    
    
    2,219
    
    
    
    2,550
    
    
    
    2,529
    
    
    
    2,877
    
    
    
    10,175Operating income
    
    
    345
    
    
    
    440
    
    
    
    388
    
    
    
    544
    
    
    
    1,717Net income
    
    
    355
    
    
    
    462
    
    
    
    359
    
    
    
    482
    
    
    
    1,658Earnings per shareBasic
    
    
    0.14
    
    
    
    0.18
    
    
    
    0.14
    
    
    
    0.19
    
    
    
    0.66Diluted
    
    
    0.14
    
    
    
    0.18
    
    
    
    0.14
    
    
    
    0.18
    
    
    
    0.64Stock price dataHigh
    
    
    6.24
    
    
    
    8.00
    
    
    
    8.57
    
    
    
    8.20
    
    
    
    8.57Low
    
    
    4.86
    
    
    
    5.39
    
    
    
    6.46
    
    
    
    6.02
    
    
    
    4.86


Span-Americas common stock trades on The Nasdaq Stock Market® under the
symbol SPAN. As of December 4, 2003, there were 2,571,218 common shares
outstanding. As of December 4, 2003, there were 277 shareholders of record and
approximately 1,030 beneficial shareholders. The closing price of
Span-Americas stock on December 4, 2003 was $11.85.

The Company has paid a regular quarterly cash dividend since January 1990.
In April 2000, the Board of Directors increased the quarterly dividend to $0.03
per share from $0.025 per share. In October 2002, the Board of Directors
increased the quarterly dividend to $0.035 per share from $0.03 per share.
Future dividend payments will depend upon the Companys earnings and liquidity
position.

(BAR CHARTS)

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MANAGEMENTS DISCUSSION AND FINANCIAL ANALYSIS

RESULTS OF OPERATIONS FISCAL 2003 VS. 2002

SUMMARY

Net sales in fiscal 2003 increased 24% to $41.6 million compared with
$33.5 million in fiscal 2002. The increase was the result of sales growth in
the Companys custom products and medical business segments. Custom products
sales rose 46% to $20.2 million. Medical segment sales increased 8% to $21.3
million.

Net income declined 16% in fiscal 2003 to $1.40 million, or $0.53 per
diluted share, compared with $1.66 million or $0.64 per diluted share, in
fiscal 2002. The Companys decrease in earnings resulted from higher than
forecasted raw material costs, expenses associated with the development and
pre-production of the new Secure I.V.® safety catheter, increased professional
fees, and two non-recurring income items included in fiscal 2002 results.

SALES

Sales in the Companys medical segment rose 8% to $21.3 million in fiscal
2003 compared with $19.7 million the previous year. The medical sales growth
was led by our proprietary lines of therapeutic replacement mattresses which
increased by 24% over 2002 sales. Most of the mattress growth came from the
Companys PressureGuard® APM2® and the PressureGuard Easy Air® products. Sales
of patient positioners increased by 8%, seating products declined 24% due to a
large one-time order in fiscal 2002, and Selan® skin care products rose by 6%.
Sales of overlays were down by 10%, continuing a long-term trend of customers
switching to replacement mattresses from mattress overlays. We expect that
total medical sales will increase during fiscal 2004 compared with 2003 levels.

Sales in the custom products segment jumped 46% during fiscal 2003 to
$20.2 million from $13.8 million in fiscal 2002. Most of the custom products
sales increase was due to higher unit volumes of Thera-FOAM mattress pads sold
to Wal-Mart through Louisville Bedding Company. Louisville Bedding, which
distributes the Companys consumer products under a marketing and distribution
agreement, is a leading manufacturer and distributor of bedding products in
North America. Industrial sales, which are part of the custom products
business, increased by 3% in fiscal 2003 to $2.9 million. Management believes
that total custom products sales in fiscal 2004 will be higher than those of
fiscal 2003, but the rate of increase will be lower than that achieved in
fiscal 2003.

GROSS PROFIT

The Companys gross profit increased by 9% to $11.1 million during fiscal
2003 from $10.2 million in fiscal 2002. The increase in gross profit level was
primarily the result of higher sales volume during the year. The gross profit
margin percentage declined to 26.8% for fiscal year 2003 compared with 30.3%
for fiscal 2002. The decline in gross margin percentage resulted from raw
material cost increases due to higher prices on foam (our largest volume raw
material). The Company has received three price increases on foam raw material
during the past 12 months and has only been partially successful at passing
these higher costs along to customers. Higher sales of consumer products in
2003 compared with 2002 also reduced gross margins since consumer products
generally carry lower gross margins than the Companys medical products. The
medical segment typically has a higher gross margin than the custom products
segment because many of the Companys medical products are patented and
proprietary. Management expects the gross margin percentage during fiscal 2004
to be slightly higher than the gross margin percentage in fiscal 2003.

S G & A EXPENSES

Sales and marketing expenses increased 9% to $6.5 million, or 15.5% of
sales, in fiscal 2003 compared with $5.9 million, or 17.6% of sales, in fiscal
2002. The increase occurred primarily in the medical segment and was due to
higher commissions and mattress evaluation samples. The increase in sales and
marketing expenses for 2003 also included $86,000 related to the Secure I.V.
safety catheter acquired in July 2002 which is further discussed below.
Management expects sales and marketing expenses to be higher in 2004 than those
of 2003.

Research and development expenses increased 61% to $556,000 in fiscal 2003
compared with $346,000 in fiscal 2002. The increase was primarily due to
$301,000 of design and development costs associated with the Secure I.V.
product line. We anticipate that initial sales of Secure I.V. products will
occur in fiscal 2004 and will only partially offset higher pre-production and
marketing expenses related to the product lines introduction during the
period. The
Company considers safety catheters to be a separate reportable segment
based on product type and distribution channels. See Note 18 in the Notes to
Financial Statements for additional information on the safety catheter segment.
We

10



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expect that total research and development expenses in fiscal
2004 will be moderately higher than 2003 levels.

General and administrative expenses increased 21% to $2.7 million in
fiscal 2003 from $2.2 million in 2002. The Company incurred costs of
approximately $286,000 in fiscal 2003 for professional fees and other expenses
related to the renewal of the Companys Shareholder Rights Plan, which was set
to expire in 2003, and the proposed tender offer and subsequent lawsuit by Mr.
Jerry Zucker as discussed below. Another factor affecting the increase was the
receipt in the fourth quarter of fiscal 2002 of proceeds from the settlement of
a patent infringement lawsuit, which reduced administrative expenses in fiscal
2002. Higher insurance costs in 2003 were partially offset by increased income
on company-owned life insurance policies. Professional fees and other expenses
associated with Secure I.V. added $110,000 to general and administrative
expenses in fiscal 2003. General and administrative expenses for 2004 are
expected to be higher than 2003 levels.

As noted above, Mr. Jerry Zucker filed suit against the Company on July
17, 2003 challenging certain aspects of the Companys Shareholder Rights Plan
(the Plan). In his suit, Mr. Zucker sought to have certain provisions of the
Plan held unenforceable and an injunction precluding the Company from
interpreting the Plan to restrict certain actions that he might take in the
future. Both a committee of independent directors and the full board of
directors have previously concluded that the Plan is in the best interests of
the Company and its shareholders. The Plan is designed to help ensure that the
Companys shareholders receive fair treatment in the event of an unsolicited
attempt to gain control of the Company and to discourage certain coercive
takeover tactics. The Plan is not designed to deter a proxy contest or fair
offer for the whole Company. In November 2003, Mr. Zucker and the Company
reached a settlement agreement whereby Mr. Zucker agreed to dismiss his lawsuit
without prejudice in exchange for the Companys agreement to delete certain
language in the definition of Person contained in the Shareholder rights
agreement. The Company believes removal of the language clarifies the scope of
the definition of Person but will not significantly change the protections
afforded the Company and its shareholders by the shareholder rights agreement.

