**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-K**





x
            Annual
                report pursuant to section 13 or 15(d) of the Securities Exchange
                Act of
                1934
                For
                  the fiscal year ended**September
                  29, 2007**or





o
            Transition
                report pursuant to section 13 or 15(d) of the Securities Exchange
                Act of
                1934


For
      the
      transition period from _______ to _______.





Commission
      file number 0-11392





**SPAN-AMERICA
      MEDICAL SYSTEMS, INC.**


(Exact
      name of registrant as specified in its charter)





**South
                Carolina**
            **57-0525804**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification
                No.)**70
                Commerce Center, Greenville, South
                Carolina**
            **29615**(Address
                of principal executive
                offices)
            (Zip
                Code)Registrant’s
                telephone number, including area
                code
            **(864)
                288-8877**





Securities
      registered pursuant to section 12(b) of the Act:





Title
                of each class
            Name
                of each exchange on which registeredNone
            None





Securities
      registered pursuant to section 12(g) of the Act:





Common
      stock, no par value


(Title
      of
      class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes
o No
x





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










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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
      the
      Act). (Check one):




Large
      Accelerated Filer o Accelerated Filer oNon-Accelerated Filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes o No x





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      last sold as of the last business day of the registrant’s most recently
      completed second fiscal quarter was $38,402,333.





The
      number of shares of the registrant’s common stock, no par value, outstanding as
      of December 20, 2007 was 2,768,834.





Documents
      Incorporated By Reference





Portions
      of the Company’s Definitive Proxy Statement for the annual shareholders’ meeting
      to be held February 7, 2008 are incorporated by reference into Part
      III.









**PART
      I**





**Item
      1. Business**





**Forward-Looking
      Statements**





This
      annual report on Form 10-K includes forward-looking statements that describe
      anticipated results for Span-America Medical Systems, Inc. (the “Company” or
“Span-America”). These statements are estimates or forecasts about Span-America
      and its markets based on our beliefs, assumptions and expectations. These
      forward-looking statements therefore involve numerous risks and uncertainties.
      We wish to caution the reader that these forward-looking statements, such as,
      but not limited to, our expectations for future sales or future expenses, are
      only predictions. Actual events or results may differ materially as a result
      of
      risks and uncertainties in our business. Such risks include but are not limited
      to the “Risk Factors” described in Item 1A below and other risks referenced from
      time to time in our other Securities and Exchange Commission (‘SEC”) filings. We
      disclaim any obligation to update any forward-looking statement whether as
      a
      result of new information, future events or otherwise.





**Background**





Span-America
      Medical Systems, Inc. was incorporated under the laws of the state of South
      Carolina on September 21, 1970. We manufacture and distribute a variety of
      polyurethane foam products for the medical, consumer and industrial
      markets.





We
      began
      operations in 1975 as a manufacturer of polyurethane foam patient positioners
      and later expanded our product lines to include foam mattress overlays for
      the
      wound care market primarily in acute care hospitals. Wound care products aid
      in
      the treatment or prevention of pressure ulcers and diabetic ulcers, commonly
      known as bedsores. In the late 1970s we also began producing foam products
      for
      industrial applications. In 1985, we introduced the patented
      Geo-Matt â mattress
      overlay in the health care market, which became one of our leading products.
      About the same time, we began selling convoluted foam mattress overlay products
      to consumer bedding retailers throughout the United States.





We
      entered the replacement mattress segment of the medical market in 1992 through
      the acquisition of Healthflex, Inc., which included the PressureGuard® II
      replacement mattress. We have since significantly expanded the PressureGuard
      mattress line and have added the Geo-Mattress® product line to provide a broad
      line of therapeutic support surfaces that we sell directly and through
      distributors to hospitals, long-term care facilities, and home health care
      dealers throughout the Unites States and Canada.





In
      July
      2002, we acquired certain assets of Vadus, Inc., which included patents and
      equipment related to the design and production of the Secure I.V.® line of short
      peripheral intravenous catheters. The product line was in the development stage
      at the time of the acquisition, and we completed the development of the product
      and initially launched Secure I.V. in 2004. However, we have been unable to
      generate sufficient sales volume in the safety catheter segment to make it
      a
      viable business. Consequently, in October 2007, we decided to exit the safety
      catheter business and try to sell the related assets. As of September 29, 2007,
      we recorded an impairment charge to eliminate the book value of our safety
      catheter assets. We are currently engaged in efforts to sell this part of our
      business.




1





Our
      primary long-term strategy is to become a leading health care manufacturer
      and
      marketer specializing in wound management products used in the prevention and
      treatment of pressure ulcers. We are actively seeking to develop or acquire
      new
      products in this market segment. We also seek to further develop consumer and
      industrial applications of our medical products.





Our
      products are distributed in the United States and to a lesser degree in several
      foreign countries. Total export sales during fiscal 2007 were approximately
      $3.7
      million or 6.2% of total net sales. The majority of our export sales occurred
      in
      Canada. See Note 18 Operations and Industry Segments in the Notes to Financial
      Statements included in Item 8 of this report.





We
      maintain a website at *http://www.spanamerica.com* .
      Our
      reports and other filings made with the SEC are available free of charge on
      the
      website, which includes a link to the Company’s filings in the SEC’s EDGAR
      filing database.





**Industry
      Segment Data**





Please
      see Note 18 Operations and Industry Segments in the Notes to Financial
      Statements included in Item 8 of this report for additional information on
      industry segment data and revenues from foreign sales.





**Medical**





Span-America’s
      principal medical products consist of polyurethane foam mattress overlays,
      therapeutic support surfaces (which consist of non-powered and powered
      mattresses), patient positioners, and seating products. We market these products
      to all health care settings, including acute care hospitals, long-term care
      facilities, and home health care providers, primarily in North America. Sales
      of
      medical products represented 71% of total net sales in fiscal 2007, 71% of
      total
      net sales in fiscal 2006, and 63% of total net sales in fiscal
      2005.





*Mattress
      Overlays.* Span-America produces a variety of foam mattress overlays, including convoluted
      foam pads and its patented Geo-Matt® overlay. Our mattress overlays disperse
      body heat, increase air circulation beneath the patient, and reduce moisture
      build-up in order to prevent the development of pressure ulcers and promote
      healing. Their convoluted or geometrically contoured construction also reduces
      shear forces and more evenly distributes the patient's body weight, thereby
      reducing the localized pressure that causes ulcers. The Geo-Matt design includes
      numerous individual foam cells that are cut to exacting tolerances on
      computer-controlled equipment to create a clinically effective mattress surface.
      Mattress overlays comprised approximately 6% of total net sales in fiscal 2007.
      These products are designed to provide patients with greater comfort and to
      assist in treating patients who have or are susceptible to developing pressure
      ulcers. Span-America's overlay products are mattress pads rather than complete
      mattresses and are marketed as less expensive alternatives to more complex
      therapeutic support surfaces. The mattress overlays are designed for single
      patient use.




2





*Therapeutic
      Support Surfaces* .
      Span-America’s non-powered therapeutic support surfaces fall into two main
      product categories: the Geo-Mattress® all-foam products and the non-powered
      portion of the PressureGuard® product line. Geo-Mattress® products are
      single-density or multi-layered foam mattresses topped with the same patented
      Geo-Matt surface used in our overlays. These mattresses are sold as alternatives
      to standard innerspring and all-foam mattresses often found in acute and
      long-term care settings.





In
      1997,
      we introduced the Geo-Mattress Max, Plus, and Pro models of foam therapeutic
      support surfaces. In early 1999, we extended the product line with the release
      of the Geo-Mattress with Wings®, which has been a significant contributor to
      overall Geo-Mattress sales. The Wings support surfaces feature raised perimeter
      bolsters designed to reduce the chances of patients rolling out of bed or
      becoming entrapped. A second line extension, the Geo-Mattress Atlas®, was added
      in December 2000 to address the needs of bariatric patients.





Span-America’s
      more complex non-powered support surfaces consist of products from the
      PressureGuard® series. We acquired the PressureGuard design through the
      acquisition of Healthflex, Inc. in February 1992. The original design combined
      a
      polyurethane foam shell and static air cylinders to form a support surface
      that
      incorporated the comfort and pressure relieving features of both mattress
      overlays and more sophisticated dynamic mattresses. This original design, which
      we later used as the basis for powered versions (see below), was further refined
      through a complete technical upgrade of all PressureGuard components in November
      1997.





In
      addition to the non-powered, static PressureGuard Renew®, we also offer the
      PressureGuard CFT®. This model incorporates patented design principles of
      constant force technology. The PressureGuard CFT is unique in that it is a
      dynamic support surface that rivals very expensive powered surfaces in
      effectiveness, yet it requires no power source of any kind. In fiscal 2007,
      the
      CFT was our largest medical product line as measured by sales.





Span-America’s
      powered therapeutic support surfaces constitute the remaining models in the
      PressureGuard Series. In November 1993, we received FDA 510(k) marketing
      approval for the PressureGuard IV therapeutic support surface. Building on
      the
      comfort and support of the original PressureGuard design, PressureGuard IV
      was
      designed as a sophisticated, powered system for providing pressure reduction
      and
      patient comfort, with the added ability to turn the patient. The system was
      designed to automatically sense the patient’s weight and position and to
      continually adjust the pressures appropriately while slowly and quietly
      repositioning the patient at angles up to 30 degrees in cycles of up to two
      hours. The upgraded version, renamed the PressureGuard Turn Select®,
      incorporates all of these capabilities, as well as several additional features.
      Of particular note is a pendant-operated, microprocessor-controlled motion
      system, which is built into the support surface rather than being hung on the
      bed frame as a separate unit.





Another
      powered system in the PressureGuard line is the PressureGuard APM®, a simpler
      but effective alternating pressure mattress. The APM is targeted primarily
      at
      the long-term care and home care markets. In 2000, we added a more feature-rich
      version of this mattress called the PressureGuard APM 2 .
      The
      APM 2 products
      were further upgraded with new features in 2003, such as the addition of the
      Deluxe control unit. The APM 2 gives
      the caregiver the flexibility to offer either alternating pressure or a basic
      lateral rotation modality by activating a toggle switch on the control panel.
      The APM 2 represents
      our second largest medical product in terms of sales.




3





In
      late
      2001, Span-America introduced the PressureGuard Easy Air®, our first offering in
      the category of low-air-loss mattresses. The Easy Air incorporates several
      patented design innovations, which the company believes allow it to overcome
      common performance compromises inherent in competitive low-air-loss products.
      Additionally, the Easy Air was independently documented (see *Ostomy/Wound
      Management* ,
      January
      2003, Volume 49, Issue 1, pp. 32-42) to outperform all leading competitors
      at
      that time in controlling excess skin moisture, a key performance advantage
      in
      the competitive support surfaces marketplace.





All
      of
      the powered products in the PressureGuard Series are sold primarily through
      home
      health care equipment dealers for daily rental in home care, long-term care
      and,
      less commonly, in acute care settings. Following the government’s 1998
      implementation of the Prospective Payment System of reimbursement, however,
      long-term care facilities increasingly have elected to purchase these products
      outright through our distributors rather than continuing to rent
      them.





In
      fiscal
      2004, we began working with Hill-Rom Company, Inc. to develop a private-label
      version of our PressureGuard CFT mattress to be sold under the Hill-Rom name
      primarily to acute care hospitals. Hill-Rom, a division of Hillenbrand
      Industries, is a major supplier of hospital beds and various other types of
      patient care equipment. Since the initial work in 2004, we have expanded the
      private label CFT line to include several other therapeutic mattresses with
      additional features designed to meet Hill-Rom’s needs. The PressureGuard CFT
      product line was our fastest growing group of mattresses in fiscal 2007. Our
      current agreement with Hill-Rom will expire in 2008. As a result, sales to
      Hill-Rom in fiscal 2008 will not likely equal those of 2007. See “Major
      Customers” on page 9. We also manufacture private-label mattresses for other
      customers on a case-by-case basis, depending on market conditions and customer
      interest.





Therapeutic
      support surfaces and related products made up approximately 54% of total Company
      net sales in fiscal 2007, 52% in fiscal 2006 and 43% in fiscal
      2005.





*Patient
      Positioners.* Our
      specialty line of patient positioners is sold primarily under the trademark
      Span-Aids®. Span-Aids accounted for approximately 7% of our total net sales in
      fiscal 2007. This is our original product line and consists of over 300
      different foam items that aid in relieving the basic patient positioning
      problems of elevation, immobilization, muscle contracture, foot drop, and foot
      or leg rotation. Span-Aids patient positioners hold a patient's body in
      prescribed positions, provide greater patient comfort, and generally are used
      to
      aid long-term comatose patients or those in a weakened or immobilized condition.
      The positioners also help in the prevention of pressure ulcers by promoting
      more
      effective dispersion of pressure, heat and moisture. Span-Aids are intended
      for
      single-patient use throughout a patient's entire treatment program. Among the
      Span-Aids products that we presently market are abduction pillows, body
      aligners, head supports, limb elevators and various foot and wrist positioners.
      We sell patient positioners primarily to hospitals and long-term care facilities
      through several national medical products distributors.




4





*Seating
      Products.* Another
      product category in our medical segment consists of seat cushions and related
      seating products for wheelchairs, Geri-chairs (typically used in long-term
      care
      facilities) and other health care seating needs. Our offerings in this category
      can be subdivided into three main groups:





·
            wound
                healing aids,





·
            patient
                positioning and general pressure management products,
                and





·
            pressure
                management products without patient positioning
                features.





Seating
      products made specifically as an aid to wound healing include the Isch-Dish® and
      Sacral Dish® pressure relief cushions. Seating products made for patient
      positioning and general pressure management include the Isch-Dish Thin, the
      Geo-Matt® ContourTM cushion, the EqualizerTM, and the EZ-DishTM. The Equalizer
      contoured positioning cushion has a multi-component design that includes a
      viscoelastic foam top, proprietary soft polymer inserts, and a contoured base.
      Like the Isch-Dish, the Equalizer is included among seating products covered
      for
      reimbursement by the Medicare system. This makes it an attractive option for
      durable medical equipment suppliers and rehab seating specialists. The EZ-Dish
      pressure relief cushion, which uses some of the features of the original
      Isch-Dish design, offers a simpler, more affordable solution to the seating
      problems of nursing home patients. The Geo-WaveTM Cushion assists with
      positioning and pressure reduction for patients using specialty recliners and
      Geri-chairs.  The Short-WaveTM seat and back cushion reduces shear and
      assists with patient positioning in standard wheelchairs.  The Short-Wave
      is covered for reimbursement by the Medicare system.





Seating
      products designed to address pressure management without additional positioning
      benefits include the Gel-T® cushion and the Geo-Matt and Geo-Matt PRT®
wheelchair cushions. The Gel-T is a gel/foam combination cushion that is
      especially popular with elderly patients. The Geo-Matt and Geo-Matt PRT cushions
      incorporate our proprietary Geo-Matt anti-shearing surface.





Seating
      products accounted for approximately 3% of total net sales in fiscal
      2007.





*Skin
      Care Products.* We also
      market the Selan® line of skin care creams and lotions under a license agreement
      with PJ Noyes Company. The products, which are manufactured by PJ Noyes, are
      used for cleaning, moisturizing and protecting patients’ skin and are primarily
      sold in long-term care and acute care settings. The license agreement with
      PJ
      Noyes will expire in 2011. Sales of skin care products accounted for
      approximately 2% of our total net sales in fiscal 2007.





*Distributor
      and Private-Label Manufacturing Relationships.* We sell
      our medical products to many customers of varying sizes. Our largest medical
      customer in fiscal 2007 was Hill-Rom Company, for whom we manufacture
      therapeutic support surfaces that incorporate Span-America’s patented features
      and are sold under the Hill-Rom name. Sales to Hill-Rom during fiscal 2007
      made
      up approximately 24% of net sales in the medical segment. We also sell our
      branded medical products to several medical products distributors who resell
      our
      products to acute care hospitals and long-term care facilities throughout North
      America. Sales to our four largest medical distributors made up approximately
      57% of net sales in the medical segment during fiscal 2007. We believe our
      relationships with these distributors are good. However, the loss of any one
      of
      these customers could have a material adverse effect on our business. See “Item
      1A. Risk Factors” below for more information on our relationships with large
      customers.




5





**Custom
      Products**





Span-America's
      custom products segment includes two major product lines: consumer bedding
      products and industrial foam products. Our consumer product line consists
      primarily of convoluted and contour-cut mattress overlays and specially designed
      pillows for the consumer bedding market. The consumer products are marketed
      to
      retailers through Louisville Bedding Company, a leading manufacturer and
      distributor of bedding products in North America. Louisville Bedding is the
      exclusive distributor of our consumer foam products pursuant to a distribution
      agreement between the companies, which expires in December 2009. The agreement
      automatically renews for successive three-year terms unless either party
      provides notice of its intent not to renew at least 60 days prior to the
      expiration date.





Our
      industrial product line consists of specially designed foam products used in
      a
      variety of industries, the largest of which include kayak and automotive
      manufacturing, specialty packaging and various other manufacturing operations.
      The majority of our industrial products are made to order according to customer
      specifications. We currently have one full-time sales representative and several
      manufacturers’ representatives selling our industrial foam fabrication
      capabilities primarily in the southeastern United States. Our customers
      represent a wide variety of markets, including the sports equipment, automotive,
      photographic film, durable goods and electronics industries.





Custom
      products represented approximately 29% of our total net sales in fiscal 2007,
      compared with 29% in fiscal 2006 and 37% in fiscal 2005. In fiscal 2007,
      approximately 72% of our total custom products sales were distributed through
      Louisville Bedding Company. The loss of this relationship would have a material
      adverse effect on our business. Sales of consumer bedding products within the
      custom products segment represented 23% of total Company net sales in fiscal
      2007, 22% in fiscal 2006 and 32% in fiscal 2005.





