UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended November 28, 2004

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For the Transition Period from  to

Commission file number 333-117081-27

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SEALY MATTRESS CORPORATION(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction
of incorporation or organization)
20-1178482(I.R.S. Employer Identification No.)Sealy Drive
One Office Parkway
Trinity, North Carolina(Address of principal executive offices)
27370(Zip Code)


Registrant's telephone number, including area code(336) 861-3500

Securities registered pursuant to Section 12(b) of the Act: None

Securities
registered pursuant to Section 12(g) of the Act: None

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

The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 28, 2005: not applicable.

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
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. ý

Indicated by check mark whether the registrant is an accelerated filer (as defined in File 12b-2 of the Act).
Yes o    No ý

The number of shares of the registrant's common stock outstanding as of January 31, 2005: 1,000.

DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE:    None



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PART I

Item 1.Business



Sealy Mattress Corporation (hereinafter referred to as the "Company", "we", "our" or "us"), through our subsidiaries, is the largest bedding manufacturer in the
world and manufactures and markets a complete line of conventional bedding (innerspring) products including mattresses and box springs. Our conventional bedding products include the
SEALY®, SEALY POSTUREPEDIC®, STEARNS & FOSTER® and BASSETT® brands and account for approximately 88.4% of our total net sales for the year ended
November 28, 2004. We maintain our own component parts manufacturing capability and produce substantially all of our mattress innerspring requirements and approximately 48% of our boxspring
component parts requirements. In addition to our innerspring bedding, we also produce a variety of foam latex bedding products, though sales of such products were not significant in 2004. Our
subsidiary, Sealy, Inc., provides corporate and administrative services for the Company. Additional information about the Company can be found at our website: www.sealy.com. Information
contained on our website does not constitute part of the Annual Report and is not incorporated herein by reference.



On April 6, 2004 our parent company, Sealy Corporation, completed a merger with affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") whereby KKR
acquired approximately 92% of Sealy
Corporation's capital stock. Certain of Sealy Corporation's stockholders prior to the merger, including affiliates of Bain Capital, LLC and others, retained approximately an 8% interest in Sealy
Corporation's stock. In connection with the merger, Sealy Corporation recapitalized substantially all of its outstanding debt. See Note 2 to our Consolidated Financial Statements
(Part II, Item 8 included herein) for a full description of the effects of the merger and recapitalization. Subsequent to the recapitalization, we received as contributed capital all of Sealy
Corporation's 100% interest in Sealy Mattress Company, and we replaced Sealy Corporation as the parent-guarantor of the 8.25% Senior Subordinated Notes due 2014 issued by Sealy Mattress Company.
Accordingly, we are now the reporting guarantor-parent company. The information regarding our results of operations included in this Annual Report reflects the operations of Sealy Corporation through
April 6, 2004. Likewise, the information regarding our assets, liabilities and stockholders' deficit included in this Annual Report includes the assets, liabilities and stockholders' deficit of
Sealy Corporation immediately following the merger on April 6, 2004.



Industry and Competition.According to industry sales data compiled by the International Sleep Products Association ("ISPA"),
a bedding industry trade group, over 700 manufacturers of mattresses and box springs make up the U.S. conventional bedding industry, generating wholesale revenues of $5.04 billion during
calendar year 2003. ISPA estimated that the industry experienced a 5.8% increase in sales in 2003with a unit increase of 1.8%. According toFurniture
Today, approximately 38% of conventional bedding is sold through furniture stores and 30% through specialty sleep shops. Most of the remaining conventional bedding is sold to
department stores and membership warehouse clubs. We estimate that approximately 70% of conventional bedding is sold for replacement purposes, and the Better Sleep Council reports that the average
time between consumer purchases of mattresses in 2004 is 10.3 years. Factors such as disposable income, sales of homes, a trend toward more bedrooms per home, growth in the U.S. population, and
heightened consumer awareness of the bedding category also have an effect on bedding purchases.

We
believe that sales by companies with recognized national brands account for more than half of total conventional bedding sales. We supply such nationally recognized brands as Sealy,
Sealy Posturepedic, Stearns & Foster and Bassett. We consider Sealy branded products to be the most well

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recognized
in the domestic conventional bedding industry. Competition in conventional bedding is generally based on quality, product innovation and performance, brand name recognition, service and
price. Our largest competitors include Simmons Company and Serta, Inc. We believe that we derive a competitive advantage over our conventional bedding competitors as a result of strong consumer
recognition of multiple nationally recognized branded products (Sealy, Stearns & Foster and Bassett), as well as our high quality and innovative product offerings.

Products.We manufacture a complete line of conventional bedding options in various sizes ranging in retail price from under
$300 to approximately $5,000 per queen size set. The Sealy brand mattress, including the new UniCased® Posturepedic, is the largest selling mattress brand in North America. Approximately
93% of the Sealy brand, Stearns & Foster brand and Bassett brand conventional bedding products sold in North America are produced by us, with the remainder being produced by Sealy Mattress
Company of New Jersey, Inc. ("Sealy New Jersey"), a licensee. The Stearns & Foster product line consists of top quality, premium mattresses sold under the Stearns & Foster brand
name. The Bassett brand, licensed from Bassett Furniture Industries beginning in 2000, is sold primarily to Bassett Furniture Direct and BJ's Wholesale Club. In addition to our innerspring bedding, we
also produce a variety of foam latex bedding products. These are sold principally through our European subsidiary under the Pirelli brand name.

Customers.Our customers include furniture stores, national mass merchandisers, specialty sleep shops, department and other
stores. In addition, our contract division sells bedding products primarily to the hospitality industry, including many of the leading hotel chains, resorts and cruise lines. The top five conventional
bedding customers accounted for approximately 20.2% of our net sales for the year ended November 28, 2004 and no single customer accounted for over 10.0% of our net sales.

Sales and Marketing.Our sales depend primarily on our ability to provide quality products with recognized brand names at
competitive prices. Additionally, we work to build brand loyalty with our end-use consumers, principally through targeted national advertising and cooperative advertising with our dealers,
along with superior "point-of-sale" materials designed to emphasize the various features and benefits of our products which differentiate them from other brands.

Our
national account and regional account sales force is organized along customer lines, and our field sales force is generally structured based on regions of the country and districts
within those regions. We have a comprehensive training and development program for our sales force, including our University of Sleep curriculum, which provides ongoing training sessions with programs
focusing on advertising, merchandising and sales education, including techniques to help analyze a dealer's business and profitability.

Our
sales force emphasizes follow-up service to retail stores and provides retailers with promotional and merchandising assistance, as well as extensive specialized
professional training and instructional materials. Training for retail sales personnel focuses on several programs, designed to assist retailers in maximizing the effectiveness of their own sales
personnel, store operations, and advertising and promotional programs, thereby creating loyalty to, and enhanced sales of, our products.

Suppliers.We are dependent upon a single supplier for certain key structural components of our new UniCased®
Posturepedic line of mattresses. Such components are purchased under a four-year supply agreement, and are manufactured in accordance with a proprietary design exclusive to the supplier.
We have incorporated the UniCased® method of construction into substantially all of our Sealy brand products, and have also incorporated the similar TripLCased® construction
into some Stearns & Foster branded products. Under the terms of the supply agreement, we have committed to make minimum purchases of the components totaling $70 million through 2006. We
believe that our supply requirements will exceed the minimum purchase commitments over the life of the agreement. We purchase our other raw materials and certain components from a variety of vendors.
We purchase approximately 52% of our

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Sealy
and Stearns & Foster box spring parts from a single third-party source and manufacture the remainder of these parts. Except for our dependence regarding certain structural components for
the UniCased® and TripLCased® mattresses, we do not consider ourselves to be dependent upon any single outside vendor as a source of supply to our conventional bedding
business, and we believe that sufficient alternative sources of supply for the same, similar or alternative components are available.

Manufacturing and Facilities.We manufacture most conventional bedding to order and have adopted
"just-in-time" inventory techniques in our manufacturing process to more efficiently serve our dealers' needs and to minimize their inventory carrying costs. Most bedding
orders are scheduled, produced and shipped within five days of receipt. This rapid delivery capability allows us to minimize our inventory of finished products and better satisfy customer demand for
prompt shipments.

We
operate 17 bedding manufacturing facilities and three component manufacturing facilities in 16 states, plus three facilities in Canadian provinces, and one each in Puerto Rico,
France, Italy, Mexico, Argentina and Brazil. We believe that through the utilization of extra shifts, we will be able to continue to meet growing demand for our products without a significant
investment in facilities. See Item 2, "Properties," herein. We also operate a Research and Development center in High Point, North Carolina with a staff which tests new materials and machinery, trains
personnel, compares the quality of our products with those of our competitors and develops new products and processes. We have developed advanced proprietary methods (Digital Image Analysis) of
dynamically measured spinal morphology on any human subject in any sleep position. This technology is expected to enhance Sealy's Posturepedic brand leadership and market position.

We
distinguish ourselves from our major competitors by internally sourcing the majority of our requirements for component parts through our component manufacturing facilities, which
manufacture component parts exclusively for use by our bedding plants and licensees. Our component plants currently provide substantially all of our mattress innerspring unit requirements, and supply
approximately 48% of our Sealy box spring parts requirements. The three component manufacturing sites are located in Rensselaer, Indiana; Delano, Pennsylvania; and Colorado Springs, Colorado. See Item
2, "Properties," herein.

In
addition to reducing the risks associated with relying on single sources of supply for certain essential raw materials, we believe the vertical integration resulting from our
component manufacturing capability provides us with a competitive advantage. We believe that we are the only conventional bedding manufacturer in the United States with substantial innerspring and
formed wire component-making capacity.



We have wholly owned subsidiaries in Canada, Mexico, Puerto Rico, Brazil, France, Italy and Argentina which have marketing and manufacturing responsibilities for
those markets. We have three manufacturing facilities in Canada and one each in Mexico, Puerto Rico, Argentina, Brazil, France and Italy which comprise all of the company-owned manufacturing
operations outside of the U.S. at November 28, 2004. In 2000, we formed a joint venture with our Australian licensee to import, manufacture, distribute and sell Sealy products in Southeast
Asia. Except for our European subsidiaries, which manufacture mostly latex foam products, the remainder of our international subsidiaries manufacture and sell primarily conventional innerspring
bedding.

We
utilize licensing agreements in certain international markets. Licensing agreements allow us to reduce exposure to political and economic risk abroad by minimizing investments in
those markets. Twelve foreign license agreements exist, which provide exclusive rights to market the Sealy brand in Thailand, Japan, the United Kingdom, Spain, Australia, New Zealand, South Africa,
Israel, Jamaica, Saudi Arabia, Bahamas and the Dominican Republic. We operate a sales office in Korea and use a contract manufacturer to service the Korean market. In addition, we ship products
directly into many small international markets.

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At November 28, 2004, there are 17 separate license arrangements in effect with six domestic and eleven foreign independent licensees. Sealy New Jersey (a
bedding manufacturer), Klaussner Corporation Services (a furniture manufacturer), Kolcraft Enterprises, Inc. (a crib mattress manufacturer), Pacific Coast Feather Company (a pillow, comforter
and mattress pad manufacturer), Chairworks Manufacturing Group Limited (an office seating manufacture), and KCB Enterprises (a futon manufacturer) are the only domestic manufacturers that are licensed
to use the Sealy trademark, subject to the terms of license agreements. Pacific Coast Feather also has a license to use the Stearns &
Foster brand on certain approved products. Under license agreements between Sealy New Jersey and us, Sealy New Jersey has the perpetual right to use certain of our trademarks in the manufacture and
sale of Sealy brand and Stearns & Foster brand products in selected markets in the United States.

Our
licensing group generates royalties by licensing Sealy brand technology and trademarks to manufacturers located throughout the world. We also provide our licensees with product
specifications, quality control inspections, research and development, statistical services and marketing programs. In the fiscal years ended November 28, 2004, November 30, 2003 and
December 1, 2002, the licensing group as a whole generated gross royalties of approximately $15.6 million, $13.7 million and $12.2 million, respectively.

See
the International section for international licensees.



Sealy, Stearns & Foster and Bassett bedding offer limited warranties on our manufactured products. The periods for "no-charge" warranty service
vary among products. Prior to fiscal year 1995, such warranties ranged from one year on promotional bedding to 20 years on certain Posturepedic and Stearns & Foster bedding. All
currently manufactured Sealy Posturepedic models, Stearns & Foster bedding, Bassett and some other Sealy-brand products offer a 10-year non-prorated warranty service
period. Our TrueForm visco elastic line of bedding, introduced late in the first quarter of 2005, will carry a 20 year warranty. In fiscal 2000, we amended our warranty policy to
no longer require the mattress to be periodically flipped. We also accept, upon occasion, other returns from some of our retailers as an accommodation.



We own, among others, the Sealy and Stearns & Foster trademarks and tradenames and also own the Posturepedic, and University of Sleep trademarks, service
marks and certain related logos and design marks. We also license the Bassett and Pirelli tradenames in various territories under certain long term agreements.



As of November 28, 2004 we had 6,399 full-time employees. Approximately 70% of our employees at our 25 North American plants are represented by
various labor unions with separate collective bargaining agreements. Due to the large number of collective bargaining agreements, we are periodically in negotiations with certain of the unions
representing our employees. We consider our overall relations with our work force to be satisfactory. We have only experienced one work stoppage in the last ten years due to labor disputes. Due to the
ability to shift production from one plant to another, these lost workdays have not had a material adverse effect on our financial results. We have not encountered any significant organizing activity
at our non-union facilities in that time frame. Our current collective bargaining agreements, which are typically three years in length, expire at various times beginning in fiscal 2005
through 2007. As of November 28, 2004, our domestic manufacturing plants employed 644, 885 and 1,398 employees covered under collective bargaining agreements expiring in fiscal 2005, 2006 and
2007,

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respectively.
At our international facilities, there were 824, 557 and 721 employees covered under collective bargaining agreements expiring in fiscal 2005, 2006 and 2007, respectively.



Our third quarter sales are typically 10% to 15% higher than other quarters. See Note 13 to our Consolidated Financial Statements included in
Part II, Item 8 herein.

Most
of our sales are by short term purchase orders. Since the level of production of products is generally promptly adjusted to meet customer order demand, we have a negligible backlog
of orders. Most finished goods inventories of bedding products are physically stored at manufacturing locations until shipped (usually within 5 days of accepting the order).



Our conventional bedding product lines are subject to various federal and state laws and regulations relating to flammability and other standards. We believe that
we are in material compliance with all
such laws and regulations, including the new California flame retardant regulations related to manufactured mattresses and box springs which became effective January 1, 2005. We do not expect
the impact of those regulations to be significant to our results of operations or financial position.

Our
principal waste products are foam and fabric scraps, wood, cardboard and other non-hazardous materials derived from product component supplies and packaging. We also
periodically dispose (primarily by recycling) of small amounts of used machine lubricating oil and air compressor waste oil. We are, generally, subject to the Federal Water Pollution Control Act, the
Comprehensive Environmental Response, Compensation and Liability Act and amendments and regulations thereunder and corresponding state statutes and regulations. We believe that we are in material
compliance with all applicable federal, state and local country environmental statutes and regulations. Except as set forth in Item 3. "Legal Proceedings" below, compliance with federal, state
or local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, should not have any
material effect upon our capital expenditures, earnings or competitive position. We are not aware of any pending federal environmental legislation which would have a material impact on our operations.
Except as set forth in Item 3. "Legal Proceedings," we have not been required to make and do not expect to make any material capital expenditures for environmental control facilities in the
foreseeable future.

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Item 2.Properties

Our principal executive offices are located on Sealy Drive at One Office Parkway, Trinity, North Carolina, 27370. Corporate and administrative services are
provided to the Company by Sealy, Inc. (a wholly owned subsidiary of the Company).

We
administer our component operations at our Rensselaer, Indiana facility. Our leased facilities are occupied under operating leases, which expire from fiscal 2005 to 2033, including
renewal options.

The
following table sets forth certain information regarding manufacturing and distribution facilities operated by the Company at January 31, 2005:

|Location      |                |                |                              | Approximate
Square
Footage |                 | Title   
|------------- | -------------- | -------------- | ---------------------------- | -------------------------- | --------------- | --------
|United States |                |                |                              |                            |                 |         
|              | Arizona        |                | Phoenix                      |                            | 76,000          |         
|              | California     |                | Richmond
South Gate          |                            | 238,000
185,000 |         
|              | Colorado       |                | Colorado Springs
Denver      |                            | 70,000
92,900   |         
|              | Florida        |                | Orlando
Lake Wales(c)(d)     |                            | 97,600
179,700  |         
|              | Georgia        |                | Atlanta                      |                            | 292,500         |         
|              | Illinois       |                | Batavia                      |                            | 212,700         |         
|              | Indiana        |                | Rensselaer
Rensselaer        |                            | 131,000
124,000 |         
|              | Kansas         |                | Kansas City                  |                            | 102,600         |         
|              | Maryland       |                | Williamsport                 |                            | 144,000         |         
|              | Minnesota      |                | St. Paul                     |                            | 93,600          |         
|              | New York       |                | Green Island                 |                            | 257,000         |         
|              | North Carolina |                | High Point                   |                            | 151,200         |         
|              | Ohio           |                | Medina                       |                            | 140,000         |         
|              | Oregon         |                | Portland                     |                            | 140,000         |         
|              | Pennsylvania   |                | Clarion
Delano               |                            | 85,000
143,000  |         
|              | Tennessee      |                | Memphis(b)(d)                |                            | 225,000         |         
|              | Texas          |                | Brenham
North Richland Hills |                            | 220,000
124,500 |         
|Canada        |                |                |                              |                            |                 |         
|              | Alberta        |                | Edmonton                     |                            | 144,500         |         
|              | Quebec         |                | Saint Narcisse               |                            | 76,000          |         
|              | Ontario        |                | Toronto                      |                            | 80,200          |         
|Argentina     |                | Buenos Aires   |                              | 85,000                     |                 | Owned   
|Brazil        |                | Sorocaba       |                              | 92,000                     |                 | Owned   
|Puerto Rico   |                | Carolina       |                              | 58,600                     |                 | Owned(a)
|Italy         |                | Silvano d'Orba |                              | 170,600                    |                 | Owned(a)
|France        |                | Saleux         |                              | 239,400                    |                 | Owned   
|Mexico        |                | Toluca         |                              | 157,100                    |                 | Owned   
|              |                |                |                              |                            |                 |         
|              |                |                |                              | 4,628,700                  |                 |         
|              |                |                |                              |                            |                 |         

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In
addition to the locations listed above, we maintain additional warehousing facilities in several of the states where our manufacturing facilities are located. We
consider our present facilities to be generally well maintained and in sound operating condition.

In
December 2004, we sold our Randolph, Massachusetts facility that had been previously closed in May 2004.

Item 3.Legal Proceedings

We are subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not
determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

We
are currently conducting an environmental cleanup at a formerly owned facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial Site Recovery Act. We and one of
our subsidiaries are parties to an Administrative Consent Order issued by the New Jersey Department of Environmental Protection. Pursuant to that order, we and our subsidiary agreed to conduct soil
and groundwater remediation at the property. We do not believe that our manufacturing processes were the
source of contamination. We sold the property in 1997 and retained primary responsibility for the required remediation. We have completed essentially all soil remediation with the New Jersey
Department of Environmental Protection approval, and have concluded a pilot test of the groundwater remediation system. We have received approval from the New Jersey Department of Environmental
Protection of a remediation plan for the sediment in Oakeys Brook adjoining the site, which we expect to start in 2005. We have recorded a reserve of $2.5 million for the estimated future costs
associated with completing this remediation project, and it is reasonably possible that up to an additional $0.3 million may be incurred to complete the project.

We
are also remediating soil and groundwater contamination at an inactive facility located in Oakville, Connecticut. Although we are conducting the remediation voluntarily, we obtained
Connecticut Department of Environmental Protection approval of the remediation plan. We have completed essentially all soil remediation under the remediation plan and are currently monitoring
groundwater at the site. We have identified cadmium in the groundwater at the site and intend to address that during 2005. We have recorded a reserve of approximately $0.5 million associated
with the additional work and ongoing monitoring. We believe the contamination at the site is attributable to the manufacturing operations of previous unaffiliated occupants of the facility.

We
removed three underground storage tanks previously used for diesel, gasoline, and waste oil from our South Gate, California facility in March 1994 and remediated the soil in
the area. Since August 1998, we have been working with the California Regional Water Quality Control Board, Los Angeles Region to monitor ground water at the site.

While
uncertainty exists as to the ultimate resolution of the South Brunswick, Oakville, and South Gate environmental matters, based on facts currently known, we believe that the
accruals recorded are adequate and do not believe the resolution of these matters will have a material adverse effect on our financial position or future operations; however, in the event of an
adverse decision by one or more of the governing environmental authorities, these matters could have a material adverse effect.

In
2000, Montgomery Ward, a customer of Sealy, declared bankruptcy and filed for protection under Chapter 7 of the U.S. Bankruptcy Code in the district of Delaware. In 2003, the
bankruptcy trustee filed a claim of $3.7 million associated with certain alleged preferential payments by Montgomery Ward to Sealy. In December of 2004, we reached a settlement of this matter
with the bankruptcy trustee for $0.2 million and are awaiting approval of this matter from the bankruptcy court.

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

None.

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PART II

Item 5.Market for Registrant's Common Equity and Related Stockholder Matters

There is no established public trading market for any class of our common equity or that of our parent company, Sealy Corporation.

As
of January 31, 2005, there were 24 holders of record of the Class A shares of Sealy Corporation, which owns 100% of our common equity.

On
July 16, 2004 our parent, Sealy Corporation, paid a cash dividend of approximately $0.62 per share of common stock. Any payment of future dividends and the amounts thereof will
be dependent upon our earnings, fiscal requirements and other factors deemed relevant by our Board of Directors. Certain restrictive covenants contained in out senior credit agreements and the
indenture governing our 8.25% Senior Subordinated Notes due 2014 currently limit our ability to make dividend or other payments.

Item 6.Selected Financial Data

The following tables set forth selected consolidated financial and other data of the Company for the years ended November 28, 2004, November 30,
2003, December 1, 2002, December 2, 2001, and November 26, 2000.

The
selected consolidated financial and other data set forth in the following tables has been derived from the our audited consolidated financial statements. The report of
Deloitte & Touche LLP, independent registered public accounting firm, covering our Consolidated Financial Statements for the year ended November 28, 2004, and the report of
PricewaterhouseCoopers LLP, independent registered public accounting firm, covering our Consolidated Financial Statements for the years ended November 30, 2003, and December 1, 2002, are
included elsewhere herein. These tables should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial
Statements included elsewhere herein.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

|                              |                                                                                         | Year Ended
November 28,
2004 |   | Year Ended
November 30,
2003 |   | Year Ended
December 1,
2002 |         | Year Ended
December 2,
2001 |   | Year Ended
November 26,
2000 | 
|----------------------------- | --------------------------------------------------------------------------------------- | ---------------------------- | - | ---------------------------- | - | --------------------------- | ------- | --------------------------- | - | ---------------------------- | 
|
|Statement of Operations Data: |                                                                                         |                              |   |                              |   |                             |         |                             |   |                              | 
|                              | Net sales(a)                                                                            |                              | $ | 1,314.0                      |   | $                           | 1,189.9 |                             | $ | 1,189.2                      | 
|                              | Costs and expenses(a)(b)(c)(d)                                                          |                              |   | 1,360.8                      |   |                             | 1,153.4 |                             |   | 1,165.0                      | 
|                              | Income (loss) before income tax and cumulative effect of change in accounting principle |                              |   | (46.8                        | ) |                             | 36.5    |                             |   | 24.1                         | 
|                              | Cumulative effect of change in accounting principle(e)                                  |                              |   |                             |   |                             |        |                             |   |                             | 
|                              | Net income (loss)                                                                       |                              |   | (38.3                        | ) |                             | 18.3    |                             |   | 16.9                         | 
|                              |                                                                                         |                              |   |                              |   |                             |         |                             |   |                              | 
|                              |                                                                                         |                              |   |                              |   |                             |         |                             |   |                              | 

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|Other Data: |                                                 |                         |   |      |        |   |       |       |   |       |       |   |       |       |   |      
|----------- | ----------------------------------------------- | ----------------------- | - | ---- | ------ | - | ----- | ----- | - | ----- | ----- | - | ----- | ----- | - | -----
|            | Depreciation and amortization of intangibles(b) |                         | $ | 25.4 |        | $ | 24.9  |       | $ | 22.5  |       | $ | 31.9  |       | $ | 27.1 
|            | Income from operations                          |                         |   | 22.2 |        |   | 105.9 |       |   | 99.8  |       |   | 93.9  |       |   | 123.0
|            | Cash flows provided by (used in):               |                         |   |      |        |   |       |       |   |       |       |   |       |       |   |      
|            |                                                 | Operating activities(c) |   |      | 43.5   |   |       | 87.1  |   |       | 100.3 |   |       | 11.3  |   |      
|            |                                                 | Investing activities(c) |   |      | (7.4   | ) |       | 0.6   |   |       | (39.5 | ) |       | (62.9 | ) |      
|            |                                                 | Financing activities(c) |   |      | (116.1 | ) |       | (14.7 | ) |       | (45.1 | ) |       | 45.5  |   |      
|            | EBITDA(f)                                       |                         |   | 48.5 |        |   | 129.9 |       |   | 119.2 |       |   | 101.4 |       |   | 153.4
|            | Capital expenditures                            |                         |   | 22.8 |        |   | 13.3  |       |   | 16.8  |       |   | 20.1  |       |   | 24.1 
|            | Interest expense                                |                         |   | 69.9 |        |   | 68.5  |       |   | 72.6  |       |   | 78.0  |       |   | 69.0 
|            | Ratio of EBITDA to interest expense             |                         |   | 0.7  | x      |   | 1.9   | x     |   | 1.6   | x     |   | 1.3   | x     |   | 2.2  
|            | Ratio of earnings to fixed charges(g)           |                         |   |     |        |   | 1.5   | x     |   | 1.3   | x     |   |      |       |   | 1.8  

|                    |                                               | November 28,
2004 |   | November 30,
2003 |   | December 1,
2002 |       | December 2,
2001 |   | November 26,
2000 |  
|------------------- | --------------------------------------------- | ----------------- | - | ----------------- | - | ---------------- | ----- | ---------------- | - | ----------------- | -
|
|Balance Sheet Data: |                                               |                   |   |                   |   |                  |       |                  |   |                   |  
|                    | Total assets                                  |                   | $ | 897.3             |   | $                | 959.1 |                  | $ | 904.9             |  
|                    | Long-term obligations, net of current portion |                   |   | 965.8             |   |                  | 699.6 |                  |   | 719.9             |  
|                    | Total debt                                    |                   |   | 974.3             |   |                  | 747.3 |                  |   | 753.2             |  
|                    | Stockholders' deficit                         |                   |   | (383.7            | ) |                  | (76.2 | )                |   | (115.7            | )

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10

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|                                                                         |                                                     | Fiscal Year                                           |      
|------------------------------------------------------------------------ | --------------------------------------------------- | ----------------------------------------------------- | -----
|
|Income (loss) before cumulative effect of change in accounting principle |                                                     | $                                                     | (38.3
|                                                                         | Interest expense                                    |                                                       |      
|                                                                         | Income Taxes                                        |                                                       |      
|                                                                         | Depreciation                                        |                                                       |      
|                                                                         | Amortization                                        |                                                       |      
|                                                                         |                                                     |                                                       |      
|                                                                         | EBITDA                                              |                                                       | $    
|Adjustments to EBITDA to arrive at cash flow from operations:            |                                                     |                                                       |      
|                                                                         | Cumulative effect of change in accounting principle |                                                       |      
|                                                                         | Interest expense                                    |                                                       |      
|                                                                         | Income taxes                                        |                                                       |      
|                                                                         | Non-cash charges against (credits to) net income:   |                                                       |      
|                                                                         |                                                     | Equity in losses (income) of investees                |      
|                                                                         |                                                     | Business closure and impairment charges               |      
|                                                                         |                                                     | Deferred income taxes                                 |      
|                                                                         |                                                     | Non-cash interest expense                             |      
|                                                                         |                                                     | Non-cash charges associated with the recapitalization |      
|                                                                         | Other, net                                          |                                                       |      
|                                                                         | Changes in operating assets & liabilities           |                                                       |      
|                                                                         |                                                     |                                                       |      
|Cash flow from operations                                                |                                                     | $                                                     | 43.5 
|                                                                         |                                                     |                                                       |      

---



Fiscal Year2004

2003

2002

2001

2000Pre-tax income (loss) from operations

$
(46.8
)
$
36.5

$
24.1

$
(8.5
)
$
57.4Fixed charges:Interest expense, including amortization of debt discount and financing costs


69.9


68.5


72.6


78.0


69.0Rentals33%


5.1


4.5


4.5


4.4


3.3Total Fixed charges


75.0


73.0


77.1


82.4


72.3Earnings before income taxes and fixed charges

$
28.2

$
109.5

$
101.2

$
73.9

$
129.7Ratio of earnings to fixed charges





1.5x


1.3x





1.8x


11

---



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

The following discussion and analysis should be read in conjunction with the "Selected Financial Data" and our consolidated financial
statements and related notes appearing elsewhere in this report.



Sealy Mattress Corporation, through our subsidiaries, is the largest bedding manufacturer in the world, with a 21% domestic market share in 2003. We estimate that
our market share has increased slightly in 2004. We manufacture and market a complete line of conventional bedding (innerspring) products including mattresses and box springs, holding leading
positions in key market segments such as luxury bedding products and among leading retailers. According toHome Furnishing Newsin 2003, the Sealy brand
ranked 9th among the top 150 home products brands. Our conventional bedding products include the SEALY®, SEALY POSTUREPEDIC®, STEARNS & FOSTER®
and BASSETT® brands and account for approximately 88.4% of the our total net sales for the year ended November 28, 2004. In addition to our innerspring bedding, we also produce a
variety of foam latex bedding products. Though sales of such products were not significant in 2004, we expect to experience growth in these product lines in 2005 as we seek to strengthen our
competitive position in the specialty bedding (non-innerspring mattress) market. We distinguish ourselves from our major competitors by maintaining our own component parts manufacturing
capability and producing substantially all of our mattress innerspring requirements and approximately 48% of our boxspring component parts requirements. We believe that our industry is resilient to
economic downturns due in part to the large portion of purchases, approximately 70%, which are for mattress replacements. The growth of the bedding industry has been supported by economic and
demographic factors such as increasing disposable income among the "baby boomer" segment of the population, an increase in the number of bedrooms per home and also second home purchases, and growing
awareness of the health benefits of quality sleep.