OTHER

Investment income decreased by 15% to $84,000 in fiscal 2003 compared with
$100,000 in fiscal 2002. The decrease was the result of lower interest rates on
the Companys floating rate debt securities and lower average level of
investments during fiscal 2003.

Royalty income decreased 1% to $598,000 in fiscal 2003 compared with
$607,000 in fiscal 2002 as a result of lower sales volume of a shielded syringe
product licensed to Becton Dickinson and Company (BD). The Companys license
agreement with BD will expire in December 2005, and no further royalty income
will be received after the expiration date.

Other income for 2003 includes an $11,000 loss on the retirement of
certain equipment. Other income for fiscal 2002 included a one-time pretax gain
of $84,000 ($55,000 or 2 cents a share after taxes) as a result of common stock
received through the demutualization of Prudential Insurance Company.
Management expects total non-operating income for fiscal 2004 to be lower than
2003 levels.

During fiscal 2003, the Company paid dividends of $356,000, or 25% of net
income, for the year. This amount represented four quarterly dividends of
$0.035 per share.

The statements contained in Results of Operations and Liquidity and
Capital Resources which are not historical facts are forward-looking
statements that involve risks and uncertainties. Management wishes to caution
the reader that these forward-looking statements, such as the Companys
expectations for future sales increases or expense changes compared with
previous periods, are only predictions. Actual events or results may differ
materially as a result of risks and uncertainties facing the Company, including
(a) the loss of a major distributor of the Companys medical or custom
products, (b) the inability to achieve anticipated sales volumes of medical or
custom products, (c) raw material cost increases, (d) changes in relationships
with large customers, (e) the degree of success achieved in manufacturing and
selling the Secure I.V. safety catheter product line, (f) the impact of
competitive products and pricing, (g) government reimbursement changes in the
medical market, (h) FDA regulation of medical device manufacturing, and other
risks referenced in the Companys Securities and Exchange Commission filings.
The

11



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Company disclaims any obligation to update any forward-looking statement
whether as a result of new information, future events or otherwise.

RESULTS OF OPERATIONS FISCAL 2002 VS. 2001

SUMMARY

Net sales in fiscal 2002 rose 15% to $33.5 million compared with $29.1
million in fiscal 2001. The increase was the result of significant sales growth
in the Companys medical and custom products business segments. Medical sales
grew by 13% to $19.7 million, and custom products sales increased by 18% to
$13.8 million.

Net income rose 32% in fiscal 2002 to $1.66 million, or $0.64 per diluted
share, compared with $1.26 million or $0.50 per diluted share, in fiscal 2001.
The Companys increased earnings were primarily due to higher sales volume,
lower amortization expense as a result of the new accounting rules for
goodwill, proceeds received from the settlement of a patent infringement
lawsuit, and higher non-operating income.

SALES

Sales in the Companys medical segment rose 13% to $19.7 million in fiscal
2002 compared with $17.4 million the previous year. The medical sales growth
was led by our lines of therapeutic replacement mattresses, including
Geo-Mattress, and PressureGuard, products, which increased by 39%, and seating
products which grew by 30%. This growth more than offset declines in medical
overlays and patient positioners, which were down in fiscal 2002 by 15% and 4%,
respectively, compared with the prior year. The decline in medical overlay
sales, which includes Geo-Matt® and convoluted foam products, is expected to
continue as more customers seek to eliminate their use of single-patient
overlays by purchasing therapeutic replacement mattresses instead.

Sales in the custom products segment increased 18% during fiscal 2002 to
$13.8 million from $11.7 million in fiscal 2001. All of the custom products
sales growth came from the consumer product line, which grew by 29% to $11.0
million. The sales increase came from higher volumes of the Companys
Geo-Systems line of mattress overlays sold through our partnership with
Louisville Bedding Company. Industrial sales, which are part of the custom
products business, declined in fiscal 2002 by 11% to $2.8 million because of
the loss of two large customers in late fiscal 2001.

GROSS PROFIT

The Companys gross profit increased by 14% to $10.2 million during fiscal
2002 from $8.9 million in fiscal 2001. The increase in gross profit level was
primarily the result of higher sales volume during the year. The gross profit
margin percentage decreased slightly to 30.3% for fiscal year 2002 compared
with 30.6% for fiscal 2001. The decrease in gross margin percentage was due to
a less profitable product mix within the consumer product line related to a
seasonal promotion of consumer overlays.

S G& A EXPENSES

Sales and marketing expenses increased 17.3% to $5.9 million, or 17.6% of
sales, in fiscal 2002 compared with $5.0 million, or 17.3% of sales, in fiscal
2001. The increase occurred primarily in the medical segment and was due to
higher shipping costs, commissions, and mattress evaluation samples.

On July 15, 2002, the Company acquired assets related to the Secure I.V.
product line from VADUS®, Inc., a privately owned designer and manufacturer of
peripheral intravenous catheters. The assets consist primarily of patents and
equipment related to the design, production and sale of the Secure I.V.
catheter. The purchase price of the assets was $340,000 plus a royalty to be
paid on future sales of the product. The Secure I.V. has FDA 510(k) approval
and is protected by 11 patents. Expenses related to the new product line in
fiscal 2002 were $59,000, consisting mostly of design and development costs.

Research and development expenses increased 25% to $346,000 in fiscal 2002
compared with to $278,000 in fiscal 2001. The increase was primarily due to
expenses associated with the Secure I.V. product line as discussed above.

General and administrative expenses decreased 4% to $2.2 million in fiscal
2002. The decrease resulted mainly from two factors: lower amortization expense
and funds received from settlement of a patent infringement lawsuit. The
settlement agreement requires the terms of the settlement to remain
confidential. Amortization expense decreased by
$182,000 mostly as a result of the Companys adoption at the beginning of
fiscal 2002

12



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of Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets. See Note 5 in the Notes to Financial Statements for more
information on goodwill amortization expense. These reduced expenses were
largely offset by increases in property and casualty insurance expense and
incentive compensation.

OTHER

Investment income decreased by 46% to $100,000 in fiscal 2002 compared
with $185,000 in fiscal 2001. The decrease was the result of lower interest
rates on the Companys floating rate debt securities during fiscal 2002.

Royalty income increased 33% to $607,000 in fiscal 2002 compared with
$456,000 in fiscal 2001 as a result of higher sales volume of a shielded
syringe product licensed to Becton & Dickinson Company.

Other income for fiscal 2002 included a one-time pretax gain of $84,000
($55,000 or 2 cents a share after taxes) as a result of common stock received
through the demutualization of Prudential Insurance Company.

During fiscal 2002, the Company paid dividends of $303,400, or 18% of net
income, for the year. This amount represented four quarterly dividends of $0.03
per share.

LIQUIDITY AND CAPITAL RESOURCES (FISCAL 2003 VS. 2002)

The Company generated cash from operations of approximately $1.1 million
during fiscal 2003, representing a decline of $339,000 (23%) compared with cash
flow of $1.5 million in fiscal 2002. The decline in cash flow resulted
primarily from an increase in accounts receivable and inventory levels in
fiscal 2003 and lower net income for the year. The effect of higher accounts
receivable and inventory and lower net income was partially offset by an
increase in accounts payable and accrued expenses related to higher sales
volume during fiscal 2003.

Working capital decreased by $243,000, or 2%, to $10.8 million during
fiscal 2003. The lower working capital was the result of sales of marketable
securities to fund new equipment purchases and increases in accounts payable
and accrued expenses. The Companys current ratio decreased to 3.6 at September
27, 2003 from 4.4 at fiscal year end 2002.