**Safety
      Catheters**





In
      July
      2002, we acquired assets related to the Secure I.V.® protected short peripheral
      intravenous catheter from Vadus, Inc., a privately owned designer and
      manufacturer of catheters. The acquired assets consisted primarily of patents
      and equipment related to the design, production and sale of the Secure I.V.
      catheter. We completed first-phase development of the product and initially
      launched Secure I.V. in 2004. In March 2006, to expand the safety catheter
      product line, we entered into a one-year distribution agreement with Command
      Medical Products, Inc. to sell the HuberProTM safety Huber needle infusion set to
      customers primarily in alternate site health care markets, i.e. other than
      acute-care hospitals. However, we have been unable to generate sufficient sales
      volume in the safety catheter segment to make it a viable business. Operating
      losses in the safety catheter segment were $4.0 million in fiscal 2007
      (including an impairment charge of $2.9 million), $1.1 million in fiscal 2006
      and $1.5 million in fiscal 2005. Consequently, in October 2007, we decided
      to
      exit the safety catheter business and try to sell the related assets. As of
      September 29, 2007, we recorded an impairment charge to eliminate the book
      value
      of our safety catheter assets. We are currently engaged in efforts to sell
      this
      part of our business. Net sales of Secure I.V. were less than 1% of total net
      sales in fiscal 2007.




6





**Research
      and Development**





Span-America’s
      expenditures for research and development for the last three fiscal years are
      set forth in the following table:


Research
                  and Development Expense2007
              
              2006
              
              2005Medical
              
              $
              724,000
              
              $
              520,000
              
              $
              407,000Custom
                  products
              
              
              -
              
              
              2,000
              
              
              1,000Safety
                  catheters
              
              
              83,000
              
              
              112,000
              
              
              733,000Total
                  R&D expense
              
              $
              807,000
              
              $
              634,000
              
              $
              1,141,000




We
      expect
      research and development costs in fiscal 2008 to be slightly lower than those
      of
      fiscal 2007 due to our exit from the safety catheter business.





**Competition**





*Medical* .
      In the
      medical market segment, we face significant competition for sales of our foam
      mattress overlays. Competition within the overlay market is primarily based
      on
      price and delivery for convoluted foam overlays. For therapeutic overlays,
      including Geo-Matt, competition is based on price, product performance, quality
      and delivery. However, the largest single source of competition for our mattress
      overlay products is from therapeutic support surfaces (or mattresses), either
      of
      our design and manufacture or those of our competitors. Sales of overlays have
      generally declined since the 1990s as customers began to replace
      single-patient-use overlays with longer lasting therapeutic surfaces that
      incorporated the pressure relieving features of overlays. Competition with
      respect to our Span-Aids patient positioners is primarily based on price.
      However, a secondary source of competition for patient positioners results
      from
      alternative methods, such as the use of pillows and other devices to position
      patients.





We
      believe that Span-America is one of the largest nationwide suppliers of foam
      mattress overlays and patient positioners to the U.S. health care market. Our
      primary competitors in the overlay and positioner markets are the BioClinic
      division of Sunrise Medical, Inc. and Covidien (formerly Tyco
      Healthcare).




7




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





The
      market for therapeutic support surfaces developed principally during the 1990s.
      Competitors include The Encompass Group, Gaymar Industries, Inc., Hill-Rom
      (a
      division of Hillenbrand Industries, Inc.), Kinetic Concepts, Inc., Invacare
      Corporation, Sunrise Medical, Inc., Direct Supply, Inc. and Medline Industries,
      Inc. These competitors use combinations of their own sales representatives
      and
      manufacturer’s representatives to sell directly to hospitals, distributors, and
      long-term care facilities nationwide.





Many
      of
      our competitors in the health care segment are larger and have greater resources
      than our Company. We believe our competitive advantages in the medical segment
      include innovative and patented product designs, product quality, manufacturing
      capabilities, distribution relationships, and customer
      responsiveness.





*Custom
      Products.* In the
      custom products segment, we have encountered significant competition for our
      mattress pad and pillow products. The competition is principally based on price,
      which is largely determined by foam density and thickness. However, competition
      also exists due to variations in product design and packaging. There are
      presently a number of companies with the manufacturing capability to produce
      similar bedding products. Our primary competitors in this market are Sleep
      Innovations, Inc., E.R. Carpenter Company and Zinus, Inc., all of which are
      larger and have greater resources than we do. We also have a number of
      competitors in the market for our industrial products, including SCA Packaging
      North America (formerly Tuscarora, Inc.) and UFP Technologies, Inc. These
      competitors are larger and have greater resources than we do. The competition
      for industrial foam products is largely based on price. In many instances,
      however, design, product quality and delivery capabilities are also important.
      We believe our competitive advantages in the custom products segment include
      our
      distribution relationship with Louisville Bedding Company, innovative product
      designs, foam manufacturing and fabrication capabilities, low cost manufacturing
      processes, and customer responsiveness.





Within
      the last two years, we have encountered increasing competition in the consumer
      bedding market from visco foam products manufactured both in the United States
      and China. Visco foam, also known as visco-elastic foam or memory foam, has
      greater density and different properties than traditional polyurethane foam
      products. It responds to body temperature, conforms to the shape of the body,
      and generally has slower recovery time compared with traditional polyurethane
      foam. Visco foam is also significantly more expensive than traditional foam
      and
      is more difficult to handle and fabricate. Because visco foam is more difficult
      to cut and shape than traditional foam, it is more difficult for us to
      differentiate our products from those of our competitors. Consequently, the
      visco mattress pads currently on the market tend to be somewhat undifferentiated
      without unique surface designs. In addition, since visco foam is significantly
      more expensive and more dense than traditional foam, it is more cost effective
      for overseas competitors (from China for example) to ship the products into
      the
      U.S. market. This is generally because retail prices of visco foam products
      are
      significantly higher than comparable traditional foam products, which generates
      much higher revenue per square foot of retail shelf space and lowers shipping
      costs as a percent of sales value.




8





*Safety
      Catheters* .
      Our
      Secure I.V. products competed in the protected short peripheral intravenous
      catheter marketplace. Approximately 85% of the market is supplied by three
      major
      companies: Smiths Group plc, Becton Dickinson and Company, and B. Braun Medical,
      Inc. All of these companies have established national sales organizations and
      worldwide distribution networks. Their resources are greater than ours. Prior
      to
      our decision in October 2007 to exit the safety catheter business, we had
      distribution agreements with distributors in three distinct markets: acute
      care,
      alternate care and emergency medical services. Our emergency medical services
      distributor was a national distributor. The other distributors were regional
      but
      in combination offered national coverage.





**Major
      Customers**





We
      have a
      business relationship with Louisville Bedding Company to distribute our consumer
      foam products. Sales to Louisville Bedding during fiscal 2007 made up
      approximately 21% of our total net sales and approximately 72% of sales in
      the
      custom products segment.





In
      the
      medical segment, sales to two additional customers with whom we have business
      relationships to re-sell certain of our medical products exceed 10% of our
      total
      net sales. Sales to Hill-Rom, for whom we manufacture private label therapeutic
      support surfaces, made up approximately 17% of total net sales and approximately
      24% of sales in the medical segment during fiscal 2007. Sales to one of our
      distributors, McKesson Medical Surgical, during fiscal 2007 made up
      approximately 11% of total net sales and approximately 15% of sales in the
      medical products segment.





Our
      exclusive agreement to supply Hill-Rom Company, Inc. with private label support
      surfaces will expire on May 4, 2008. Following the expiration of the exclusive
      supply contract, Span-America will be able to sell its proprietary
      PressureGuard®CFT® therapeutic support surfaces to customers other than
      Hill-Rom, and Hill-Rom will be able to purchase similar products from other
      suppliers. The current agreement between Span-America and Hill-Rom provides
      for
      mutual exclusivity regarding products that feature non-powered, self-adjusting
      technology similar to Span-America’s CFT product . Following
      the expiration of the contract, we expect to provide products to Hill-Rom on
      an
      order-by-order basis. Our expectation for fiscal 2008 is that Hill-Rom sales
      will decline from fiscal 2007 levels; however, based on shipments made to date
      in the first quarter of fiscal 2008, we expect Hill-Rom to remain as one of
      our
      largest medical customers based on sales volume during fiscal 2008.




9





See
      “Industry Segment Data - Medical - Distributor and Private-Label Manufacturing
      Relationships” above and Note 17 Major Customers and Note 18 Operations and
      Industry Segments in the Notes to Financial Statements below for more
      information on major customers. The loss of any of these major customers would
      have a material adverse effect on our business.





**Seasonal
      Trends**





Some
      seasonality can be identified in certain of our medical and consumer foam
      products. However, the fluctuations have minimal effect on our operations
      because of offsetting trends among these product lines. We have not experienced
      significant seasonal fluctuations in our industrial product line.





**Patents
      and Trademarks**




We
      hold
      37 United States patents and 10 foreign patents relating to various components
      of our patient positioners, mattress overlays, and therapeutic support surfaces
      for the medical segment. We have also filed additional patent applications.
      We
      believe that these patents are important to our business. However, while we
      have
      a number of products covered by patents, there are competitive alternatives
      available, which are not covered by these patents. Therefore, we do not rely
      solely on our patents to maintain our competitive position in our various
      markets.





Our
      principal patents include the patents on Geo-Matt, Geo-Mattress, PressureGuard,
      and Span-Aids products. The Geo-Matt and Geo-Mattress patents have remaining
      lives ranging from 1 to 6 years with additional patents pending. The
      PressureGuard patents have remaining lives ranging from 7 to 11 years with
      additional patents pending. The Span-Aids patents have remaining lives ranging
      from less than a year to 7 years.





As
      previously noted, in July 2002, we acquired assets related to the Secure I.V.®
catheter product line of Vadus, Inc., a privately owned designer and
      manufacturer of peripheral intravenous catheters. The Secure I.V. has FDA 510(k)
      approval and is protected by 11 U. S. patents and 9 foreign patents, all of
      which are owned by Span-America. The Secure I.V. patents have remaining terms
      ranging from 5 to 14 years. The mark “Secure I.V.” is also Span-America’s
      registered trademark. We have also filed additional patent applications. If
      we
      are successful in our efforts to sell the Secure I.V. business, we expect that
      the purchaser will acquire the related patents and trademarks.





We
      hold
      38 federally registered trademarks and 18 foreign trademark registrations,
      including *Span-America,
      Span-Aids, Geo-Matt, Geo-Mattress, PressureGuard,* and *Isch
      Dish* in
      the
      medical and consumer segments *.* Other
      federal registration applications are presently pending. We believe that these
      trademarks are readily identifiable in their respective markets and add value
      to
      our product lines.




10




**Raw
      Materials and Backlog**





Polyurethane
      foam and nylon/vinyl mattress covers and tubes account for approximately 80%
      of
      our raw materials. In addition, we use corrugated shipping cartons, polyethylene
      plastic packaging material and hook-and-loop fasteners. We believe that our
      basic raw materials are in adequate supply and are available from many suppliers
      at competitive prices.





See
      Item
      1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations” for more information on price
      increases for polyurethane foam.





As
      of
      September 29, 2007, we had unshipped orders of approximately $1.3 million,
      which
      represents a 1% increase compared to our backlog at fiscal year end 2006. All
      orders in the current backlog are expected to be filled in the 2008 fiscal
      year.




**Employees**





We
      had
      319 full-time employees as of September 29, 2007. Of these employees, six were
      officers, 18 were management personnel, 26 were administrative and clerical
      personnel, 23 were sales personnel, and 246 were manufacturing employees. We
      are
      not a party to any collective bargaining agreement and have never experienced
      an
      interruption or curtailment of operations due to labor controversy. We believe
      that our relations with our employees are good.





**Supervision
      and Regulation**





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





We
      are
      certified as an ISO 9001 and ISO 13485 supplier for our PressureGuard mattress
      products from the Greenville, South Carolina plant. These standards are prepared
      by the American Society for Quality Control Standards Committee to correspond
      to
      the International Standard ISO 9001:2000. ISO (the International Organization
      for Standardization) is a worldwide federation of national standards bodies
      dealing with quality-system requirements that can be used by a supplier to
      demonstrate its capability and for the assessment of the capability of a
      supplier by external parties. Compliance with ISO standard 13485 is required
      by
      Health Canada for all Class II medical devices sold there. All of our powered
      medical therapeutic support surfaces are considered Class II medical devices.
      The certification is subject to reassessment at six-month intervals. We have
      maintained our certification based on the results of ISO audits conducted during
      fiscal year 2007.




11





**Environmental
      Matters**





Our
      manufacturing operations are subject to various government regulations
      pertaining to the discharge of materials into the environment. We believe that
      we are in substantial compliance with applicable regulations. We do not
      anticipate that continued compliance will have a material effect on our capital
      expenditures, earnings or competitive position.





**Item
      1A. Risk Factors**





**The
      loss of a key distributor or customer in the Company’s medical or custom
      products segments could cause a rapid and significant sales decline, which
      would
      likely result in a decline in earnings.** Many of
      our medical products are sold through large national distributors in the United
      States and Canada. We do not maintain long-term distribution agreements with
      most of these distributors. Instead, we supply them based on purchase orders
      that are issued by the customers on a daily or weekly basis. These
      supplier-customer relationships can generally be ended by either party with
      minimal notice. Consequently, if a large customer or distributor decided to
      discontinue purchasing our products, our sales and earnings could quickly
      decline. Our largest customers in the medical segment are Hill-Rom and McKesson
      Medical Surgical. In addition, all of our consumer foam products are sold
      through our exclusive distributor, Louisville Bedding Company, under a marketing
      and distribution agreement that expires in December 2009. The agreement
      automatically renews for successive three-year terms unless either party
      provides notice of its intent not to renew at least 60 days prior to the
      expiration date.





As
      we
      have previously disclosed, our agreement to supply Hill-Rom with private label
      therapeutic support surfaces will expire in May 2008. Hill-Rom was our largest
      customer in the medical segment in fiscal 2007 with sales of approximately
      $10.4
      million. We expect to continue to supply products to Hill-Rom under the terms
      of
      the agreement until the agreement expiration date. Following the expiration
      date, we expect to continue supplying products to Hill-Rom on an order-by-order
      basis. The current agreement provides for mutual exclusivity regarding products
      that feature non-powered, self-adjusting technology similar to our CFT product.
      The expiration of the agreement will allow us to sell our proprietary
      PressureGuard®CFT® therapeutic support surfaces to customers other than
      Hill-Rom, and Hill-Rom will be able to purchase similar products from other
      suppliers. At this time due to lack of information from Hill-Rom regarding
      its
      expected demand for our products, we are unable to forecast future sales of
      our
      products to Hill-Rom. There can be no assurance that sales of our CFT to other
      customers will offset any decline in sales to Hill-Rom.





For
      more
      information on major customers and information on our business segments, see
      the
      discussion under “Major Customers” on page 9 and Note 17 Major Customers and
      Note 18 Operations and Industry Segments in the Notes to Financial Statements,
      Item 1. “Business - Industry Segment Data - Medical - Distributor and
      Private-Label Manufacturing Relationships” and Item 1. “Business - Industry
      Segment Data - Custom Products.”




12





**Our
      earnings could be negatively affected by raw material cost increases that we
      are
      unable to recover through sales price increases or expense reductions.** The
      cost
      of polyurethane foam represented approximately 41% of our total cost of goods
      sold in fiscal 2007. An increase in foam raw material costs that we are not
      able
      to offset through sales price increases or expense reductions could have a
      significant negative effect on our profitability. Besides polyurethane foam,
      our
      other major raw material categories include nylon mattress covers, vinyl bags,
      vinyl air cylinders, electronic components for mattresses and corrugated
      cartons. Raw materials are our single largest cost category in the business,
      representing approximately 73% of our total cost of goods sold in fiscal 2007.
      Cost increases in these raw materials could have a significant adverse effect
      on
      earnings if we are unable to recover the higher costs through sales price
      increases or expense reductions.





**Our
      sales volume could decline as a result of competition from low-cost foreign
      imports.** Within
      the last two years, we have experienced increased competition in our medical
      and
      custom products segments from low-cost foreign imports. In the medical segment,
      the number of low-cost, imported mattress products has increased in the last
      two
      years, but it has not yet had a significant impact on our medical business.
      We
      believe that we have potentially greater exposure to low-cost imports in our
      consumer bedding product lines because those products have more commodity-like
      characteristics than our medical products and our customers, who are generally
      national retailers, are more likely to change suppliers to buy lower-cost
      products. Therefore, we could lose significant parts of our consumer bedding
      business and certain parts of our medical business if we are unable to compete
      effectively with low-cost imports.





**Our
      medical business could lose sales volume or could have lower sales growth rates
      as a result of government reimbursement changes in the medical
      market.** A number
      of our medical products are eligible for reimbursement by Medicare. We receive
      no direct reimbursements from Medicare, but our customers often submit
      reimbursement requests to Medicare. For example, we sell therapeutic mattresses
      to home health care dealers who in turn rent our mattresses to patients.
      Medicare reimburses the dealers for some or all of the patient’s rental cost. If
      Medicare reimbursement rates are reduced, the demand for our medical products
      that are covered by Medicare would likely be reduced.





**Certain
      of our medical products are classified as medical devices and are regulated
      by
      the FDA.** These
      regulations require, among other things, that medical device manufacturers
      register with the FDA, list devices manufactured by them, and file various
      types
      of reports. In addition, our manufacturing facilities are subject to periodic
      inspections by regulatory authorities and must comply with “good manufacturing
      practices” as required by the FDA and state regulatory authorities. Although we
      believe we are in substantial compliance with applicable regulations, the
      existence of the regulations creates the risk of a product recall and related
      expenses as well as the risk of additional expenses required to meet the
      regulatory requirements.





**Item
      1B. Unresolved Staff Comments**





None




13





**Item
      2. Properties**





We
      own
      our principal office and manufacturing facility which is located in Greenville,
      South Carolina. This facility contains approximately 188,000 square feet used
      by
      the medical and custom products segments and is located on a 13-acre site.
      In
      fiscal 2006, we completed a 58,000 square foot addition to our plant in
      Greenville, which is included in the square footage total above. We believe
      our
      current manufacturing and storage space is adequate to support our operations
      during the next several years, depending on sales growth rates.





We
      also
      lease 15,000 square feet of warehouse space in Salt Lake City, Utah for use
      as a
      distribution center for our medical products. The lease rate for the facility
      is
      $6,750 per month. The lease expires in August 2008 unless renewed by mutual
      agreement. We currently expect to renew the agreement in 2008, but we will
      evaluate other alternatives before the renewal date.