On
April 6, 2004 our parent company, Sealy Corporation, completed a merger with affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") whereby KKR acquired approximately
92% of Sealy Corporation's capital stock. In connection with the merger, we recapitalized substantially all of our outstanding debt. See Note 2 to our Consolidated Financial Statements
(Part II, Item 8 herein) for a full description of the effects of the merger and recapitalization. Although we incurred substantially increased levels of debt in the recapitalization, our cost
of capital was reduced due to lower interest rates on the new debt compared with our earlier financing, and our total interest costs have remained comparable with 2003. Due to our strong operating
profitability and cash flow (exclusive of the effects of the recapitalization, which included expenses of $133.1 million, of which $42.4 million was non-cash), we have been able to repay
$90 million of our senior secured term debt significantly ahead of schedule. Our strategy in 2005 will be to continue to deleverage our business through additional prepayments of our
long-term debt as permitted by our senior credit agreements and our operating cash flow.

In
2004, we successfully completed the rollout of our new single-sided, "no-flip" Sealy UniCased® and Stearns & Foster TripLCased® product
lines in the United States, Canada, and Mexico, representing the broadest product redesign in our history. The manufacture and sale of these products began early in 2003, however our profitability was
limited during that time period as we worked to gain manufacturing efficiency with the new products and supported our customers' transition to the new products with price rollbacks. In 2004, with
these issues substantially behind us, we began to realize the anticipated contribution of these products to our sales growth and profitability. Our 2004 profitability has been further enhanced by
rapid growth among our high-end price point ($1,000 and up) luxury bedding lines. Our shares of the Luxury and Ultra-Luxury product segments are greater than our overall market share, and
our Stearns & Foster and Luxury Posturepedic lines directly target these segments.

The
growth of the specialty bedding market both domestically and internationally, including latex foam, visco-elastic and air-adjustable mattress products, presents both a
challenge and opportunity to our

12

---



company.
While certain of our competitors hold a significantly higher share of this market at the end of 2004, we have responded by creating our own separate marketing department for specialty bedding
and we conducted extensive consumer research which has lead to the launch of our own TrueForm visco-elastic bedding product line late in the first quarter of 2005. We believe that by
successfully leveraging our strong brand advantage and our marketing and distribution capabilities, we have the potential to make significant gains in the specialty bedding market.

Our
industry continues to be challenged by the high cost of steel and petroleum products, which affect the cost of our steel innerspring and our polyurethane foam and polyethylene
component parts. Thus far, we have been able to successfully address these cost pressures though a price increase announced in May of 2004 and cost reduction efforts. We expect the cost of these
components to remain elevated above their recent historical averages throughout 2005.

Historically,
the bedding industry has had limited exposure to competition from imports due to high shipping costs, short lead times, the large number of finished goods SKUs and the
importance of brands. Recently, however Chinese bedding manufactures have begun to explore the feasibility of exporting their products into the United States. We do not expect that competition from
Chinese bedding imports will have a significant impact on our business. We believe that by focusing on further improvements in the efficiency of our supply chain, controlling costs, and continuing to
invest in product innovation and our brands, we can ensure that our domestically produced products will remain competitive with Chinese bedding imports. Furthermore, we believe that the relatively low
labor content of our domestically produced mattresses lessens any competitive advantage provided by lower Chinese labor costs.



Our analysis and discussion of our financial condition and results of operations are based upon our Consolidated Financial Statements that have been prepared in
accordance with generally accepted accounting principles in the United States (US GAAP). The preparation of financial statements in accordance with US GAAP requires our management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to
make these estimates, assumptions and disclosures. We choose accounting policies within US GAAP that our management believes are appropriate to accurately and fairly report our operating results and
financial position in a consistent manner. Our management regularly assesses these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note 1
to the Consolidated Financial Statements (Part II, Item 8 included herein). We believe the following accounting estimates are critical to understanding our results of operations and affect the
more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

Cooperative Advertising and Rebate ProgramsWe enter into agreements with our customers to provide funds to the customer for
advertising and promotion of our products. We also enter into volume and other rebate programs with our customers whereby funds may be rebated to the customer. When sales are made to these customers,
we record liabilities pursuant to these agreements. We periodically assess these liabilities based on actual sales and claims to determine whether all of the cooperative advertising earned will be
used by the customer or whether the customers will meet the requirements to receive rebated funds. We generally negotiate these agreements on a customer-by-customer basis. Some
of these agreements extend over several periods and are linked with supply agreements. Most of these agreements coincide with our fiscal year, however our customers typically have ninety days
following the end of a period to submit claims for reimbursement of advertising and promotional costs. Therefore, significant estimates are required at any point in time with regard to the ultimate
reimbursement claimed by our customers. Subsequent revisions to such estimates are recorded and charged to earnings in the period in which they are identified. Costs of these programs totaled
$171.4 million in 2004 of which $41.9 is recorded as a reduction of sales.

13

---



Allowance for Doubtful AccountsWe actively monitor the financial condition of our customers to determine the potential for
any nonpayment of trade receivables. In determining our reserve for bad debts, we also consider other general economic factors. Our management believes that our process of specific review of customers
combined with overall analytical review provides an accurate evaluation of ultimate collectibility of trade receivables. Our loss experience was $3.1 million, or approximately
0.2 percent of sales in 2004.

Warranties and Product ReturnsOur warranty policy provides a 10-year non-prorated warranty service
period on all currently manufactured Sealy Posturepedic, Stearns & Foster and Bassett bedding products and some other Sealy-branded products and a 20-year warranty period on our
True Form visco-elastic product introduced late in the first quarter of 2005. Our policy is to accrue the estimated cost of warranty coverage at the time the sale is recorded based on
historical trends of warranty costs. Our estimate involves an average lag time in days between the sale of a bed and the date of its return applied to the current rate of warranty returns. Our accrued
warranty liability totaled $13.9 million as of November 28, 2004.

Impairment of GoodwillWe perform an annual assessment of our goodwill for impairment as of the beginning of the fiscal fourth
quarter. We base our assessment of recoverability on a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA). At least annually, or when events or circumstances indicate
that their carrying value may not be recoverable from future cash flows, we assess our goodwill and other intangible assets for impairment. The use of the EBITDA multiple is considered by our
management to be the most meaningful measurement. The EBITDA multiple selected is based on comparison of other companies in the furnishings and consumer durable industry sectors. These comparable
multiples have historically ranged from 5.0 to 9.6. We consider comparable factors in determining which multiple should be utilized. These factors include among others, company size, estimated market
share or dominance, recent trends and forecasted
results. Our 2004 test for impairment indicated that utilizing an EBITDA measure of less than 4.0 times would likely result in an indication of impairment requiring a further assessment of potential
impairment. Should market factors or our performance result in either a lower valuation multiple or decreased EBITDA, impairment could result which may be material. The total carrying value of our
goodwill at November 28, 2004 was $387.5 million.

Income TaxesWe record an income tax valuation allowance when the realization of certain deferred tax assets, including net
operating losses and capital loss carryforwards, is not likely. These deferred tax items represent expenses recognized for financial reporting purposes, which may result in tax deductions in the
future. Certain judgments, assumptions and estimates may affect the carrying value of the valuation allowance and income tax expense in the consolidated financial statements. Our net deferred tax
assets at November 28, 2004 were $13.1 million, net of a $19.8 million valuation allowance. Significant judgment is also required in evaluating our federal, state and foreign tax
positions and in the determination of our tax provision. Despite our belief that our tax return positions are fully supportable, we may establish and have established reserves when we believe that
certain tax positions are likely to be challenged and we may not fully prevail in overcoming these challenges. We may adjust these reserves as relevant circumstances evolve, such as guidance from the
relevant tax authority, our tax advisors, or resolution of issues in the courts. Our tax expense includes the impact of reserve provisions and changes to reserves that we consider appropriate, as well
as related interest. Accruals for tax contingencies are included in other noncurrent liabilities.



As more fully discussed in Note 2 to the Condensed Consolidated Financial Statements (Part II, Item 8 included herein), on April 6, 2004 our
parent company, Sealy Corporation, completed a merger with affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") whereby KKR acquired approximately 92% of Sealy Corporation's capital stock.
Certain of Sealy Corporation's existing stockholders, including affiliates

14

---



of
Bain Capital, LLC and others (the "Rollover Stockholders"), retained approximately an 8% interest in Sealy Corporation's stock.

In
connection with the merger, Sealy Corporation paid off substantially all of its outstanding debt and accrued interest as of April 6, 2004 totaling $751.1 million. Sealy
Corporation's capital stock outstanding immediately prior to the merger, except with respect to those shares to be retained by the Rollover Stockholders, was cancelled and exchanged for aggregate cash
consideration of approximately $740.5 million plus direct costs of $7.6 million.

Sealy
Corporation issued new Class A common stock to KKR in exchange for cash in the amount of $436.1 million, and the Rollover Stockholders retained their Class A
common stock in proportion to their respective ownership interests. We issued new debt totaling $1,050 million consisting of a new $125 million floating rate senior secured revolving
credit facility with a six-year maturity (under which no amounts were drawn at the time of the recapitalization), a new $560 million floating rate senior secured term loan facility
with an eight-year maturity, $100 million under a floating rate senior unsecured term loan with a nine-year maturity, and $390 million aggregate principal amount
of new Senior Subordinated Notes bearing interest at 8.25% due June 2014. On September 29, 2004, we completed an exchange offer whereby all of the Senior Subordinated Notes were exchanged for
publicly traded, registered securities with identical terms (other than certain terms relating to registration rights and certain interest rate provisions otherwise applicable to the original senior
subordinated notes).

Concurrent
with the recapitalization, the option agreements of three officers of the Company were amended to provide them with the right to put their vested shares held under their
options back to the Company upon their retirement. We recorded an obligation of approximately $2.5 million to recognize the resulting obligation to repurchase vested shares under options held
by these officers.

In
connection with the recapitalization, we incurred costs and expenses totaling $177.1 million, including $36.4 million capitalized as deferred debt issuance costs to be
amortized over the respective terms of the new debt, and $7.6 million of costs charged against additional paid-in capital associated with the repurchase of previously outstanding
shares as noted above. The remaining $133.1 million of expenses resulted in a pre-tax charge against earnings for the year ended November 28, 2004. Included in the charge
were compensation expenses of approximately $53.8 million for the cash settlement and change in the measurement date for options that remained outstanding, management transaction bonuses and
the cancellation of an executive's contract. Also included were $11.8 million for the write-off of debt issuance costs and premiums associated with debt extinguished in the
transaction, and $20.4 million for the payment of premium and consent fees associated with the repayment of the previous public debt. The remaining charges represent other
non-recurring charges primarily associated with advisory fees and expenses paid in connection with the merger and recapitalization. Of the total pre-tax charge of
$133.1 million, approximately $42.2 million were non-cash charges. Cash costs and pre-tax expenses connected with the recapitalization, including the payment of
certain previously accrued expenses of approximately $1.1 million, and totaled approximately $136.9 million.

15

---







The following table sets forth our summarized results of operations for fiscal years 2004, 2003 and 2002, expressed in millions of dollars as well as a percentage
of each year's net sales:

|                                                 |                                   | Year Ended |        
|------------------------------------------------ | --------------------------------- | ---------- | -------
|
|
|Total net sales                                  |                                   | $          | 1,314.0
|Total cost of goods sold                         |                                   |            | 740.1  
|                                                 |                                   |            |        
|Gross Profit                                     |                                   |            | 573.9  
|                                                 |                                   |            |        
|Selling, general and administrative              |                                   |            | 430.9  
|Recapitalization expense                         |                                   |            | 133.1  
|Plant/Business closing and restructuring charges |                                   |            | 0.6    
|Amortization of intangibles                      |                                   |            | 1.2    
|Royalty income, net of royalty expense           |                                   |            | (14.1  
|                                                 |                                   |            |        
|                                                 | Income from operations            |            |        
|                                                 |                                   |            |        
|Interest expense                                 |                                   |            | 69.9   
|Other (income) expense, net                      |                                   |            | (0.9   
|                                                 |                                   |            |        
|                                                 | Income (loss) before income taxes |            |        
|Income taxes                                     |                                   |            | (8.5   
|                                                 |                                   |            |        
|                                                 | Net income (loss)                 |            | $      
|                                                 |                                   |            |        
|Effective tax rate                               |                                   |            | 18.3   

The
following table indicates the percentage distribution of our net sales in U.S. dollars throughout our international operations:

Geographic distribution of sales:

2004

2003

2002US Domestic

78.9
%
79.9
%
81.7
%International:Canada

8.7
%
7.7
%
7.1
%Europe

7.6
%
7.4
%
6.6
%Mexico

1.6
%
2.0
%
2.7
%Other

3.2
%
3.0
%
1.9
%Total

100.0
%
100.0
%
100.0
%


We
anticipate our 2005 geographic distribution will be relatively consistent with 2004.

16

---



The
following table shows our net sales and margin profitability for the major geographic regions of our operations, including local currency results for the significant international
operations:

|                                  |                          | November 28,
2004        |              | November 30,
2003 |       | December 1,
2002 |      
|--------------------------------- | ------------------------ | ------------------------ | ------------ | ----------------- | ----- | ---------------- | -----
|
|Total Domestic (US Dollars):      |                          |                          |              |                   |       |                  |      
|                                  | Total net sales          |                          | $            | 1,036.2           |       | 100.0            | %    
|                                  | Total cost of goods sold |                          |              | 564.7             |       | 54.5             | %    
|                                  |                          |                          |              |                   |       |                  |      
|                                  |                          | Gross profit             |              |                   | 471.5 |                  | 45.5 
|Total International (US Dollars): |                          |                          |              |                   |       |                  |      
|                                  | Total net sales          |                          |              | 277.8             |       | 100.0            | %    
|                                  | Total cost of goods sold |                          |              | 175.4             |       | 63.1             | %    
|                                  |                          |                          |              |                   |       |                  |      
|                                  |                          | Gross profit             |              |                   | 102.4 |                  | 36.9 
|Canada:                           |                          |                          |              |                   |       |                  |      
|                                  | US Dollars:              |                          |              |                   |       |                  |      
|                                  |                          | Total net sales          |              |                   | 114.5 |                  | 100.0
|                                  |                          | Total cost of goods sold |              |                   | 68.7  |                  | 60.0 
|                                  |                          |                          |              |                   |       |                  |      
|                                  |                          |                          | Gross profit |                   |       | 45.8             |      
|                                  | Canadian Dollars:        |                          |              |                   |       |                  |      
|                                  |                          | Total net sales          |              |                   | 154.6 |                  | 100.0
|                                  |                          | Total cost of goods sold |              |                   | 89.9  |                  | 58.2 
|                                  |                          |                          |              |                   |       |                  |      
|                                  |                          |                          | Gross profit |                   |       | 64.7             |      
|Europe:                           |                          |                          |              |                   |       |                  |      
|                                  | US Dollars:              |                          |              |                   |       |                  |      
|                                  |                          | Total net sales          |              |                   | 100.5 |                  | 100.0
|                                  |                          | Total cost of goods sold |              |                   | 66.4  |                  | 66.1 
|                                  |                          |                          |              |                   |       |                  |      
|                                  |                          |                          | Gross profit |                   |       | 34.1             |      
|                                  | Euros:                   |                          |              |                   |       |                  |      
|                                  |                          | Total net sales          |              |                   | 81.6  |                  | 100.0
|                                  |                          | Total cost of goods sold |              |                   | 53.8  |                  | 65.9 
|                                  |                          |                          |              |                   |       |                  |      
|                                  |                          |                          | Gross profit |                   |       | 27.8             |      
|Other International (US Dollars): |                          |                          |              |                   |       |                  |      
|                                  | Total net sales          |                          |              | 62.8              |       | 100.0            | %    
|                                  | Total cost of goods sold |                          |              | 40.3              |       | 64.2             | %    
|                                  |                          |                          |              |                   |       |                  |      
|                                  |                          | Gross profit             |              | $                 | 22.5  |                  | 35.8 



Net Sales.Our total net sales for the year ended November 28, 2004 increased $124.1 million, or 10.4% from the
year ended November 30, 2003. The domestic sales increase of $85.4 million, or 9.0% from fiscal 2003 was attributable to a 1.6% increase in volume and a 7.3% increase in average unit
selling price. The increase in average unit selling price is due primarily to price increases announced in May 2004 to offset the effects of rising steel costs, and an improved sales mix from
our new UniCased® Posturepedic and TripLCased® Stearns & Foster lines. Also, net sales for fiscal 2003 were reduced by the effects of price

17

---



roll-backs
on existing products in conjunction with the roll-out of our new product lines. Our total international sales increased $38.7 million, or 16.2%, over fiscal
2003. Sales improvements were further increased by favorable exchange rate fluctuations, most notably in our European and Canadian markets, where local currency sales gains of 7.2% and 19.2%,
respectively, translated in to gains of 14.1% and 24.5%, respectively, in US Dollars. Local currency gains in our Canadian market were driven by a 7.3% increase in average unit selling price resulting
from the successful introduction of our UniCased® product line, combined with an 11% increase in volume primarily attributable to market share gains with national retail accounts. Sales
gains in the European market were primarily attributable to increased volume. Elsewhere, sales gains in our South American markets were slightly offset by continued weakness in Mexico.

Cost of Goods Sold.Our cost of goods sold for year ended November 28, 2004, as a percentage of net sales, decreased
2.1 percentage points compared to fiscal 2003. Cost of goods sold for our domestic business, as a percentage of net sales, decreased 2.7 percentage points. This decrease (as a percentage
of net sales) is due primarily to the increase in average unit selling price as discussed above, partially offset by increased material costs. On a per unit basis, material costs increased 2.8%
relative to fiscal 2003 due primarily to increased steel costs partially offset by material cost savings associated with the new one-sided mattress construction. In addition, variable
conversion costs increased 0.5% primarily due to higher product return costs, partially offset by increased manufacturing efficiency. Fixed manufacturing costs increased 6.3% per unit primarily driven
by increased incentive compensation, higher rent costs associated with our new Albany facility and higher supervisory costs. Cost of goods sold for our international business, as a percentage of net
sales, decreased 0.2 percentage points. This decrease is primarily due to increased manufacturing efficiency in Canada associated with the new product lines and better product mix in Brazil and
Argentina, partially offset by higher material costs in the European market.

Selling, General, and Administrative.Selling, general, and administrative expenses increased $32.5 million compared
to the year ended November 30, 2003. As a percentage of net sales, selling, general, and administrative expenses decreased by 0.7 percentage points. Selling, general, and administrative
expenses for 2004 include a $4.0 million (0.3% of net sales) one time management bonus paid to the holders of Sealy Corporation stock options in lieu of the cash dividend which was paid to
stockholders in association with our parent company's financing transaction (see Note 19 to the Consolidated Financial Statements (Part II, Item 8 included herein)). Other increases
include: $4.6 million (0.4% of net sales) higher incentive compensation over 2003 for our selling and administrative personnel resulting from improved performance against budgeted targets and
approximately $2.5 million (0.2% of net sales) for higher incremental consulting fees associated with a new product development process and Sarbanes-Oxley compliance. These increases were
offset in part by certain decreases which include: promotional, co-op advertising and national advertising, which as a percentage of net sales declined
0.8 percentage points from 2003, and bad debt expense, which declined to 0.2% of net sales in 2004 from 0.4% in 2003.

Recapitalization Expense.We incurred approximately $133.1 million of recapitalization expenses in the year ended
November 28, 2004 in connection with our merger with affiliates of Kohlberg Kravis Roberts & Co., L.P., completed April 6, 2004 (seeMerger and
Recapitalization).

Plant/Business Closure and Restructuring Charges.Charges of $0.6 million were incurred in 2004 related to the closure
of our Randolph, Massachusetts manufacturing facility. Such charges consist primarily of employee severance and retention payments. All restructuring costs related to this plant closure have been paid
as of November 28, 2004. The land and building were sold on December 10, 2004, which will result in a gain in fiscal 2005 of approximately $0.2 million.

18

---



Royalty Income, net of royalty expense.Our net royalty income for the year ended November 28, 2004 increased
$1.7 million over the year ended November 30, 2003. Our net domestic royalty income and net international royalty income increased $0.9 million and $0.8 million over 2003,
respectively.

Interest Expense.Our interest expense in 2004 increased $1.4 million over 2003. Lower effective interest rates on our
new debt largely offset the effect of the increased debt levels resulting from our recapitalization. Our weighted average borrowing cost during 2004 was approximately 7.6% compared to approximately
9.1% for 2003. We also incurred a $1.2 million charge to write off a portion of the previously capitalized debt issuance costs associated with the senior secured term loan due to unscheduled
debt paydowns. See also the previous discussion inMerger and Recapitalizationrelated to the recapitalization and its effects on the Company's debt
structure, as well as Note 6 to our Consolidated Financial Statements (Part II, Item 8 included herein).

Income Tax.Our effective income tax rate generally differs from the federal statutory rate due to the effects of certain
foreign tax rate differentials and state and local income taxes. In 2004, the rate has also been affected by certain expenses associated with the recapitalization and loss carryforwards for which we
do not expect a benefit. Our effective tax rate for the year ended November 28, 2004 was 18.3%. Our effective rate for the year ended November 30, 2003 was 49.9%. Our effective tax rate
in 2003 differs from the federal statutory rate due to the effects of certain foreign tax rate differentials and state and local income taxes. Also in 2003 the rate has been affected by uncertainty
surrounding the reclassification of certain capital loss carryforwards.



Net Sales.Our net sales for the year ended November 30, 2003 increased $0.7 million from the year ended
December 1, 2002. Total domestic sales declined $21.7 million from 2002, attributable to a 3.7% decrease in volume partially offset by a 1.6% increase in average unit selling price. This
unit volume decrease was primarily due to lower sales to current and prior affiliates as they transitioned from single vendor to multi-vendor supply relationships. Additionally, year to date sales
were negatively impacted by slower economic activity during the first half of 2003. Improving economic conditions and the success of the launch of our UniCased® Posturepedic line during
the second half of 2003 contributed to a 2.0% increase in sales volume over the corresponding period in 2002. Excluding the effects of lower sales from current and former affiliates, sales volume
increased 6.0% over the second half of the year. The increase in average unit selling price was due primarily to an improved sales mix from both our existing core Posturepedic line and the new
Unicased® Posturepedic line, partially offset by lower sales of other higher-end products and increased price roll-backs on existing products in conjunction with
the roll-out of the Unicased® Posturepedic line. For the year ended November 30, 2003, sales to affiliates included sales to one affiliate for the entire period and
sales to a prior affiliate for approximately four and a half months, while sales to affiliates for the year ended December 1, 2002 included sales to three affiliates. Total international sales
increased $22.4 million, or 10.3%, primarily attributable to favorable currency fluctuations in Canada and Europe and volume gains in Argentina and Brazil, partially offset by continued
weakness in the Mexican market.

Cost of Goods Sold.Our cost of goods sold for the year ended November 30, 2003, as a percentage of net sales,
increased 1.2 percentage points compared to fiscal 2002. Cost of goods sold for our domestic business, as a percentage of net sales, increased 1.3 percentage points. This increase was
primarily due to lower absorption of fixed costs due to lower unit sales, higher variable costs associated with health insurance costs, higher costs associated with product returns, a lower mix of
higher-end products that typically carry a higher margin than other products, costs associated with the shutdown of the Taylor facility in December 2002, manufacturing costs and
roll-back pricing related to the roll out of the new Unicased® design for our Posturepedic bedding line. Cost of goods sold for our international business, as a percentage of
net sales, increased 0.4 percentage points compared to 2002. This increase was primarily due to labor

19

---



increases
in the European business partially offset by lower material costs in the Canadian business, due primarily to the weakening of the US dollar relative to the Canadian dollar as our Canadian
business purchases a large percentage of its raw materials payable in US dollars.

Selling, General, and Administrative.Our selling, general, and administrative expenses decreased $12.8 million
compared to fiscal 2002, a decline of 1.1 percentage points as a percentage of net sales.
This decrease was primarily attributable to a $26.2 million decrease in bad debt expense. During 2002 we recorded a charge of $22.6 million for bad debt expense associated with
affiliated customers (as discussed fully in Note 18 to the Consolidated Financial Statements). Also, during 2002 we recorded a charge of $6.1 million for bad debts as a result of
difficulties in an accounts receivable system conversion. The difficulties negatively impacted our collections during 2002 and through the second quarter of 2003. Accordingly, during the second
quarter of 2003 we reassessed the progress of our collection efforts and determined that it was necessary to record an increase of $2.0 million in our reserve for bad debts. Since then we have
made significant progress in resolving our accounts receivable processing issues and our accounts receivable statistics had improved significantly by November 30, 2003. No additional charges
were necessary during the second half of the year. The decrease in bad debt expense was partially offset by increased employment costs of $10.3 million. Salaries increased $8.5 million,
of which $2.4 million was due to normal merit and cost of living increases, with the remaining $6.1 million primarily attributable to increased head count. Fringe benefits increased
$1.8 million over 2002, attributable mainly to increased headcount. The remaining increase of $3.3 million is primarily associated with increased promotional and advertising costs,
including those incurred to support the roll out of our new Unicased® Posturepedic line.

Restructuring Charge.Due to continued weak performance of our only remaining retail subsidiary, as well as the fact that it
is not our strategy to own or control retail operations, we committed to a plan in the fourth quarter of 2003 to dispose of our wholly-owned retail subsidiary by sale or liquidation in early 2004.
Accordingly, we recognized a non-cash impairment charge of $1.8 million during the fourth quarter, which included the $1.6 million write-off goodwill on the books
of the subsidiary plus impairment charges for leasehold improvements likely to be abandoned. Following the disposal of this subsidiary in May of 2004, we no longer have a direct interest in any
domestic mattress retailer.

Interest Expense.Interest expense decreased $4.0 million primarily due to lower effective interest rates. This lower
rate was primarily due to the favorable impact from the interest rate swaps as the interest rate on the majority of our bank debt floated during a time of declining interest rates. In 2000, we entered
into an interest rate swap agreement that effectively converted $236 million of our floating-rate debt to a fixed-rate basis through December 2006. In the second
quarter of 2002, we entered into another interest rate swap agreement that had the effect of reestablishing as floating rate debt the debt previously converted to fixed rate debt through
December 2006. While the $236 million of our bank debt was fixed at approximately 6% for the first half of 2002, the entire balance was at a floating rate for all of 2003 during a time
of declining interest rates. This had the effect of reducing the weighted average cost of our bank debt from 5.6% in 2002 to 3.7% in 2003. In May 2003, we issued an additional
$50.0 million of 9.875% senior subordinated notes, due in December, 2007 ("public debt"). The proceeds were used to prepay all quarterly principal payments on our Senior AXELs Credit Facility
("bank debt") through March, 2004. The exchange of bank debt for public debt increased our interest expense by approximately $1.8 million for 2003. While all of the aforementioned debt was
repaid in connection with the recapitalization on April 6, 2004, the interest rate swap agreements remain in effect.

Income Tax.Our effective income tax rates in 2003 and 2002 differ from the Federal statutory rate principally because of the
effect of certain foreign tax rate differentials and state and local income taxes. In addition, no tax benefit was recorded in 2001 on the $26.3 million impairment charge recognized due to the
uncertainty at that time concerning the recoverability of such loss. In 2002, we reduced a portion of the loss for tax purposes as MHI sold its equity interest in Malachi Mattress America, Inc.
Our effective tax rate for the year ended November 30, 2003 was approximately 49.9% compared to 29.9% in 2002.

20

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Our principal sources of funds are cash flows from operations and borrowings under our senior secured revolving credit facility. Our principal use of funds
consists of operating expenditures, payments of principal and interest on our senior credit agreements, capital expenditures and interest payments on our outstanding senior subordinated notes. Capital
expenditures totaled $22.8 million for the year ended November 28, 2004. We expect 2005 capital expenditures to be approximately $30 million. We believe that annual capital
expenditure limitations in our current debt agreements will not significantly prevent us from meeting our ongoing capital needs. At November 28, 2004, we had approximately $91.9 million
available under our revolving credit facility after taking into account letters of credit issued totaling $28.1 million. Our net weighted average borrowing cost was 7.6% and 9.1% for the years
ended November 28, 2004 and November 30, 2003, respectively. The decline in our borrowing cost was due to lower rates on our new debt as compared with that retired at the
recapitalization.



As part of the recapitalization we have incurred substantial debt, including new senior credit facilities consisting of a $125 million senior secured
revolving credit facility with a six-year maturity, a $560 million senior secured term loan facility with an eight-year maturity. The Company also borrowed
$100 million under a senior unsecured term loan, due in 2013, and issued $390 million aggregate principal amount of new Senior Subordinated Notes due 2014. See Note 6 to our
Consolidated Financial Statements (Part II, Item 8 included herein) for more information regarding the terms and conditions of our debt. Since the recapitalization and through
November 28, 2004, we have repaid $90.0 million of the original $560.0 million outstanding under our senior secured term loan. In doing so, we have effectively prepaid all
principal payments due prior to the maturity of the loan in 2012. Substantially all of the prepayments have been funded out of our operating cash flow, with only $5.0 million outstanding under
our senior secured revolving credit facility at November 28, 2004, at which time we had approximately $91.9 million available under the revolving credit facility after taking into
account letters of credit issued totaling $28.1 million. Subsequent to November 28, 2004 and through
February 25, 2005, we have repaid an additional $5.0 million of our senior secured term loan, with $22.0 million outstanding under our revolving credit facility.

Borrowings
under our new senior secured credit facilities bear interest at our choice of the Eurodollar rate or adjusted base rate ("ABR"), in each case, plus an applicable margin,
subject to adjustment based on a pricing grid. On August 6, 2004, we amended the senior secured credit facility to reduce the applicable margin by 25 basis points. On June 3, 2004, we
entered into an interest rate swap agreement effective July 6, 2004 effectively fixing the floating portion of the interest rate at 3.725% on $200 million of the outstanding balance
under the senior secured term loan through November 2005, declining to $150 million through November 2007. To retain the designation of this swap as a hedging instrument, we must
select the Eurodollar rate on the hedged portion of the senior secured term loan during the term of the swap.