Accounts receivable, net of allowances, increased 21% to $5.9 million at
the end of fiscal 2003 compared with $4.9 million at the end of fiscal 2002.
The majority of the increase resulted from higher sales of consumer products
throughout fiscal 2003 compared with fiscal 2002. However, the days sales
outstanding, calculated using a monthly average for accounts receivable over
the entire year, improved to 45 days in 2003 compared with 47 days in 2002. All
of the Companys accounts receivable are unsecured.

Inventory, net of reserves, increased 30% to $2.5 million at September 27,
2003 compared with $2.0 million at September 28, 2002. Approximately 78% of the
increase in inventory was due to higher levels of raw materials and finished
goods in the consumer segment to support continuing scheduled shipments of
consumer products. The balance of the increase in inventory occurred in the
medical segment and is related to higher sales of medical mattresses. However,
average inventory turnover improved by 17% in fiscal 2003 to 13.5 times from
11.5 times in fiscal 2002. Management expects inventory levels in fiscal 2004
to be slightly higher than those of fiscal 2003.

Net property and equipment increased by 33% during fiscal 2003. The change
resulted primarily from the combination of normal depreciation expense and
equipment purchases of $1.6 million. Purchases of tooling and equipment for the
Secure I.V. product line totaled $1.0 million. Replacement of the HVAC system
for the Greenville, South Carolina plant totaled approximately $300,000.
Management expects capital expenditures to be higher in fiscal 2004 than in
2003.

From time to time, the Company purchases forward contracts for foreign
currency to lock in exchange rates for future payments on manufacturing
equipment ordered by the Company. The foreign exchange contracts are used to
eliminate foreign currency fluctuations during the six to nine month period
between when the order is placed and the time of final payment. Realized gains
and losses, if any, are included in the cost of the related equipment.
Unrealized gains and losses on open contracts are not material to the Companys
results of operations or financial conditions. There were no forward contracts
held by the Company at September 27, 2003.

13



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The Companys trade accounts payable increased $765,000 or 45% in fiscal
2003 to $2.5 million. The increase in payables was the result of higher
inventory purchases and other expenses in support of higher sales volumes in
fiscal 2003 as discussed above. Accrued and sundry liabilities increased by 11%
during the year to $1.7 million compared with $1.6 million last year. The
increase was due to higher accrued payroll and payroll tax expense as well as
accrued medical insurance claims.

Management believes that funds on hand and funds generated from operations
are adequate to finance operations and expected capital requirements during
fiscal 2004.

IMPACT OF INFLATION

Higher inflation rates could impact the Company through higher raw
material and labor costs. The Companys profit margin could be adversely
affected to the extent that we are unable to pass cost increases along to our
customers due to competitive conditions. Management considers it possible that
foam raw material costs will increase during fiscal 2004. We will attempt to
recover any such cost increases by sales prices increases and expense
reductions. However, there can be no assurance that we will be able to offset
potential raw material cost increases.

MARKET RISK

The Company is exposed to financial market risk in two areas: short-term
investments and cash value of life insurance. As of September 27, 2003, the
Company had short-term investments of $4.1 million which were classified as
available for sale. These short-term investments consist primarily of high
quality and highly liquid corporate commercial paper and bonds known as
variable rate demand notes or low floaters. The bonds are issued by
municipalities or companies and are backed by letters of credit from federally
insured banks. The bonds carry the credit rating of the underlying bank and are
therefore highly rated. The interest rate on the bonds is a floating rate which
is reset weekly by the re-marketing agent based on market rates for comparable
securities. The bonds can be liquidated by the Company at any time with seven
days notice. Using the level of securities available for sale at fiscal year
end 2003, a 1% change in interest rates for one year would change after-tax
earnings by approximately $41,000.

In addition, the Companys other assets at September 27, 2003 include $1.5
million in cash value of life insurance, which is subject to financial market
risk related to equity pricing and interest rate changes. The cash value is
generated from life insurance policies which are being used as the funding
vehicle for a retirement program for the Companys founder and former chairman.
The cash value is invested in a combination of fixed income life insurance
contracts and a portfolio of mutual funds managed by an insurance company. The
fixed income contracts are similar to fixed income bond funds and are therefore
subject to interest rate and company risk. The mutual fund portfolios invest in
common stocks and bonds in accordance with their individual investment
objectives. These portfolios are exposed to stock market and interest rate risk
similar to comparable mutual funds. 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. During the fiscal year ended September 27,
2003, the Companys cash value of life insurance increased by 10%, creating
income of approximately $127,000.

CRITICAL ACCOUNTING POLICIES

This discussion and analysis of financial condition and results of
operations is based on our financial statements which we prepare in conformity
with accounting principles generally accepted in the United States of America.
The preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. These estimates and assumptions are based on historical
experience and on various other factors that we believe are reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. These estimates and assumptions also require the
application of certain accounting policies, many of which require us to make
estimates and assumptions about future events and their impact on amounts
reported in our financial statements and related notes. We periodically review
our accounting policies and estimates and make adjustments when facts and
circumstances dictate.

14



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Actual results may differ from these estimates under different assumptions
or conditions. Any differences may have a material impact on our financial
condition and results of operations.

In addition to the accounting policies which are more fully described in
the Notes to Financial Statements included in this report, we have identified
the following critical accounting policies used in the preparation of our
financial statements.

Allowance for Doubtful Accounts

Credit evaluations are undertaken to set credit limits for all customers.
On a quarterly basis, we evaluate aged items in the accounts receivable aging
analysis and provide adequate reserves for doubtful accounts. Customer business
conditions may change and increase the risk of collectibility and may require
additional provisions which would negatively impact our operating results. As
of September 27, 2003, our provision for doubtful accounts represented
approximately 3% of total accounts receivable.

Inventories

We regularly review inventory quantities on hand and adjust for excess and
obsolete inventory based primarily on historical usage rates and our estimated
forecast of product demand and production. Actual demand may differ from our
estimate, in which case we may have understated or overstated the provision
required for obsolete and excess inventory, which would have an impact on our
operating results. As of September 27, 2003, our provision for excess and
obsolete inventory represented approximately 5% of total inventories.

Warranty Obligations

We warrant certain of our products for a specific period of time against
material defects. We provide for the estimated future cost of warranty
obligations in cost of goods sold when the related revenue is recognized. The
accrued warranty cost represents our best estimate at the time of sale of the
total cost that we will incur to repair or replace product parts which fail
while under warranty. The amount of accrued estimated warranty cost is
primarily based on historical experience about product failure as well as
current information on repair costs. Actual warranty cost could differ from the
estimated amounts. On a quarterly basis, we review the accrued balances and
update the historical warranty cost trends. If we were required to accrue
additional warranty cost in the future, it would negatively affect operating
results.

Impairment of Goodwill

The Company accounts for goodwill under SFAS No. 142. As required by this
statement, we have made an annual assessment as to the carrying value of
goodwill. We determined that the fair value of the reporting units, which are
the industry segments as described in Note 18 Operations and Industry
Segments of the Notes to Financial Statements, exceeded the carrying value and
thus no impairment charge was required. We will continue to make assessments of
impairment on an annual basis in the fourth quarter of our fiscal years or more
frequently if certain indicators arise. In assessing the value of goodwill, we
must make assumptions regarding estimated future cash flows and other factors
to determine the fair value of the reporting units. If these estimates or their
related assumptions change in the future, we may be required to record
impairment charges which would negatively impact operating results. As of
September 27, 2003, the carrying value of goodwill was $1.9 million.

Present Value of Deferred Compensation

The Company is obligated to make fixed payments under a retirement
agreement over the remaining life of its founder as discussed in Note 10
Deferred Compensation in the Notes to Financial Statements. The Company has
fully accrued the present value of the expected payments due over the
executives estimated life expectancy. In calculating this present value the
Company estimated an effective long term investment return of 8%. If actual
long term interest rates declined significantly and we were required to accrue
additional deferred compensation costs in the future, it would negatively
affect operating results. As of September 27, 2003, the Company has recorded a
deferred compensation liability of $1.0 million, including current and deferred
portions.

