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

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FORM 10-Q

|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the quarterly period ended: June 1, 2008                 
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the Transition Period
from                             to

Commission file number 001-08738

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

|Delaware(State or other jurisdiction of incorporation)                                         |  | 36-3284147(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|Sealy Drive One Office Parkway
Trinity, North Carolina(Address of principal executive offices) |  | 27370(Zip Code)                               
|(336) 861-3500Registrant's telephone number, including area code                              

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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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

|Large accelerated filer ý |  | Accelerated filer o |  | Non-accelerated filer o (Do not check if a smaller
reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

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

The number of shares of the registrant's common stock outstanding as of June 27, 2008 is approximately: 91,020,819.



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PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

SEALY CORPORATION    Condensed Consolidated Statements of Operations    (in thousands, except per share data)    (unaudited)

|                                                      |              | Three Months Ended               |           
|----------------------------------------------------- | ------------ | -------------------------------- | ----------
|
|Net sales                                             |              | $                                | 375,375   
|Cost of goods sold                                    |              |                                  | 227,002   
|                                                      |              |                                  |           
|                                                      | Gross profit |                                  |           
|Selling, general and administrative expenses          |              |                                  | 116,359   
|Amortization of intangibles                           |              |                                  | 954       
|Royalty income, net of royalty expense                |              |                                  | (4,276    
|                                                      |              |                                  |           
|                                                      |              | Income from operations           |           
|Interest expense                                      |              |                                  | 15,369    
|Other income, net                                     |              |                                  | (81       
|                                                      |              |                                  |           
|                                                      |              | Income before income tax expense |           
|Income tax expense                                    |              |                                  | 8,091     
|                                                      |              |                                  |           
|                                                      |              |                                  | Net income
|                                                      |              |                                  |           
|Earnings per common shareBasic                       |              | $                                | 0.13      
|                                                      |              |                                  |           
|Earnings per common shareDiluted                     |              | $                                | 0.13      
|                                                      |              |                                  |           
|Weighted average number of common shares outstanding: |              |                                  |           
|                                                      | Basic        |                                  |           
|                                                      | Diluted      |                                  |           

See
accompanying notes to condensed consolidated financial statements.

1

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SEALY CORPORATION        Condensed Consolidated Statements of Operations        (in thousands, except per share data)        (unaudited)

|                                                      |              | Six Months Ended                 |           
|----------------------------------------------------- | ------------ | -------------------------------- | ----------
|
|Net sales                                             |              | $                                | 767,304   
|Cost of goods sold                                    |              |                                  | 465,736   
|                                                      |              |                                  |           
|                                                      | Gross profit |                                  |           
|Selling, general and administrative expenses          |              |                                  | 233,103   
|Amortization of intangibles                           |              |                                  | 1,869     
|Royalty income, net of royalty expense                |              |                                  | (9,136    
|                                                      |              |                                  |           
|                                                      |              | Income from operations           |           
|Interest expense                                      |              |                                  | 30,745    
|Other income, net                                     |              |                                  | (180      
|                                                      |              |                                  |           
|                                                      |              | Income before income tax expense |           
|Income tax expense                                    |              |                                  | 16,996    
|                                                      |              |                                  |           
|                                                      |              |                                  | Net income
|                                                      |              |                                  |           
|Earnings per common shareBasic                       |              | $                                | 0.31      
|                                                      |              |                                  |           
|Earnings per common shareDiluted                     |              | $                                | 0.30      
|                                                      |              |                                  |           
|Weighted average number of common shares outstanding: |              |                                  |           
|                                                      | Basic        |                                  |           
|                                                      | Diluted      |                                  |           

See
accompanying notes to condensed consolidated financial statements.

2

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SEALY CORPORATION        Condensed Consolidated Balance Sheets        (in thousands, except per share amounts)        (unaudited)

|                                               |                                                                                                                                                                                                           | June 1,
2008 |           | December 2,
2007 |  
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | --------- | ---------------- | -
|ASSETS                                         |                                                                                                                                                                                                           |              |           |                  |  
|Current assets:                                |                                                                                                                                                                                                           |              |           |                  |  
|                                               | Cash and cash equivalents                                                                                                                                                                                 |              | $         | 44,247           |  
|                                               | Accounts receivable, net of allowances for bad debts, cash discounts and returns                                                                                                                          |              |           | 190,872          |  
|                                               | Inventories                                                                                                                                                                                               |              |           | 74,558           |  
|                                               | Prepaid expenses and other current assets                                                                                                                                                                 |              |           | 24,194           |  
|                                               | Deferred income taxes                                                                                                                                                                                     |              |           | 16,446           |  
|                                               |                                                                                                                                                                                                           |              |           |                  |  
|                                               |                                                                                                                                                                                                           |              | 350,317   |                  |  
|                                               |                                                                                                                                                                                                           |              |           |                  |  
|Property, plant and equipmentat cost          |                                                                                                                                                                                                           |              | 464,854   |                  |  
|Less accumulated depreciation                  |                                                                                                                                                                                                           |              | (214,776  | )                |  
|                                               |                                                                                                                                                                                                           |              |           |                  |  
|                                               |                                                                                                                                                                                                           |              | 250,078   |                  |  
|                                               |                                                                                                                                                                                                           |              |           |                  |  
|Other assets:                                  |                                                                                                                                                                                                           |              |           |                  |  
|                                               | Goodwill                                                                                                                                                                                                  |              |           | 397,522          |  
|                                               | Other intangibles, net of accumulated amortization                                                                                                                                                        |              |           | 7,465            |  
|                                               | Deferred income taxes                                                                                                                                                                                     |              |           | 6,812            |  
|                                               | Debt issuance costs, net, and other assets                                                                                                                                                                |              |           | 31,928           |  
|                                               |                                                                                                                                                                                                           |              |           |                  |  
|                                               |                                                                                                                                                                                                           |              | 443,727   |                  |  
|                                               |                                                                                                                                                                                                           |              |           |                  |  
|                                               |                                                                                                                                                                                                           | $            | 1,044,122 |                  | $
|                                               |                                                                                                                                                                                                           |              |           |                  |  
|LIABILITIES AND STOCKHOLDERS' DEFICIT          |                                                                                                                                                                                                           |              |           |                  |  
|Current liabilities:                           |                                                                                                                                                                                                           |              |           |                  |  
|                                               | Current portionlong-term obligations                                                                                                                                                                     |              | $         | 33,908           |  
|                                               | Accounts payable                                                                                                                                                                                          |              |           | 159,366          |  
|                                               | Accrued incentives and advertising                                                                                                                                                                        |              |           | 25,978           |  
|                                               | Accrued compensation                                                                                                                                                                                      |              |           | 25,115           |  
|                                               | Accrued interest                                                                                                                                                                                          |              |           | 16,381           |  
|                                               | Other accrued expenses                                                                                                                                                                                    |              |           | 48,568           |  
|                                               |                                                                                                                                                                                                           |              |           |                  |  
|                                               |                                                                                                                                                                                                           |              | 309,316   |                  |  
|                                               |                                                                                                                                                                                                           |              |           |                  |  
|Long-term obligations, net of current portion  |                                                                                                                                                                                                           |              | 753,427   |                  |  
|Other noncurrent liabilities                   |                                                                                                                                                                                                           |              | 71,048    |                  |  
|Deferred income taxes                          |                                                                                                                                                                                                           |              | 7,549     |                  |  
|Common stock and options subject to redemption |                                                                                                                                                                                                           |              | 8,081     |                  |  
|Stockholders' deficit:                         |                                                                                                                                                                                                           |              |           |                  |  
|                                               | Common stock, $0.01 par value; Authorized shares: 2008 and 2007200,000 Issued and outstanding: 200891,018; 200790,814 (including shares classified above as subject to redemption: 2008277;
2007401) |              |           | 907              |  
|                                               | Additional paid-in capital                                                                                                                                                                                |              |           | 664,237          |  
|                                               | Accumulated deficit                                                                                                                                                                                       |              |           | (783,260         | )
|                                               | Accumulated other comprehensive income                                                                                                                                                                    |              |           | 12,817           |  
|                                               |                                                                                                                                                                                                           |              |           |                  |  
|                                               |                                                                                                                                                                                                           |              | (105,299  | )                |  
|                                               |                                                                                                                                                                                                           |              |           |                  |  
|                                               |                                                                                                                                                                                                           | $            | 1,044,122 |                  | $
|                                               |                                                                                                                                                                                                           |              |           |                  |  

See accompanying notes to condensed consolidated financial statements.

3

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SEALY CORPORATION        Condensed Consolidated Statement of Stockholders' Deficit        (in thousands)        (unaudited)

|                                                                         |                                                  |   |        | Common Stock |        |  |   |     |  | Accumulated
Other
Comprehensive
Income |         |       |  
|------------------------------------------------------------------------ | ------------------------------------------------ | - | ------ | ------------ | ------ |  | - | --- |  | -------------------------------------- | ------- | ----- | -
|
|
|Balance at December 2, 2007                                              |                                                  |   |        |              | 90,814 |  | $ | 902 |  | $                                      | 654,626 |       | $
|Net income                                                               |                                                  |   | 28,171 |              |        |  |   |     |  |                                        |         |       |  
|Foreign currency translation adjustment                                  |                                                  |   | 3,694  |              |        |  |   |     |  |                                        |         |       |  
|Adjustment to defined benefit plan liability, net of tax of $46          |                                                  |   | 69     |              |        |  |   |     |  |                                        |         |       |  
|Change in fair value of cash flow hedge, net of tax of $43               |                                                  |   | (185   | )            |        |  |   |     |  |                                        |         |       |  
|Cumulative effect of a change in accounting principleadoption of FIN 48 |                                                  |   |        |              |        |  |   |     |  |                                        |         |       |  
|Share-based compensation:                                                |                                                  |   |        |              |        |  |   |     |  |                                        |         |       |  
|                                                                         | Compensation associated with stock option grants |   |        |              |        |  |   |     |  |                                        |         | 1,723 |  
|                                                                         | Directors' deferred stock compensation           |   |        |              |        |  |   |     |  |                                        |         | (40   | )
|Cash dividend                                                            |                                                  |   |        |              |        |  |   |     |  |                                        |         |       |  
|Exercise of stock options                                                |                                                  |   |        |              | 204    |  |   | 4   |  |                                        | (926    | )     |  
|Excess tax benefit on options exercised                                  |                                                  |   |        |              |        |  |   |     |  |                                        | 781     |       |  
|Adjustment of temporary equity subject to redemption                     |                                                  |   |        |              |        |  |   | 1   |  |                                        | 8,073   |       |  
|                                                                         |                                                  |   |        |              |        |  |   |     |  |                                        |         |       |  
|Balance at June 1, 2008                                                  |                                                  | $ | 31,749 |              | 91,018 |  | $ | 907 |  | $                                      | 664,237 |       | $
|                                                                         |                                                  |   |        |              |        |  |   |     |  |                                        |         |       |  

See accompanying notes to condensed consolidated financial statements.

4

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SEALY CORPORATION        Condensed Consolidated Statements of Cash Flows        (in thousands)        (unaudited)

|                                        |                                                                                   | Six Months Ended                                          |                                          
|--------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------- | -----------------------------------------
|
|Cash flows from operating activities:   |                                                                                   |                                                           |                                          
|                                        | Net income                                                                        |                                                           | $                                        
|                                        | Adjustments to reconcile net income to net cash provided by operating activities: |                                                           |                                          
|                                        |                                                                                   | Depreciation and amortization                             |                                          
|                                        |                                                                                   | Deferred income taxes                                     |                                          
|                                        |                                                                                   | Amortization of debt issuance costs and other             |                                          
|                                        |                                                                                   | Share-based compensation                                  |                                          
|                                        |                                                                                   | Excess tax benefits from share-based payment arrangements |                                          
|                                        |                                                                                   | Loss (gain) on sale of assets                             |                                          
|                                        |                                                                                   | Other, net                                                |                                          
|                                        | Changes in operating assets and liabilities:                                      |                                                           |                                          
|                                        |                                                                                   | Accounts receivable                                       |                                          
|                                        |                                                                                   | Inventories                                               |                                          
|                                        |                                                                                   | Prepaid expenses and other current assets                 |                                          
|                                        |                                                                                   | Other assets                                              |                                          
|                                        |                                                                                   | Accounts payable                                          |                                          
|                                        |                                                                                   | Accrued expenses                                          |                                          
|                                        |                                                                                   | Other liabilities                                         |                                          
|                                        |                                                                                   |                                                           |                                          
|                                        |                                                                                   |                                                           | Net cash provided by operating activities
|                                        |                                                                                   |                                                           |                                          
|Cash flows from investing activities:   |                                                                                   |                                                           |                                          
|                                        | Purchase of property, plant and equipment                                         |                                                           |                                          
|                                        | Proceeds from sale of property, plant and equipment                               |                                                           |                                          
|                                        |                                                                                   |                                                           |                                          
|                                        |                                                                                   |                                                           | Net cash used in investing activities    
|                                        |                                                                                   |                                                           |                                          
|Cash flows from financing activities:   |                                                                                   |                                                           |                                          
|                                        | Cash dividends                                                                    |                                                           |                                          
|                                        | Proceeds from issuance of long-term obligations                                   |                                                           |                                          
|                                        | Repayments of long-term obligations                                               |                                                           |                                          
|                                        | Borrowings under revolving credit facilities                                      |                                                           |                                          
|                                        | Repayments under revolving credit facilities                                      |                                                           |                                          
|                                        | Repurchase of common stock                                                        |                                                           |                                          
|                                        | Exercise of employee stock options, including related excess tax benefits         |                                                           |                                          
|                                        | Other                                                                             |                                                           |                                          
|                                        |                                                                                   |                                                           |                                          
|                                        |                                                                                   |                                                           | Net cash used in financing activities    
|                                        |                                                                                   |                                                           |                                          
|Effect of exchange rate changes on cash |                                                                                   |                                                           | (1,317                                   
|                                        |                                                                                   |                                                           |                                          
|Change in cash and cash equivalents     |                                                                                   |                                                           | 29,640                                   
|Cash and cash equivalents:              |                                                                                   |                                                           |                                          
|                                        | Beginning of period                                                               |                                                           |                                          
|                                        |                                                                                   |                                                           |                                          
|                                        | End of period                                                                     |                                                           | $                                        
|                                        |                                                                                   |                                                           |                                          

See accompanying notes to condensed consolidated financial statements.