The
$100 million senior unsecured term loan will mature in 2013 and will bear interest at our choice of the Eurodollar rate or ABR, plus an applicable margin, subject to
adjustment based on a pricing grid. All principal amounts outstanding under the senior unsecured term loan are to be repaid at maturity.

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The outstanding Senior Subordinated Notes consist of $390 million aggregate principal amount maturing June 15, 2014, bearing interest at 8.25% per annum payable
semiannually in arrears on June 15 and December 15, commencing on December 15, 2004. On September 29, 2004, we completed an exchange offer whereby all of the Senior
Subordinated Notes were exchanged for publicly traded, registered securities with identical terms (other than certain terms relating to registration rights and certain interest rate provisions
otherwise applicable to the original senior subordinated notes).

At
November 28, 2004, we were in compliance with the covenants contained within our senior credit agreements and note indenture.

The
following table summarizes our changes in cash:

|                             |                                         | Year Ended
November 28,
2004 |       | Year Ended
November 30,
2003 |      | Year Ended
December 1,
2002 |     
|---------------------------- | --------------------------------------- | ---------------------------- | ----- | ---------------------------- | ---- | --------------------------- | ----
|
|Statement of Cash Flow Data: |                                         |                              |       |                              |      |                             |     
|                             | Cash flows provided by (used in):       |                              |       |                              |      |                             |     
|                             |                                         | Operating activities         |       | 43.5                         |      | 87.1                        |     
|                             |                                         | Investing activities         |       | (7.4                         | )    | 0.6                         |     
|                             |                                         | Financing activities         |       | (116.1                       | )    | (14.7                       | )   
|                             | Effect of exchange rate changes on cash |                              | 1.7   |                              | 0.7  |                             | (0.3
|                             | Change in cash and cash equivalents     |                              | (78.3 | )                            | 73.7 |                             | 15.4
|                             | Cash and cash equivalents:              |                              |       |                              |      |                             |     
|                             |                                         | Beginning of period          |       | 101.1                        |      | 27.4                        |     
|                             |                                         |                              |       |                              |      |                             |     
|                             |                                         | End of period                |       | 22.8                         |      | 101.1                       |     
|                             |                                         |                              |       |                              |      |                             |     

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Year Ended November 28, 2004 Compared With Year Ended November 30, 2003

Cash Flows from Operating Activities.Our cash flow from operations decreased $43.6 million to $43.5 for the year
ended November 28, 2004, compared to $87.1 million for the year ended November 30, 2003, primarily due to $90.9 million of cash expenses associated with the
recapitalization. Excluding the effect of the recapitalization, our cash flow from operations increased $47.3 million. Contributing to the improvement before the effect of the recapitalization
were higher operating margins, and improved working capital management. These improvements were partially offset by higher interest payments in the first six months of 2004, due in part to the payoff
of debt in connection with the recapitalization, and also to the prepayment of interest late in the 2002 fiscal year, thus lowering cash interest payments in 2003.

Cash Flows from Investing Activities.Our cash flows used in investing activities increased primarily due to
$9.5 million of increased capital expenditures over 2003, partially offset by $1.5 million higher net proceeds from the sale of property plant and equipment, $1.4 million of which
was associated with the sale of our former Albany, New York facility. Also in 2004, we collected a $13.6 million note receivable from a prior affiliate in connection with the recapitalization,
compared to $13.6 million received in 2003 on another affiliate note and investment.

Cash Flows from Financing Activities.Our cash flow used in financing activities increased $101.4 million from 2003,
primarily due to the $90.0 million prepayment of our senior secured term loan funded primarily out of operating cash flow, whereas our debt repayments in 2003 had been substantially

22

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funded
by the issuance of subordinated notes registered under the Securities Act of 1933. The net use of cash from financing activities associated with the recapitalization was $35.6 million in
2004, primarily for debt issuance costs.



Cash Flows from Operating Activities.Our cash flow from operations decreased $13.2 million from $100.3 million
for 2002 to $87.1 million for the year ended November 30, 2003. This decrease in operating cash flows was primarily the result of lower operating margins, higher cash tax payments, and
higher payments in the first quarter associated with incentive compensation that were not made in the first quarter of 2002, partially offset by improved working capital management.

Cash Flows from Investing Activities.Our cash flow from investing activities increased from fiscal 2002 primarily due to
$13.6 million received in 2003 on an affiliate note and investment. In 2002, the Company loaned this affiliate $12.5 million in the form of a long-term note. The Company also
made $6.8 million in cash payments in fiscal 2002 associated with business acquisitions. There were no such acquisitions in fiscal 2003.

Cash Flows from Financing Activities.Our cash flows from financing activities increased from fiscal 2002 primarily due to
$51.5 million in proceeds from the issuance of senior subordinated notes which were used to fund the retirement of a portion of our senior secured term debt.

Our
ability to make scheduled payments of principal, or to pay the interest or liquidated damages, if any, on, or to refinance our indebtedness, or to fund planned capital expenditures
will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based
upon the current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under the senior credit agreement, will be adequate to meet the
future liquidity needs throughout 2005. We will make regularly scheduled principal payments of approximately $8.5 million in 2005, substantially all of which is for debt owed by our
international subsidiaries. However, as we continually evaluate our ability to make additional prepayments as permitted under our senior credit agreements, it is possible that we will make substantial
prepayments on our senior debt in 2005. There can be no assurance that we will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be
realized or that future borrowings will be available under the senior credit agreements in an amount sufficient to enable us to service our indebtedness or to fund other liquidity needs. In addition,
there can be no assurance that we will be able to effect any future refinancing of our debt on commercially reasonable terms or at all.



Our new long-term obligations contain various financial tests and covenants. Our senior secured credit facilities require us to meet a minimum
interest coverage ratio and a maximum leverage ratio. The indenture governing our new senior subordinated notes also requires us to meet a fixed charge coverage ratio in order to incur additional
indebtedness, subject to certain exceptions. We are currently in compliance with all debt covenants. The specific covenants and related definitions can be found in the applicable debt agreements, each
of which we have previously filed with the Securities and Exchange Commission.

The
covenants contained in our senior secured credit facilities are based on what we refer to herein as "Adjusted EBITDA". In the senior secured credit facilities, EBITDA is defined as
net income plus interest, taxes, depreciation and amortization and Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments permitted in calculating
covenant compliance as discussed above. Adjusted EBITDA is presented herein as it is a material component of these covenants.

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Non-compliance
with such covenants could result in the requirement to immediately repay all amounts outstanding under such facilities. While the determination of "unusual items" is subject
to interpretation and requires judgment, we believe the adjustments listed below are in accordance with covenants discussed above.

EBITDA
and Adjusted EBITDA are not recognized terms under GAAP and do not purport to be alternatives to net income as a measure of operating performance or to cash flows from operating
activities as a measure of liquidity. Additionally, they are not intended to be measures of free cash flow for management's discretionary use, as they do not consider certain cash requirements such as
interest payments, tax payments and debt service requirements. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of
other companies. See Part II, Item 6 herein for a reconciliation of EBITDA to our cash flows from operations.

The
following table sets forth a reconciliation of net loss to EBITDA and EBITDA to Adjusted EBITDA for the year ended November 28, 2004:

Year Ended
November 28,
2004(in millions)Net Loss

$
(38.3
)Interest


69.9Income Taxes


(8.5
)Depreciation and Amortization


25.4EBITDA

$
48.5Recapitalization expenses


133.1Management fees paid to KKR


1.4Unusual items:Post-closing residual plant costs


5.7Bonus to option holders related to parent company
financing transaction


4.0Other (various)


7.3Adjusted EBITDA

$
200.0




As previously discussed, our debt at November 28, 2004 consists of $5 million outstanding under a $125 million senior secured revolving
credit facility with a six-year maturity, $470 million outstanding under a senior secured term loan facility with an eight-year maturity, $100 million outstanding
under a senior unsecured term loan due in 2013, $390 million outstanding aggregate principal amount of senior subordinated notes due 2014, and an additional $8.5 million owed by our
international subsidiaries.

We
also occupy premises and utilize equipment under operating leases that expire at various dates through 2033. The obligations under those leases are not recorded on our balance sheet
in accordance with generally accepted accounting principles. Many of these leases provide for payment of certain expenses and contain renewal and purchase options.

We
engage in various hedging activities in order to mitigate the risk of variability in future cash flows resulting from floating interest rates on our debt and projected foreign
currency purchase requirements. Accordingly, we have entered into contractual arrangements for interest rate swaps and forward purchases of foreign currency. The related assets and liabilities
associated with the fair value of such derivative instruments are recorded on our balance sheet. Changes in the fair value of these derivatives are recorded

24

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in
our income statement, except for those associated with our interest rate swap agreement which has been designated as a cash flow hedge for accounting purposes.

Significant
judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax provision. Despite our belief that our tax return
positions are fully supportable, we have established reserves where we believe that certain tax positions are likely to be challenged and we may not fully prevail in overcoming these challenges.
Because we are not currently undergoing examinations of any of our corporate income tax returns by tax authorities, we believe that it is unlikely that an audit could be initiated which would result
in assessment and payment of taxes related to these positions during 2005. We also cannot predict when or if any other future tax payments related to these tax positions may occur.

We
are involved in a joint venture to develop markets for Sealy brand products in Asia. The joint venture is not considered to be a variable interest entity and is therefore not
consolidated into our financial statements. We account for our interest in the joint venture under the equity method, and our net investment of $0.7 million is recorded in our balance sheet at
November 28, 2004. We believe that any possible commitments arising from this joint venture will not be significant to our financial position or results of operations.

The
Company's contractual obligations and other commercial commitments as of November 28, 2004 are summarized below (in thousands):

|Contractual Obligations                  |       | 2005 |        | 2006   |   | 2007   |        | 2008 |        | 2009   |   | After 2010 |        | Total Obligations
|---------------------------------------- | ----- | ---- | ------ | ------ | - | ------ | ------ | ---- | ------ | ------ | - | ---------- | ------ | -----------------
|Principal Maturities of Long-Term Debt   |       | $    | 8,542  |        | $ | 410    |        | $    | 284    |        | $ | 40         |        | $                
|Projected Interest on Long-Term Debt(1)  |       |      | 61,158 |        |   | 60,701 |        |      | 60,693 |        |   | 60,680     |        |                  
|Projected Cash Flows from Derivatives(2) |       |      | 7,929  |        |   | 2,067  |        |      | (317   | )      |   | (188       | )      |                  
|Operating Leases(3)                      |       |      | 9,222  |        |   | 8,213  |        |      | 7,292  |        |   | 5,136      |        |                  
|Component Purchase Commitment(4)         |       |      | 2,187  |        |   | 20,000 |        |      |       |        |   |           |        |                  
|                                         |       |      |        |        |   |        |        |      |        |        |   |            |        |                  
|                                         | Total |      | $      | 89,038 |   | $      | 91,391 |      | $      | 67,952 |   | $          | 65,668 |                  
|                                         |       |      |        |        |   |        |        |      |        |        |   |            |        |                  

|Other Commercial Commitments |  | 2005 |        | 2006 |   | 2007 |   | 2008 |   | 2009 |   | After 2010 |   | Total Commitments
|---------------------------- |  | ---- | ------ | ---- | - | ---- | - | ---- | - | ---- | - | ---------- | - | -----------------
|Standby Letters of Credit(5) |  | $    | 28,096 |      |  |      |  |      |  |      |  |            |  |                  

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25

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As discussed in Note 12 to our Consolidated Financial Statements (Part II, Item 8 herein), we have a $3.9 million
long-term obligation arising from an under funded pension plan. Future minimum pension funding requirements are not included in the schedule above as they are not available for all periods
presented. During 2005, we estimate that we will make approximately $1.0 million in contributions to the plan. In 2004, we contributed $2.2 million into the plan.

We
have an obligation to repurchase equity securities of Sealy Corporation from certain of our executives upon their retirement. The value of the obligation is determined based on a
formulated
estimate of Sealy Corporation's book value per share. Future payments associated with this obligation are not included in the schedule above as their timing and amount is contingent upon when the
executives retire and the number of underlying shares owned by the executives at that time. At November 28, 2004, we have a noncurrent liability on our balance sheet of $2.4 million for
this obligation.

Only
agreements to purchase goods or services with fixed or minimum obligations are included in the schedule above. It does not include normal purchases which are made in the ordinary
course of business.



We own three manufacturing facilities in Canada, and one each in Mexico, Argentina and Brazil. In addition, we own Sapsa Bedding S.A.S., a leading European
manufacturer of latex bedding products in Europe, with headquarters in Italy and manufacturing operations in France and Italy. In 2000, we formed a joint venture with our Australian licensee to
import, manufacture, distribute and sell Sealy products in South East Asia. We operate a Korean sales office and use a contract manufacturer to help service the Korean market. We also export products
directly into many small international markets, and have license agreements in Thailand, Japan, the United Kingdom, Spain, Australia, New Zealand, South Africa, Israel, Jamaica, Saudi Arabia, the
Bahamas and the Dominican Republic.



In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46-R", as revised December 2003 with respect to effective dates). The primary objectives of FIN 46-R are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the
"primary beneficiary"). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46-R requires
that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. We adopted FIN 46-R in our second fiscal quarter of
2004, however we do not believe we are a primary beneficiary of a VIE or hold any significant interests or involvement in a VIE, therefore adoption of FIN 46-R did not have an impact on
our consolidated financial statements.

In
December 2003, The FASB issued FAS 132 (Revised), "Employers' Disclosure about Pensions and Other Postretirement Benefits." A revision of the pronouncement originally
issued in 1998, FAS 132R expands employers' disclosure requirements for pension and postretirement benefits to enhance information about plan assets, obligations, benefit payments,
contributions, and net benefit cost. FAS 132R does not change the accounting requirements for pensions and other postretirement benefits. This statement is effective for fiscal years ending
after December 15, 2003, with interim-period disclosure requirements effective for interim periods beginning after December 15, 2003. Accordingly, we

26

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implemented
FAS 132R beginning with our second fiscal quarter of 2004. The adoption of this statement did not have an impact on our financial position or results of operations.

In
November of 2004, the FASB issued SFAS 151, "Inventory Costs, an amendment of ARB No. 43 Chapter 4". This Statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and requires that those items be
recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for fiscal years beginning after June 15, 2005. We will adopt this statement as of the beginning of fiscal 2006, and do not expect it to have a material
impact on our financial position or results of operations.

In
December 2004, the FASB issued FAS 123 (Revised), "Share-Based Payment" ("FAS 123R") which replaces FAS 123 and supercedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). This statement requires compensation costs relating to share-based payment transactions to be recognized in financial statements based upon the
fair value of the award. FAS 123R eliminates the option to account for the cost of stock-based compensation using the intrinsic value method as allowed under APB 25. Having no publicly traded
equity securities, we are considered a "nonpublic entity" as defined in the statement. FAS 123R is effective for nonpublic entities for fiscal years beginning after December 15, 2005.
Therefore, we expect to adopt FAS 123R as of the beginning of our fiscal year ending December 2, 2007. We currently measure compensation costs related to our share-based awards under APB
25, as allowed by FAS 123, and provide pro forma disclosure in the notes to our financial statements of the effects of accounting for share-based payments under FAS 123, as required by
that standard (See Note 1 to our Consolidated Financial Statements, Part II, Item 8 included herein). As the intrinsic value method of APB 25 has rarely resulted in the recognition of
expense in our financial statements, we expect the adoption of FAS 123R to have an impact on our results of operations. We are still in the process of evaluating the extent of such impact.



Our customers include furniture stores, specialty sleep shops, department stores, membership warehouse clubs, contract customers and other stores. In the future,
these retailers may consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry our products. These retailers are
also subject to changes in consumer spending and the overall state of the economy both domestically and internationally. We are dependent upon a single supplier for certain key structural components
of our Unicased® and TripLCased® designs. Such components are purchased under a four-year supply agreement, and are manufactured in accordance with a proprietary
design exclusive to the supplier. Any of these factors could have a material adverse effect on our business, financial condition or results of operations.



We use a 52-53 week fiscal year ending on the closest Sunday to November 30, but no later than December 2. The fiscal years ended
November 28, 2004, November 30, 2003 and December 1, 2002 were 52-week years.



"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995. When used in this Annual
Report on Form 10-K, the words "believes," "anticipates," "expects," "intends," "projects" and similar expressions are used to identify forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future financial and operational results. Any forward-looking statements contained in this report
represent our management's

27

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current
expectations, based on present information and current assumptions, and are thus prospective and subject to risks and uncertainties which could cause actual results to differ materially from
those expressed in such forward-looking statements. Actual results could differ materially from those anticipated or projected due to a number of factors. These factors include, but are not limited
to:



All
forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Annual Report on Form 10-K and are expressly
qualified in their entirety by the cautionary statements include in this Annual Report on From 10-K. Except as may be required by law, we undertake no obligation to publicly update or
revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

Item 7a.Quantitative and Qualitative Disclosures About Market Risk



Our earnings are affected by fluctuations in the value of our subsidiaries' functional currency as compared to the currencies of our foreign denominated
purchases. Foreign currency forward, swap and option contracts are used to hedge against the earnings effects of such fluctuations. The result of a uniform 10% change in the value of the U.S. dollar
relative to currencies of countries in which we
manufacture or sell our products would not be material to our earnings or financial position. This calculation assumes that each exchange rate would change in the same direction relative to the U.S.
dollar.

To
protect against the reduction in value of forecasted foreign currency cash flows resulting from purchases in a foreign currency, we have instituted a forecasted cash flow hedging
program. We hedge portions of our purchases denominated in foreign currencies with forward and option contracts. At November 28, 2004, the Company had forward contracts to sell a total of
32.5 million Canadian dollars with expiration dates ranging from December 8, 2004 through November 1, 2005. At November 28, 2004, the fair value of the Company's net
obligation under the forward contracts was $3.1 million. We generally

28

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do
not designate our foreign currency hedges for accounting purposes, therefore all changes in fair value are charged to earnings.



As more fully discussed in Note 9 to our Consolidated Financial Statements (Part II, Item 8 included herein), we had entered into two interest rate
swap agreements associated with debt existing prior to the recapitalization. Although the related debt was repaid in connection with the recapitalization, the related swaps remain in effect and are
scheduled to expire in December 2006. Because the first swap converted a portion of our floating rate debt to a fixed rate and a subsequent swap effectively re-established a
floating rate on the same debt, the effect of the two instruments on both cash flows and earnings is largely off-setting. As a result of the recapitalization and repayment of the related
debt, $4.7 million of changes in fair value previously recorded in accumulated other comprehensive loss were included in recapitalization expenses charged against earnings during the fiscal
year ended November 28, 2004 (seeMerger and Recapitalization). The combined fair value carrying amount of these swap instruments at
November 28, 2004 and November 30, 2003 was a net obligation of $4.3 and $8.1 million, respectively.

We
had also entered into an interest rate cap agreement associated with previous debt that caps the floating rate on the debt at 8% through June 2005. The agreement also remains
in effect following the repayment of the related debt. This agreement has not been designated for hedge accounting and, accordingly, any changes in the fair value are recorded in interest expense. The
fair value of this instrument is not material.

A
10% increase or decrease in market interest rates that affect our interest rate derivative instruments would not have a material impact on our earnings during the next fiscal year.

On
June 3, 2004, we entered into an interest rate swap agreement effective July 6, 2004 effectively fixing the floating portion of the interest rate at 3.725% on
$200 million of our outstanding balance under the senior secured term loan through November 2005, declining to $150 million through November 2007. The fair value of this
swap instrument at November 28, 2004 was an obligation of $2.0 million.

Based
on the unhedged portion our variable rate debt outstanding at November 28, 2004, a 12.5 basis point increase or decrease in variable interest rates would have an
approximately $0.5 million dollar impact on our annual interest expense.



The cost of our steel innerspring and our polyurethane foam and polyethylene component parts are impacted by volatility in the price of steel and petroleum. We
expect the cost of the components to remain elevated above their recent historical averages throughout 2005. Thus far, we have been able to successfully address these cost pressures through a price
increase announced in May of 2004 and cost reduction efforts. We do not engage in commodity hedging programs.

29

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Item 8.Financial Statements and Supplementary Data

SEALY MATTRESS CORPORATION
Consolidated Financial Statements
November 28, 2004 and November 30, 2003
(With Independent Registered Public Accounting Firms' Reports Thereon)

30

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
Sealy Mattress Corporation:

We
have audited the accompanying consolidated balance sheet of Sealy Mattress Corporation and subsidiaries (the "Company") as of November 28, 2004, and the related consolidated
statements of income, stockholders' deficit, and cash flows for the year ended November 28, 2004. Our audit also included the financial statement schedule listed in the Index at Item 15. These
financial statements and
financial schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial schedule based on our audit. The
financial statements of Sealy Corporation for the years ended November 30, 2003 and December 1, 2002 were audited by other auditors whose report, dated February 10, 2004, on those
statements included an explanatory paragraph that described the adoption of the provisions of Statement of Financial Accounting Standards No. 142 effective the beginning of the year ended
December 1, 2002.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion.An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sealy Mattress Corporation and subsidiaries as of
November 28, 2004, and the results of their operations and their cash flows for the year ended November 28, 2004, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material
respects the information set forth therein.

/s/
Deloitte & ToucheLLP

Charlotte,
North Carolina
February 28, 2005

31

---



Report of Independent Registered Public Accounting Firm

To
the Board of Directors and
Stockholders of Sealy Corporation:

In
our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15 present fairly, in all materials respects, the financial position of
Sealy Corporation and its subsidiaries (the "Company") at November 30, 2003 and the results of their operations and their cash flows for each of the two years in the period ended
November 30, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information set forth therein when read in conjuction with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

As
discussed in Note 5 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standard No. 142 effective the
beginning of the year ended December 1, 2002.

/s/
PricewaterhouseCoopers LLP

Greensboro,
North Carolina
February 10, 2004

32

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SEALY MATTRESS CORPORATION        Consolidated Balance Sheets  (in thousands, except share amounts)

|                                       |                                                                                                                                | November 28,
2004 |         | November 30,
2003
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | ----------------- | ------- | -----------------
|ASSETS                                 |                                                                                                                                |                   |         |                  
|Current assets:                        |                                                                                                                                |                   |         |                  
|                                       | Cash and cash equivalents                                                                                                      |                   | $       | 22,779           
|                                       | Accounts receivableNon-affiliates (net of allowance for doubtful accounts, discounts and returns, 2004$14,776; 2003$23,007) |                   |         | 172,829          
|                                       | Accounts receivableAffiliates (net of allowance for doubtful accounts, discounts and returns, 2004$0; 2003$22) (Note 18)    |                   |         |                 
|                                       | Inventories                                                                                                                    |                   |         | 51,923           
|                                       | Assets held for sale                                                                                                           |                   |         | 8,983            
|                                       | Prepaid expenses and other current assets                                                                                      |                   |         | 18,713           
|                                       | Deferred income taxes (Note 11)                                                                                                |                   |         | 23,898           
|                                       |                                                                                                                                |                   |         |                  
|                                       |                                                                                                                                |                   | 299,125 |                  
|                                       |                                                                                                                                |                   |         |                  
|Property, plant and equipmentat cost: |                                                                                                                                |                   |         |                  
|                                       | Land                                                                                                                           |                   |         | 11,887           
|                                       | Buildings and improvements                                                                                                     |                   |         | 86,125           
|                                       | Machinery and equipment                                                                                                        |                   |         | 203,678          
|                                       | Construction in progress                                                                                                       |                   |         | 8,229            
|                                       |                                                                                                                                |                   |         |                  
|                                       |                                                                                                                                |                   | 309,919 |                  
|                                       | Less accumulated depreciation                                                                                                  |                   |         | 145,740          
|                                       |                                                                                                                                |                   |         |                  
|                                       |                                                                                                                                |                   | 164,179 |                  
|                                       |                                                                                                                                |                   |         |                  
|Other assets:                          |                                                                                                                                |                   |         |                  
|                                       | Goodwill (Note 5)                                                                                                              |                   |         | 387,508          
|                                       | Other intangiblesnet of accumulated amortization (2004$4,658; 2003$3,181) (Note 5)                                          |                   |         | 4,555            
|                                       | Long-term notes receivable (Note 18)                                                                                           |                   |         |                 
|                                       | Debt issuance costs, net, and other assets                                                                                     |                   |         | 41,910           
|                                       |                                                                                                                                |                   |         |                  
|                                       |                                                                                                                                |                   | 433,973 |                  
|                                       |                                                                                                                                |                   |         |                  
|Total Assets                           |                                                                                                                                | $                 | 897,277 |                  
|                                       |                                                                                                                                |                   |         |                  

See
accompanying notes to consolidated financial statements.

33

---



|                                                       |                                                                                                                                                      | November 28,
2004                   |          | November 30,
2003 |       
|------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | -------- | ----------------- | ------
|LIABILITIES AND STOCKHOLDERS' DEFICIT                  |                                                                                                                                                      |                                     |          |                   |       
|Current liabilities:                                   |                                                                                                                                                      |                                     |          |                   |       
|                                                       | Current portionlong-term obligations (Note 6)                                                                                                       |                                     | $        | 8,542             |       
|                                                       | Accounts payable                                                                                                                                     |                                     |          | 96,566            |       
|                                                       | Accrued expenses:                                                                                                                                    |                                     |          |                   |       
|                                                       |                                                                                                                                                      | Customer incentives and advertising |          |                   | 35,829
|                                                       |                                                                                                                                                      | Compensation                        |          |                   | 37,142
|                                                       |                                                                                                                                                      | Interest                            |          |                   | 27,366
|                                                       |                                                                                                                                                      | Other                               |          |                   | 49,795
|                                                       |                                                                                                                                                      |                                     |          |                   |       
|                                                       |                                                                                                                                                      |                                     | 255,240  |                   |       
|                                                       |                                                                                                                                                      |                                     |          |                   |       
|Due to parent company (Note 19)                        |                                                                                                                                                      |                                     | 3,376    |                   |       
|Long-term obligations, net of current portion (Note 6) |                                                                                                                                                      |                                     | 965,795  |                   |       
|Other noncurrent liabilities                           |                                                                                                                                                      |                                     | 45,774   |                   |       
|Deferred income taxes (Note 11)                        |                                                                                                                                                      |                                     | 10,835   |                   |       
|Commitments and contingencies (Note 15)                |                                                                                                                                                      |                                     |         |                   |       
|Sealy Mattress Corporation Stock:                      |                                                                                                                                                      |                                     |          |                   |       
|                                                       | Common stock, $0.01 par value; Authorized 1,000 shares; Issued (20041,000; 2003none)                                                               |                                     |          |                  |       
|Sealy Corporation Stock:                               |                                                                                                                                                      |                                     |          |                   |       
|                                                       | Preferred stock, $0.01 par value; Authorized 100,000 shares; Issued, none                                                                            |                                     |          |                  |       
|                                                       | Class L common stock, $0.0029 par value; Authorized, 20,954 shares; Issued (2004none; 20035,389); Aggregate liquidation preference (2003$110,202) |                                     |          |                  |       
|                                                       | Class M common stock, $0.0029 par value; Authorized, 6,985 shares; Issued (2004none; 20035,630); Aggregate liquidation preference (2003$115,138)  |                                     |          |                  |       
|                                                       | Class A common stock, $0.0029 par value; Authorized 2,095,440 shares; Issued (2004none; 200353,242)                                                |                                     |          |                  |       
|                                                       | Class B common stock, $0.0029 par value; Authorized 698,480 shares; Issued (2004none; 200349,034)                                                  |                                     |          |                  |       
|Additional paid-in capital                             |                                                                                                                                                      |                                     | 458,620  |                   |       
|Accumulated deficit                                    |                                                                                                                                                      |                                     | (848,158 | )                 |       
|Accumulated other comprehensive income (loss)          |                                                                                                                                                      |                                     | 5,795    |                   |       
|Common stock held in treasury, at cost                 |                                                                                                                                                      |                                     |         |                   |       
|                                                       |                                                                                                                                                      |                                     |          |                   |       
|                                                       |                                                                                                                                                      |                                     | (383,743 | )                 |       
|                                                       |                                                                                                                                                      |                                     |          |                   |       
|Total Liabilities and Stockholders' Deficit            |                                                                                                                                                      | $                                   | 897,277  |                   | $     
|                                                       |                                                                                                                                                      |                                     |          |                   |       

See
accompanying notes to consolidated financial statements.

34

---





SEALY MATTRESS CORPORATION        Consolidated Statements Of Operations  (in thousands)

|                               |                                                                                                                   | Year Ended                        |          
|------------------------------ | ----------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------
|
|Net salesNon-affiliates       |                                                                                                                   | $                                 | 1,306,990
|Net salesAffiliates (Note 18) |                                                                                                                   |                                   | 7,030    
|                               |                                                                                                                   |                                   |          
|                               | Total net sales                                                                                                   |                                   |          
|                               |                                                                                                                   |                                   |          
|Cost and expenses:             |                                                                                                                   |                                   |          
|                               | Cost of goods soldNon-affiliates                                                                                 |                                   |          
|                               | Cost of goods soldAffiliates (Note 18)                                                                           |                                   |          
|                               |                                                                                                                   |                                   |          
|                               |                                                                                                                   | Total cost of goods sold          |          
|                               |                                                                                                                   |                                   |          
|Gross Profit                   |                                                                                                                   |                                   | 573,911  
|                               | Selling, general and administrative (including provisions for bad debts $3,149, $5,047 and $31,252, respectively) |                                   |          
|                               | Recapitalization expense (Note 2)                                                                                 |                                   |          
|                               | Plant/Business closing and restructuring charges (Notes 14 and 17)                                                |                                   |          
|                               | Amortization of intangibles                                                                                       |                                   |          
|                               | Royalty income, net of royalty expense                                                                            |                                   |          
|                               |                                                                                                                   |                                   |          
|                               |                                                                                                                   | Income from operations            |          
|                               | Interest expense                                                                                                  |                                   |          
|                               | Other (income) expense, net (Note 10)                                                                             |                                   |          
|                               |                                                                                                                   |                                   |          
|                               |                                                                                                                   | Income (loss) before income taxes |          
|                               | Income tax expense (benefit) (Note 11)                                                                            |                                   |          
|                               |                                                                                                                   |                                   |          
|                               | Net income (loss)                                                                                                 |                                   | $        
|                               |                                                                                                                   |                                   |          

See
accompanying notes to consolidated financial statements.