15



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BALANCE SHEETS

September 27,
    
    September 28,2003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,811,332
    
    
    $
    1,095,299Securities available for sale (Note 2)
    
    
    4,143,758
    
    
    
    5,853,717Accounts receivable, net of allowances of $340,000 (2003) and $381,000 (2002)
    
    
    5,941,774
    
    
    
    4,926,879Inventories (Note 3)
    
    
    2,539,325
    
    
    
    1,958,388Prepaid expenses and deferred income taxes
    
    
    592,997
    
    
    
    496,238Total current assets
    
    
    15,029,186
    
    
    
    14,330,521Property and equipment, net (Note 4)
    
    
    4,817,450
    
    
    
    3,631,867Goodwill, net of accumulated amortization of $1,027,765 (2003 and 2002) (Note 5)
    
    
    1,924,131
    
    
    
    1,924,131Other assets (Note 6)
    
    
    2,219,890
    
    
    
    2,019,334$
    23,990,657
    
    
    $
    21,905,853LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,467,524
    
    
    $
    1,702,989Accrued and sundry liabilities (Note 8)
    
    
    1,747,385
    
    
    
    1,569,899Total current liabilities
    
    
    4,214,909
    
    
    
    3,272,888Deferred income taxes (Note 13)
    
    
    321,000
    
    
    
    282,000Deferred compensation (Note 11)
    
    
    929,407
    
    
    
    957,299Commitments and contingencies (Notes 11, 19, and 20)Shareholders equity (Notes 12 and 14)Common stock, no par value, 20,000,000 shares authorized;
issued and outstanding shares 2,552,154 (2003) and 2,538,870 (2002)
    
    
    283,981
    
    
    
    196,340Additional paid-in capital
    
    
    10,035
    
    
    
    8,527Retained earnings
    
    
    18,231,325
    
    
    
    17,188,799Total shareholders equity
    
    
    18,525,341
    
    
    
    17,393,666$
    23,990,657
    
    
    $
    21,905,853


See accompanying notes.

16



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##### 



STATEMENTS OF INCOME

September 27,
    
    September 28,
    
    September 29,Years Ended
    
    2003
    
    2002
    
    2001Net sales
    
    $
    41,574,603
    
    
    $
    33,535,640
    
    
    $
    29,074,958Cost of goods sold
    
    
    30,440,681
    
    
    
    23,360,403
    
    
    
    20,165,299Gross profit
    
    
    11,133,922
    
    
    
    10,175,237
    
    
    
    8,909,659Selling and marketing expenses
    
    
    6,455,468
    
    
    
    5,895,730
    
    
    
    5,028,077Research and development expenses
    
    
    556,421
    
    
    
    346,140
    
    
    
    277,755General and administrative expenses
    
    
    2,682,221
    
    
    
    2,216,275
    
    
    
    2,307,3269,694,110
    
    
    
    8,458,145
    
    
    
    7,613,158Operating income
    
    
    1,439,812
    
    
    
    1,717,092
    
    
    
    1,296,501Non-operating income (expense):Investment income
    
    
    84,046
    
    
    
    99,489
    
    
    
    184,909Royalty income
    
    
    597,687
    
    
    
    606,846
    
    
    
    456,429Other
    
    
    (7,751
    )
    
    
    89,305
    
    
    
    2,347673,982
    
    
    
    795,640
    
    
    
    643,685Income before income taxes
    
    
    2,113,794
    
    
    
    2,512,732
    
    
    
    1,940,186Provision for income taxes (Note 13)
    
    
    715,000
    
    
    
    855,000
    
    
    
    680,000Net income
    
    $
    1,398,794
    
    
    $
    1,657,732
    
    
    $
    1,260,186Earnings per share of common stock (Note 14)Net income:Basic
    
    $
    0.55
    
    
    $
    0.66
    
    
    $
    0.50Diluted
    
    $
    0.53
    
    
    $
    0.64
    
    
    $
    0.50Dividends per share of common stock
    
    $
    0.14
    
    
    $
    0.12
    
    
    $
    0.12Weighted average shares outstanding:Basic
    
    
    2,544,882
    
    
    
    2,527,416
    
    
    
    2,510,427Diluted
    
    
    2,659,699
    
    
    
    2,600,604
    
    
    
    2,532,539


See accompanying notes.

17



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##### 



STATEMENTS OF SHAREHOLDERS EQUITY

Common Stock
    
    AdditionalPaid-in
    
    RetainedShares
    
    Amount
    
    Capital
    
    Earnings
    
    TotalBalance at September 30, 2000
    
    
    2,503,400
    
    
    $
    28,000
    
    
    $
    
    
    
    $
    14,875,581
    
    
    $
    14,903,581Net income for the 2001 fiscal year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,260,186
    
    
    
    1,260,186Common stock issued to Directors
    
    
    8,000
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Common stock issued on
exercise of stock options
    
    
    6,000
    
    
    
    23,725
    
    
    
    
    
    
    
    
    
    
    
    23,725Tax benefits for stock options exercised
    
    
    
    
    
    
    
    
    
    
    1,708
    
    
    
    
    
    
    
    1,708Cash dividends paid ($.12 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (301,307
    )
    
    
    (301,307
    )Balance at September 29, 2001
    
    
    2,517,400
    
    
    
    91,725
    
    
    
    1,708
    
    
    
    15,834,460
    
    
    
    15,927,893Net income for the 2002 fiscal year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,657,732
    
    
    
    1,657,732Common stock issued to Directors
    
    
    8,000
    
    
    
    47,600
    
    
    
    
    
    
    
    
    
    
    
    47,600Common stock issued on
exercise of stock options
    
    
    13,470
    
    
    
    57,015
    
    
    
    
    
    
    
    
    
    
    
    57,015Tax benefits for stock options exercised
    
    
    
    
    
    
    
    
    
    
    6,819
    
    
    
    
    
    
    
    6,819Cash dividends paid ($.12 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (303,393
    )
    
    
    (303,393
    )Balance at September 28, 2002
    
    
    2,538,870
    
    
    
    196,340
    
    
    
    8,527
    
    
    
    17,188,799
    
    
    
    17,393,666Net income for the 2003 fiscal year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,398,794
    
    
    
    1,398,794Common stock issued to Directors
    
    
    8,000
    
    
    
    64,000
    
    
    
    
    
    
    
    
    
    
    
    64,000Common stock issued on
exercise of stock options
    
    
    5,284
    
    
    
    23,641
    
    
    
    
    
    
    
    
    
    
    
    23,641Tax benefits for stock options exercised
    
    
    
    
    
    
    
    
    
    
    1,508
    
    
    
    
    
    
    
    1,508Cash dividends paid ($.14 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (356,268
    )
    
    
    (356,268
    )Balance at September 27, 2003
    
    
    2,552,154
    
    
    $
    283,981
    
    
    $
    10,035
    
    
    $
    18,231,325
    
    
    $
    18,525,341


See accompanying notes.

