##### 



Exhibit 13.1

(FRONT COVER)

|2002 ANNUAL REPORT
Science
Safety
Simplicity
|--------------------------------------------





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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 packaging products to the
industrial market. Span-Americas common stock trades on The Nasdaq Stock
Market® under the symbol SPAN.

Financial Summary

|                                                          |         |      |        |      |  |          |        |      |  |  |    |    |  
|--------------------------------------------------------- | ------- | ---- | ------ | ---- |  | -------- | ------ | ---- |  |  | -- | -- | -
|(Amounts
in thousands, except per share and percent data) |         | 2002 |        | 2001 |  | % Change
|                                                          |         |      |        |      |  |         
|Net sales                                                 |         | $    | 33,536 |      |  | $        | 29,075 |      |  |  | 15 | % 
|Operating income                                          |         |      | 1,717  |      |  |          | 1,297  |      |  |  | 32 | % 
|Net income                                                |         |      | 1,658  |      |  |          | 1,260  |      |  |  | 32 | % 
|Earnings per share:                                       |         |      |        |      |  |          |        |      |  |  |    |   
|                                                          | Basic   |      |        | 0.66 |  |          |        | 0.50 |  |  |    | 32 | %
|                                                          | Diluted |      |        | 0.64 |  |          |        | 0.50 |  |  |    | 28 | %
|Return on net sales                                       |         |      | 4.9    | %    |  |          | 4.3    | %    |  |  |    |   
|Cash and securities                                       |         |      | 6,949  |      |  |          | 6,552  |      |  |  | 6  | % 
|Current assets                                            |         |      | 14,331 |      |  |          | 12,942 |      |  |  | 11 | % 
|Total assets                                              |         |      | 21,906 |      |  |          | 20,185 |      |  |  | 9  | % 
|Current liabilities                                       |         |      | 3,273  |      |  |          | 3,098  |      |  |  | 6  | % 
|Shareholders equity                                      |         |      | 17,394 |      |  |          | 15,928 |      |  |  | 9  | % 
|Return on ending shareholders equity                     |         |      | 9.5    | %    |  |          | 7.9    | %    |  |  |    |   
|Number of shares outstanding at fiscal year end           |         |      | 2,539  |      |  |          | 2,517  |      |  |  | 1  | % 
|Book value per share                                      |         |      | 6.85   |      |  |          | 6.33   |      |  |  | 8  | % 

Products Overview

|                                                                                                                                                                                                         |  |                                                                                                                                                                                        |  |                                                                                                                                                                                                        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|MEDICAL                                                                                                                                                                                                  |  | CUSTOM PRODUCTS                                                                                                                                                                       
|                                                                                                                                                                                                         |  |                                                                                                                                                                                       
|                                                                                                                                                                                                         |  | Consumer                                                                                                                                                                               |  | Industrial                                                                                                                                                                                             
|PRODUCTS:                                                                                                                                                                                                |  |                                                                                                                                                                                        |  |                                                                                                                                                                                                        
|Powered and non-powered mattresses,
bed overlays, wheelchair cushions,
patient positioners, skin care
products
MARKETS:Hospitals, nursing homes, and
homecare customers through
distributors and dealers |  | PRODUCTS:Pillows, mattress pads, comfort bedding
products, terry foam products
MARKETS:Distributed through Louisville
Bedding Company to retail outlets
throughout the U.S. and Canada |  | PRODUCTS:Ethafoam, minicell, crosslink,
polyether and polyester urethanes, filter
foam
MARKETS:Sold directly to diverse manufacturers
as component parts, protective
packaging, and industrial products

Table of Contents

LETTER TO SHAREHOLDERS 1 SELECTED FINANCIAL INFORMATION 6 QUARTERLY FINANCIAL DATA 7
MANAGEMENTS DISCUSSION AND FINANCIAL ANALYSIS 8 BALANCE SHEETS 13 STATEMENTS OF INCOME 14
STATEMENTS OF SHAREHOLDERS EQUITY 15 STATEMENTS OF CASH FLOWS 16 NOTES TO FINANCIAL STATEMENTS 17
REPORT OF ELLIOTT DAVIS, LLC, INDEPENDENT AUDITORS 24 DIRECTORS AND OFFICERS IBC CORPORATE DATA IBC





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To Our Shareholders

Span-America made excellent progress during fiscal year 2002. Our
sales grew by 15% to $33.5 million. Earnings rose 32% to $1.66 million or
64 cents a diluted share. The companys performance was driven by
significant growth in both our medical and custom products business units.
In addition, our stock price responded favorably to the sales and
earnings results by climbing 32% since the beginning of the fiscal
year. Overall, we are pleased with
Span-Americas performance in 2002.

The key to our success during the past year was sales growth. Medical
sales were up 13% to $19.7 million, and custom products sales increased 18%
to $13.8 million. Together our two businesses generated $4.5 million in new
sales during the year almost entirely from higher volume instead of price
increases. That higher sales volume was the main contributor to the
companys rise in profitability.

Our gross profit level rose 14% to $10.2 million compared with $8.9
million in 2001, but our gross margin declined slightly to 30.3% in 2002
from 30.6% last year. The slight decline in gross margin percent was caused
by a less profitable product mix in our consumer product line. The
operations group did a good job of controlling material and overhead costs
during the year, somewhat mitigating pressure on our margins.

The companys operating profit
increased 32% in 2002 to $1.7 million.
In addition to benefiting from the
increased sales, our operating profit
was helped by a 4% decline in
administrative expenses. Although we
would like to take full credit for the
expense decrease, the truth is that we
were helped by a payment received from
the settlement of a patent
infringement law suit and an
accounting change which eliminated
goodwill amortization expense. We were
able to redirect some of those funds
into the sales, marketing and R&D
efforts that we hope will generate
future sales increases.

Span-America also benefited from non-operating income of $796,000  up
24% over last year. Most of our non-operating income came from a royalty
the company receives on a shielded hypodermic syringe licensed to Becton
and Dickinson Company. This royalty increased 33% this year to $607,000.
Please be aware, however, that we expect the royalty and related income to
end in December 2005 due to patent expiration. We are working on replacing
that source of income.

Those results combined to generate a 32% increase in net income to $1.66
million or 64 cents a diluted share compared with $1.26 million or 50 cents
a diluted share in 2001.

|                                                               |  |                                                      
|-------------------------------------------------------------- |  | -----------------------------------------------------
|(PHOTO OF JAMES D. FERGUSON
JAMES D. FERGUSONPresident and CEO |  | (PHOTO OF THOMAS D. HENRION
THOMAS D. HENRIONChairman

1



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Medical Products

MEDICAL BUSINESS

The medical business unit posted exceptional results in 2002. Sales
were up 13% to $19.7 million compared with $17.4 million in 2001. All of
the sales growth came from our line of mattresses sold to hospitals,
long-term care facilities, and home care dealers throughout the United
States. Our top performing medical products included the PressureGuard®
APM2 alternating pressure mattress, the new PressureGuard Easy Air low air
loss mattress, and our full line of Geomattress® therapeutic foam
mattresses. Total mattress sales increased 39% during fiscal 2002.

We had mixed results among our other medical product lines. Sales of
seating products grew by 30% during the year. Our line of Selan® skin care
products also increased 30% in 2002 but it was entirely due to the timing
of our purchase of the Selan line in 2001. If we look at annualized sales
for both years, Selan volume was roughly flat in 2002. Patient positioners
were down 4% for the year, and foam overlays declined 18%. The drop in
overlay sales continues a long-term trend of customers eliminating their
use of overlays by purchasing replacement mattresses instead.

We believe the medical business is well positioned for long-term
growth in the medical market. Our product line of innovative pressure
management and skin care products is the broadest in the industry, and we
will continue to focus on new product development.

(INNOVATION GRAPHIC)

CUSTOM PRODUCTS BUSINESS

The custom products business had mixed results during fiscal 2002. The
segment consists of two main product lines: consumer bedding and industrial
foam products.

Consumer sales jumped 29% during the year, but sales of
industrial products fell by 11% compared to 2001. In total, sales in the
custom products segment were up 18% in 2002 to $13.8 million compared
with $11.7 million last year. However, our operating profit for the
business unit declined during the year because of a less profitable product
mix within the consumer product line and lower sales of industrial
products.

Consumer sales were up due to excellent growth from our Geo-Systems
mattress overlays, which incorporate some of our patented medical designs
into products for the consumer market. We attribute the consumer sales
success to the first-rate sales and marketing work done by our marketing
partner, Louisville Bedding Company. Louisville Bedding is a leading
manufacturer and marketer of bedding products in North America. They
distribute our full line of consumer products to retailers throughout the
U.S. and Canada.

Our industrial product line consists of a variety of foam products
used in many industrial applications, including reusable packaging,
flotation, insulation, and cushioning. Sales of industrial products
declined during 2002 due specifically to the loss of two large customers in
late 2001 and generally to weakness in the manufacturing sector. We are
encouraged, however, that industrial sales in the fourth quarter of fiscal

2



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2002 increased 25% over the year-earlier quarter. This was our first quarterly
increase in two years, and we hope it
signals strengthening in that part of our business.

SECURE IV

In July 2002, we announced that we had acquired the Secure IV product
line from privately held Vadus®, Inc. for $300,000 plus closing costs and a
royalty to be paid on future sales of the product. Vadus designed and
manufactured Secure IV and marketed it on a limited basis before seeking a
partner to expand its distribution. Since July we have been assimilating
Secure IV into Span-America and preparing to launch the product in 2003. We
are encouraged about the new product line and believe it will offer the
company a new prospect for future sales and earnings growth.

The Secure IV is a proprietary safety catheter that has FDA 510(k)
marketing approval and is protected by 11 patents. The catheter has a
unique design which includes an integrated valve that eliminates the flow
of blood back through the catheter as it is inserted in the vein. The valve
allows for bloodless starts without the need for vein occlusion thus
providing healthcare workers with maximum protection from blood and body
fluids. Secure IV also incorporates a protective needle shield that
permanently disarms the needle after use, another safety feature.

The Secure IV allows Span-America to participate in a different yet
larger part of the medical market. We expect to bring the product to market
in 2003. The start-up will require investment in capital expenditures,
development, and marketing expenses. As a result of those expenses, we
believe that total company earnings in fiscal 2003 will be slightly lower
than those of 2002. However, we do expect continued growth in sales

Our product line of
innovative pressure
management and
skin care products is
the broadest in the
industry, and we will
continue to focus
on new product
development.

(PRODUCT GRAPHIC)

|PressureGuard® APM2
Alternating Pressure Mattress
with Basic Lateral Rotation
The APM2 gives caregivers the
flexibility to change instantly
from alternating pressure to
basic lateral rotation by flipping
an easy-access toggle switch.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PressureGuard® Easy Air
Low Air Loss / Alternating
Pressure Mattress System
Easy Airs exclusive Air Diffusion
Matrix design maximizes
removal of excess moisture to
enhance skin integrity and patient
comfort.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Geo-Mattress® with Wings
Raised Perimeter Mattress
Industrys only raised perimeter
mattress with an edge-to-edge,
anti-shearing therapeutic surface.
|------------------------------------------------------------------------------------------------------------------------------------------------------

|The Equalizer
Contoured Positioning Cushion
The Equalizers multi-component
construction provides superior
pressure management and its
contoured design facilitates prop er seated positioning.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3



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and
earnings of our core medical and custom product businesses. We believe the Secure IV
will open the door to a new growth
opportunity for Span-America. We look forward to keeping you updated on our
progress.