5

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SEALY CORPORATION        Notes to Condensed Consolidated Financial Statements        (unaudited)

Note 1:Basis of Presentation

The interim Condensed Consolidated Financial Statements are unaudited, and certain related information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with Rule 10-01 of
Regulation S-X. The accompanying interim Condensed Consolidated Financial Statements were prepared following the same policies and procedures used in the preparation of the annual
financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Sealy Corporation and its subsidiaries (the
"Company"). The results of operations for the interim periods are not necessarily indicative of the results for the fiscal year. These Condensed Consolidated Financial Statements should be read in
conjunction with the annual consolidated financial statements for the year ended December 2, 2007 included within the Company's Annual Report on Form 10-K (File
No. 001-08738).

On
April 6, 2004, the Company completed a merger with affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") whereby KKR acquired 92% of the Company's
capital stock. Certain of the Company's previous stockholders, including affiliates of Bain Capital, LLC and others, retained an 8% interest in the Company's stock. The merger was accounted for
as a recapitalization. Subsequent to the recapitalization, the Company contributed all of its interest in Sealy Mattress Company, of which it was the sole shareholder, to a newly formed subsidiary
holding company, Sealy Mattress Corporation, which also replaced the Company as the parent-guarantor of the 8.25% Senior Subordinated Notes due 2014 (the "2014 Notes") issued by Sealy Mattress
Company. Effective May 25, 2006, Sealy Corporation was named a guarantor of the 2014 Notes. At June 1, 2008, KKR controlled approximately 51% of the issued and outstanding common stock
of the Company.

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

Note 2:Recently Issued Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
No. 109" ("FIN 48"). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FAS 109,
"Accounting for Income Taxes." This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The Company adopted the provisions of this interpretation effective December 3, 2007. As a result of the adoption of this interpretation, the Company recorded an increase of approximately
$10.5 million to the liability for uncertain tax positions in the Condensed Consolidated Balance Sheets for unrecognized tax benefits, which was accounted for as a cumulative effect adjustment
to the December 3, 2007, balance of accumulated deficit. See Note 16.

In
September 2006, the FASB issued FAS 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles

6

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SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 2:Recently Issued Accounting Pronouncements (Continued)

("GAAP")
and expands disclosure about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-b, "Effective Date of FASB Statement
No. 157", which provides a one year deferral of the effective date of FAS 157 for non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least annually. In accordance with this interpretation, the Company has only adopted the provisions of FAS 157 with respect
to its financial assets and liabilities that are measured at fair value within the financial statements as of December 3, 2007. The provisions of FAS 157 have not been applied to
non-financial assets and non-financial liabilities. The major categories of assets and liabilities that are measured at fair value, for which the Company has not applied the
provisions of FAS 157 are as follows: asset retirement obligations, reporting units measured at fair value in the first step of a goodwill impairment test under FAS 142,
long-lived assets measured at fair value for an impairment assessment under FAS 146.

In
February 2007, the FASB issued FAS 159, "The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an amendment to FASB Statement
No. 115," which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company
adopted this statement as of December 3, 2008 and has elected not to apply the fair value option to any of its financial instruments.

In
June 2007, the Emerging Issues Task Force ("EITF") issued EITF 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities," which provides guidance on the accounting for certain nonrefundable advance payments for goods or services that will be used or rendered for future research and
development activities. This issue is effective prospectively for fiscal years beginning after December 15, 2007, or fiscal 2009 for the Company. The Company is still assessing the potential
impact of adoption.

In
December 2007, the FASB issued FAS 160, "Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51". This statement
establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective prospectively, except for
certain retrospective disclosure requirements, for fiscal years beginning after December 15, 2008. This statement will be effective for the Company beginning in fiscal 2010. The Company is
still assessing the potential impact of adoption.

In
December 2007, the FASB issued FAS 141(R), "Business Combinationsa replacement of FASB Statement No. 141", which significantly changes the principles and
requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business combination. This statement is effective prospectively, except for certain retrospective adjustments to deferred tax
balances, for fiscal years beginning after December 15, 2008. This statement will be effective for the Company beginning in fiscal 2010. The Company is still assessing the potential impact of
adoption.

In
March 2008, the FASB issued FAS 161, "Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133", which amends and expands
the disclosure

7

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SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 2:Recently Issued Accounting Pronouncements (Continued)

requirements
of FAS 133 to require qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This statement will be effective for the Company beginning in
fiscal 2009. The adoption of this statement will change the disclosures related to derivative instruments held by the Company.

In
April 2008, the FASB issued FASB Staff Position No. 142-3, "Determination of the Useful Lives of Intangible Assets", which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of an intangible asset. This interpretation is effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods within those years. The Company will adopt this interpretation as of the beginning of fiscal 2010 and is still assessing the potential
impact of adoption.

Note 3:Change in Estimate

During the second quarter of fiscal 2008, the Company completed an analysis of its returns claims experience based on historical return trends for the Company's
U.S. business, which is a component of the Americas segment, using newly available information as a result of a new and improved product return process that allows it to better track and match claims
received to the sales for which those claims were initially recorded. This analysis was applied to both its warrantable and other product returns. The effect of this change in estimate for warranty
claims was to reduce other accrued liabilities and cost of sales by approximately $4.5 million. The change in estimate for other product returns reduced other accounts receivable balances by
approximately $3.7 million, with a corresponding increase in net sales. For both the three and six month period ended June 1, 2008, the change in estimate increased operating income by
$8.2 million and net income by $5.1 million. This change in estimate also increased net income per basic and diluted share by $0.06 and $0.05, respectively for the three and six months
ended June 1, 2008.

Note 4:Share-Based Compensation

The Company maintains the 1998 Stock Option Plan ("1998 Plan") and the 2004 Stock Option Plan for Key Employees of Sealy Corporation and its Subsidiaries ("2004
Plan") which are collectively referred to as the "Option Plans". The Company accounts for all new stock options granted or outstanding options modified after August 29, 2005 (the beginning of
the fourth quarter of fiscal 2005) under the provisions of FAS No. 123 (revised 2004) "Share-Based Payment" ("FAS 123(R)").

During
the three and six months ended June 1, 2008, the Company granted new options to purchase 1,352,455 shares of common stock and recognized compensation expense associated
with these grants of approximately $0.1 million. During the three and six months ended May 27, 2007, the Company granted new options to purchase 17,821 and 450,282 shares, respectively,
of common stock, and recognized compensation expense associated with these grants of approximately $0.3 million and $0.5 million during the three and six months ended May 27,
2007, respectively. The options granted during the second quarter of fiscal 2008 and the second quarter of fiscal 2007 had a weighted average

8

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4:Share-Based Compensation (Continued)

grant-date
fair value of $2.92 and 5.06, respectively, per option. The Company valued these stock option grants using the trinomial lattice valuation model with the following assumptions:

Three Months Ended
June 1, 2008

Three Months
Ended
May 27, 2007Expected volatility

40%

30%Expected dividend yield

0.00%3.35%

1.76%2.03%Expected term (in years)

5.876.53

6.717.88Risk-free rate

2.48%3.03%

4.54%4.72%


Due
to the lack of sufficient historical trading information with respect to its own shares, the Company estimates expected volatility based on a portfolio of selected stocks of
companies believed to have market and economic characteristics similar to its own. The expected dividend yield was based on the Company's prior quarterly dividend of $0.075 per share relative to the
fair value of the underlying stock at grant date for options granted prior to the suspension of the dividend in the second quarter of fiscal 2008. The expected dividend yield for options granted after
the decision was made to suspend the dividend was assumed to be zero. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term is
based on an analysis of the early exercise behavior of employees.

A
summary of option activity under the 1998 Plan for the six months ended June 1, 2008, is presented below:

Shares Subject
to Options

Weighted Average
Exercise Price
Per ShareOutstanding December 2, 2007


3,109,454

$
1.44Exercised


(246,028
)

2.08Outstanding June 1, 2008 (all fully vested and exercisable)


2,863,426

$
1.39Weighted average remaining contractual term


5.9 yearsAggregate intrinsic value at June 1, 2008 (in thousands)

$
13,830


9

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4:Share-Based Compensation (Continued)

A
summary of option activity under the 2004 Plan for the three months ended June 1, 2008, is presented below:

Shares Subject to Options

Weighted Average Exercise Price Per ShareOutstanding December 2, 2007


9,304,343

$
8.06Granted


1,352,455


8.91Exercised


(162,154
)

5.78Forfeited


(2,181,930
)

8.64Outstanding June 1, 2008


8,312,714

$
8.09Weighted average remaining contractual term


6.6 yearsAggregate intrinsic value (in thousands)

$
0Exercisable at June 1, 2008


4,566,488Weighted average remaining contractual term


6.4 yearsAggregate intrinsic value (in thousands)

$
0


As
of June 1, 2008, the Company had approximately $5.1 million of unrecognized compensation expense which is expected to be recognized over a weighted average period of
3.0 years.

During
the three and six months ended June 1, 2008 and May 27, 2007, the Company recognized total non-cash compensation expense associated with stock options of
$1.2 million and $1.7 million, respectively for fiscal 2008 and $0.7 million and $1.1 million, respectively, for fiscal 2007. The non-cash compensation expense
recognized for the three and six months ended June 1, 2008 includes a charge of approximately $0.7 million related to a modification of awards given to our former President and Chief
Executive Officer. This charge has been recorded as a component of selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

During
the three and six months ended June 1, 2008 and May 27, 2007, the Company recognized expense of $0.2 million and $0.3 million, respectively for fiscal
2008 and $0.4 million and $0.5 million, respectively, for fiscal 2007, resulting from the accretion of an obligation to certain executives of the Company for their right to sell to the
Company, upon their retirement, vested shares of the Company's common stock.

The
Company has granted stock options to employees that have accelerated vesting provisions which take effect if certain performance levels are achieved by the Company. If the Company
does not meet these performance targets, then the vesting of the options, in some cases, occurs over the remainder of the requisite service period or, in other cases, the options will not vest. As of
June 1, 2008, it is the Company's expectation that the performance targets for these stock options will not be met. As such, the recognition of the related unrecognized compensation cost is
being recognized over the remainder of the requisite service period for those options that vest over the remaining service period. The Company has not recognized compensation cost in the current
period for options to purchase 674,532 shares of common stock that do not vest if the performance targets are not achieved.

10

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 5:Inventories

The major components of inventories were as follows (in thousands):

June 1, 2008

December 2, 2007Raw materials

$
35,024

$
30,327Work in process


25,839


27,647Finished goods


13,695


15,708$
74,558

$
73,682


Note 6:Warranty Costs

The Company's warranty policy provides a 10-year non-prorated warranty service period on all currently manufactured Sealy Posturepedic, Stearns &
FosterandBassettbedding products and certain other Sealy-branded
products as well as a 20-year warranty on itsTrueFormproduct line and a 20-year limited warranty on its RightTouchproduct line which cover only certain
parts of the products and are prorated for part of the twenty years. In fiscal 2007, the Company
amended its warranty policy onSealybranded promotional bedding to three years for the new line introduced in January 2007 and shipped in the second
quarter of fiscal 2007. The Company's policy is to accrue the estimated cost of warranty coverage at the time the sale is recorded.

As
indicated in Note 3, during the second quarter of fiscal 2008, the Company completed an analysis of its warranty claims experience. The analysis was based on historical return
trends using newly available information as a result of a new and improved product return process that allows the Company to better track and match claims received to the sales for which those claims
were initially recorded. As a result of the analysis performed, the Company changed its estimate of its accrued warranty obligations. This resulted in a reduction of accrued warranty obligations and
cost of sales of approximately
$4.5 million. The change in the Company's accrued warranty obligations for each of the six months ended June 1, 2008 and May 27, 2007 and the year ended December 2, 2007
was as follows (in thousands):

June 1, 2008

December 2, 2007

May 27, 2007Accrued warranty obligations at beginning of period

$
15,964

$
15,349

$
15,349Warranty claims


(9,981
)

(17,389
)

(7,778
)Warranty provisions


13,623


18,004


6,415Change in estimate


(4,484
)




Accrued warranty obligations at end of period

$
15,122

$
15,964

$
13,986


Warranty
claims for the year ended December 2, 2007 included approximately $14.0 million for claims associated with products sold prior to November 26, 2006 that
were still under warranty. In estimating its warranty obligations, the Company considers the impact of recoverable salvage value on warranty cost in determining its estimate of future warranty
obligations. Warranty claims and provisions shown above do not include estimated salvage recoveries that reduced cost of sales by $3.1 million,

11

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 6:Warranty Costs (Continued)

$6.2 million
and $3.3 million for the six months ended June 1, 2008, the year ended December 2, 2007 and the six months ended May 27, 2007, respectively.

Note 7:Assets Held for Sale

In March 2007, the Company sold a facility that had been classified as an asset held for sale. A pretax gain on sale of this facility of approximately
$2.6 million was recorded in the second quarter of fiscal 2007 as a reduction of selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

Note 8:Assets Constructed on Behalf of the Company

The Company has engaged third parties to construct production facilities to be leased by the Company. Emerging Issues Task Force Issue
No. 97-10, "The Effect of Lessee Involvement in Asset Construction" ("EITF 97-10"), is applied to entities involved with certain structural elements of the
construction of an asset that will be leased when construction of the asset is completed. EITF 97-10 requires the Company to be considered the owner, for accounting purposes, of
these production facilities if the lessee has substantially all of the construction period risks. During the lease terms, the Company recognizes building depreciation and interest expense for the
obligations.

Note 9:Goodwill and Other Intangible Assets

The Company performs an annual assessment of its goodwill for impairment as of the beginning of the fiscal fourth quarter. The Company also assesses its goodwill
and other intangible assets for impairment when events or circumstances indicate that their carrying value may not be recoverable from future cash flows.

The
changes in the carrying amount of goodwill for the six months ended June 1, 2008 are as follows:

Americas

Europe

Total(in thousands)Balance as of December 2, 2007

$
366,943

$
28,517

$
395,460Increase due to foreign currency translation


255


1,807


2,062Balance as of June 1, 2008

$
367,198

$
30,324

$
397,522


Total
other intangibles of $7.5 million (net of accumulated amortization of $14.1 million) as of June 1, 2008 consist primarily of licenses, which are amortized
using a straight-line method over periods ranging from 5 to 15 years.