18



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##### 



STATEMENTS OF CASH FLOWS

September 27,
    
    September 28,
    
    September 29,Years Ended
    
    2003
    
    2002
    
    2001OPERATING ACTIVITIES:Net income
    
    $
    1,398,794
    
    
    $
    1,657,732
    
    
    $
    1,260,186Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation
    
    
    449,844
    
    
    
    411,898
    
    
    
    382,010Amortization
    
    
    77,203
    
    
    
    75,568
    
    
    
    257,546Income from insurance demutualization
    
    
    
    
    
    
    (83,636
    )Provision for losses on accounts receivable
    
    
    86,884
    
    
    
    62,293
    
    
    
    44,202Provision for deferred income taxes
    
    
    107,508
    
    
    
    62,819
    
    
    
    76,708Loss on sale and disposal of property and equipment
    
    
    10,864(Increase) decrease in cash value of life insurance
    
    
    (126,809
    )
    
    
    48,648
    
    
    
    73,432Deferred compensation
    
    
    (27,892
    )
    
    
    (25,826
    )
    
    
    (23,913
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,076,820
    )
    
    
    (994,304
    )
    
    
    270,204Inventories
    
    
    (580,937
    )
    
    
    144,774
    
    
    
    (36,680
    )Prepaid expenses and other assets
    
    
    (123,123
    )
    
    
    (48,285
    )
    
    
    42,194Accounts payable and accrued and sundry liabilities
    
    
    951,487
    
    
    
    174,515
    
    
    
    16,144Net cash provided by operating activities
    
    
    1,147,003
    
    
    
    1,486,196
    
    
    
    2,362,033INVESTING ACTIVITIES:Purchase of Secure I.V. assets
    
    
    
    
    
    
    (339,524
    )Purchases of securities
    
    
    
    
    
    
    (2,400,000
    )
    
    
    (1,510,000
    )Proceeds from sales of securities
    
    
    1,705,000
    
    
    
    2,100,000
    
    
    
    425,000Purchases of property and equipment
    
    
    (1,647,291
    )
    
    
    (558,516
    )
    
    
    (461,059
    )Proceeds from sale of property and equipment
    
    
    1,000Payments for other assets
    
    
    (147,586
    )
    
    
    (20,870
    )
    
    
    (51,664
    )Net cash used for investing activities
    
    
    (88,877
    )
    
    
    (1,218,910
    )
    
    
    (1,597,723
    )FINANCING ACTIVITIES:Dividends paid
    
    
    (356,268
    )
    
    
    (303,393
    )
    
    
    (301,307
    )Common stock issued upon exercise of options
    
    
    14,175
    
    
    
    57,015
    
    
    
    23,725Net cash used for financing activities
    
    
    (342,093
    )
    
    
    (246,378
    )
    
    
    (277,582
    )Increase in cash and cash equivalents
    
    
    716,033
    
    
    
    20,908
    
    
    
    486,728Cash and cash equivalents at beginning of year
    
    
    1,095,299
    
    
    
    1,074,391
    
    
    
    587,663Cash and cash equivalents at end of year
    
    $
    1,811,332
    
    
    $
    1,095,299
    
    
    $
    1,074,391


See accompanying notes.

19



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##### 



NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

The Company manufactures and distributes replacement mattresses, mattress
overlays, patient positioners, seating cushions, and skin care products for the
medical market and pillows, mattress pads and various foam products for the
custom products market throughout the United States and Canada. In addition the
Company is preparing to manufacture and sell a line of safety catheters under
the Secure I.V. brand name. The Secure I.V. product line is currently in the
development phase.

CASH AND CASH EQUIVALENTS

The Company considers all cash equivalents to be highly liquid investments
with a maturity when purchased of three months or less. Depending on market
conditions, the Company may maintain a centralized cash management program
whereby its excess cash balances are invested in commercial paper and are
considered cash equivalents. Cash balances in the Companys accounts usually
exceed federally insured limits.

ACCOUNTS RECEIVABLE

The Company provides credit in the normal course of business and performs
ongoing credit evaluations on certain of its customers, but generally does not
require collateral to support such receivables. Accounts receivable are carried
at original invoice amount less an estimate made for doubtful accounts based on
a quarterly review of all outstanding amounts. Management establishes the
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information. Trade
receivables are written off when deemed uncollectible. Recoveries of trade
receivables previously written off are recorded when received.

INVENTORIES

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

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Maintenance, repairs, and minor
replacements that do not improve or extend the useful lives of assets are
expensed when incurred. 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.

Construction in progress is stated at cost, which includes the cost of
construction and other direct costs attributable to the construction. No
provision for depreciation is made on construction in progress until such time
as the relevant assets are completed and put into use. Construction in progress
at September 27, 2003 represents machinery under assembly and installation.
(See Note 4.)

INTANGIBLES

Intangible assets are amortized 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. Goodwill, costs in excess of the
fair value of net assets, acquired from two separate acquisitions, is accounted
for under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets. (See Note 5.) Accumulated amortization of
intangible assets at September 27, 2003 and September 28, 2002 was
approximately $2,192,000 and $2,115,000, respectively. The Company reviews
annually the recoverability of the carrying value of these assets in accordance
with SFAS No. 142 and SFAS No. 144, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The Company
also reviews long-lived assets and the related intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of
such assets may not be recoverable.

20



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##### 



REVENUE RECOGNITION

Revenue is recognized by the Company when goods are shipped and title
passes to the customer. There are no customer acceptance provisions, and the
right to return exists only in cases of damaged product or non-compliance with
customer specifications.

The Company has applied the accounting and disclosure requirements of
Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 101.

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, securities available for sale, accounts receivable, cash value of
life insurance, 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 when available, or quoted market prices of financial instruments
with similar characteristics.

EARNINGS PER SHARE OF COMMON SHARE

Earnings per share of common stock are computed based on the weighted
average number of shares outstanding during each period in accordance with SFAS
No. 128, Earnings Per Share. (See Note 14.)

STOCK-BASED COMPENSATION

The Company accounts for stock options under Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees. Accordingly, no
compensation expense has been charged to operations. Had compensation expense
for the plans been determined based on the fair value at the grant dates for
awards under the plans consistent with the accounting method available under
SFAS No. 123 Accounting for Stock Based Compensation, the Companys net
income and net income per common share would have been reduced to the proforma
amounts indicated below:

2003
    
    2002
    
    2001Net incomeAs reported
    
    $
    1,398,794
    
    
    $
    1,657,732
    
    
    $
    1,260,186Stock option expense, net of taxes
    
    
    144,391
    
    
    
    87,840
    
    
    
    55,602Pro forma
    
    $
    1,254,403
    
    
    $
    1,569,892
    
    
    $
    1,204,584Basic net income per common shareAs reported
    
    $
    0.55
    
    
    $
    0.66
    
    
    $
    0.50Stock option expense, net of taxes
    
    
    0.06
    
    
    
    0.04
    
    
    
    0.02Pro forma
    
    $
    0.49
    
    
    $
    0.62
    
    
    $
    0.48Diluted net income per common shareAs reported
    
    $
    0.53
    
    
    $
    0.64
    
    
    $
    0.50Stock option expense, net of taxes
    
    
    0.06
    
    
    
    0.04
    
    
    
    0.02Pro forma
    
    $
    0.47
    
    
    $
    0.60
    
    
    $
    0.48


21



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##### 



1. SIGNIFICANT ACCOUNTING POLICIES (continued)

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions for grants made in 2003, 2002, and 2001, respectively:
risk-free interest rates of 3.26%, 3.45%, and 4.0%; dividend yields of 1.6%,
1.7%, and 2.0%; volatility factors of the expected market price of the
Companys common stock of 38.4%, 40.7%, and 42.4%; and a weighted average
expected life of the option of eight years for all three years.

FISCAL YEAR

The Companys fiscal year ends on the Saturday nearest to September 30.
The 2003, 2002, and 2001, fiscal years were all 52-week years.

INCOME TAXES

In accordance with SFAS No. 109, Accounting for Income Taxes, 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 are estimated to be in effect when
the differences are expected to reverse.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 planned for
the future, the estimates may ultimately differ from actual results.

RECENT PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) has issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The provisions of the statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company adopted the provisions of this statement as of September 29, 2002.
Adoption of SFAS No. 144 did not have a material impact on the Companys
financial position or results of operations.

Additional standards that have been issued or proposed by the FASB do not
require adoption until a future date and are not expected to have a material
impact on the Companys financial statements upon adoption.