Consumer Products

FINANCIAL CONDITION

Span-Americas financial condition remains excellent. Our capital base
increased by 9% during the year to $17.4 million, which represents a book
value of $6.85 per share. In addition, our return on ending equity
increased to 9.5% from 7.9% last year. The companys balance sheet
continues to be highly liquid with no long-term debt and ample short-term
investments. However, our operating cash flow declined by 37% in 2002 to
$1.5 million compared with $2.4 million last year. The drop in cash flow
was caused by an increase in accounts receivable which was tied directly to
higher sales volume during the last two months of fiscal 2002. Despite the
higher accounts receivable level at year-end, our average collection time
improved in 2002 to 47 days in 2002 from 53 days last year. Inventory
turnover also improved during the year, indicating good management of our
key working capital items.

In recognition of the companys strong financial condition and good
operating results in 2002, the board increased the quarterly dividend by
17% to 3.5 cents a share, beginning with the December 2002 dividend
payment. That works out to an annualized dividend rate of 14 cents a share
for the new fiscal year.

FUTURE OUTLOOK

We believe fiscal 2003 will be a pivotal year for Span-America. We
have a number of opportunities for growth in our core medical and custom
products businesses. Plus we have the challenge and interesting new
potential of launching the Secure IV product line.

(BED GRAPHIC)

|Consumer sales were up due
to excellent growth from our
Geo-Systems mattress
overlays, which incorporate
some of our patented medical
designs into products for the
consumer market.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4



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We believe fiscal
2003 will be a pivotal
year for Span-America.
We have a number
of opportunities for
growth in our core
medical and custom
products businesses.

In the medical business, we expect most of our growth to come from the
long term care segment of the medical market. This has been the fastest
growing market for our medical products during the last several years, and
we expect that trend to
continue in 2003. We believe the Medicare funding cuts in the
long-term care industry, which took effect in October 2002, will not have a
significant impact on our business. Our mattress products provide excellent
clinical results and are less expensive than many alternatives.

We plan to continue our commitment to product innovation, particularly
in the areas of mattresses, seating, and skin care products. We expect to
introduce several new products in these categories during fiscal 2003. We
will also promote the safety advantages of our mattress products which will
be targeted at the industrys growing concern about patient entrapment and
fall prevention. In addition, we will continue to expand our sales and
marketing efforts with national accounts. We have had great success in the
area of national accounts during the last several years and we hope to
build on that going forward.

We also have opportunities for growth in the custom products business.
We expect to continue expanding our relationship with Louisville Bedding
Company by offering a steady stream of new and innovative pads and pillows
to their many retail customers. Our main emphasis will be on the
Geo-Systems product line, which we believe provides retailers and end-user
consumers with a higher value for their money. We will also be working to
increase the profitability of the consumer business by improving our
manufacturing efficiencies and controlling costs. Our skills are highly
complementary to those of Louisville Bedding and we look forward to future
consumer sales growth that can add value to both companies.

(PRODUCT LINE GRAPHIC)

In the industrial area, we seem to have turned the corner toward
higher sales and earnings. Our expertise with this product line lies in
designing and manufacturing precision foam component parts for a variety of
industrial uses. We have recently focused on providing parts for the
automotive industry, and we see this as a growth opportunity. We also think
that this part of our business is in an excellent position to benefit from
a stronger regional manufacturing economy.

Overall, we expect to stretch our resources in fiscal 2003. We have
assembled a unique combination of people, products, and proficiencies; and
we are focused on building a business that can generate sustained and
growing value for our shareholders. Thank you for your continued interest
in Span-America. We look forward to reporting to you on our progress in
2003.

Sincerely,

| |  |                                    |  |                          
| |  | ---------------------------------- |  | -------------------------
| |  | -s- James D. Ferguson              |  | -s- Thomas D. Henrion    
| |  |                                    |  |                          
| |  | JAMES D. FERGUSONPresident and CEO |  | THOMAS D. HENRIONChairman

5



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Span-America Medical Systems, Inc.  2002 Annual Report

Selected Financial Information

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

|                |                                                 |         |   |        |      |      |   |        |      |      |   |        |      |  |   |        |      |  |   |        |      | 
|--------------- | ----------------------------------------------- | ------- | - | ------ | ---- | ---- | - | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                |                                                 |         |   | 2002   |      | 2001 |   | 2000   |      | 1999 |   | 1998  
|                |                                                 |         |   |        |      |      |   |        |      |      |   |       
|For the year:   |                                                 |         |   |        |      |      |   |        |      |      |   |        |      |  |   |        |      |  |   |       
|                | Net sales                                       |         | $ | 33,536 |      |      | $ | 29,075 |      |      | $ | 26,568 |      |  | $ | 23,063 |      |  | $ | 28,346 |     
|                | Gross profit                                    |         |   | 10,175 |      |      |   | 8,910  |      |      |   | 7,621  |      |  |   | 6,344  |      |  |   | 8,499  |     
|                | Operating income (loss)                         |         |   | 1,717  |      |      |   | 1,297  |      |      |   | 902    |      |  |   | (166   | )    |  |   | 1,805  |     
|                | Income from continuing operations               |         |   | 1,658  |      |      |   | 1,260  |      |      |   | 971    |      |  |   | 132    |      |  |   | 1,412  |     
|                | Cash flow from operations                       |         |   | 1,486  |      |      |   | 2,362  |      |      |   | 1,483  |      |  |   | 2,202  |      |  |   | 364    |     
|                | Capital expenditures from continuing operations |         |   | 559    |      |      |   | 461    |      |      |   | 413    |      |  |   | 171    |      |  |   | 562    |     
|Per share:      |                                                 |         |   |        |      |      |   |        |      |      |   |        |      |  |   |        |      |  |   |       
|                | Income from continuing operations:              |         |   |        |      |      |   |        |      |      |   |        |      |  |   |        |      |  |   |        |     
|                |                                                 | Basic   |   | $      | 0.66 |      |   | $      | 0.50 |      |   | $      | 0.39 |  |   | $      | 0.05 |  |   | $      | 0.48 | 
|                |                                                 | Diluted |   |        | 0.64 |      |   |        | 0.50 |      |   |        | 0.39 |  |   |        | 0.05 |  |   |        | 0.47 | 
|                | Cash dividends declared                         |         |   | 0.12   |      |      |   | 0.12   |      |      |   | 0.11   |      |  |   | 0.10   |      |  |   | 0.10   |     
|At end of year: |                                                 |         |   |        |      |      |   |        |      |      |   |        |      |  |   |        |      |  |   |       
|                | Working capital                                 |         |   | 11,058 |      |      |   | 9,844  |      |      |   | 8,671  |      |  |   | 7,858  |      |  |   | 8,749  |     
|                | Property and equipment  net                    |         |   | 3,632  |      |      |   | 3,425  |      |      |   | 3,346  |      |  |   | 3,460  |      |  |   | 3,822  |     
|                | Total assets                                    |         |   | 21,906 |      |      |   | 20,185 |      |      |   | 19,161 |      |  |   | 17,679 |      |  |   | 19,412 |     
|                | Shareholders equity                            |         |   | 17,394 |      |      |   | 15,928 |      |      |   | 14,904 |      |  |   | 14,180 |      |  |   | 15,696 |     
|                | Book value per share                            |         |   | 6.85   |      |      |   | 6.33   |      |      |   | 5.95   |      |  |   | 5.68   |      |  |   | 5.57   |     
|                | Number of employees  continuing operations     |         |   | 234    |      |      |   | 221    |      |      |   | 188    |      |  |   | 174    |      |  |   | 201    |     
|Key ratios:     |                                                 |         |   |        |      |      |   |        |      |      |   |        |      |  |   |        |      |  |   |       
|                | Current ratio                                   |         |   | 4.4    |      |      |   | 4.2    |      |      |   | 3.8    |      |  |   | 4.5    |      |  |   | 4.3    |     
|                | Return on net sales(1)                          |         |   | 4.9    | %    |      |   | 4.3    | %    |      |   | 3.7    | %    |  |   | 0.6    | %    |  |   | 5.0    | %   
|                | Return on ending shareholders equity(1)        |         |   | 9.5    | %    |      |   | 7.9    | %    |      |   | 6.5    | %    |  |   | 3.5    | %    |  |   | 10.0   | %   
|                | Return on average total assets(1)               |         |   | 7.9    | %    |      |   | 6.4    | %    |      |   | 5.3    | %    |  |   | 2.7    | %    |  |   | 7.4    | %   

(1) Calculated using income from continuing operations.

(BAR CHARTS)

|Net Sales
(dollars in millions)
|-------------------------------

|Income From Continuing Operations
(dollars in millions)
|-------------------------------------------------------

|Diluted Earnings Per Share
From Continuing Operations
(cents per share)
|-----------------------------------------------------------------------

6



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Span-America Medical Systems, Inc.  2002 Annual Report

QUARTERLY FINANCIAL DATA

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

|                   |         |   |       |      |        |   |       |      |        |   |       |      |  |   |        |      |  |   |        |      | 
|------------------ | ------- | - | ----- | ---- | ------ | - | ----- | ---- | ------ | - | ----- | ---- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                   |         |   | First |      | Second |   | Third |      | Fourth |   | Year 
|                   |         |   |       |      |        |   |       |      |        |   |      
|FOR FISCAL 2002    |         |   |       |      |        |   |       |      |        |   |       |      |  |   |        |      |  |   |        |     
|Net sales          |         | $ | 6,892 |      |        | $ | 7,557 |      |        | $ | 8,344 |      |  | $ | 10,743 |      |  | $ | 33,536 |     
|Gross profit       |         |   | 2,219 |      |        |   | 2,550 |      |        |   | 2,529 |      |  |   | 2,877  |      |  |   | 10,175 |     
|Operating income   |         |   | 345   |      |        |   | 440   |      |        |   | 388   |      |  |   | 544    |      |  |   | 1,717  |     
|Net income         |         |   | 355   |      |        |   | 462   |      |        |   | 359   |      |  |   | 482    |      |  |   | 1,658  |     
|Earnings per share |         |   |       |      |        |   |       |      |        |   |       |      |  |   |        |      |  |   |        |     
|                   | Basic   |   |       | 0.14 |        |   |       | 0.18 |        |   |       | 0.14 |  |   |        | 0.19 |  |   |        | 0.66 | 
|                   | Diluted |   |       | 0.14 |        |   |       | 0.18 |        |   |       | 0.14 |  |   |        | 0.18 |  |   |        | 0.64 | 
|Stock price data   |         |   |       |      |        |   |       |      |        |   |       |      |  |   |        |      |  |   |        |     
|                   | High    |   |       | 6.24 |        |   |       | 8.00 |        |   |       | 8.57 |  |   |        | 8.20 |  |   |        | 8.57 | 
|                   | Low     |   |       | 4.86 |        |   |       | 5.39 |        |   |       | 6.46 |  |   |        | 6.02 |  |   |        | 4.86 | 
|FOR FISCAL 2001    |         |   |       |      |        |   |       |      |        |   |       |      |  |   |        |      |  |   |        |     
|Net sales          |         | $ | 7,144 |      |        | $ | 6,493 |      |        | $ | 7,347 |      |  | $ | 8,091  |      |  | $ | 29,075 |     
|Gross profit       |         |   | 2,180 |      |        |   | 1,885 |      |        |   | 2,245 |      |  |   | 2,600  |      |  |   | 8,910  |     
|Operating income   |         |   | 364   |      |        |   | 111   |      |        |   | 351   |      |  |   | 471    |      |  |   | 1,297  |     
|Net income         |         |   | 327   |      |        |   | 175   |      |        |   | 334   |      |  |   | 424    |      |  |   | 1,260  |     
|Earnings per share |         |   |       |      |        |   |       |      |        |   |       |      |  |   |        |      |  |   |        |     
|                   | Basic   |   |       | 0.13 |        |   |       | 0.07 |        |   |       | 0.13 |  |   |        | 0.17 |  |   |        | 0.50 | 
|                   | Diluted |   |       | 0.13 |        |   |       | 0.07 |        |   |       | 0.13 |  |   |        | 0.17 |  |   |        | 0.50 | 
|Stock price data   |         |   |       |      |        |   |       |      |        |   |       |      |  |   |        |      |  |   |        |     
|                   | High    |   |       | 6.00 |        |   |       | 6.00 |        |   |       | 5.48 |  |   |        | 5.50 |  |   |        | 6.00 | 
|                   | Low     |   |       | 3.75 |        |   |       | 4.50 |        |   |       | 4.38 |  |   |        | 4.50 |  |   |        | 3.75 | 