12

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10:Long-Term Obligations

Long-term obligations as of June 1, 2008 and December 2, 2007 consisted of the following:

June 1, 2008

December 2, 2007(in thousands)Senior revolving credit facility

$
44,800

$
41,600Senior secured term loans


395,931


403,393Senior subordinated notes


273,945


273,945Financing obligations


42,773


41,674Other


29,886


33,143787,335


793,755Less current portion


(33,908
)

(36,433
)$
753,427

$
757,322


The
total borrowing capacity under the senior revolving credit facility is $125 million, of which up to $25 million may be borrowed in Canada. At June 1, 2008,
amounts outstanding under the senior revolving credit facility included $44.8 million under the U.S. portion of the facility. No amounts were outstanding under the Canadian portion at
June 1, 2008. At June 1, 2008, the Company had approximately $64.3 million available under the revolving credit facility after taking into account letters of credit issued
totaling $15.9 million.

Annually,
the Company may be required to make principal prepayments depending on certain financial ratios, as defined in its senior secured credit agreement. At June 1, 2008, the
Company is unable to estimate the amount of such required payment, if any, that would be due following the first quarter of fiscal 2009 with respect to excess cash flow for the 2008 fiscal year. No
prepayments based on these conditions have been made prior to June 1, 2008.

At
June 1, 2008, the Company was in compliance with the covenants contained within its senior credit agreements and indenture governing the senior subordinated notes. The senior
credit agreements and the senior subordinated notes restrict the Company's ability to pay dividends.

Note 11:Hedging Strategy

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 qualifying 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 valuations 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.

In
June 2004, the Company entered into a swap agreement having the effect of converting $200 million of the floating-rate debt under the Company's senior credit
facilities to a fixed-rate basis, declining to $150 million from December 2005 through December 3, 2007. The Company formally designated this swap agreement as a cash flow
hedge and expected the hedge to be highly effective in

13

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 11:Hedging Strategy (Continued)

offsetting
fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. For the three and six months ended May 27, 2007, $0.6 million and
$1.2 million respectively, was recorded as a reduction of interest expense related to this swap agreement.

On
June 15, 2007, the Company entered into an interest rate swap agreement effective December 3, 2007 fixing the floating portion of the interest rate at 5.495% on
$242 million of the outstanding balance under the senior secured term loan through November 2008, declining to $240 million from December 2008 through November 2009, and further
declining to $180 million from December 2009 through November 2010. 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 charges in the benchmark interest rate. The Company will select the Eurodollar rate on the hedged portion of the senior
secured term loan during the term of the swap. The fair value of this swap instrument was recorded in the consolidated balance sheets as a liability of $10.5 and $10.2 million at June 1,
2008 and December 2, 2007, respectively. Over the next 12 months, the Company expects to reclassify $4.7 million of deferred losses from accumulated other comprehensive income to
interest expense as related interest payments that are being hedged are recognized.

Additionally,
the Company entered into three interest rate swaps for 2.3 million Euro, 2.9 million Euro and 3.5 million Euro which fix the floating interest rates on
the Company's debt of its Europe segment at 4.92%, 4.85% and 4.50%, respectively. The notional amounts of these contracts amortize over the life of the agreement and the agreements expire in May 2019,
January 2013 and October 2013. The fair value of these swaps was an insignificant amount as of June 1, 2008 and was recorded as a component of other noncurrent assets in the accompanying
Condensed Consolidated Balance Sheet. The Company has not formally documented these interest rate swaps as hedges. Therefore, the change in the fair value of these contracts for the three months ended
June 1, 2008 of $0.3 million has been recorded as additional interest expense. For the six months ended June 1, 2008, an insignificant amount has been recorded as a reduction of
interest expense.

At
June 1, 2008 and December 2, 2007, the fair value carrying amount of the instruments indicated above was recorded as follows:

June 1,
2008

December 2,
2007(in thousands)Accrued interest receivable

$


$
711Other noncurrent assets


16


Accrued interest payable


(1,480
)

Other current liabilities


(4,745
)

(3,237
)Other liabilities


(5,726
)

(7,006
)Total net liability

$
(11,935
)
$
(9,532
)


At
June 1, 2008 and December 2, 2007, accumulated other comprehensive income associated with interest rate swaps qualifying for hedge accounting treatment was
$(6.5 million) and $(6.3 million), respectively, net of income tax effects.

14

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 11:Hedging Strategy (Continued)

To
protect against the reduction in value of forecasted foreign currency cash flows resulting from purchases in a foreign currency, the Company enters into foreign currency forward
contracts. The Company does not designate its foreign currency forward contracts as hedges for accounting purposes, therefore all changes in fair value are charged to earnings. At June 1, 2008,
the Company had an
outstanding forward contract to sell a total of 6.0 million Canadian dollars with an expiration date of June 2, 2008. At June 1, 2008, the fair value of the Company's forward
contract was a liability of an insignificant amount. At December 2, 2007, the Company did not have any foreign currency forward contracts outstanding. For the three and six months ended
June 1, 2008, recognized foreign currency transaction gains (losses) were $(0.1 million) and $0.6 million, respectively, compared with losses of $1.5 million and
$1.3 million for the three and six months ended May 27, 2007, respectively.

Note 12:Fair Value of Financial Instruments

For assets and liabilities measured at fair value on a recurring basis during the period under the provisions of FAS 157, the Company uses an income
approach to value the assets and liabilities for outstanding derivative contracts which include interest rate swap and foreign currency forward contracts discussed in Note 11 above. These
contracts are valued using an income approach which consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts using
current market information as of the reporting date such as prevailing interest rates and foreign currency spot and forward rates. As noted in Note 2 above, the Company has only adopted the
provisions of FAS 157 with respect to its financial assets and liabilities that are measured at fair value within the condensed consolidated financial statements. The Company has deferred the
application of the provisions of this statement to its non-financial assets and liabilities in accordance with FSP 157-b. The following table provides a summary of the fair
value of assets and liabilities under FAS 157 (in thousands):

|            |  |   |         | Fair Value Measurements at June 1, 2008 Using
|----------- |  | - | ------- | ---------------------------------------------
|
|Derivatives |  | $ | (11,968 | )                                            
|            |  |   |         |                                              

Note 13:Other Income, Net

Other income, net, includes interest income for the three and six months ended June 1, 2008 and May 27, 2007 of $0.1 million and
$0.2 million, respectively for both fiscal 2008 and fiscal 2007.

Note 14:Conditional Asset Retirement Obligations

Under the provisions of FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"), the Company recorded an
additional $0.1 million in property, plant and equipment and other noncurrent liabilities in the first quarter of fiscal 2007. These amounts resulted from obligations in certain of the
Company's facility leases that require the Company to return those properties to the same or similar condition at the end of the lease as existed when the Company began using those facilities.
Although the lease termination dates range from 2008 to 2022, the Company may be able to renegotiate such leases to extend the terms.

15

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 14:Conditional Asset Retirement Obligations (Continued)

In addition to the above obligations, the Company also owns certain factories that contain asbestos. Current regulations require that the Company remove and
dispose of asbestos if the factory undergoes major renovations or is demolished. Although the Company is not required to remove the asbestos unless renovation or demolition occurs, it is required to
monitor the asbestos and ensure that it remains stable and is required to notify any potential buyer of its existence. In fiscal 2007, the Company removed asbestos at a European facility and a
domestic facility. The Company has recognized an asset retirement obligation of $0.2 million for the remaining asbestos in its European facilities. The Company has not recognized asset
retirement obligations in the condensed consolidated financial statements for asbestos at other facilities because management believes that there is an indeterminate settlement date for the retirement
obligation as the range of time over which the Company may be required to remove and dispose of the asbestos is unknown or cannot be estimated. The Company currently has no plans to demolish a factory
or to undertake a major renovation that would require removal of the asbestos at any of these other facilities. Management will continue to monitor this issue and will record an asset retirement
obligation when sufficient information becomes available to estimate the obligation.

Note 15:Defined Benefit Pension Expense

The components of net periodic pension cost recognized for the Company's defined benefit pension plans in the U.S., Canada and France for the three and six months
ended June 1, 2008 and May 27, 2007 are as follows:

|                                                |  | Three Months Ended |      | Six Months Ended |  
|----------------------------------------------- |  | ------------------ | ---- | ---------------- | -
|
|
|Service cost                                    |  | $                  | 272  |                  | $
|Interest cost                                   |  |                    | 339  |                  |  
|Expected return on plan assets                  |  |                    | (335 | )                |  
|Amortization of unrecognized gains and losses   |  |                    | 39   |                  |  
|Amortization of unrecognized transition asset   |  |                    | (22  | )                |  
|Amortization of unrecognized prior service cost |  |                    | 69   |                  |  
|                                                |  |                    |      |                  |  
|Net periodic pension cost*                      |  | $                  | 362  |                  | $
|                                                |  |                    |      |                  |  
|Cash contributions                              |  | $                  | 501  |                  | $
|                                                |  |                    |      |                  |  

---

The
Company expects to make additional cash contributions to the plans of approximately $1.2 million during the remainder of fiscal 2008. The plans were underfunded by
$7.0 million and $7.4 million as of June 1, 2008 and December 2, 2007, respectively.

16

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 16:Income Taxes

The Company's effective income tax rates differ from the Federal statutory rate principally because of the effect of certain foreign tax rate differentials and
state and local income taxes. The effective tax rate for the three and six months ended June 1, 2008 was 40.4% and 37.6%, respectively compared to approximately 36.7% and 36.8%, respectively,
for the three and six months ended May 27, 2007. The effective rate for the three and six months ended June 1, 2008 was higher than the rate for the three and six months ended
May 27, 2007 primarily due to capital loss benefits recognized in fiscal 2007 and lower pre-tax income in fiscal 2008 compared to fiscal 2007.

The
Company adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes", effective December 3, 2007. As a
result of the adoption, the Company recognized a $10.5 million net increase to the liability for uncertain tax positions including interest and penalties of $0.7 million and
$2.5 million, respectively. These increases were accounted for as a cumulative effect adjustment and recognized as an increase in the beginning accumulated deficit in the consolidated balance
sheet (unaudited). Including the cumulative effect adjustment, the Company had approximately $25.9 million of total unrecognized tax benefits as of December 3, 2007. The statement of
financial position as of June 1, 2008 includes accrued interest of $5.5 million and penalties of $4.0 million due to unrecognized tax benefits of which $4.3 million and
$3.6 million were recorded in connection with the adoption. An additional $0.6 million interest and $0.2 million penalties were recorded in income tax expense in the three months
ended June 1, 2008, and an additional $1.1 million interest and $0.3 million penalties were recorded in income tax expense in the six months ended June 1, 2008. As of
December 3, 2007, $13.9 million represents the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate in future periods. The remaining
$12.0 million represents the correlative relief for state and international items, plus the valuation allowance applied to state net operating loss adjustments. The Company does not expect a
significant decrease in unrecognized tax benefits within the next twelve months. Federal years open to examination are fiscal year 2004 and forward. State and international jurisdictions remain open
to examination for fiscal year 2000 and forward.

Significant
judgment is required in evaluating the Company's federal, state and foreign tax positions and in the determination of its tax provision. Despite the Company's belief that its
liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matter. The Company may adjust these
liabilities as relevant circumstances evolve, such as guidance from the relevant tax authority, or resolution of issues in the courts. These adjustments are recognized as a component of income tax
expense entirely in the period in which they are identified. While the Company is currently undergoing examinations of certain of its corporate income tax returns by tax authorities, no issues related
to these reserves have been presented to the Company and the Company has not been informed that such audits will result in an assessment or payment of taxes related to these positions during the one
year period following June 1, 2008. The Company also cannot predict when or if any other future tax payments related to these tax positions may occur.

Note 17:Comprehensive Income

Comprehensive income for the three and six months ended June 1, 2008 was $16.4 million and $31.7 million, respectively, and for the three and
six months ended May 27, 2007, was $20.2 million and $43.9 million.

17

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 18:Commitments and 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 New Jersey Department of
Environmental Protection approval and operates a groundwater remediation system on the site. During 2005, with the approval of the New Jersey Department of Environmental Protection, the Company
removed and disposed of sediment in Oakeys Brook adjoining the site. The Company continues to monitor ground water at the site. The Company has recorded a reserve as a component of other accrued
expenses and other noncurrent liabilities in the accompanying Condensed Consolidated Balance Sheet for $2.6 million ($3.3 million prior to discounting at 4.75%) associated with this
remediation project. Also in connection with this site, the Company received a written complaint from the New Jersey Department of Environmental Protection alleging natural resources damages in an
unspecified amount. Because the natural resources damages claim is in an early stage and the Company's liability, if any, cannot be reasonably estimated at this time, no amounts have been accrued
related to this matter.

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 identified cadmium in the soil and ground water at the site and
removed the cadmium contaminated soil and rock from the site during fiscal 2007. The Company has recorded a reserve of approximately $0.2 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 by the agencies involved, or an unfavorable result in the New Jersey natural resources damages matter, these matters could have a material adverse effect.

18

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 18:Commitments and Contingencies (Continued)

On
October 12, 2006, the Canadian government passed legislation providing for tariff refunds on certain purchases of wood made by the Company from 2002 through 2005. During the
second quarter of fiscal 2007, certain factors on which the refund was contingent were resolved; thus, the Company recorded $2.5 million as refunds in the second quarter of fiscal 2007 as a
reduction of costs of goods sold on the Condensed Consolidated Statements of Operations.

The
Company has employment agreements with certain of its executive officers and key employees which, among other things, provide severance benefits to those employees. On
March 12, 2008, David J. McIlquham resigned as President, Chief Executive Officer and Chairman of the Board of Directors of the Company. In accordance with his employment agreement and Company
Policy, certain benefits are to be paid to Mr. McIlquham in connection with his resignation. Additionally, during the second quarter, the Company terminated other employees who were also
entitled to severance benefits. In connection with Mr. McIlquham's resignation and the termination of the other employees, the Company recorded charges related to severance obligations due to
these individuals. For the three and six months ended June 1, 2008 severance costs of $3.4 million and $4.3 million, respectively were recorded as a component of operating income
within the accompanying Condensed Consolidated Statements of Operations. These amounts are inclusive of the $0.7 million of compensation cost that was recognized in connection with a
modification of the terms of Mr. McIlquham's stock options made in connection with his resignation (Note 4). Severance benefits of $2.4 million have been accrued as of
June 1, 2008 and are included as a component of accrued liabilities within the accompanying Condensed Consolidated Balance Sheet as of June 1, 2008.

Note 19:Related Party Transactions

During the three and six months ended June 1, 2008, the Company was billed for premiums of $0.1 million and $0.2 million, respectively for
excess directors and officers liability insurance and excess liability insurance to KKR. As of June 1, 2008, $0.1 million of this amount was accrued as a component of other accrued
expenses in the accompanying Condensed Consolidated Balance Sheet.

