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: August 27, 2006              
|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) 861-3500
Registrant'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, or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (check one):

Large
accelerated filer o                Accelerated filer o                Non-accelerated
filer ý

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 October 9, 2006 is approximately: 90,983,041.



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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)

|                                                      |         | Quarter Ended          |        
|----------------------------------------------------- | ------- | ---------------------- | -------
|
|Net sales                                             |         | $                      | 415,124
|Cost of goods sold                                    |         |                        | 229,941
|                                                      |         |                        |        
|                                                      |         | Gross Profit           |        
|Selling, general and administrative expenses          |         |                        | 127,207
|Amortization of intangibles                           |         |                        | 144    
|Royalty income, net of royalty expense                |         |                        | (3,830 
|                                                      |         |                        |        
|                                                      |         | Income from operations |        
|Interest expense                                      |         |                        | 15,981 
|Debt extinguishment and refinancing expenses          |         |                        | 4,567  
|Other income, net                                     |         |                        | (75    
|                                                      |         |                        |        
|Income before income tax expense                      |         |                        | 41,189 
|Income tax expense                                    |         |                        | 11,821 
|                                                      |         |                        |        
|                                                      |         | Net income             |        
|                                                      |         |                        |        
|Earnings per common shareBasic                       |         | $                      | 0.32   
|                                                      |         |                        |        
|Earnings per common shareDiluted                     |         | $                      | 0.30   
|                                                      |         |                        |        
|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)

|                                                                                                    |                                                                     | Nine Months Ended                 |          
|--------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------- | ---------
|
|Net sales                                                                                           |                                                                     | $                                 | 1,187,571
|Cost of goods sold                                                                                  |                                                                     |                                   | 657,115  
|                                                                                                    |                                                                     |                                   |          
|                                                                                                    |                                                                     | Gross Profit                      |          
|Selling, general and administrative expenses                                                        |                                                                     |                                   | 373,922  
|Expenses associated with initial public offering of common stock                                    |                                                                     |                                   | 28,510   
|Amortization of intangibles                                                                         |                                                                     |                                   | 399      
|Royalty income, net of royalty expense                                                              |                                                                     |                                   | (11,225  
|                                                                                                    |                                                                     |                                   |          
|                                                                                                    |                                                                     | Income from operations            |          
|Interest expense                                                                                    |                                                                     |                                   | 52,610   
|Debt extinguishment and refinancing expenses                                                        |                                                                     |                                   | 9,862    
|Other income, net                                                                                   |                                                                     |                                   | (641     
|                                                                                                    |                                                                     |                                   |          
|Income before income tax expense                                                                    |                                                                     |                                   | 77,019   
|Income tax expense                                                                                  |                                                                     |                                   | 24,266   
|                                                                                                    |                                                                     |                                   |          
|Income before cumulative effect of a change in accounting principle                                 |                                                                     |                                   | 52,753   
|Cumulative effect of the adoption of FASB Interpretation No. 47, net of related tax benefit of $191 |                                                                     |                                   | 287      
|                                                                                                    |                                                                     |                                   |          
|                                                                                                    |                                                                     | Net income                        |          
|                                                                                                    |                                                                     |                                   |          
|Earnings per common shareBasic                                                                     |                                                                     |                                   |          
|                                                                                                    | Income before cumulative effect of change in accounting principle   |                                   | $        
|                                                                                                    | Cumulative effect of change in accounting principle                 |                                   |          
|                                                                                                    |                                                                     |                                   |          
|                                                                                                    |                                                                     | Earnings per common shareBasic   |          
|                                                                                                    |                                                                     |                                   |          
|Earnings per common shareDiluted                                                                   |                                                                     |                                   |          
|                                                                                                    | Income before cumulative effect of a change in accounting principle |                                   | $        
|                                                                                                    | Cumulative effect of change in accounting principle                 |                                   |          
|                                                                                                    |                                                                     |                                   |          
|                                                                                                    |                                                                     | Earnings per common shareDiluted |          
|                                                                                                    |                                                                     |                                   |          
|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)