35

---



SEALY MATTRESS CORPORATION
Consolidated Statements of Stockholders' Deficit
(in thousands, except per share amounts)

|                                                                                                         |                                                                                          |   |         | Class L |       | Class M |   | Class A |     | Class B |        |   |    |     |        |         |   |     |      |        |        
|-------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | - | ------- | ------- | ----- | ------- | - | ------- | --- | ------- | ------ | - | -- | --- | ------ | ------- | - | --- | ---- | ------ | -------
|
|
|Balance at December 2, 2001                                                                              |                                                                                          | $ |        |         | 5,581 |         | $ | 16      |     | 5,410   |        | $ | 15 |     | 52,952 |         | $ | 151 |      | 47,085 |        
|Net income                                                                                               |                                                                                          |   | 16,919  |         |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Foreign currency translation adjustment                                                                  |                                                                                          |   | (4,370  | )       |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Change in fair value of cash flow hedges prior to dedesignation                                          |                                                                                          |   | 2,963   |         |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Amortization of dedesignated cash flow hedge                                                             |                                                                                          |   | 2,023   |         |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Exercise of stock options                                                                                |                                                                                          |   |        |         | 28    |         |   |        |     |        |        |   |   |     | 1,456  |         |   | 4   |      |       |        
|Purchase of treasury stock                                                                               |                                                                                          |   |        |         |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Cancellation and issuance of common stock associated with the purchase of Malachi Mattress America, Inc. |                                                                                          |   |        |         | (220  | )       |   | (1      | )   | 220     |        |   | 1  |     | (1,949 | )       |   | (5  | )    | 1,949  |        
|                                                                                                         |                                                                                          |   |         |         |       |         |   |         |     |         |        |   |    |     |        |         |   |     |      |        |        
|Balance at December 1, 2002                                                                              |                                                                                          | $ | 17,535  |         | 5,389 |         | $ | 15      |     | 5,630   |        | $ | 16 |     | 52,459 |         | $ | 150 |      | 49,034 |        
|                                                                                                         |                                                                                          |   |         |         |       |         |   |         |     |         |        |   |    |     |        |         |   |     |      |        |        
|Net income                                                                                               |                                                                                          |   | 18,269  |         |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Foreign currency translation adjustment                                                                  |                                                                                          |   | 17,616  |         |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Excess of additional pension liability over unrecognized prior service cost                              |                                                                                          |   | (1,711  | )       |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Amortization of dedesignated cash flow hedge                                                             |                                                                                          |   | 3,291   |         |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Write-off of dedesignated cash flow hedge                                                                |                                                                                          |   | 2,010   |         |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Exercise of stock options                                                                                |                                                                                          |   |        |         |      |         |   |        |     |        |        |   |   |     | 856    |         |   | 3   |      |       |        
|                                                                                                         |                                                                                          |   |         |         |       |         |   |         |     |         |        |   |    |     |        |         |   |     |      |        |        
|Balance at November 30, 2003                                                                             |                                                                                          | $ | 39,475  |         | 5,389 |         | $ | 15      |     | 5,630   |        | $ | 16 |     | 53,315 |         | $ | 153 |      | 49,034 |        
|                                                                                                         |                                                                                          |   |         |         |       |         |   |         |     |         |        |   |    |     |        |         |   |     |      |        |        
|Net loss                                                                                                 |                                                                                          |   | (38,283 | )       |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Foreign currency translation adjustment                                                                  |                                                                                          |   | 11,388  |         |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Excess of additional pension liability over unrecognized prior service cost                              |                                                                                          |   | (140    | )       |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Amortization of dedesignated cash flow hedge                                                             |                                                                                          |   | 595     |         |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Purchase of treasury stock                                                                               |                                                                                          |   |        |         |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Change in fair value of cash flow hedge                                                                  |                                                                                          |   | (626    | )       |      |         |   |        |     |        |        |   |   |     |       |         |   |    |      |       |        
|Exercise of stock options                                                                                |                                                                                          |   |        |         |      |         |   |        |     |        |        |   |   |     | 3,981  |         |   | 2   |      |       |        
|Effects of recapitalization:                                                                             |                                                                                          |   |         |         |       |         |   |         |     |         |        |   |    |     |        |         |   |     |      |        |        
|                                                                                                         | Stock compensation related to rollover of options                                        |   |         |        |       |        |   |         |    |         |       |   |    |    |        |        |   |     |     |        |       
|                                                                                                         | Treasury stock repurchase, including direct costs                                        |   |         |        |       | (5,389  | ) |         | (15 | )       | (5,630 | ) |    | (16 | )      | (56,296 | ) |     | (131 | )      | (49,034
|                                                                                                         | Issuance of common stock                                                                 |   |         |        |       |        |   |         |    |         |       |   |    |    |        |        |   |     | 250  |        |       
|                                                                                                         | Write-off of dedesignated cash flow hedge                                                |   |         | 2,743   |       |        |   |         |    |         |       |   |    |    |        |        |   |     |     |        |       
|                                                                                                         | Change in aggregate par value of common stock due to change in reporting entity (Note 2) |   |         |        |       |        |   |         |    |         |       |   |    |    |        |        |   |     | (274 | )      |       
|                                                                                                         | Issuance of officers' equity put option                                                  |   |         |        |       |        |   |         |    |         |       |   |    |    |        |        |   |     |     |        |       
|                                                                                                         | Cancellation of former officer's equity put option                                       |   |         |        |       |        |   |         |    |         |       |   |    |    |        |        |   |     |     |        |       
|                                                                                                         |                                                                                          |   |         |         |       |         |   |         |     |         |        |   |    |     |        |         |   |     |      |        |        
|Balance at November 28, 2004                                                                             |                                                                                          | $ | (24,323 | )       |      |         | $ |        |     |        |        | $ |   |     | 1,000  |         | $ |    |      |       |        
|                                                                                                         |                                                                                          |   |         |         |       |         |   |         |     |         |        |   |    |     |        |         |   |     |      |        |        

See accompanying notes to consolidated financial statements.

36

---





SEALY MATTRESS CORPORATION  Consolidated Statements Of Cash Flows  (in thousands)

|                                        |                                                                                                      | Year Ended                                          |                                                     
|--------------------------------------- | ---------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------------------
|
|Cash flows from operating activities:   |                                                                                                      |                                                     |                                                     
|                                        | Net income (loss)                                                                                    |                                                     | $                                                   
|                                        | Adjustments to reconcile net income (loss) to net cash provided by operating activities:             |                                                     |                                                     
|                                        |                                                                                                      | Depreciation and amortization                       |                                                     
|                                        |                                                                                                      | Equity in net loss of investee                      |                                                     
|                                        |                                                                                                      | Business closure charge                             |                                                     
|                                        |                                                                                                      | Impairment charges                                  |                                                     
|                                        |                                                                                                      | Deferred income taxes                               |                                                     
|                                        |                                                                                                      | Non-cash interest expense:                          |                                                     
|                                        |                                                                                                      |                                                     | Discount (premium) on Senior Subordinated Notes, net
|                                        |                                                                                                      |                                                     | Junior Subordinated Note                            
|                                        |                                                                                                      |                                                     | Amortization of debt issuance costs and other       
|                                        |                                                                                                      | Non-cash charges associated with recapitalization:  |                                                     
|                                        |                                                                                                      |                                                     | Stock based compensation                            
|                                        |                                                                                                      |                                                     | Write off of deferred debt charges                  
|                                        |                                                                                                      |                                                     | Other                                               
|                                        |                                                                                                      | Other, net                                          |                                                     
|                                        | Changes in operating assets and liabilities:                                                         |                                                     |                                                     
|                                        |                                                                                                      | Accounts receivable                                 |                                                     
|                                        |                                                                                                      | Inventories                                         |                                                     
|                                        |                                                                                                      | Prepaid expenses and other current assets           |                                                     
|                                        |                                                                                                      | Accounts payable                                    |                                                     
|                                        |                                                                                                      | Accrued expenses                                    |                                                     
|                                        |                                                                                                      | Other                                               |                                                     
|                                        |                                                                                                      |                                                     |                                                     
|                                        |                                                                                                      |                                                     | Net cash provided by operating activities           
|                                        |                                                                                                      |                                                     |                                                     
|Cash flows from investing activities:   |                                                                                                      |                                                     |                                                     
|                                        | Purchase of property, plant and equipment                                                            |                                                     |                                                     
|                                        | Note receivable from prior affiliate                                                                 |                                                     |                                                     
|                                        | Cash received from (paid on) affiliate notes and investments                                         |                                                     |                                                     
|                                        | Purchase of businesses, net of cash acquired                                                         |                                                     |                                                     
|                                        | Proceeds from sale of property, plant and equipment                                                  |                                                     |                                                     
|                                        |                                                                                                      |                                                     |                                                     
|                                        |                                                                                                      |                                                     | Net cash provided by (used in) investing activities 
|                                        |                                                                                                      |                                                     |                                                     
|Cash flows from financing activities:   |                                                                                                      |                                                     |                                                     
|                                        | Cash flows associated with financing of the recapitalization (Note 2):                               |                                                     |                                                     
|                                        |                                                                                                      | Proceeds from issuance of common stock              |                                                     
|                                        |                                                                                                      | Treasury stock repurchase                           |                                                     
|                                        |                                                                                                      | Proceeds from issuance of new long-term obligations |                                                     
|                                        |                                                                                                      | Repayment of existing long-term debt                |                                                     
|                                        |                                                                                                      | Debt issuance costs                                 |                                                     
|                                        | Repayments of long-term obligations                                                                  |                                                     |                                                     
|                                        | Issuance of public notes                                                                             |                                                     |                                                     
|                                        | Repayments of long-term obligations                                                                  |                                                     |                                                     
|                                        | Net borrowings on revolving credit facilities                                                        |                                                     |                                                     
|                                        | Equity issuances                                                                                     |                                                     |                                                     
|                                        | Treasury stock repurchase, including direct expenses                                                 |                                                     |                                                     
|                                        | Purchase of interest rate cap agreement                                                              |                                                     |                                                     
|                                        | Other                                                                                                |                                                     |                                                     
|                                        |                                                                                                      |                                                     |                                                     
|                                        |                                                                                                      |                                                     | Net cash used in financing activities               
|                                        |                                                                                                      |                                                     |                                                     
|Effect of exchange rate changes on cash |                                                                                                      |                                                     | 1,668                                               
|                                        |                                                                                                      |                                                     |                                                     
|Change in cash and cash equivalents     |                                                                                                      |                                                     | (78,321                                             
|Cash and cash equivalents:              |                                                                                                      |                                                     |                                                     
|                                        | Beginning of period                                                                                  |                                                     |                                                     
|                                        |                                                                                                      |                                                     |                                                     
|                                        | End of period                                                                                        |                                                     | $                                                   
|                                        |                                                                                                      |                                                     |                                                     
|Supplemental disclosures:               |                                                                                                      |                                                     |                                                     
|                                        | Taxes paid (net of tax refunds $2,292, $512 and $18,403 in fiscal 2004, 2003 and 2002, respectively) |                                                     | $                                                   
|                                        | Interest paid                                                                                        |                                                     | $                                                   

See accompanying notes to consolidated financial statements.

37

---





SEALY MATTRESS CORPORATION        Notes To Consolidated Financial Statements

Note 1:Significant Accounting Policies

Significant accounting policies used in the preparation of the consolidated financial statements are summarized below.



Sealy Mattress Corporation (the "Company" or the "Parent"), is engaged in the consumer products business and manufactures, distributes and sells conventional
bedding products including mattresses and box springs, as well as a limited number of foam latex mattress products. The Company's products are manufactured in a number of countries in North and South
America and Europe. Substantially all of the Company's trade accounts receivable are from retail businesses.



On April 6, 2004, Sealy Corporation, owner of 100% of the Company's common stock, completed a merger with affiliates of Kohlberg Kravis Roberts &
Co. L.P. ("KKR") whereby KKR acquired 92% of Sealy Corporation's capital stock. Certain of Sealy Corporation's previous stockholders, including affiliates of Bain Capital, LLC and others, retained an
8% interest in Sealy Corporation's stock. The
merger was accounted for as a recapitalization. See Note 2 for further details on the recapitalization. Subsequent to the recapitalization, the Company received as contributed capital all of
Sealy Corporation's 100% interest in Sealy Mattress Company. The Company also replaced Sealy Corporation as the parent-guarantor of the 8.25% Senior Subordinated Notes due 2014 issued by Sealy
Mattress Company. Accordingly, the Company is now the reporting guarantor-parent company and as a result of being an entity under common control has reflected the operation of Sealy Corporation prior
to April 6, 2004 in a manner similar to a pooling-of-interests. Additionally, all assets, liabilities, and stockholders' deficit of Sealy Corporation existing upon the
completion of the recapitalization as of April 6, 2004 have been pushed down to and included with those of the Company as of November 28, 2004. Therefore, all reported amounts as of and
for the year ended November 28, 2004 are comparable in all material respects to those for the prior periods presented herein except as to common stock and additional paid-in
capital, which reflect the respective outstanding shares of the Company and Sealy Corporation. Subsequent to the recapitalization, none of the activity of Sealy Corporation will be included in the
consolidated financial statements of the Company and its subsidiaries (see Note 19).

All
stock share amounts presented in the Consolidated Financial Statements and in the notes thereto have been restated to reflect a 3.49 to one stock split which occurred in 2004.



The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary companies. Intercompany transactions are eliminated. The
equity method of accounting is used for joint ventures and investments in associated companies over which the Company has significant influence, but does not have effective control. Significant
influence is generally deemed to exist when the Company has an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the
investee's Board of Directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. The cost method of
accounting is used for investments in which the Company has less than a 20% ownership interest, and the Company does not have the ability to exercise significant influence. These investments are
carried at cost and are adjusted only for other-than-temporary declines in fair value. The

38

---



carrying
value of these investments is reported in other long-term assets. The Company's equity in the net income and losses of these investments is reported in other (income) expense,
net. See Note 10, "Other (Income) Expense, net." The Company also periodically assesses whether it has any primary beneficial interests in any variable interest entity ("VIE") which would
require consolidation of such entity in accordance with FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." At November 28, 2004, the Company does not believe it
is a primary beneficiary of a VIE or holds any significant interests or involvement in a VIE.



The Company uses a 52-53 week fiscal year ending on the closest Sunday to November 30, but no later than December 2. The fiscal years
ended November 28, 2004, November 30, 2003 and December 1, 2002 were 52-week years.



In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46-R", as revised December 2003 with respect to effective dates). The primary objectives of FIN 46-R are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the
"primary beneficiary"). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities without receivingadditional subordinated financial support from other parties. In addition, FIN 46-R requires
that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The Company adopted FIN 46-R in its second fiscal
quarter of 2004, however the Company does not believe it is a primary beneficiary of a VIE or holds any significant interests or involvement in a VIE, therefore adoption of FIN 46-R did
not have an impact on the Company's consolidated financial statements.

In
December 2003, The FASB issued FAS 132 (Revised), "Employers' Disclosure about Pensions and Other Postretirement Benefits" ("FAS 132R"). A revision of the
pronouncement originally issued in 1998, FAS 132R expands employers' disclosure requirements for pension and postretirement benefits to enhance information about plan assets, obligations,
benefit payments, contributions, and net benefit cost. FAS 132R does not change the accounting requirements for pensions and other postretirement benefits. This statement is effective for
fiscal years ending after December 15, 2003, with interim-period disclosure requirements effective for interim periods beginning after December 15, 2003. Accordingly, the Company
implemented FAS 132R beginning with its second fiscal quarter of 2004. The adoption of this statement did not have an impact on the Company's financial position or results of operations.

In
November of 2004, the FASB issued SFAS 151, "Inventory Costs, an amendment of ARB No. 43 Chapter 4". This Statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and requires that those items be
recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for fiscal years beginning after June 15, 2005. The Company will adopt this statement as of the beginning of fiscal 2006, and does not expect it to have
a material impact on its financial position or results of operations.

39

---



In
December 2004, the FASB issued FAS 123 (Revised), "Share-Based Payment" ("FAS 123R") which replaces FAS 123 and supercedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). This statement requires compensation costs relating to share-based payment transactions to be recognized in financial statements based upon the
fair value of the award. FAS 123R eliminates the option to account for the cost of stock-based compensation using the intrinsic value method as allowed under APB 25. Having no publicly traded
equity securities, the Company is considered a "nonpublic entity" as defined in the statement. FAS 123R is effective for nonpublic entities for fiscal years beginning after December 15,
2005. Therefore, the Company expects to adopt FAS 123R as of the beginning of its fiscal year ending December 2, 2007. The Company currently measures compensation costs related to its
share-based awards under APB 25, as allowed by FAS 123, and provides pro forma disclosure in the notes to the financial statements of the effects of accounting for share-based payments under
FAS 123, as required by that standard (Note 1). As the intrinsic value method of APB 25 has rarely resulted in the recognition of expense in the Company's financial statements, the
Company expects the adoption of FAS 123R to have an impact on its results of operations. The Company is still in the process of evaluating the extent of such impact.



The Company recognizes revenue, when realized or realizable and earned, which is when the following criteria are met: persuasive evidence of an arrangement
exists; delivery has occurred; the sales price is fixed and determinable; and collectibility is reasonably assured. The recognition criteria are generally met when title and risk of loss have
transferred from the Company to the buyer, which is generally upon delivery to the customer sites or as determined by legal requirements in foreign jurisdictions. At the time revenue is recognized,
the Company provides for the estimated costs of warranties and reduces revenue for estimated returns and cash discounts. The Company also records reductions to revenue for customer incentive programs
offered including volume discounts, promotional allowances, slotting fees and supply agreement amortization, in accordance with Emerging Issues Task Force Issue 01-09, "Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Product" ("EITF 01-09"). Accordingly, $64.1 million, $50.3 million, and $51.5 million was
recorded as a reduction of revenue for the years ended November 28, 2004, November 30, 2003, and December 1, 2002, respectively, associated with EITF 01-09.



The Company incurred $68.9 million, $61.9 million and $58.4 million in shipping and handling costs associated with the delivery of finished
mattress products to its customers in fiscal 2004, 2003 and 2002, respectively. These costs are included in selling, general and administrative expenses in the consolidated statement of operations.



Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents,
receivables, foreign currency forward contracts and interest rate swap arrangements. The Company places its cash and cash equivalents with high-quality financial institutions and limits
the amount of credit exposure to any one institution.

The
Company's accounts receivable arise from sales to numerous customers in a variety of markets, and geographies around the world. Receivables arising from these sales are generally not
collateralized.

40

---



The
Company's customers include furniture stores, national mass merchandisers, specialty sleep shops, department stores, contract customers and other stores. The top five customers accounted for
approximately 20.2%, 18.1% and 22.0% of the Company's net sales for the years ended November 28, 2004, November 30, 2003 and December 1, 2002, respectively, and no single customer
accounted for over 10.0% of the Company's net sales in any of those years. The Company performs ongoing credit evaluations of its customers' financial conditions and maintains reserves for potential
credit losses. Such losses, in the aggregate, have not materially exceeded management's expectations, except in 2002 with respect to affiliate receivables.

The
counterparties to the Company's foreign currency and interest rate swap agreements are major financial institutions. The Company has never experienced non-performance by
any of its counterparties.

The
Company is dependent upon a single supplier for certain key structural components of its new UniCased® Posturepedic line of mattresses. Such components are purchased
under a four-year supply agreement, and are manufactured in accordance with a proprietary design exclusive to the supplier. The Company has incorporated the UniCased® method of
construction into substantially all of its Sealy brand products, and has also incorporated the similar TripLCased® construction into some of the Stearns & Foster branded products as
well. The Company purchases its other raw materials and certain components from a variety of vendors. The Company purchases approximately 52% of its Sealy and Stearns & Foster box spring parts
from a single third-party source and manufactures the remainder of these parts. In order to reduce the risks of dependence on external supply sources and to enhance profitability, the Company has
expanded its own internal component parts manufacturing capacity.

Approximately
70% of the employees at the Company's 25 North American plants are represented by various labor unions with separate collective bargaining agreements. The Company's current
collective bargaining agreements, which are typically three years in length, expire at various times beginning in fiscal 2005 through 2007. Of the employees covered by collective bargaining
agreements, approximately 29% are under contracts expiring in fiscal 2005.



The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the amount of assets and liabilities and disclosures on contingent assets and liabilities at year end and the reported amounts of revenue and expenses during the reporting period. Actual
results may differ from these estimates.



Certain reclassifications have been made to the prior periods to conform to the 2004 presentation.



Subsidiaries located outside the U.S. use the local currency as the functional currency. Assets and liabilities are translated at exchange rates in effect at the
balance sheet date and income and expense accounts at average exchange rates during the year. Resulting translation adjustments are recorded directly to a separate component of shareholders' deficit
(accumulated other comprehensive income (loss)) and are not tax-effected since they relate to investments which are permanent in nature. At November 28, 2004 and November 30,
2003, accumulated foreign currency translation adjustments were $10.5 million and $(0.9) million, respectively. Foreign currency transaction gains and losses are recognized in earnings at the

41

---



time
they occur. The Company recorded foreign currency transaction losses of $1.6 million, $0.9 million and $1.4 million in fiscal 2004, 2003 and 2002, respectively.



For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with a maturity at the time of purchase of three months or
less to be cash equivalents. Cash equivalents are stated at cost, which approximates market value.



The amounts of checks issued in excess of funds on deposit are reclassified to the appropriate liability accounts which had been relieved at the time the checks
were drawn. Accordingly, accounts payable and accrued compensation expenses include reclassifications of outstanding checks in the amounts of $9.9 million and $1.5 million at
November 28, 2004, and $4.6 million and $1.9 million at November 30, 2003, respectively.



The cost of inventories is determined by the "first-in, first-out" (FIFO) method, which approximates current cost. The cost of inventories
includes raw materials, direct labor and manufacturing overhead costs. The Company provides inventory reserves for excess, obsolete or slow moving inventory based on changes in customer demand,
technology developments or other economic factors.



The Company from time to time enters into long-term supply agreements with its customers. Any initial cash outlay by the Company is capitalized and
amortized as a reduction of sales over the life of the contract and is ratably recoverable upon contract termination. Such capitalized amounts are included in "Prepaid expenses and other current
assets" and "Debt issuance costs, net, and other assets" in the Company's balance sheet.



Property, plant and equipment are recorded at cost reduced by accumulated depreciation. Depreciation expense is provided based on historical cost and estimated
useful lives ranging from approximately twenty to forty years for buildings and building improvements and five to fifteen years for machinery and equipment. The Company generally uses the
straight-line method for calculating the provision for depreciation. The Company reviews property, plant & equipment for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net
undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets in accordance with FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. Such assets which meet the criteria of FAS 144 to be reported as "assets held for sale" are shown as such in the accompanying
balance sheets, and consist of land and buildings at the Company's closed manufacturing facilities which are being actively marketed for sales and which the Company expects to sell within one year.

42

---





The Company capitalizes costs associated with the issuance of debt and amortizes them as additional interest expense over the lives of the debt. Upon the
prepayment of the related debt, the Company will accelerate the recognition of an appropriate amount of the costs as interest expense. Additional interest expense arising from such prepayments was
$1.2 million in 2004. The Company has the following amounts recorded in Debt issuance costs, net, and other assets:

November 28,
2004

November 30,
2003(in millions)Gross cost

$
37.2

$
38.5Accumulated amortization


(4.2
)

(22.3
)Net deferred debt issuance costs

$
33.0

$
16.2




The Company recognizes royalty income based on sales of Sealy, Stearns and Foster, and Bassett branded product by various licensees. The Company recognized gross
royalty income of $15.6 million, $13.7 million, and $12.2 million in fiscal 2004, 2003 and 2002, respectively. The Company also pays royalties to other entities for the use of
their names on product produced by the Company. The Company recognized royalty expense of $1.4 million, $1.2 million and $1.0 million in fiscal 2004, 2003 and 2002, respectively.



Income taxes are accounted for under the asset and liability method in accordance with SFAS 109, "Accounting for Income Taxes". Deferred tax assets and
liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company provides valuation allowances against the net deferred tax asset for amounts that are not considered more likely than not to be realized. See
Note 11 for disclosure of amounts related to deferred taxes and associated valuation allowances.



The Company expenses all advertising costs as incurred. Advertising expenses, including cooperative advertising, for the years ended November 28, 2004,
November 30, 2003 and December 1, 2002 amounted to $142.3 million, $135.2 million and $146.3 million, respectively.



The Company's warranty policy provides a 10-year non-prorated warranty service period on all currently manufactured Sealy Posturepedic,
Stearns & Foster and Bassett bedding products and some other Sealy-branded products. The Company's policy is to accrue the estimated cost of warranty coverage

43

---



at
the time the sale is recorded. The changes in the Company's accrued warranty obligations for the years ended November 28, 2004 and November 30, 2003 are as follows:

2004

2003(in thousands)Accrued warranty obligations at beginning of year

$
9,135

$
9,538Warranty claims


(14,607
)

(11,427
)Warranty provision


19,329


11,024Accrued warranty obligations at end of year

$
13,857

$
9,135




Product development costs are charged to operations during the period incurred and are not considered material.



Environmental expenditures that relate to current operations are expensed or capitalized, as appropriate, in accordance with AICPA Statement of Position
96-1, "Environmental Remediation Liabilities". Expenditures that relate to an existing condition caused by past operations and that do not provide future benefits are expensed as incurred.
Liabilities are recorded when environmental assessments are made or the requirement for remedial efforts is probable, and the costs can be reasonably estimated. The timing of accruing for these
remediation liabilities is generally no later than the completion of feasibility studies. The Company has an ongoing monitoring and identification process to assess how the activities, with respect to
the known exposures, are progressing against the accrued cost estimates, as well as to identify other potential remediation sites that are presently unknown.



As permitted by FAS No. 123, "Accounting for Stock-Based Compensation", the Company continues to account for its stock option and stock incentive plans in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and makes no charges (except to the extent required by APB Opinion No. 25)
against earnings with respect to options granted. See Note 2 regarding certain one-time stock-based compensation expenses recognized under
APB Opinion No. 25 in connection with the Company's merger and recapitalization. FAS No. 123 does however require the disclosure of pro forma information regarding net income and
earnings per share determined as if the Company had accounted for its stock options under the fair value method. Disclosure related to pro forma earnings under FAS No. 123 is presented below.



For purposes of this pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company
recognized no compensation expense in 2003 or 2002 as all options were granted at or above the fair market value of the stock at the date of grant. Stock option expense of $45.5 million was
included in recapitalization expense (see Note 2). See Note 3 for a discussion of the provisions of the Company's stock option plans and information regarding options outstanding.

44

---





2004

2003

2002(in thousands)Net income (loss)As reported

$
(38,283
)
$
18,269

$
16,919Add: Stock-based employee compensation expense included in reported net income (loss) net of related tax effects


27,337


787


463Deduct: Stock-based employee compensation expense determined under fair value based method for all awards net of related taxes


(27,454
)

(958
)

(1,058
)Pro forma

$
(38,400
)
$
18,098

$
16,324


The
fair value for all options granted were estimated at the date of grant or revaluation using a Black-Scholes option pricing model with the following weighted-average assumptions: the
expected life for all
options is seven years; the expected dividend yield for all stock is zero percent and the expected volatility of all stock is zero percent. The fair market value of the Company's stock is determined
based on estimates by the Company's Board of Directors.

The
risk free interest rates utilized for the grants are as follows:

Option Grant Date

Risk Free
Interest RateFiscal 2002

4.07%-5.22%Fiscal 2003

3.72%-4.36%Fiscal 2004

4.00%-5.25%


The
weighted average fair value of grants issued in 2004 was $1.13 per share.

Note 2:Merger and Recapitalization

On
April 6, 2004, Sealy Corporation completed a merger with affiliates of KKR whereby KKR acquired approximately 92% of Sealy Corporation's capital stock. Certain of Sealy
Corporation's stockholders prior to the merger, including affiliates of Bain Capital, LLC and others (the "Rollover Stockholders"), retained approximately an 8% interest in Sealy Corporation's stock.
In connection with the merger, Sealy Corporation recapitalized substantially all of its outstanding debt. The following table summarizes the estimated sources and uses of cash in connection with the
recapitalization as if all amounts were funded as of the date of the recapitalization:

Sources:

Uses:(in millions)Available cash

$
128.8

Purchase outstanding equity

$
740.5Settlement of MFI Note


13.6

Repayment of existing debt andSenior secured term loan facility


560.0

accrued interest


751.1Senior unsecured term loan


100.0

Redemption of existing stock options


21.0Senior subordinated notes


390.0

Fees, expenses and otherEquity contribution


436.1

transaction costs


115.9Total sources

$
1,628.5

Total uses

$
1,628.5


45

---



Sealy
Corporation's capital stock outstanding immediately prior to the merger, except with respect to those shares to be retained by the Rollover Stockholders, was cancelled and
exchanged for aggregate cash consideration of approximately $740.5 million. Sealy Corporation issued new Class A Common Stock to KKR and the Rollover Stockholders retained their
Class A Common Stock in proportion to their respective ownership interests. All outstanding amounts under the existing Senior Credit Agreement were repaid. On April 6, 2004, the Company
closed tender offers with respect to the outstanding $300 million aggregate principal amount of the 9.875% Senior Subordinated Notes and the outstanding $128 million aggregate principal
amount of 10.875% Senior Subordinated Discount Notes
for cash in amounts equal to 103.542% and 103.875% of the principal amounts, respectively. Approximately 91% and 99% of the 9.875% Senior Subordinated Notes and 10.875% Senior Subordinated Discount
Notes were tendered, respectively, and the remaining amount was called and paid by the Company on May 6, 2004 for approximately $31.2 million including approximately $1.1 million
of accrued interest and prepayment premiums of approximately $1.0 million. The Company also repaid the $50 million outstanding balance of its existing 10% Junior Subordinated Notes.

The
Company entered into new senior credit facilities consisting of a $125 million senior secured revolving credit facility with a six-year maturity and a
$560 million senior secured term loan facility with an eight-year maturity. In addition, the Company borrowed $100 million under a senior unsecured term loan due in nine
years. The Company also issued $390 million aggregate principal amount of new Senior Subordinated Notes due in 2014. See Note 6 for a full description of the terms and conditions of the
aforementioned debt incurred in the recapitalization. The Company incurred approximately $36.4 million of costs associated with establishing the new senior credit facilities and the senior
unsecured term loan and the issuance of the new Senior Subordinated Notes. Such costs are included in the above total amount for estimated fees, expenses and other costs and will be amortized as
interest expense over the term of the respective debt.