Note 20:Segment Information

The Company has determined that it has two reportable segments: the Americas and Europe. These segments have been identified and aggregated based on the Company's
organizational structure which is organized around geographic areas.

Both
reportable segments manufacture and market conventional and specialty bedding. The Americas segment's operations are concentrated in the United States, Canada, Mexico, Argentina,
Brazil and Puerto Rico. Europe's operations are concentrated in western Europe. The accounting policies of the segments are the same as those described in Note 1. The Company evaluates
performance based on profit or loss from operations before interest expense, income taxes, depreciation and amortization ("EBITDA"). The Company accounts for inter-segment sales and transfers as if
the sales or transfers were to third parties, that is, at current market prices.

19

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 20:Segment Information (Continued)

Sales
by geographic area are as follows:

|                    |                     | Three Months Ended |         | Six Months Ended
|------------------- | ------------------- | ------------------ | ------- | ----------------
|
|Americas:           |                     |                    |         |                 
|                    | United States       |                    | $       | 258,678         
|                    | Canada              |                    |         | 44,892          
|                    | Other International |                    |         | 26,701          
|                    |                     |                    |         |                 
|                    |                     | Total Americas     |         |                 
|Europe              |                     |                    | 45,104  |                 
|                    |                     |                    |         |                 
|                    |                     | Total              |         | $               
|                    |                     |                    |         |                 
|Total International |                     | $                  | 116,697 |                 

Sales
from Europe to the Americas for the three and six months ended June 1, 2008 and May 27, 2007 were $1.8 million and $3.7 million, respectively for fiscal
2008 and $4.2 million and $6.6 million, respectively, for fiscal 2007. Long lived assets (principally property, plant and equipment) outside the United States were $71.7 million
and $68.6 million as of June 1, 2008 and December 2, 2007, respectively.

|                                        |                               | Three Months Ended |         | Six Months Ended |       
|--------------------------------------- | ----------------------------- | ------------------ | ------- | ---------------- | ------
|
|
|Net sales to external customers:        |                               |                    |         |                  |       
|                                        | Americas                      |                    | $       | 330,271          |       
|                                        | Europe                        |                    |         | 45,104           |       
|                                        |                               |                    |         |                  |       
|                                        |                               |                    | 375,375 |                  |       
|                                        |                               |                    |         |                  |       
|Capital expenditures:                   |                               |                    |         |                  |       
|                                        | Americas                      |                    |         | 4,032            |       
|                                        | Europe                        |                    |         | 772              |       
|                                        |                               |                    |         |                  |       
|                                        |                               |                    | 4,804   |                  |       
|                                        |                               |                    |         |                  |       
|EBITDA:                                 |                               |                    |         |                  |       
|                                        | Americas                      |                    |         | 42,800           |       
|                                        | Europe                        |                    |         | 1,403            |       
|                                        | Inter-segment eliminations    |                    |         | (43              | )     
|                                        |                               |                    |         |                  |       
|                                        |                               |                    | 44,160  |                  |       
|                                        |                               |                    |         |                  |       
|Reconciliation of EBITDA to net income: |                               |                    |         |                  |       
|                                        | EBITDA from segments          |                    |         | 44,160           |       
|                                        | Interest                      |                    |         | 15,369           |       
|                                        | Income taxes                  |                    |         | 8,091            |       
|                                        | Depreciation and amortization |                    |         | 8,743            |       
|                                        |                               |                    |         |                  |       
|                                        |                               | Net Income         |         | $                | 11,957
|                                        |                               |                    |         |                  |       

20

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 20:Segment Information (Continued)

|              |                           | June 1, 2008 |           | December 2, 2007 |  
|------------- | ------------------------- | ------------ | --------- | ---------------- | -
|
|Total assets: |                           |              |           |                  |  
|              | Americas                  |              | $         | 879,480          |  
|              | Europe                    |              |           | 133,567          |  
|              | Intersegment eliminations |              |           | 31,075           |  
|              |                           |              |           |                  |  
|              |                           | $            | 1,044,122 |                  | $
|              |                           |              |           |                  |  

Note 21:Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands) for the quarter ended:

|                                                                                                    |  | Three months ended |        | Six months ended
|--------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------
|
|
|Numerator:                                                                                          |  |                    |        |                 
|Net income available to common shareholders                                                         |  | $                  | 11,957 |                 
|                                                                                                    |  |                    |        |                 
|Denominator:                                                                                        |  |                    |        |                 
|Denominator for basic earnings per shareweighted average shares                                    |  |                    | 90,999 |                 
|Effect of dilutive securities:                                                                      |  |                    |        |                 
|Stock options                                                                                       |  |                    | 2,871  |                 
|Other                                                                                               |  |                    | 95     |                 
|                                                                                                    |  |                    |        |                 
|Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversions |  |                    | 93,965 |                 
|                                                                                                    |  |                    |        |                 

Note 22:Restructuring Activities

On January 4, 2008, management made the decision to cease manufacturing operations in Brazil and move to a distribution business model that is supplied by
production from other Sealy manufacturing facilities. As a result, the Company incurred certain costs related to one time termination costs of employees at this facility of approximately
$0.5 million for the three and six months ended June 1, 2008. As of June 1, 2008, $0.2 million was accrued within the accompanying condensed consolidated balance sheet as a
component of accrued compensation.

Note 23:Guarantor/Non-Guarantor Financial Information

Sealy Corporation, Sealy Mattress Corporation (a 100% owned subsidiary of Sealy Corporation) and each of the subsidiaries of Sealy Mattress Company (the "Issuer")
that guarantee the 2014 Notes (the "Guarantor Subsidiaries"), and are 100% owned subsidiaries of the Issuer, have fully and unconditionally guaranteed, on a joint and several basis, the obligation to
pay principal and interest with respect to the 2014 Notes of the Issuer. Substantially all of the Issuer's operating income and cash

21

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 23:Guarantor/Non-Guarantor Financial Information (Continued)

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 2014 Notes. Although holders of the 2014 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 2014 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 2014 Notes.

The
following supplemental Condensed Consolidating 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.

22

---





SEALY CORPORATION  Supplemental Condensed Consolidating Balance Sheets  June 1, 2008  (in thousands)

|                                               |                                                                  | Sealy
Corporation |          | Sealy
Mattress
Corporation |   | Sealy
Mattress
Company |          | Combined
Guarantor
Subsidiaries |           | Combined
Non-
Guarantor
Subsidiaries |  | Eliminations |         | Consolidated |        
|---------------------------------------------- | ---------------------------------------------------------------- | ----------------- | -------- | -------------------------- | - | ---------------------- | -------- | ------------------------------- | --------- | ------------------------------------ |  | ------------ | ------- | ------------ | -------
|Assets                                         |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        
|Current assets:                                |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        
|                                               | Cash and cash equivalents                                        |                   | $        | 91                         |   | $                      |         |                                 | $         | 1                                    |  | $            | 4,189   |              | $      
|                                               | Accounts receivable, net                                         |                   |          |                           |   |                        |         |                                 |           | 6                                    |  |              | 107,968 |              |        
|                                               | Inventories                                                      |                   |          |                           |   |                        |         |                                 |           | 1,663                                |  |              | 48,288  |              |        
|                                               | Prepaid expenses, deferred income taxes and other current assets |                   |          | 1,457                      |   |                        |         |                                 |           | 368                                  |  |              | 34,001  |              |        
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        
|                                               |                                                                  |                   | 1,548    |                            |   |                       |          |                                 | 2,038     |                                      |  | 194,446      |         |              | 153,009
|Property, plant and equipment, at cost         |                                                                  |                   |         |                            |   |                       |          |                                 | 9,578     |                                      |  | 350,973      |         |              | 104,303
|Less accumulated depreciation                  |                                                                  |                   |         |                            |   |                       |          |                                 | (4,306    | )                                    |  | (171,288     | )       |              | (39,182
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        
|                                               |                                                                  |                   |         |                            |   |                       |          |                                 | 5,272     |                                      |  | 179,685      |         |              | 65,121 
|Other assets:                                  |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        
|                                               | Goodwill                                                         |                   |          |                           |   |                        |         |                                 |           | 24,741                               |  |              | 304,773 |              |        
|                                               | Other intangibles, net                                           |                   |          | 5,365                      |   |                        |         |                                 |           |                                     |  |              | 2,100   |              |        
|                                               | Net investment in subsidiaries                                   |                   |          | (130,334                   | ) |                        | 285,481  |                                 |           | 431,333                              |  |              | 64,716  |              |        
|                                               | Due from (to) affiliates                                         |                   |          | 34,630                     |   |                        | (415,815 | )                               |           | 536,522                              |  |              | (66,564 | )            |        
|                                               | Debt issuance costs, net and other assets                        |                   |          |                           |   |                        |         |                                 |           | 9,761                                |  |              | 21,677  |              |        
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        
|                                               |                                                                  |                   | (90,339  | )                          |   | (130,334               | )        |                                 | 1,002,357 |                                      |  | 326,702      |         |              | (13,661
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        
|                                               | Total assets                                                     |                   | $        | (88,791                    | ) | $                      | (130,334 | )                               | $         | 1,009,667                            |  | $            | 700,833 |              | $      
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        
|Liabilities and Stockholders' (Deficit) Equity |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        
|Current liabilities:                           |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        
|                                               | Current portionlong-term obligations                            |                   | $        |                           |   | $                      |         |                                 | $         | 15,000                               |  | $            | 3,670   |              | $      
|                                               | Accounts payable                                                 |                   |          |                           |   |                        |         |                                 |           | 280                                  |  |              | 88,077  |              |        
|                                               | Accrued customer incentives and advertising                      |                   |          |                           |   |                        |         |                                 |           |                                     |  |              | 19,587  |              |        
|                                               | Accrued compensation                                             |                   |          |                           |   |                        |         |                                 |           | 363                                  |  |              | 14,799  |              |        
|                                               | Accrued interest                                                 |                   |          | 47                         |   |                        |         |                                 |           | 1,077                                |  |              | 14,876  |              |        
|                                               | Other accrued expenses                                           |                   |          | 4,464                      |   |                        |         |                                 |           | 5,045                                |  |              | 32,980  |              |        
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        
|                                               |                                                                  |                   | 4,511    |                            |   |                       |          |                                 | 21,765    |                                      |  | 173,989      |         |              | 109,051
|Long-term obligations                          |                                                                  |                   |         |                            |   |                       |          |                                 | 699,676   |                                      |  | 42,334       |         |              | 11,417 
|Other noncurrent liabilities                   |                                                                  |                   | 3,456    |                            |   |                       |          |                                 | 5,726     |                                      |  | 49,137       |         |              | 12,729 
|Deferred income taxes                          |                                                                  |                   | 460      |                            |   |                       |          |                                 | (2,981    | )                                    |  | 3,785        |         |              | 6,285  
|Common stock and options subject to redemption |                                                                  |                   | 8,081    |                            |   |                       |          |                                 |          |                                      |  |             |         |              |       
|Stockholders' equity (deficit)                 |                                                                  |                   | (105,299 | )                          |   | (130,334               | )        |                                 | 285,481   |                                      |  | 431,588      |         |              | 64,987 
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        
|                                               | Total liabilities and stockholders' equity (deficit)             |                   | $        | (88,791                    | ) | $                      | (130,334 | )                               | $         | 1,009,667                            |  | $            | 700,833 |              | $      
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                      |  |              |         |              |        

23

---



SEALY CORPORATION  Supplemental Condensed Consolidating Balance Sheets  December 2, 2007  (in thousands)

|                                               |                                                                  | Sealy
Corporation |          | Sealy
Mattress
Corporation |   | Sealy
Mattress
Company |          | Combined
Guarantor
Subsidiaries |         | Combined
Non-Guarantor
Subsidiaries |  | Eliminations |         | Consolidated |        
|---------------------------------------------- | ---------------------------------------------------------------- | ----------------- | -------- | -------------------------- | - | ---------------------- | -------- | ------------------------------- | ------- | ----------------------------------- |  | ------------ | ------- | ------------ | -------
|Assets                                         |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        
|Current assets:                                |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        
|                                               | Cash and cash equivalents                                        |                   | $        | 4                          |   | $                      |         |                                 | $       | 1                                   |  | $            | 4,012   |              | $      
|                                               | Accounts receivable, net                                         |                   |          | 29                         |   |                        |         |                                 |         | 720                                 |  |              | 101,675 |              |        
|                                               | Inventories                                                      |                   |          |                           |   |                        |         |                                 |         | 1,483                               |  |              | 49,841  |              |        
|                                               | Prepaid expenses, deferred income taxes and other current assets |                   |          | 1,458                      |   |                        |         |                                 |         | 1,693                               |  |              | 38,568  |              |        
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        
|                                               |                                                                  |                   | 1,491    |                            |   |                       |          |                                 | 3,897   |                                     |  | 194,096      |         |              | 145,052
|Property, plant and equipment, at cost         |                                                                  |                   |         |                            |   |                       |          |                                 | 9,051   |                                     |  | 336,196      |         |              | 97,059 
|Less accumulated depreciation                  |                                                                  |                   |         |                            |   |                       |          |                                 | (3,685  | )                                   |  | (160,839     | )       |              | (33,910
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        
|                                               |                                                                  |                   |         |                            |   |                       |          |                                 | 5,366   |                                     |  | 175,357      |         |              | 63,149 
|Other assets:                                  |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        
|                                               | Goodwill                                                         |                   |          |                           |   |                        |         |                                 |         | 24,741                              |  |              | 304,773 |              |        
|                                               | Other intangibles, net                                           |                   |          | 6,622                      |   |                        |         |                                 |         |                                    |  |              | 2,244   |              |        
|                                               | Net investment in subsidiaries                                   |                   |          | (151,637                   | ) |                        | 264,066  |                                 |         | 413,585                             |  |              | 46,521  |              |        
|                                               | Due from (to) affiliates                                         |                   |          | 40,091                     |   |                        | (415,703 | )                               |         | 535,242                             |  |              | (63,875 | )            |        
|                                               | Debt issuance costs, net and other assets                        |                   |          |                           |   |                        |         |                                 |         | 10,935                              |  |              | 17,869  |              |        
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        
|                                               |                                                                  |                   | (104,924 | )                          |   | (151,637               | )        |                                 | 984,503 |                                     |  | 307,532      |         |              | (25,625
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        
|                                               | Total assets                                                     |                   | $        | (103,433                   | ) | $                      | (151,637 | )                               | $       | 993,766                             |  | $            | 676,985 |              | $      
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        
|Liabilities and Stockholders' (Deficit) Equity |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        
|Current liabilities:                           |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        
|                                               | Current portionlong-term obligations                            |                   | $        |                           |   | $                      |         |                                 | $       | 15,000                              |  | $            | 3,323   |              | $      
|                                               | Accounts payable                                                 |                   |          |                           |   |                        |         |                                 |         | 508                                 |  |              | 77,009  |              |        
|                                               | Accrued customer incentives and advertising                      |                   |          |                           |   |                        |         |                                 |         |                                    |  |              | 36,949  |              |        
|                                               | Accrued compensation                                             |                   |          |                           |   |                        |         |                                 |         | 420                                 |  |              | 21,210  |              |        
|                                               | Accrued interest                                                 |                   |          | 56                         |   |                        |         |                                 |         | 1,040                               |  |              | 15,216  |              |        
|                                               | Other accrued expenses                                           |                   |          | 3,931                      |   |                        |         |                                 |         | 3,431                               |  |              | 39,019  |              |        
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        
|                                               |                                                                  |                   | 3,987    |                            |   |                       |          |                                 | 20,399  |                                     |  | 192,726      |         |              | 104,773
|Long-term obligations                          |                                                                  |                   |         |                            |   |                       |          |                                 | 703,938 |                                     |  | 41,517       |         |              | 11,867 
|Other noncurrent liabilities                   |                                                                  |                   | 5,356    |                            |   |                       |          |                                 | 7,006   |                                     |  | 25,483       |         |              | 12,969 
|Deferred income taxes                          |                                                                  |                   | 461      |                            |   |                       |          |                                 | (1,643  | )                                   |  | 3,479        |         |              | 5,998  
|Common stock and options subject to redemption |                                                                  |                   | 16,156   |                            |   |                       |          |                                 |        |                                     |  |             |         |              |       
|Stockholders' equity (deficit)                 |                                                                  |                   | (129,393 | )                          |   | (151,637               | )        |                                 | 264,066 |                                     |  | 413,780      |         |              | 46,969 
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        
|                                               | Total liabilities and stockholders' equity (deficit)             |                   | $        | (103,433                   | ) | $                      | (151,637 | )                               | $       | 993,766                             |  | $            | 676,985 |              | $      
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |         |                                     |  |              |         |              |        