We
      consider the South Carolina and Utah facilities to be suitable and adequate
      for
      their intended purposes.





**Item
      3. Legal Proceedings**





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





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





No
      matters were submitted to a vote of security holders during the fourth quarter
      of our 2007 fiscal year.




14


**PART
      II**





**Item
      5. Market for the Registrant's Common Equity, Related Stockholder Matters and
      Issuer Repurchases of Equity Securities**





The
      common stock of Span-America Medical Systems, Inc. trades on The NASDAQ Global
      Market® under the symbol SPAN. As of September 29, 2007, there were 2,775,444
      common shares outstanding. As of December 17, 2007, there were 196 shareholders
      of record and approximately 1,700 beneficial shareholders. The closing price
      of
      Span-America's stock on December 17, 2007 was $11.41 per share.





Selected
      quarterly stock price data is shown on the following table.


**Quarterly
                  Stock Price Data****First**
              
              **Second**
              
              **Third**
              
              **Fourth**
              
              **Year****For
                  Fiscal 2007**High
              
              $
              14.79
              
              $
              16.99
              
              $
              29.04
              
              $
              30.95
              
              $
              30.95Low
              
              
              12.90
              
              
              14.19
              
              
              15.51
              
              
              14.03
              
              
              12.90**For
                  Fiscal 2006**High
              
              $
              11.15
              
              $
              14.90
              
              $
              14.00
              
              $
              13.74
              
              $
              14.90Low
              
              
              8.65
              
              
              10.05
              
              
              10.27
              
              
              10.83
              
              
              8.65


The
      Company has paid a regular quarterly cash dividend since January 1990. In July
      2006, the Board increased the quarterly dividend to $0.06 per share from $0.045
      per share. In February 2007, the Board increased the quarterly dividend to
      $0.08
      per share from $0.06 per share. In April 2007, the Board declared a special
      cash
      dividend of $5.00 per share payable on June 6, 2007 to all shareholders of
      record on May 23, 2007. The Company expects to continue to pay quarterly
      dividends for the foreseeable future, though the Board may discontinue paying
      dividends at any time. Future dividend payments will depend upon the Company’s
      earnings and liquidity position. See the discussion of our revolving bank credit
      facility in Note 9 Borrowings in the Notes to Financial Statements for a
      description of restrictions on our ability to pay dividends, which description
      is incorporated herein by reference.





The
      information regarding equity compensation plans set forth under Item 12 below
      is
      incorporated herein by reference.




15





**PERFORMANCE
      GRAPH**





**Notwithstanding
      any statement in any of the Company’s previous or future filings under the
      Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
      as
      amended, incorporating future or past filings, including this Annual Report
      on
      Form 10-K, in whole or in part, the following Performance Graph shall not be
      incorporated by reference into any such filing unless the incorporation
      specifically lists the following Performance Graph.**





The
      following graph sets forth the performance of the Company’s Common Stock for the
      five-year period from September 28, 2002, through September 29, 2007, compared
      to the Russell 2000 Index, the Russell MicroCap Index and a peer group index.
      The peer group index was prepared by an unaffiliated third party and is
      comprised of all exchange-listed companies that had the standard industry
      classification code 3842 (which relates to medical products and supplies) as
      of
      September 29, 2007. The companies included in the peer group index are shown
      below. All stock prices reflect the reinvestment of cash dividends.




16





**COMPARISON
      OF CUMULATIVE TOTAL RETURN AMONG**


**SPAN-AMERICA
      MEDICAL SYSTEMS, INC.,**


**THE
      RUSSELL 2000 INDEX, THE RUSSELL MICROCAP INDEX**


**AND
      A PEER GROUP**









Assumes
      $100 invested on September 28, 2002.


Assumes
      dividends reinvested. Fiscal year ending September 29, 2007.




COMPANIES
      INCLUDED IN PEER GROUP INDEX




**Standard
      Industry Classification Code 3842**


**at
      September 29, 2007**


Antares
                  Pharma, Inc.
              ATS
                  Medical, Inc.
              Chad
                  Therapeutics, Inc.Cytori
                  Therapeutics AG
              DHB
                  Industries, Inc.
              DJO,
                  Inc.Emergency
                  Filtration
              Exactech,
                  Inc.
              Implant
                  Sciences Corp.Integra
                  Lifesciences
              Invacare
                  Corp.
              Lakeland
                  IndustriesLanger,
                  Inc.
              Medical
                  Action Industries
              Medical
                  Solutions Management, Inc.Microtek
                  Medical Holdings
              Mine
                  Safety Appliances Co.
              Miracor
                  Diagnostics, Inc.Orthologic
                  Corp.
              Quantum
                  MRI, Inc.
              Regeneration
                  Technology, Inc.Restore
                  Medical, Inc.
              Sharps
                  Compliance Corp.
              Sonic
                  Innovations, Inc.Stryker
                  Corp.
              Symmetry
                  Medical, Inc.
              Theragenics
                  Corp .Tutogen
                  Medical, Inc.
              Wright
                  Medical Group, Inc.
              Zimmer
                  Holdings, Inc.
  17


**Item
      6. Selected Financial Data**





Selected
      Financial Data for the Company’s last five fiscal years is shown in the table
      below.


**Five-Year
                  Financial Summary**(Amounts
                  in thousands, except per share and employee data)**2007**
              
              2006
              
              2005
              
              2004
              
              2003For
                  the year:Net
                  sales
              
              **$**
              **60,689**
              
              $
              51,557
              
              $
              48,439
              
              $
              49,929
              
              $
              41,575Gross
                  profit
              
              
              **20,168**
              
              
              15,699
              
              
              14,713
              
              
              12,691
              
              
              11,134Operating
                  income
              
              
              **4,160**
              
              
              4,010
              
              
              3,133
              
              
              2,308
              
              
              1,440Net
                  income
              
              
              **2,874**
              
              
              3,055
              
              
              2,439
              
              
              1,985
              
              
              1,399Cash
                  flow from operations
              
              
              **6,294**
              
              
              2,497
              
              
              2,589
              
              
              2,812
              
              
              1,147Capital
                  expenditures
              
              
              **1,009**
              
              
              1,074
              
              
              2,405
              
              
              1,997
              
              
              1,647Per
                  share:Net
                  income:Basic
              
              **$**
              **1.06**
              
              $
              1.15
              
              $
              0.94
              
              $
              0.77
              
              $
              0.55Diluted
              
              
              **1.00**
              
              
              1.10
              
              
              0.89
              
              
              0.73
              
              
              0.53Cash
                  dividends declared
              
              
              **5.30**
              
              
              0.195
              
              
              0.565
              
              
              0.145
              
              
              0.140At
                  end of year:Working
                  capital
              
              
              **7,447**
              
              
              13,338
              
              
              10,638
              
              
              11,623
              
              
              10,814Property
                  and equipment - net
              
              
              **6,537**
              
              
              8,132
              
              
              8,090
              
              
              6,185
              
              
              4,817Total
                  assets
              
              
              **23,969**
              
              
              31,012
              
              
              28,666
              
              
              27,098
              
              
              24,156Long
                  term debt
              
              
              **3,700**Shareholders'
                  equity
              
              
              **13,788**
              
              
              24,517
              
              
              21,561
              
              
              20,419
              
              
              18,525Book
                    value per share
              
              
              **4.97**
              
              
              9.22
              
              
              8.26
              
              
              7.88
              
              
              7.26Number
                  of employees
              
              
              **319**
              
              
              289
              
              
              293
              
              
              303
              
              
              299Key
                  ratios:Return
                  on net sales
              
              
              **4.7**
              **%**
              
              5.9
              %
              
              5.0
              %
              
              4.0
              %
              
              3.4
              %Return
                  on average shareholders' equity
              
              
              **15.0**
              **%**
              
              13.3
              %
              
              11.6
              %
              
              10.2
              %
              
              7.8
              %Return
                  on average total assets
              
              
              **10.5**
              **%**
              
              10.2
              %
              
              8.7
              %
              
              7.7
              %
              
              6.1
              %Current
                  ratio
              
              
              **2.3**
              
              
              3.8
              
              
              3.0
              
              
              3.3
              
              
              3.5
  18




**Item
      7. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations**





**OVERVIEW**




Span-America’s
      business was divided into three market segments during fiscal 2007: medical,
      custom products and safety catheters. Our revenues, profits and cash flows
      are
      derived from the development, manufacture and sale of these products. In the
      medical segment, we manufacture and market a comprehensive selection of pressure
      management products, including Geo-Matt®, PressureGuard®, Geo-Mattress®,
      Span-Aids®, Isch-Dish®, and Selan® products. In the custom products segment, we
      manufacture consumer mattress pads and pillows for the retail bedding market
      and
      various engineered foam products for the industrial market. Our consumer
      mattress pads and pillows are marketed by our exclusive distributor, Louisville
      Bedding Company. We sell the industrial product line directly to our customers.
      In October 2007, following our 2007 fiscal year end, we decided to exit the
      safety catheter business and sell the related assets because we had not been
      able to generate sufficient sales volume to make the segment a viable business.
      Consequently, we recorded a $2.9 million impairment charge in fiscal 2007 to
      eliminate the book value of the safety catheter assets. The impairment charge
      and related items are more fully discussed below. We will have only two segments
      in fiscal 2008: medical and custom products.





**RESULTS
      OF OPERATIONS FISCAL 2007 VS. 2006**





**Summary**




Net
      sales
      in fiscal 2007 increased 18% to $60.7 million compared with $51.6 million in
      fiscal 2006. The sales increase was the result of higher sales volumes in both
      the medical and custom products segments. Medical sales increased 18% to $43.2
      million. Sales in the custom products segment rose by 17% to $17.3
      million.





Net
      income declined 6% in fiscal 2007 to $2.9 million, or $1.00 per diluted share,
      compared with $3.1 million, or $1.10 per diluted share, in fiscal 2006. The
      2007
      results included a one-time, non-cash impairment
      charge of $2.9 million ($1.9 million, or $0.67 per share, after tax) related
      to the exit and proposed sale of our safety catheter business . Excluding
      the impairment charge, net income would have been $4.8 million, or $1.67 per
      diluted share, up 57% compared with the 2006 results.


This
        discussion contains several references to what our expenses or earnings would
        have been if we had excluded the impairment charge resulting from our decision
        to exit the safety catheter segment. The impairment charge was unusual,
        non-recurring and non-cash. Management considers the non-GAAP measures useful,
        and we believe they are useful to investors, to show the performance in fiscal
        2007 of the two segments of our business that are continuing -- the medical
        products and custom products segments. Beginning with reports in fiscal 2008,
        the safety catheter segment will be shown as a discontinued operation in
        accordance with GAAP, and our future Managements' Discussion and Analysis
        will be comprised largely of a discussion of only the two continuing
        segments.  We believe including the non-GAAP measures in this report will
        enhance the comparability of this report to future reports.




19





**Sales**




Total
      sales in the core medical business grew 18% to $43.2 million in fiscal 2007
      compared with $36.7 million in fiscal 2006. Sales of therapeutic support
      surfaces (our largest medical product line) rose 21% in fiscal 2007 to $32.6
      million and represented 75% of total medical sales. We sell these specialty
      mattresses to hospitals, long-term care facilities and home care dealers
      throughout the United States and Canada. Medical sales accounted for 71% of
      total net sales in each of fiscal years 2007 and 2006. Product line growth
      leaders within the therapeutic support surface group were the PressureGuard
      CFT,
      which includes private label products manufactured for Hill-Rom, the
      Geo-Mattress line of all-foam support surfaces and the PressureGuard Easy Air
      low-air-loss support surfaces. In other medical product lines, sales of
      wheelchair seating products increased by 23%, patient positioners were up by
      7%
      and overlays and Selan skin care products each rose by 2%.




We
      expect
      medical sales for fiscal 2008 to be affected by the expiration in May 2008
      of
      our existing manufacturing agreement with Hill-Rom. Hill-Rom was our largest
      medical customer in fiscal 2007, representing sales of approximately $10.4
      million, which made up 24% of medical sales and 17% of total Company sales
      in
      fiscal 2007. We expect to continue to supply Hill-Rom under the current
      agreement through the May 2008 expiration date. Thereafter, we expect to
      continue to supply Hill-Rom on an order-by-order basis. Consequently, we expect
      our sales to Hill-Rom to decline in fiscal 2008, but we are unable to forecast
      future Hill-Rom sales at this time due to lack of information from them
      regarding expected demand for our products. We remain optimistic about the
      growth prospects for the non-Hill-Rom parts of our medical business in fiscal
      2008 and beyond. We expect steady growth in our non-Hill-Rom medical business
      in
      fiscal 2008, which should partially offset anticipated declines in sales to
      Hill-Rom; however, there can be no assurance to this effect. Our product
      innovation has been a major factor in our past sales growth, and we plan to
      continue new product development efforts. Medical products introduced during
      the
      past three years accounted for approximately 31% of medical sales in fiscal
      2007.





Our
      custom products segment consists of consumer bedding products and specialty
      foam
      products for the industrial market. Sales in the custom products segment
      increased 17% during fiscal 2007 to $17.3 million from $14.8 million in fiscal
      2006. All of the sales growth was attributable to consumer bedding products,
      which were up 23% to $13.7 million compared with $11.2 million last year. This
      increase was the result of sales of the new fusion mattress overlays to Wal-Mart
      and other retailers through our marketing partner, Louisville Bedding Company.
      The fusion overlays combine the performance of traditional foam with the feel
      and features of visco foam to give customers a unique bedding choice. Wal-Mart
      has advised us that it plans to expand the number of its stores that carry
      the
      fusion consumer mattress overlay. As a result, we expect consumer sales in
      fiscal 2008 to be higher than those of fiscal 2007.





In
      the
      other part of the custom products segment, industrial sales were flat at $3.6
      million as sales growth from existing and new customers was offset by lost
      business from a key customer related to price competition. We believe industrial
      sales in fiscal 2008 will be slightly higher than those of fiscal
      2007.




20





Sales
      in
      the safety catheter segment were $145,000 in fiscal 2007 and consisted of
      $114,000 in sales of Secure I.V. catheters and $31,000 in sales of the HuberPro
      infusion sets. Sales of Secure I.V. were $75,000 in fiscal 2006 and sales of
      HuberPro were $45,000. Results in the safety catheter business continued to
      be
      below our expectations. As a result and as more fully discussed herein, we
      have
      exited the safety catheter business and are pursuing the sale of the related
      assets .




**Gross
      Profit**




Our
      gross
      profit increased by 28% during fiscal 2007 to $20.2 million compared with $15.7
      million in fiscal 2006. Gross margin rose to 33.2% for fiscal 2007 from 30.4%
      in
      fiscal 2006. The increase in gross profit level was due to higher sales volumes
      and lower manufacturing costs as a percent of sales. The reduction in
      manufacturing costs as a percent of sales was due to improved production
      efficiencies, cost savings from various process improvement projects, and from
      closing our California manufacturing plant and replacing it with a distribution
      center in Utah. We also benefitted from the relative stability of raw material
      costs during fiscal 2007. We expect our gross margin during fiscal 2008 to
      be
      lower than that of fiscal 2007 because of expected declines in sales to Hill-Rom
      as described above and an expected shift in sales mix toward the lower margin
      custom products segment.





**Selling,
      Research & Development and Administrative Expenses**




Selling
      and marketing expenses increased 10% to $9.0 million, but declined to 14.9%
      of
      net sales in fiscal 2007 compared with 15.9% of sales and $8.2 million in fiscal
      2006. Most of the dollar increase occurred in the medical segment and was due
      to
      costs related to our new distribution center in Utah and higher commissions
      and
      shipping expenses related to higher sales volumes. We believe that total selling
      and marketing expenses for fiscal 2008 will increase over 2007
      levels.





Total
      research and development expenses increased 27% to $807,000 in fiscal 2007
      compared with $634,000 in fiscal 2006. In the medical segment, R&D expenses
      increased 39% in fiscal 2007 to $724,000 compared with $520,000 in 2006. The
      expense increase in the medical segment was related to new product development
      efforts. In the safety catheter segment, R&D expenses decreased 26% in
      fiscal 2007 to $83,000 compared with $112,000 in 2006. We expect total R&D
      expenses in fiscal 2008 to be lower than those of fiscal 2007 due to the absence
      of safety catheter R&D expenses.





Administrative
      expenses increased 15% to $3.3 million in fiscal 2007 from $2.8 million in
      fiscal 2006. The increase was mainly the result of higher incentive
      compensation, professional fees and bad debt expense. We expect administrative
      expenses for fiscal 2008 to be similar to 2007 levels.





The
      safety catheter segment showed an operating loss of $4.0 million in fiscal
      2007,
      which included the effect of the $2.9 million impairment charge previously
      described. Excluding the impairment charge, our operating loss in the safety
      catheter segment would have been $1.1 million, which is approximately level
      compared with fiscal 2006. The history of operating losses and our inability
      to
      generate sufficient sales volume to make it a viable business contributed to
      our
      decision to exit the business and the resulting impairment charge. The
      impairment charge was $2.9 million pre-tax, or $1.9 million ($0.67 per share)
      after taxes, and it eliminated 100% of the book value of the safety catheter
      assets. We are now actively engaged in efforts to sell this part of our
      business. Proceeds from a future sale of these assets, if any, will be recorded
      as income from discontinued operations.




21





The
      custom products segment also showed an operating loss in fiscal 2007. But the
      loss decreased 75% to $267,000 ($0.06 per diluted share after taxes) compared
      with $1.1 million ($0.26 per diluted share after taxes) in fiscal 2006. The
      decrease in the custom products operating loss was primarily caused by the
      increase in sales volume of consumer bedding products and improved manufacturing
      efficiencies. The custom products segment receives an allocated share of our
      total manufacturing overhead and administrative expenses. Since these allocated
      expenses are largely fixed within a reasonable range of sales volume, a sales
      decline within the segment can result in a proportionally larger decline in
      segment operating income. However, we believe that the custom products segment
      makes a positive contribution to our earnings because it absorbs overhead and
      administrative expenses that would otherwise be reallocated to the medical
      segment if we exited the custom products business. If that occurred and nothing
      else changed, the medical segment and the total company would be less
      profitable.