Span-Americas common stock trades on The Nasdaq Stock Market® under the
symbol SPAN. As of September 28, 2002, there were 2,538,870 common shares
outstanding. As of December 3, 2002, there were 277 shareholders of record and
approximately 980 beneficial shareholders. The closing price of Span-Americas
stock on
December 3, 2002 was $7.73.

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)

|Working Capital
(dollars in millions)
|-------------------------------------

|Book Value Per Share
(dollars)
|------------------------------

|Return on Ending
Shareholders Equity
(percent)
|-----------------------------------------------

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Span-America Medical Systems, Inc.  2002 Annual Report

Managements Discussion and Financial Analysis

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. Management expects that total
medical sales will increase during fiscal
2003.

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. 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, declined in fiscal
2002 by 11% to $2.8 million because of
the loss of two large customers in late
fiscal 2001. Management believes that
total custom products sales in fiscal
2003 will be higher than those of fiscal
2002.

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.
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
2003 to be slightly lower than the gross
margin percentage in fiscal 2002.

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 IV®
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 IV
catheter. The purchase price of the
assets was $340,000 plus a royalty to be
paid on future sales of the
product. The Secure IV 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. We plan to begin
manufacturing and marketing Secure IV in
fiscal 2003. As a result of expenses
related to the launch of the new product,
we expect that total sales and marketing
expenses in fiscal 2003 will be higher
than 2002 levels. The Company considers
safety catheters to be a separate
reportable segment based on product type
and distribution channels.

Research and development expenses
increased 25% to $346,000 in fiscal 2002
compared with $278,000 in fiscal 2001.
The increase was primarily due to
expenses associated with the Secure IV
product line as discussed above.
Management expects research and
development expenses in fiscal 2003 to be
greater than those of fiscal 2002 as a
result of the continued development of
the Secure IV product line.

General and administrative expenses
decreased 4% to $2.2 million in fiscal
2002. The decrease resulted mainly from

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Span-America Medical Systems, Inc.  2002 Annual Report

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 of Statement of Financial
Accounting Standards (SFAS) 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. General and administrative
expenses for 2003 are expected to be
higher than 2002 levels.

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(BD). The Companys license
agreement with BD is expected to expire
in December 2005, and no further royalty
income will be received after the
expiration date.

Other income for fiscal 2002
includes 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 2003 to be lower than that of 2002
because of the one-time gain noted above.

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.

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
launching the newly acquired
Secure IV catheter, (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 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 2001 VS. 2000

Summary

Net sales in fiscal 2001 rose 9% to
$29.1 million compared with $26.6 million
in fiscal 2000. The increase was the
result of solid sales growth in the
Companys medical and custom products
business segments. Medical sales grew by
12% to $17.4 million, and custom products
sales increased by 6% to $11.7 million.

Net income rose 30% in fiscal 2001
to $1.3 million, or $0.50 per diluted
share, compared with $971,000, or $0.39
per diluted share, in fiscal 2000. The
Companys increased earnings were
primarily due to higher sales volume,
improved manufacturing efficiencies, and
higher non-operating income.

Sales

Sales in the Companys medical
segment rose 12% to $17.4 million in
fiscal 2001 compared with $15.5 million
the previous year. The strongest
performers in the medical business were
our lines of therapeutic replacement
mattresses, including Geo-Mattress® and
PressureGuard® products, which grew 29%
in fiscal 2001. In addition, sales of
seating products increased 6%, and sales
of patient positioners increased 7%
during the year. Sales of medical
mattress overlays, including Geo-Matt®
and convoluted foam pads, decreased 6%
compared with the prior year. The decline
in overlay sales is expected to continue
as more customers seek to eliminate their
use of single-patient overlays by
purchasing therapeutic replacement
mattresses instead. However, the increase
in the Companys mattress sales in fiscal
2001 more than offset the decline in
overlay sales.

Sales in the custom products segment
increased 6% during fiscal 2001 to $11.7
million from $11.1 million in fiscal
2000. The sales increase came entirely
from higher volumes of the Companys
consumer pillows and mattress overlays,
which are sold through our partnership
with Louisville Bedding Company. Sales of
consumer pillows and overlays rose 18%
during fiscal 2001 to $8.5 million.
However, this increase

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Span-America Medical Systems, Inc.  2002 Annual Report

was partially
offset by lower sales of industrial
products, which declined by 18% during the year due to the loss of
sales with two large customers and the
slowing economy. Sales of industrial
products tend to be sensitive to economic
cycles and were soft throughout fiscal
2001.

Gross Profit

The Companys gross profit increased
by 17% to $8.9 million during fiscal 2001
from $7.6 million in fiscal 2000. The
gross profit margin percentage increased
to 30.6% for fiscal year 2001 compared
with 28.7% for fiscal 2000. The increase
in gross profit level and gross margin
percentage resulted from higher sales
volume and a more profitable product mix
as medical sales, which generally have a
higher gross margin, grew faster than
sales of custom products. The medical
segment has a higher gross margin than
the custom products segment mainly
because many of the Companys medical
products are patented and proprietary.
The gross margin was also aided by lower
manufacturing overhead costs and good
control of raw material costs.

S G & A Expenses

Sales and marketing expenses
increased 16.5% to $5.0 million, or 17.3%
of sales, in fiscal 2001 compared with
$4.3 million, or 16.2% of sales, in
fiscal 2000. The increase occurred
primarily in the medical segment and was
due to higher shipping costs,
commissions, and evaluation samples.

Research and development expenses
increased 90% to $278,000 in fiscal 2001
compared with $147,000 in fiscal 2000.
The increase was primarily due to
increased compensation expense. During
fiscal 2001, the Company hired a vice
president of R&D and engineering, a newly
created position.

General and administrative expenses
increased 2% to $2.3 million in fiscal
2001. The slight increase was the result
of an unrealized loss on the cash value
of Company-owned life insurance
policies. Income or loss on the cash
value of these life insurance policies is
recorded as a reduction or increase in
administrative expense at the end of each
quarter.

Other

Investment income decreased by 10%
to $185,000 in fiscal 2001 compared with
$205,000 in fiscal 2000. The decrease was
the result of lower interest rates on the
Companys floating rate debt securities
during the majority of fiscal 2001.

Royalty income and other increased
35% to $459,000 in fiscal 2001 compared
with $340,000 in fiscal 2000 mainly as a
result of higher sales volume of a
shielded syringe product licensed to
Becton & Dickinson(BD). The Companys
license agreement with BD is expected to
expire in December 2005, and no further
royalty income will be received after the
expiration date.

During fiscal 2001, the Company paid
dividends of $301,300, or 24% of net
income, for the year. This amount
represented four quarterly dividends of
$0.03 per share.

LIQUIDITY AND CAPITAL RESOURCES

The Company generated cash from
operations of approximately $1.5 million
during fiscal 2002, representing a
decline of $876,000 compared with cash
flow of $2.4 million in fiscal 2001. The
decline resulted primarily from an
increase in accounts receivable balances,
which was related to higher sales volume
during the last two months of fiscal
2002.

Working capital increased by $1.2
million, or 12%, to $11.1 million during
fiscal 2002. The higher working capital
was the result of increases in marketable
securities and accounts receivable. The
Companys current ratio increased to 4.4
at September 28, 2002 from 4.2 at fiscal
year end 2001.

Accounts receivable, net of
allowances, increased 24% to $4.9 million
at the end of fiscal 2002 compared with
$4.0 million at the end of fiscal 2001.
The majority of the increase resulted
from a seasonal promotion of consumer
products which increased sales at the end
of fiscal 2002 compared with the end of
fiscal 2001. However, the days sales
outstanding, calculated using a monthly
average for accounts receivable over the
entire year, improved to 47 days in 2002
compared with 53 days in 2001. All of the
Companys accounts receivable are
unsecured.

Inventory, net of reserves, declined
7% to $2.0 million at September 28, 2002
compared with $2.1 million at September
29, 2001. The decline represents normal
monthly fluctuations in inventory levels.
Management expects inventory levels in
fiscal 2003 to be higher than those of
fiscal 2002.

Net property and equipment increased
by 6% during fiscal 2002. The change
resulted primarily from the combination
of normal depreciation expense, equipment
purchases of $559,000, and the addition
of $60,000 in equipment related to the
Secure IV product line. Management
expects capital expenditures to be higher
in fiscal 2003 than in 2002.

The Companys trade accounts payable
increased by 4% in fiscal 2002 to $1.7
million due to normal monthly
fluctuations in purchases which were
primarily driven by higher sales volumes
near the end of fiscal 2002. Accrued and
sundry liabilities increased by 8% during
the year to $1.6 million compared with
$1.5 million last year. The increase was
due to higher accruals for incentive
compensation and medical insurance
claims.

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Span-America Medical Systems, Inc.  2002 Annual Report

Management believes that funds on
hand and funds generated from operations
are adequate to finance operations
and expected capital requirements during fiscal 2003.

IMPACT OF INFLATION

Inflation was not a significant
factor for the Company during fiscal
2002. 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 likely that
foam raw material costs will increase
during fiscal 2003. We will attempt to
recover cost increases by sales price
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 market
risk in two areas: short-term investments
and cash value of life insurance. As of
September 28, 2002, the Company had
short-term investments of $5.9 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 2002, a 1% change in
interest rates for one year would change
after-tax earnings by approximately
$59,000.

In addition, the Companys other
assets at September 28, 2002 include $1.3
million in cash value of life insurance,
which is subject to 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 either in a fixed
income life insurance contract or in a
portfolio of mutual funds managed by an
insurance company. The fixed account
options 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 28, 2002, the Companys
cash value of life insurance declined by
3.6%, creating expense of approximately
$49,000.