All
stock options to purchase Sealy Corporation's common stock outstanding immediately prior to the merger, whether or not vested, other than certain options held by members of
management that those members elected to rollover (the "Rollover Options") were cancelled and converted into a right to receive cash consideration upon the completion of the merger. Accordingly, the
Company paid approximately $21.0 million to settle the options which were not rolled over, resulting in a charge to expense during the year ended November 28, 2004. The Rollover Options,
which had intrinsic value of approximately $24.6 million upon the completion of the merger, now have an expiration date which was extended beyond that of the previously existing options,
resulting in a new measurement date. Consequently, a non-cash charge to expense of $24.6 million was recorded during the year ended November 28, 2004.

The
Company incurred approximately $78.2 million of other cash costs primarily associated with debt breakage costs, merger advisory fees, management retention bonuses and other
costs, of which $70.6 million was charged to expense during the year, with the remaining $7.6 million of direct costs related to the repurchase of shares charged against additonal
paid-in capital. The Company also incurred non-cash charges of approximately $11.8 million primarily related to the write-off of previous debt issuance
costs, and various other non-cash charges of approximately $5.1 million related to the recapitalization. Included in the amounts disclosed above are losses associated with the
extinguishment of the previously existing debt totaling $32.2 million.

46

---



Note 3:Stock Based Compensation

All
stock options described below relate to options to purchase equity shares of Sealy Corporation, the parent company of Sealy Mattress Corporation. Such options are disclosed herein
because they are used as compensation for employees of Sealy Mattress Corporation and its subsidiaries, thus requiring expense associated with such options to be recognized by Sealy Mattress
Corporation.



Sealy Corporation's Board of Directors adopted the 1998 Stock Option Plan ("1998 Plan") and reserved 5,000,000 shares of Class A Common Stock of Sealy
Corporation for issuance. Options under the 1998 Plan were granted as Nonqualified Stock Options subject to the provisions of Section 83 of the Internal Revenue Code. The options vested either
20% on the first through fifth anniversary of the grant or 40% upon the second anniversary, and 20% on the third, fourth and fifth anniversary dates of the grant. On April 6, 2004, all
outstanding options under the 1998 Plan, whether or not vested, other than certain options held by members of management that those members elected to rollover (the "Rollover Options"), were canceled
and converted into a right to receive cash consideration upon the completion of the Merger. The Rollover Options, which have an aggregate initial intrinsic value of $24.6 million, represent
options to purchase Class A common stock in Sealy Corporation and are fully vested. The expiration dates of the existing options converted to Rollover Options were uniformly extended to ten
years from the date of the merger, thus resulting in a new measurement date and recognition of expense for the intrinsic value. Recapitalization expense in the accompanying Statement of Operations
includes $21.0 million to settle options not rolled over and $24.6 million for the intrinsic value of the Rollover Options.



Sealy Corporation's Board of Directors has adopted the 2004 Stock Option Plan for Key Employees of Sealy Corporation and its Subsidiaries ("2004 Plan") that
provides for the grant of cash and cashless exercise stock options, stock appreciation rights and/or dividend equivalent rights to management and other key employees on terms and subject to conditions
as established by the Human Resources Committee of Sealy Corporation's Board of Directors or certain of the committee's designees. Twenty million shares of Sealy Corporation's Class A common
stock are available for grants under the plan. Options under the 2004 Plan are granted in part as "time options," which vest and become exercisable ratably on a monthly basis over the first five years
following the date of grant, and granted in part as "performance options," which vest and become exercisable over the five fiscal years through fiscal year 2008 upon the achievement of certain EBITDA
performance targets, and in any event by the eighth anniversary of the date of grant. As of November 28, 2004, approximately 4.9 million time options and
7.1 million performance options were issued and outstanding. The Company has met its EBITDA performance target as of November 28, 2004, thus the 2004 portion of the performance options
became vested (approximately 20% of the total outstanding performance options vested as of November 28, 2004).



Concurrent with the merger in 2004, three officers of the Company were given options to sell their shares of stock in Sealy Corporation back to the Company upon
their retirement. The sales price per share is based on a formula which takes into account changes in the equity of Sealy Corporation since the merger and recapitalization, including, among other
things, consolidated net income, additional capital contributions, and capital distributions. The Company recognized an initial put obligation concurrent with the recapitalization of approximately
$2.5 million to recognize the resulting obligation to repurchase

47

---



Rollover
Shares held by these officers. A subsequent decline in the sales price per share, resulting from the fact that a Sealy Corporation dividend distribution (see Note 19) exceeded
consolidated net income since the merger and recapitalization, resulted in a credit to earnings of $0.1 million in 2004 included in selling, general and administrative expense. At
November 28, 2004, the put obligation of $2.4 million, recorded in other noncurrent liabilities, included both Rollover Options and the vested portion of new options granted to these
employees under the 2004 Plan.

At
November 30, 2003, other noncurrent liabilities included an obligation to repurchase certain Sealy Corporation equity securities held by a former officer at the estimated fair
market value subject to a maximum and minimum share value stated in the officer's agreement. A charge to earnings of $1.3 million and $0.8 million in fiscal 2003 and 2002, respectively,
resulted from adjustments to revalue this obligation to reflect increases in the fair market value of the securities. The obligation reached its maximum value per share in 2003, therefore no expense
was recorded in 2004 associated with this obligation. This obligation was subsequently discharged in connection with the recapitalization on April 6, 2004.

A
summary of the status and changes of shares subject to options and the related average price per share is as follows (the option price equalled the stock price at the grant date for
all options):

Shares Subject to Options

Average Option Price Per ShareOutstanding December 2, 2001 (6,499,112 options exercisable)

13,597,764

$
0.99Granted

3,445,951


1.25Exercised

(1,487,239
)

0.29Canceled

(2,912,662
)

0.60Outstanding December 1, 2002 (5,391,847 options exercisable)

12,643,814


1.23Granted

1,196,147


1.43Exercised

(846,855
)

0.23Canceled

(505,700
)

2.20Outstanding November 30, 2003 (6,688,575 options exercisable)

12,487,406


1.27Exercised prior to recapitalization

(518,911
)

0.63Exercised and cashed out in connection with recapitalization

(5,649,935
)

1.11Granted subsequent to recapitalization

11,973,088


4.39Exercised subsequent to recapitalization




Canceled




Outstanding November 28, 2004 (8,333,632 options exercisable)

18,291,648

$
3.26


48

---



For
various price ranges, weighted average characteristics of outstanding stock options at November 28, 2004 were as follows:

Outstanding Options

Exercisable OptionsRange of Exercise prices

Shares

Remaining Life (Years)

Weighted Average Price

Shares

Weighted Average Price$0.00-$1.00

2,557,534

9.4

$
0.33

2,557,534

$
0.33$1.00-$2.00

2,960,120

9.4


1.42

2,960,120


1.42$2.00-$3.00

759,973

9.4


2.43

759,973


2.43$3.00-$3.44

40,933

9.4


3.44

40,933


3.44$4.39

11,973,088

9.7


4.39

2,015,072


4.39


Note 4:Inventories

The
components of inventory as of November 28, 2004 and November 30, 2003 were as follows:

2004

2003(in thousands)Raw materials

$
27,269

$
26,575Work in process


16,626


14,699Finished goods


8,028


8,139$
51,923

$
49,413


Note 5:Goodwill and Other Intangible Assets

The
Company adopted the remaining provisions of FAS 142 "Goodwill and Other Intangible Assets" effective at the beginning of fiscal 2002. In accordance with FAS 142, the Company
reviews the carrying amounts of goodwill and certain other intangibles for impairment at least annually, or when events or circumstances indicate that their carrying value may not be recoverable from
future cash flows. Except for specific write-offs of goodwill associated with business closures, the Company has not recorded any impairment charges during fiscal 2004, 2003 or 2002.

The
changes in the carrying amount of goodwill for the years ended November 28, 2004 and November 30, 2003 are as follows:

2004

2003(in thousands)Balance at beginning of year

$
381,891

$
374,946Goodwill reduced due to business closure (See Note 17)





(1,600
)Increase due to foreign currency translation


5,617


8,545Balance at end of year

$
387,508

$
381,891


49

---





Other intangibles as of November 28, 2004 and November 30, 2003 consisted of the following:

2004

2003(in thousands)Acquired licenses

$
8,021

$
7,530Less accumulated amortization


(4,658
)

(3,181
)Acquired licensesnet


3,363


4,349Intangible pension asset for unamortized prior service costs
(Note 12)


1,192


1,015Total other intangibles

$
4,555

$
5,364


Acquired
licenses are amortized on the straight-line method over periods ranging from 5 to 15 years.

Note 6:Long-Term Obligations

Long-term debt as of November 28, 2004 and November 30, 2003 consisted of the following:

November 28,
2004

November 30,
2003(in thousands)Senior Revolving Credit Facility

$
5,000

$
Senior Secured Term Loan


470,000Senior Unsecured Term Loan


100,000


Senior Subordinated Notes


390,000


Senior AXELs Credit Agreement





259,139Senior Subordinated Notes (net of premium of $2,816)





302,816Senior Subordinated Discount Notes





128,000Junior Subordinated Notes





49,989Other


9,337


7,309974,337


747,253Less current portion


8,542


47,623$
965,795

$
699,630


In
connection with the Recapitalization, the Company entered into new senior credit facilities consisting of a $125 million senior secured revolving credit facility with a
six-year maturity and a $560 million senior secured term loan facility with an eight-year maturity. The Company also borrowed $100 million under a senior
unsecured term loan, due in 2013, and issued $390 million aggregate principal amount of new Senior Subordinated Notes due in 2014.

As
of November 28, 2004, there was $470 million outstanding under the senior secured term loan due in 2012 and $5 million outstanding under the $125 million
revolving credit facility due in 2010. At November 28, 2004, the Company had approximately $91.9 million available under the revolving credit facility after taking into account letters
of credit issued totaling $28.1 million. The Company will be permitted to incur up to an additional $100.0 million of senior secured term debt at the option of participating lenders, so
long as no default or event of default under the new senior secured credit facilities has occurred or would occur after giving effect to such incurrence and certain other conditions are

50

---



satisfied.
The senior secured credit facilities are guaranteed by all of the Company's current and future domestic subsidiaries and are secured by substantially all of the assets of the Company and
its current and future domestic subsidiaries by a first priority pledge of 100% of the capital stock of Sealy Mattress Company (the issuer of the debt and a wholly owned subsidiary of the Company
through which all other subsidiaries are controlled), 100% of the capital stock of all other domestic subsidiaries, and a security interest in 65% of the capital stock of each direct foreign
subsidiary of Sealy Mattress Company. The Company's ultimate parent, Sealy Corporation, is not a guarantor of these credit facilities. The senior credit facilities are governed by the Senior Credit
Agreement which imposes certain restrictions including, but not limited to, the payment of dividends or other equity distributions and the incurrence of debt or liens upon the assets of the Company or
its subsidiaries. The Senior Credit Agreement also calls for the Company to maintain a maximum net leverage ratio and a minimum interest coverage ratio and imposes limitations on capital expenditures.

Borrowings
under the Company's new senior secured credit facilities bear interest at the Company's choice of the Eurodollar rate or adjusted base rate ("ABR"), in each case, plus an
applicable margin (1.00% on the revolving credit facility and 2.25% on the term loan facility as of November 28, 2004), subject to adjustment based on a pricing grid. On August 6, 2004,
the Company amended the senior secured credit facility to reduce the applicable margin by 25 basis points. On June 3, 2004, the Company entered into an interest rate swap agreement effective
July 6, 2004 effectively fixing the floating portion of the interest rate at 3.725% on $200 million of the outstanding balance under the senior secured term loan through
November 2005, declining to $150 million through November 2007 (see also Note 9). To
retain the designation of this swap as a hedging instrument, the Company must select the Eurodollar rate on the hedged portion of the senior secured term loan during the term of the swap. The term
loan facility initially provided for quarterly principal payments of approximately $1.4 million, however as of November 28, 2004, the Company had repaid $90 million of the term
debt, effectively pre-paying all principal payments due prior to the final maturity of the debt in 2012. The Company may also be required to make prepayments equal to 50% of excess cash
flow, as defined in the Senior Credit Agreement, as well as 100% of certain asset sales by or proceeds from debt issuances of the Company or its subsidiaries. No Excess cash flow payment was required
for 2004.

The
$100 million senior unsecured term loan, governed by the Senior Unsecured Credit Agreement, will mature in 2013 and bears interest at the Company's choice of the Eurodollar
rate or ABR, plus an applicable margin (4.50% as of November 28, 2004), subject to adjustment based on a pricing grid. All principal amounts outstanding under the senior unsecured term loan are
to be repaid at maturity. The senior unsecured term loan is guaranteed by all of the Company's current and future domestic subsidiaries. The Company's ultimate parent, Sealy Corporation, is not a
guarantor of this facility. The Senior Unsecured Credit Agreement imposes certain restrictions including, but not limited to, the payment of dividends or other equity distributions and the incurrence
of debt or liens upon the assets of the Company or it subsidiaries. The Senior Unsecured Credit Agreement calls for the Company to offer prepayment of the loan at a price equal to 101% of the
outstanding principal amount in the event of a change in control as defined in the agreement. The Senior Unsecured Credit Agreement also allows for the voluntary prepayment of the unsecured term loan
at a premium (principal plus premium expressed as percentages of

51

---



principal
amount) if redeemed during the twelve-month period beginning on April 6 of each of the years indicated below:

Year

Percentage of
Principal Amount2004

103.0
%2005

102.0
%2006

101.0
%2007 and thereafter

100.0
%


The
outstanding Senior Subordinated Notes consist of $390 million aggregate principal amount maturing June 2014, bearing interest at 8.25% per annum payable semiannually in
arrears on June 15 and December 15, commencing on December 15, 2004. On September 29, 2004, the Company completed an exchange offer whereby all of the Senior Subordinated
Notes were exchanged for publicly traded, registered securities with identical terms (other than certain terms relating to registration rights and certain interest rate provisions otherwise applicable
to the original senior subordinated notes). The Senior Subordinated Notes rank junior to all of the Company's existing and future senior indebtedness and secured indebtedness, including any borrowings
under the senior secured credit facilities and the senior unsecured term loan. The Senior Subordinated Notes are guaranteed by all of the Company's domestic subsidiaries, but are not guaranteed by the
Company's ultimate parent, Sealy Corporation. The Senior Subordinated Notes are governed by an indenture which imposes certain restrictions including, but not limited to, the payment of dividends or
other equity distributions and the incurrence of debt or liens upon the assets of the Company or its subsidiaries. The indenture calls for the Company to offer prepayment of the notes at a price equal
to 101% of the outstanding principal amount in the event of a change in control as defined in the indenture. After June 15, 2009, the Senior Subordinated Notes are subject to redemption at 30
to 60 days' notice at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon and Special Interest, if any, to the
applicable redemption date, if redeemed during the twelve-month period beginning on June 15 of each of the years indicated below:

Year

Percentage of Principal Amount2009

104.125
%2010

102.750
%2011

101.375
%2012 and thereafter

100.000
%


At
November 28, 2004, the company was in compliance with the covenants contained within its senior credit agreements and note indenture.

In
connection with the Recapitalization, all outstanding amounts under the existing Senior AXELs Credit Agreement ($259.1 million outstanding at November 30, 2003) were
repaid. On April 6, 2004, the Company closed tender offers with respect to the outstanding $300 million aggregate principal amount of the 9.875% Senior Subordinated Notes
($302.8 million, including premium of $2.8 million, outstanding at November 30, 2003) and the outstanding $128 million aggregate principal amount of 10.875% Senior

52

---



Subordinated
Discount Notes ($128 million outstanding at November 30, 2003) for cash in amounts equal to 103.542% and 103.875% of the principal amounts, respectively. Approximately 91%
and 99% of the 9.875% Senior Subordinated Notes and 10.875% Senior Subordinated Discount Notes were tendered, respectively, and the remaining amount was called and paid by the Company on May 6,
2004 for approximately $31.2 million including approximately $1.1 million of accrued interest and prepayment premiums of approximately $1.0 million. The Company also repaid the
$50 million outstanding balance ($50.0 million outstanding at November 30, 2003) of its existing 10% Junior Subordinated Notes.

The
Company's net weighted average borrowing cost was 7.6% and 9.1% for Fiscal 2004 and 2003, respectively.

At
November 28, 2004, the annual scheduled maturities of the principal amounts of long-term obligations were (in thousands, and excluding future mandatory prepayments
which may be required as discussed above):

2005

$
8,5422006


4102007


2842008


402009


41Thereafter


965,020


Note 7:Commitments



The Company leases certain operating facilities, offices and equipment. The following is a schedule of future minimum annual lease commitments at
November 28, 2004.

Fiscal Year

Commitments Under
Operating Leases(in thousands)2005

$
9,2222006


8,2132007


7,2922008


5,1362009


3,763Thereafter


14,608$
48,234


53

---



Rental
expense charged to operations is as follows:

Year Ended
Nov. 28, 2004

Year Ended
Nov. 30, 2003

Year Ended
Dec. 1, 2002(in thousands)Minimum rentals

$
15,381

$
13,766

$
13,790Contingent rentals (based upon delivery equipment mileage)


2,744


2,502


2,686$
18,125

$
16,268

$
16,476


The
Company has the option to renew certain plant operating leases, with the longest renewal period extending through 2033. Most of the operating leases provide for increased rent
through increases in general price levels.



The Company has entered into a four-year supply agreement with a manufacturer to purchase key component parts for its "UniCased®
Construction" mattresses. The agreement calls for the Company to meet minimum cumulative purchase targets at the end of each year of the agreement totaling $70.0 million over the entire life of
the agreement. To the extent that the Company has exceeded the cumulative target as of the beginning of a year, the commitment for that year is reduced. For the year ended November 28, 2004,
the Company exceeded its cumulative minimum purchase requirement of $30.0 million by $17.8 million, thus reducing its minimum obligation for 2005. Based on the cumulative minimum
targets, the Company's future minimum purchases under the agreement are $2.2 million for 2005 and $20.0 million in 2006.

Note 8:Fair Value of Financial Instruments

Due to the short maturity of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, their carrying values approximate fair value.
The carrying amounts of long-term debt under the senior secured credit facilities and the senior unsecured term loan approximate fair value because the interest rate adjusts to market
interest rates. The fair value of long-term debt under the Senior Subordinated Notes, based on a quoted market price, was $415.9 million at November 28, 2004.

Note 9:Hedging Strategy

In 2000, the Company entered into an interest rate swap agreement that effectively converted $236 million of its floating-rate debt to a
fixed-rate basis through December 2006, thereby hedging against the impact of interest rate changes on future interest expense (forecasted cash flows). Use of hedging contracts
allows the Company to reduce its overall exposure to interest rate changes, since gains and losses on these contracts will offset losses and gains on the transactions being hedged. The Company
formally documents all hedged transactions and hedging instruments, and assesses, both at inception of the contract and on an ongoing basis, whether the hedging instruments are effective in offsetting
changes in cash flows of the hedged transaction. The fair values of the interest rate agreements are estimated by obtaining

54

---



quotes
from brokers and are the estimated amounts that the Company would receive or pay to terminate the agreements at the reporting date, taking into consideration current interest rates and the
current creditworthiness of the counterparties. Effective June 3, 2002, the Company dedesignated the interest rate swap agreement for hedge accounting. As a result of the dedesignation,
$12.9 million previously recorded in accumulated other comprehensive loss as of the date of dedesignation was being amortized into interest expense. Due to the retirement of the existing debt
in connection with the recapitalization, the remaining $4.7 million previously recorded in accumulated other comprehensive loss was charged to recapitalization expense (see Note 2).
Prior to the recapitalization, $0.9 million was amortized into interest expense. For the fiscal years ended November 30, 2003 and December 1, 2002, $3.3 million and
$2.0 million, respectively, was amortized into interest expense. Prior to June 3, 2002, the changes in the fair market value of the interest rate swap were recorded in accumulated other
comprehensive income (loss). Subsequent to June 3, 2002, changes in the fair market value of the interest rate swap are recorded in interest expense. For the fiscal years ended
November 28, 2004, November 30, 2003 and December 1, 2002, $0.9 million, $5.4 million and $15.0 million, respectively, was recorded as net interest expense as
a result of the cash requirements of the swap net of the non-cash interest associated with the change in its fair market value. At November 28, 2004 and November 30, 2003,
the fair value carrying amounts of this instrument were net obligations of $6.4 million and $14.9 million, respectively, which is recorded as follows:

November 28,
2004

November 30,
2003(in millions)Accrued interest

$
1.2

$
2.2Other accrued expenses


3.0


6.5Other noncurrent liabilities


2.2


6.2$
6.4

$
14.9


During
the second quarter of 2002, the Company entered into another interest rate swap agreement that has the effect of reestablishing as floating rate debt the $236 million of
debt previously converted to fixed rate debt through December 2006. This interest rate swap agreement has not been designated for hedge accounting and, accordingly, any changes in the fair
value are recorded in interest expense. For fiscal years ended November 29, 2004, November 30, 2003 and December 1, 2002, $0.8 million, $5.2 million and
$10.4 million, respectively, was recorded as a reduction of net interest expense as a result of the cash interest received on the swap net of the non-cash interest associated with
the change in its fair market value. At November 28, 2004 and November 30, 2003, the fair value carrying amount of this instrument was $2.2 million and $6.8 million,
respectively, with $1.8 million and $5.1 million recorded in prepaid expenses and other current assets, and $0.3 million and $1.7 million recorded in noncurrent assets.

The
Company also entered into an interest rate cap agreement during the second quarter of 2002 with a notional amount of $175.0 million that capped the LIBOR rate on which certain
of its previous floating-rate debt was based at 8% through June 2005. This agreement has not been designated for hedge accounting and, accordingly, any changes in the fair value are
recorded in interest expense. The fair value of this instrument is not material.

In
June 2004, the Company entered into an additional swap agreement that has the effect of converting $200 million of the floating-rate debt under the Company's
new senior credit facilities to a

55

---



fixed-rate
basis, declining to $150 million through November 2007. The Company has formally designated this swap agreement as a cash flow hedge and expects the hedge to be
highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. Accordingly, the effective portion of changes in the market value
of the swap will be recorded in other comprehensive income (loss). As of November 28, 2004 $1.7 million was recorded in interest expense. At November 28, 2004, the fair value
carrying amount of the instrument was $2.0 million which is recorded as follows:

November 28, 2004(In millions)Accrued interest

$
1.0Other accrued expenses


1.4Long term receivable


(0.4
)$
2.0


At
November 28, 2004 and November 30, 2003, accumulated other comprehensive income (loss) associated with the interest rate swaps was ($0.6) million and $(5.6) million,
respectively.

To
protect against the reduction in value of forecasted foreign currency cash flows resulting from purchases in a foreign currency, the Company has instituted a forecasted cash flow
hedging program. The Company hedges portions of its purchases denominated in foreign currencies with forward and option contracts. At November 28, 2004, the Company had forward contracts to
sell a total of 32.5 million Canadian dollars with expiration dates ranging from December 8, 2004 through November 1, 2005. At November 28, 2004, the fair value of the
Company's net obligation under the forward contracts was a liability of $3.1 million.

Note 10:Other (Income) Expense, Net

Other (income) expense, net includes interest income of $0.9 million, $1.6 million and $2.2 million for the years ended November 28,
2004, November 30, 2003, and December 1, 2002, respectively.

Other
(income) expense, net in the year ended November 30, 2003 also includes a $2.0 million write-off of previously deferred derivative losses recorded in
accumulated other comprehensive loss and $0.5 million of deferred debt costs associated with the early extinguishment of debt in May 2003. See also Note 9.

Other
(income) expense, net for the year ended December 1, 2002 also includes the Company's equity in the net loss of Malachi Mattress America, Inc. ("Malachi") of
$5.6 million. The Company disposed of its interest in Malachi, a domestic mattress retailer, in October of 2002.

Other
(income) expense, net for the year ended December 1, 2002 also includes $(0.3) for minority interest formerly associated with the Argentina operations.

56

---





Note 11:Income Taxes

The
Company and its domestic subsidiaries file a consolidated U.S. Federal income tax return. Income tax expense (benefit) consists of:

Year ended
Nov. 28, 2004

Year ended
Nov. 30, 2003

Year ended
Dec. 1, 2002(in thousands)Current:Federal

$
(1,896
)
$
10,743

$
2,743State and local


259


1,097


433Foreign


9,319


7,074


6,1957,682


18,914


9,371Deferred:Federal


(16,669
)

(1,546
)

(2,014
)State and local


(921
)

(226
)

(288
)Foreign


1,359


1,054


163(16,231
)

(718
)

(2,139
)Total tax expense

$
(8,549
)
$
18,196

$
7,232


Income
before taxes from foreign operations amounted to $10.1 million, $11.8 million, and $13.4 million for the years ended November 28, 2004,
November 30, 2003, and December 1, 2002, respectively.

The
differences between the actual tax expense and tax expense computed at the statutory U.S. Federal tax rate are explained as follows:

Year ended
Nov. 28, 2004

Year ended
Nov. 30, 2003

Year ended
Dec. 1, 2002Income tax expense (benefit) computed at statutory U.S. Federal income tax rate

$
(16,391
)
$
12,762

$
8,453State and local income taxes, net of federal tax benefit


(3,027
)

595


(1
)Foreign tax rate differential


5,420


283


1,946Adjustment of estimated loss carryforward previously reserved








584Change in valuation allowance on deferred tax assets


5,856


3,822


(5,258
)Effect of non deductible meals and entertainment


556


461


494Other items, net


(963
)

273


1,014Total income tax expense

$
(8,549
)
$
18,196

$
7,232


57

---



Deferred
income taxes reflect the tax effect of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax
purposes. The Company's total deferred tax assets and liabilities and their significant components are as follows:

|                                                                      |  | 2004 |         | 2003 |  
|--------------------------------------------------------------------- |  | ---- | ------- | ---- | -
|
|
|Accrued salaries and benefits                                         |  | $    | 9,532   |      | $
|Allowance for doubtful accounts                                       |  |      | 2,531   |      |  
|Plant shutdown, idle facilities, and environmental costs              |  |      | 33      |      |  
|Tax credit and loss carryforward benefit                              |  |      | 11,896  |      |  
|Accrued warranty reserve                                              |  |      | 4,007   |      |  
|Other accrued reserves                                                |  |      | 1,361   |      |  
|Book versus tax differences related to property, plant, and equipment |  |      | (1,480  | )    |  
|Book versus tax differences related to intangible assets              |  |      | 1,290   |      |  
|All other                                                             |  |      | 4,920   |      |  
|                                                                      |  |      |         |      |  
|                                                                      |  |      | 34,090  |      |  
|                                                                      |  |      |         |      |  
|Valuation allowance                                                   |  |      | (10,192 | )    |  
|                                                                      |  |      |         |      |  
|                                                                      |  | $    | 23,898  |      | $
|                                                                      |  |      |         |      |  

The
Company has a valuation allowance against certain deferred tax assets of $19.8 million and $13.9 at November 28, 2004 and November 30, 2003, primarily reflecting
uncertainties regarding utilization of loss carryforward benefits.

At
November 28, 2004, the Company had unused federal and state net operating loss and tax credit benefits of $15.8 million generally expiring from 2005 through 2024. There
is a valuation allowance against these benefits in the amount of $5.6 million which represents the portion that the company, at this time, expects to expire unused.

A
provision has not been made for U.S. or foreign taxes on undistributed earnings of foreign subsidiaries permanently invested outside the United States. Should the Company repatriate
foreign earnings, the Company would have to adjust the income tax provision in the period management determined that the Company would repatriate the earnings. The Company is currently studying the
impact of the one-time favorable foreign dividend provisions enacted on October 22, 2004, as part of the American Jobs Creation Act of 2004, and may decide to repatriate earnings of
some of its foreign subsidiaries during the coming fiscal year if it qualifies for certain favorable foreign withholding rates. The Company has not completed the evaluation of the range of amounts
that may be repatriated and the related income tax effects. Management believes this evaluation will be completed by the end of the third quarter of 2005.

Significant
judgment is required in evaluating the Company's federal, state and foreign tax positions and in the determination of its tax provision. Despite management's belief that the
Company's tax return

58

---



positions
are fully supportable, the Company may establish and has established reserves when it believes that certain tax positions are likely to be challenged and it may not fully prevail in
overcoming these challenges. The Company may adjust these reserves as relevant circumstances evolve, such as guidance from the relevant tax authority, its tax advisors, or resolution of issues in the
courts. The Company's tax expense includes the impact of reserve provisions and changes to reserves that it considers appropriate, as well as related interest. Because the Company is not currently
undergoing examinations of any of its corporate income tax returns by tax authorities, management believes that it is unlikely that an audit could be initiated which would result in assessment and
payment of taxes related to these positions during 2005. Therefore, the reserves for these positions are classified as noncurrent in the balance sheet.

Note 12:Retirement Plans

Substantially all employees are covered by defined contribution profit sharing plans, where specific amounts (as annually established by the Company's board of
directors) are set aside in trust for retirement benefits. Profit sharing expense was $7.2 million, $6.4 million, and $5.8 million for the years ended November 28, 2004,
November 30, 2003, and December 1, 2002, respectively.

Hourly
employees working at twelve of the Company's domestic manufacturing facilities are covered by union-sponsored retirement plans. The Company's pension cost associated with these
plans consists of periodic contributions to these plans based upon employee participation. The Company recognized expense for such contributions of $4.6 million, $4.3 million, and
$3.9 million for the years ended November 28, 2004, November 30, 2003, and December 1, 2002, respectively.