Total
      operating income rose 4% to $4.2 million compared with $4.0 million in fiscal
      2006. Excluding the $2.9 million impairment charge, fiscal 2007 operating income
      would have been a record $7.0 million, a 76% increase over fiscal 2006 operating
      income.





**Non-Operating
      Income**




Investment
      income increased by 28% to $261,000 in fiscal 2007 compared with $204,000 in
      fiscal 2006. The increase in investment income was the result of higher interest
      rates and slightly higher average balances of marketable securities during
      fiscal 2007. We expect investment income in fiscal 2008 to be significantly
      lower than in 2007 because we liquidated our short-term investments during
      fiscal 2007 to partially fund the special dividend paid in June
      2007.





We
      received no royalty income in fiscal 2007 as a result of the expiration in
      December 2005 of our license agreement for the Safety-Lok® shielded syringe
      product formerly licensed to Becton Dickinson and Company (BD). The license
      agreement ended due to the expiration of the related patents. We received the
      final royalty payment from BD in February 2006 and recorded $247,000 of royalty
      income in fiscal 2006.





Other
      non-operating income for 2007 included a $9,000 gain on the sale of
      manufacturing equipment. Other non-operating income for 2006 included a $99,000
      gain on the sale of manufacturing equipment. We expect total non-operating
      income for fiscal 2008 to be significantly lower than 2007 levels because of
      the
      liquidation of our short-term investments to pay the special, one-time dividend
      more fully described below.





**Interest
      Expense**




Fiscal
      2007 results included $103,000 in interest expense incurred from the addition
      of
      $5.7 million in debt to partially fund the $5.00 per share special dividend
      paid
      on June 6, 2007. No comparable interest expense was incurred in fiscal 2006.
      See
“Liquidity and Capital Resources” below for further discussion about the special
      dividend.




22





**Net
      Income and Dividends**




Net
      income for fiscal 2007 decreased 6% to $2.9 million, or $1.00 per diluted share,
      compared with $3.1 million, or $1.10 per diluted share, in fiscal 2006. The
      2007
      results included a one-time, non-cash impairment charge of $2.9 million ($1.9
      million, or $0.67 per share, after tax) related to the exit and proposed sale
      of
      our safety catheter business. Excluding the impairment charge, net income for
      fiscal 2007 would have been $4.8 million, or $1.67 per diluted share, up 57%
      compared with the 2006 results.





We
      expect
      earnings for fiscal 2008 to decline from the adjusted $4.8 million ($1.67 per
      diluted share) level due to our anticipated reduction in sales to Hill-Rom
      as
      previously described. The expected earnings decrease related to the anticipated
      Hill-Rom sales decline should be partially offset by eliminating the losses
      associated with the safety catheter business and by expected growth in our
      non-Hill-Rom medical business and our custom products business; however, there
      can be no assurance to this effect. See “Item 1A Risk Factors” in this report.
      Overall, we expect earnings for fiscal 2008 to be higher than reported earnings
      for fiscal 2007 but lower than fiscal 2007 earnings adjusted to exclude the
      impairment charge.





During
      fiscal 2007, we paid dividends of approximately $14.7 million, or 511% of net
      income, for the year. This amount consisted of a special dividend of $5.00
      per
      share, one quarterly dividend of $0.06 per share and three quarterly dividends
      of $0.08 per share.





**RESULTS
      OF OPERATIONS FISCAL 2006 VS. 2005**





**Summary**




Net
      sales
      in fiscal 2006 increased 6% to $51.6 million compared with $48.4 million in
      fiscal 2005. The sales increase was the result of higher volumes in the medical
      segment where sales increased 21% to $36.7 million. Sales in the custom products
      segment fell by 18% to $14.8 million.





Net
      income rose 25% in fiscal 2006 to a record $3.1 million, or $1.10 per diluted
      share, compared with $2.4 million, or $0.89 per diluted share, in fiscal 2005.
      The increase in earnings resulted mainly from higher unit sales in our
      PressureGuard® line of therapeutic support surfaces for the medical segment and
      a decline in research and development expenses in the safety catheter segment
      compared with fiscal 2005.





**Sales**




Sales
      in
      our medical segment rose 21% to $36.7 million in fiscal 2006 compared with
      $30.3
      million the previous year. The medical sales growth was led by our proprietary
      therapeutic support surfaces (or mattresses), sales of which increased by 28%
      over 2005 levels. We sell these specialty mattresses to hospitals, long-term
      care facilities and home care dealers throughout the United States and Canada.
      Our PressureGuard CFT® support surfaces, which are sold primarily in the acute
      care market, made up about two-thirds of the total growth in the medical
      segment. Other top performing mattress products included the PressureGuard
      APM 2 ®
      alternating pressure mattresses, the PressureGuard Easy Air® low-air-loss
      mattress and our private label therapeutic surfaces manufactured for Hill-Rom.
      The APM 2 and Easy
      Air products are sold primarily in the long-term care and home care sections
      of
      the medical market. In other medical product lines, Selan® skin care products
      rose by 11%. Mattress overlay sales were up by 6%. Sales of seating products
      increased 2%, and sales of patient positioners climbed by 1%. The majority
      of
      the sales increases in our positioners, seating and overlay product lines were
      due to sales price increases that were passed along to customers in response
      to
      raw material cost increases we received in the first quarter of fiscal
      2006.




23





Our
      medical business achieved solid growth in fiscal 2006 primarily because of
      increased customer demand for our therapeutic support surfaces, particularly
      in
      the long-term care market, and the success of our private label support surfaces
      in the acute care market. Therapeutic support surfaces made up approximately
      73%
      of our total medical sales in fiscal 2006, and were our fastest growing medical
      product lines during the year.





Sales
      in
      the custom products segment declined 18% during fiscal 2006 to $14.8 million
      from $18.1 million in fiscal 2005. The entire decline occurred in the consumer
      portion of the custom products segment, where sales of consumer bedding products
      were down 29% to $11.2 million. The consumer sales decline was caused primarily
      by the phase out of our previous line of Geo-Comfort foam overlays sold to
      Wal-Mart, increased competition from imported and domestic visco foam products
      and lost business to one customer that was acquired by a larger company. The
      weakness in consumer sales was the main factor causing the operating loss in
      the
      custom products segment during fiscal 2006. To help reverse this trend, we
      developed a new fusion mattress overlay during the year, which began shipping
      late in our fourth fiscal quarter. The fusion pad replaces the Geo-Comfort
      line
      and is being sold under Wal-Mart’s HomeTrends brand. We are also selling the
      fusion products to other retailers.




In
      the
      other part of the custom products segment, industrial sales increased by 46%
      to
      $3.6 million. The industrial sales increase was primarily attributable to higher
      demand from existing customers.





Sales
      in
      the safety catheter segment were $120,000 in fiscal 2006 and consisted of
      $75,000 in sales of Secure I.V. catheters and $45,000 in sales of the HuberPro
      infusion sets. Sales of Secure I.V. were $6,000 in fiscal 2005. There were
      no
      comparable HuberPro sales in the year-earlier period.




**Gross
      Profit**




Our
      gross
      profit level increased by 7% during fiscal 2006 to $15.7 million compared with
      $14.7 million in fiscal 2005. The gross profit margin percentage remained level
      at 30.4%. The increase in gross profit level was due to higher sales volumes
      in
      the medical segment. The medical segment typically has a higher gross margin
      than the custom products segment because many of our medical products are
      patented and proprietary. In addition, higher material costs were also partly
      offset by lower labor costs due to improved manufacturing efficiencies and
      lower
      overtime requirements related to higher inventory levels.




24





**Selling,
      Research & Development and Administrative Expenses**




Selling
      and marketing expenses increased 7% to $8.2 million, or 15.9% of net sales,
      in
      fiscal 2006 compared with $7.7 million, or 15.8% of sales, in fiscal 2005.
      Most
      of the increase occurred in the medical segment and was due to higher expenses
      for commissions and shipping costs related to higher sales volumes.





Total
      research and development expenses decreased 44% to $634,000 in fiscal 2006
      compared with $1.1 million in fiscal 2005. The entire decrease occurred in
      the
      safety catheter segment where R&D expenses dropped by $621,000, or 85%, to
      $112,000 compared with $733,000 in the prior year. R&D expenses were high in
      the safety catheter segment during the first three quarters of fiscal 2005
      because of design changes being made to Secure I.V. The design changes were
      completed in the fourth quarter of fiscal 2005, which significantly lowered
      R&D expenses related to Secure I.V. in fiscal 2006. We consider safety
      catheters to be a separate reportable segment based on product type and
      distribution channels. See Notes 12 and 18 in the Notes to Financial Statements
      for additional information on the safety catheter segment.





In
      the
      medical segment, R&D expenses increased 27% in fiscal 2006 to $520,000
      compared with $407,000 in 2005, offsetting part of the expense decline in the
      safety catheter segment. The expense increase in the medical segment was related
      to new product development efforts.





General
      and administrative expenses remained level at $2.8 million in fiscal 2006.
      Increases in incentive compensation and bad debt expense were offset by a
      decline in insurance expense.





The
      operating loss in the safety catheter segment for fiscal 2006 declined by 28%
      to
      $1.1 million ($0.26 per diluted share after taxes) compared with $1.5 million
      ($0.35 per diluted share after taxes) in fiscal 2005. The decline in operating
      loss was primarily due to a reduction in R&D expenses.





The
      custom products segment also showed an operating loss in fiscal 2006. The custom
      products operating loss for fiscal 2006 increased to $1.1 million ($0.26 per
      diluted share after taxes) compared with a loss of $226,000 ($0.05 per diluted
      share after taxes) in fiscal 2005. The increase in the operating loss was
      primarily caused by the decline in sales volume of consumer bedding products
      as
      described above.





Total
      operating profit increased 28% to $4.0 million compared to $3.1 million in
      fiscal 2005. The increase was primarily the result of higher sales volume in
      the
      medical segment and lower R&D expenses in the safety catheter
      segment.





**Non-Operating
      Income**




Investment
      income increased by 80% to $204,000 in fiscal 2006 compared with $113,000 in
      fiscal 2005. The increase in investment income was the result of higher interest
      rates and slightly higher average balances of marketable securities in fiscal
      2006.




25





Royalty
      income fell 50% in fiscal 2006 to $247,000 compared with $498,000 in fiscal
      2005
      as a result of the expiration in December 2005 of our license agreement for
      the
      Safety-Lok® shielded syringe product licensed to Becton Dickinson and Company
      (BD). The license agreement ended due to the expiration of the related patents.
      We received the final royalty payment from BD in February 2006.





Other
      non-operating income for 2006 included a $99,000 gain on the sale of
      manufacturing equipment.





**Net
      Income and Dividends**




Net
      income for fiscal 2006 increased 25% to $3.1 million, or $1.10 per diluted
      share, compared with $2.4 million, or $0.89 per diluted share, in fiscal 2005.
      The increase was due primarily to higher sales volume in the medical segment,
      lower R&D expenses in the safety catheter segment and lower labor costs due
      to improved manufacturing efficiencies.





During
      fiscal 2006, we paid dividends of approximately $517,000, or 17% of net income,
      for the year. This amount consisted of three quarterly dividends of $0.045
      per
      share and one quarterly dividend of $0.06 per share.




**LIQUIDITY
      AND CAPITAL RESOURCES**




We
      generated cash from operations of $6.3 million during fiscal 2007, which was
      a
      152% increase compared with cash flow of $2.5 million in fiscal 2006. The major
      factors contributing to the increased cash flow during the year were higher
      earnings as adjusted for the non-cash impairment charge, an increase in accounts
      payable and accrued expenses, a smaller increase in inventory (as adjusted
      for
      the non-cash write off of safety catheter inventory), and decreases in prepaid
      expenses and other assets. The balance sheet components of these changes are
      described below.





Working
      capital decreased by $5.9 million, or 44%, to $7.4 million during fiscal 2007.
      The decrease resulted from the payment of the special dividend as noted above.
      The special dividend paid in June 2007 and the regular quarterly dividend paid
      at the same time were funded from the combination of $5.7 million in newly
      acquired long-term debt and $8.4 million in cash on hand and cash generated
      from
      the liquidation of short-term investments. Our current ratio decreased to 2.3
      at
      September 29, 2007 from 3.8 at fiscal year end 2006.





Accounts
      receivable, net of allowances, increased 3% to $7.2 million at the end of fiscal
      2007 compared with $7.0 million at the end of fiscal 2006. The increase resulted
      from higher sales in the fourth quarter of 2007. The days sales outstanding
      (or
      average collection time), calculated using a 12-month average for accounts
      receivable balances, decreased to 43 days in 2007 compared with 47 days in
      2006.
      The decrease in day’s sales outstanding is the result of increases in consumer
      bedding sales and sales to Hill-Rom, both of which tend to have faster average
      collection times than our broader customer base. We expect our average
      collection time to increase in fiscal 2008 as the result of anticipated lower
      sales to Hill-Rom and higher sales to a broader medical customer base. All
      of
      our accounts receivable are unsecured.




26





Inventory,
      net of reserves, decreased by $356,000 to $4.0 million at September 29, 2007
      compared with $4.4 million at September 30, 2006. This decrease was the result
      of the impairment charge for the safety catheter segment which included a
      write-down of inventory of $794,000. Inventory turns for fiscal 2007 increased
      to 9.7 times from 9.5 times in fiscal 2006 primarily because of the impairment
      charge for the safety catheter segment. Excluding the safety catheter segment,
      inventory would have turned 10.6 times in fiscal 2007 compared to 11.0 times
      in
      fiscal 2006. We expect inventory levels in fiscal 2008 to be similar to 2007
      fiscal year end levels.





Our
      deferred income tax asset increased 101% during fiscal 2007 to $997,000 from
      $497,000 primarily due to the impairment charge for the safety catheter segment,
      which was not deductible for tax purposes in fiscal 2007, and an increase in
      2007 deferred incentive compensation.





Prepaid
      expenses decreased 59% to $97,000 during fiscal 2007 from $239,000 at the end
      of
      fiscal 2006. The decrease was primarily the result of the receipt during fiscal
      2007 of a fiscal 2006 income tax refund.





Net
      property and equipment decreased by 20% during fiscal 2007. The change resulted
      from the combination of the impairment charge for the safety catheter segment,
      which included an impairment charge for machinery and equipment of $1.7 million,
      and regular depreciation expense offset by equipment purchases of $1.0 million.
      We expect capital expenditures in fiscal 2008 to be slightly less than those
      of
      fiscal 2007.





Other
      assets decreased by 13% to $2.4 million during fiscal 2007 compared with $2.8
      million at fiscal year end 2006 due to the impairment of patents of $373,000
      associated with the safety catheter segment.





Our
      trade
      accounts payable decreased 10% in fiscal 2007 to $2.1 million. Accrued and
      sundry liabilities increased by 42% during the year to $3.5 million compared
      with $2.5 million last year. The increase was mostly due to higher accruals
      for
      incentive compensation and income tax payable.





During
      fiscal 2007, we entered into a $10 million revolving credit agreement with
      a
      bank to partially fund the $5.00 per share special dividend paid on June 6,
      2007
      and other corporate needs. We initially borrowed $5.7 million to fund the
      dividend. During the fourth quarter of fiscal 2007 we repaid $2.0 million,
      leaving a balance at fiscal year end of $3.7 million. The maximum principal
      amount we can borrow at any one time under the agreement is $10 million. The
      maturity date is June 5, 2012. The agreement is unsecured and accrues interest
      at a variable rate equal to 30-day LIBOR plus a margin ranging from 85 to 165
      basis points depending on our leverage ratio (as defined in the agreement).
      The
      margin in effect during fiscal 2007 was 85 basis points. The interest rate,
      including the margin, at September 29, 2007 was 6.57%. Interest-only payments
      are required monthly. The agreement includes financial covenants relating to
      tangible net worth and leverage ratios. The agreement restricts dividends,
      stock
      repurchases, mergers and acquisitions, asset sales, indebtedness, liens, and
      capital expenditures. Violation of loan covenants could result in acceleration
      of the term of the agreement. We have pledged to grant the bank a security
      interest in our accounts, instruments, and chattel paper upon its request in
      the
      event of a default as defined in the agreement. We believe that we were in
      compliance with these covenants as of September 29, 2007.




27





The
      credit facility restricts dividends and stock repurchases during any fiscal
      year
      to an aggregate amount of no more than 50% of the sum of (i) our income from
      continuing operations for that fiscal year plus (ii) the absolute value of
      any
      aggregate after-tax, non-cash and extraordinary losses for that fiscal year.
      We
      may pay a regular quarterly dividend in an amount no greater than the previous
      quarter’s regular dividend so long as we remain in compliance with the financial
      covenants after giving effect to the payment of the dividend as an exception
      to
      the restriction above.





We
      believe that funds on hand, funds generated from operations and funds available
      under our revolving credit facility are adequate to finance our operations
      and
      expected capital requirements during fiscal 2008 and for the foreseeable future.





**OFF-BALANCE-SHEET
      ARRANGEMENTS**




We
      have
      no off-balance-sheet arrangements.





**CONTRACTUAL
      OBLIGATIONS**




The
      following table summarizes our significant contractual obligations and
      commercial commitments at September 29, 2007 and the future periods in which
      such obligations are expected to be settled in cash. For additional information
      regarding these obligations, see the referenced footnotes in the Notes to
      Financial Statements under Item 8 below.