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.

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
the 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 and provide adequate
reserves for doubtful accounts. Customer
economic conditions may change and
increase the risk of collectibility and
may require

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Span-America Medical Systems, Inc.  2002 Annual Report

additional provisions which
would negatively impact our operating
results. As of September 28, 2002, our
provision for
doubtful accounts represented
approximately 4% 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
28, 2002, our provision for excess and
obsolete inventory represented
approximately 3% 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 costs of warranty
obligations in costs of goods sold when
the related revenue is recognized. The
accrued warranty costs represent our best
estimate at the time of sale of the total
costs that we will incur to repair or
replace product parts, which fail while
under warranty. The amount of accrued
estimated warranty costs is primarily
based on historical experience as to
product failure as well as current
information on repair costs. Actual
warranty costs 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

We adopted SFAS No. 142 during the
first quarter of fiscal year 2002. This
statement requires us to make an initial
assessment within the first six months of
adoption and then annually thereafter as
to the carrying value of goodwill. During
the first and fourth quarters of fiscal
year 2002, we determined that the fair
value of the reporting units, which are
the industry segments as described in
Note 17 Operations and Industry
Segments of the Notes to the Financial
Statements, exceeded the carrying value
and thus did not need to record an
impairment charge. 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 28, 2002, 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 of the Notes to the
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 has used a discount rate of 8%,
which approximates the expected long-term
rate of return on the assets funding the
retirement plan. If actual returns differ
significantly from expected results, the
Company could be required to reduce the
discount rate, which would increase the
deferred compensation liability and
create additional deferred compensation
expense. As of September 28, 2002, the
Company has recorded a deferred
compensation liability of $1.1 million,
including current and deferred portions.

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Span-America Medical Systems, Inc.  2002 Annual Report

Balance Sheets

|                                                                                                                                                                     |                                                                               |   |               |            |               |   |            |            | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | - | ------------- | ---------- | ------------- | - | ---------- | ---------- | 
|                                                                                                                                                                     |                                                                               |   | September 28, |            | September
29,
|                                                                                                                                                                     |                                                                               |   | 2002          |            | 2001         
|                                                                                                                                                                     |                                                                               |   |               |            |              
|ASSETS                                                                                                                                                               |                                                                               |   |               |            |               |   |            |           
|Current assets:                                                                                                                                                      |                                                                               |   |               |            |               |   |            |           
|                                                                                                                                                                     | Cash and cash equivalents                                                     |   | $             | 1,095,299  |               |   | $          | 1,074,391  | 
|                                                                                                                                                                     | Securities available for sale (Note 2)                                        |   |               | 5,853,717  |               |   |            | 5,477,219  | 
|                                                                                                                                                                     | Accounts receivable, net of allowances of $381,000 (2002) and $366,000 (2001) |   |               | 4,926,879  |               |   |            | 3,987,731  | 
|                                                                                                                                                                     | Inventories (Note 3)                                                          |   |               | 1,958,388  |               |   |            | 2,103,162  | 
|                                                                                                                                                                     | Prepaid expenses and deferred income taxes                                    |   |               | 496,238    |               |   |            | 299,489    | 
|                                                                                                                                                                     |                                                                               |   |               |            |               |   |            |            | 
|Total current assets                                                                                                                                                 |                                                                               |   | 14,330,521    |            |               |   | 12,941,992 |           
|Property and equipment, net (Note 4)                                                                                                                                 |                                                                               |   | 3,631,867     |            |               |   | 3,425,249  |           
|Goodwill, net of accumulated amortization of $1,027,765 (2002 and 2001) (Note 5)                                                                                     |                                                                               |   | 1,924,131     |            |               |   | 1,924,131  |           
|Other assets (Note 6)                                                                                                                                                |                                                                               |   | 2,019,334     |            |               |   | 1,894,019  |           
|                                                                                                                                                                     |                                                                               |   |               |            |               |   |            |            | 
|                                                                                                                                                                     |                                                                               | $ | 21,905,853    |            |               | $ | 20,185,391 |           
|                                                                                                                                                                     |                                                                               |   |               |            |               |   |            |            | 
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                 |                                                                               |   |               |            |               |   |            |           
|Current liabilities:                                                                                                                                                 |                                                                               |   |               |            |               |   |            |           
|                                                                                                                                                                     | Accounts payable                                                              |   | $             | 1,702,989  |               |   | $          | 1,640,195  | 
|                                                                                                                                                                     | Accrued and sundry liabilities (Note 8)                                       |   |               | 1,569,899  |               |   |            | 1,458,178  | 
|                                                                                                                                                                     |                                                                               |   |               |            |               |   |            |            | 
|Total current liabilities                                                                                                                                            |                                                                               |   | 3,272,888     |            |               |   | 3,098,373  |           
|Deferred income taxes (Note 12)                                                                                                                                      |                                                                               |   | 282,000       |            |               |   | 176,000    |           
|Deferred compensation (Note 10)                                                                                                                                      |                                                                               |   | 957,299       |            |               |   | 983,125    |           
|Commitments
and contingencies (Note 19)                                                                                                                             
|Shareholders
equity (Notes 11 and 13)
Common stock, no par value, 20,000,000 shares authorized;
issued and outstanding shares 2,538,870 (2002) and 2,517,400 (2001) |                                                                               |   | 196,340       |            |               |   | 91,725     |           
|                                                                                                                                                                     | Additional paid-in capital                                                    |   |               | 8,527      |               |   |            | 1,708      | 
|                                                                                                                                                                     | Retained earnings                                                             |   |               | 17,188,799 |               |   |            | 15,834,460 | 
|                                                                                                                                                                     |                                                                               |   |               |            |               |   |            |            | 
|Total shareholders equity                                                                                                                                           |                                                                               |   | 17,393,666    |            |               |   | 15,927,893 |           
|                                                                                                                                                                     |                                                                               |   |               |            |               |   |            |            | 
|                                                                                                                                                                     |                                                                               | $ | 21,905,853    |            |               | $ | 20,185,391 |           
|                                                                                                                                                                     |                                                                               |   |               |            |               |   |            |            | 

See accompanying notes.

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Span-America Medical Systems, Inc.  2002 Annual Report

Statements of Income

|                                             |                   |   |               |           |               |   |               |           |  |   |            |           | 
|-------------------------------------------- | ----------------- | - | ------------- | --------- | ------------- | - | ------------- | --------- |  | - | ---------- | --------- | 
|                                             |                   |   | Years Ended  
|                                             |                   |   |              
|                                             |                   |   | September 28, |           | September 29, |   | September 30,
|                                             |                   |   | 2002          |           | 2001          |   | 2000         
|                                             |                   |   |               |           |               |   |              
|Net sales                                    |                   | $ | 33,535,640    |           |               | $ | 29,074,958    |           |  | $ | 26,568,424 |          
|Cost of goods sold                           |                   |   | 23,360,403    |           |               |   | 20,165,299    |           |  |   | 18,947,044 |          
|                                             |                   |   |               |           |               |   |               |           |  |   |            |          
|Gross profit                                 |                   |   | 10,175,237    |           |               |   | 8,909,659     |           |  |   | 7,621,380  |          
|Selling and marketing expenses               |                   |   | 5,895,730     |           |               |   | 5,028,077     |           |  |   | 4,314,396  |          
|Research and development expenses            |                   |   | 346,140       |           |               |   | 277,755       |           |  |   | 146,528    |          
|General and administrative expenses          |                   |   | 2,216,275     |           |               |   | 2,307,326     |           |  |   | 2,257,959  |          
|                                             |                   |   |               |           |               |   |               |           |  |   |            |          
|                                             |                   |   | 8,458,145     |           |               |   | 7,613,158     |           |  |   | 6,718,883  |          
|Operating income                             |                   |   | 1,717,092     |           |               |   | 1,296,501     |           |  |   | 902,497    |          
|Non-operating income:                        |                   |   |               |           |               |   |               |           |  |   |            |          
|                                             | Investment income |   |               | 99,489    |               |   |               | 184,909   |  |   |            | 204,820   | 
|                                             | Royalty income    |   |               | 606,846   |               |   |               | 456,429   |  |   |            | 340,221   | 
|                                             | Other             |   |               | 89,305    |               |   |               | 2,347     |  |   |            |          | 
|                                             |                   |   |               |           |               |   |               |           |  |   |            |          
|                                             |                   |   | 795,640       |           |               |   | 643,685       |           |  |   | 545,041    |          
|Income before income taxes                   |                   |   | 2,512,732     |           |               |   | 1,940,186     |           |  |   | 1,447,538  |          
|Provision for income taxes (Note 12)         |                   |   | 855,000       |           |               |   | 680,000       |           |  |   | 477,000    |          
|                                             |                   |   |               |           |               |   |               |           |  |   |            |          
|Net income                                   |                   | $ | 1,657,732     |           |               | $ | 1,260,186     |           |  | $ | 970,538    |          
|                                             |                   |   |               |           |               |   |               |           |  |   |            |          
|Earnings per share of common stock (Note 13) |                   |   |               |           |               |   |               |           |  |   |            |          
|Net income:                                  |                   |   |               |           |               |   |               |           |  |   |            |          
|                                             | Basic             |   | $             | 0.66      |               |   | $             | 0.50      |  |   | $          | 0.39      | 
|                                             | Diluted           |   | $             | 0.64      |               |   | $             | 0.50      |  |   | $          | 0.39      | 
|Dividends per share of common stock          |                   | $ | 0.12          |           |               | $ | 0.12          |           |  | $ | 0.11       |          
|Weighted average shares outstanding:         |                   |   |               |           |               |   |               |           |  |   |            |          
|                                             | Basic             |   |               | 2,527,416 |               |   |               | 2,510,427 |  |   |            | 2,501,224 | 
|                                             | Diluted           |   |               | 2,600,604 |               |   |               | 2,532,539 |  |   |            | 2,502,278 | 

See accompanying notes.