2. SECURITIES AVAILABLE FOR SALE

Securities available for sale are carried at aggregate cost which
approximates market. The Company had no unrealized holding gains or losses
during fiscal years 2003, 2002, or 2001.

Securities available for sale at September 27, 2003 and September 28,
2002, consist principally of variable rate demand notes.

3. INVENTORIES

The components of inventories are as follows:

2003
    
    2002Raw materials
    
    $
    1,763,001
    
    
    $
    1,287,831Finished goods
    
    
    776,324
    
    
    
    670,557$
    2,539,325
    
    
    $
    1,958,388


4. PROPERTY AND EQUIPMENT

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

2003
    
    2002Land
    
    $
    317,343
    
    
    $
    317,343Land improvements
    
    
    246,172
    
    
    
    246,172Buildings
    
    
    4,036,473
    
    
    
    3,727,761Construction in progress
    
    
    1,030,932Machinery and equipment
    
    
    6,311,639
    
    
    
    6,125,240Furniture and fixtures
    
    
    538,045
    
    
    
    539,386Automobiles
    
    
    9,520
    
    
    
    9,520Leasehold improvements
    
    
    11,345
    
    
    
    11,34512,501,469
    
    
    
    10,976,767Less accumulated depreciation
    
    
    7,684,019
    
    
    
    7,344,900$
    4,817,450
    
    
    $
    3,631,867


22



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##### 



5. GOODWILL AND OTHER INTANGIBLES

On September 30, 2001, the Company adopted SFAS No. 142. As of September
27, 2003, the Company had goodwill (net of accumulated amortization) of
$1,924,131 and patents and trademarks (net of accumulated amortization) of
$639,445. These assets are part of the medical and safety catheter segments.
The Company has re-assessed the useful lives of goodwill, patents, and
trademarks. Goodwill was determined to have an indefinite useful life.
Amortization of goodwill ceased on September 29, 2001.
The useful lives of individual patents and trademarks were reviewed and no
material changes were required. No impairment losses were recorded on the
Companys intangible assets as a result of the adoption of SFAS No. 142 based
on the goodwill impairment test.

The following table reconciles the Companys reported net income and
earnings per share with pro forma balances from previous periods adjusted to
exclude goodwill amortization expense, which is no longer recorded under SFAS
No. 142.

2003
    
    2002
    
    2001Reported net income
    
    $
    1,398,794
    
    
    $
    1,657,732
    
    
    $
    1,260,186Add back: Goodwill amortization after-tax
    
    
    
    
    
    
    
    
    
    
    123,744Adjusted net income
    
    $
    1,398,794
    
    
    $
    1,657,732
    
    
    $
    1,383,930Basic earnings per share:Reported net income
    
    $
    0.55
    
    
    $
    0.66
    
    
    $
    0.50Goodwill amortization after-tax
    
    
    
    
    
    
    
    
    
    
    0.05Adjusted net income
    
    $
    0.55
    
    
    $
    0.66
    
    
    $
    0.55Diluted earnings per share:Reported net income
    
    $
    0.53
    
    
    $
    0.64
    
    
    $
    0.50Goodwill amortization after-tax
    
    
    
    
    
    
    
    
    
    
    0.05Adjusted net income
    
    $
    0.53
    
    
    $
    0.64
    
    
    $
    0.55


Amortization expense for patents and trademarks during fiscal years 2003,
2002, and 2001 was $77,203, $75,568, and $110,123, respectively. Estimated
amortization expense for the next five fiscal years is as follows:

Fiscal Years
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008Estimated amortization expense
    
    $
    87,630
    
    
    $
    81,151
    
    
    $
    70,950
    
    
    $
    61,414
    
    
    $
    59,704


23



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##### 



6. OTHER ASSETS

Other assets consist of the following:

2003
    
    2002Patents and trademarks, net of
accumulated amortization of
$1,164,332 (2003) and
$1,087,128 (2002)
    
    $
    639,445
    
    
    $
    579,053Cash value of life insurance policies
    
    
    1,457,005
    
    
    
    1,320,206Other
    
    
    123,440
    
    
    
    120,075$
    2,219,890
    
    
    $
    2,019,334


7. ACQUISITION OF SECURE I.V.® ASSETS

On July 15, 2002, the Company purchased the assets related to the Secure
I.V.® product line of VADUS®, Inc., a privately owned designer and manufacturer
of peripheral intravenous catheters. The Secure I.V. product line assets
consist primarily of patents and equipment related to the design, production,
and sale of the Secure I.V. catheter. The purchase price was approximately
$340,000 plus a royalty to be paid on future sales of the product. The purchase
price was allocated $60,000 to equipment and $280,000 to patents and will be
depreciated or amortized over the remaining useful lives of the assets which
are five years for equipment and 10 years for patents.

8. ACCRUED AND SUNDRY LIABILITIES

2003
    
    2002Salaries and other compensation
    
    $
    1,073,562
    
    
    $
    1,025,049Payroll taxes accrued and withheld
    
    
    175,789
    
    
    
    109,891Property taxes
    
    
    117,900
    
    
    
    112,500Medical insurance
    
    
    136,200
    
    
    
    96,728Warranty reserve
    
    
    141,723
    
    
    
    138,107Customer deposits
    
    
    35,551
    
    
    
    66,073Other
    
    
    66,660
    
    
    
    21,551$
    1,747,385
    
    
    $
    1,569,899


9. PRODUCT WARRANTIES

The Company offers warranties of various lengths to its customers
depending on the specific product sold. The Companys warranties require it to
repair or replace defective products during the warranty period at no cost to
the customer. At the time revenue is recognized for covered products, the
Company records a liability for estimated costs that may be incurred under its
warranties. The costs are estimated based on historical experience and any
specific warranty problems that have been identified. (Although historical
warranty costs have been within expectations, there can be no assurance that
future warranty costs will not exceed historical amounts.) The Company
periodically assesses the adequacy of its recorded liability and adjusts the
balance as necessary.

Changes in the Companys product warranty liability for fiscal years 2003
and 2002 are as follows:

2003
    
    2002Accrued liability at
beginning of year
    
    $
    138,107
    
    
    $
    150,500Increases in reserve
    
    
    134,416
    
    
    
    112,207Expenses
    
    
    (130,800
    )
    
    
    (124,600
    )Accrued liability at end of year
    
    $
    141,723
    
    
    $
    138,107


10. BORROWINGS

The Company paid no interest expense during fiscal years 2003, 2002, or
2001.

11. DEFERRED COMPENSATION

The Company is obligated to make fixed payments of approximately $114,000
per year 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 $86,000 in
2003, $88,000 in 2002, and $90,000 in 2001 related to this agreement. An 8%
discount rate was used in measuring the present value of the Companys deferred
compensation obligation.

24



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##### 



12. SHAREHOLDERS EQUITY

In March 1997, the Board of Directors (the Board) adopted the 1997 Stock
Option Plan (1997 Plan). The 1997 Plan authorized the Board to grant options
to key officers and employees of the Company for up to 200,000 shares of the
Companys common stock. Options granted under the 1997 Plan are generally
granted at the fair market value on the date of grant. These options become
exercisable and vested at the greater of 1,000 shares per year or 20% of the
grant. Vested options expire 10 years from the date of grant for continuing
employees, or three months after termination for employees who leave the
Company.

In November 1991, the Board adopted the 1991 Stock Option Plan (1991
Plan). The 1991 Plan authorized the Board to grant options of up to 200,000
shares of the Companys common stock to officers and key employees and 50,000
shares to directors who are neither officers nor employees of the Company. All other terms and
conditions of the 1991 Plan are similar to the 1997 Plan. The 1991 Plan was
terminated on November 7, 2001. The termination does not affect options
outstanding under the plan, but no further options can be granted under the
1991 Plan.