Payments
                  Due by PeriodContractual
                  Obligations
              
              
              
              Less
                  Than
              
              
              
              
              
              More
                  Than(dollars
                  in thousands)
              
              Total
              
              1
                  Year
              
              1-3
                  Years
              
              3-5
                  Years
              
              5
                  YearsRevolving
                  credit agreement
              
              $
              3,700
              
              
              
              
              
              
              
              $
              3,700Purchase
                  obligations - Note 20
              
              
              1,875
              
              $
              625
              
              $
              1,250Deferred
                  compensation - Note 10
              
              
              907
              
              
              114
              
              
              227
              
              $
              227
              
              $
              339Total
                  contractual obligations
              
              $
              6,482
              
              $
              739
              
              $
              1,477
              
              $
              3,927
              
              $
              339


**IMPACT
      OF INFLATION AND COST OF RAW MATERIALS**




Based
      on
      current conditions in the markets for our primary raw materials, we expect
      inflation to be a moderate factor for our operations in fiscal 2008. Volatile
      oil prices resulting in additional increases in the cost of polyurethane foam
      or
      other raw materials could negatively affect our profitability if we are unable
      to recover these higher costs through sales price increases or other cost
      reduction efforts. The cost of polyurethane foam, our primary raw material,
      is
      indirectly influenced by oil prices. However, other market factors also affect
      foam prices, including supply availability of component chemicals, demand for
      related products from domestic and international manufacturers, competition
      among domestic suppliers, our purchase volumes and regulatory requirements.
      Consequently, it is difficult for us to accurately predict future changes in
      foam raw material costs.




28





**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 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. We regularly
      evaluate past due items in our accounts receivable listing and provide what
      we
      estimate to be adequate reserves for doubtful accounts. Customer economic
      conditions may change and increase the risk of non-collectibility and may
      require additional provisions which would negatively impact our operating
      results. As of September 29, 2007, our provision for doubtful accounts
      represented approximately 2.6% of total accounts receivable, or
      $189,000.





**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 29, 2007, our provision for excess and obsolete
      inventory represented approximately 5.0% of total inventories, or
      $200,000.





**Warranty
      Obligations**




We
      warrant certain of our products for specific periods of time against
      manufacturing or performance defects. We provide for the estimated future cost
      of warranty obligations in cost of goods sold when the related revenue is
      recognized. The accrued warranty cost represents our best estimate at the time
      of sale of the total cost that we will incur to repair or replace covered
      products or parts. The amount of accrued estimated warranty cost is primarily
      based on historical experience as well as current information on repair costs.
      Actual warranty cost could differ from the estimated amounts. On a quarterly
      basis, we review the accrued balances and update the historical warranty cost
      trends. If we were required to accrue additional warranty cost in the future,
      it
      would negatively affect operating results. Our actual warranty expense was
      approximately $222,000 in fiscal 2007 and $185,000 in fiscal 2006. See Notes
      7
      and 8 in the Notes to Financial Statements for more information on product
      warranties.




29





**Impairment
      of Goodwill**




As
      required by SFAS No. 142, “Goodwill and Other Intangible Assets,” we evaluate
      goodwill in our medical business unit for impairment at least annually or more
      frequently if events occur or circumstances change that could reduce the fair
      value of our medical business unit. For fiscal year end 2007, we determined
      that
      the fair value of the medical business unit exceeded its carrying value and
      thus
      no impairment charge was required. 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 medical business unit. 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 29, 2007, the carrying value of goodwill was $1.9
      million.





**Impairment
      of Long-Lived Assets**




“Impairment”
      is the condition that exists when the carrying amount of a long-lived asset
      or
      asset group is greater than its fair value. As required by SFAS No. 144, we
      evaluate long-lived assets for potential impairment whenever events occur or
      circumstances indicate that the carrying amount of the assets may not be
      recoverable. The carrying amount of a long-lived asset is not recoverable if
      it
      exceeds the sum of the undiscounted cash flows expected to result from the
      use
      and eventual disposition of the asset. If the carrying amount of a long-lived
      asset is not recoverable and is greater than its fair value, the asset is
      impaired and an impairment loss must be recognized. Accordingly we recorded
      an
      impairment charge of $2.9 million in September of 2007 which eliminates 100%
      of
      the book value of the safety catheter assets, and management has begun efforts
      to sell this part of the business. Proceeds from a future sale of these assets,
      if any, will be recorded as income from discontinued operations. (See Notes
      12
      and 18 in the Notes to Financial Statements.)





**Present
      Value of Deferred Compensation**




We
      are
      obligated to make fixed payments under a retirement agreement over the remaining
      life of Span-America’s founder as discussed in Note 10 “Deferred Compensation”
in the Notes to Financial Statements. This obligation can be funded from
      internally generated cash or from the cash value of Company-owned life insurance
      policies, which had a value of $1.9 million at September 29, 2007. See Item
      7A
      below and Notes 6 and 10 in the Notes to Financial Statements for more
      information on deferred compensation and the cash value of life insurance.
      We
      have fully accrued the present value of the expected payments due over the
      executive’s estimated life expectancy. In calculating this present value we
      estimated an effective long-term interest rate of 8%. If actual long-term
      interest rates declined significantly and we were required to accrue additional
      deferred compensation costs in the future, it would negatively affect operating
      results. As of September 29, 2007, we had recorded a deferred compensation
      liability of approximately $907,000, including current and long-term portions.
      If we reduced the discount rate by 1%, the deferred compensation liability
      would
      be increased by approximately $53,000 and pre-tax income would be reduced by
      the
      same amount.




30





**Item
      7A. Quantitative and Qualitative Disclosures About Market
      Risk**





We
      are
      exposed to financial market risk because our other assets at September 29,
      2007
      included $1.9 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 Span-America’s founder and former chairman.
      See “Present Value of Deferred Compensation” above. The cash value is invested
      in a combination of fixed income life insurance contracts and a portfolio of
      mutual funds managed by an insurance company. The fixed income contracts are
      similar to fixed income bond funds and are therefore subject to interest rate
      and company risk. The mutual fund portfolios invest in common stocks and bonds
      in accordance with their individual investment objectives. These portfolios
      are
      exposed to stock market and interest rate risk similar to comparable mutual
      funds. We believe 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 our financial position. During the fiscal year ended
      September 29, 2007, cash value of life insurance increased by 7%, creating
      after-tax income of approximately $131,000.





Our
      credit facility accrues interest at a variable rate equal to 30-day LIBOR plus
      a
      margin ranging from 85 to 165 basis points depending on our then-applicable
      leverage ratio (as defined in the credit facility). The current margin is 85
      basis points. Interest is payable monthly. An increase in interest rates would
      have a negative impact on our financial condition and earnings to the extent
      that we had outstanding borrowings under the facility. The degree of impact
      would vary depending on the level of the borrowings. Using our level of
      long-term debt at September 29, 2007 of $3.7 million, and assuming a constant
      level of debt for the entire year, a 100 basis point increase in the interest
      rate on the outstanding loan balance would increase our interest expense by
      approximately $37,000 per year.


31


**Item
      8. Financial Statements and Supplementary Data**





**Span-America
      Medical Systems, Inc.**


**Financial
      Statements**





**September
      29, 2007**


ContentsReport
                  of Independent Registered Public Accounting Firm
              
              
              33Financial
                  StatementsStatements
                  of Income
              
              
              34Balance
                  Sheets
              
              
              35Statements
                  of Changes in Shareholders’Equity
                  and Comprehensive Income
              
              
              36Statements
                  of Cash Flows
              
              
              37Notes
                  to Financial Statements
              
              
              38


32





**Report
      of Independent Registered Public Accounting Firm**





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 29, 2007 and September 30, 2006 and the related statements of
      income, changes in shareholders’ equity and comprehensive income, and cash flows
      for each of the years in the three year period ended September 29, 2007. 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 the Standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits 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 29, 2007 and September 30, 2006 and the results of its
      operations and its cash flows for each of the years in the three year period
      ended September 29, 2007 in conformity with accounting principles generally
      accepted in the United States of America.







/s/
      ELLIOTT DAVIS, LLC





Greenville,
      South Carolina


December
      20, 2007




33


**Statements
                of Income**




Years
                Ended**September
                29,**
            
            September
                30,
            
            October
                1,**2007**
            
            2006
            
            2005Net
                sales
            
            **$**
            **60,689,120**
            
            $
            51,556,548
            
            $
            48,439,310Cost
                of goods sold
            
            
            **40,520,833**
            
            
            35,857,885
            
            
            33,725,836Gross
                profit
            
            
            **20,168,287**
            
            
            15,698,663
            
            
            14,713,474Selling
                and marketing expenses
            
            
            **9,039,967**
            
            
            8,208,043
            
            
            7,656,876Research
                and development expenses
            
            
            **806,937**
            
            
            633,608
            
            
            1,141,198General
                and administrative expenses
            
            
            **3,282,341**
            
            
            2,846,534
            
            
            2,781,951Impairment
                of safety catheter assets - Note 12
            
            
            **2,878,803****16,008,048**
            
            
            11,688,185
            
            
            11,580,025Operating
                income
            
            
            **4,160,239**
            
            
            4,010,478
            
            
            3,133,449Non-operating
                income:Investment
                income
            
            
            **260,710**
            
            
            204,042
            
            
            113,342Royalty
                income
            
            
            
            
            
            246,627
            
            
            497,516Other
            
            
            **16,142**
            
            
            103,664
            
            
            29,600**276,852**
            
            
            554,333
            
            
            640,458Interest
                expense
            
            
            **103,152**Income
                before income taxes
            
            
            **4,333,939**
            
            
            4,564,811
            
            
            3,773,907Provision
                for income taxes - Note 13
            
            
            **1,460,000**
            
            
            1,510,000
            
            
            1,335,000Net
                income
            
            **$**
            **2,873,939**
            
            $
            3,054,811
            
            $
            2,438,907Earnings
                per share of common stock - Note 14Net
                income:Basic
            
            **$**
            **1.06**
            
            $
            1.15
            
            $
            0.94Diluted
            
            **$**
            **1.00**
            
            $
            1.10
            
            $
            0.89Dividends
                per share of common stock
            
            **$**
            **5.300**
            
            $
            0.195
            
            $
            0.565Weighted
                average shares outstanding:Basic
            
            
            **2,723,942**
            
            
            2,648,635
            
            
            2,603,932Diluted
            
            
            **2,864,820**
            
            
            2,771,924
            
            
            2,739,149The
                accompanying notes are an integral part of these financial
                statements.




34




**Balance
                  Sheets**
  **September
                  29,**
              
              September
                  30,**2007**
              
              2006**ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              **$**
              **808,864**
              
              $
              975,525Securities
                  available for sale - Note 2
              
              
              
              
              
              5,134,882Accounts
                  receivable, net of allowances of $189,000(2007)
                  and $117,000 (2006)
              
              
              **7,195,288**
              
              
              6,986,794Inventories
                  - Note 3
              
              
              **3,997,585**
              
              
              4,353,479Deferred
                  income taxes - Note 13
              
              
              **997,000**
              
              
              497,000Prepaid
                  expenses
              
              
              **97,395**
              
              
              238,684Total
                  current assets
              
              
              **13,096,132**
              
              
              18,186,364Property
                  and equipment, net - Note 4
              
              
              **6,536,842**
              
              
              8,132,057Goodwill
                  - Note 5
              
              
              **1,924,131**
              
              
              1,924,131Other
                  assets - Notes 5 and 6
              
              
              **2,411,803**
              
              
              2,769,926**$**
              **23,968,908**
              
              $
              31,012,478**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              **$**
              **2,146,138**
              
              $
              2,374,357Accrued
                  and sundry liabilities - Note 7
              
              
              **3,503,436**
              
              
              2,474,049Total
                  current liabilities
              
              
              **5,649,574**
              
              
              4,848,406Long-term
                  debt - Note 9
              
              
              **3,700,000**Deferred
                  income taxes - Note 13
              
              
              **38,000**
              
              
              815,000Deferred
                  compensation - Note 10
              
              
              **793,667**
              
              
              831,614Total
                  liabilities
              
              
              **10,181,241**
              
              
              6,495,020Commitments
                  and contingencies - Notes 19 and 20Shareholders'
                  equity - Notes 11 and 14Common
                  stock, no par value, 20,000,000 sharesauthorized;
                  issued and outstanding shares2,775,444
                  (2007) and 2,660,345 (2006)
              
              
              **1,724,225**
              
              
              1,032,118Additional
                  paid-in capital
              
              
              **528,945**
              
              
              136,614Retained
                  earnings
              
              
              **11,534,497**
              
              
              23,352,221Accumulated
                  other comprehensive loss
              
              
              
              
              
              (3,495
              )Total
                  shareholders' equity
              
              
              **13,787,667**
              
              
              24,517,458**$**
              **23,968,908**
              
              $
              31,012,478The
                  accompanying notes are an integral part of these financial statements.




35


**Statements
        of Changes in Shareholders' Equity and Comprehensive
        Income**


AccumulatedAdditional
              
              
              
              OtherCommon
                  Stock
              
              Paid-in
              
              Retained
              
              ComprehensiveShares
              
              Amount
              
              Capital
              
              Earnings
              
              Loss
              
              TotalBalance
                  at October 2, 2004
              
              
              2,592,218
              
              $
              557,856
              
              $
              19,297
              
              $
              19,842,239
              
              $
              -
              
              $
              20,419,392Net
                  income for the 2005 fiscal year
              
              
              
              
              
              
              
              
              
              
              
              2,438,907
              
              
              
              
              
              2,438,907Unrealized
                  loss on securitiesavailable
                  for sale
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,712
              )
              
              (1,712
              )Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,437,195Common
                  stock issued to Directors
              
              
              9,000
              
              
              92,970
              
              
              
              
              
              
              
              
              
              
              
              92,970Common
                  stock issued onexercise
                  of stock options
              
              
              10,550
              
              
              56,190
              
              
              
              
              
              
              
              
              
              
              
              56,190Tax
                  benefits for stock options exercised
              
              
              
              
              
              
              
              
              11,566
              
              
              
              
              
              
              
              
              11,566Stock
                  option compensation expense
              
              
              
              
              
              
              
              
              11,019
              
              
              
              
              
              
              
              
              11,019Cash
                  dividends paid or declared($0.565
                  per share)
              
              
              
              
              
              
              
              
              
              
              
              (1,466,955
              )
              
              
              
              
              (1,466,955
              )Balance
                  at October 1, 2005
              
              
              2,611,768
              
              
              707,016
              
              
              41,882
              
              
              20,814,191
              
              
              (1,712
              )
              
              21,561,377Net
                  income for the 2006 fiscal year
              
              
              
              
              
              
              
              
              
              
              
              3,054,811
              
              
              
              
              
              3,054,811Unrealized
                  loss on securitiesavailable
                  for sale
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,783
              )
              
              (1,783
              )Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,053,028Common
                  stock issued to Directors
              
              
              8,500
              
              
              113,730
              
              
              
              
              
              
              
              
              
              
              
              113,730Common
                  stock issued onexercise
                  of stock options
              
              
              40,077
              
              
              211,372
              
              
              
              
              
              
              
              
              
              
              
              211,372Tax
                  benefits for stock options exercised
              
              
              
              
              
              
              
              
              47,872
              
              
              
              
              
              
              
              
              47,872Stock
                  option compensation expense
              
              
              
              
              
              
              
              
              46,860
              
              
              
              
              
              
              
              
              46,860Cash
                  dividends paid or declared($0.195
                  per share)
              
              
              
              
              
              
              
              
              
              
              
              (516,781
              )
              
              
              
              
              (516,781
              )Balance
                  at September 30, 2006
              
              
              2,660,345
              
              
              1,032,118
              
              
              136,614
              
              
              23,352,221
              
              
              (3,495
              )
              
              24,517,458Net
                  income for the 2007 fiscal year
              
              
              
              
              
              
              
              
              
              
              
              **2,873,939**
              ****
              ****
              ****
              ****
              ****
              **2,873,939**Reclassification
                  adjustmentfrom
                  sale of securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              **3,495**
              ****
              ****
              **3,495**Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              **2,877,434**Common
                  stock issued to Directors
              
              
              **8,500**
              ****
              ****
              **132,090**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **132,090**Common
                  stock issued onexercise
                  of stock options
              
              
              **109,109**
              ****
              ****
              **595,917**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **595,917**Tax
                  benefits for stock options exercised
              
              
              
              
              
              
              
              
              **314,371**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **314,371**Stock
                  repurchase
              
              
              **(2,510**
              **)**
              ****
              **(35,900**
              **)**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **(35,900**
              **)**Stock
                  option compensation expense
              
              
              
              
              
              
              
              
              **77,960**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **77,960**Cash
                  dividends paid or declared($5.30
                  per share)
              
              
              
              
              
              
              
              
              
              
              
              **(14,691,663**
              **)**
              ****
              ****
              ****
              ****
              **(14,691,663**
              **)****Balance
                  at September 29, 2007**
              
              
              **2,775,444**
              
              **$**
              **1,724,225**
              
              **$**
              **528,945**
              
              **$**
              **11,534,497**
              
              **$**
              **-**
              
              **$**
              **13,787,667**The
                  accompanying notes are an integral part of these financial
                  statements.