24

---





SEALY CORPORATION  Supplemental Condensed Consolidating Statements of Operations  Three Months Ended June 1, 2008  (in thousands)

Sealy Corporation

Sealy Mattress Corporation

Sealy Mattress Company

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
18,334

$
248,087

$
116,919

$
(7,965
)
$
375,375Cost and expenses:Cost of goods sold








10,654


148,850


75,442


(7,944
)

227,002Selling, general and administrative


21





1,850


84,946


29,542





116,359Amortization of intangibles


847








73


34





954Royalty (income) expense, net


(1,170
)







(4,276
)

1,170





(4,276
)Income from operations


302





5,830


18,494


10,731


(21
)

35,336Interest expense


72


127


13,251


604


1,315





15,369Other (income) expense, net














(81
)




(81
)Loss (income) from equity investees


(11,835
)

(11,906
)

(9,351
)







33,092


Loss (income) from non-guarantor equity investees











(5,483
)




5,483


Capital charge and intercompany interest allocation








(12,273
)

11,363


910





Income (loss) before income taxes


12,065


11,779


14,203


12,010


8,587


(38,596
)

20,048Income tax expense (benefit)


108


(56
)

2,297


2,640


3,147


(45
)

8,091Net income (loss)

$
11,957

$
11,835

$
11,906

$
9,370

$
5,440

$
(38,551
)
$
11,957


25

---



SEALY CORPORATION  Supplemental Condensed Consolidating Statements of Operations  Three Months Ended May 27, 2007  (in thousands)

Sealy Corporation

Sealy Mattress Corporation

Sealy Mattress Company

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
19,687

$
291,962

$
100,687

$
(10,508
)
$
401,828Costs and expenses:Cost of goods sold








11,299


163,988


64,367


(10,344
)

229,310Selling, general and administrative


57





1,875


107,084


26,516





135,532Amortization of intangibles


728








71


31





830Royalty (income) expense, net


(838
)







(4,410
)

837





(4,411
)Income from operations


53





6,513


25,229


8,936


(164
)

40,567Interest expense


91


153


14,252


158


575





15,229Other income (expense), net











(45
)

(89
)




(134
)Loss (income) from equity investees


(16,155
)

(16,252
)

(12,725
)







45,132


Loss (income) from nonguarantor equity investees











(4,618
)




4,618


Capital charge and intercompany interest allocation








(13,301
)

12,353


948





Income (loss) before income taxes


16,117


16,099


18,287


17,381


7,502


(49,914
)

25,472Income tax expense (benefit)


(16
)

(56
)

2,035


4,608


2,796


(28
)

9,339Net income (loss)

$
16,133

$
16,155

$
16,252

$
12,773

$
4,706

$
(49,886
)
$
16,133


26

---





SEALY CORPORATION  Supplemental Condensed Consolidating Statements of Operations  Six Months Ended June 1, 2008  (in thousands)

Sealy Corporation

Sealy Mattress Corporation

Sealy Mattress Company

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
36,464

$
518,600

$
227,609

$
(15,369
)
$
767,304Cost and expenses:Cost of goods sold








21,636


313,229


146,357


(15,486
)

465,736Selling, general and administrative


(33
)




3,591


171,685


57,860





233,103Amortization of intangibles


1,647








145


77





1,869Royalty (income) expense, net


(2,214
)







(9,136
)

2,214





(9,136
)Income from operations


600





11,237


42,677


21,101


117


75,732Interest expense


149


270


27,314


1,055


1,957





30,745Other (income) expense, net














(180
)




(180
)Loss (income) from equity investees


(27,985
)

(28,097
)

(24,245
)







80,327


Loss (income) from non-guarantor equity investees











(16,229
)




16,229


Capital charge and intercompany interest allocation








(25,401
)

22,738


2,663





Income (loss) before income taxes


28,436


27,827


33,569


35,113


16,661


(96,439
)

45,167Income tax expense (benefit)


265


(158
)

5,472


10,868


549





16,996Net income (loss)

$
28,171

$
27,985

$
28,097

$
24,245

$
16,112

$
(96,439
)
$
28,171


27

---



SEALY CORPORATION  Supplemental Condensed Consolidating Statements of Operations  Six Months Ended May 27, 2007  (in thousands)

Sealy Corporation

Sealy Mattress Corporation

Sealy Mattress Company

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
39,157

$
598,481

$
196,386

$
(19,629
)
$
814,395Costs and expenses:Cost of goods sold








22,772


336,889


124,906


(19,964
)

464,603Selling, general and administrative


121





3,792


207,935


50,597





262,445Amortization of intangibles


1,438








144


31





1,613Royalty (income) expense, net


(1,962
)







(9,319
)

1,578





(9,703
)Income from operations


403





12,593


62,832


19,274


335


95,437Interest expense


186


296


28,747


307


1,598





31,134Other income, net


(8
)







(46
)

(160
)




(214
)Loss (income) from equity investees


(40,625
)

(40,811
)

(34,057
)







115,493


Loss (income) from non-guarantor equity investees











(10,314
)




10,314


Capital charge and intercompany interest allocation








(26,880
)

24,800


2,080





Income (loss) before income taxes


40,850


40,515


44,783


48,085


15,756


(125,472
)

64,517Income tax expense (benefit)


83


(110
)

3,972


13,989


5,839


(23
)

23,750Net income (loss)

$
40,767

$
40,625

$
40,811

$
34,096

$
9,917

$
(125,449
)
$
40,767


28

---





SEALY CORPORATION  Supplemental Condensed Consolidating Statements of Cash Flows  Six Months Ended June 1, 2008  (in thousands)

|                                          |                                                                                  | Sealy
Corporation |        | Sealy
Mattress
Corporation |   | Sealy
Mattress
Company |   | Combined
Guarantor
Subsidiaries |        | Combined
Non-
Guarantor
Subsidiaries |   | Eliminations |         | Consolidated |       
|----------------------------------------- | -------------------------------------------------------------------------------- | ----------------- | ------ | -------------------------- | - | ---------------------- | - | ------------------------------- | ------ | ------------------------------------ | - | ------------ | ------- | ------------ | ------
|Net cash provided by operating activities |                                                                                  | $                 | (2     | )                          | $ |                       |   | $                               | 5,667  |                                      | $ | 10,625       |         | $            | 46,490
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |         |              |       
|Cash flows from investing activities:     |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |         |              |       
|                                          | Purchase of property, plant and equipment                                        |                   |        |                           |   |                        |  |                                 |        | (125                                 | ) |              | (11,399 | )            |       
|                                          | Proceeds from the sale of property, plant, and equipment                         |                   |        |                           |   |                        |  |                                 |        |                                     |   |              | 5       |              |       
|                                          | Net activity in investment in and advances from (to) subsidiaries and affiliates |                   |        | 6,097                      |   |                        |  |                                 |        | (1,280                               | ) |              | 3,807   |              |       
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |         |              |       
|                                          | Net cash provided by (used in) investing activities                              |                   |        | 6,097                      |   |                        |  |                                 |        | (1,405                               | ) |              | (7,587  | )            |       
|Cash flows from financing activities:     |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |         |              |       
|                                          | Dividend                                                                         |                   |        | (6,811                     | ) |                        |  |                                 |        |                                     |   |              |        |              |       
|                                          | Equity received upon exercise of stock including related excess tax benefits     |                   |        | 803                        |   |                        |  |                                 |        |                                     |   |              |        |              |       
|                                          | Repurchase of common stock                                                       |                   |        |                           |   |                        |  |                                 |        |                                     |   |              |        |              |       
|                                          | Proceeds from issuance of long term obligations                                  |                   |        |                           |   |                        |  |                                 |        |                                     |   |              |        |              |       
|                                          | Repayments of long-term obligations                                              |                   |        |                           |   |                        |  |                                 |        | (7,462                               | ) |              | (2,861  | )            |       
|                                          | Borrowings under revolving credit facilities                                     |                   |        |                           |   |                        |  |                                 |        | 189,300                              |   |              |        |              |       
|                                          | Repayments on revolving credit facilities                                        |                   |        |                           |   |                        |  |                                 |        | (186,100                             | ) |              |        |              |       
|                                          | Other                                                                            |                   |        |                           |   |                        |  |                                 |        |                                     |   |              |        |              |       
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |         |              |       
|Net cash used in financing activities     |                                                                                  |                   | (6,008 | )                          |   |                       |   |                                 | (4,262 | )                                    |   | (2,861       | )       |              | (4,838
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |         |              |       
|Effect of exchange rate changes on cash   |                                                                                  |                   |       |                            |   |                       |   |                                 |       |                                      |   |             |         |              | (1,317
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |         |              |       
|Change in cash and cash equivalents       |                                                                                  |                   | 87     |                            |   |                       |   |                                 |       |                                      |   | 177          |         |              | 29,376
|Cash and cash equivalents:                |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |         |              |       
|                                          | Beginning of period                                                              |                   |        | 4                          |   |                        |  |                                 |        | 1                                    |   |              | 4,012   |              |       
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |         |              |       
|                                          | End of period                                                                    |                   | $      | 91                         |   | $                      |  |                                 | $      | 1                                    |   | $            | 4,189   |              | $     
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |         |              |       

29

---



SEALY CORPORATION  Supplemental Condensed Consolidating Statements of Cash Flows  Six Months Ended May 27, 2007  (in thousands)

|                                                    |                                                                              | Sealy
Corporation                                                                |         | Sealy
Mattress
Corporation |        | Sealy
Mattress
Company |   | Combined
Guarantor
Subsidiaries |         | Combined
Non-
Guarantor
Subsidiaries |        | Eliminations |         | Consolidated |       
|--------------------------------------------------- | ---------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------- | -------------------------- | ------ | ---------------------- | - | ------------------------------- | ------- | ------------------------------------ | ------ | ------------ | ------- | ------------ | ------
|Net cash provided by operating activities           |                                                                              | $                                                                                |        |                            | $      |                       |   | $                               | 8,407   |                                      | $      | 2,547        |         | $            | 11,508
|                                                    |                                                                              |                                                                                  |         |                            |        |                        |   |                                 |         |                                      |        |              |         |              |       
|Cash flows from investing activities:               |                                                                              |                                                                                  |         |                            |        |                        |   |                                 |         |                                      |        |              |         |              |       
|                                                    |                                                                              | Purchase of property, plant and equipment                                        |         |                            |       |                        |   |                                |         |                                      | (1,627 | )            |         | (19,017      | )     
|                                                    |                                                                              | Proceeds from the sale of property, plant, and equipment                         |         |                            |       |                        |   |                                |         |                                      |       |              |         | 4,913        |       
|                                                    |                                                                              | Net activity in investment in and advances to (from) subsidiaries and affiliates |         |                            | 12,226 |                        |   |                                |         |                                      | 3,220  |              |         | (10,864      | )     
|                                                    |                                                                              |                                                                                  |         |                            |        |                        |   |                                 |         |                                      |        |              |         |              |       
|                                                    | Net cash provided by (used in) investing activities                          |                                                                                  |         | 12,226                     |        |                        |  |                                 |         | 1,593                                |        |              | (24,968 | )            |       
|                                                    |                                                                              |                                                                                  |         |                            |        |                        |   |                                 |         |                                      |        |              |         |              |       
|Cash flows from financing activities:               |                                                                              |                                                                                  |         |                            |        |                        |   |                                 |         |                                      |        |              |         |              |       
|                                                    | Dividend                                                                     |                                                                                  |         | (13,724                    | )      |                        |  |                                 |         |                                     |        |              |        |              |       
|                                                    | Equity received upon exercise of stock including related excess tax benefits |                                                                                  |         | 5,900                      |        |                        |  |                                 |         |                                     |        |              |        |              |       
|                                                    | Repurchase of common stock                                                   |                                                                                  |         | (5,376                     | )      |                        |  |                                 |         |                                     |        |              |        |              |       
|                                                    | Repayment of long-term obligations                                           |                                                                                  |         |                           |        |                        |  |                                 |         | (10,000                              | )      |              |        |              |       
|                                                    | Borrowings under revolving credit facilities                                 |                                                                                  |         |                           |        |                        |  |                                 |         |                                     |        |              |        |              |       
|                                                    | Repayments under revolving credit facilities                                 |                                                                                  |         |                           |        |                        |  |                                 |         |                                     |        |              |        |              |       
|                                                    | Other                                                                        |                                                                                  |         | 50                         |        |                        |  |                                 |         |                                     |        |              | (1,625  | )            |       
|                                                    |                                                                              |                                                                                  |         |                            |        |                        |   |                                 |         |                                      |        |              |         |              |       
|Net cash provided by (used in) financing activities |                                                                              |                                                                                  | (13,150 | )                          |        |                       |   |                                 | (10,000 | )                                    |        | (1,625       | )       |              | (3,716
|                                                    |                                                                              |                                                                                  |         |                            |        |                        |   |                                 |         |                                      |        |              |         |              |       
|Effect of exchange rate changes on cash             |                                                                              |                                                                                  |        |                            |        |                       |   |                                 |        |                                      |        |             |         |              | (403  
|                                                    |                                                                              |                                                                                  |         |                            |        |                        |   |                                 |         |                                      |        |              |         |              |       
|Change in cash and cash equivalents                 |                                                                              |                                                                                  | (924    | )                          |        |                       |   |                                 |        |                                      |        | (24,046      | )       |              | 1,072 
|Cash and cash equivalents:                          |                                                                              |                                                                                  |         |                            |        |                        |   |                                 |         |                                      |        |              |         |              |       
|                                                    | Beginning of period                                                          |                                                                                  |         | 934                        |        |                        |  |                                 |         | 1                                    |        |              | 36,182  |              |       
|                                                    |                                                                              |                                                                                  |         |                            |        |                        |   |                                 |         |                                      |        |              |         |              |       
|                                                    | End of period                                                                |                                                                                  | $       | 10                         |        | $                      |  |                                 | $       | 1                                    |        | $            | 12,136  |              | $     
|                                                    |                                                                              |                                                                                  |         |                            |        |                        |   |                                 |         |                                      |        |              |         |              |       

30

---





SEALY CORPORATION

Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis is provided as a supplement to, and should be read in conjunction with, our Condensed
Consolidated Financial Statements and accompanying notes included in this Quarterly Report on Form 10-Q as well as our management's discussion and analysis included in our Annual
Report on Form 10-K (File No. 001-08738). Except where the context suggests otherwise, the terms "we," "us" and "our" refer to Sealy Corporation and its
subsidiaries.