In March 1987, the Board adopted the 1987 Stock Option Plan (1987 Plan).
The 1987 Plan authorized the Board to grant options of up to 200,000 shares of
the Companys common stock to officers and key employees of the Company. All
other terms and conditions of the 1987 Plan are similar to the 1997 Plan. The
1987 Plan was terminated on March 31, 1997. The termination does not affect
options outstanding under the plan, but no further options can be granted under
the 1987 Plan.

A summary of activity under the Companys three stock option plans is as
follows.

Outstanding
    
    ExercisableWeighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageShares
    
    Number of
    
    Ex. Price
    
    Number of
    
    Ex. PriceAvailable
    
    Shares
    
    Per Share
    
    Shares
    
    Per ShareBalance at 9/30/00
    
    
    239,800
    
    
    
    230,000
    
    
    $
    4.85
    
    
    
    139,800
    
    
    $
    5.14Fiscal Year 2001Granted
    
    
    (63,250
    )
    
    
    63,250
    
    
    
    5.29Exercised
    
    
    
    
    
    
    (6,000
    )
    
    
    3.95Forfeited
    
    
    22,500
    
    
    
    (22,500
    )
    
    
    5.73Forfeitures terminated
    
    
    (8,500
    )
    
    
    
    
    
    
    4.00Balance at 9/29/01
    
    
    190,550
    
    
    
    264,750
    
    
    
    4.95
    
    
    
    169,250
    
    
    
    5.16Fiscal Year 2002Granted
    
    
    (23,000
    )
    
    
    23,000
    
    
    
    5.55Exercised
    
    
    
    
    
    
    (11,250
    )
    
    
    4.35Forfeited
    
    
    3,500
    
    
    
    (3,500
    )
    
    
    6.67Forfeitures terminated
    
    
    (3,500
    )
    
    
    
    
    
    
    6.67Plan terminated
    
    
    (45,600
    )
    
    
    
    
    
    
    n/aBalance at 9/28/02
    
    
    121,950
    
    
    
    273,000
    
    
    
    5.01
    
    
    
    239,400
    
    
    
    4.99Fiscal Year 2003Granted
    
    
    (28,250
    )
    
    
    28,250
    
    
    
    7.97Exercised
    
    
    
    
    
    
    (3,000
    )
    
    
    4.73Forfeited
    
    
    3,000
    
    
    
    (3,000
    )
    
    
    8.38Forfeitures terminated
    
    
    (3,000
    )
    
    
    
    
    
    
    8.38Balance at 9/27/03
    
    
    93,700
    
    
    
    295,250
    
    
    $
    5.26
    
    
    
    263,850
    
    
    $
    5.13


25



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##### 



12. SHAREHOLDERS EQUITY (continued)

A summary of stock options outstanding and exercisable at fiscal year end
2003 is shown below.

Outstanding
    
    ExercisableWeighted
    
    Wtd. Avg.
    
    
    
    
    
    WeightedAverage
    
    Remaining
    
    
    
    
    
    AverageNumber of
    
    Ex. Price
    
    Contract
    
    Number of
    
    Ex. PriceRanges of Exercise Prices
    
    Shares
    
    Per Share
    
    Life (yrs)
    
    Shares
    
    Per Share$3.55$4.91
    
    
    129,500
    
    
    $
    4.10
    
    
    
    4.4
    
    
    
    122,500
    
    
    $
    4.075.00 5.55
    
    
    107,500
    
    
    
    5.42
    
    
    
    5.2
    
    
    
    96,100
    
    
    
    5.427.09 7.97
    
    
    58,250
    
    
    
    7.52
    
    
    
    6.8
    
    
    
    45,250
    
    
    
    7.39$3.55$7.97
    
    
    295,250
    
    
    $
    5.26
    
    
    
    5.2
    
    
    
    263,850
    
    
    $
    5.13


The Board adopted a stock purchase incentive plan in February 2000. The
2000 Stock Purchase Plan was created to encourage management employees of the
Company to purchase and hold the Companys common stock. Plan benefits are paid
in shares of the Companys common stock. Benefits earned and accrued under the
plan were $11,310 in 2003, $8,217 in 2002, and $5,626 in 2001. The Company
issued stock valued at $9,466 in 2003, leaving a vested balance of $11,310 at
September 27, 2003.

In March 1997 the Board approved the 1997 Long-Term Incentive Stock Option
Plan for certain executives of the Company based on achievement of specified
financial goals by fiscal year end 1999. As of September 27, 2003, the Company
has accrued compensation expense of $24,000 related to this plan.

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 September 27, 2003
and September 28, 2002 are as follows:

2003
    
    2002Deferred tax liabilities:Depreciation
    
    $
    641,000
    
    
    $
    656,000Other
    
    
    128,000
    
    
    
    105,000Total deferred tax liabilities
    
    
    769,000
    
    
    
    761,000Deferred tax assets:Deferred compensation
    
    
    306,000
    
    
    
    346,000Accrued expenses
    
    
    216,000
    
    
    
    249,000Intangible assets
    
    
    13,000
    
    
    
    28,000Other
    
    
    71,000
    
    
    
    81,000Total deferred tax assets
    
    
    606,000
    
    
    
    704,000Net deferred tax liabilities
    
    $
    163,000
    
    
    $
    57,000


The Company made income tax payments, net of refunds, of approximately
$782,000, $962,000, and $491,000 in fiscal years 2003, 2002, and 2001,
respectively.

26



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##### 



13. INCOME TAXES (continued)

Federal and state income tax provisions consist of the following:

2003
    
    2002
    
    2001Current:Federal
    
    $
    541,000
    
    
    $
    720,000
    
    
    $
    530,000State
    
    
    52,000
    
    
    
    76,000
    
    
    
    75,000593,000
    
    
    
    796,000
    
    
    
    605,000Deferred:Federal
    
    
    111,000
    
    
    
    54,000
    
    
    
    63,000State
    
    
    11,000
    
    
    
    5,000
    
    
    
    12,000122,000
    
    
    
    59,000
    
    
    
    75,000Income tax expense
    
    $
    715,000
    
    
    $
    855,000
    
    
    $
    680,000


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

2003
    
    2002
    
    2001Computed tax at the statutory rate
    
    $
    719,000
    
    
    $
    852,000
    
    
    $
    660,000Increases (decreases):State income taxes, net of federal tax benefit
    
    
    42,000
    
    
    
    54,000
    
    
    
    58,000Tax-exempt investment income
    
    
    (22,000
    )
    
    
    (31,000
    )
    
    
    (55,000
    )Other, net
    
    
    (24,000
    )
    
    
    (20,000
    )
    
    
    17,000Income tax expense
    
    $
    715,000
    
    
    $
    855,000
    
    
    $
    680,000


14. EARNINGS PER SHARE OF COMMON STOCK

The following table sets forth the computation of basic and diluted earnings
per share of common stock in accordance with SFAS
No. 128.

2003
    
    2002
    
    2001Numerator for basic and diluted earnings per share:Net income
    
    $
    1,398,794
    
    
    $
    1,657,732
    
    
    $
    1,260,186Denominator:Denominator for basic earnings per share:Weighted average shares
    
    
    2,544,882
    
    
    
    2,527,416
    
    
    
    2,510,427Effect of dilutive securities:Employee and board stock options
    
    
    114,817
    
    
    
    73,188
    
    
    
    22,112Denominator for diluted earnings per share:Adjusted weighted average shares and assumed conversions
    
    
    2,659,699
    
    
    
    2,600,604
    
    
    
    2,532,539Net income per share:Basic
    
    $
    0.55
    
    
    $
    0.66
    
    
    $
    0.50Diluted
    
    $
    0.53
    
    
    $
    0.64
    
    
    $
    0.50


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15. EMPLOYEE BENEFITS AND INCENTIVE PLANS

The Company has an employee savings and investment plan (401(k) plan)
available to employees meeting eligibility requirements. The Company matches a
percentage of the employee contributions, with certain limitations.
Contributions by the Company amounted to approximately $144,000, $118,000, and
$106,000, for the 2003, 2002, and 2001 fiscal years, respectively.