36




**Statements
                  of Cash Flows**Years
                  Ended**September
                  29,**
              
              September
                  30,
              
              October
                  1,**2007**
              
              2006
              
              2005**OPERATING
                  ACTIVITIES:**Net
                  income
              
              **$**
              **2,873,939**
              
              $
              3,054,811
              
              $
              2,438,907Adjustments
                  to reconcile net income to netcash
                  provided by operating activities:Impairment
                  charge
              
              
              **2,878,803**Depreciation
              
              
              **891,872**
              
              
              814,210
              
              
              715,706Amortization
              
              
              **137,841**
              
              
              128,971
              
              
              128,769Provision
                  for losses on accounts receivable
              
              
              **99,841**
              
              
              47,762
              
              
              34,263Provision
                  for deferred income taxes
              
              
              **(962,629**
              **)**
              
              (39,128
              )
              
              (122,434
              )Realized
                  loss on securities available for sale
              
              
              **3,595**Gain
                  on sale and disposal of property and equipment
              
              
              **(8,644**
              **)**
              
              (99,378
              )
              
              (26,246
              )Increase
                  in cash value of life insurance
              
              
              **(138,199**
              **)**
              
              (102,955
              )
              
              (101,233
              )Deferred
                  compensation
              
              
              **(37,947**
              **)**
              
              (35,136
              )
              
              (32,533
              )Stock
                  compensation expense
              
              
              **77,960**
              
              
              46,860
              
              
              11,019Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              **(267,767**
              **)**
              
              176,341
              
              
              (671,343
              )Inventory
              
              
              **(435,896**
              **)**
              
              (1,136,996
              )
              
              (498,910
              )Prepaid
                  expenses and other assets
              
              
              **345,596**
              
              
              (65,976
              )
              
              457,496Accounts
                  payable and accrued expenses
              
              
              **835,530**
              
              
              (291,907
              )
              
              255,402Net
                  cash provided by operating activities
              
              
              **6,293,895**
              
              
              2,497,479
              
              
              2,588,863**INVESTING
                  ACTIVITIES:**Purchases
                  of marketable securities
              
              
              **(5,095,000**
              **)**
              
              (4,618,714
              )
              
              (3,719,866
              )Proceeds
                  from sales of marketable securities
              
              
              **10,187,175**
              
              
              3,610,000
              
              
              4,305,000Purchases
                  of property and equipment
              
              
              **(1,009,175**
              **)**
              
              (1,073,696
              )
              
              (2,405,418
              )Proceeds
                  from sale of property and equipment
              
              
              **9,137**
              
              
              101,305
              
              
              26,246Payments
                  for other assets
              
              
              **(86,685**
              **)**
              
              (116,434
              )
              
              (185,295
              )Net
                  cash provided by (used for) investing activities
              
              
              **4,005,452**
              
              
              (2,097,539
              )
              
              (1,979,333
              )**FINANCING
                  ACTIVITIES:**Dividends
                  paid
              
              
              **(14,691,663**
              **)**
              
              (516,781
              )
              
              (1,466,955
              )Proceeds
                  of long-term debt
              
              
              **5,700,000**Repayment
                  of long-term debt
              
              
              **(2,000,000**
              **)**Purchase
                  and retirement of common stock
              
              
              **(35,900**
              **)**Proceeds
                  from exercise of options for common stock
              
              
              **561,555**
              
              
              197,980
              
              
              44,213Net
                  cash used for financing activities
              
              
              **(10,466,008**
              **)**
              
              (318,801
              )
              
              (1,422,742
              )(Decrease)
                  Increase in cash and cash equivalents
              
              
              **(166,661**
              **)**
              
              81,139
              
              
              (813,212
              )Cash
                  and cash equivalents at beginning of year
              
              
              **975,525**
              
              
              894,386
              
              
              1,707,598Cash
                  and cash equivalents at end of year
              
              **$**
              **808,864**
              
              $
              975,525
              
              $
              894,386The
                  accompanying notes are an integral part of these financial
                  statements.




37




**NOTES
      TO FINANCIAL STATEMENTS**


**September
      29, 2007**





**1.
      SIGNIFICANT ACCOUNTING POLICIES**





**Description
      of Business**




We
      manufacture and distribute replacement mattresses, mattress overlays, patient
      positioners, seating cushions, and skin care products for the medical market
      and
      pillows, mattress pads and various foam products for the custom products market
      throughout the United States and Canada. In addition, until October 2007, we
      manufactured and marketed the Secure I.V. line of intravenous catheters to
      the
      health care market in North America. In April 2006, we began distributing the
      HuberPro needle infusion set primarily to oncology clinics to augment the Secure
      I.V. product line. In October 2007, we decided to exit the safety catheter
      segment, and we are actively seeking to sell the related safety catheter
      assets.





**Cash
      and Cash Equivalents**




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





**Accounts
      Receivable**




We
      provide credit in the normal course of business and perform ongoing credit
      evaluations on certain of our customers, but generally we do not require
      collateral to support these receivables. We also establish an allowance for
      doubtful accounts based upon factors surrounding the credit risk of specific
      customers, historical trends and other information. Account balances are charged
      against the allowance after all collection efforts have been exhausted and
      the
      potential for recovery is considered remote.





**Inventories**




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





**Property
      and Equipment**




Property
      and equipment is stated at cost. Maintenance, repairs, and minor replacements
      that do not improve or extend the useful lives of assets are expensed when
      incurred. Depreciation is computed using the straight-line method. Estimated
      useful lives for buildings and land improvements range from 15 to 35 years.
      The
      estimated useful lives of all other property and equipment range from 3 years
      to
      15 years. For income tax purposes, substantially all depreciation is computed
      using accelerated methods.





Construction
      in progress is stated at cost, which includes the cost of construction and
      other
      direct costs attributable to the construction. No provision for depreciation
      is
      made on construction in progress until the relevant assets are completed and
      put
      into use. As of September 29, 2007, the balance in construction in progress
      represented costs incurred relating to the installation of a purchased software
      system.




38




**Intangibles**




Intangible
      assets are amortized using the straight-line method. Costs of patents are
      amortized over periods ranging from 10 to 17 years, and trademarks are amortized
      over periods of 5 or 10 years. Goodwill, or costs in excess of the fair value
      of
      net assets, acquired from two separate acquisitions, is accounted for under
      Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other
      Intangible Assets.” See Note 5. Accumulated amortization of intangible assets at
      September 29, 2007 and September 30, 2006 was approximately $2,400,000 and
      $2,546,000, respectively. We annually review the recoverability of the carrying
      value of these assets in accordance with SFAS No. 142 and SFAS No. 144
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
      to
      be Disposed Of.” We also review 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. See
      Note
      12 Impairment of Safety Catheter Assets.





**Revenue
      Recognition**




We
      recognize revenue 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, non-compliance with customer specifications or
      warranty claims.




We
      have
      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.





**Shipping
      and Handling Costs**




Shipping
      and handling costs that are not reimbursed by customers are charged to selling
      and marketing expenses and were approximately $1,801,000 in 2007, $1,697,000
      in
      2006, and $1,516,000 in 2005.





**Fair
      Value of Financial Instruments**




The
      carrying amounts reported in our 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 our 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.” See Note 14 Earnings per Share of Common Stock.




39




**Stock-Based
      Compensation**




During
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      123R “Share-Based Payment,” which requires us to measure and recognize
      compensation expense for all stock-based payments at fair value. This statement
      eliminated the ability to account for share-based compensation transactions
      using Accounting Principles Board Opinion 25, “Accounting for Stock Issued to
      Employees” (“APB No. 25”). Stock-based payments include stock option grants. We
      grant options to purchase common stock to some of our employees under various
      plans at prices equal to the market value of the stock on the dates the options
      were granted. We adopted SFAS No. 123R in the fourth quarter of fiscal 2005
      using the modified prospective method.





Prior
      to
      adopting SFAS No. 123R, we accounted for stock options under APB No. 25.
      Accordingly, no compensation expense was charged to operations in previous
      fiscal years. If compensation expense for the plans had been determined based
      on
      the fair value at the grant dates for awards under the plans consistent with
      the
      accounting method available under SFAS No. 123 “Accounting for Stock Based
      Compensation,” our net income and net income per common share would have been
      reduced to the proforma amounts indicated below:


**2007**
              
              2006
              
              2005Net
                  incomeAs
                  reported
              
              **$**
              **2,873,939**
              
              $
              3,054,811
              
              $
              2,438,907Add
                  stock-based employee compensationexpense
                  included in reported net income,net
                  of taxes
              
              
              **77,960**
              
              
              46,860
              
              
              11,019Deduct
                  stock-based employeecompensation
                  expense determined underfair-value-based
                  method for all awards,net
                  of taxes - after adoption of SFAS 123R
              
              
              **(77,960**
              **)**
              
              (46,860
              )
              
              (11,019
              )Deduct
                  stock-based employeecompensation
                  expense determined underfair-value-based
                  method for all awards,net
                  of taxes - prior to adoption of SFAS 123R
              
              
              
              
              
              
              
              
              (140,166
              )Pro
                  forma
              
              **$**
              **2,873,939**
              
              $
              3,054,811
              
              $
              2,298,741Basic
                  net income per common shareAs
                  reported
              
              **$**
              **1.06**
              
              $
              1.15
              
              $
              0.94Stock
                  option expense, net of taxes
              
              
              **-**
              
              
              -
              
              
              (0.05
              )Pro
                  forma
              
              **$**
              **1.06**
              
              $
              1.15
              
              $
              0.88Diluted
                  net income per common shareAs
                  reported
              
              **$**
              **1.00**
              
              $
              1.10
              
              $
              0.89Stock
                  option expense, net of taxes
              
              
              **-**
              
              
              -
              
              
              (0.05
              )Pro
                  forma
              
              **$**
              **1.00**
              
              $
              1.10
              
              $
              0.84




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 2006 and 2005, respectively: risk-free interest
      rates of 4.58% and 4.08%; dividend yields of 1.5% and 1.5%; volatility factors
      of the expected market price of our common stock of 35.7% and 32.3%; and a
      weighted average expected life of the option of 8.2 years and 8.0 years. No
      options were granted during fiscal year 2007.




40




**Fiscal
      Year**




Our
      fiscal year ends on the Saturday nearest to September 30. Fiscal years 2007,
      2006 and 2005 were 52-week years. Fiscal year 2008 will be a 52-week
      year.





**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 us to make estimates
      and assumptions that affect the amounts reported in the financial statements
      and
      accompanying notes and the disclosure of contingent assets
      and liabilities. Although these estimates are based on our knowledge of current
      events and actions planned for the future, the estimates may ultimately differ
      from actual results.





**Recently
      Issued Accounting Standards**




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities.” SFAS No. 159 provides companies
      with an option to report selected financial assets and liabilities at fair
      value. SFAS No. 159 also establishes presentation and disclosure requirements
      designed to facilitate comparisons between companies that choose different
      measurement attributes for similar types of assets and liabilities and to
      provide additional information that will help investors and other financial
      statement users to easily understand the effect of the company’s choice to use
      fair value on its earnings. Additionally, SFAS No. 159 requires entities to
      display the fair value of those assets and liabilities for which the company
      has
      chosen to use fair value on the face of the balance sheet. SFAS No. 159 is
      effective as of the beginning of an entity’s first fiscal year beginning after
      November 15, 2007. Early adoption is permitted as of the beginning of the
      previous fiscal year provided that the entity makes that choice in the first
      120 days of that fiscal year and also elects to apply the provisions of
      SFAS No. 157. We are currently assessing the impact of SFAS No. 159, which
      we
      may adopt at the start of fiscal year 2009.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
Among other requirements, SFAS No. 157 defines fair value and establishes a
      framework for measuring fair value and also expands disclosure about the use
      of
      fair value to measure assets and liabilities. SFAS No. 157 is effective
      beginning the first fiscal year that begins after November 15, 2007. We are
      currently evaluating the impact of SFAS No. 157 on our financial position and
      results of operations.




41





In
      September 2006, the SEC issued Staff Accounting Bulletin (SAB)
      No. 108, “Considering the Effects of Prior Year Misstatements When
      Quantifying Misstatements in Current Year Financial Statements,” which provides
      interpretive guidance on how the effects of the carryover or reversal of prior
      year misstatements should be considered in quantifying a current year
      misstatement. The guidance is applicable for fiscal years ending after
      November 15, 2006. SAB No. 108 did not have a material impact on our
      financial statements.





In
      July 2006, the FASB issued Interpretation No. 48, “Accounting for
      Uncertain Tax Positions, an Interpretation of FASB Statement
      No. 109” (FIN 48), which clarifies the criteria for recognition and
      measurement of benefits from uncertain tax positions. Under FIN 48, an entity
      should recognize a tax benefit when it is “more-likely-than-not,” based on the
      technical merits, that the position would be sustained upon examination by
      a
      taxing authority. The amount to be recognized should be measured as the largest
      amount of tax benefit that is greater than 50 percent likely of being realized
      upon ultimate settlement with a taxing authority that has full knowledge of
      all
      relevant information. Furthermore, any change in the recognition, de-recognition
      or measurement of a tax position should be recognized in the interim period
      in
      which the change occurs. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. We do not expect the adoption of FIN 48 to have a
      material impact on our financial position or results of operations.





Other
      accounting standards that have been issued or proposed by FASB or other
      standards-setting bodies that do not require adoption until a future date are
      not expected to have a material impact on our financial statements upon
      adoption.





**Reclassifications**




Certain
      prior year amounts have been reclassified to conform to the current year
      presentation in the accompanying financial statements. These reclassifications
      had no effect on previously reported results of operations or retained
      earnings.





**2.
      SECURITIES AVAILABLE FOR SALE**





The
      variable rate demand notes included in securities available for sale at fiscal
      year end 2006 were carried at aggregate cost which approximated market.
      Preferred stocks were carried at market value. Unrealized holding losses were
      $3,495 as of September 30, 2006.


**2007**
              
              2006Variable
                  rate demand notes
              
              
              
              
              $
              4,769,797Preferred
                  stocks
              
              
              
              
              
              365,085$
              5,134,882




42





**3.
                  INVENTORIES****2007**
              
              2006Raw
                  materials
              
              **$**
              **2,680,520**
              
              $
              2,829,048Finished
                  goods
              
              
              **1,317,065**
              
              
              1,524,431**$**
              **3,997,585**
              
              $
              4,353,479




**4.
                  PROPERTY AND EQUIPMENT****2007**
              
              2006Land
              
              **$**
              **469,718**
              
              $
              469,718Land
                  improvements
              
              
              **486,698**
              
              
              486,698Buildings
              
              
              **6,776,068**
              
              
              6,774,418Construction
                  in progress
              
              
              **344,975**Machinery
                  and equipment
              
              
              **5,611,931**
              
              
              7,817,829Furniture
                  and fixtures
              
              
              **474,037**
              
              
              447,412Automobiles
              
              
              **9,520**
              
              
              9,520Leasehold
                  improvements
              
              
              **-**
              
              
              12,330**14,172,947**
              
              
              16,017,925Less
                  accumulated depreciation
              
              
              **7,636,105**
              
              
              7,885,868**$**
              **6,536,842**
              
              $
              8,132,057




**5.
      GOODWILL AND OTHER INTANGIBLES**





As
      of
      September 29, 2007 and September 30, 2006 we had goodwill (net of accumulated
      amortization) of $1,924,131. In addition, we had patents and trademarks (net
      of
      accumulated amortization) of $306,116 as of September 29, 2007 and $720,221
      as
      of September 30, 2006. The goodwill and patents and trademarks at fiscal year
      end 2007 were associated with the medical segment. The value of patents and
      trademarks at fiscal year end 2006 included assets from both the medical and
      safety catheter segments. Goodwill has been determined to have an indefinite
      useful life in accordance with SFAS No. 142. The useful lives of individual
      patents and trademarks have been reviewed, and no material changes were required
      in the medical segment.





As
      of
      September 29, 2007, we ceased production of the Secure I.V. safety catheter
      and
      recorded an impairment charge equal to the full carrying amount of the assets
      included in the safety catheter segment. Accordingly, the book value of patents
      and trademarks in the safety catheter segment was written off in the amount
      of
      $372,948. See Note 12.




43


Amortization
      expense for patents and trademarks during fiscal years 2007, 2006, and 2005
      was
      $137,841, $128,971 and $128,769, respectively. Estimated amortization expense
      for the next five fiscal years is as follows:




EstimatedAmortizationFiscal
                  years
              
              Expense2008
              
              $
              44,1072009
              
              
              37,5672010
              
              
              34,6862011
              
              
              31,3682012
              
              
              27,169




**6.
      OTHER ASSETS**


**2007**
              
              2006Patents
                  and trademarks, net of accumulated amortizationof
                  $1,371,809 (2007) and $1,518,281 (2006)
              
              **$**
              **306,116**
              
              $
              720,221Cash
                  value of life insurance policies
              
              
              **1,920,856**
              
              
              1,782,658Other
              
              
              **184,831**
              
              
              267,047**$**
              **2,411,803**
              
              $
              2,769,926





**7.
      ACCRUED AND SUNDRY LIABILITIES**


**2007**
              
              2006Salaries
                  and other compensation
              
              **$**
              **1,984,920**
              
              $
              1,384,772Federal
                  and state income taxes
              
              
              **176,697**
              
              
              13,435Payroll
                  taxes accrued and withheld
              
              
              **173,478**
              
              
              126,450Property
                  taxes
              
              
              **164,625**
              
              
              144,800Medical
                  insurance
              
              
              **214,260**
              
              
              164,204Warranty
                  reserve
              
              
              **332,881**
              
              
              282,887Vendor
                  rebates
              
              
              **311,285**
              
              
              268,198Customer
                  deposits
              
              
              **130,850**
              
              
              74,520Other
              
              
              **14,440**
              
              
              14,783**$**
              **3,503,436**
              
              $
              2,474,049




**8.
      PRODUCT WARRANTIES**





We
      offer
      warranties of various lengths to our customers depending on the specific product
      sold. Our warranties require us to repair or replace non-performing products
      during the warranty period at no cost to the customer. At the time revenue
      is
      recognized for covered products, we record a liability for estimated costs
      that
      may be incurred under our warranties. The costs are estimated based on
      historical experience and any recent warranty trends that have been identified.
      (Although historical warranty costs have been within our expectations, there
      can
      be no assurance that future warranty costs will not exceed historical amounts.)
      We regularly assess the adequacy of our recorded liability and adjust the
      balance as necessary.




44





Changes
      in our product warranty liability for the years ended September 29, 2007 and
      September 30, 2006 are as follows:


**2007**
              
              2006Accrued
                  liability at beginning of year
              
              **$**
              **282,887**
              
              $
              243,477Increases
                  in reserve
              
              
              **271,594**
              
              
              224,510Expenses
              
              
              **(221,600**
              **)**
              
              (185,100
              )Accrued
                  liability at end of year
              
              **$**
              **332,881**
              
              $
              282,887





**9.
      BORROWINGS**





Long-term
      debt consists of a revolving credit facility from a bank. The maximum principal
      amount we can borrow at any one time under the agreement is $10 million. The
      maturity date is June 5, 2012. The agreement is unsecured and accrues interest
      at a variable rate equal to 30-day LIBOR plus a margin ranging from 85 to 165
      basis points depending on our leverage ratio (as defined in the agreement).
      The
      margin in effect for fiscal 2007 was 85 basis points. The interest rate at
      September 29, 2007 was 6.57%. Interest-only payments are required monthly.
      The
      agreement includes financial covenants relating to tangible net worth and
      leverage ratios. The agreement restricts dividends, stock repurchases, mergers
      and acquisitions, asset sales, indebtedness, liens, and capital expenditures.
      Violation of loan covenants could result in acceleration of the term of the
      agreement. We have pledged to grant the bank a security interest in our
      accounts, instruments, and chattel paper upon their request in the event of
      a
      default as defined in the agreement.