BUSINESS OVERVIEW

Our conventional bedding products include theSealy, Sealy Posturepedic, Stearns & Foster,and Bassettbrands and accounted for approximately 88% of our total net sales for the year ended December 2, 2007. In addition to our innerspring
bedding, we also produce a variety of visco-elastic (memory foam) and latex foam bedding products.

In
the first quarter of fiscal 2007, we introduced a new line ofStearns & Fosterbranded mattresses and box springs that
incorporates the features we determined were the most desired by the consumer during our intensive market and consumer research. We also introduced a new line of PosturepedicReserve branded mattresses
and box springs. These launches were essentially completed in the third quarter of fiscal 2007. In addition, we
introduced newSealy-branded products that are compliant with the new Federal flame retardant standards, 16 CFR Part 1633 passed by the U.S.
Consumer Product Safety Commission, which became effective July 1, 2007.

In
January 2008, we unveiled an innovative newSealy Posturepedicinnerspring line which is designed to eliminate tossing and turning
caused by pressure points. The line was designed in conjunction with orthopedic surgeons, and reviewed by the Orthopedic Advisory Board. These mattresses come in three series, Preferred, Reserve and
Signature and range in retail price points from $599 to more than $1,000 per queen set. As with earlier major product launches, we expect our sales and profitability growth to be limited during the
period in which our customers complete the transition to the new product lines.

Our
industry continues to be challenged by the unprecedented volatility in the price of steel and petroleum-based products, which affects the cost of our steel innerspring and box spring
components, as well as our polyurethane, latex and polyethylene foams. During fiscal 2007 and into the first and second quarter of fiscal 2008, the cost of these components has increased
significantly, and we expect these costs, particularly those related to steel and polyurethane foam, to increase significantly over the remainder of fiscal 2008.

The
expected volatility in the price of our steel and petroleum-based components and the current uncertainty in the credit and equity markets may impact the estimates used in evaluating
goodwill and indefinite lived intangible assets for potential impairment. In light of these changes in market conditions, we will continue to monitor impairment indications across our reporting units.

We
have two reportable segments: the Americas and Europe. These segments have been identified and aggregated based on our organizational structure which is organized around geographic
areas. Both reportable segments manufacture and market conventional and specialty bedding. The Americas segment's operations are concentrated in the United States, Canada, Mexico, Argentina, Brazil
and Puerto Rico. Europe's operations are concentrated in western Europe.

31

---



RESULTS OF OPERATIONS



The following table sets forth our summarized results of operations for the three months ended June 1, 2008 and May 27, 2007, expressed in thousands
of dollars, as well as a percentage of each period's net sales:

|                                             |                            | For the three months ended: |        
|-------------------------------------------- | -------------------------- | --------------------------- | -------
|
|
|Net sales                                    |                            | $                           | 375,375
|Cost of goods sold                           |                            |                             | 227,002
|                                             |                            |                             |        
|                                             | Gross profit               |                             |        
|Selling, general and administrative expenses |                            |                             | 116,359
|Amortization of intangibles                  |                            |                             | 954    
|Royalty income, net of royalty expense       |                            |                             | (4,276 
|                                             |                            |                             |        
|                                             | Income from operations     |                             |        
|Interest expense                             |                            |                             | 15,369 
|Other income, net                            |                            |                             | (81    
|                                             |                            |                             |        
|                                             | Income before income taxes |                             |        
|Income tax expense                           |                            |                             | 8,091  
|                                             |                            |                             |        
|                                             | Net income                 |                             | $      
|                                             |                            |                             |        
|Effective tax rate                           |                            |                             | 40.4   

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

Three Months Ended:June 1,
2008

May 27,
2007Americas:United States

68.9
%
75.4
%Canada

12.0

10.1Other

7.1

5.9Total Americas

88.0

91.4Europe

12.0

8.6Total

100.0
%
100.0
%


32

---



The
following table shows our net sales and margin profitability for our Americas and Europe segments as well as the major geographic regions within our Americas segment:

|                                  |                    | For the Three Months Ended |             
|--------------------------------- | ------------------ | -------------------------- | ------------
|
|
|Total Americas (US Dollars):      |                    |                            |             
|                                  | Net sales          |                            | $           
|                                  | Cost of goods sold |                            |             
|                                  |                    |                            |             
|                                  |                    | Gross profit               |             
|United States (US Dollars):       |                    |                            |             
|                                  | Net sales          |                            |             
|                                  | Cost of goods sold |                            |             
|                                  |                    |                            |             
|                                  |                    | Gross profit               |             
|Total International (US Dollars): |                    |                            |             
|                                  | Net sales          |                            |             
|                                  | Cost of goods sold |                            |             
|                                  |                    |                            |             
|                                  |                    | Gross profit               |             
|Canada:                           |                    |                            |             
|                                  | US Dollars:        |                            |             
|                                  |                    | Net sales                  |             
|                                  |                    | Cost of goods sold         |             
|                                  |                    |                            |             
|                                  |                    |                            | Gross profit
|                                  | Canadian Dollars:  |                            |             
|                                  |                    | Net sales                  |             
|                                  |                    | Cost of goods sold         |             
|                                  |                    |                            |             
|                                  |                    |                            | Gross profit
|Other Americas (US Dollars):      |                    |                            |             
|                                  | Net sales          |                            |             
|                                  | Cost of goods sold |                            |             
|                                  |                    |                            |             
|                                  |                    | Gross profit               |             
|Europe:                           |                    |                            |             
|                                  | US Dollars:        |                            |             
|                                  |                    | Net sales                  |             
|                                  |                    | Cost of goods sold         |             
|                                  |                    |                            |             
|                                  |                    |                            | Gross profit
|                                  | Euros:             |                            |             
|                                  |                    | Net sales                  |             
|                                  |                    | Cost of goods sold         |             
|                                  |                    |                            |             
|                                  |                    |                            | Gross profit

33

---





Net Sales.Our consolidated net sales for the quarter ended June 1, 2008 were $375.4 million, a decrease of
$26.5 million, or 6.6% from the quarter ended May 27, 2007. Total Americas net sales were $330.3 million for the second quarter of fiscal 2008, a decrease of 10.1% from the second
quarter of
fiscal 2007. This decrease was primarily related to our U.S. operations within the Americas segment. Total U.S. net sales were $258.7 million for the second quarter of fiscal 2008, a decrease
of 14.7% from the second quarter of fiscal 2007. The U.S. net sales decrease of $44.5 million was attributable to a 16.1% decrease in wholesale unit volume partially offset by a 0.6% increase
in wholesale average unit selling price. The decrease in unit volume is primarily attributable to an overall slowing of consumer spending. Our Sealy Posturepedic innerspring products performed better
than our other innerspring products due to the positive reception of the new line that began shipping in the second quarter. Average unit selling price as compared to the second quarter of fiscal 2007
was favorably impacted by the price increases taken in December 2007 and the second quarter 2008 change in estimated reserve for non-warranty product returns which increased net sales
$3.7 million. These increases were partially offset by increased subsidies and product mix changes. In Canada, sales gains of 10.7% in U.S. dollars translate to local currency sales decreases
of 1.3%. Local currency sales performance in Canada was driven primarily by a 1.3% decrease in average unit selling price. Unit volume remained flat as compared with the second quarter of fiscal 2007.
Elsewhere in the Americas, we experienced sales gains in our Mexico and Argentina markets. In our European segment, sales gains of 30.8% in U.S. dollars translate to local currency sales gains of
12.3%. Local currency sales gains in Europe were driven by a 17.2% increase in unit volume, partially offset by a 4.1% decrease in average unit selling price. Increased sales of OEM latex bed cores,
which have lower prices, drove the unit growth and the decrease in average unit selling price. Local currency finished goods sales in Europe increased 4.5%.

Gross Profit.Our consolidated gross profit for the quarter was $148.4 million, a decrease of $24.1 million
from the comparable prior year period. As a percentage of net sales, gross profit decreased 3.4 percentage points to 39.5%. This was due to a decrease in gross profit margins in both of our
segments. Total Americas gross profit for the quarter was $137.2 million, a decrease of $25.6 million from the comparable prior year period. As a percentage of net sales, gross profit
for the Americas decreased 2.8 percentage points to 41.5%. This decrease was primarily due to a decrease in gross profit margins in our U.S. operations. U.S. gross profit decreased
$29.1 million to $106.4 million, which, as a percentage of sales, represents a decrease of 3.6 percentage points to 41.1% of net sales. The decrease in percentage of net sales was
driven primarily by inflation on core inputs such as steel and foam as well as increases in material costs per unit including an incremental $3.0 million in costs required for our products to
be in compliance with the July 2007 federal flame retardant regulations. In addition, the domestic gross profit margin relative to the prior year was negatively impacted by a deleveraging of overhead
expenses on lower volume. The U.S. gross profit was positively impacted by a change in accounting estimate related to warrantable and other product returns reserves which resulted in a reduction of
cost of sales of approximately $4.5 million and an increase to sales of approximately $3.7 million. We also showed continued improvements in manufacturing efficiencies particularly
factory labor and product scrap costs. The 2007 results include $2.5 million of refunds on lumber tariffs received from Canadian suppliers as well as $0.8 million more startup costs
associated with the latex facility in Mountain Top, PA. The gross profit margin in Canada in local currency increased to 44.1% of net sales, an increase of 1.9 percentage points driven by
favorable changes in currency exchange rates that allowed for the import of less expensive raw materials. In our European segment, the local currency gross profit margin decrease resulted from a shift
in sales mix toward more latex bed cores to other manufacturers and an increase in material costs. We expect the economic environment in Europe to become more challenging, which may have a negative
impact on sales and gross profit.

Selling, General, Administrative.Our consolidated selling, general, and administrative expense decreased
$19.2 million to $116.4 million. As a percent of net sales this expense was 31.0% and 33.7%

34

---



for
the quarters ended June 1, 2008 and May 27, 2007, respectively, a decrease of 2.7 percentage points. This decrease in both absolute dollars and as a percent of sales is
primarily due to $14.9 million of cost reduction efforts and an $7.8 million reduction in volume driven variable expenses. Actions taken to reduce costs included a $4.3 million
reduction in promotional expenses related to a more efficient launch of the new Sealy Posturepedic line of products in the U.S. as compared to the same prior year period, which included costs
associated with the 2007 roll out of our Stearns & Foster products and Sealy Posturepedic Reserve collection. In addition, salary and fringe related costs decreased $4.1 million and
spending on professional services and other discretionary items declined relative to the second quarter of fiscal 2007. Reduced sales drove a reduction in volume variable expenses of
$7.8 million comprised of an $8.7 million decrease in cooperative advertising costs partially offset by a $2.0 million increase in delivery costs due primarily to higher diesel
fuel costs, higher foreign currency valuations relative to the U.S. dollar and increased International unit volume. These decreases were partially offset by $3.4 million of severance costs
associated with a reduction in personnel. The second quarter of fiscal 2007 included the gain on the sale of our Orlando facility of $2.6 million as well as $1.7 million of costs
associated with an organizational realignment.

Royalty income, net of royalty expense.Our consolidated royalty income, net of royalty expenses, for the three months ended
June 1, 2008 remained flat as compared with the prior year period at $4.3 million.

Interest Expense.Our consolidated interest expense for the second quarter of fiscal 2008 remained flat at
$15.4 million as compared with the prior year period at $15.2 million. Our net weighted average borrowing cost was 7.6% and 7.4% for the three months ended June 1, 2008 and
May 27, 2007, respectively. Our borrowing cost increased because of higher interest rates on the unhedged variable rate component of our floating rate debt and an increase in the outstanding
amount on our revolving credit facility. This increase was partially offset by the retirement of $68.1 million of our 2014 Notes late in fiscal 2007.

Income Tax.Our effective income tax rates differ from the Federal statutory rate principally because of the effect of
certain foreign tax rate differentials and state and local income taxes. The effective tax rate for the three months ended June 1, 2008 was 40.4% compared to 36.7% for the three months ended
May 27, 2007. The effective rate for the fiscal 2008 period was higher than the fiscal 2007 period primarily due to capital loss benefits recognized in fiscal 2007 and lower pre-tax
income in fiscal 2008 compared to fiscal 2007.