The
Company has a noncontributory, defined benefit pension plan covering current and former hourly employees at five of its active plants and seven previously closed facilities. The plan
provides retirement and survivorship benefits based on the employees' credited years of service. The Company's funding policy provides for contributions of an amount between the minimum required and
maximum amount that can be deducted for federal income tax purposes. Pension plan assets consist of investments in various publicly traded stock, bond and money market mutual funds. The Company
records a minimum liability equal to the excess of the accumulated benefit obligation over the fair value of plan assets. Changes in the minimum liability in excess of pension costs recognized in
earnings are charged to other comprehensive income, net of related deferred taxes. Because future compensation levels are not a factor

59

---



in
the plan's benefit formula, the accumulated benefit obligation is approximately equal to the projected benefit obligation as reported below. Summarized information for the plan follows:

2004

2003Change in Benefit Obligation:Projected benefit obligation at beginning of year

$
11,034

$
9,486Service cost


554


422Interest cost


681


610Plan changes


336


329Actuarial (gains)/losses


678


516Benefits paid


(374
)

(329
)Expenses paid


(104
)

Projected benefit obligation at end of year

$
12,805

$
11,034Change in Plan Assets:Fair value of plan assets at beginning of year

$
6,492

$
5,396Actual return on assets


581


859Employer contribution


2,182


566Benefits paid


(374
)

(329
)Expenses paid


(104
)

Fair value of plan assets at end of year

$
8,777

$
6,492Funded Status of Plan:Funded status

$
(4,028
)
$
(4,542
)Unrecognized actuarial (gain)/loss


3,611


3,082Unrecognized transition (asset)/obligation


(350
)

(437
)Unrecognized prior service cost


1,192


1,015Net amount recognized as of fiscal year end

$
425

$
(882
)


2004

2003Amounts Recognized in the Consolidated Balance Sheets:Accrued benefit liability

$
(3,852
)
$
(4,542
)Intangible asset


1,192


1,015Accumulated other comprehensive income


3,085


2,645Net amount recognized as of fiscal year end

$
425

$
(882
)Accumulated Benefit Obligation and Fair Value of Assets:Accumulated benefit obligation

$
(12,629
)
$
(11,034
)Projected benefit obligation

$
(12,805
)
$
(11,034
)Fair value of assets


8,777


6,492Unfunded Projected Benefit Obligation

$
(4,028
)
$
(4,542
)


60

---



2004
Target

2004
Actual

2003
ActualAllocation of plan assets:Equity securities

60.00
%
61.56
%
60.78
%Debt securities

40.00
%
37.96
%
38.83
%Other

0.00
%
0.48
%
0.39
%Total plan assets

100.00
%
100.00
%
100.00
%


2004

2003

2002Components of Net Periodic Pension Cost:Service cost

$
554

$
422

$
390Interest cost


681


610


553Expected return on assets


(616
)

(444
)

(506
)Amortization of unrecognized net loss


184


226


70Amortization of unrecognized transition asset


(87
)

(87
)

(87
)Amortization of unrecognized prior service cost


159


128


121Net periodic pension cost

$
875

$
855

$
541


2004

2003

2002Weighted-average assumptions used to determine net periodic benefit cost:Settlement (discount) rate

6.25
%
6.50
%
7.00
%Expected long-term return on plan assets

8.50
%
8.50
%
8.50
%Weighted average rate of increase in future compensation levels

N/A

N/A

N/A


Estimated Future Benefit Payments:Fiscal 2005

$
254Fiscal 2006


282Fiscal 2007


316Fiscal 2008


375Fiscal 2009


406Fiscal 2010-2014


2,864Employer Contributions Expected to be Paid in Fiscal 2005

$
1,030


61

---





Note 13:Summary of Interim Financial Information (Unaudited)

Quarterly
financial data for the years ended November 28, 2004 and November 30, 2003, is presented below:

|      |                   | First
Quarter |   | Second
Quarter |  | Third
Quarter |         | Fourth
Quarter
|----- | ----------------- | ------------- | - | -------------- |  | ------------- | ------- | --------------
|
|2004: |                   |               |   |                |  |               |         |               
|      | Net sales         |               | $ | 318,198        |  | $             | 316,554 |               
|      | Gross profit      |               |   | 134,597        |  |               | 136,617 |               
|      | Net income (loss) |               |   | 11,261         |  |               | (82,158 | )             
|2003: |                   |               |   |                |  |               |         |               
|      | Net sales         |               | $ | 288,311        |  | $             | 269,776 |               
|      | Gross profit      |               |   | 122,956        |  |               | 107,826 |               
|      | Net income (loss) |               |   | 9,093          |  |               | (1,018  | )             

The
net loss for the second quarter of 2004 includes the effects of the recapitalization.

Note 14:Business Acquisitions

During
the first quarter of 2002, the Company took control of a retail mattress company in which it had previously made investments in the form of a supply agreement and additional
equity. This investment provided the Company an opportunity to determine whether the entity would be a viable distribution source for the Company's products. It is not the Company's strategy to own or
control retail operations. Based on management's assessment, evaluation and consideration of alternative business strategies of the Company, it was determined that the acquired entity did not
represent a valid business strategy and ceased its operations in May 2002. The Company recorded a non-cash charge of $5.8 million associated with this shut-down
of the business representing a write-off of previously recorded goodwill of $5.3 million and a write-down of other assets to their estimated liquidation value. See
note 17 regarding other plant/business closure and restructuring charges.

Due
to the immateriality of the acquisitions to the Company's balance sheet and statement of operations, no pro forma disclosures are considered necessary.

Note 15:Contingencies

The
Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable,
management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

The
Company is currently conducting an environmental cleanup at a formerly owned facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial Site Recovery Act. The
Company and one of its subsidiaries are parties to an Administrative Consent Order issued by the New Jersey Department of Environmental Protection. Pursuant to that order, the Company and its
subsidiary agreed to conduct soil and groundwater remediation at the property. The Company does not believe that its manufacturing processes were the source of contamination. The Company sold the
property in 1997. The Company and its subsidiary retained primary responsibility for the required remediation. The Company has completed essentially all soil remediation with the New Jersey Department
of Environmental Protection approval,

62

---



and
has concluded a pilot test of the groundwater remediation system. The Company has received approval from the New Jersey Department of Environmental Protection of a remediation plan for the
sediment in Oakeys Brook adjoining the site, which the Company expects to start in 2005. The Company is also monitoring ground water at the site. The Company has recorded a reserve for
$2.5 million ($3.1 million prior to discounting at 4.75%) associated with this remediation project, and it is reasonably possible that up to an additional $0.3 million may be
incurred to complete the project.

The
Company is also remediating soil and groundwater contamination at an inactive facility located in Oakville, Connecticut. Although the Company is conducting the remediation
voluntarily, it obtained Connecticut Department of Environmental Protection approval of the remediation plan. The Company has completed essentially all soil remediation under the remediation plan and
is currently monitoring groundwater at the site. The Company has identified cadmium in the ground water at the site and intends to address that during 2005. The Company has recorded a reserve of
approximately $0.5 million associated with the additional work and ongoing monitoring. The Company believes the contamination is attributable to the manufacturing operations of previous
unaffiliated occupants of the facility.

The
Company removed three underground storage tanks previously used for diesel, gasoline, and waste oil from its South Gate, California facility in March 1994 and remediated the
soil in the area. Since August 1998, the Company has been working with the California Regional Water Quality Control Board, Los Angeles Region to monitor ground water at the site.

While
the Company cannot predict the ultimate timing or costs of the South Brunswick, Oakville, and South Gate environmental matters, based on facts currently known, the Company believes
that the accruals recorded are adequate and does not believe the resolution of these matters will have a material adverse effect on the financial position or future operations of the Company; however,
in the event of an adverse decision, these matters could have a material adverse effect.

The
state of California adopted new flame retardant regulations related to manufactured mattresses and box springs which became effective January 1, 2005. The Company believes
that it is in full compliance with those regulations. The Company does not expect the impact of those regulations to be significant to the Company's results of operations or financial position.

In
2000, Montgomery Ward, a customer of Sealy, declared bankruptcy and filed for protection under Chapter 7 of the U.S. Bankruptcy Code. In 2003, the bankruptcy trustee filed a claim of
$3.7 million associated with certain alleged preferential payments by Montgomery Ward to Sealy. In December of 2004 the Company reached a settlement of this matter with the bankruptcy trustee
for $0.2 million and is awaiting approval of this settlement from the bankruptcy court.

Note 16:Segment Information

The
Company has determined that it has two operating segments, domestic and international, that qualify for aggregation as prescribed in SFAS 131. Accordingly the Company has one
reportable industry segment, the manufacture and marketing of conventional bedding. During fiscal 2004, 2003 and 2002, no one customer represented 10% or more of total net sales. Sales outside the
United States were $277.8 million, $239.1 million and $216.8 million for fiscal 2004, 2003 and 2002, respectively. Additionally, long-lived assets (principally
property, plant and equipment) outside the United States were $53.5 million and $49.7 million as of November 28, 2004 and November 30, 2003, respectively.

63

---





|               |                               | 2004                |         | 2003  |         | 2002 |      
|-------------- | ----------------------------- | ------------------- | ------- | ----- | ------- | ---- | -----
|
|US Domestic    |                               | $                   | 1,036.2 |       | 78.9    | %    | $    
|International: |                               |                     |         |       |         |      |      
|               | Canada                        |                     |         | 114.5 |         | 8.7  |      
|               | Europe                        |                     |         | 100.5 |         | 7.6  |      
|               | Mexico                        |                     |         | 21.0  |         | 1.6  |      
|               | Other International Locations |                     |         | 41.8  |         | 3.2  |      
|               |                               |                     |         |       |         |      |      
|               |                               | Total International |         |       | 277.8   |      | 21.1 
|               |                               |                     |         |       |         |      |      
|               |                               | Total Company       |         | $     | 1,314.0 |      | 100.0
|               |                               |                     |         |       |         |      |      

Note 17:Plant/Business Closings and Restructuring Charges

On
May 1, 2004, the Company closed its manufacturing facility at Randolph, Massachusetts. Accordingly, the Company incurred restructuring charges of approximately
$0.6 million during the fiscal year ended November 28, 2004 primarily associated with severance and retention costs. The Company also incurred additional period costs during the year as
the business was primarily shifted to the new Albany facility.

Due
to continued weak performance and the fact that it is not the Company's strategy to own or control retail operations in North America, the Company committed to a plan in the fourth
quarter of 2003 to dispose of its wholly-owned retail subsidiary by sale or liquidation in early 2004. Accordingly, the Company recognized an impairment charge of $1.8 million during the fourth
quarter of 2003, which included the write-off of $1.6 million of goodwill on the books of the subsidiary plus impairment charges for leasehold improvements likely to be abandoned.
The subsidiary was sold in May of 2004, with no additional losses recorded. Following the disposal of this subsidiary, the Company no longer has a direct interest in any domestic mattress retailer.

During
2002, the Company shutdown its Lake Wales and Taylor facilities. The Company recorded a $2.5 million charge associated with the Lake Wales shutdown to writedown the land,
building and equipment to its estimated fair market value and is actively pursuing the sale of this facility. The Company also recorded a $0.3 million charge primarily for severance associated
with the shutdown of the Taylor plant, a leased facility.

See
note 14 regarding a $5.8 million charge in 2002 due to the closure of a retail subsidiary.

Note 18:Related Party Transactions

The
Company previously contributed cash and other assets to Mattress Holdings International LLC ("MHI"), a company which was controlled by the Company's previous largest stockholder,
Bain Capital, LLC ("Bain"), in exchange for a non-voting interest. MHI was formed to invest in domestic and international loans, advances and investments in joint ventures, licensees and
retailers. The equity ownership of MHI was transferred from Bain to the Company in November 2002. In 1999, MHI indirectly through a Bain controlled holding company acquired a minority interest
in Mattress Holdings Corporation

64

---



("MHC").
MHC owns an interest in Mattress Discounters Corporation ("Mattress Discounters"), a domestic mattress retailer. In addition, MHC sold all of its equity interest in an international retailer
on April 15, 2003. This international retailer had been an affiliate of the Company since MHC's acquisition in 2000.

In
October 2002, Mattress Discounters filed a voluntary joint petition with the U.S. Bankruptcy Court for the District of Maryland for reorganization under Chapter 11 of the U.S.
Bankruptcy Code and was operating as a debtor in possession under the Bankruptcy Code. Effective March 14, 2003, Mattress Discounters emerged from bankruptcy. At the time Mattress Discounters
filed for bankruptcy protection, the Company had recorded in its financial statements a $12.5 million participation in Mattress Discounters' banking facility and $16.0 million in trade
receivables. The Company had fully-reserved the trade receivables. As part of the approved bankruptcy settlement, the Company received a non-controlling minority interest in Mattress
Discounters and a $12.9 million secured note, guaranteed by MHC. Other entities affiliated with Bain also received a minority interest in Mattress Discounters. Since emerging from bankruptcy,
Mattress Discounters has generally been paying within stated terms. Concurrent with the previously mentioned sale of the international bedding retailer by MHC, Sealy consummated the sale to MHC of the
$12.9 million note and the equity interest that the Company received in the Mattress Discounters bankruptcy, as well as MHI's equity interest in MHC for $13.6 million. As a result of
these transactions, the Company no longer has any direct interest in Mattress Discounters other than trade receivables in the normal course of business. In addition, as a result of the
recapitalization discussed in Note 2, after April 6, 2004 Mattress Discounters has ceased to be considered an affiliate of the Company.

As
previously mentioned, MHC sold its interest in an international bedding retailer on April 15, 2003. Consequently, this retailer is no longer an affiliate of Sealy and sales to
this retailer after this date have been included in sales to non-affiliates in the statement of operations.

The
following table provides sales to affiliates for the years ended November 28, 2004, November 30, 2003 and December 1, 2002:

Year ended
November 28,
2004

Year ended
November 30,
2003

Year Ended
December 1,
2002($'s in million)Mattress Discounters Corporation(1)

$
7.0

$
28.0

$
71.6Malachi Mattress America, Inc.(2)

$


$


$
58.7International retailer

$


$
4.0

$
13.2


---

The
Company believes that the terms on which mattresses were supplied to these affiliates were not materially different than those that might reasonably be obtained in a comparable
transaction on an arm's length basis from a person that is not an affiliate or related party.

Included
in fees, expenses and other transaction costs as shown in Note 2 are approximately $31.8 million of merger and acquisition advisory fees paid to KKR and Bain
Capital, LLC. During the fiscal year November 28, 2004, the Company paid management fees of $1.4 million to KKR. Also during the year ended November 28, 2004, the Company incurred
$2.0 million for consulting services provided by

65

---



Capstone
Consulting LLC, the chief executive officer of which is on the Company's board of directors. During the fiscal year ended November 28, 2004, the Company paid $0.5 million to
Bain Capital, LLC for management fees.

Note 19:Parent Company Financing

On
July 16, 2004, Sealy Corporation, the 100% owner of the Company, issued $75.0 million aggregate principal amount of senior subordinated
pay-in-kind (PIK) notes (the "PIK Notes") and $47.5 million of Sealy Corporation common stock to certain institutional investors and others in transactions exempt from
registration under the Securities Act of 1933. This transaction was executed and recorded by Sealy Corporation. The Company does not guarantee nor have any of the assets of the Company been pledged as
collateral under the PIK Notes.

The
PIK Notes accrue interest in-kind at 10% per year, compounded semi-annually. Sealy Corporation is not required to pay accrued interest on the PIK Notes in
cash until maturity. The PIK Notes mature on July 15, 2015, following the maturities of substantially all other existing indebtedness of the Company and its wholly owned subsidiaries, including
its $470 million outstanding senior secured term loan, $125 million senior secured revolving credit facility, $100 million senior unsecured term loan and $390 million
senior subordinated notes. At maturity, the outstanding principal amount of the PIK Notes, along with any accrued and unpaid interest, will be paid in cash by Sealy Corporation and, accordingly, is
not reflected in the financial statements of the Company. At November 28, 2004, the balance of the PIK Notes, together with accrued and unpaid interest, was $77.8 million.

Sealy
Corporation may redeem the PIK Notes at its option at any time, in whole or in part, at an initial price of 105% of the principal amount thereof plus all accrued interest not
previously paid in cash, which price declines to 102.5% after the first anniversary of issue, 101% after the second anniversary of issue and 100% after the third anniversary of issue. At any time
prior to the third anniversary of issue, Sealy Corporation may also use the proceeds of an equity offering to redeem any or all of the PIK Notes at its option at a price of 101% of the principal
amount thereof plus all accrued interest not previously paid in cash. In addition, upon a change of control in Sealy Corporation and the repayment of the Company's senior secured credit facility,
holders of the PIK Notes will be able to require Sealy Corporation to repurchase the PIK Notes at a price of 101% of the principal amount thereof plus all accrued interest not previously paid in cash.
The terms of the PIK Notes
include covenants and events of default similar to those contained in the outstanding notes and exchange notes.

The
$122.5 million in gross proceeds from the issuance of PIK notes and common stock was returned to existing investors in Sealy Corporation by a combination of cash distributions
to shareholders and option holders as well as share repurchases of Sealy Corporation common stock. In connection with the distribution to option holders, the Company recorded an expense of
approximately $4.0 million in the fiscal third quarter of 2004 since the holders of the Sealy Corporation options are employees of the Company. This charge, net of approximately
$0.6 million of deferred financing costs related to the issuance of the PIK Notes which were paid on behalf of Sealy Corporation by a subsidiary of Sealy Mattress Corporation, has resulted in
an approximately $3.4 million liability owed by the Company to Sealy Corporation at November 28, 2004. This obligation does not bear interest and has no scheduled repayment terms.
Management anticipates that the balance will be gradually reduced over time as the Company pays for various expenses of Sealy Corporation in the ordinary course of business.

66

---



Note 20:Guarantor/Non-Guarantor Financial Information

The
Parent (as defined below) and each of the subsidiaries of Sealy Mattress Company (the "Issuer") that guarantee the Notes (as defined below) (the "Guarantor Subsidiaries") has fully
and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and interest with respect to the 8.25% Senior Subordinated Notes due in 2014 (the "Notes") of the Issuer.
Substantially all of the Issuer's operating income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Issuer's debt service obligations are provided in part by
distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Issuer's
subsidiaries, could limit the Issuer's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the
Notes. Although holders of the Notes will be direct creditors of the Issuer's principal direct subsidiaries by virtue of the guarantees, the Issuer has subsidiaries ("Non-Guarantor
Subsidiaries") that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated with respect to the Notes. As a result, the claims of creditors of the
Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the claims of creditors of the Issuer, including the holders of the
Notes.

The
following supplemental consolidating condensed financial statements present:



Separate
financial statements of each of the Guarantor Subsidiaries are not presented because Management believes that these financial statements would not be material to investors.

67

---





SEALY MATTRESS CORPORATION        Supplemental Consolidating Condensed Balance Sheet  November 28, 2004  (in thousands)

|                                                                 |  | Sealy
Mattress
Corporation |          | Sealy
Mattress
Company |   | Combined
Guarantor
Subsidiaries |   | Combined
Non-
Guarantor
Subsidiaries |          | Eliminations |   | Consolidated |  
|---------------------------------------------------------------- |  | -------------------------- | -------- | ---------------------- | - | ------------------------------- | - | ------------------------------------ | -------- | ------------ | - | ------------ | -
|Assets                                                           |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  
|Current assets:                                                  |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  
|Cash and cash equivalents                                        |  | $                          |         |                        | $ | 2                               |   | $                                    | 5,142    |              | $ | 17,635       |  
|Accounts receivable, net                                         |  |                            |         |                        |   | 61                              |   |                                      | 106,511  |              |   | 66,257       |  
|Inventories                                                      |  |                            |         |                        |   | 1,047                           |   |                                      | 35,014   |              |   | 15,862       |  
|Assets held for sale                                             |  |                            |         |                        |   |                                |   |                                      | 8,983    |              |   |             |  
|Prepaid expenses, deferred income taxes and other current assets |  |                            |         |                        |   | 4,616                           |   |                                      | 33,933   |              |   | 4,062        |  
|                                                                 |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  
|                                                                 |  |                            |         |                        |   | 5,726                           |   |                                      | 189,583  |              |   | 103,816      |  
|Property, plant and equipment, at cost                           |  |                            |         |                        |   | 6,962                           |   |                                      | 233,339  |              |   | 69,618       |  
|Less accumulated depreciation                                    |  |                            |         |                        |   | 3,620                           |   |                                      | 123,132  |              |   | 18,988       |  
|                                                                 |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  
|                                                                 |  |                            |         |                        |   | 3,342                           |   |                                      | 110,207  |              |   | 50,630       |  
|Other assets:                                                    |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  
|Goodwill                                                         |  |                            |         |                        |   | 24,741                          |   |                                      | 304,773  |              |   | 57,994       |  
|Other intangibles, net                                           |  |                            |         |                        |   |                                |   |                                      | 4,303    |              |   | 252          |  
|Net investment in and advances to (from) subsidiaries            |  |                            | (389,163 | )                      |   | 941,617                         |   |                                      | (210,360 | )            |   | (94,885      | )
|Debt issuance costs, net, and other assets                       |  |                            |         |                        |   | 33,729                          |   |                                      | 7,094    |              |   | 1,087        |  
|                                                                 |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  
|                                                                 |  |                            | (389,163 | )                      |   | 1,000,087                       |   |                                      | 105,810  |              |   | (35,552      | )
|                                                                 |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  
|Total assets                                                     |  | $                          | (389,163 | )                      | $ | 1,009,155                       |   | $                                    | 405,600  |              | $ | 118,894      |  
|                                                                 |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  
|Liabilities And Stockholders' deficit                            |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  
|Current liabilities:                                             |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  
|Current portionlong-term obligations                            |  | $                          |         |                        | $ |                                |   | $                                    | 22       |              | $ | 8,520        |  
|Accounts payable                                                 |  |                            |         |                        |   | 189                             |   |                                      | 56,056   |              |   | 40,321       |  
|Accrued customer incentives and advertising                      |  |                            |         |                        |   | 1,552                           |   |                                      | 28,549   |              |   | 5,728        |  
|Accrued compensation                                             |  |                            |         |                        |   | 270                             |   |                                      | 29,622   |              |   | 7,250        |  
|Accrued interest                                                 |  |                            |         |                        |   | 2,518                           |   |                                      | 24,790   |              |   | 58           |  
|Other accrued expenses                                           |  |                            |         |                        |   | 5,428                           |   |                                      | 39,857   |              |   | 4,510        |  
|                                                                 |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  
|                                                                 |  |                            |         |                        |   | 9,957                           |   |                                      | 178,896  |              |   | 66,387       |  
|Due to (from) Parent Company                                     |  |                            | 3,876    |                        |   | (500                            | ) |                                      |         |              |   |             |  
|Long-term obligations                                            |  |                            |         |                        |   | 965,000                         |   |                                      | 21       |              |   | 774          |  
|Other noncurrent liabilities                                     |  |                            |         |                        |   | 2,254                           |   |                                      | 34,847   |              |   | 8,673        |  
|Deferred income taxes                                            |  |                            | (9,296   | )                      |   | 122                             |   |                                      | 13,101   |              |   | 6,908        |  
|Stockholders' deficit                                            |  |                            | (383,743 | )                      |   | 32,322                          |   |                                      | 178,735  |              |   | 36,152       |  
|                                                                 |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  
|Total liabilities and stockholders' deficit                      |  | $                          | (389,163 | )                      | $ | 1,009,155                       |   | $                                    | 405,600  |              | $ | 118,894      |  
|                                                                 |  |                            |          |                        |   |                                 |   |                                      |          |              |   |              |  

68

---





SEALY MATTRESS CORPORATION        Supplemental Consolidating Condensed Balance Sheet  November 30, 2003  (in thousands)

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedAssetsCurrent assets:Cash and cash equivalents

$


$
31

$
90,985

$
10,084

$


$
101,100Accounts receivableNon-affiliates, net


15


(38
)

103,358


57,649





160,984Accounts receivableAffiliates, net








1,758








1,758Inventories





1,774


33,258


14,381





49,413Prepaid expenses, deferred income taxes and other current assets


(63
)

6,548


31,756


5,163





43,404(48
)

8,315


261,115


87,277





356,659Property, plant and equipment, at cost





6,485


231,966


61,267





299,718Less accumulated depreciation





3,339


111,777


13,777





128,893


3,146


120,189


47,490





170,825Other assets:Goodwill





14,816


314,698


52,377





381,891Other intangibles, net








4,415


949





5,364Net investment in and advances to (from) subsidiaries


(18,896
)

613,359


(349,653
)

(91,683
)

(153,127
)

Long-term notes receivable











13,323





13,323Debt issuance costs, net, and other assets


96


17,946


10,535


2,427





31,004(18,800
)

646,121


(20,005
)

(22,607
)

(153,127
)

431,582Total assets

$
(18,848
)
$
657,582

$
361,299

$
112,160

$
(153,127
)
$
959,066Liabilities And Stockholders' DeficitCurrent liabilities:Current portionlong-term obligations

$


$
41,918

$


$
5,705

$


$
47,623Accounts payable





204


51,851


33,423





85,478Accrued customer incentives and advertising





1,369


29,045


5,132





35,546Accrued compensation





102


21,675


5,806





27,583Accrued interest


847


1,028


21,109


581





23,565Other accrued expenses


10


7,842


31,385


5,602





44,839857


52,463


155,065


56,249





264,634Long-term obligations


49,989


648,056


44


1,541





699,630Other noncurrent liabilities


6,998


6,202


29,095


6,556





48,851Deferred income taxes


(530
)

(1,202
)

19,590


4,255





22,113Stockholders' deficit


(76,162
)

(47,937
)

157,505


43,559


(153,127
)

(76,162
)Total liabilities and stockholders' deficit

$
(18,848
)
$
657,582

$
361,299

$
112,160

$
(153,127
)
$
959,066


69

---





SEALY MATTRESS CORPORATION        Supplemental Consolidating Condensed Statements of Operations        Year Ended November 28, 2004        (in thousands)

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet salesNon-affiliates

$


$
51,935

$
1,009,221

$
265,878

$
(20,044
)
$
1,306,990Net salesAffiliates








7,030








7,030Total net sales





51,935


1,016,251


265,878


(20,044
)

1,314,020Costs and expenses:Cost of goods soldNon- affiliates





32,304


556,023


167,791


(20,044
)

736,074Cost of goods soldAffiliates








4,035








4,035Total cost of goods sold





32,304


560,058


167,791


(20,044
)

740,109Selling, general and administrative


4


14,247


338,696


77,934





430,881Recapitalization Expense


41,753


36,871


50,224


4,286





133,134Plant/Business closing and restructuring charges








624








624Amortization of intangibles








289


919





1,208Royalty (income) expense, net








(15,295
)

1,124





(14,171
)Income (loss) from operations


(41,757
)

(31,487
)

81,655


13,824





22,235Interest expense


2,019


67,441


(470
)

938





69,928Other income, net








(436
)

(425
)




(861
)Loss (income) from equity investees


26,247


19,941








(46,188
)

Loss (income) from non- guarantor equity investees








166





(166
)

Capital charge and intercompany interest allocation


(22,829
)

(88,808
)

106,786


4,851





Income (loss) before income taxes


(47,194
)

(30,061
)

(24,391
)

8,460


46,354


(46,832
)Income tax expense (benefit)


(8,911
)

(3,814
)

(4,450
)

8,626





(8,549
)Net income (loss)

$
(38,283
)
$
(26,247
)
$
(19,941
)
$
(166
)
$
46,354

$
(38,283
)


70

---



SEALY MATTRESS CORPORATION        Supplemental Consolidating Condensed Statements of Operations        Year Ended November 30, 2003        (in thousands)

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet salesNon-affiliates

$


$
51,765

$
893,820

$
228,233

$
(15,931
)
$
1,157,887Net salesAffiliates








27,928


4,045





31,973Total net sales





51,765


921,748


232,278


(15,931
)

1,189,860Costs and expenses:Cost of goods soldNon- affiliates





34,826


513,658


143,861


(15,931
)

676,414Cost of goods soldAffiliates








16,031


2,662





18,693Total cost of goods sold





34,826


529,689


146,523


(15,931
)

695,107Selling, general and administrative


1,210


15,334


314,469


67,387





398,400Plant/Business closing and restructuring charges











1,825





1,825Amortization of intangibles








289


814





1,103Royalty (income) expense, net








(13,462
)

990





(12,472
)Income (loss) from operations


(1,210
)

1,605


90,763


14,739





105,897Interest expense


5,800


61,230


462


1,033





68,525Other (income) expense, net





2,550


(936
)

(707
)




907Loss (income) from equity investees


(19,393
)

(22,801
)







42,194


Loss (income) from non- guarantor equity investees





(95
)

(5,199
)




5,294


Capital charge and intercompany interest allocation


(4,766
)

(55,183
)

56,103


3,846





Income (loss) before income taxes


17,149


15,904


40,333


10,567


(47,488
)

36,465Income tax expense (benefit)


(1,120
)

(3,489
)

17,532


5,273





18,196Net income (loss)

$
18,269

$
19,393

$
22,801

$
5,294

$
(47,488
)
$
18,269


71

---





SEALY MATTRESS CORPORATION        Supplemental Consolidating Condensed Statements of Operations        Year Ended December 1, 2002        (in thousands)

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedNet salesNon-affiliates

$


$
43,958

$
816,284

$
196,570

$
(11,173
)
$
1,045,639Net salesAffiliates








130,304


13,225





143,529Total net sales





43,958


946,588


209,795


(11,173
)

1,189,168Costs and expenses:Cost of goods soldNon-affiliates





29,787


460,322


122,943


(11,173
)

601,879Cost of goods soldAffiliates








68,875


8,909





77,784Total cost of goods sold





29,787


529,197


131,852


(11,173
)

679,663Selling, general and administrative


951


10,596


334,771


64,918





411,236Plant/Business closure and restructuring charges








2,779


5,802





8,581Amortization of intangibles








289


774





1,063Royalty income, net








(12,008
)

853





(11,155
)Income (loss) from operations


(951
)

3,575


91,560


5,596





99,780Interest expense


5,455


64,915


695


1,506





72,571Other (income) expense, net


(5
)




(1,480
)

4,543





3,058Loss (income) from equity investees


(15,659
)

(17,646
)







33,305


Loss (income) from non-guarantor equity investees





256


2,139





(2,395
)

Capital charge and intercompany interest allocation


(8,199
)

(58,869
)

64,102


2,966





Income (loss) before income taxes


17,457


14,919


26,104


(3,419
)

(30,910
)

24,151Income tax expense (benefit)


538


(740
)

8,458


(1,024
)




7,232Net income (loss)