The
      credit facility restricts dividends and stock repurchases during any fiscal
      year
      to an aggregate amount of no more than 50% of the sum of (i) our income from
      continuing operations for that fiscal year plus (ii) the absolute value of
      our
      aggregate after-tax, non-cash and extraordinary losses for that fiscal year,
      if
      any. We may pay a regular quarterly dividend in an amount no greater than the
      previous quarter’s regular dividend so long as we remain in compliance with the
      financial covenants after giving effect to the payment of the dividend as an
      exception to the restriction noted above.





We
      paid
      interest expense of approximately $103,000 in 2007 and paid no interest during
      fiscal years 2006 or 2005.





**10.
      DEFERRED COMPENSATION**





We
      are
      obligated to make fixed payments of approximately $114,000 per year to our
      founder and former chief executive officer pursuant to a retirement agreement.
      The payments will be made for the longer of the executive’s remaining life or
      his ex-wife's remaining life, if she survives him. We have fully accrued the
      present value of the expected payments due over the combined life expectancy
      of
      the executive and his ex-wife. We recognized expenses of approximately $76,000
      in 2007, $78,000 in 2006, and $81,000 in 2005 related to this agreement. An
      8%
      discount rate was used in measuring the present value of our deferred
      compensation obligation.




45





**11.
      SHAREHOLDERS’ EQUITY**





In
      January 2007, the Board adopted the 2007 Equity Incentive Plan (“2007 Plan”),
      which was approved by shareholders in February 2007. The 2007 Plan authorized
      the Board to grant stock-based compensation awards to the Company’s officers,
      directors and key employees for up to 250,000 shares of Company common stock.
      Awards may be in the form of restricted stock, non-restricted stock, restricted
      stock units, options or stock appreciation rights (SARs). Total awards under
      the
      2007 Plan may not exceed 250,000 shares, of which no more than 75,000 shares
      may
      be in the form of restricted stock, non-restricted stock or restricted stock
      units. The per share exercise prices of options or SARs granted under the 2007
      Plan must be no less than the fair market value of a share on the grant date.
      The terms and conditions of each award may be set by the Board or a committee
      of
      the Board. The 2007 Plan will expire on December 31, 2016 unless terminated
      earlier in accordance with the plan. As of September 29, 2007, no awards had
      been granted under the 2007 Plan.





In
      March
      1997, the Board adopted the 1997 Stock Option Plan (“1997 Plan”). The 1997 Plan
      authorized the Board to grant options to our key officers and employees for
      up
      to 200,000 shares of our 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 vest at the greater of 1,000 shares per year or 20%
      of
      the grant. Options expire 10 years from the date of grant for continuing
      employees, or three months after termination for employees who leave the
      Company. The 1997 Plan was terminated on October 20, 2007. The termination
      does
      not affect options outstanding under the plan, but no further options can be
      granted under the 1997 Plan.





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
      Company common stock to our 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
      our common stock to officers and key employees of the Company. All other terms
      and conditions of the 1987 Plan are similar to the 1997 Plan. The 1987 Plan
      was
      terminated on March 31, 1997. The termination does not affect options
      outstanding under the plan, but no further options can be granted under the
      1987
      Plan.


46


Shown
      below is a summary of activity under the Company’s four stock option
      plans.


Outstanding
              
              ExercisableWeighted
              
              
              
              WeightedAverage
              
              
              
              AverageShares
              
              Number
                  of
              
              Ex.
                  Price
              
              Number
                  of
              
              Ex.
                  PriceAvailable
              
              Shares
              
              Per
                  Share
              
              Shares
              
              Per
                  ShareBalance
                  at 10/2/04
              
              
              81,947
              
              
              329,555
              
              $
              5.24
              
              
              301,968
              
              $
              5.06Fiscal
                  Year 2005Granted
              
              
              (30,452
              )
              
              30,452
              
              
              9.73Exercised
              
              
              
              
              
              (9,200
              )
              
              4.79ForfeitedBalance
                  at 10/1/05
              
              
              51,495
              
              
              350,807
              
              
              5.64
              
              
              332,876
              
              
              5.51Fiscal
                  Year 2006Granted
              
              
              (29,045
              )
              
              29,045
              
              
              9.67Exercised
              
              
              
              
              
              (38,750
              )
              
              5.11Forfeited
              
              
              750
              
              
              (750
              )
              
              12.43Balance
                  at 9/30/06
              
              
              23,200
              
              
              340,352
              
              
              6.03
              
              
              307,432
              
              
              5.66**Fiscal
                  Year 2007****Granted****Exercised**
              
              
              
              
              
              **(108,089**
              **)**
              
              **5.20****Forfeited**
              
              
              **2,750**
              
              
              **(2,750**
              **)**
              
              **9.64****New
                  option plan**
              
              
              **250,000****Balance
                  at 9/29/07**
              
              
              **275,950**
              
              
              **229,513**
              
              **$**
              **6.39**
              
              
              **218,860**
              
              **$**
              **6.23**
 Shown
        below is a summary of stock options outstanding and exercisable at fiscal
        year
        end 2007.





Outstanding
              
              ExercisableWeightedWeighted
              
              Average
              
              
              
              WeightedAverage
              
              Remaining
              
              
              
              AverageRanges
                  of Exercise
              
              Number
                  of
              
              Ex.
                  Price
              
              Contract
              
              Number
                  of
              
              Ex.
                  PricePrices
              
              Shares
              
              Per
                  Share
              
              Life
                  (yrs)
              
              Shares
              
              Per
                  Share$ 
                  2.75 - $ 4.30
              
              
              86,843
              
              $
              3.87
              
              
              3.5
              
              
              86,843
              
              $
              3.875.50 - 6.18
              
              
              66,510
              
              
              5.78
              
              
              2.5
              
              
              66,510
              
              
              5.789.18 - 10.52
              
              
              76,160
              
              
              9.78
              
              
              7.6
              
              
              65,507
              
              
              9.81$
                  2.75 - $10.52
              
              
              229,513
              
              $
              6.39
              
              
              4.5
              
              
              218,860
              
              $
              6.23




The
      Board
      of Directors adopted a stock purchase incentive plan in February 2000. The
      2000
      Restricted Stock Plan was created to encourage our management employees to
      purchase and hold Span-America common stock. Plan benefits are paid in shares
      of
      Company common stock. Benefits earned and accrued under the plan were $7,814
      in
      2007, $11,212 in 2006 and $13,392 in 2005. We issued stock valued at $11,212
      in
      2007, leaving a vested balance of $7,814 at September 29, 2007.




47





In
      March
      1997, the Board of Directors approved the 1997 Long-Term Incentive Stock Option
      Plan for certain of our executives based on achievement of specified financial
      goals by fiscal year end 1999. As of September 29, 2007, we had no accrued
      compensation expense related to this plan. As of September 30, 2006, we had
      accrued compensation expense of $23,150 related to this plan.





**12.
      IMPAIRMENT OF SAFETY CATHETER ASSETS**





In
      October 2007, we decided to exit the safety catheter business and sell the
      related assets because we have been unable to generate sufficient sales volume
      to make it a viable business. As of September 29, 2007 we recorded an impairment
      charge of approximately $2,879,000 to eliminate the book value of our safety
      catheter assets and we are currently engaged in efforts to sell this segment.
      As
      a result of the degree of uncertainty associated with any potential sale of
      these assets, we concluded that we could not reasonably estimate a net
      realizable value for the assets.  This charge included an impairment charge
      for equipment of approximately $1,712,000, impairment of patents and trademarks
      of approximately $373,000 and reduction in net realizable value of inventories
      of approximately $794,000. No impairments were considered necessary during
      fiscal years 2006 or 2005.





**13.
      INCOME TAXES**





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of our deferred
      tax liabilities and assets as of September 29, 2007 and September 30, 2006
      are
      as follows:


**2007**
              
              2006Deferred
                  tax liabilities:Depreciation
              
              **$**
              **(442,000**
              **)**
              $
              (1,115,000
              )Deferred
                  tax assets:Deferred
                  compensation
              
              
              **600,000**
              
              
              300,000Accrued
                  expenses
              
              
              **286,000**
              
              
              388,000Inventory
              
              
              **387,000**
              
              
              95,000Amortization
              
              
              **118,000**Other
              
              
              **10,000**
              
              
              14,000Total
                  deferred tax assets
              
              
              **1,401,000**
              
              
              797,000Net
                  deferred tax assets (liabilities)
              
              **$**
              **959,000**
              
              **$**
              **(318,000**
              **)**


We
      made
      cash income tax payments, net of refunds, of approximately $2,114,000,
      $1,960,000, and $974,000 in fiscal years 2007, 2006, and 2005,
      respectively.




48


Federal
      and state income tax provisions consist of the following:


**2007**
              
              2006
              
              2005Current:Federal
              
              **$**
              **2,502,000**
              
              $
              1,471,000
              
              $
              1,357,000State
              
              
              **222,000**
              
              
              126,000
              
              
              112,000**2,724,000**
              
              
              1,597,000
              
              
              1,469,000Deferred:Federal
              
              
              **(1,165,000**
              **)**
              
              (91,000
              )
              
              (133,000
              )State
              
              
              **(99,000**
              **)**
              
              4,000
              
              
              (1,000
              )**(1,264,000**
              **)**
              
              (87,000
              )
              
              (134,000
              )Income
                  tax expense
              
              **$**
              **1,460,000**
              
              $
              1,510,000
              
              $
              1,335,000




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


**2007**
              
              2006
              
              2005Computed
                  tax at the statutory rate
              
              **$**
              **1,474,000**
              
              $
              1,552,000
              
              $
              1,283,000Increases
                  (decreases):State
                  income taxes, net of federal tax benefit
              
              
              **81,000**
              
              
              86,000
              
              
              74,000Tax-exempt
                  investment income
              
              
              **(51,000**
              **)**
              
              (53,000
              )
              
              (36,000
              )Extraterritorial
                  income exclusion
              
              
              
              
              
              (12,600
              )
              
              (18,000
              )Officer's
                  life insurance
              
              
              **(44,000**
              **)**
              
              (32,000
              )
              
              (31,000
              )Domestic
                  production deduction
              
              
              **(77,000**
              **)**
              
              (44,000
              )Other,
                  net
              
              
              **77,000**
              
              
              13,600
              
              
              63,000Income
                  tax expense
              
              **$**
              **1,460,000**
              
              $
              1,510,000
              
              $
              1,335,000  49


**14.
      EARNINGS PER SHARE OF COMMON STOCK**





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


**2007**
              
              2006
              
              2005Numerator
                  for basic and dilutedearnings
                  per share:Net
                  income
              
              **$**
              **2,873,939**
              
              $
              3,054,811
              
              $
              2,438,907Denominator:Denominator
                  for basic earnings per share:Weighted
                  average shares
              
              
              **2,723,942**
              
              
              2,648,635
              
              
              2,603,932Effect
                  of dilutive securities:Employee
                  and board stock options
              
              
              **140,878**
              
              
              123,289
              
              
              135,217Denominator
                  for diluted earnings per share:Adjusted
                  weighted average sharesand
                  assumed conversions
              
              
              **2,864,820**
              
              
              2,771,924
              
              
              2,739,149Net
                  income per share:Basic
              
              **$**
              **1.06**
              
              $
              1.15
              
              $
              0.94Diluted
              
              **$**
              **1.00**
              
              $
              1.10
              
              $
              0.89




**15.
      EMPLOYEE BENEFITS AND INCENTIVE PLANS**





We
      have a
      401(k) plan available to employees meeting eligibility requirements. We match
      a
      percentage of employee contributions, with certain limitations. Our 401(k)
      matching contributions amounted to approximately $183,000, $190,000 and $164,000
      for the 2007, 2006 and 2005 fiscal years, respectively.





**16.
      RELATED-PARTY TRANSACTIONS**





We
      had no
      related-party transactions.





**17.
      MAJOR CUSTOMERS**





We
      have a
      business relationship with a customer to manufacture and supply private label
      mattresses. Sales to this customer made up approximately 17% of net sales in
      2007, 16% in 2006 and 8% in 2005. The largest of our medical customers are
      distributors who sell our products to acute care hospitals and other treatment
      facilities throughout the United States. Sales generated by the largest of
      these
      distributors amounted to approximately 11% of net sales in 2007, 11% in 2006
      and
      9% in 2005.




50





We
      have a
      business relationship with another customer to distribute certain of our
      consumer products. Sales to this customer amounted to 21% of net sales in 2007,
      20% of net sales in 2006, and 33% of net sales in 2005.





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





**18.
      OPERATIONS AND INDUSTRY SEGMENTS**





For
      management and reporting purposes, we divide our business into three segments:
      medical, custom products, and safety catheters. This industry segment
      information corresponds to the markets in the United States and Canada for
      which
      we manufacture and distribute our various products and therefore complies with
      the requirements of SFAS No. 131, “Disclosures about Segments of an Enterprise
      and Related Information.”





See
      Note
      12 Impairment of the Safety Catheter Segment.





The
      following table summarizes certain information on industry
      segments:


**2007**
              
              2006
              
              2005Net
                  sales:Medical
              
              **$**
              **43,248,331**
              
              $
              36,675,830
              
              $
              30,338,548Custom
                  products
              
              
              **17,295,498**
              
              
              14,760,330
              
              
              18,094,490Safety
                  catheters
              
              
              **145,291**
              
              
              120,388
              
              
              6,272Total
              
              **$**
              **60,689,120**
              
              $
              51,556,548
              
              $
              48,439,310Impairment
                  charge:Safety
                  catheters
              
              **$**
              **2,878,803**Operating
                  profit (loss):Medical
              
              **$**
              **9,129,693**
              
              $
              6,839,256
              
              $
              5,519,942Custom
                  products
              
              
              **(266,994**
              **)**
              
              (1,063,636
              )
              
              (225,966
              )Safety
                  catheters
              
              
              **(3,967,703**
              **)**
              
              (1,082,115
              )
              
              (1,499,697
              )Total
              
              
              **4,894,996**
              
              
              4,693,505
              
              
              3,794,279Corporate
                  expense
              
              
              **(734,757**
              **)**
              
              (683,027
              )
              
              (660,830
              )Other
                  income
              
              
              **173,700**
              
              
              554,333
              
              
              640,458Income
                  before income taxes
              
              **$**
              **4,333,939**
              
              $
              4,564,811
              
              $
              3,773,907




51




**2007**
              
              2006
              
              2005Identifiable
                  assets:Medical
              
              **$**
              **15,991,914**
              
              $
              13,513,665
              
              $
              13,094,814Custom
                  products
              
              
              **5,242,869**
              
              
              6,096,464
              
              
              5,838,000Safety
                  catheters
              
              
              
              
              
              3,347,419
              
              
              3,035,118Corporate
              
              
              **2,734,125**
              
              
              8,054,930
              
              
              6,697,913**$**
              **23,968,908**
              
              $
              31,012,478
              
              $
              28,665,845Depreciation
                  and amortization expenses:Medical
              
              **$**
              **444,751**
              
              $
              380,944
              
              $
              288,629Custom
                  products
              
              
              **232,522**
              
              
              207,992
              
              
              214,368Safety
                  catheters
              
              
              **352,011**
              
              
              353,613
              
              
              340,606Corporate
              
              
              **429**
              
              
              632
              
              
              872**$**
              **1,029,713**
              
              $
              943,181
              
              $
              844,475Capital
                  expenditures:Medical
              
              **$**
              **884,655**
              
              $
              735,962
              
              $
              1,540,520Custom
                  products
              
              
              **124,520**
              
              
              335,111
              
              
              834,680Safety
                  catheters
              
              
              
              
              
              2,623
              
              
              30,218**$**
              **1,009,175**
              
              $
              1,073,696
              
              $
              2,405,418




Total
      sales by industry segment include sales from unaffiliated customers as reported
      in our 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.





We
      have
      several customers whose sales represent significant portions of sales in their
      respective business segments. In the medical segment, sales to the top four
      distributors represented 57% of net medical sales in 2007, 58% in 2006, and
      59%
      in 2005. In the custom products segment, sales to one customer accounted for
      72%
      of net custom products sales in 2007, 69% in 2006, and 87% in 2005.





Export
      sales, primarily to Canada, were approximately $3,733,000 in 2007, $3,162,000
      in
      2006, and $2,127,000 in 2005.





**19.
      OPERATING LEASES**





We
      lease
      truck equipment in South Carolina. Until October 31, 2006 when the lease was
      terminated, we also leased manufacturing space in California. In October 2006,
      we initiated the lease of a 15,000 square foot distribution facility in Utah
      for
      $6,750 per month. The lease is cancellable by either party with 60 days notice.
      All of the leases require us to pay certain insurance and maintenance
      costs.




52





Rental
      expense for all operating leases was $107,000 in 2007, $212,000 in 2006, and
      $321,000 in 2005.





**20.
      COMMITMENTS AND CONTINGENCIES**





We
      are
      committed to minimum purchases of $625,000 of Selan® skin care products per
      calendar year through 2010. Previously, we were committed to purchases of
      $500,000 per calendar year through 2005. For the fiscal years ended 2007, 2006
      and 2005, purchases under this commitment were $782,000, $757,000 and $763,000,
      respectively.





From
      time
      to time we are defendants in legal actions involving claims arising in the
      normal course of business. We believe that, as a result of legal defenses and
      insurance arrangements, none of these actions should have a material adverse
      effect on our operations or financial condition.





**21.
      QUARTERLY FINANCIAL DATA (Unaudited)**





Selected
      quarterly financial data are shown in the following table.