14



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Span-America Medical Systems, Inc.  2002 Annual Report

Statements of Shareholders Equity

|                              |                                                   |  |              |        |         |   |          |        |          |   |            |       |  |   |            |           |   |   |            |           |  
|----------------------------- | ------------------------------------------------- |  | ------------ | ------ | ------- | - | -------- | ------ | -------- | - | ---------- | ----- |  | - | ---------- | --------- | - | - | ---------- | --------- | -
|                              |                                                   |  |              |        |         |   |          |        |          |   | Additional |       |  |   |            |           |   |   |           
|                              |                                                   |  | Common Stock |        | Paid-in |   | Retained |        |          |   |           
|                              |                                                   |  | Shares       |        | Amount  |   | Capital  |        | Earnings |   | Total     
|                              |                                                   |  |              |        |         |   |          |        |          |   |           
|Balance at October 2, 1999    |                                                   |  | 2,495,400    |        |         | $ |         |        |          | $ |           |       |  | $ | 14,180,217 |           |   | $ | 14,180,217 |          
|                              |                                                   |  |              |        |         |   |          |        |          |   |            |       |  |   |            |           |   |   |            |          
|                              | Net income for the 2000 fiscal year               |  |              |        |         |   |          |        |          |   |            |       |  |   |            | 970,538   |   |   |            | 970,538   |  
|                              | Common stock issued to Directors                  |  |              | 8,000  |         |   |          | 28,000 |          |   |            |       |  |   |            |           |   |   |            | 28,000    |  
|                              | Cash dividends paid or declared ($0.11 per share) |  |              |        |         |   |          |        |          |   |            |       |  |   |            | (275,174  | ) |   |            | (275,174  | )
|                              |                                                   |  |              |        |         |   |          |        |          |   |            |       |  |   |            |           |   |   |            |          
|Balance at September 30, 2000 |                                                   |  | 2,503,400    |        |         |   | 28,000   |        |          |   |           |       |  |   | 14,875,581 |           |   |   | 14,903,581 |          
|                              |                                                   |  |              |        |         |   |          |        |          |   |            |       |  |   |            |           |   |   |            |          
|                              | Net income for the 2001 fiscal year               |  |              |        |         |   |          |        |          |   |            |       |  |   |            | 1,260,186 |   |   |            | 1,260,186 |  
|                              | Common stock issued to Directors                  |  |              | 8,000  |         |   |          | 40,000 |          |   |            |       |  |   |            |           |   |   |            | 40,000    |  
|                              | Common stock issued on exercise of stock options  |  |              | 6,000  |         |   |          | 23,725 |          |   |            |       |  |   |            |           |   |   |            | 23,725    |  
|                              | Tax benefits for stock options exercised          |  |              |        |         |   |          |        |          |   |            | 1,708 |  |   |            |           |   |   |            | 1,708     |  
|                              | Cash dividends paid or declared ($0.12 per share) |  |              |        |         |   |          |        |          |   |            |       |  |   |            | (301,307  | ) |   |            | (301,307  | )
|                              |                                                   |  |              |        |         |   |          |        |          |   |            |       |  |   |            |           |   |   |            |          
|Balance at September 29, 2001 |                                                   |  | 2,517,400    |        |         |   | 91,725   |        |          |   | 1,708      |       |  |   | 15,834,460 |           |   |   | 15,927,893 |          
|                              |                                                   |  |              |        |         |   |          |        |          |   |            |       |  |   |            |           |   |   |            |          
|                              | Net income for the 2002 fiscal year               |  |              |        |         |   |          |        |          |   |            |       |  |   |            | 1,657,732 |   |   |            | 1,657,732 |  
|                              | Common stock issued to Directors                  |  |              | 8,000  |         |   |          | 47,600 |          |   |            |       |  |   |            |           |   |   |            | 47,600    |  
|                              | Common stock issued on exercise of stock options  |  |              | 13,470 |         |   |          | 57,015 |          |   |            |       |  |   |            |           |   |   |            | 57,015    |  
|                              | Tax benefits for stock options exercised          |  |              |        |         |   |          |        |          |   |            | 6,819 |  |   |            |           |   |   |            | 6,819     |  
|                              | Cash dividends paid or declared ($0.12 per share) |  |              |        |         |   |          |        |          |   |            |       |  |   |            | (303,393  | ) |   |            | (303,393  | )
|                              |                                                   |  |              |        |         |   |          |        |          |   |            |       |  |   |            |           |   |   |            |          
|Balance at September 28, 2002 |                                                   |  | 2,538,870    |        |         | $ | 196,340  |        |          | $ | 8,527      |       |  | $ | 17,188,799 |           |   | $ | 17,393,666 |          
|                              |                                                   |  |              |        |         |   |          |        |          |   |            |       |  |   |            |           |   |   |            |          

See accompanying notes.

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Span-America Medical Systems, Inc.  2002 Annual Report

Statements of Cash Flows

|                                                                                  |                                                      |                                       |            |               |          |               |            |               |         |   |            |          |          |  
|--------------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------------- | ---------- | ------------- | -------- | ------------- | ---------- | ------------- | ------- | - | ---------- | -------- | -------- | -
|                                                                                  |                                                      |                                       |            | Years Ended  
|                                                                                  |                                                      |                                       |            |              
|                                                                                  |                                                      |                                       |            | September 28, |          | September 29, |            | September 30,
|                                                                                  |                                                      |                                       |            | 2002          |          | 2001          |            | 2000         
|                                                                                  |                                                      |                                       |            |               |          |               |            |              
|OPERATING ACTIVITIES:                                                             |                                                      |                                       |            |               |          |               |            |               |         |   |            |         
|Net income                                                                        |                                                      | $                                     | 1,657,732  |               |          | $             | 1,260,186  |               |         | $ | 970,538    |         
|Adjustments to reconcile net income to net
cash provided by operating activities: |                                                      |                                       |            |               |          |               |            |               |         |   |            |         
|                                                                                  | Depreciation                                         |                                       |            | 411,898       |          |               |            | 382,010       |         |   |            | 472,929  |         
|                                                                                  | Amortization                                         |                                       |            | 75,568        |          |               |            | 257,546       |         |   |            | 255,637  |         
|                                                                                  | Income from insurance demutualization                |                                       |            | (83,636       | )        |               |            |               |         |   |            |          |         
|                                                                                  | Provision for losses on accounts receivable          |                                       |            | 62,293        |          |               |            | 44,202        |         |   |            | 141,516  |         
|                                                                                  | Provision for deferred income taxes                  |                                       |            | 62,819        |          |               |            | 76,708        |         |   |            | (140,000 | )       
|                                                                                  | Gains on sale and disposal of property and equipment |                                       |            |               |          |               |            |               |         |   |            | (24,627  | )       
|                                                                                  | Decrease (increase) in cash value of life insurance  |                                       |            | 48,648        |          |               |            | 73,432        |         |   |            | (94,659  | )       
|                                                                                  | Deferred compensation                                |                                       |            | (25,826       | )        |               |            | (23,913       | )       |   |            | (22,142  | )       
|                                                                                  | Changes in operating assets and liabilities:         |                                       |            |               |          |               |            |               |         |   |            |          |         
|                                                                                  |                                                      | Accounts receivable                   |            |               | (994,304 | )             |            |               | 270,204 |   |            |          | (952,058 | )
|                                                                                  |                                                      | Inventory                             |            |               | 144,774  |               |            |               | (36,680 | ) |            |          | 119,954  |  
|                                                                                  |                                                      | Prepaid expenses and other assets     |            |               | (48,285  | )             |            |               | 42,194  |   |            |          | (46,846  | )
|                                                                                  |                                                      | Accounts payable and accrued expenses |            |               | 174,515  |               |            |               | 16,144  |   |            |          | 803,034  |  
|                                                                                  |                                                      |                                       |            |               |          |               |            |               |         |   |            |         
|Net cash provided by operating activities                                         |                                                      |                                       | 1,486,196  |               |          |               | 2,362,033  |               |         |   | 1,483,276  |         
|INVESTING ACTIVITIES:                                                             |                                                      |                                       |            |               |          |               |            |               |         |   |            |         
|Purchase of Secure IV assets                                                      |                                                      |                                       | (339,524   | )             |          |               |            |               |         |   |            |         
|Purchases of marketable securities                                                |                                                      |                                       | (2,400,000 | )             |          |               | (1,510,000 | )             |         |   | (1,310,000 | )       
|Proceeds from sales of marketable securities                                      |                                                      |                                       | 2,100,000  |               |          |               | 425,000    |               |         |   | 85,000     |         
|Purchases of property and equipment                                               |                                                      |                                       | (558,516   | )             |          |               | (461,059   | )             |         |   | (412,697   | )       
|Proceeds from sale of property and equipment                                      |                                                      |                                       |            |               |          |               |            |               |         |   | 29,200     |         
|Payments for other assets                                                         |                                                      |                                       | (20,870    | )             |          |               | (51,664    | )             |         |   | (41,528    | )       
|                                                                                  |                                                      |                                       |            |               |          |               |            |               |         |   |            |         
|Net cash used for investing activities                                            |                                                      |                                       | (1,218,910 | )             |          |               | (1,597,723 | )             |         |   | (1,650,025 | )       
|FINANCING ACTIVITIES:                                                             |                                                      |                                       |            |               |          |               |            |               |         |   |            |         
|Dividends paid                                                                    |                                                      |                                       | (303,393   | )             |          |               | (301,307   | )             |         |   | (275,174   | )       
|Common stock issued upon exercise of options                                      |                                                      |                                       | 57,015     |               |          |               | 23,725     |               |         |   |            |         
|                                                                                  |                                                      |                                       |            |               |          |               |            |               |         |   |            |         
|Net cash used for financing activities                                            |                                                      |                                       | (246,378   | )             |          |               | (277,582   | )             |         |   | (275,174   | )       
|                                                                                  |                                                      |                                       |            |               |          |               |            |               |         |   |            |         
|Increase (decrease) in cash and cash equivalents                                  |                                                      |                                       | 20,908     |               |          |               | 486,728    |               |         |   | (441,923   | )       
|Cash and cash equivalents at beginning of year                                    |                                                      |                                       | 1,074,391  |               |          |               | 587,663    |               |         |   | 1,029,586  |         
|                                                                                  |                                                      |                                       |            |               |          |               |            |               |         |   |            |         
|Cash and cash equivalents at end of year                                          |                                                      | $                                     | 1,095,299  |               |          | $             | 1,074,391  |               |         | $ | 587,663    |         
|                                                                                  |                                                      |                                       |            |               |          |               |            |               |         |   |            |         

See accompanying notes.

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Span-America Medical Systems, Inc.  2002 Annual Report

Notes to Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES

Description of Business

The Company manufactures and distributes replacement
mattresses, mattress overlays, patient positioners and seating
cushions for the medical market and pillows, mattress pads and
various foam products for the custom products market throughout the United
States and Canada.

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. The Company maintains 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. The Company also establishes an allowance for
doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical
trends and other information.

Inventories

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

Property and Equipment

Property and equipment are 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.

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. Costs in excess of the fair value of net
assets acquired (goodwill) from two separate acquisitions are
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 28, 2002 and September 29, 2001 was
approximately $2,115,000 and $2,039,000, respectively. The
Company continually reviews the recoverability of the carrying
value of these assets in accordance with SFAS No. 121
Accounting for the Impairment of Long-Lived Assets and LongLived 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.

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 Stock

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.

Fiscal Year

The Companys fiscal year ends on the Saturday nearest to
September 30. The 2002, 2001, and 2000 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 will 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

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Span-America Medical Systems, Inc.  2002 Annual Report

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 longlived assets.
The provisions of the statement are effective for
financial statements issued for fiscal years beginning after
December 15, 2001. The Company will adopt the provisions of
this statement as of September 29, 2002. Adoption of SFAS No.
144 is not expected to 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.

Reclassifications

Certain prior year amounts have been reclassified to
conform with the current year presentation in the accompanying
financial statements.

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 2002, 2001, or 2000.

Securities available for sale at September 28, 2002 and
September 29, 2001, consist of variable rate demand notes.