|                                               |                                                                                                                                                                                             | August 27,
2006 |          | November 27,
2005 |  
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- | -------- | ----------------- | -
|
|Assets                                         |                                                                                                                                                                                             |                 |          |                   |  
|Current assets:                                |                                                                                                                                                                                             |                 |          |                   |  
|                                               | Cash and cash equivalents                                                                                                                                                                   |                 | $        | 22,206            |  
|                                               | Accounts receivable, net of allowances for bad debts, cash discounts and returns                                                                                                            |                 |          | 208,760           |  
|                                               | Inventories                                                                                                                                                                                 |                 |          | 66,465            |  
|                                               | Assets held for sale                                                                                                                                                                        |                 |          | 2,338             |  
|                                               | Prepaid expenses and other current assets                                                                                                                                                   |                 |          | 22,719            |  
|                                               | Deferred income taxes                                                                                                                                                                       |                 |          | 15,823            |  
|                                               |                                                                                                                                                                                             |                 |          |                   |  
|                                               |                                                                                                                                                                                             |                 | 338,311  |                   |  
|Property, plant and equipment  at cost        |                                                                                                                                                                                             |                 | 347,711  |                   |  
|Less: accumulated depreciation                 |                                                                                                                                                                                             |                 | (173,323 | )                 |  
|                                               |                                                                                                                                                                                             |                 |          |                   |  
|                                               |                                                                                                                                                                                             |                 | 174,388  |                   |  
|Other assets:                                  |                                                                                                                                                                                             |                 |          |                   |  
|                                               | Goodwill                                                                                                                                                                                    |                 |          | 388,279           |  
|                                               | Other intangibles                                                                                                                                                                           |                 |          | 4,399             |  
|                                               | Debt issuance costs, net, and other assets                                                                                                                                                  |                 |          | 27,615            |  
|                                               |                                                                                                                                                                                             |                 |          |                   |  
|                                               |                                                                                                                                                                                             |                 | 420,293  |                   |  
|                                               |                                                                                                                                                                                             |                 |          |                   |  
|                                               |                                                                                                                                                                                             | $               | 932,992  |                   | $
|                                               |                                                                                                                                                                                             |                 |          |                   |  
|Liabilities and Stockholders' Deficit          |                                                                                                                                                                                             |                 |          |                   |  
|Current liabilities:                           |                                                                                                                                                                                             |                 |          |                   |  
|                                               | Current portion of long-term obligations                                                                                                                                                    |                 | $        | 15,388            |  
|                                               | Accounts payable                                                                                                                                                                            |                 |          | 116,037           |  
|                                               | Accrued incentives and advertising                                                                                                                                                          |                 |          | 38,281            |  
|                                               | Accrued compensation                                                                                                                                                                        |                 |          | 31,970            |  
|                                               | Accrued interest                                                                                                                                                                            |                 |          | 6,467             |  
|                                               | Other accrued expenses                                                                                                                                                                      |                 |          | 41,191            |  
|                                               |                                                                                                                                                                                             |                 |          |                   |  
|                                               |                                                                                                                                                                                             |                 | 249,334  |                   |  
|Long-term obligations, net of current portion  |                                                                                                                                                                                             |                 | 795,782  |                   |  
|Other noncurrent liabilities                   |                                                                                                                                                                                             |                 | 44,059   |                   |  
|Deferred income taxes                          |                                                                                                                                                                                             |                 | 11,952   |                   |  
|Common stock and options subject to redemption |                                                                                                                                                                                             |                 | 20,263   |                   |  
|Stockholders' deficit:                         |                                                                                                                                                                                             |                 |          |                   |  
|                                               | Common stock, $0.01 par value; Authorized 200,000 shares; Issued and outstanding: 200690,983; 200570,480 (including shares classified above as subject to redemption: 2006424; 2005263) |                 |          | 904               |  
|                                               | Additional paid-in capital                                                                                                                                                                  |                 |          | 664,588           |  
|                                               | Accumulated deficit                                                                                                                                                                         |                 |          | (860,821          | )
|                                               | Accumulated other comprehensive income                                                                                                                                                      |                 |          | 6,931             |  
|                                               |                                                                                                                                                                                             |                 |          |                   |  
|                                               |                                                                                                                                                                                             |                 | (188,398 | )                 |  
|                                               |                                                                                                                                                                                             |                 |          |                   |  
|                                               |                                                                                                                                                                                             | $               | 932,992  |                   | $
|                                               |                                                                                                                                                                                             |                 |          |                   |  

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 November 27, 2005                         |                                                            | $ | 65,322 |              | 70,480 |        | $ | 702 |     | $                                      | 365,900 |         | $
|Net income                                           |                                                            |   | 52,466 |              |       |        |   |    |     |                                        |        |         |  
|Foreign currency translation adjustment              |                                                            |   | 4,346  |              |       |        |   |    |     |                                        |        |         |  
|Change in fair value of cash flow hedge              |                                                            |   | (53    | )            |       |        |   |    |     |                                        |        |         |  
|Initial Public Offerring (IPO):                      |                                                            |   |        |              |        |        |   |     |     |                                        |         |         |  
|                                                     | Proceeds from IPO, net of underwriting discount of $20,800 |   |        |             |        | 20,000 |   |     | 200 |                                        |         | 299,000 |  
|                                                     | Direct costs of IPO                                        |   |        |             |        |       |   |     |    |                                        |         | (3,689  | )
|Stock-based compensation:                            |                                                            |   |        |              |        |        |   |     |     |                                        |         |         |  
|                                                     | Conversion of options to shares in connection with the IPO |   |        |             |        | 192    |   |     | 2   |                                        |         | 348     |  
|                                                     | Compensation associated with stock option grants           |   |        |             |        |       |   |     |    |                                        |         | 1,153   |  
|                                                     | Directors' deferred stock compensation                     |   |        |             |        |       |   |     |    |                                        |         | 329     |  
|Cash dividend                                        |                                                            |   |       |              |       |        |   |    |     |                                        |        |         |  
|Exercise of stock options                            |                                                            |   |       |              | 311    |        |   | 3   |     |                                        | (2,730  | )       |  
|Excess tax benefit on options exercised or converted |                                                            |   |       |              |       |        |   |    |     |                                        | 2,884   |         |  
|Adjustment of temporary equity subject to redemption |                                                            |   |       |              |       |        |   | (3  | )   |                                        | 1,393   |         |  
|                                                     |                                                            |   |        |              |        |        |   |     |     |                                        |         |         |  
|Balance at August 27, 2006                           |                                                            | $ | 56,759 |              | 90,983 |        | $ | 904 |     | $                                      | 664,588 |         | $
|                                                     |                                                            |   |        |              |        |        |   |     |     |                                        |         |         |  