16. RELATED-PARTY TRANSACTIONS

The Company paid approximately $102,000 in 2003, $72,000 in 2002, and
$37,000 in 2001 in legal fees to a firm having a member who is also a director
of the Company.

17. MAJOR CUSTOMERS

The Company has a business relationship with a customer to distribute
certain of its medical products to hospitals and other treatment facilities
throughout the United States. Sales generated by this customer amounted to
approximately 8% of total net sales in 2003, 11% in 2002, and 13% in 2001.

The Company has a business relationship with another customer to
distribute certain of its consumer products. Sales to this customer amounted to
40% of net sales in 2003, 32% in 2002, and 26% in 2001.

See note 18 for further information about sales to major customers.

18. OPERATIONS AND INDUSTRY SEGMENTS

The Company reports on three segments of business: medical, custom
products, and safety catheters. However, the safety catheters segment, acquired
during fiscal 2002, had no sales in fiscal 2003 or 2002 because the Secure I.V.
product line is still in the development phase. (See Note 7.) This industry
segment information corresponds to the markets in the United States for which
the Company manufactures and distributes its polyurethane foam, packaging, and
other products and therefore complies with the requirements of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information.

Total
sales by industry segment include sales from unaffiliated customers as reported
in the Companys statements of income. In calculating operating profit,
non-allocable general corporate expenses, interest expense, other income, and
income taxes are not included, but 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. All of the Companys assets are located in the United States.

The Company has several customers whose sales represent significant
portions of sales in their respective business segments. In the medical
segment, sales to one of these customers represented 15% of net medical sales
in 2003, 19% sales in 2002, and 22 % in 2001. In the custom products segment,
sales to one customer accounted for 82% of net custom products sales in 2003,
77% in 2002, and 68% in 2001.

Export sales, primarily to Canada, were approximately $2,174,000 in 2003,
$1,063,000 in 2002, and $1,207,000 in 2001.

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18. OPERATIONS AND INDUSTRY SEGMENTS (continued)

The following table summarizes certain information on industry segments:

2003
    
    2002
    
    2001Net sales:Medical
    
    $
    21,330,122
    
    
    $
    19,707,865
    
    
    $
    17,393,487Custom products
    
    
    20,244,481
    
    
    
    13,827,775
    
    
    
    11,681,471Safely cathetersTotal
    
    
    41,574,603
    
    
    
    33,535,640
    
    
    
    29,074,958Operating profit (loss):Medical
    
    $
    2,469,596
    
    
    $
    2,418,085
    
    
    $
    1,693,483Custom products
    
    
    254,225
    
    
    
    645
    
    
    
    184,890Safety catheters
    
    
    (504,575
    )
    
    
    (58,954
    )Total
    
    
    2,219,246
    
    
    
    2,359,776
    
    
    
    1,878,373Corporate expense
    
    
    (779,433
    )
    
    
    (642,684
    )
    
    
    (581,872
    )Other income
    
    
    673,981
    
    
    
    795,640
    
    
    
    643,685Income before income taxes
    
    $
    2,113,794
    
    
    $
    2,512,732
    
    
    $
    1,940,186Identifiable assets:Medical
    
    $
    8,609,857
    
    
    $
    8,977,161
    
    
    $
    8,102,371Custom products
    
    
    6,406,753
    
    
    
    4,287,781
    
    
    
    4,099,220Safety catheters
    
    
    1,417,980
    
    
    
    332,865Corporate
    
    
    7,556,067
    
    
    
    8,308,046
    
    
    
    7,983,800$
    23,990,657
    
    
    $
    21,905,853
    
    
    $
    20,185,391Depreciation and amortization expenses:Medical
    
    $
    229,209
    
    
    $
    266,995
    
    
    $
    436,169Custom products
    
    
    251,150
    
    
    
    212,930
    
    
    
    202,612Safety catheters
    
    
    45,805
    
    
    
    6,659Corporate
    
    
    883
    
    
    
    882
    
    
    
    775$
    527,047
    
    
    $
    487,466
    
    
    $
    639,556Capital expenditures:Medical
    
    $
    302,546
    
    
    $
    326,313
    
    
    $
    304,410Custom products
    
    
    312,102
    
    
    
    232,203
    
    
    
    156,649Safety catheters
    
    
    1,032,643$
    1,647,291
    
    
    $
    558,516
    
    
    $
    461,059


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19. OPERATING LEASES

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

Rental expense for all operating leases was $299,000 in 2003, $255,000 in
2002, and $235,000 in 2001.

Future minimum lease payments under noncancelable operating leases with
initial terms of one year or more at September 27, 2003 were $231,000 for
fiscal 2004, $230,000 for fiscal 2005, $240,000 for fiscal 2006, and $61,000
for fiscal 2007.

20. COMMITMENTS AND CONTINGENCIES

The Company is committed to purchases of $1,650,000 for machinery and
equipment in fiscal year 2004 for the safety catheter segment.

The Company is committed to minimum purchases of $500,000 of Selan® skin
care products per calendar year through 2005. For the fiscal years ended
September 27, 2003 and September 28, 2002, purchases under this commitment were
$622,000 and $730,000, respectively.

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 and insurance arrangements, none of these actions
should have a material adverse effect on its operations or financial condition.

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REPORT OF ELLIOTT DAVIS, LLC  INDEPENDENT AUDITORS

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

We have audited the accompanying balance sheets of Span-America Medical
Systems, Inc. as of September 27, 2003 and September 28, 2002 and the related
statements of income, shareholders equity, and cash flows for each of the
years in the three year period ended September 27, 2003. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Span-America Medical
Systems, Inc., as of September 27, 2003 and September 28, 2002 and the results
of its operations and its cash flows for each of the years in the three year
period ended September 27, 2003 in conformity with accounting principles
generally accepted in the United States of America.

-s- Elliott Davis, LLCGreenville, South CarolinaOctober 30, 2003


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OFFICERS AND DIRECTORS

OFFICERS

James D. Ferguson
President and Chief Executive Officer

Robert E. Ackley
Vice President  Custom Products

Richard C. Coggins
Chief Financial Officer, Treasurer and Secretary

James R. OReagan
Vice President  R & D and Engineering

Clyde A. Shew
Vice President  Medical Sales and Marketing

DIRECTORS

Thomas D. Henrion
Chairman of the Board
Span-America Medical Systems, Inc.
President/Owner
Silver Thread Farms, LLC
La Grange, Kentucky

James D. Ferguson
President and Chief Executive Officer
Span-America Medical Systems, Inc.
Greenville, South Carolina

Richard C. Coggins
Chief Financial Officer, Treasurer and Secretary
Span-America Medical Systems, Inc.
Greenville, South Carolina

Robert H. Dick
President
R.H. Dick & Company, Inc.
Citra, Florida

Thomas F. Grady, Jr.
Retired Vice President
International Paper
Chapel Hill, North Carolina

Guy R. Guarch
Retired Vice President
C.R. Bard
Atlanta, Georgia

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

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

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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, South Carolina 29606-5231
Web Site: www.spanamerica.comSTOCK 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
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, New York 10038
(877) 777-0800 or (800) 937-5449
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 29602-0728AUDITORS
Elliott Davis, LLC
P.O. Box 6286
Greenville, South Carolina 29606-6286SHAREHOLDER INQUIRIES AND AVAILABILITY OF FORM 10-K REPORT
A copy of the Companys Annual Report on Form 10-K for the year ended September
27, 2003 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 29606-5231(SPAN NASDAQ LISTED)




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