$
16,919

$
15,659

$
17,646

$
(2,395
)
$
(30,910
)
$
16,919


72

---





SEALY MATTRESS CORPORATION        Supplemental Consolidating Condensed Statements of Cash Flows  Year Ended November 28, 2004  (in thousands)

|                                                    |                                                                                  | Sealy
Mattress
Corporation                          |          | Sealy
Mattress
Company |          | Combined
Guarantor
Subsidiaries |          | Combined
Non-
Guarantor
Subsidiaries |         | Eliminations |   | Consolidated |        
|--------------------------------------------------- | -------------------------------------------------------------------------------- | --------------------------------------------------- | -------- | ---------------------- | -------- | ------------------------------- | -------- | ------------------------------------ | ------- | ------------ | - | ------------ | -------
|Net cash provided by operating activities           |                                                                                  | $                                                   |         |                        | $        | 8,368                           |          | $                                    | 20,226  |              | $ | 14,908       |        
|                                                    |                                                                                  |                                                     |          |                        |          |                                 |          |                                      |         |              |   |              |        
|Cash flows from investing activities:               |                                                                                  |                                                     |          |                        |          |                                 |          |                                      |         |              |   |              |        
|                                                    | Purchase of property, plant and equipment                                        |                                                     |          |                       |          |                                 | (611     | )                                    |         | (19,238      | ) |              | (2,924 
|                                                    | Cash received on affiliate note and investment                                   |                                                     |          |                       |          |                                 |         |                                      |         |             |   |              | 13,573 
|                                                    | Net activity in investment in and advances to (from) subsidiaries and affiliates |                                                     |          | 358,141                |          |                                 | (247,839 | )                                    |         | (88,599      | ) |              | (21,703
|                                                    | Proceeds from the sale of property, plant and equipment                          |                                                     |          |                       |          |                                 |         |                                      |         | 1,768        |   |              |       
|                                                    |                                                                                  |                                                     |          |                        |          |                                 |          |                                      |         |              |   |              |        
|                                                    | Net cash provided by (used in) investing activities                              |                                                     |          | 358,141                |          |                                 | (248,450 | )                                    |         | (106,069     | ) |              | (11,054
|Cash flows from financing activities:               |                                                                                  |                                                     |          |                        |          |                                 |          |                                      |         |              |   |              |        
|                                                    | Cash flows associated with financing of the recapitalization (Note 2):           |                                                     |          |                        |          |                                 |          |                                      |         |              |   |              |        
|                                                    |                                                                                  | Proceeds from issuance of common stock              |          |                        | 436,050  |                                 |          |                                     |         |              |  |              |        
|                                                    |                                                                                  | Treasury stock repurchase                           |          |                        | (748,146 | )                               |          |                                      |         |              |   |              |        
|                                                    |                                                                                  | Proceeds from issuance of new long-term obligations |          |                        |         |                                 |          | 1,050,000                            |         |              |  |              |        
|                                                    |                                                                                  | Repayment of existing long-term debt                |          |                        | (49,989  | )                               |          | (687,139                             | )       |              |  |              |        
|                                                    |                                                                                  | Debt issuance costs                                 |          |                        |          |                                 |          | (36,403                              | )       |              |   |              |        
|                                                    | Repayments of other long-term obligations, net                                   |                                                     |          |                       |          |                                 | (90,000  | )                                    |         |             |   |              |       
|                                                    | Net borrowings on revolving credit facilities                                    |                                                     |          |                       |          |                                 | 5,000    |                                      |         |             |   |              |       
|                                                    | Equity issuances                                                                 |                                                     |          | 63                     |          |                                 |         |                                      |         |             |   |              |       
|                                                    | Other                                                                            |                                                     |          | 3,881                  |          |                                 | (1,405   | )                                    |         |             |   |              | 2,029  
|                                                    |                                                                                  |                                                     |          |                        |          |                                 |          |                                      |         |              |   |              |        
|Net cash (used in) provided by financing activities |                                                                                  |                                                     | (358,141 | )                      |          | 240,053                         |          |                                      |        |              |   | 2,029        |        
|                                                    |                                                                                  |                                                     |          |                        |          |                                 |          |                                      |         |              |   |              |        
|Effect of exchange rate changes on cash             |                                                                                  |                                                     |         |                        |          |                                |          |                                      |        |              |   | 1,668        |        
|                                                    |                                                                                  |                                                     |          |                        |          |                                 |          |                                      |         |              |   |              |        
|Change in cash and cash equivalents                 |                                                                                  |                                                     |         |                        |          | (29                             | )        |                                      | (85,843 | )            |   | 7,551        |        
|Cash and cash equivalents:                          |                                                                                  |                                                     |          |                        |          |                                 |          |                                      |         |              |   |              |        
|                                                    | Beginning of period                                                              |                                                     |          |                       |          |                                 | 31       |                                      |         | 90,985       |   |              | 10,084 
|                                                    |                                                                                  |                                                     |          |                        |          |                                 |          |                                      |         |              |   |              |        
|                                                    | End of period                                                                    |                                                     | $        |                       |          | $                               | 2        |                                      | $       | 5,142        |   | $            | 17,635 
|                                                    |                                                                                  |                                                     |          |                        |          |                                 |          |                                      |         |              |   |              |        

73

---



SEALY MATTRESS CORPORATION        Supplemental Consolidating Condensed Statements of Cash Flows  Year Ended November 30, 2003  (in thousands)

|                                                    |                                                                                  | Sealy
Mattress
Corporation |     | Sealy
Mattress
Company |   | Combined
Guarantor
Subsidiaries |         | Combined
Non-
Guarantor
Subsidiaries |        | Eliminations |   | Consolidated |        
|--------------------------------------------------- | -------------------------------------------------------------------------------- | -------------------------- | --- | ---------------------- | - | ------------------------------- | ------- | ------------------------------------ | ------ | ------------ | - | ------------ | -------
|Net cash provided by (used in) operating activities |                                                                                  | $                          |    |                        | $ | (2,638                          | )       | $                                    | 81,950 |              | $ | 7,750        |        
|                                                    |                                                                                  |                            |     |                        |   |                                 |         |                                      |        |              |   |              |        
|Cash flows from investing activities:               |                                                                                  |                            |     |                        |   |                                 |         |                                      |        |              |   |              |        
|                                                    | Purchase of property, plant and equipment                                        |                            |     |                       |   |                                 | (416    | )                                    |        | (11,629      | ) |              | (1,246 
|                                                    | Cash received on affiliate note and investment                                   |                            |     |                       |   |                                 |        |                                      |        |             |   |              | 13,611 
|                                                    | Net activity in investment in and advances to (from) subsidiaries and affiliates |                            |     | (103                   | ) |                                 | 18,919  |                                      |        | (1,438       | ) |              | (17,378
|                                                    | Proceeds from the sale of property, plant and equipment                          |                            |     |                       |   |                                 |        |                                      |        | 257          |   |              |       
|                                                    |                                                                                  |                            |     |                        |   |                                 |         |                                      |        |              |   |              |        
|                                                    | Net cash provided by (used in) investing activities                              |                            |     | (103                   | ) |                                 | 18,503  |                                      |        | (12,810      | ) |              | (5,013 
|Cash flows from financing activities:               |                                                                                  |                            |     |                        |   |                                 |         |                                      |        |              |   |              |        
|                                                    | Issuance of public notes                                                         |                            |     |                       |   |                                 | 51,500  |                                      |        |             |   |              |       
|                                                    | (Repayment of) borrowings on long-term obligations                               |                            |     |                       |   |                                 | (63,341 | )                                    |        | (36          | ) |              | 1,140  
|                                                    | Equity issuances                                                                 |                            |     | 103                    |   |                                 |        |                                      |        |             |   |              |       
|                                                    | Debt issuance costs                                                              |                            |     |                       |   |                                 | (4,021  | )                                    |        |             |   |              |       
|                                                    |                                                                                  |                            |     |                        |   |                                 |         |                                      |        |              |   |              |        
|Net cash (used in) provided by financing activities |                                                                                  |                            | 103 |                        |   | (15,862                         | )       |                                      | (36    | )            |   | 1,140        |        
|                                                    |                                                                                  |                            |     |                        |   |                                 |         |                                      |        |              |   |              |        
|Effect of exchange rate changes on cash             |                                                                                  |                            |    |                        |   |                                |         |                                      |       |              |   | 673          |        
|                                                    |                                                                                  |                            |     |                        |   |                                 |         |                                      |        |              |   |              |        
|Change in cash and cash equivalents                 |                                                                                  |                            |    |                        |   | 3                               |         |                                      | 69,104 |              |   | 4,550        |        
|Cash and cash equivalents:                          |                                                                                  |                            |     |                        |   |                                 |         |                                      |        |              |   |              |        
|                                                    | Beginning of period                                                              |                            |     |                       |   |                                 | 28      |                                      |        | 21,881       |   |              | 5,534  
|                                                    |                                                                                  |                            |     |                        |   |                                 |         |                                      |        |              |   |              |        
|                                                    | End of period                                                                    |                            | $   |                       |   | $                               | 31      |                                      | $      | 90,985       |   | $            | 10,084 
|                                                    |                                                                                  |                            |     |                        |   |                                 |         |                                      |        |              |   |              |        

74

---





SEALY MATTRESS CORPORATION        Supplemental Consolidating Condensed Statements of Cash Flows  Year Ended December 1, 2002  (in thousands)

|                                          |                                                                                  | Sealy
Mattress
Corporation |      | Sealy
Mattress
Company |   | Combined
Guarantor
Subsidiaries |         | Combined
Non-
Guarantor
Subsidiaries |        | Eliminations |   | Consolidated |        
|----------------------------------------- | -------------------------------------------------------------------------------- | -------------------------- | ---- | ---------------------- | - | ------------------------------- | ------- | ------------------------------------ | ------ | ------------ | - | ------------ | -------
|Net cash provided by operating activities |                                                                                  | $                          |     |                        | $ | 725                             |         | $                                    | 84,135 |              | $ | 15,392       |        
|                                          |                                                                                  |                            |      |                        |   |                                 |         |                                      |        |              |   |              |        
|Cash flows from investing activities:     |                                                                                  |                            |      |                        |   |                                 |         |                                      |        |              |   |              |        
|                                          | Purchase of property, plant and equipment                                        |                            |      |                       |   |                                 | (225    | )                                    |        | (14,186      | ) |              | (2,437 
|                                          | Purchase of business, net of cash acquired                                       |                            |      |                       |   |                                 |        |                                      |        |             |   |              | (6,829 
|                                          | Note receivable from prior affiliate                                             |                            |      |                       |   |                                 |        |                                      |        |             |   |              | (3,272 
|                                          | Cash paid on affiliate note                                                      |                            |      |                       |   |                                 |        |                                      |        |             |   |              | (12,500
|                                          | Net activity in investment in and advances to (from) subsidiaries and affiliates |                            |      | 369                    |   |                                 | 29,335  |                                      |        | (54,429      | ) |              | 24,725 
|                                          |                                                                                  |                            |      |                        |   |                                 |         |                                      |        |              |   |              |        
|                                          | Net cash provided by (used in) investing activities                              |                            |      | 369                    |   |                                 | 29,110  |                                      |        | (68,615      | ) |              | (313   
|Cash flows from financing activities:     |                                                                                  |                            |      |                        |   |                                 |         |                                      |        |              |   |              |        
|                                          | Treasury stock repurchase, including direct expenses                             |                            |      | (801                   | ) |                                 |        |                                      |        |             |   |              |       
|                                          | Repayment of long-term obligations                                               |                            |      |                       |   |                                 | (27,637 | )                                    |        | (81          | ) |              | (14,773
|                                          | Equity issuances                                                                 |                            |      | 432                    |   |                                 |        |                                      |        |             |   |              |       
|                                          | Debt issuance costs                                                              |                            |      |                       |   |                                 | (1,600  | )                                    |        |             |   |              |       
|                                          | Purchase of interest rate cap                                                    |                            |      |                       |   |                                 | (625    | )                                    |        |             |   |              |       
|                                          |                                                                                  |                            |      |                        |   |                                 |         |                                      |        |              |   |              |        
|Net cash used in financing activities     |                                                                                  |                            | (369 | )                      |   | (29,862                         | )       |                                      | (81    | )            |   | (14,773      | )      
|                                          |                                                                                  |                            |      |                        |   |                                 |         |                                      |        |              |   |              |        
|Effect of exchange rate changes on cash   |                                                                                  |                            |     |                        |   |                                |         |                                      |       |              |   | (285         | )      
|                                          |                                                                                  |                            |      |                        |   |                                 |         |                                      |        |              |   |              |        
|Change in cash and cash equivalents       |                                                                                  |                            |     |                        |   | (27                             | )       |                                      | 15,439 |              |   | 21           |        
|Cash and cash equivalents:                |                                                                                  |                            |      |                        |   |                                 |         |                                      |        |              |   |              |        
|                                          | Beginning of period                                                              |                            |      |                       |   |                                 | 55      |                                      |        | 6,442        |   |              | 5,513  
|                                          |                                                                                  |                            |      |                        |   |                                 |         |                                      |        |              |   |              |        
|                                          | End of period                                                                    |                            | $    |                       |   | $                               | 28      |                                      | $      | 21,881       |   | $            | 5,534  
|                                          |                                                                                  |                            |      |                        |   |                                 |         |                                      |        |              |   |              |        

75

---





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

None.

Item 9A.Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as
amended, as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the
Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our
Securities and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated
and communicated to the Company's management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

In
connection with the evaluation of our disclosure controls and procedures for the year ended November 28, 2004, and in connection with observations by our independent registered
public accountants identified in their audit of our consolidated financial statements, management identified certain deficiencies in our financial statement close process primarily related to the
review and approval process for various account analyses and reserve/accrual calculations and the consolidated financial/balance sheet review process. Management has discussed these deficiencies with
our Audit Committee and we are currently addressing these deficiencies as part of our effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002 which requires our management to
annually report on internal control over financial reporting, starting with our Annual Report on Form 10-K for the year ended November 27, 2005. Specifically, we are
currently in the process of documenting and assessing our financial processes and controls throughout the organization and plan to begin testing the identified key controls beginning in the second
quarter.

There
were no other changes in our internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the fourth quarter of 2004 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.Other Information

None.

76

---



PART III

Item 10.Directors and Executive Officers of the Registrant Directors

The following sets forth the name, age, principal occupation and employment and business experience of each of the Sealy Corporation directors:

Steven Barnes.Mr. Barnes, age 44, is a Managing Director at Bain Capital, LLC ("Bain") and has been affiliated with
Bain since 1988. Since 1988, he has been involved with various leveraged acquisitions and has served in various leadership positions with Bain companies, including CEO of Dade Behring, President of
Executone Business Solutions and President of The Holson Burnes Group. Mr. Barnes presently serves on several boards including Unisource, SigmaKalon and the Board of Overseers of Children's
Hospital in Boston. Prior to 1988, Mr. Barnes was with PricewaterhouseCoopers, where he worked in the Mergers and Acquisitions Support Group. He has been a director of the Company since
March 2001. Mr. Barnes serves on the Board's audit committee.

Simon E. Brown.Mr. Brown, age 34, has been an executive of KKR since April 2003. From August 1999 to
March 2003, he worked for Madison Dearborn Partners. From September 1997 to June 1999, Mr. Brown attended Harvard University Graduate School of Business Administration.
Before attending business school, he worked for Thomas H. Lee Company and Morgan Stanley Capital Partners. Mr. Brown is also a member of the Board of Directors of The Boyds
Collection Ltd. He has been a director of our company since April 2004. Mr. Brown serves on the Board's audit committee.

Brian F. Carroll.Mr. Carroll, age 33, has been an executive of KKR since July 1999. From September 1997
to June 1999, Mr. Carroll attended Stanford University Graduate School of Business. Before attending business school, from March 1995 to July 1997, he was an executive of
KKR. Mr. Carroll is also a member of the Board of Directors of Rockwood Specialities Group, Inc. and The Boyds Collection Ltd. He has been a director of our company since
April 2004. Mr. Carroll serves on the Board's audit, executive and human resources committees.

James B. Hirshorn.Mr. Hirshorn, age 38, has been Executive Vice President, Chief Financial Officer since
November 2002. From 1999 until joining the Company, Mr. Hirshorn was a Vice President with Bain Capital Inc., an investment and leveraged buyout firm. From 1993 until 1999, he was
with Bain & Company Inc., consulting firm. He has been a director since April 2004.

James W. Johnston.Mr. Johnston, age 57, is President and Chief Executive Officer of Stonemarker
Enterprises, Inc., a consulting and investment company. Mr. Johnston was Vice Chairman of RJR Nabisco, Inc. from 1995 to 1996. He also served as Chairman and CEO of R. J. Reynolds
Tobacco Co. from 1989 to 1995, Chairman of R. J. Reynolds Tobacco Co. from 1995 to 1996 and Chairman of R. J. Reynolds Tobacco International from 1993 to 1996. Mr. Johnston served on the board
of RJR Nabisco, Inc. and RJR Nabisco Holdings Corp. from 1992 to 1996. From 1984 until joining Reynolds, Mr. Johnston was Division Executive, Northeast Division, of Citibank, N.A., a
subsidiary of Citicorp, where he was responsible for Citibank's New York Banking Division, its banking activities in upstate New York, Maine and Mid-Atlantic regions, and its national
student loan business. He has been a director of the Company since March 1993. Mr. Johnston serves on the Board's human resources committee.

David J. McIlquham.Mr. McIlquham, age 50, has been Chief Executive Officer of the Company since April 2002,
has been President of the Company since January 2001 and has been chairman of the Board of Directors since July 2004. He had been Chief Operating Officer from January 2001 to
April 2002. Prior to that, he had been Corporate Vice President Sales and Marketing since April 1998 and was Corporate Vice President Marketing since joining the Company in 1990 until
1998. He has been a director since April 2002. Mr. McIlquham serves on the Board's executive committee.

77

---



Dean B. Nelson.Mr. Nelson, age 45, has been Chief Executive Officer of Capstone Consulting LLC since
March 2000. He is also Chairman of the Board and a director of PRIMEDIA Inc. and a director of Yellow Pages Group. From August 1985 to February 2000, Mr. Nelson was
employed by Boston Consulting Group, Inc. where he was a Senior Vice President from December 1998 to February 2000 and held various other positions from August 1985 to
November 1998. He has been a director of the company since April 2004.

Scott M. Stuart.Mr. Stuart, age 45, is a Member of the limited liability company which serves as the General Partner
of KKR since 1996 and has worked for KKR since 1986. He is a director of KKR Financial Corporation, The Boyds Collection Ltd. and Texas Genco Holdings Inc. Mr. Stuart received his
B.A. in English Literature from Dartmouth College and his M.B.A. from Stanford University. He has been a director of the company since April 2004. Mr. Stuart serves on the Board's
executive and human resources committees.

Each
director listed above was elected by Sealy Corporation's stockholders at the time of the merger and each will serve until his or her successor has been elected or qualified or until
his or her early resignation or removal.

Audit Committee Matters

Our Board of Directors has an Audit Committee that is responsible, among other things, for overseeing our accounting and financial reporting processes and audits
of our financial statements. The Audit Committee is comprised of Messrs. Barnes, Brown and Carroll. While each member of the Committee has significant financial experience, our board of
Directors has not designated any member of the Audit Committee as an "audit committee financial expert" but expects to do so in the future. None of the members of the audit committee are considered
"independent" as defined in federal securities laws.

Executive Officers

The following sets forth the name, age, title and certain other information with respect to the executive officers of Sealy Corporation:

David J. McIlquham.See directors above.

James B. Hirshorn.See directors above.

Lawrence J. Rogers.Mr. Rogers, age 56, has been the President of the International Bedding Group since
January 2001. Prior to that, Mr. Rogers was Corporate Vice President and General Manager International since February 1994. Since joining the Company in 1979, Mr. Rogers
has served in numerous other capacities within the Company's operations, including President of Sealy of Canada (a wholly owned subsidiary).

Bruce G. Barman, Ph.D.Dr. Barman, age 59, has been Senior Vice President, Research & Development since joining
the Company in 1995.

Alfred R. Boulden.Mr. Boulden, age 58, has been Senior Vice President, Sales since August 2001. Since joining
the Company in 1991, Mr. Boulden has served in numerous sales positions.

Jeffrey C. Claypool.Mr. Claypool, age 57, has been Senior Vice President, Human Resources since joining the Company
in September 1991.

Charles L. Dawson.Mr. Dawson, age 48, has been Senior Vice President, National Accounts since August 2001.
Since joining the Company in 1986, Mr. Dawson has served in numerous sales positions.

78

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G. Michael Hofmann.Mr. Hofmann, age 46, has been Senior Vice President, Operations since October 2002. From
1982 until joining the Company, Mr. Hofmann was with Hill-Rom Company, a medical equipment manufacturing firm, serving as its Vice President of Engineering from 2001 through 2002,
and its Vice President and General Manager, European Capital Business Unit from 1995 through 2000.

Kenneth L. Walker.Mr. Walker, age 56, has been Senior Vice President, General Counsel and Secretary since joining the
Company in May 1997.

Code of Ethics

Our principal executive officer and principal financial officer, as well as all other employees of the Company, are covered by our Business Conduct Policy adopted
in 1999, a copy of which has been filed as an Exhibit to this Annual Report on Form 10-K. This policy contains provisions regarding our accounting practices as well as other guidelines
governing ethical business practices.

Item 11.Executive Compensation

The following table sets forth information concerning the annual and long-term compensation for services in all capacities to the Company for each of
the years ended November 28, 2004, November 30, 2003 and December 1, 2002, of those persons who served as (i) the chief executive officer during fiscal 2004, 2003 and 2002,
and (ii) the other four most highly compensated executive officers of the Company for fiscal 2004 (collectively, the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

|                                                                 |  |                |  | Annual Compensation |                         | Long-Term Compensation
|---------------------------------------------------------------- |  | -------------- |  | ------------------- | ----------------------- | ----------------------
|
|David J. McIlquham
    Chairman, President
    and CEO           |  | 2004
2003
2002 |  | $$$                 | 575,417
518,750
406,920 |                       
|James B. Hirshorn
    Executive VP
& CFO                         |  | 2004
2003
2002 |  | $$$                 | 336,917
325,000
18,466  |                       
|Lawrence J. Rogers
    President International
    Bedding Group |  | 2004
2003
2002 |  | $$$                 | 293,282
284,217
274,725 |                       
|Jeffrey C. Claypool
    Sr. VP Human Resources                   |  | 2004
2003
2002 |  | $$$                 | 246,340
238,280
229,622 |                       
|Charles L. Dawson
    Sr. VP National Accounts                   |  | 2004
2003
2002 |  | $$$                 | 231,435
224,583
220,000 |                       

---

79

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80

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OPTION GRANTS IN LAST FISCAL YEAR

|Individual Grants(a)                                                 |  | Potential Realizable Value
At Assumed Annual Rates
of Stock Price
Appreciation For Option
Term(b)
|-------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------
|
|David J. McIlquham
Chairman, President and CEO                       |  | 4,586,667                                                                                        
|James B. Hirshorn
Executive Vice President &
Chief Financial Officer |  | 1,433,567                                                                                        
|Lawrence J. Rogers
President International Bedding
Group             |  | 457,823                                                                                          
|Jeffrey C. Claypool
Sr. VP Human Resources                           |  | 332,911                                                                                          
|Charles L. Dawson
Sr. VP National Accounts                           |  | 327,266                                                                                          

---

81

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AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR  AND FY-END OPTION VALUES

|Name                                                                 |  | Shares
Acquired
On
Exercise(#) |  | Value
Realized |  | Number Of Securities
Underlying
Unexercised Options
At FY-End(#)
Exercisable/
Unexercisable(a) |  | Value Of Unexercised
In-the-money Options
At FY-End($)
Exercisable/
Unexercisable(b)(c)
|-------------------------------------------------------------------- |  | ------------------------------ |  | -------------- |  | ---------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------
|David J. McIlquham
Chairman, President and CEO                       |  | 161,394                        |  | 1,320,534      |  | 2,489,639/3,768,511                                                                            |  | $                                                                                      
|James B. Hirshorn
Executive Vice President & Chief Financial Officer |  | 65,440                         |  | 820,879        |  | 902,602/1,175,522                                                                              |  | $                                                                                      
|Lawrence J. Rogers
President International
Bedding Group             |  | 181,411                        |  | 2,912,398      |  | 286,892/376,825                                                                                |  | $                                                                                      
|Jeffrey C. Claypool
Sr. VP Human Resources                           |  | 120,523                        |  | 1,756,718      |  | 161,807/274,049                                                                                |  | $                                                                                      
|Charles L. Dawson
Sr. VP National Accounts                           |  | 30,342                         |  | 274,207        |  | 342,148/266,807                                                                                |  | $                                                                                      

---

Compensation Pursuant To Plans and Other Arrangements

Rollover Options and New Options2004 Stock Option Plan.All outstanding options, whether or not vested, to
purchase Sealy Corporation common stock, other than certain options held by members of management that those members elected to rollover (the "Rollover Options"), were canceled and converted into a
right to receive cash consideration upon the completion of the Merger. The Rollover Options, which have an aggregate initial intrinsic value of $24.6 million, represent options to purchase
Class A common stock in Sealy Corporation. In July, we granted to these members of management new options to purchase Sealy Corporation Class A common stock (the "New Options") in an
amount based on a multiple of the value of the member's Rollover Options. The New Options were granted under a stock option plan established after the completion of the Merger that provides for the
grant of cash and cashless exercise stock options, stock appreciation rights and/or dividend equivalent rights to management and other key employees on terms and subject to conditions as established
by the Human Resources Committee of Sealy Corporation's Board of Directors or certain of the committee's designees. Twenty million shares of Sealy Corporation's Class A common stock are
available for grants under the plan. The exercise price for the New Options is the per share transaction value of the common stock in the Merger reduced by the effect of the Sealy Corporation dividend
in July, 2004.

The
New Options were granted in part as "time options," which vest and become exercisable ratably on a monthly basis over the first five years following the date of grant, and granted in
part as "performance options," which vest and become exercisable over the five fiscal years through fiscal year 2008 upon the achievement of certain EBITDA performance targets, and in any event by the
eighth anniversary of the date of grant.

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All
Rollover Options and New Options, and any common stock for which such options are exercised, are governed by a management stockholders' agreement and a sale participation agreement,
which together provide for the following:



Executive Put Options.Concurrent with the merger in 2004, Messrs. Barman, Claypool and Rogers were given options to
sell their shares of stock in Sealy Corporation back to the Company upon their retirement. The sales price per share is based on a formula which takes into account changes in the equity of Sealy
Corporation since the merger and recapitalization, including, among other things, consolidated net income, additional capital contributions, and capital distributions.

Executive Employment Agreements.On January 14, 2005, Mr. McIlquham entered into an amended employment
agreement with Sealy Corporation as Chief Executive Officer. That agreement has a perpetual two-year term and provides for an annual base salary of $625,000, subject to annual increase by
Sealy Corporation Board of Directors plus a performance bonus between zero and one hundred twenty percent of his base salary. In addition, nine other employees of the Company, including Lawrence J.
Rogers, James B. Hirshorn and Charles L. Dawson, have entered into employment agreements that provide, among other things, a perpetual one-year employment term thereafter (two year in the
case of Mr. Hirshorn), during which such employees will receive base salary (not less than their current salary) and a performance bonus between zero and seventy percent of their base salary
(between zero and eighty percent for Mr. Hirshorn) and substantially the same benefits as they received as of the date of such agreements. For the fiscal year ending November 28, 2004,
the compensation committee of the Sealy Corporation Board of Directors determined that the bonuses to be paid pursuant to those employment agreements were to be based 70% on the Sealy Corporation
achievement of an Adjusted EBITDA target and 30% on the Sealy Corporation achievement in net debt reduction. Each such target represented an improvement over the Company's prior year performance.

Deferred Compensation Agreements.On December 18, 1997, two current employees, including Lawrence J. Rogers, entered
into deferred compensation agreements with us pursuant to which such employees elected to defer an aggregate $188,212 of compensation, which was paid out as part of the Recapitalization on
April 6, 2004.

Severance Benefit Plans.Effective December 1, 1992, Sealy Corporation established the Sealy Executive Severance
Benefit Plan (the "Executive Severance Plan") for employees in certain salary grades. Benefit eligibility includes, with certain exceptions, termination as a result of a permanent reduction in work
force or the closing of a plant or other facility, termination for inadequate job performance, termination of employment by the participant following a reduction in base compensation, reduction in
salary grade which would result in the reduction in potential plan benefits or involuntary transfer to another location. Benefits include cash severance payments calculated using various multipliers
varying by salary grade, subject to specified minimums and maximums depending on such salary grades. Such cash severance payments are made in equal semi-monthly installments calculated in
accordance with the Executive Severance Plan until paid in full. Certain executive-level officers would be entitled to a minimum of one-year's salary and a maximum of
two-year's salary under the Executive Severance Plan. However, if a participant becomes employed prior to completion of the payment of benefits, such semi-monthly installments
shall be reduced by the participant's base compensation for the corresponding period from the

83

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participant's
new employer. Participants receiving cash severance payments under the Executive Severance Plan also would receive six months of contributory health and dental coverage and six months of
group term life insurance coverage.

The
Company currently follows the terminal accrual approach to accounting for severance benefits under the Executive Severance Plan and records the estimated cost of these benefits as
expense at the date of the event giving rise to payment of the benefits.

In
addition, certain executives and other employees are eligible for benefits under our severance benefit plans and certain other agreements, which provide for cash severance payments
equal to their base salary and, in some instances, bonuses (from periods ranging from two weeks to two years) and for the continuation of certain benefits. In July of 2002, Sealy Corporation's Board
of Directors provided 12 company employees with a waiver of our stock repurchase right and a cashless exercise program (utilizing stock owned for at least six months) for stock acquired under our
stock option program, if the employee's employment with us terminates as the result of death, disability or retirement

Management Incentive Plan.The Company provides performance-based compensation awards to executive officers and key employees
for achievement each year as part of a bonus plan. Such compensation awards are a function of individual performance and corporate results. The qualitative and quantitative criteria will be determined
from time to time by Sealy Corporation's Board of Directors and currently include such factors as EBITDA and net debt level.

Sealy Mattress Corporation 1998 Stock Option Plan.In order to provide additional financial incentives for certain of the
Company's employees, such employees of the Company were granted options to purchase additional common stock of Parent pursuant to the Sealy Mattress Corporation 1998 Stock Option Plan. Such options
vested and became fully exercisable upon the April 6, 2004 change of control of
Sealy Corporation. Those options will now expire on April 6, 2014 or provided that if an employee's employment with the Company is terminated, then the exercise period of all such employee's
vested options under the 1998 Stock Option Plan will be reduced to a period ending no later than six months after such employee's termination.