3. INVENTORIES

The components of inventories are as follows:

|               |  |      |           |      |  |   |           | 
|-------------- |  | ---- | --------- | ---- |  | - | --------- | 
|               |  | 2002 |           | 2001
|               |  |      |           |     
|Raw materials  |  | $    | 1,287,831 |      |  | $ | 1,509,159 | 
|Finished goods |  |      | 670,557   |      |  |   | 594,003   | 
|               |  |      |           |      |  |   |           | 
|               |  | $    | 1,958,388 |      |  | $ | 2,103,162 | 
|               |  |      |           |      |  |   |           | 

4. PROPERTY AND EQUIPMENT

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

|                              |  |      |            |      |  |   |            | 
|----------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                              |  | 2002 |            | 2001
|                              |  |      |            |     
|Land                          |  | $    | 317,343    |      |  | $ | 317,343    | 
|Land improvements             |  |      | 246,172    |      |  |   | 246,172    | 
|Buildings                     |  |      | 3,727,761  |      |  |   | 3,727,761  | 
|Machinery and equipment       |  |      | 6,125,240  |      |  |   | 5,992,434  | 
|Furniture and fixtures        |  |      | 539,386    |      |  |   | 533,601    | 
|Automobiles                   |  |      | 9,520      |      |  |   | 9,520      | 
|Leasehold improvements        |  |      | 11,345     |      |  |   | 11,345     | 
|                              |  |      |            |      |  |   |            | 
|                              |  |      | 10,976,767 |      |  |   | 10,838,176 | 
|Less accumulated depreciation |  |      | 7,344,900  |      |  |   | 7,412,927  | 
|                              |  |      |            |      |  |   |            | 
|                              |  | $    | 3,631,867  |      |  | $ | 3,425,249  | 
|                              |  |      |            |      |  |   |            | 

5. GOODWILL AND OTHER INTANGIBLES

On September 30, 2001, the Company adopted SFAS No.
142 Goodwill and Other Intangible Assets (SFAS No. 142). As
of September 28, 2002, the Company had goodwill (net of
accumulated amortization) of $1,924,131 and patents and
trademarks (net of accumulated amortization) of $579,053. These
assets are part of the medical segment. The Company has reassessed the useful
lives of goodwill and 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 table at the top of the next page 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.

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Span-America Medical Systems, Inc.  2002 Annual Report

5. GOODWILL AND OTHER INTANGIBLES (CONTINUED)

|                                          |                                 |   |           |      |      |   |           |      |  |   |           |      | 
|----------------------------------------- | ------------------------------- | - | --------- | ---- | ---- | - | --------- | ---- |  | - | --------- | ---- | 
|                                          |                                 |   | 2002      |      | 2001 |   | 2000     
|                                          |                                 |   |           |      |      |   |          
|Reported net income                       |                                 | $ | 1,657,732 |      |      | $ | 1,260,186 |      |  | $ | 970,538   |     
|Add back: Goodwill amortization after-tax |                                 |   |          |      |      |   | 123,744   |      |  |   | 123,744   |     
|                                          |                                 |   |           |      |      |   |           |      |  |   |           |     
|Adjusted net income                       |                                 | $ | 1,657,732 |      |      | $ | 1,383,930 |      |  | $ | 1,094,282 |     
|                                          |                                 |   |           |      |      |   |           |      |  |   |           |     
|Basic earnings per share:                 |                                 |   |           |      |      |   |           |      |  |   |           |     
|                                          | Reported net income             |   | $         | 0.66 |      |   | $         | 0.50 |  |   | $         | 0.39 | 
|                                          | Goodwill amortization after-tax |   |           |     |      |   |           | 0.05 |  |   |           | 0.05 | 
|                                          |                                 |   |           |      |      |   |           |      |  |   |           |     
|                                          | Adjusted net income             |   | $         | 0.66 |      |   | $         | 0.55 |  |   | $         | 0.44 | 
|                                          |                                 |   |           |      |      |   |           |      |  |   |           |     
|Diluted earnings per share:               |                                 |   |           |      |      |   |           |      |  |   |           |     
|                                          | Reported net income             |   | $         | 0.64 |      |   | $         | 0.50 |  |   | $         | 0.39 | 
|                                          | Goodwill amortization after-tax |   |           |     |      |   |           | 0.05 |  |   |           | 0.05 | 
|                                          |                                 |   |           |      |      |   |           |      |  |   |           |     
|                                          | Adjusted net income             |   | $         | 0.64 |      |   | $         | 0.55 |  |   | $         | 0.44 | 
|                                          |                                 |   |           |      |      |   |           |      |  |   |           |     

6. OTHER ASSETS

Other assets consist of the following:

|                                                                                    |  |      |           |      |  |   |           | 
|----------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                                                                    |  | 2002 |           | 2001
|                                                                                    |  |      |           |     
|Patents, net of accumulated
amortization of $1,087,128
(2002) and $1,011,560 (2001) |  | $    | 579,053   |      |  | $ | 354,226   | 
|Cash value of life insurance policies                                               |  |      | 1,320,206 |      |  |   | 1,368,854 | 
|Other                                                                               |  |      | 120,075   |      |  |   | 170,939   | 
|                                                                                    |  |      |           |      |  |   |           | 
|                                                                                    |  | $    | 2,019,334 |      |  | $ | 1,894,019 | 
|                                                                                    |  |      |           |      |  |   |           | 

7. ACQUISITION OF SECURE IV ASSETS

On July 15, 2002, the Company purchased the assets related to the Secure
IV product line of
VADUS®, Inc., a privately
owned designer and manufacturer of peripheral intravenous
catheters. The Secure IV product line assets consist primarily of
patents and equipment related to the design, production, and sale
of the Secure IV 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 5 and 10 years,
respectively.

8. ACCRUED AND SUNDRY LIABILITIES

|                                   |  |      |           |      |  |   |           | 
|---------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                   |  | 2002 |           | 2001
|                                   |  |      |           |     
|Salaries and other compensation    |  | $    | 1,025,049 |      |  | $ | 749,545   | 
|Federal and state income taxes     |  |      | 910       |      |  |   | 218,949   | 
|Payroll taxes accrued and withheld |  |      | 109,891   |      |  |   | 100,260   | 
|Property taxes                     |  |      | 112,500   |      |  |   | 118,800   | 
|Medical insurance                  |  |      | 96,728    |      |  |   | 24,830    | 
|Warranty reserve                   |  |      | 138,107   |      |  |   | 150,500   | 
|Customer deposits                  |  |      | 66,073    |      |  |   | 74,789    | 
|Other                              |  |      | 20,641    |      |  |   | 20,505    | 
|                                   |  |      |           |      |  |   |           | 
|                                   |  | $    | 1,569,899 |      |  | $ | 1,458,178 | 
|                                   |  |      |           |      |  |   |           | 

9. BORROWINGS

The Company paid no interest expense in fiscal years 2002,
2001, or 2000.

10. 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 $88,000 in 2002, $90,000 in 2001, and $91,000 in
2000 related to this agreement. An 8% discount rate was used in
measuring the present value of the Companys deferred compensation obligation.

11. SHAREHOLDERS EQUITY

In March 1997, 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 of Directors 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

19



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Span-America Medical Systems, Inc.  2002 Annual Report

11. SHAREHOLDERS EQUITY (CONTINUED)

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 |         | Exercisable
|                       |  |           |         |           |  |             |         |            
|                       |  |           |         |           |  |             |         |             |  | Weighted  |      |  |  |  |         | Weighted
|                       |  |           |         |           |  |             |         |             |  | Average   |      |  |  |  |         | Average 
|                       |  | Shares    |         | Number of |  | Ex. Price   |         | Number of   |  | Ex. Price
|                       |  | Available |         | Shares    |  | Per Share   |         | Shares      |  | Per Share
|                       |  |           |         |           |  |             |         |             |  |          
|Balance at 10/2/99     |  |           | 253,200 |           |  |             | 228,800 |             |  | $         | 5.05 |  |  |  | 119,800 |          |  | $ | 5.30 | 
|Fiscal Year 2000       |  |           |         |           |  |             |         |             |  |           |      |  |  |  |         |          |  |   |      | 
|Granted                |  |           | (37,000 | )         |  |             | 37,000  |             |  |           | 3.55 |  |  |  |         |          |  |   |      | 
|Exercised              |  |           |         |           |  |             |         |             |  |           |      |  |  |  |         |          |  |   |      | 
|Forfeited              |  |           | 35,800  |           |  |             | (35,800 | )           |  |           | 4.83 |  |  |  |         |          |  |   |      | 
|Forfeitures terminated |  |           | (12,200 | )         |  |             |         |             |  |           | 3.80 |  |  |  |         |          |  |   |      | 
|                       |  |           |         |           |  |             |         |             |  |           |      |  |  |  |         |          |  |   |      | 
|Balance at 9/30/00     |  |           | 239,800 |           |  |             | 230,000 |             |  |           | 4.85 |  |  |  | 139,800 |          |  |   | 5.14 | 
|Fiscal Year 2001       |  |           |         |           |  |             |         |             |  |           |      |  |  |  |         |          |  |   |      | 
|Granted                |  |           | (63,250 | )         |  |             | 63,250  |             |  |           | 5.29 |  |  |  |         |          |  |   |      | 
|Exercised              |  |           |         |           |  |             | (6,000  | )           |  |           | 3.95 |  |  |  |         |          |  |   |      | 
|Forfeited              |  |           | 22,500  |           |  |             | (22,500 | )           |  |           | 5.73 |  |  |  |         |          |  |   |      | 
|Forfeitures terminated |  |           | (8,500  | )         |  |             |         |             |  |           | 4.00 |  |  |  |         |          |  |   |      | 
|                       |  |           |         |           |  |             |         |             |  |           |      |  |  |  |         |          |  |   |      | 
|Balance at 9/29/01     |  |           | 190,550 |           |  |             | 264,750 |             |  |           | 4.95 |  |  |  | 169,250 |          |  |   | 5.16 | 
|Fiscal Year 2002       |  |           |         |           |  |             |         |             |  |           |      |  |  |  |         |          |  |   |      | 
|Granted                |  |           | (23,000 | )         |  |             | 23,000  |             |  |           | 5.55 |  |  |  |         |          |  |   |      | 
|Exercised              |  |           |         |           |  |             | (11,250 | )           |  |           | 4.35 |  |  |  |         |          |  |   |      | 
|Forfeited              |  |           | 3,500   |           |  |             | (3,500  | )           |  |           | 6.67 |  |  |  |         |          |  |   |      | 
|Forfeitures terminated |  |           | (3,500  | )         |  |             |         |             |  |           | 6.67 |  |  |  |         |          |  |   |      | 
|Plan terminated        |  |           | (45,600 | )         |  |             |         |             |  |           | n/a  |  |  |  |         |          |  |   |      | 
|                       |  |           |         |           |  |             |         |             |  |           |      |  |  |  |         |          |  |   |      | 
|Balance at 9/28/02     |  |           | 121,950 |           |  |             | 273,000 |             |  | $         | 5.01 |  |  |  | 239,400 |          |  | $ | 4.99 | 
|                       |  |           |         |           |  |             |         |             |  |           |      |  |  |  |         |          |  |   |      | 

A summary of stock options outstanding and exercisable at fiscal year end 2002 is shown below.