See accompanying notes to condensed consolidated financial statements.

4

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

|                                          |                                                                                                                       | Nine 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                                            |                                                    
|                                          |                                                                                                                       | Non-cash interest expense:                                       |                                                    
|                                          |                                                                                                                       |                                                                  | Senior Subordinated PIK Notes                      
|                                          |                                                                                                                       |                                                                  | Amortization of debt issuance costs and other      
|                                          |                                                                                                                       | Stock-based compensation                                         |                                                    
|                                          |                                                                                                                       | (Gain) loss on sale of assets                                    |                                                    
|                                          |                                                                                                                       | Write-off of debt issuance costs related to debt extinguishments |                                                    
|                                          |                                                                                                                       | Cumulative effect of accounting change                           |                                                    
|                                          |                                                                                                                       | Other, net                                                       |                                                    
|                                          | Changes in operating assets and liabilities:                                                                          |                                                                  |                                                    
|                                          |                                                                                                                       | Accounts receivable                                              |                                                    
|                                          |                                                                                                                       | Inventories                                                      |                                                    
|                                          |                                                                                                                       | Prepaid expenses and other current assets                        |                                                    
|                                          |                                                                                                                       | Accounts payable                                                 |                                                    
|                                          |                                                                                                                       | Accrued expenses                                                 |                                                    
|                                          |                                                                                                                       | Other liabilities                                                |                                                    
|                                          |                                                                                                                       |                                                                  |                                                    
|Net cash provided by operating activities |                                                                                                                       |                                                                  | (3,118                                             
|                                          |                                                                                                                       |                                                                  |                                                    
|Cash flows from investing activities:     |                                                                                                                       |                                                                  |                                                    
|                                          | Purchase of property, plant and equipment, net                                                                        |                                                                  |                                                    
|                                          | Proceeds from the sale of property, plant and equipment                                                               |                                                                  |                                                    
|                                          |                                                                                                                       |                                                                  |                                                    
|                                          |                                                                                                                       |                                                                  | Net cash used in investing activities              
|Cash flows from financing activities:     |                                                                                                                       |                                                                  |                                                    
|                                          | Proceeds from initial public offering of common stock, net of underwriting discount and other direct costs of $24,489 |                                                                  |                                                    
|                                          | Cash dividend                                                                                                         |                                                                  |                                                    
|                                          | Repayment of long-term debt                                                                                           |                                                                  |                                                    
|                                          | Borrowings under new credit facility                                                                                  |                                                                  |                                                    
|                                          | Borrowings under revolving credit facilities                                                                          |                                                                  |                                                    
|                                          | Repayments of amounts borrowed under revolving credit facilities                                                      |                                                                  |                                                    
|                                          | Other borrowings                                                                                                      |                                                                  |                                                    
|                                          | Exercise of employee stock options, including related excess tax benefits                                             |                                                                  |                                                    
|                                          | Debt issuance costs                                                                                                   |                                                                  |                                                    
|                                          | Other                                                                                                                 |                                                                  |                                                    
|                                          |                                                                                                                       |                                                                  |                                                    
|                                          |                                                                                                                       |                                                                  | Net cash provided by (used in) financing activities
|                                          |                                                                                                                       |                                                                  |                                                    
|Effect of exchange rate changes on cash   |                                                                                                                       |                                                                  | 1,125                                              
|                                          |                                                                                                                       |                                                                  |                                                    
|Change in cash and cash equivalents       |                                                                                                                       |                                                                  | (14,348                                            
|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

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 annual condensed consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited
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 audited consolidated financial statements for the year ended November 27, 2005 included within the Company's Registration Statement on Form S-1 (File
No. 333-126280).

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 "Notes") issued by Sealy Mattress Company. Effective
May 25, 2006, Sealy Corporation was named a guarantor of the Notes. At August 27, 2006, KKR controlled approximately 52% 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.

All
common stock and per share amounts presented in the condensed consolidated financial statements and accompanying notes thereto have been restated to reflect a 0.7595 for 1 reverse
stock split which became effective on March 23, 2006.