Remuneration of Directors.Sealy Corporation reimbursed all directors for any out-of-pocket expenses
incurred by them in connection with services provided in such capacity. In addition, prior to 2005, Mr. Johnston received an annual retainer of $30,000, reduced by $1,000 for each board meeting
not attended, plus $1,000 ($1,250 if he was Committee Chairman) for each board of directors committee meeting attended if such meeting was on a date other than a board meeting date. Starting in 2005,
each of our non-management directors will receive $12,500 per quarter for their service as a director of the Company. In 2006, that amount shall be reduced to $7,500 per quarter. The
directors may elect to defer all or a portion of these fees into stock appreciation units. For 2005, each of the directors have elected to do so.

Compensation Committee Interlocks And Insider Participation

The Compensation Committee of the Company's Board of Directors currently consists of Messrs. Carroll, Johnston, and Stuart. For a description of
transactions between us and entities affiliated with Messrs. Carroll and Stuart, see Item 13, "Certain Relationships and Related Transactions herein.

Item 12.Security Ownership of Certain Beneficial Owners and Management

Sealy Mattress Corporation owns 100% of the capital stock of Sealy Mattress Company, and Sealy Corporation owns 100% of the capital stock of Sealy Mattress
Corporation.

The
following table and accompanying footnotes show information regarding the beneficial ownership of Sealy Mattress Corporation common stock as of January 31, 2005 by
(i) each person known by us to beneficially own more than 5% of the outstanding shares of Sealy Mattress Corporation common stock, (ii) each of our directors, (iii) each named
executive officer and (iv) all directors and executive officers as a

84

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group.
Unless otherwise indicated, the address of each person named in the table below is c/o Sealy Mattress Corporation, One Office Parkway, Trinity, North Carolina 27370.

|                                                                  |  | Beneficial
Ownership of Sealy
Mattress
Corporation
Common Stock (1) |  | Percentage of
Sealy Mattress
Corporation
Common Stock |  
|----------------------------------------------------------------- |  | ------------------------------------------------------------------- |  | ----------------------------------------------------- | -
|Name and Address of Beneficial Owner                              |  |                                                                     |  |                                                       |  
|KKR Millennium GP LLC(2)                                          |  | 807.6956                                                            |  | 80.77                                                 | %
|The Northwestern Mutual Life Insurance Company(3)                 |  | 61.6630                                                             |  | 6.17                                                  | %
|Steven Barnes(4)                                                  |  | 37.2964                                                             |  | 3.73                                                  | %
|Simon E. Brown(2)                                                 |  | 807.6956                                                            |  | 80.77                                                 | %
|Brian F. Carroll(2)                                               |  | 807.6956                                                            |  | 80.77                                                 | %
|James W. Johnston                                                 |  | 0.740                                                               |  | *                                                     |  
|Dean B. Nelson                                                    |  | *                                                                   |  | *                                                     |  
|Scott M. Stuart(2)                                                |  | 807.6956                                                            |  | 80.77                                                 | %
|Jeffrey C. Claypool (5)                                           |  | 1.7463                                                              |  | *                                                     |  
|Charles Dawson(5)                                                 |  | 3.6855                                                              |  | *                                                     |  
|James B. Hirshorn(5)                                              |  | 9.8547                                                              |  | *                                                     |  
|David J. McIlquham(5)                                             |  | 26.2113                                                             |  | 2.62                                                  | %
|Lawrence J. Rogers(5)                                             |  | 3.0921                                                              |  | *                                                     |  
|Directors and executive officers as a group (15 persons)(4)(5)(6) |  | 858.9138                                                            |  | 85.89                                                 | %

---

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Equity Compensation Information

There are 18,291,648 shares of Sealy Corporation common stock to be issued upon exercise of outstanding options, the weighted average exercise price of which was
$3.26 per share, issued under compensation plans approved by our shareholders. There were 8,026,912 shares remaining available for future issuances under these plans.

Item 13.Certain Relationships And Related Transactions

Stockholders Agreement

In connection with the Merger, Sealy Corporation, KKR, and the Rollover Stockholders entered into a stockholders agreement that governs the terms and conditions
upon which the Rollover Stockholders may transfer their shares of Common Stock, in addition to other shareholding matters.

Under
the stockholders agreement, for the first two years after the Merger, the Rollover Stockholders are restricted from transferring, other than to their respective affiliates or
members who agree to become parties to the agreement, their respective shares of Sealy Corporation common stock. Furthermore, after such two-year period, for three additional years
thereafter, any proposed transfers of Sealy Corporation common stock by a Rollover Stockholder (other than those to affiliates or effected pursuant to the "tag-along" or
"drag-along" rights discussed below) will be subject to a right of first refusal by KKR. If Sealy Corporation sells or issues to KKR or its affiliates shares of common stock, securities
convertible into or exchangeable for common stock or options warrants or other rights to acquire common stock, the Rollover Stockholders are allowed to participate on a proportionate basis.

The
stockholders agreement grants to the Rollover Stockholders "tag-along" rights, and to KKR, "drag-along" rights, in each case in connection with transfers by
KKR of its Sealy Corporation common stock. In connection with such transfers, a Rollover Stockholder may sell concurrently with KKR, upon notice to KKR and on terms no less favorable than those
granted to KKR, a certain number of shares calculated based upon the amount of shares proposed to be sold by KKR and the percentage of shares held by such Rollover Stockholder relative to the total
number of shares held by the Rollover Stockholders, KKR and other persons entitled to "tag-along" rights in such transfer, collectively. Similarly, in the event KKR decides to transfer
more than 50% of its shares to a non-affiliate, the Rollover Stockholders may be required to sell, on the same terms and conditions as KKR, a proportionate number of shares held by them.

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Under the stockholders agreement, the Rollover Stockholders were also granted "piggyback" registration rights in connection with registered resales by KKR of its Sealy Corporation common
stock.

In
addition to the transferability restrictions discussed above, provided the Rollover Stockholders hold at least 5% of the outstanding common stock of Sealy Corporation, for the first
two years after the Merger, Bain Capital shall have, pursuant to the stockholders agreement, the right to designate one member of Sealy Corporation's board of directors. Steven Barnes is Bain
Capital's current board designee.

Registration Rights Agreement

In connection with the Recapitalization, Sealy Corporation entered into a registration rights agreement with Sealy Holding LLC, a KKR controlled entity, pursuant
to which KKR (through Sealy Holding LLC, and KKR's transferees, to the extent they agree to be bound by the agreement) will have the right to register its shares for sale with the SEC along with Sealy
Corporation in the event that Sealy Corporation registers common stock for sale to the public. In addition, the agreement also provides KKR with an unlimited number of demand registration rights at
any time upon written request, subject to certain limitations. Sealy Corporation is required to pay registration expenses in the event it registers shares of common stock for sale to the public and in
connection with the first six registrations undertaken pursuant to KKR's demand registration rights. To the extent any other holders of Class A common stock are granted registration rights more
favorable than those of KKR under the agreement, the agreement will be deemed automatically amended to provide that KKR is granted similar rights.

Management Stockholder's Agreement

In connection with the Merger, Sealy Corporation allowed certain members of management (each, a "Member") to rollover options granted under its
pre-existing stock option plan. Concurrently with the rollover, each Member entered into a management stockholder's agreement and sale participation agreement (discussed below) which
together allow for the issuance of new options under Sealy Corporation's 2004 stock option plan and set forth the restrictions and rights with respect to the transfer and sale of the Members' options
and underlying shares. Under the management stockholder's agreement, Members may not, absent a change of control of Sealy Corporation, transfer any shares of common stock until five years after the
Merger, except for (i) certain transfers permitted upon the death or disability of the Member or upon termination of his or her employment; (ii) sales
pursuant to an effective registration statement where the Member has exercised its "piggyback" registration rights granted under the management stockholder's agreement; and
(iii) "tag-along" or "drag-along" transfers completed pursuant to the sale participation agreement. In addition to these restrictions, if at any time after the
five-year period and prior to a qualified public offering the Member receives a third-party offer to purchase his or her stock, Sealy Corporation has a right of refusal to purchase such
shares on the same terms and conditions as set forth in the offer. In entering into the management stockholder's agreement, each Member agreed to be bound by certain non-compete provisions
during his or her employment and for eighteen months thereafter.

Sale Participation Agreement

KKR (through Sealy Holding LLC) has entered into a sale participation agreement with each Member of management electing rollover options in connection with the
Merger. The sale participation agreement grants to the Member or its estate or trust the right to participate in any sale for cash or other consideration of shares of common stock by KKR occurring
prior to the fifth anniversary of the first public offering of Sealy Corporation common stock. The Member or its estate or trust will be able to sell the maximum number of shares of common stock owned
by such stockholder or which can be acquired under exercisable options that is proportional to the number of shares being sold by KKR in relation to the number of shares it then owns. Similarly, in
the event of a proposed sale of common stock by KKR, KKR

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may
require the Member or its estate or trust to sell in such transaction up to the number of shares described above.

Management Services Agreement with KKR

In connection with the Recapitalization, Sealy Mattress Company entered into a management services agreement with KKR pursuant to which KKR provides certain
structuring, consulting and management advisory services to us. Pursuant to this agreement, KKR received a transaction fee of $25 million upon the closing of the Recapitalization and will
receive an advisory fee of $2 million payable annually, such amount to increase by 5% per year. In fiscal 2004, we paid KKR approximately $1.4 million in advisory fees (exclusive of the
$25 million transaction fee). We are required to indemnify KKR and its affiliates, directors, officers and representatives for losses relating to the services contemplated by the management
services agreement and the engagement of KKR pursuant to, and the performance by KKR of the services contemplated by, the management services agreement.

Existing Agreements

Pursuant to the terms of the Merger agreement, Sealy Corporation's then existing stockholders agreement and registration rights agreement with Bain, Harvard
Private Capital Holdings, Inc., Sealy Investors 1, LLC, Sealy Investors 2, LLC and Sealy Investors 3, LLC, as well as its existing management services agreement with Bain, were terminated.

Sealy Corporation Refinancing

On July 16, 2004, Sealy Corporation, the ultimate parent company of Sealy Mattress Corporation and Sealy Mattress Company, issued $75.0 million
aggregate principal amount of senior subordinated pay-in-kind (PIK) notes (the "PIK Notes") and $47.5 million of common stock to certain institutional investors in
transactions exempt from registration under the Securities Act of 1933.

The
PIK Notes accrue interest in-kind at 10% per year, compounded semi-annually. Sealy Corporation is not required to pay accrued interest on the PIK Notes in
cash for the entire time that the PIK Notes are outstanding. The PIK Notes mature on July 15, 2015, following the maturities of substantially all other existing indebtedness of Sealy Mattress
Company, including its $595 million senior secured credit facility, $100 million senior unsecured term loan and $390 million senior subordinated notes offered for exchange hereby.
At maturity, the outstanding principal amount of the PIK Notes, along with any accrued and unpaid interest, will be paid in cash by Sealy Corporation.

Sealy
Corporation may redeem the PIK Notes at its option at any time, in whole or in part, at an initial price of 105% of the principal amount thereof plus all accrued interest not
previously paid in cash, which price declines to 102.5% after the first anniversary of issue, 101% after the second anniversary of issue and 100% after the third anniversary of issue. At any time
prior to the third anniversary of issue, Sealy Corporation may also use the proceeds of an equity offering to redeem any or all of the PIK Notes at its option at a price of 101% of the principal
amount thereof plus all accrued interest not previously paid in cash. In addition, upon a change of control Sealy Corporation and the repayment of Sealy Mattress Company's senior secured credit
facility, holders of the PIK Notes will be able to require Sealy Corporation to repurchase the PIK Notes at a price of 101% of the principal amount thereof plus all accrued interest not previously
paid in cash. The terms of the PIK Notes include covenants and events of default similar to those contained in the outstanding notes and exchange notes.

The
$122.5 million in gross proceeds from the transactions was returned to existing investors in Sealy Corporation by a combination of cash distributions to shareholders and
option holders as well as share repurchases of Sealy Corporation common stock. In connection with the distribution to option holders, Sealy Mattress Corporation recognized an approximately
$4.0 million charge against earnings in the fiscal third quarter of 2004.

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Item 14.    Principal Accounting Fees and Services

The Audit Committee pre-approves all permissible services provided by our independent registered public accounting firm. In addition to annual audit
fees, the Audit Committee grants pre-approvals of certain tax and other specific non-auditing services provided that aggregate billings for the services encompassed by each
such pre-approval do not exceed a pre-approved dollar threshold and provided that such specific services are subsequently presented to the Audit Committee. The Audit
Committee's pre-approval policy of non-audit services is based on its consideration of whether the provision of such non-audit services is compatible with
maintaining independent registered public accounting firm's independence. For all other services provided, the Audit Committee has delegated to each member the authority to approve such services with
such decision to be presented to the Audit Committee at its next regularly scheduled meeting.

The
following table summarizes aggregate fees billed to us by Deloitte & Touche, LLP ("Deloitte") and PricewaterhouseCoopers LLP (our independent registered accounting firm for
2003) for the fiscal years below, calculated in part based on amounts billed through February 25, 2005, with the following notes explaining the services underlying the table captions:

2004

2003(in thousands)Deloitte Fees:Audit fees

$
792

$
Audit-related fees





Tax fees





All other fees





Total

$
792

$
PricewaterhouseCoopers Fees:Audit fees

$


$
786Audit-related fees


135


90Tax fees


262


229All other fees


35


51Total

$
432

$
1,156


The
Audit-related fees include services for various public filings associated with the Recapitalization in 2004 and a public bond offering in 2003.

The
Tax fees include services for various tax return reviews and other tax consulting and planning projects.

PART IV

Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K



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90

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|Exhibit
Number |  | Exhibit Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            |  | Agreement and Plan of Merger, dated as of March 3, 2004, by and between Sealy Corporation and Posturepedic Acquisition Corp. (Incorporated herein by reference to Exhibit 2.1 to Sealy Corporation's Current Report
on Form 8-K (File No. 1-8738) filed April 15, 2004).                                                                                                                                                                                                                                                                 
|2.2            |  | First Amendment to the Agreement and Plan of Merger, dated April 5, 2004, by and between Sealy Corporation and Sealy Acquisition Corp. (incorporated herein by reference to Exhibit 2.2 to Sealy Corporation's
Current Report on Form 8-K (File No. 1-8738) filed April 15, 2004).                                                                                                                                                                                                                                                       
|3.1            |  | Amended and Restated Certificate of Incorporation of Sealy Mattress Company dated as of June 3, 1998 (incorporated herein by reference to Exhibit 3.1 to Sealy Mattress Company's Registration Statement on Form
S-4 (File No. 333-48187) filed June 3, 1998)                                                                                                                                                                                                                                                                            
|3.2            |  | Amended and Restated By-Laws of Sealy Mattress Company adopted October 15, 2003 (incorporated herein by reference to Exhibit 3.2 to Sealy Mattress Company's Registration Statement on Form S-4 (File No.
333-48187) filed July 1, 2004)                                                                                                                                                                                                                                                                                                 
|4.1            |  | Indenture, dated as of April 6, 2004, by and among Sealy Mattress Company, the Guarantors named therein and The Bank of New York Trust Company, N.A., as trustee, with respect to the 8.25% Senior Subordinated Notes
due 2014 and the 8.25% Senior Subordinated Exchange Notes due 2014. (Incorporated here in by reference to the appropriate Exhibit to Sealy Mattress Company's Registration Statement on from S-4 (File No. 333-117081) filed July 1,
2004).                                                                        
|4.2            |  | Exchange and Registration Rights Agreement, dated as of April 6, 2004, among Sealy Mattress Company, the Guarantors named therein and Goldman Sachs & Co. and J.P. Morgan Securities Inc., as representatives
of the initial purchasers. (Incorporated here in by reference to the appropriate Exhibit to Sealy Mattress Company's Registration Statement on from S-4 (File No. 333-117081) filed July 1, 2004).                                                                                                                         
|4.3            |  | First Supplemental Indenture, dated as of June 28, 2004, among Sealy Mattress Company, Sealy Corporation, Sealy Mattress Corporation and the subsidiary guarantors named therein and The Bank of New York Trust Company,
N.A., as trustee, with respect to the 8.25% Senior Subordinated Notes due 2014 and the 8.25% Senior Subordinated Exchange Notes due 2014 (Incorporated here in by reference to the appropriate Exhibit to Sealy Mattress Company's Registration
Statement on from S-4 (File No. 333-117081 filed July 1, 2004)).
|*10.1          |  | Sealy Profit Sharing Plan, Amended and Restated, dated December 1, 1989 (incorporated herein by reference to Exhibit 10.1 to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended
November 30, 1995 (File No. 1-8738) filed February 27, 1996).                                                                                                                                                                                                                                                                      
|*10.2          |  | Sealy Corporation Bonus Program (incorporated herein by reference to Exhibit 10.5 to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738) filed
February 27, 1996)                                                                                                                                                                                                                                                                                                               
|*10.3          |  | Amendment No. 1 to Sealy Bonus Plan (incorporated herein by reference to Exhibit 10.17 to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738) filed
March 3, 1997)                                                                                                                                                                                                                                                                                                               
|*10.4          |  | Amendment No. 1 to Sealy Profit Sharing Plan. (Incorporated herein by reference to the appropriate Exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996
(File No. 1-8738 filed March 3, 1997)).                                                                                                                                                                                                                                                                                          
|*10.5          |  | Amendment No. 2 to Sealy Profit Sharing Plan. (Incorporated herein by reference to the appropriate Exhibit to Sealy Mattress Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996
(File No. 1-8738) filed March 3, 1997).                                                                                                                                                                                                                                                                                 
|*10.6          |  | Sealy Corporation 1998 Stock Option Plan (incorporated herein by reference to Exhibit 10.48 to Sealy Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 1, 1998 (File No.
1-8738) filed April 15, 1998).                                                                                                                                                                                                                                                                                                   
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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|*10.7  |  | 2004 Stock Option Plan for Key Employees of Sealy Corporation and its Subsidiaries (incorporated herein by reference to Exhibit 4.4 to Sealy Corporation's Registration Statement on Form S-8 (File No. 333-113987)
filed March 26, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.8  |  | Form of Management Stockholder's Agreement (incorporated herein by reference to Exhibit 4.5 to Sealy Corporation's Registration Statement on Form S-8 (File No. 333-113987) filed March 26, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|*10.9  |  | Form of Sale Participation Agreement (incorporated herein by reference to Exhibit 4.6 to Sealy Corporation's Registration Statement on Form S-8 (File No. 333-113987) filed March 26, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.10 |  | Form of Stock Option Agreement (incorporated herein by reference to Exhibit 4.6 to Sealy Corporation's Registration Statement on Form S-8 (File No. 333-113987) filed March 26, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|*10.11 |  | Form of Rollover Agreement (incorporated herein by reference to Exhibit 4.9 to Sealy Corporation's Registration Statement on Form S-8 (File No. 333-113987) filed March 26, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.12  |  | Stockholders' Agreement, dated as of April 6, 2004, among Sealy Corporation, Bain Capital Fund V, L.P., Bain Capital Fund V, L.P., BCIP Associates, BCIP Trust Associates, L.P., Harvard Private Capital Holdings, Inc.,
Sealy Investors 1, LLC, Sealy Investors 2, LLC, Sealy Investors 3, LLC and Sealy Holding LLC.                                                                                                                                                                                                                                                                                                                                                                                    
|10.13  |  | Registration Rights Agreement, dated as of April 6, 2004, among Sealy Corporation and Sealy Holding LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.14  |  | Credit Agreement, dated April 6, 2004 among Sealy Mattress Company, Sealy Canada, LTD./LTEE, the Guarantors named therein, Sealy Mattress Corporation, Sealy Corporation, JPMorgan Chase Bank, as administrative agent,
J.P. Morgan Securities Inc., as joint lead arranger, Goldman Sachs Credit Partners, L.P., as joint lead arranger, General Electric Capital Corporation, as co-documentation agent, and Royal Bank of Canada, as co-documentation agent, and other lenders
from time to time parties thereto (incorporated herein by reference to Exhibit 10.1 to Sealy Corporation's Quarterly Report on Form 10-Q for the period ended February 29, 2004 (File No. 1-8738) filed April 14, 2004).
|10.15  |  | Senior Unsecured Credit Agreement, dated April 6, 2004 among Sealy Mattress Company, the Guarantors named therein, Sealy Mattress Corporation, Sealy Corporation, JPMorgan Chase Bank, as administrative agent, J.P.
Morgan Securities Inc., as joint lead arranger, Goldman Sachs Credit Partners, L.P., as joint lead arranger, and other lenders from time to time parties thereto (incorporated herein by reference to Exhibit 10.1 to Sealy Corporation's Quarterly
Report on Form 10-Q for the period ended February 29, 2004 (File No. 1-8738) filed April 14, 2004).                                                                                                                              
|*10.16 |  | Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and Jeffrey C. Claypool (incorporated herein by reference to Exhibit 10.8 to Sealy Corporation's Current Report on Form 8-K
(File No. 1-8738) filed December 30, 1997).                                                                                                                                                                                                                                                                                                                                                                                                                                               
|*10.17 |  | Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and Lawrence J. Rogers (incorporated herein by reference to Exhibit 10.12 to Sealy Corporation's Current Report on Form 8-K
(File No. 1-8738) filed December 30, 1997).                                                                                                                                                                                                                                                                                                                                                                                                                                               
|*10.18 |  | Amendment to Employment Agreement, dated as of December 17, 1997, between the employees named therein and Sealy Corporation (incorporated herein by reference to Exhibit 10.19 to Sealy Corporation's Current
Report on Form 8-K (File No. 1-8738) filed December 30, 1997).                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.19  |  | Fee and Monitoring Agreement, dated April 6, 2004, between Kohlberg Kravis Roberts &Co. and Sealy Mattress Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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|*10.20  |  | Amendment to Employment Agreement dated January 20, 2000 by and between Sealy Corporation and Lawrence J. Rogers (incorporated herein by reference to Exhibit 10.33 to Sealy Mattress Company's Registration
Statement on Form S-4 (File No. 333-67478) filed December 21, 2001).                   
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.21 |  | Amended Employment Agreement, dated as of January 14, 2005 by and between Sealy Corporation and David J. McIlquham.                                                                                                                                                                                 
|*10.22  |  | Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and Bruce Barman (incorporated herein by reference to Exhibit 10.7 to Sealy Corporation's Current Report on Form 8-K
(File No. 1-8738) filed December 30, 1997)                                                 
|*10.23  |  | Employment Agreement, dated as of September 17, 2002 by and between Sealy Corporation and Al Boulden (incorporated herein by reference to Exhibit 10.35 to Sealy Corporation's Annual Report on Form 10-K for the
fiscal year ended November 30, 2003 (File No. 1-8738) filed March 1, 2004).       
|*10.24  |  | Employment Agreement, dated as of September 17, 2002 by and between Sealy Corporation and Kenneth L. Walker (incorporated herein by reference to Exhibit 10.36 to Sealy Corporation's Annual Report on
Form 10-K for the fiscal year ended November 30, 2002 (File No. 1-8738) filed March 3, 2003).
|*10.25  |  | Employment Agreement, dated as of May 25, 2001 by and between Sealy Corporation and Charles Dawson (incorporated herein by reference to Exhibit 10.37 to Sealy Corporation's Annual Report on Form 10-K for the
fiscal year ended November 30, 2002 (File No. 1-8738) filed March 3, 2003).         
|*10.26  |  | Employment Agreement, dated as of October 1, 2002 by and between Sealy Corporation and G. Michael Hofmann (incorporated herein by reference to Exhibit 10.38 to Sealy Corporation's Annual Report on Form 10-K for
the fiscal year ended November 30, 2002 (File No. 1-8738) filed March 3, 2003).  
|*10.27 |  | Amended Employment Agreement, dated as of January 14, 2005 by and between Sealy Corporation and James B. Hirshorn.                                                                                                                                                                                  
|*10.28  |  | Sealy Corporation Executive Severance Benefit Plan dated January 25, 1993 (incorporated herein by reference to the appropriate Exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended
November 30, 1992 (File No. 1-8738)).                                            
|*10.29 |  | Sealy Corporation Directors' Deferred Compensation Plan dated December 13, 2004.                                                                                                                                                                                                                    
|*10.30 |  | Form of Stock Option Agreement (Special Retirement Only), dated as of July 20, 2004 by and between Sealy Corporation and Bruce G. Barman.                                                                                                                                                           
|*10.31 |  | Form of Stock Option Agreement (Special Retirement Only), dated as of July 20, 2004 by and between Sealy Corporation and Jeffrey C. Claypool.                                                                                                                                                       
|*10.32 |  | Form of Stock Option Agreement (Special Retirement Only), dated as of July 20, 2004 by and between Sealy Corporation and Lawrence J. Rogers.                                                                                                                                                        
|12.1   |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                  
|14.1   |  | Sealy's Business Conduct Policy and Guidelines adopted in 1999.                                                                                                                                                                                                                                     
|21.1    |  | List of Subsidiaries of Sealy Mattress Corporation.                                                                                                                                                                                                                                                 
|31.1   |  | Chief Executive Officer Certification of the Type Described in Rule13a-14(a) and Rule 15d-14(a)                                                                                                                                                                                                     
|31.2   |  | Chief Financial Officer Certification of the Type Described in Rule 13a-14(a) and Rule 15d-14(a)                                                                                                                                                                                                    
|32.1   |  | Certification pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                     

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|99.1 |  | Certificate of Ownership and Merger merging Sealy Holdings, Inc. with and into Sealy Mattress Corporation dated as of November 5, 1991. (Incorporated herein by reference to the appropriate Exhibit to Sealy
Mattress Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|99.2 |  | Sealy Mattress Corporation Executive Severance Benefit Plan dated January 25, 1993. (Incorporated herein by reference to the appropriate Exhibit to Sealy Mattress Corporation's Annual Report on Form 10-K for the
fiscal year ended November 30, 1992 (File No. 1-8738)).                                                    

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Schedule II

Valuation and Qualifying Accounts  Sealy Mattress Corporation and Subsidiaries

|Description                                           |  | Balance at
Beginning
of Period |        | Charged to
Costs
and Expenses |   | Charged to
Other
Accounts
Described |   | Deductions
Describe |  | Balance at
End of
Period
|----------------------------------------------------- |  | ------------------------------ | ------ | ----------------------------- | - | ------------------------------------ | - | -------------------- |  | ------------------------
|YEAR ENDED NOVEMBER 28, 2004                          |  |                                |        |                               |   |                                      |   |                      |  |                         
|Reserves and allowances deducted from
asset accounts: |  |                                |        |                               |   |                                      |   |                      |  |                         
|Allowance for doubtful accounts                       |  | $                              | 17,596 |                               | $ | 3,149                                |   |                     |  | $                       
|Reserve for discounts and returns                     |  |                                | 5,433  |                               |   | 19,238                               |   |                     |  |                         
|Reserve for inventory obsolescence                    |  |                                | 2,163  |                               |   | 360                                  |   |                     |  |                         
|Deferred tax asset valuation                          |  |                                | 13,908 |                               |   | 5,855                                |   |                     |  |                         
|                                                      |  |                                |        |                               |   |                                      |   |                      |  |                         
|                                                      |  | $                              | 39,100 |                               | $ | 28,602                               |   |                     |  | $                       
|                                                      |  |                                |        |                               |   |                                      |   |                      |  |                         
|YEAR ENDED NOVEMBER 30, 2003                          |  |                                |        |                               |   |                                      |   |                      |  |                         
|Reserves and allowances deducted from
asset accounts: |  |                                |        |                               |   |                                      |   |                      |  |                         
|Allowance for doubtful accounts                       |  | $                              | 24,777 |                               | $ | 5,047                                |   |                     |  | $                       
|Reserve for discounts and returns                     |  |                                | 1,566  |                               |   | 29,465                               |   |                     |  |                         
|Reserve for inventory obsolescence                    |  |                                | 1,594  |                               |   | 569                                  |   |                     |  |                         
|Deferred tax asset valuation                          |  |                                | 6,744  |                               |   | 7,164                                |   |                     |  |                         
|                                                      |  |                                |        |                               |   |                                      |   |                      |  |                         
|                                                      |  | $                              | 34,681 |                               | $ | 42,245                               |   |                     |  | $                       
|                                                      |  |                                |        |                               |   |                                      |   |                      |  |                         
|YEAR ENDED DECEMBER 1, 2002                           |  |                                |        |                               |   |                                      |   |                      |  |                         
|Reserves and allowances deducted from
asset accounts: |  |                                |        |                               |   |                                      |   |                      |  |                         
|Allowance for doubtful accounts                       |  | $                              | 20,481 |                               | $ | 31,252                               |   |                     |  | $                       
|Reserve for discounts and returns                     |  |                                | 1,612  |                               |   | 21,963                               |   |                     |  |                         
|Reserve for inventory obsolescence                    |  |                                | 1,983  |                               |   | (389                                 | ) |                     |  |                         
|Deferred tax asset valuation                          |  |                                | 12,002 |                               |   |                                     |   |                     |  |                         
|                                                      |  |                                |        |                               |   |                                      |   |                      |  |                         
|                                                      |  | $                              | 36,078 |                               | $ | 52,826                               |   |                     |  | $                       
|                                                      |  |                                |        |                               |   |                                      |   |                      |  |                         

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95

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SIGNATURES

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

| |  | SEALY CORPORATION
| |  | -----------------
| |  | By:              

Date:
February 28, 2005

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 and on
the dates indicated:

|Signature                               |  | Title                                                                                            |  | Date             
|--------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | -----------------
|                                        |  |                                                                                                  |  |                  
|/s/JAMES B. HIRSHORNJames B. Hirshorn   |  | Executive Vice President and Chief Financial Officer (Principal Accounting Officer) and Director |  | February 28, 2005
|/s/DAVID J. MCILQUHAMDavid J. McIlquham |  | Director                                                                                         |  | February 28, 2005
|/s/STEVEN BARNESSteven Barnes           |  | Director                                                                                         |  | February 28, 2005
|/s/SIMON E. BROWNSimon E. Brown         |  | Director                                                                                         |  | February 28, 2005
|/s/BRIAN F. CARROLLBrian F. Carroll     |  | Director                                                                                         |  | February 28, 2005
|/s/JAMES W. JOHNSTONJames W. Johnston   |  | Director                                                                                         |  | February 28, 2005
|/s/DEAN B. NELSONDean B. Nelson         |  | Director                                                                                         |  | February 28, 2005
|/s/SCOTT M. STUARTScott M. Stuart       |  | Director                                                                                         |  | February 28, 2005

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