|                          |                 |        |             |           |             |            |          |        |           |           |           |     |  |  |          |        |  |   |      |      | 
|------------------------- | --------------- | ------ | ----------- | --------- | ----------- | ---------- | -------- | ------ | --------- | --------- | --------- | --- |  |  | -------- | ------ |  | - | ---- | ---- | 
|                          |                 |        | Outstanding |           | Exercisable
|                          |                 |        |             |           |            
|                          |                 |        |             |           |             |            | Weighted |        | Wtd. Avg. |           |           |     |  |  | Weighted
|                          |                 |        |             |           |             |            | Average  |        | Remaining |           |           |     |  |  | Average 
|                          |                 |        | Number of   |           | Ex. Price   |            | Contract |        | Number of |           | Ex. Price
|Ranges of Exercise Prices |                 | Shares |             | Per Share |             | Life (yrs) |          | Shares |           | Per Share
|                          |                 |        |             |           |             |            |          |        |           |          
|$    3.55  $  4.91       |                 |        | 130,500     |           |             | $          | 4.10     |        |           |           | 5.4       |     |  |  | 118,500  |        |  | $ | 4.06 |     
|                          | 5.00      5.55 |        |             | 109,500   |             |            |          | 5.42   |           |           |           | 6.1 |  |  |          | 87,900 |  |   |      | 5.41 | 
|                          | 7.09      8.38 |        |             | 33,000    |             |            |          | 7.21   |           |           |           | 4.9 |  |  |          | 33,000 |  |   |      | 7.21 | 
|                          |                 |        |             |           |             |            |          |        |           |           |           |     |  |  |          |        |  |   |      |      | 
|$    3.55  $  8.38       |                 |        | 273,000     |           |             | $          | 5.01     |        |           |           | 5.6       |     |  |  | 239,400  |        |  | $ | 4.99 |     
|                          |                 |        |             |           |             |            |          |        |           |           |           |     |  |  |          |        |  |   |      |      | 

The Board of Directors 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 $8,217 in 2002, $5,626 in 2001,
and $4,595 in 2000. The Company issued stock valued at $8,097
in 2002, leaving a vested balance of $10,341 at September 28,
2002.

In March 1997 the Board of Directors approved the 1997
Long-Term Incentive Stock Option Plan for certain executives
of the Company based on achievement of specified financial
goals by fiscal year end 1999. As of September 28, 2002, the
Company has accrued compensation expense of $24,000 related to this plan.

The Company accounts for and will continue to account 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

20



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Span-America Medical Systems, Inc.  2002 Annual Report

11. SHAREHOLDERS EQUITY (CONTINUED)

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 pro forma amounts indicated below:

|                                    |             |  |      |           |      |  |      |           |  |  |   |         | 
|----------------------------------- | ----------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | ------- | 
|                                    |             |  | 2002 |           | 2001 |  | 2000
|                                    |             |  |      |           |      |  |     
|Net income                          |             |  |      |           |      |  |      |           |  |  |   |        
|                                    | As reported |  | $    | 1,657,732 |      |  | $    | 1,260,186 |  |  | $ | 970,538 | 
|                                    | Pro forma   |  | $    | 1,569,892 |      |  | $    | 1,204,584 |  |  | $ | 914,610 | 
|Basic net income per
common share   |             |  |      |           |      |  |      |           |  |  |   |        
|                                    | As reported |  | $    | 0.66      |      |  | $    | 0.50      |  |  | $ | 0.39    | 
|                                    | Pro forma   |  | $    | 0.62      |      |  | $    | 0.48      |  |  | $ | 0.37    | 
|Diluted net income per
common share |             |  |      |           |      |  |      |           |  |  |   |        
|                                    | As reported |  | $    | 0.64      |      |  | $    | 0.50      |  |  | $ | 0.39    | 
|                                    | Pro forma   |  | $    | 0.60      |      |  | $    | 0.48      |  |  | $ | 0.37    | 

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
2002, 2001 and 2000, respectively: risk-free interest rates of
3.45%, 4.0% and 5.75%; dividend yields of 1.7%, 2.0% and
2.5%; volatility factors of the expected market price of the
Companys common stock of .407, .424 and .406; and a weighted average expected
life of the option of eight years for 2002 and
2001, and five years for 2000.

12. 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 28, 2002 and
September 29, 2001 are as follows:

|                               |                       |   |         |         |      |   |         |         | 
|------------------------------ | --------------------- | - | ------- | ------- | ---- | - | ------- | ------- | 
|                               |                       |   | 2002    |         | 2001
|                               |                       |   |         |         |     
|Deferred tax liabilities:      |                       |   |         |         |      |   |         |        
|                               | Depreciation          |   | $       | 656,000 |      |   | $       | 595,000 | 
|                               | Other                 |   |         | 105,000 |      |   |         | 72,000  | 
|                               |                       |   |         |         |      |   |         |         | 
|Total deferred tax liabilities |                       |   | 761,000 |         |      |   | 667,000 |        
|Deferred tax assets:           |                       |   |         |         |      |   |         |        
|                               | Deferred compensation |   |         | 346,000 |      |   |         | 376,000 | 
|                               | Accrued expenses      |   |         | 249,000 |      |   |         | 154,000 | 
|                               | Intangible assets     |   |         | 28,000  |      |   |         | 43,000  | 
|                               | Other                 |   |         | 81,000  |      |   |         | 93,000  | 
|                               |                       |   |         |         |      |   |         |         | 
|Total deferred tax assets      |                       |   | 704,000 |         |      |   | 666,000 |        
|                               |                       |   |         |         |      |   |         |         | 
|Net deferred tax liabilities   |                       | $ | 57,000  |         |      | $ | 1,000   |        
|                               |                       |   |         |         |      |   |         |         | 

The Company made income tax payments, net of refunds,
of approximately $962,000, $491,000, and $488,000 in fiscal
years 2002, 2001, and 2000, respectively.

12. INCOME TAXES (CONTINUED)

Federal and state income tax provisions consist of the following:

|                   |         |   |         |         |      |   |         |         |  |   |          |          |  
|------------------ | ------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | -------- | -------- | -
|                   |         |   | 2002    |         | 2001 |   | 2000   
|                   |         |   |         |         |      |   |        
|Current:           |         |   |         |         |      |   |         |         |  |   |          |         
|                   | Federal |   | $       | 720,000 |      |   | $       | 530,000 |  |   | $        | 547,000  |  
|                   | State   |   |         | 76,000  |      |   |         | 75,000  |  |   |          | 70,000   |  
|                   |         |   |         |         |      |   |         |         |  |   |          |          |  
|                   |         |   | 796,000 |         |      |   | 605,000 |         |  |   | 617,000  |         
|Deferred:          |         |   |         |         |      |   |         |         |  |   |          |         
|                   | Federal |   |         | 54,000  |      |   |         | 63,000  |  |   |          | (127,000 | )
|                   | State   |   |         | 5,000   |      |   |         | 12,000  |  |   |          | (13,000  | )
|                   |         |   |         |         |      |   |         |         |  |   |          |          |  
|                   |         |   | 59,000  |         |      |   | 75,000  |         |  |   | (140,000 | )       
|                   |         |   |         |         |      |   |         |         |  |   |          |          |  
|Income tax expense |         | $ | 855,000 |         |      | $ | 680,000 |         |  | $ | 477,000  |         
|                   |         |   |         |         |      |   |         |         |  |   |          |          |  

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

|                                   |                                                |   |         |         |      |   |         |         |   |   |         |         |  
|---------------------------------- | ---------------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                   |                                                |   | 2002    |         | 2001 |   | 2000   
|                                   |                                                |   |         |         |      |   |        
|Computed tax at the statutory rate |                                                | $ | 852,000 |         |      | $ | 660,000 |         |   | $ | 492,000 |        
|Increases (decreases):             |                                                |   |         |         |      |   |         |         |   |   |         |        
|                                   | State income taxes, net of federal tax benefit |   |         | 54,000  |      |   |         | 58,000  |   |   |         | 38,000  |  
|                                   | Tax-exempt investment income                   |   |         | (31,000 | )    |   |         | (55,000 | ) |   |         | (55,000 | )
|                                   | Other, net                                     |   |         | (20,000 | )    |   |         | 17,000  |   |   |         | 2,000   |  
|                                   |                                                |   |         |         |      |   |         |         |   |   |         |        
|Income tax expense                 |                                                | $ | 855,000 |         |      | $ | 680,000 |         |   | $ | 477,000 |        
|                                   |                                                |   |         |         |      |   |         |         |   |   |         |        

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Span-America Medical Systems, Inc.  2002 Annual Report

13. 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, Earnings Per Share.

|                                                    |                                                          |  |      |           |      |  |      |           |  |  |   |           | 
|--------------------------------------------------- | -------------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                    |                                                          |  | 2002 |           | 2001 |  | 2000
|                                                    |                                                          |  |      |           |      |  |     
|Numerator for basic and diluted earnings per share: |                                                          |  |      |           |      |  |      |           |  |  |   |          
|                                                    | Net income                                               |  | $    | 1,657,732 |      |  | $    | 1,260,186 |  |  | $ | 970,538   | 
|                                                    |                                                          |  |      |           |      |  |      |           |  |  |   |           | 
|Denominator:                                        |                                                          |  |      |           |      |  |      |           |  |  |   |          
|Denominator for basic earnings per share:           |                                                          |  |      |           |      |  |      |           |  |  |   |          
|                                                    | Weighted average shares                                  |  |      | 2,527,416 |      |  |      | 2,510,427 |  |  |   | 2,501,224 | 
|Effect of dilutive securities:                      |                                                          |  |      |           |      |  |      |           |  |  |   |          
|                                                    | Employee and board stock options                         |  |      | 73,188    |      |  |      | 22,112    |  |  |   | 1,054     | 
|                                                    |                                                          |  |      |           |      |  |      |           |  |  |   |           | 
|Denominator for diluted earnings per share:         |                                                          |  |      |           |      |  |      |           |  |  |   |          
|                                                    | Adjusted weighted average shares and assumed conversions |  |      | 2,600,604 |      |  |      | 2,532,539 |  |  |   | 2,502,278 | 
|                                                    |                                                          |  |      |           |      |  |      |           |  |  |   |           | 
|Net income per share:                               |                                                          |  |      |           |      |  |      |           |  |  |   |          
|                                                    | Basic                                                    |  | $    | 0.66      |      |  | $    | 0.50      |  |  | $ | 0.39      | 
|                                                    | Diluted                                                  |  | $    | 0.64      |      |  | $    | 0.50      |  |  | $ | 0.39      | 
|                                                    |                                                          |  |      |           |      |  |      |           |  |  |   |           | 

14. EMPLOYEE BENEFITS AND INCENTIVE PLANS

The Company has an employee savings and investment
plan (401(k) plan) available to the Companys employees meeting eligibility
requirements. The Company matches a percentage of the employee
contributions, with certain
limitations. Contributions by the Company amounted to approximately $118,000,
$106,000, and $96,000, for the 2002, 2001,
and 2000 fiscal years, respectively.

15. RELATED-PARTY TRANSACTIONS

The Company paid approximately $72,000 in 2002,
$37,000 in 2001, and $40,000 in 2000 in legal fees to a firm having a member
who is also a director of the Company.

16. MAJOR CUSTOMERS

The Company has a business relationship with a customer to
distribute certain of its medical products to hospitals and other
treatment facilities throughout the United States. Sales generated
by this customer amounted to approximately 11% of total net
sales in 2002, 13% in 2001, and 14% in 2000.