6

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Note 2:Initial Public Offering of Common Stock and Use of Proceeds

On April 12, 2006, the Company completed an initial public offering ("IPO") of its common stock, raising $299.2 million of net proceeds after
deducting the underwriting discount. The following table presents the sources and uses of cash from the IPO:

|                 |                                                                                                                                                 | (in millions)                      
|---------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------
|Source:          |                                                                                                                                                 |                                    
|                 | Gross proceeds from issuance of 20 million shares of common stock at $16.00 per share                                                           |                                    
|                 |                                                                                                                                                 |                                    
|Use of Proceeds: |                                                                                                                                                 |                                    
|                 | Cash dividend to shareholders of record immediately prior to the IPO                                                                            |                                    
|                 | Repayment of Senior Subordinated PIK Notes, including 1% prepayment penalty thereon1                                                            |                                    
|                 | Repurchase of $47.5 million aggregate principal amount of the Notes, plus market premiums of $2.7 million1 and accrued interest of $1.4 million |                                    
|                 | Underwriting discount at $1.04 per share for 20 million shares                                                                                  |                                    
|                 | Cash bonuses to members of management2                                                                                                          |                                    
|                 | Management Services Agreement termination fee paid to KKR2                                                                                      |                                    
|                 | Other fees and expenses associated with the IPO3                                                                                                |                                    
|                 | Net cash available for use by the Company                                                                                                       |                                    
|                 |                                                                                                                                                 |                                    
|                 |                                                                                                                                                 | Total uses of proceeds from the IPO
|                 |                                                                                                                                                 |                                    

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The condensed consolidated statements of operations for the nine months ended August 27, 2006 also include the following charges related to
the IPO and associated debt extinguishments:

|                                                                                                                                                                                                                                  |                                                                                              | (in millions)                   
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | --------------------------------
|Cash charges:                                                                                                                                                                                                                     |                                                                                              |                                 
|Compensation expense associated with transaction bonuses                                                                                                                                                                          |                                                                                              | $                               
|Fee paid to KKR for termination of Management Services Agreement                                                                                                                                                                  |                                                                                              |                                 
|                                                                                                                                                                                                                                  |                                                                                              |                                 
|                                                                                                                                                                                                                                  | Total charges included in "expenses associated with initial public offering of common stock" |                                 
|Cash premiums and prepayment penalties totaling $3.6 million plus non-cash charges of $1.7 million resulting from the repurchase of Notes and retirement of PIK Notes, included in "debt extinguishment and refinancing
expenses" |                                                                                              |                                 
|Non-cash compensation resulting from the conversion of certain equity share options into common stock, included in "selling, general and administrative expenses"                                                                 |                                                                                              |                                 
|                                                                                                                                                                                                                                  |                                                                                              |                                 
|                                                                                                                                                                                                                                  |                                                                                              | Total charges related to the IPO
|                                                                                                                                                                                                                                  |                                                                                              |                                 

Note 3:Share-Based Compensation

Effective August 29, 2005 (the beginning of the fourth quarter of fiscal 2005), the Company adopted the provisions of FAS No. 123 (revised 2004)
"Share-Based Payment" ("FAS 123(R)"). Previously, as permitted by FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), the

7

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Company
accounted for its stock option and stock incentive plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and recorded
no charges (except to the extent required by APB Opinion No. 25) against earnings with respect to options granted. Prior to Sealy Corporation's June 30, 2005 filing of a registration
statement on Form S-1, the Company had been considered a nonpublic entity as defined by both FAS 123 and FAS 123(R), and had used the minimum value method of measuring
equity share options for pro forma disclosure purposes. Accordingly, the Company is required to apply the provisions of FAS 123(R) prospectively to new awards and to awards modified,
repurchased, or cancelled after the date of adoption. The Company has continued to account for any portion of awards outstanding at August 29, 2005 using the provisions of APB 25 as previously
permitted under FAS 123. In addition, the Company has discontinued pro forma disclosures previously required by FAS 123 for equity share options accounted for using the intrinsic value
method of APB 25.

From
the time of the Company's adoption of FAS 123(R) through the first quarter of fiscal 2006, no new stock options were granted, nor were outstanding options modified. During
the nine months ended August 27, 2006, the Company granted new options to purchase 2,020,983 shares of common stock, and recognized compensation expense associated with these grants of
approximately $1.2 million. As of August 27, 2006, there was approximately $8.2 million of unrecognized compensation costs associated with these grants. That cost is expected to
be recognized over a weighted average period of 4.0 years. The options granted during the third quarter of fiscal 2006 had a weighted average grant-date fair value of $3.97 per
option and the weighted average grant-date fair value for all option grants during fiscal 2006 was $4.96 per option. The
Company valued these stock option grants using the Black-Scholes valuation model with the following assumptions:

Expected volatility

29%30%Expected dividend yield

1.882.42%Expected term (in years)