35

---





The following table sets forth our summarized results of operations for the six months ended June 1, 2008 and May 27, 2007, expressed in thousands
of dollars, as well as a percentage of each period's net sales:

|                                             |                            | For the six months ended: |        
|-------------------------------------------- | -------------------------- | ------------------------- | -------
|
|
|Net sales                                    |                            | $                         | 767,304
|Cost of goods sold                           |                            |                           | 465,736
|                                             |                            |                           |        
|                                             | Gross profit               |                           |        
|Selling, general and administrative expenses |                            |                           | 233,103
|Amortization of intangibles                  |                            |                           | 1,869  
|Royalty income, net of royalty expense       |                            |                           | (9,136 
|                                             |                            |                           |        
|                                             | Income from operations     |                           |        
|Interest expense                             |                            |                           | 30,745 
|Debt extinguishment and refinancing          |                            |                           |       
|Other income, net                            |                            |                           | (180   
|                                             |                            |                           |        
|                                             | Income before income taxes |                           |        
|Income taxes                                 |                            |                           | 16,996 
|                                             |                            |                           |        
|                                             | Net income                 |                           | $      
|                                             |                            |                           |        
|Effective tax rate                           |                            |                           | 37.6   

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

Six Months Ended:2008

2007Americas:United States

70.4
%
76.1
%Canada

11.6

9.9Other

7.1

5.8Total Americas

89.1

91.8Europe

10.9

8.2Total

100.0
%
100.0
%


36

---



The following table shows our net sales and margin profitability for our Americas and Europe segments as well as the major geographic regions within our Americas segment:

|                                  |                    | For the six months ended: |  
|--------------------------------- | ------------------ | ------------------------- | -
|
|
|Total Americas (US Dollars):      |                    |                           |  
|                                  | Net sales          |                           | $
|                                  | Cost of goods sold |                           |  
|                                  |                    |                           |  
|                                  |                    | Gross profit              |  
|United States (US Dollars):       |                    |                           |  
|                                  | Net sales          |                           |  
|                                  | Cost of goods sold |                           |  
|                                  |                    |                           |  
|                                  |                    | Gross profit              |  
|Total International (US Dollars): |                    |                           |  
|                                  | Net sales          |                           |  
|                                  | Cost of goods sold |                           |  
|                                  |                    |                           |  
|                                  |                    | Gross profit              |  
|Canada:                           |                    |                           |  
|                                  | US Dollars:        |                           |  
|                                  |                    | Net sales                 |  
|                                  |                    | Cost of goods sold        |  
|                                  |                    |                           |  
|                                  |                    | Gross profit              |  
|                                  | Canadian Dollars:  |                           |  
|                                  |                    | Net sales                 |  
|                                  |                    | Cost of goods sold        |  
|                                  |                    |                           |  
|                                  |                    | Gross profit              |  
|Other Americas (US Dollars):      |                    |                           |  
|                                  | Net sales          |                           |  
|                                  | Cost of goods sold |                           |  
|                                  |                    |                           |  
|                                  |                    | Gross profit              |  
|Europe:                           |                    |                           |  
|                                  | US Dollars:        |                           |  
|                                  |                    | Net sales                 |  
|                                  |                    | Cost of goods sold        |  
|                                  |                    |                           |  
|                                  |                    | Gross profit              |  
|                                  | Euros:             |                           |  
|                                  |                    | Net sales                 |  
|                                  |                    | Cost of goods sold        |  
|                                  |                    |                           |  
|                                  |                    | Gross profit              |  



Net Sales.Our consolidated net sales for the six months ended June 1, 2008 were $767.3 million, a decrease of
$47.1 million, or 5.8% from the six months ended May 27, 2007. Total Americas net sales were $683.4 million for the first half of fiscal 2008, a decrease of 8.6% from the first
half of fiscal 2007.

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This
decrease was primarily related to our U.S. operations within the Americas segment. Total U.S. net sales were $540.0 million for the first half of fiscal 2008, a decrease of 12.9% from the
first half of fiscal 2007. The U.S. net sales decrease of $79.9 million was attributable to a 13.2% decrease in wholesale unit volume and a 0.4% decrease in wholesale average unit selling
price. The decrease in unit volume is primarily attributable to an overall slowing of consumer spending. Our Sealy Posturepedic innerspring products performed better than our other innerspring
products due to the positive reception of the new line that began shipping in the second quarter. The slight decline in average unit selling price was due in part to higher discounts on floor samples
related to the launch of the Sealy Posturepedic product line and other subsidies partially offset by the impact of a price increase taken in December 2007. Average unit selling price was also
favorably impacted by the $3.7 million favorable impact from the change in the estimated reserve for non-warranty product returns. In Canada, sales gains of 10.2% in U.S. dollars
translate to local currency decreases of 3.5%. Local currency sales performance in Canada was driven by a 3.4% decrease in unit volume, while the average unit selling price remained flat with that of
the first half of fiscal 2007. The decrease in unit volume is partially attributable to ourSealybrand promotional product sales. Elsewhere in the
Americas, sales increased in the Mexico and Argentina markets. In our European segment, sales gains of 26.2% in U.S. dollars translate to local currency gains of 10.0%. Local currency gains in Europe
were driven by a 28.4% increase in unit volume, partially offset by a 14.4% decrease in average unit selling price. Increased sales of OEM latex bed cores, which have lower prices, drove the unit
growth and the decrease in average unit selling price. Local currency finished goods sales in Europe increased 1.2%.

Gross Profit.Our consolidated gross profit for the six months ended June 1, 2008 was $301.6 million, a
decrease of $48.2 million from the comparable prior year period. As a percentage of net sales, gross profit decreased 3.7 percentage points to 39.3%. This was due to a decrease in gross
profit margins in both segments. Total Americas gross profit for the six months was $280.2 million, a decrease of
$51.4 million from the comparable prior year period. As a percentage of net sales, gross profit for the Americas decreased 3.3 percentage points to 41.0%. This decrease was primarily due
to a decrease in gross profit margin in our U.S. operations. U.S. gross profit decreased $57.1 million to $219.1 million, which, as a percentage of sales, represents a decrease of
4.0 percentage points to 40.6% of net sales. The decrease in percentage of net sales was driven primarily by higher inflation on core inputs such as steel and foam as well as increase in
material costs per unit including an incremental $8.1 million in costs required for the our products to be in compliance with the July 2007 federal flame retardant regulations. In addition, the
domestic profit margin relative to prior year was negatively impacted by a deleveraging of overhead expenses on lower volume. The U.S. gross profit was positively impacted by a change in accounting
estimate related to our returns reserves which resulted in a reduction of cost of sales of approximately $4.5 million and an increase to sales of approximately $3.7 million. Also, U.S.
gross profit was positively impacted by continued improvements in manufacturing efficiencies particularly factory labor and product scrap costs. The results of the first half of fiscal 2007 include
$2.5 million of refunds on lumber tariffs received from Canadian suppliers as well as $1.3 million more startup costs associated with the latex facility in Mountain Top, PA. The gross
profit margin in Canada in local currency was 43.5% as a percentage of net sales which represents an increase of 0.9 percentage points from the first half of fiscal 2007. In our European
segment, the gross profit margin decrease resulted from a shift in sales mix toward more latex bed cores to other manufacturers and a shift in mix to lower margin accounts.

Selling, General, Administrative.Our consolidated selling, general, and administrative expense decreased
$29.3 million to $233.1 million. As a percent of net sales this expense was 30.4% and 32.2% for the six months ended June 1, 2008 and May 27, 2007, respectively, a decrease
of 1.8 percentage points. This decrease in both absolute dollars and as a percent of sales is primarily due to reductions in fixed costs and a $13.3 million reduction in volume driven
variable expenses. Actions taken to reduce fixed costs included $7.4 million of reductions in compensation related expenses, $5.4 million less promotional expenses related to more
efficient launches of new products in the U.S. as compared to

38

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the
same prior year period. In addition, spending on professional services and other discretionary items declined relative to the first half of fiscal 2007. Reduced sales drove a reduction of
$13.3 million in volume variable expenses comprised of a $17.5 million decrease in cooperative advertising costs partially offset by a $4.1 million increase in delivery costs due
primarily to higher diesel fuel costs, higher foreign currency valuations relative to the US dollar and increased International unit volume. These decreases were partially offset by
$4.3 million of severance costs associated with a reduction in personnel. The selling, general and administrative expense recorded in the first half of fiscal 2007 also reflected the gain on
the sale of our Orlando facility of $2.6 million as well as $1.9 million of costs associated with an organizational realignment.

Royalty income, net of royalty expense.Our consolidated royalty income, net of royalty expenses, for the six months ended
June 1, 2008 decreased as compared with the prior year period by 5.8% to $9.1 million. The decrease in the royalty income is due to a decrease in international royalty revenue.

Interest Expense.Our consolidated interest expense for the first half of fiscal 2008 declined $0.4 million as
compared with the prior year period to $30.7 million. Our net weighted average borrowing cost was 7.6% and 7.5% for the three months ended June 1, 2008 and May 27, 2007,
respectively. Our borrowing
cost increased because of higher interest rates on the unhedged variable rate component of our floating rate debt and in increase in the outstanding amount on our revolving credit facility. This was
partially offset by the retirement of $68.1 million of our 2014 Notes late in fiscal 2007.

Income Tax.Our effective income tax rates differ from the Federal statutory rate principally because of the effect of
certain foreign tax rate differentials and state and local income taxes. Our effective tax rate for the six months ended June 1, 2008 was 37.6% compared to 36.8% for the six months ended
May 27, 2007. The effective rate for the fiscal 2008 period was higher than the fiscal 2007 period primarily due to capital loss benefits recognized in fiscal 2007 and lower pre-tax
income in fiscal 2008 compared to fiscal 2007.

We
adopted the provisions of FASB Interpretation No. 48 effective December 3, 2007. As a result of the adoption of FASB Interpretation No. 48, we recorded an
increase of approximately $10.5 million in the liability for unrecognized tax benefits, which was accounted for as an increase to the December 3, 2007, balance of the accumulated
deficit. As of December 3, 2007, the gross amount of unrecognized tax benefits was approximately $25.9 million. The total amount of unrecognized tax benefits that, if recognized, would
affect the effective tax rate was approximately $13.9 million.

LIQUIDITY AND CAPITAL RESOURCES



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, interest payments on our outstanding senior subordinated notes, and
dividend payments to shareholders. Capital expenditures totaled $13.9 million for the six months ended June 1, 2008. We expect total 2008 capital expenditures to be approximately
$30 million to 33 million. We believe that annual capital expenditure limitations in our current debt agreements will not prevent us from meeting our ongoing capital needs. Our
introductions of new products typically require us to make initial cash investments in inventory, promotional supplies and employee training which may not be immediately recovered through new product
sales. However, we believe that we have sufficient liquidity to absorb such expenditures related to new products and that these expenses will not have a significant adverse impact on our operating
cash flow. At June 1, 2008, we had approximately $64.3 million available under our revolving credit facility after taking into account letters of credit issued totaling
$15.9 million. Our net weighted average

39

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borrowing
cost was 7.6% and 7.5% for the six months ended June 1, 2008 and May 27, 2007, respectively.



We have incurred debt, including senior credit facilities consisting of a $125 million senior secured revolving credit facility maturing in 2010 and senior
secured term loan facilities maturing in August 2011 and August 2012 with outstanding balances of $440.7 million at June 1, 2008 for the senior facilities. We also have an outstanding
principal balance of $273.9 million at June 1, 2008 on the 2014 Notes.

On
August 25, 2006, we amended our senior secured credit agreement to provide for two senior secured term loans, one for $300 million maturing August 25, 2011 and
one for $140 million maturing August 25, 2012. This amendment reduced the applicable interest rate margins charged on the senior secured term loans, provided certain financial leverage
ratio tests are met, by 50 basis points on the $300 million loan and 25 basis points on the $140 million loan. In addition, this amendment provides us with greater flexibility for Sealy
Mattress Company to make dividend payments to us, or to repay certain subordinated debt, provided certain leverage ratio tests and other conditions are met. The terms and conditions of our
$125 million senior revolving credit facility were unchanged by the amendment. Since August 25, 2006 we have repaid $33.9 million of the original $140 million outstanding
on our term loan maturing August 25, 2012 and $10.2 million of the original $300 million outstanding on our term loan maturing August 25, 2011.

Future
principal debt payments are expected to be paid out of cash flows from operations and borrowings on our revolving credit facility. As of June 27, 2008, we had
$64.7 million outstanding under the U.S. portion of our revolving credit facility and no amounts outstanding under the Canadian portion. After taking into account letters of credit issued
totaling $15.9 million, we had approximately $44.4 million available under the revolving credit facility at June 27, 2008.

Borrowings
under our 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. Annually, we may be required to make principal prepayments equal to 25% of excess cash flow for the preceding fiscal year, as defined in our senior secured
credit agreement, if our leverage ratio is less than 4.00 to 1.00 reducing to 0% if our leverage ratio is less than 3.25 to 1.00. At June 1, 2008, we are unable to determine the amount of such
required payment, if any, that would be due following the first quarter of fiscal 2009 with respect to excess cash flow for the 2008 fiscal year.

On
June 3, 2004, we entered into an interest rate swap agreement 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 from December 2005 through December 3, 2007. This swap terminated on December 3, 2007.

On
June 15, 2007 we entered into an interest rate swap agreement fixing the floating portion of the interest rate at 5.495% on $242 million of the outstanding balance under
the senior secured term loan through November 2008, declining to $240 million from December 2008 through November 2009, and further declining to $180 million from December 2009 through
November 2010. To retain the designation of this swap as a hedging instrument, we will select the Eurodollar rate on the hedged portion of the senior secured term loan during the term of the swap.

Additionally,
we entered into three interest rate swaps for 2.3 million Euro, 2.9 million Euro and 3.5 million Euro which fix the floating interest rates on the debt
of our Europe segment at 4.92%, 4.85% and 4.50%, respectively. The notional amounts of these contracts amortize over the life of the agreement and the agreements expire in May 2019, January 2013 and
October 2013. We have not

40

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formally
documented these interest rate swaps as hedges. Therefore, changes in the fair value of these interest rate swaps are recorded as a component of interest expense.

The
outstanding 2014 Notes consist of an original $314 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 2014 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). During the third and fourth
quarters of fiscal 2007, we retired $68.1 million aggregate principal amount of the 2014 Notes. At June 1, 2008, the outstanding balance of the 2014 Notes was $273.9 million.

At
June 1, 2008, we were in compliance with the covenants contained within our senior credit agreements and indenture governing the 2014 Notes.