The Company has a business relationship with another customer to
distribute certain of its consumer products. Sales to this
customer amounted to 32% of total net sales in 2002, 26% in
2001, and 24% in 2000.

See Note 17 for further information about sales to
major customers.

17. OPERATIONS AND INDUSTRY SEGMENTS

The Company reports on three segments of business: medical, custom
products, and safety catheters. However, the safety
catheters segment had no sales during fiscal 2002 because the
Secure IV 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.

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
19% of net medical sales in 2002, 22% in
2001, and 23% in 2000. In the custom products segment, sales to
one customer accounted for 77% of net custom
products sales in 2002, 68% in 2001, and 58% in 2000.

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Span-America Medical Systems, Inc.  2002 Annual Report

17. OPERATIONS AND INDUSTRY SEGMENTS (CONTINUED)

The following table summarizes certain information on industry segments:

|                                        |                  |   |            |            |      |   |            |            |  |   |            |            |  
|--------------------------------------- | ---------------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | -
|                                        |                  |   | 2002       |            | 2001 |   | 2000      
|                                        |                  |   |            |            |      |   |           
|Net Sales:                              |                  |   |            |            |      |   |            |            |  |   |            |           
|                                        | Medical          |   | $          | 19,707,865 |      |   | $          | 17,393,487 |  |   | $          | 15,510,093 |  
|                                        | Custom products  |   |            | 13,827,775 |      |   |            | 11,681,471 |  |   |            | 11,058,331 |  
|                                        | Safety catheters |   |            |           |      |   |            |            |  |   |            |            |  
|                                        |                  |   |            |            |      |   |            |            |  |   |            |            |  
|Total                                   |                  | $ | 33,535,640 |            |      | $ | 29,074,958 |            |  | $ | 26,568,424 |           
|                                        |                  |   |            |            |      |   |            |            |  |   |            |            |  
|Operating profit (loss):                |                  |   |            |            |      |   |            |            |  |   |            |           
|                                        | Medical          |   | $          | 2,418,085  |      |   | $          | 1,693,483  |  |   | $          | 1,364,709  |  
|                                        | Custom products  |   |            | 645        |      |   |            | 184,890    |  |   |            | (53,536    | )
|                                        | Safety Catheters |   |            | (58,954    | )    |   |            |            |  |   |            |            |  
|                                        |                  |   |            |            |      |   |            |            |  |   |            |            |  
|Total                                   |                  |   | 2,359,776  |            |      |   | 1,878,373  |            |  |   | 1,311,173  |           
|Corporate expense                       |                  |   | (642,684   | )          |      |   | (581,872   | )          |  |   | (408,676   | )         
|Other income                            |                  |   | 795,640    |            |      |   | 643,685    |            |  |   | 545,041    |           
|                                        |                  |   |            |            |      |   |            |            |  |   |            |            |  
|Income before income taxes              |                  | $ | 2,512,732  |            |      | $ | 1,940,186  |            |  | $ | 1,447,538  |           
|                                        |                  |   |            |            |      |   |            |            |  |   |            |            |  
|Identifiable assets:                    |                  |   |            |            |      |   |            |            |  |   |            |           
|                                        | Medical          |   | $          | 8,977,161  |      |   | $          | 8,102,371  |  |   | $          | 8,260,776  |  
|                                        | Custom products  |   |            | 4,287,781  |      |   |            | 4,099,220  |  |   |            | 4,385,033  |  
|                                        | Safety catheters |   |            | 332,865    |      |   |            |            |  |   |            |            |  
|                                        | Corporate        |   |            | 8,308,046  |      |   |            | 7,983,800  |  |   |            | 6,515,039  |  
|                                        |                  |   |            |            |      |   |            |            |  |   |            |            |  
|                                        |                  | $ | 21,905,853 |            |      | $ | 20,185,391 |            |  | $ | 19,160,848 |           
|                                        |                  |   |            |            |      |   |            |            |  |   |            |            |  
|Depreciation and amortization expenses: |                  |   |            |            |      |   |            |            |  |   |            |           
|                                        | Medical          |   | $          | 266,995    |      |   | $          | 436,169    |  |   | $          | 470,590    |  
|                                        | Custom products  |   |            | 212,930    |      |   |            | 202,612    |  |   |            | 257,436    |  
|                                        | Safety catheters |   |            | 6,659      |      |   |            |            |  |   |            |            |  
|                                        | Corporate        |   |            | 882        |      |   |            | 775        |  |   |            | 540        |  
|                                        |                  |   |            |            |      |   |            |            |  |   |            |            |  
|                                        |                  | $ | 487,466    |            |      | $ | 639,556    |            |  | $ | 728,566    |           
|                                        |                  |   |            |            |      |   |            |            |  |   |            |            |  
|Capital expenditures:                   |                  |   |            |            |      |   |            |            |  |   |            |           
|                                        | Medical          |   | $          | 326,313    |      |   | $          | 304,410    |  |   | $          | 234,567    |  
|                                        | Custom products  |   |            | 232,203    |      |   |            | 156,649    |  |   |            | 178,130    |  
|                                        | Safety catheters |   |            |           |      |   |            |            |  |   |            |            |  
|                                        |                  |   |            |            |      |   |            |            |  |   |            |            |  
|                                        |                  | $ | 558,516    |            |      | $ | 461,059    |            |  | $ | 412,697    |           
|                                        |                  |   |            |            |      |   |            |            |  |   |            |            |  

18. 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 $255,000 in
2002, $235,000 in 2001, and $205,000 in 2000.

Future minimum lease payments under noncancelable operating leases with
initial terms of one year or more at September
28, 2002 were $248,000 for the 2003 fiscal year and $63,000 for
the 2004 fiscal year.

19. COMMITMENTS AND CONTINGENCIES

The Company is committed to purchases of $500,000 of
Selan® skin care products per calendar year through 2005.
For the fiscal years ended September 28, 2002 and September
29, 2001, purchases under this commitment were $730,000
and $497,000, 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.

23



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Span-America Medical Systems, Inc.  2002 Annual Report

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 28, 2002 and
September 29, 2001 and the related statements of income, shareholders equity,
and cash flows for each of the years in the three- year
period ended September 28, 2002. 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 28, 2002 and September 29,
2001 and the results of its operations and its cash
flows for each of the years in the three-year period ended September 28, 2002
in conformity with accounting principles
generally accepted in the United States of America.

|                           |  |                     
|-------------------------- |  | --------------------
|                           |  | (Elliott Davis, LLC)
|Greenville, South Carolina |  |                     
|October 28, 2002           |  |                     

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|                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Directors and Officers                                                                                                                                                                                              |  | Corporate Data                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                          
|DIRECTORS                                                                                                                                                                                                           |  | CORPORATE OFFICE                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                    |  | Span-America Medical Systems, Inc.                                                                                                                                                                                                                                                                                                       
|Thomas D. Henrion                                                                                                                                                                                                   |  | 70 Commerce Center                                                                                                                                                                                                                                                                                                                       
|Chairman of the Board                                                                                                                                                                                               |  | Greenville, South Carolina 29615                                                                                                                                                                                                                                                                                                         
|Span-America Medical Systems, Inc.                                                                                                                                                                                  |  | (864) 288-8877                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                          
|President                                                                                                                                                                                                           |  |                                                                                                                                                                                                                                                                                                                                          
|Silver Thread Farms, LLC                                                                                                                                                                                            |  | Mailing Address:                                                                                                                                                                                                                                                                                                                         
|La Grange, Kentucky                                                                                                                                                                                                 |  | P.O. Box 5231                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                    |  | Greenville, South Carolina 29606-5231                                                                                                                                                                                                                                                                                                    
|James D. Ferguson                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                          
|President and Chief Executive Officer                                                                                                                                                                               |  | Web Site:                                                                                                                                                                                                                                                                                                                                
|Span-America Medical Systems, Inc.                                                                                                                                                                                  |  | www.spanamerica.com                                                                                                                                                                                                                                                                                                                      
|Greenville, South Carolina                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                          
|B. Kenneth Bolt                                                                                                                                                                                                     |  | GENERAL COUNSEL                                                                                                                                                                                                                                                                                                                          
|President                                                                                                                                                                                                           |  | Wyche, Burgess, Freeman & Parham, P.A.                                                                                                                                                                                                                                                                                                   
|Banyan Retirement Services, Inc.                                                                                                                                                                                    |  | P.O. Box 728                                                                                                                                                                                                                                                                                                                             
|Greenville, South Carolina                                                                                                                                                                                          |  | Greenville, South Carolina 29602-0728                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                          
|Richard C. Coggins                                                                                                                                                                                                  |  | AUDITORS                                                                                                                                                                                                                                                                                                                                 
|Chief Financial Officer, Treasurer and Secretary                                                                                                                                                                    |  | Elliott Davis, LLC                                                                                                                                                                                                                                                                                                                       
|Span-America Medical Systems, Inc.                                                                                                                                                                                  |  | P.O. Box 6286                                                                                                                                                                                                                                                                                                                            
|Greenville, South Carolina                                                                                                                                                                                          |  | Greenville, South Carolina 29606-6286                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                          
|Robert H. Dick                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                          
|President                                                                                                                                                                                                           |  | STOCK INFORMATION                                                                                                                                                                                                                                                                                                                        
|R.H. Dick & Company, Inc.
Palm Beach, Florida                                                                                                                                                                       |  | The common stock of Span-America Medical Systems, Inc.
trades on The Nasdaq Stock Market® under the symbol SPAN.                                                                                                                                                                                                                         
|                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                          
|Thomas F. Grady, Jr.                                                                                                                                                                                                |  |                                                                                                                                                                                                                                                                                                                                          
|Retired Vice President
International Paper
Montvale, New JerseyDouglas E. Kennemore, M.D.Retired Neurosurgeon
Greenville, South CarolinaJ. Ernest Lathem, M.D.Retired Urological Surgeon
Greenville, South Carolina |  | SHAREHOLDER 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 28, 2002 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
|                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                          
|James M. Shoemaker, Jr.                                                                                                                                                                                             |  | STOCK TRANSFER AGENT                                                                                                                                                                                                                                                                                                                     
|Member                                                                                                                                                                                                              |  | American Stock Transfer & Trust Company                                                                                                                                                                                                                                                                                                  
|Wyche, Burgess, Freeman & Parham, P.A                                                                                                                                                                               |  | 59 Maiden Lane                                                                                                                                                                                                                                                                                                                           
|Greenville, South Carolina                                                                                                                                                                                          |  | Plaza Level                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                    |  | New York, New York 10038                                                                                                                                                                                                                                                                                                                 
|OFFICERS                                                                                                                                                                                                            |  | (877) 777-0800 or (800) 937-5449                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                          
|James D. FergusonPresident and Chief Executive OfficerRobert E. Ackley                                                                                                                                              |  | Inquiries regarding stock transfers, lost certificates, or address
changes should be directed to the Stock Transfer Agent at the
address above.                                                                                                                                                                                          
|Vice President  Custom Products                                                                                                                                                                                    |  | (SPAN - NASDAQ LISTED)                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                          
|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                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                          





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(SPAN AMERICA BANNER)