5.07.5Risk-free rate

4.85%5.10%


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 is based on the Company's current quarterly dividend of $0.075 per share relative to the
fair value of the underlying stock at grant date. Expected term is estimated based on the simplified method allowed under Staff Accounting Bulletin No. 107, issued by the United States
Securities and Exchange Commission. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

The
Company also recognized compensation expense during the nine months ended August 27, 2006 related to 192,236 options which were converted to shares of stock in connection with
the IPO on April 6, 2006. Non-cash compensation of approximately $0.4 million, reflecting the excess of the fair value of the shares received over the fair value of the
options converted, is included in selling, general and administrative expenses. Cash compensation expense of approximately $2.8 million, resulting from the payment of taxes on behalf of
employees benefiting from the conversion, is included in "expenses associated with initial public offering of common stock" in the accompanying statements of operations.

During
the three and nine months ended August 27, 2006 and August 28, 2005, the Company recognized expense of $0.3 million and $1.2 million, respectively, for
fiscal 2006 and $0.2 million and $0.5 million, respectively, for fiscal 2005, resulting from the accretion of an obligation to three executives of the Company for their right to sell to
the Company, upon their retirement, vested shares of the Company's common stock.

8

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Note 4:Inventories

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

August 27, 2006

November 27, 2005Raw materials

$
40,285

$
32,336Work in process


17,082


18,945Finished goods


9,098


8,860$
66,465

$
60,141


Note 5:Warranty Costs

The Company's warranty policy provides a 10-year non-prorated warranty service period on all currently manufactured Sealy Posturepedic,
Stearns & Foster and Bassett bedding products and certain other Sealy-branded products, and a 20-year warranty on its TrueForm product line introduced late in the first quarter of
fiscal 2005. The Company's policy is to accrue the estimated cost of warranty coverage at the time the sale is recorded. The change in the Company's accrued warranty obligations for each of the nine
months ended August 27, 2006 and August 28, 2005 and the year ended November 27, 2005 was as follows (in thousands):

August 27,
2006

November 27,
2005

August 28,
2005Accrued warranty obligations at beginning of period

$
14,321

$
13,857

$
13,857Warranty claims


(12,236
)

(14,484
)

(11,366
)Warranty provisions


12,580


14,948


11,940Accrued warranty obligations at end of period

$
14,665

$
14,321

$
14,431


Warranty
claims for the year ended November 27, 2005 include approximately $8.9 million for claims associated with products sold prior to
November 28, 2004 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 $4.0 million, $4.3 million
and $3.5 million for the nine months ended August 27, 2006, the year ended November 27, 2005 and the nine months ended August 28, 2005, respectively.

9

---



Note 6: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 nine months ended August 27, 2006 are as follows (in thousands):

Balance as of November 27, 2005

$
384,646Increase due to foreign currency translation


3,633Balance as of August 27, 2006

$
388,279


Total
other intangibles of $4.4 million (net of accumulated amortization of $5.0 million) as of August 27, 2006 consist primarily of acquired
licenses, which are amortized on the straight-line method over periods ranging from 5 to 15 years, and unamortized pension prior service costs of $1.4 million.

Note 7:Assets Held for Sale

The Company has assets held for sale totaling $2.4 million at August 27, 2006 and $1.4 million at November 27, 2005. The
$2.4 million is for a facility that is expected to be sold within the next twelve months. The fiscal 2005 balance was for the Oakville, CT facility. The Company is continuing to remediate
groundwater contamination at that site and does not expect to sell the facility in the next twelve months (see Note 17). As a result, the Company has reclassified this facility to other assets
on the balance sheet.

Note 8:Long-Term Obligations

Long-term debt as of August 27, 2006 and November 27, 2005 consisted of the following:

August 27,
2006

November 27,
2005(in thousands)Senior Revolving Credit Facility

$
6,309

$
18,814Senior Secured Term Loan


440,000


450,000Senior Subordinated Notes


342,000


389,500Senior Subordinated PIK Notes





85,766Other


22,861


17,664811,170


961,744Less current portion


(15,388
)

(12,769
)$
795,782

$
948,975


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 August 27, 2006,
amounts outstanding under the senior revolving credit facility included $6.3 million under the Canadian portion of the facility. At August 27, 2006, the Company had approximately
$86.6 million available under the revolving credit facility after taking into account letters of credit issued totaling $32.1 million.

10

---



Annually, the Company may be required to make principal prepayments depending on certain financial ratios, as defined in its senior secured credit agreement. At August 27, 2006,
the Company estimates that a payment will not have to be made with respect to excess cash flow for the 2006 fiscal year, and as such, no amount has been reclassified to current for an anticipated
principal prepayment.