**Quarterly
                  Financial Data (Unaudited)**(Amounts
                in thousands, except per share data)**First**
              
              **Second**
              
              **Third**
              
              **Fourth**
              
              **Year****For
                  Fiscal 2007**Net
                  sales
              
              $
              13,470
              
              $
              16,467
              
              $
              15,237
              
              $
              15,515
              
              $
              60,689Gross
                  profit
              
              
              4,544
              
              
              5,023
              
              
              5,288
              
              
              5,313
              
              
              20,168Impairment
                  of safety catheter segment
              
              
              
              
              
              
              
              
              
              
              
              2,879
              
              
              2,879Operating
                  income
              
              
              1,481
              
              
              1,729
              
              
              1,804
              
              
              (854
              )
              
              4,160Net
                  income
              
              
              1,021
              
              
              1,181
              
              
              1,255
              
              
              (582
              )
              
              2,874Earnings
                  per shareBasic
              
              
              0.38
              
              
              0.44
              
              
              0.46
              
              
              (0.21
              )
              
              1.06Diluted
              
              
              0.36
              
              
              0.42
              
              
              0.43
              
              
              (0.21
              )
              
              1.00For
                  Fiscal 2006Net
                  sales
              
              $
              13,282
              
              $
              12,234
              
              $
              12,548
              
              $
              13,493
              
              $
              51,557Gross
                  profit
              
              
              3,882
              
              
              3,574
              
              
              4,009
              
              
              4,234
              
              
              15,699Operating
                  income
              
              
              1,057
              
              
              774
              
              
              1,017
              
              
              1,162
              
              
              4,010Net
                  income
              
              
              789
              
              
              638
              
              
              728
              
              
              900
              
              
              3,055Earnings
                  per shareBasic
              
              
              0.30
              
              
              0.24
              
              
              0.27
              
              
              0.34
              
              
              1.15Diluted
              
              
              0.29
              
              
              0.23
              
              
              0.26
              
              
              0.32
              
              
              1.10


53


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





None





**Item
      9A. Controls and Procedures**





The
      Company has evaluated, with the participation of the Chief Executive Officer
      and
      Chief Financial Officer, the effectiveness of the Company’s disclosure controls
      and procedures as of the end of the period covered by this annual report (the
      “Evaluation Date”), and, based on this evaluation, the Company’s Chief Executive
      Officer and Chief Financial Officer have concluded that these controls and
      procedures were effective at the Evaluation Date. There were no changes in
      the
      Company’s internal controls over financial reporting during the last quarter of
      fiscal 2007 that have materially affected or are reasonably likely to materially
      affect its internal control over financial reporting.





Disclosure
      controls and procedures are the Company’s controls and other procedures that are
      designed to ensure that information required to be disclosed by the Company
      in
      the reports that it files or submits under the Exchange Act is recorded,
      processed, summarized and reported, within the time periods specified in the
      Securities and Exchange Commission’s rules and forms. Disclosure controls and
      procedures include, without limitation, controls and procedures designed to
      ensure that information required to be disclosed by the Company in the reports
      that it files or submits under the Exchange Act is accumulated and communicated
      to the Company’s management, including its Chief Executive Officer and Chief
      Financial Officer, as appropriate to allow for timely decisions regarding
      required disclosure.





**Item
      9B. Other Information**





None





**PART
      III**





**Item
      10. Directors, Executive Officers and Corporate
      Governance**





Information
      required under Item 10 of Part III is incorporated herein by reference to
      portions of the definitive Proxy Statement filed or to be filed with the
      Securities and Exchange Commission on or prior to 120 days following the end
      of
      our 2007 fiscal year under the headings “Proposals to be Voted Upon-Election of
      Directors,”  “Corporate Governance,” “Executive Officers” and “Section
      16(a) Beneficial Ownership Reporting Compliance.”





**Item
      11. Executive Compensation**





Information
      required under Item 11 of Part III is incorporated herein by reference to
      portions of the definitive Proxy Statement filed or to be filed with the
      Securities and Exchange Commission on or prior to 120 days following the end
      of
      our 2007 fiscal year under the heading “Compensation of Executive Officers,”
“Corporate Governance-Director Compensation” and Corporate
      Governance-Compensation Committee Interlocks and Insider
      Participation.”




54





**Item
      12. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters**





The
      information under the heading “Security Ownership of Certain Beneficial Owners
      and Management” set forth in our definitive Proxy Statement filed or to be filed
      with the Securities and Exchange Commission on or prior to 120 days following
      the end of our 2007 fiscal year is incorporated herein by
      reference.





The
      following table summarizes information regarding our equity compensation plans
      as of September 29, 2007:


Plan
                  category
              
              Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))(a)
              
              (b)
              
              (c)Equity
                  compensation plans approved by security holders
              
              
              229,513
              
              $
              6.39
              
              
              275,950Equity
                  compensation plans not approved by security holders
              
              
              0
              
              
              0
              
              
              0(1
              )Total
              
              
              229,513
              
              $
              6.39
              
              
              275,950
  (1)
                  Under the Company’s director compensation arrangements, there is no set
                  amount of equity securities authorized for issuance, but the Company
                  currently anticipates issuing approximately 8,500 shares annually.
                  Each
                  non-employee Director of the Company receives 1,000 shares of Company
                  common stock per year in lieu of annual cash compensation. As compensation
                  for additional duties, the Chairman of the Board receives an additional
                  1,000 shares, and the Chairman of the Audit Committee receives
                  an
                  additional 500 shares of Company common stock per year. We
                  do not register the shares issued to non-employee Directors in
                  reliance on
                  the exemption provided by Section 4(2) of the Securities Act of
                  1933, as
                  amended, which exempts stock issued outside of a public offering
                  from
                  registration
                  requirements.





For
      additional information on our stock option plans, see Note 11 in the Notes
      to
      Financial Statements for the year ended September 29, 2007.





**Item
      13. Certain Relationships and Related Transactions, and Director
      Independence**





The
      information required under Item 13 of Part III is incorporated herein by
      reference to portions of our definitive Proxy Statement filed or to be filed
      with the Securities and Exchange Commission on or prior to 120 days following
      the end of our 2007 fiscal year under the heading “Certain Relationships and
      Related Transactions” and “Corporate Governance - Director
      Independence.”


55





**Item
      14. Principal Accountant Fees and Services**





Additional
      information required under Item 14 of Part III is incorporated herein by
      reference to portions of our definitive Proxy Statement filed or to be filed
      with the Securities and Exchange Commission on or prior to 120 days following
      the end of our 2007 fiscal year under the heading “Principal Accountant Fees and
      Services.”




**PART
      IV**





**Item
      15. Exhibits and Financial Statement Schedules**





(a)
      (1) Financial
      Statements





The
      response to this portion of Item 15 is submitted under Item 8, Financial
      Statements and Supplementary Data, beginning on page 30.





(2) Financial
      Statement Schedules





The
      response to this portion of Item 15 is submitted below under Item
      15(c).





(3) Listing
      of Exhibits





3.1
            Restated
                Articles of Incorporation: Incorporated by reference to Exhibit 3(a)
                to
                the Company’s Registration Statement on Form S-18, Commission File No.
                0-11392.





3.1.1
            Articles
                of Amendment filed with the South Carolina Secretary of State on
                February
                6, 1989: Incorporated by reference to Exhibit 3.1.1 to the Company’s
                Annual Report on Form 10-K for the fiscal year ended September 28,
                1991.





3.1.2
            Articles
                of Amendment filed with the South Carolina Secretary of State on
                March 5,
                1992: Incorporated by reference to Exhibit 4.4 to the Company’s
                Registration Statement on Form S-2 dated May 11, 1992, Commission
                File No.
                33-47670.





3.1.3
            Articles
                of Amendment filed with the South Carolina Secretary of State on
                April 22,
                1993: Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly
                Report on Form 10-Q for the quarter ended April 3,
                1993.





3.2
            Amended
                and Restated By-Laws dated February 4, 1997: Incorporated by reference
                to
                Exhibit 3.0 to the Company’s Quarterly Report on Form 10-Q for the quarter
                ended March 29, 1997.




56




3.2.1
            
            Amendment
                to the Company's By-laws dated March 13, 2003: Incorporated by reference
                to Exhibit 3.2 to the Company's report on Form 8-K dated March 13,
                2003,
                Commission File No. 000-11392.





3.2.2
            
            Amendment
                to the Company's By-laws dated November 7, 2003: Incorporated by
                reference
                to Exhibit 3.2.2 to the Company’s Annual Report on Form 10-K for the
                fiscal year ended September 27, 2003 (the “2003 10-K”), Commission File
                No. 0-11392.





4.1
            
            Specimen
                of Common Stock certificate: Incorporated by reference to Exhibit
                1 to the
                Form S-8 filed on January 8, 1990, Commission File No.
                33-32896.





4.2
            
            Amended
                and Restated Shareholder Rights Agreement dated March 24, 2003, between
                Span-America Medical Systems, Inc. and American Stock Transfer & Trust
                Company as Rights Agent: Incorporated by reference to Exhibit 4.1
                to the
                Company's report on Form 8-K dated March 24,
                2003.





4.2.1
            
            Amendment
                No. 1 to the Amended and Restated Shareholder Rights Agreement dated
                November 19, 2003: Incorporated by reference to Exhibit 4.1 to the
                Company's report on Form 8-K dated December 2,
                2003.





4.3
            Agreement
                among Span-America Medical Systems, Inc., Jerry Zucker, and Robert
                B.
                Johnston, dated December 17, 2003, regarding nomination of Mr. Johnston
                to
                the Span-America Board of Directors: Incorporated by reference to
                Exhibit
                4.4 to the 2003 10-K.





10.1
            
            Patent
                Assignment and Royalty Agreement between Donald C. Spann and the
                Company,
                with letter amendment thereto: Incorporated by reference to Exhibit
                10(c)
                to the Form S-18 filed on June 2, 1983, Commission File No.
                2-832-74-A.





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





10.2.1*
            Amendment
                No. 1 to the 1987 Stock Option Plan: Incorporated by reference to
                Exhibit
                10.2.2 to the Company’s Annual Report on Form 10-K for the fiscal year
                ended October 3, 1998 (the “1998 10-K”), Commission File No.
                0-11392.





10.3*
            1991
                Stock Option Plan: Incorporated by reference to Exhibit 10.6 to the
                Company’s Annual Report on Form 10-K for the fiscal year ended September
                28, 1991 (the “1991 10-K”), Commission File No.
                0-11392.




57




10.3.1*
            Amendment
                No. 1 to the 1991 Stock Option Plan: Incorporated by reference to
                Exhibit
                10.4.2 to the 1998 10-K.





10.4*
            
            Retirement
                Agreement dated February 6, 1991 between the Company and Donald C.
                Spann:
                Incorporated by reference to Exhibit 10.7 to the 1991
                10-K.





10.5*
            
            Voluntary
                Resignation Agreement dated July 30, 1993 between the Company and
                Donald
                C. Spann: Incorporated by reference to Exhibit 10.1 to the Company's
                Quarterly Report on Form 10-Q for the quarter ended July 3, 1993,
                Commission File No. 0-11392.





10.6*
            1997
                Stock Option Plan: Incorporated by reference to Exhibit 10.14 to
                the
                Company’s Annual Report on Form 10-K for the fiscal year ended September
                27, 1997 (the “1997 10-K”), Commission File No.
                0-11392.





10.6.1*
            Amendment
                No. 1 to the 1997 Stock Option Plan: Incorporated by reference to
                Exhibit
                10.14.2 to the 1998 10-K.





10.7*
            1997
                Long Term Incentive Stock Option Plan: Incorporated by reference
                to
                Exhibit 10.15 to the 1997 10-K.





10.8
            Distribution
                Agreement dated March 1, 1999 between the Company and Louisville
                Bedding
                Corporation: Incorporated by reference to Exhibit 10.16 to the Company’s
                Annual Report on Form 10-K for the fiscal year ended September 30,
                2000
                (the “2000 10-K”), Commission File No.
                000-11392.





10.8.1
            Addendum
                to Distribution Agreement between Louisville Bedding Company and
                Span-America Medical Systems, Inc. dated January 1, 2002: Incorporated
                by
                reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q
                for the quarter ended March 30,
                2002.





10.9
            Asset
                Purchase Agreement By and Among Span-America Medical Systems, Inc.,
                Vadus,
                Inc., and Certain Stockholders of Vadus, Inc. dated February 1, 2002,
                including amendments dated May 20, 2002 and July 9, 2002: Incorporated
                by
                reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
                for the quarter ended June 29,
                2002.





10.10
            Production,
                Marketing and Product Development Support Agreement between Span-America
                Medical Systems, Inc. and Vadus, Inc. dated February 1, 2002: Incorporated
                by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
                10-Q for the quarter ended June 29,
                2002.





10.11*
            Severance
                Protection Agreement between the Company and James D. Ferguson dated
                July
                25, 2002: Incorporated by reference to Exhibit 10.20 of the Company’s
                Annual Report on Form 10-K for the fiscal year ended September 28,
                2002
                (the “2002 10-K”), Commission File No.
                000-11392.




58




10.12*
            Severance
                Protection Agreement between the Company and Robert E. Ackley dated
                July
                25, 2002: Incorporated by reference to Exhibit 10.21 of the 2002
                10-K.





10.13*
            Severance
                Protection Agreement between the Company and Richard C. Coggins dated
                July
                25, 2002: Incorporated by reference to Exhibit 10.22 of the 2002
                10-K.





10.14*
            Severance
                Protection Agreement between the Company and James R. O’Reagan dated July
                25, 2002: Incorporated by reference to Exhibit 10.23 of the 2002
                10-K.





10.15*
            Severance
                Protection Agreement between the Company and Clyde A. Shew dated
                July 25,
                2002: Incorporated by reference to Exhibit 10.24 of the 2002
                10-K.





10.16*
            Severance
                Protection Agreement between the Company and Wanda J. Totton dated
                February 11, 2004: Incorporated by reference to Exhibit 10.1 of the
                Company’s Quarterly Report on Form 10-Q for the quarter ended April 3,
                2004.





10.17*
            Span-America
                Medical Systems, Inc. 2000 Restricted Stock Plan: Incorporated by
                reference to Exhibit B to the Company’s Definitive Proxy Statement filed
                with the Commission on January 11,
                2001.





10.18
            Amended
                Private Label Product Supply Agreement between the Company and Hill-Rom
                Company, Inc. dated September 14, 2004. Incorporated by reference
                to
                Exhibit 10.18 of the Company’s Annual Report on Form 10-K for the fiscal
                year ended October 1, 2005 (the “2005 10-K”), Commission File No.
                000-11392.





10.19
            Span-America
                Medical Systems, Inc. 2007 Equity Incentive Plan: Incorporated by
                reference to Appendix A to the Company’s Definitive Proxy Statement for
                its 2007 Annual Meeting of Shareholders filed with the Commission
                on
                January 8, 2007.





10.20
            Loan
                Agreement dated June 5, 2007 by and between Carolina First Bank,
                as
                lender, and the Company, as borrower: Incorporated by reference to
                the
                Company’s Current Report on Form 8-K dated June 5, 2007 and filed with the
                commission on June 11, 2007.





10.20.1
            Revolving
                Note dated June 5, 2007 by the Company to Carolina First Bank:
                Incorporated by reference to the Company’s Current Report on Form 8-K
                dated June 5, 2007 and filed with the commission on June 11,
                2007.





10.20.2
            Negative
                Pledge Agreement dated June 5, 2007 by the Company to Carolina First
                Bank:
                Incorporated by reference to the Company’s Current Report on Form 8-K
                dated Jun 5, 2007 and filed with the commission on June 11,
                2007.




59




23.1
            Consent
                of Elliott Davis, LLC.





31.1
            Officer
                Certifications Pursuant to Section
                302.





32.1
            Officer
                Certifications Pursuant to Section
                906.





*  Management
      contract or compensatory plan or arrangement.





(b) Exhibits




The
                exhibits required by this section of Item 15 are attached hereto
                or
                incorporated by reference


60





(c)
            Financial
                Statement Schedules




**Schedule
                  VIII Valuation and Qualifying Accounts**COL
                  C.COL.
                    A
              
              COL.
                    B
              
              ADDITIONS
              
              COL.
                    D
              
              
              
              COL.
                    E(1)Balance
                  at
              
              Charged
                  to
              
              
              
              
              
              Balance
                  atBeginning
                  of
              
              Costs
                  and
              
              Deductions-
              
              
              
              End
                  ofDescription
              
              Period
              
              Expenses
              
              Describe
              
              
              
              PeriodYear
                  Ended September 29, 2007Deducted
                  from asset accounts:Reserve
                  for uncollectible accounts
              
              $
              117,000
              
              $
              99,841
              
              $
              27,841
              
              
              (a
              )
              $
              189,000Year
                  Ended September 30, 2006Deducted
                  from asset accounts:Reserve
                  for uncollectible accounts
              
              $
              116,000
              
              $
              47,762
              
              $
              46,762
              
              
              (a
              )
              $
              117,000Year
                  Ended October 1, 2005Deducted
                  from asset accounts:Reserve
                  for uncollectible accounts
              
              $
              140,000
              
              $
              34,263
              
              $
              58,263
              
              
              (a
              )
              $
              116,000(a)
                  Uncollectible accounts written off.




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




61


SIGNATURES





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




SPAN-AMERICA
                MEDICAL SYSTEMS, INC.By:
            /s/ Thomas
              D.
              Henrion
            
            
            December
                20, 2007Thomas
              D. HenrionChairman
              of the
              Board




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


/s/
                  James D. Ferguson
              
              President,
                  Chief Executive Officer and DirectorJames
                  D. Ferguson
              
              (Principal
                  Executive Officer)/s/
                  Richard C. Coggins
              
              Chief
                  Financial Officer and DirectorRichard
                  C. Coggins
              
              (Principal
                  Financial Officer)/s/
                  Gwendolyn L. Randolph
              
              ControllerGwendolyn
                  L. Randolph/s/
                  Robert H. Dick
              
              DirectorRobert
                  H. Dick/s/
                  Thomas F. Grady, Jr.
              
              DirectorThomas
                  F. Grady, Jr./s/
                  Guy R. Guarch
              
              DirectorGuy
                  R. Guarch/s/
                  Thomas D. Henrion
              
              DirectorThomas
                  D. Henrion/s/
                  Robert B. Johnston
              
              DirectorRobert
                  B. Johnston/s/
                  Linda D. Norman
              
              DirectorLinda
                  D. Norman/s/
                  Peter S. Nyberg
              
              DirectorPeter
                  S. Nyberg


December
      20, 2007




62