As
part of our ongoing evaluation of our capital structure, we continually assess opportunities to reduce our debt, which opportunities may from time to time include voluntary
prepayments of our senior secured term debt, or redemption or repurchase of a portion of our senior subordinated notes to the extent permitted by our debt covenants. In addition, our Board authorized
a common stock repurchase program under which we may repurchase up to $100 million of our Company's stock. As of June 1, 2008, we had repurchased shares for $16.3 million under
this program, none of which was repurchased during the first half of fiscal 2008. From June 2 through June 27, 2008, we did not repurchase any additional shares under this program.

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 during the one year following June 1, 2008. We will be required to make scheduled principal payments of $33.9 million during the next twelve months, with
$15.0 million for our senior secured term loans, $1.9 million for our financing obligations and capital leases and the remainder 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 additional voluntary prepayments on our senior
debt during that time.

While
we believe that we will have the necessary liquidity through our operating cash flow and revolving credit facility for the next several years to fund our debt service requirements,
capital expenditures and other operational cash requirements, we may not be able to generate sufficient cash flow from operations, realize anticipated revenue growth and operating improvements or
obtain future borrowings under the senior credit agreements in an amount sufficient to enable us to do so. For example, our senior secured credit facilities require us to meet a minimum interest
coverage ratio and a maximum leverage ratio. Non-compliance with such ratios could prevent us from being able to access these facilities for liquidity purposes and could require us to
immediately repay all amounts outstanding under such facilities. In addition, the expiration of the revolving credit facility in 2010, followed by the maturities of the senior and subordinated debt in
the following years, will likely require us to refinance such debt as it matures. We may not be able to affect any future refinancing of our debt on commercially reasonable terms or at all.



The Company announced on April 8, 2008 that its Board of Directors voted to suspend the Company's quarterly dividend. This decision is intended to increase
the Company's financial flexibility

41

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and
will enable it to better allocate its capital in order to enhance shareholder returns over time. We do not currently expect a dividend will be declared during the fiscal third quarter.



The following table summarizes our changes in cash:

Six Months Ended:June 1, 2008

May 27, 2007(in thousands)Statement of Cash Flow Data:Cash flows provided by (used in):Operating activities

$
62,780

$
22,462Investing activities


(13,854
)

(17,466
)Financing activities


(17,969
)

(28,491
)Effect of exchange rate changes on cash


(1,317
)

(403
)Change in cash and cash equivalents


29,640


(23,898
)Cash and cash equivalents:Beginning of period


14,607


45,620End of period

$
44,247

$
21,722




Cash Flows from Operating Activities.Our cash flow from operations increased $40.3 million to $62.8 million
net cash provided for the six months ended June 1, 2008, compared to a $22.5 million net cash provided for the six months ended May 27, 2007. This increase is primarily the result
of improved collection of customer accounts receivable balances and the timing of various vendor payments. These increases have been partially offset by a reduction in net income during the first half
of fiscal 2008.

Cash Flows from Investing Activities.Our cash flows used in investing activities decreased approximately $3.6 million
to $13.9 million net use of cash for the six months ended June 1, 2008, compared to the six months ended May 27, 2007 due to $8.5 million of lower capital expenditures for
the first six months of fiscal 2008 as compared to the same fiscal period in the prior year. The decrease in our capital expenditures was primarily due to the inclusion of expenditures related to the
construction of our facility in Mountain Top, PA in the six months ended May 27, 2007. Also, impacting this change were the cash proceeds from the sale of our Orlando facility in the second
quarter of fiscal 2007.

Cash Flows from Financing Activities.Our cash flow used in financing activities for the six months ended June 1, 2008
was $18.0 million compared with $28.5 million for the six months ended May 27, 2007. The decrease in cash used for financing activities has been driven by the suspension of our
quarterly dividend in the second quarter of fiscal 2008 and no repurchases of common stock during the first half of fiscal 2008 versus $5.4 million used to repurchase stock in the first half of
fiscal 2007. These decreases have been offset by increased repayments of long-term obligations, primarily for our international subsidiaries.



Effective December 3, 2007, we adopted the provisions of FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxesan
Interpretation of FASB Statement No. 109" ("FIN 48"), as described in Note 2 to the Condensed Consolidated Financial Statements, Part I, Item 1, included

42

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herein.
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 liability for
unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. We may adjust these liabilities as relevant
circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. These adjustments are recognized as a component of income tax expense
entirely in the period in which they are identified. While the Company is currently undergoing examinations of its corporate income tax returns by tax authorities, no issues related to these reserved
positions have been presented to the Company. The Company has no indication that such audits will result in assessment and payment of taxes related to these positions during the one year period
following June 1, 2008. We also cannot predict when or if any other future tax payments related to these tax positions may occur.



Our 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 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. 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 the covenants.

EBITDA
and Adjusted EBITDA are not recognized terms under generally accepted accounting principles ("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.

43

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The
following table sets forth a reconciliation of net income to EBITDA and EBITDA to Adjusted EBITDA for the three and six months ended June 1, 2008:

Three Months Ended:

Six Months Ended:June 1, 2008

June 1, 2008(in thousands)

(in thousands)Net income

$
11,957

$
28,171Interest expense


15,369


30,745Income taxes


8,091


16,996Depreciation and amortization


8,743


17,120EBITDA


44,160


93,032Unusual and nonrecurring losses:Executive severance


2,731


3,672Non-cash compensation


1,365


1,975Other (various) (a)


1,572


3,056Adjusted EBITDA

$
49,828

$
101,735




The
following table reconciles EBITDA to cash flow from operations:

Six Months Ended:
June 1, 2008(in thousands)EBITDA

$
93,032Adjustments to EBITDA to arrive at cash flow from operations:Interest expense


(30,745
)Income taxes


(16,996
)Non-cash charges against (credits to) net income


6,105Changes in operating assets & liabilities


11,384Cash flow from operations

$
62,780




There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", included in our Form 10-K for the fiscal year ended December 2, 2007, except as follows:

Warranties and Product ReturnsOur warranty policy provides a 10 year non-pro rated warranty service period
on all currently manufacturedSealy Posturepedic, Stearns & FosterandBassettbedding products
and some otherSealybranded products and a 20 year warranty period on the major components of our TrueFormandMirrorFormvisco-elastic products as well as our SpringFreelatex product, introduced in 2005, the last ten years of which are pro rated on a straight-line basis. In
2006, we introduced Right Touch, which has a twenty year limited warranty that covers only certain parts of the product and is pro rated for part of the twenty years. In
fiscal 2007, we amended our warranty policy onSealybrand promotional bedding to three years for our new line introduced in January 2007 and shipped in
the second quarter of fiscal 2007. The impact of the changes to the warranty policies did not have a significant impact on our financial results or position. 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. We utilize warranty trends on existing similar product in order to estimate future

44

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warranty
claims associated with newly introduced product. Our accrued warranty liability totaled $15.1 million and $16.0 million as of June 1, 2008 and December 2, 2007,
respectively.

During
the second quarter of fiscal 2008, we completed an analysis of our returns claims experience for the U.S. business within the Americas segment based on historical return trends
using new information that is available which allows us to better track and match claims received to the sales for which those claims were initially recorded. This change in estimate resulted in a
reduction of cost of sales of approximately $4.5 million for the three month period ended June 1, 2008 as well as a corresponding reduction in the accrued returns obligation. Our
estimate involves an application of the lag time in days between the sale date and the date of its return applied to the current rate of returns.

Income TaxesEffective December 3, 2007, we adopted the provisions of FASB Interpretation No. 48 "Accounting
for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109" ("FIN 48"), as described in Note 2 to the Condensed Consolidated Financial Statements,
Part I, Item 1, included herein. 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 liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. We may adjust
these liabilities as relevant circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. These adjustments are recognized as a
component of income tax expense entirely in the period in which they are identified.



"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995.When used in this Quarterly Report on
Form 10-Q, 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 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:



45

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All
forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q and are expressly
qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. 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.



We adopted FIN 48, "Accounting for Uncertainty in Income Taxes", effective December 3, 2007. As of the date of the adoption, our reserve for
uncertain tax positions (including penalties and interest) was $10.5 million. In the six months ended June 1, 2008, the liability for uncertain tax positions increased
$3.0 million (including penalties and interest), partially offset by an adjustment to deferred taxes of $1.3 million. At June 1, 2008, the entire reserve for uncertain tax
positions (including penalties and interest) was classified as a noncurrent liability. At this time, we are unable to make a reasonably
reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of the effective settlement of tax positions.

There
have been no other material changes in our contractual obligations and commercial commitments other than in the ordinary course of business since the end of fiscal 2007. Refer to
our Annual report on Form 10-K for additional information regarding our contractual obligations and commercial commitments.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

The information appearing below relating to our market risk sensitive instruments by major category should be read in conjunction with the
related disclosure contained in the management's discussion and analysis section of our Annual Report on Form 10-K (File No. 001-08738).



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 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 have an approximate $1.4 million dollar impact on our financial position for the six months ended June 1, 2008.
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 contracts. At June 1, 2008, the Company had an outstanding forward contract to sell a total of
$6.0 million Canadian dollars with an expiration date of June 2, 2008. At June 1, 2008, the fair value of the Company's forward contracts was a liability of an insignificant
amount. We do not designate our foreign currency hedges for accounting purposes, therefore all changes in fair value are charged to earnings.

46

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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 December 3, 2007. This swap
expired on December 3, 2007 and we had recognized a receivable of $0.7 million at December 2, 2007.

On
June 15, 2007 the Company entered into an interest rate swap agreement effective December 3, 2007 fixing the floating portion of the interest rate at 5.495% on
$242 million of the outstanding balance under the senior secured term loan through November 2008, declining to $240 million from December 2008 through November 2009, and further
declining to $180 million from December 2009 through November 2010. The fair value of this swap instrument was a liability of $10.5 million at June 1, 2008 and
$10.2 million at December 2, 2007.

Additionally,
the Company has entered into three interest rate swaps for 2.3 million Euro, 2.9 million Euro and 3.5 million Euro which fix the floating interest
rates on the Company's debt of its Europe segment at 4.92%, 4.85% and 4.50%, respectively. The notional amounts of these contracts amortize over the life of the agreement and the agreements expire in
May 2019, January 2013 and October 2013. The fair values of these swaps was an insignificant amount as of June 1, 2008 and were recorded as a component of other noncurrent assets in the
accompanying Condensed Consolidated Balance Sheet.

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

Based
on the unhedged portion of our variable rate debt outstanding at June 1, 2008, a 12.5 basis point increase or decrease in variable interest rates would have an approximately
$0.3 million dollar impact on our annual interest expense.



The costs of our steel innerspring, polyurethane foam, polyester and polyethylene component parts are impacted by the unprecedented volatility in the price of
steel and petroleum. We expect the cost of these components to remain elevated above their recent historical averages and, particularly for steel
and polyurethane foam, expect prices to increase significantly above current price levels. Domestic supplies of these raw materials are being limited by supplier consolidation and the exporting of
these raw materials outside of the U.S. due to the weakening dollar. In the first and second quarter of fiscal 2008, we entered into commodity-based physical contracts to buy natural gas at
agreed-upon fixed prices. These contracts were entered into in the normal course of business. We do not engage in commodity hedging programs.

Item 4.Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal accounting officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 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 accounting 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

47

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our
principal executive and principal accounting officers, as appropriate to allow timely decisions regarding required disclosure.

There
were no changes in our internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the second quarter of fiscal 2008 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

See Note 18 to the Condensed Consolidated Financial Statements, Part I, Item 1 included herein.

Item 1A.Risk Factors

We are dependent on the continued service of our senior management team. During the quarter ended June 1, 2008, David J. McIlquham resigned as President,
Chief Executive Officer and Chairman of the Board of Directors of the Company. Lawrence J. Rogers was appointed interim Chief Executive Officer and Paul Norris was appointed Non-Executive
Chairman of the Board of Directors. While Mr. McIlquham had substantial industry experience, we do not believe that his departure will have a material adverse effect on our business.
Mr. Rogers has served in numerous capacities within our operations since 1979, most recently as President of Sealy North America.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

The table below shows our repurchases of the Company's common stock during the second quarter of fiscal 2008.

|Period                  |       | Total number of
shares purchased
(1) |     | Average price paid
per share |  | Total number of shares
purchased during quarter
as part of publicly
announced program(2) |   | Approximate dollar
value of shares that may
yet be purchased under
program
|----------------------- | ----- | ------------------------------------ | --- | ---------------------------- |  | ---------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------
|March 3March 30, 2008  |       |                                     |     |                              |  |                                                                                         |   | $                                                                         
|March 31April 27, 2008 |       | 610                                  |     | 7.00                         |  |                                                                                         |   |                                                                           
|April 28June 1, 2008   |       |                                     |     |                              |  |                                                                                         |   |                                                                           
|                        |       |                                      |     |                              |  |                                                                                          |   |                                                                           
|                        | Total |                                      | 610 |                              |  |                                                                                          |  |                                                                           
|                        |       |                                      |     |                              |  |                                                                                          |   |                                                                           

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Our
ability to pay dividends is restricted by our debt agreements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

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Item 3.Defaults Upon Senior Securities



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



Shares For

Shares WithheldBrian F. Carroll

78,383,462

2,710,268James W. Johnston

80,793,356

300,374Gary E. Morin

80,796,820

296,910Dean Nelson

77,293,358

3,800,372Paul J. Norris

78,409,828

2,683,902Richard W. Roedel

80,796,372

297,358Scott M. Stuart

78,411,339

2,682,391




For

81,014,363Against

71,286Abstained

8,084


Item 5.Other Information



Item 6.Exhibits

|10.40 |  | Employment Agreement dated April 17, 2008 by and between Sealy Corporation and Louis R. Bachicha.
|----- |  | -------------------------------------------------------------------------------------------------
|31.1  |  | Chief Executive Officer Certification of the Quarterly Financial Statements.                     
|31.2  |  | Chief Financial Officer Certification of the Quarterly Financial Statements.                     
|32    |  | Certification pursuant to 18 U.S.C. Section 1350.                                                

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Sealy Corporation has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

| |  |                  
| |  | -----------------
| |  | SEALY CORPORATION

|Signature                                 |  | Title                                                                              
|----------------------------------------- |  | -----------------------------------------------------------------------------------
|                                          |  |                                                                                    
|/s/LAWRENCE J. ROGERSLawrence J. Rogers   |  | Interim Chief Executive Officer (Principal Executive Officer)                      
|/s/JEFFREY C. ACKERMANJeffrey C. Ackerman |  | Executive Vice President and Chief Financial Officer (Principal Accounting Officer)

Date:
July 8, 2008

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