On
August 25, 2006, the Company entered into the Third Amended and Restated Credit Agreement (the "Third Amended and Restated Credit Agreement"), which amended and restated the
Second Amended and Restated Credit Agreement, dated April 14, 2005 (the "Existing Credit Agreement"). The Third Amended and Restated Credit Agreement amended the Existing Credit Agreement to
refinance the $440 million outstanding under the existing senior secured term loan in two tranches, one for $300 million maturing August 25, 2011 and one for $140 million
due August 25, 2012. The Third Amended and Restated Credit Agreement also reduced the applicable interest rate margins charged on the senior secured term loan, provided certain financial
leverage ratio tests are met. In addition, the Third Amended and Restated Credit Agreement provides Sealy Corporation with greater flexibility to receive dividend distributions from its subsidiaries,
or to repay certain subordinated debt, provided certain leverage ratio tests and other conditions are met. The terms and conditions of the Company's $125 million senior revolving credit
facility were unchanged by the Third Amended and Restated Credit Agreement. In connection with the amendment and restatement, the Company incurred a charge of $4.6 million during the three
months ended August 27, 2006, including $4.1 million for the write-off of deferred finance charges and $0.5 million of related fees and expenses (Note 9).

In
connection with the IPO (Note 2), the Company used a portion of the proceeds from the offering to repurchase and retire $47.5 million aggregate principal amount of the
Notes in a series of open market transactions completed on April 26, 2006 at prices ranging from 105.25% to 105.92% of par, plus accrued interest. On April 21, 2006, the Company used
approximately $90.0 million of IPO proceeds to redeem the entire outstanding balance of the PIK Notes, along with accrued interest and prepayment penalties through the date of the redemption.

At
August 27, 2006 the Company was in compliance with the covenants contained within its senior credit agreements and indenture governing the Notes.

The
Company has corrected its presentation within the statement of cash flows of activity related to borrowings and repayments under its revolving credit facility. Such borrowings and
repayments, formerly presented on a net basis, are now shown in their gross amounts. This correction had no effect on total cash flows from financing activities.

Note 9:Debt Extinguishment and Refinancing Expenses

Debt extinguishment and refinancing expenses for the three months ended August 27, 2006 include $4.6 million of expense incurred in connection with
the refinancing of the Company's senior secured credit agreement on August 25, 2006 (Note 8), including non-cash charges of approximately $4.1 million resulting from
the write-off of debt issuance costs. For the nine months ended August 27, 2006, debt extinguishment and refinancing expenses also include $5.3 million of expense resulting
from the extinguishment of debt retired with proceeds from the IPO (Note 2), including non-cash charges of $1.7 million resulting from the write-off of debt
issuance costs associated with the retired debt.

For
the nine months ended August 28, 2005, debt extinguishment and refinancing expenses include approximately $6.2 million of expense incurred in connection with the
refinancing of the Company's senior secured credit agreement on April 14, 2005, including non-cash charges of approximately $3.4 million resulting from the
write-off of debt issuance costs. There was no debt extinguishment and refinancing expenses for the three months ended August 28, 2005.

11

---



Note 10:Other Income, Net

Other income, net, includes interest income for the three and nine months ended August 27, 2006 and August 28, 2005 of $0.1 million and
$0.6 million for fiscal 2006 and $0.1 million and $0.2 million for fiscal 2005, respectively.

Note 11:Conditional Asset Retirement Obligations

In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligationsan interpretation of FASB
Statement No. 143" ("FIN 47"). This interpretation clarifies the term "conditional asset retirement obligation" as used in FAS 143 and provides additional guidance on the timing and
method for the recognition and measurement of such conditional obligations. FIN 47 became effective for fiscal years ending after December 15, 2005. The Company adopted FIN 47 as of the
beginning of fiscal 2006 and has recorded an adjustment as of November 28, 2005, the first day of fiscal 2006, of approximately $0.3 million, net of income tax benefit of
$0.2 million, to recognize the cumulative effect of the accounting change. In addition, the Company
recorded $0.1 million in property, plant and equipment and a liability of $0.6 million in other noncurrent liabilities. These 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 2032, the Company may be able to renegotiate such leases to extend the terms. On a pro forma basis for the nine months ended August 28, 2005, the
effects would have been immaterial.

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 and ensure that it
remains stable and is required to notify any potential buyer of its existence. The Company has not recognized the asset retirement obligations in its financial statements for asbestos 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. Management will continue to
monitor this issue and will record an asset retirement obligation when sufficient information becomes available to estimate the obligation.

Note 12:Recently Issued Accounting Pronouncements

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

In
December 2004, the FASB issued FAS 153, "Exchanges of Nonmonetary Assetsan amendment of APB Opinion No. 29" which amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. This statement
became effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this statement has had no impact on the Company's financial position
or results of operations.

12

---



In
May 2005, the FASB issued FAS 154, "Accounting Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement No. 3."
This statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method
for reporting a change in accounting principle in the absence of explicit transition guidance specific to any newly adopted pronouncement. This statement also addresses the reporting of the correction
of an error in previously issued financial statements, which requires similar retrospective adjustment. Changes in accounting estimates continue to be reported in the period of the change and any
future periods affected. This statement will become effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005. The Company will adopt this
statement as of the beginning of fiscal 2007.

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 FASB Statement No. 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 interpretation is effective for fiscal years beginning after December 15, 2006. The Company will adopt this interpretation as of the beginning of fiscal 2008 and
is still assessing the potential impact of adoption.

In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, which provides guidance on the consideration of the effects of prior year misstatements in quantifying
current year misstatements for the purpose of a materiality assessment. The Company will apply this guidance for fiscal year end 2006.

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 ("GAAP") and expands disclosure about fair value measurements. The statement is effective for fiscal years beginning after November 15, 2007. The Company will adopt this
statement as of the beginning of fiscal 2008 and is still assessing the potential impact of adoption.

In
September 2006, the FASB also issued FAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)." This statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its
statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This statement also requires an
employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The Company will be required to initially recognize
the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006, which for the Company will be
the end of fiscal 2007. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008, or fiscal 2009 for the Company. The Company is still assessing the potential impact of adoption.

Note 13: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 all hedged transactions and hedging instruments, and assesses, both at inception of the contract and on an ongoing basis,
whether the hedging instruments

13

---



are
effective in offsetting changes in cash flows of the hedged transaction. The fair values of the interest rate agreements are estimated by obtaining quotes from brokers and are the estimated
amounts that the Company would receive or pay to terminate the agreements at the reporting date, taking into consideration current interest rates and the current creditworthiness of the
counterparties.

In
June 2004, the Company entered into a swap agreement that has 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 November 2007. The Company has formally designated this swap agreement as
a cash flow hedge and expects the hedge to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. Effective
August 25, 2006, the Company de-designated $13 million of the interest rate swap for hedge accounting due to the amendment of the senior secured term loan agreement
(Note 7). As a result of the dedesignation, $0.2 million previously recorded in accumulated other comprehensive income was recorded as a reduction of interest expense. The effective
portion of changes in the market value of $137 million of the swap is recorded in other comprehensive income and will be amortized into interest expense over the remaining life of the interest
rate swap agreement. For the three and nine months ended August 27, 2006 and August 28, 2005, $(0.5) million and $(1.1) million for fiscal 2006 and $0.2 million and
$1.3 million for fiscal 2005, respectively, was recorded as an addition to (reduction of) interest expense, excluding the impact of the de-designation noted above. At
August 27, 2006 and November 27, 2005, the fair value carrying amount of the instrument was recorded as follows (in thousands):

August 27, 2006

November 27, 2005Accrued interest receivable

$
577

$
Other current assets


1,811


1,042Long term receivable


1,034


1,716Total net asset

$
3,422

$
2,758


At
August 27, 2006 and November 27, 2005, accumulated other comprehensive income associated with the interest rate swap was $1.5 million and $1.6 million,
respectively, net of income tax effects.

The
Company had also entered into two interest rate swap agreements associated with debt that no longer exists. Although the related debt was repaid, the swaps remain in effect and are
scheduled to expire in December 2006. Because the first swap converted a portion of floating rate debt to a fixed rate and the subsequent swap effectively reestablished a floating rate on the
same debt, the effect of the two instruments on both cash flows and earnings is largely off-setting. Changes in the fair market value of these swaps are recorded in interest expense. At
August 27, 2006 and November 27, 2005, the fair value carrying amount of these instruments was a current liability of $0.5 million and $1.9 million, respectively.

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 and
option contracts. The Company does not designate its foreign currency forward and option contracts as hedges for accounting purposes, therefore all changes in fair value are charged to earnings. At
August 27, 2006, the Company had forward contracts to sell a total of 7.0 million Canadian dollars and 10.0 million Mexican pesos with expiration dates ranging from
September 15, 2006 through February 15, 2007. At August 27, 2006 and November 27, 2005, the fair value of the Company's net obligation under the forward contracts was a
liability of $0.2 million and $0.3 million, respectively. For the three and nine months ended August 27, 2006, recognized foreign currency transaction gains were
$0.2 million and $0.1 million, respectively, compared with losses of $0.1 million and gains of $2.3 million for the three and nine months ended August 28, 2005,
respectively.

14

---



Note 14:Defined Benefit Pension Expense

The components of net periodic pension cost recognized for the Company's defined benefit pension plan for the three and six months ended August 27, 2006
and August 28, 2005 are as follows (in thousands):

|                                                |  | Three months ended |      | Nine months ended |  
|----------------------------------------------- |  | ------------------ | ---- | ----------------- | -
|
|Service cost                                    |  | $                  | 147  |                   | $
|Interest cost                                   |  |                    | 207  |                   |  
|Expected return on plan assets                  |  |                    | (218 | )                 |  
|Amortization of unrecognized gains and losses   |  |                    | 30   |                   |  
|Amortization of unrecognized transition asset   |  |                    | (22  | )                 |  
|Amortization of unrecognized prior service cost |  |                    | 50   |                   |  
|                                                |  |                    |      |                   |  
|Net periodic pension cost*                      |  | $                  | 194  |                   | $
|                                                |  |                    |      |                   |  
|Cash contributions                              |  | $                  | 425  |                   | $
|                                                |  |                    |      |                   |  

---

The
Company expects to make additional cash contributions to the plan of approximately $1.0 million during the remainder of fiscal 2006.

Note 15: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 nine months ended August 27, 2006 is approximately 28.7% and 31.5%, respectively, compared to 37.9% and 46.4%,
respectively, for the three and nine months ended August 28, 2005. The effective rates for the fiscal 2006 periods reflect a reduction in income tax expense due to recognition of benefits of
approximately $2.4 million and $3.9 million for the three months and nine months ended August 28, 2006 resulting from reduction in the Company's income tax reserves due to
resolutions with tax authorities and the elimination of certain federal and state tax exposures due to expiring statutes. A benefit of approximately $1 million resulted from the reduction of
the valuation allowance on capital loss carry-forwards due to the availability of capital gains. The effective rate for the nine month fiscal 2005 period was significantly increased due to the
provision of approximately $7.2 million of income taxes on foreign earnings repatriated to the United States during fiscal 2005.

Significant
judgment is required in evaluating the Company's federal, state and foreign tax positions and in the determination of its tax provision. Despite the Company's belief that its
tax return positions are fully supportable, reserves have been established where the Company believes that certain tax positions are likely to be challenged and the Company may not fully prevail in
overcoming these challenges. The Company may adjust these reserves as relevant circumstances evolve, such as guidance from the relevant tax authority, the Company's tax advisors, or resolution of
issues in the courts. In addition the Company is still assessing the potential impact of FIN 48 (Note 11). The Company's tax expense includes the impact of reserve positions and changes to
reserves that it considers appropriate, as well as related interest and penalties. While the Company is currently undergoing examinations of certain of its corporate income tax returns by tax
authorities, no issues have been presented to the

15

---



Company
and the Company believes that such audits will not result in an assessment and payment of taxes related to these positions during the one year following August 27, 2006. The Company
also cannot predict when or if any other future tax payments related to these tax positions may occur. Therefore, substantially all of the reserves for these positions are classified as noncurrent
liabilities in the accompanying balance sheet.

Note 16:Comprehensive Income

Comprehensive income for the three and nine months ended August 27, 2006 was $27.7 million and $56.4 million, respectively, and for the three
and nine months ended August 28, 2005 was $28.4 million and $50.9 million, respectively.

Note 17:Contingencies

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

The
Company is currently conducting an environmental cleanup at a formerly owned facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial Site Recovery Act. The
Company and one of its subsidiaries are parties to an Administrative Consent Order issued by the New Jersey Department of Environmental Protection. Pursuant to that order, the Company and its
subsidiary agreed to conduct soil and groundwater remediation at the property. The Company does not believe that its manufacturing processes were the source of contamination. The Company sold the
property in 1997. The Company and its subsidiary retained primary responsibility for the required remediation. The Company has completed essentially all soil remediation with the New Jersey Department
of
Environmental Protection's approval, and has concluded a pilot test of the groundwater remediation system. 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 groundwater remediation at the site. The Company has recorded a reserve for
$2.0 million ($2.7 million prior to discounting at 4.50%) associated with this remediation project, and it is reasonably possible that up to an additional $0.2 million may be
incurred to complete the 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 our liability, if any, cannot be reasonably estimated at this time, we have not made any accruals
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 has identified cadmium in the ground water at the site and intends to address that during fiscal 2007. The Company has recorded a reserve
of approximately $0.8 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 groundwater at the site.

16

---



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.

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

Note 18:Common Stock and Options Subject to Redemption

In connection with its adoption of FAS 123(R), the Company reclassified as temporary equity amounts previously included in additional paid-in
capital that are associated with outstanding shares and options which, under the terms of management shareholder agreements, are potentially redeemable for a 180 day period following death or
disability of the share or option holder.

Note 19:Related Party Transactions

The Company also used $11.0 million of IPO proceeds to pay KKR a termination fee to end the Management Services Agreement between the Company and KKR. As a
result, these fees are no longer being paid starting in April 2006. The Company incurred management fees of $0.8 for the nine months ended August 27, 2006 and $0.5 and $1.5 for the three
and nine months ended August 28, 2005, respectively, payable to KKR, Sealy Corporation's primary owners. Also during the three and nine months ended August 28, 2005, the Company incurred
$0.2 million and $1.3 million for consulting services provided by Capstone Consulting LLC, the chief executive officer of which is on the Company's board of directors.

Note 20:Segment Information

The Company has determined that it has two operating segments, domestic and international, that qualify for aggregation as prescribed in SFAS 131.
Accordingly, the Company has one reportable industry segment, the manufacture and marketing of innerspring and specialty bedding. Sales outside the United States for the three and nine months ended
August 27, 2006 and August 28, 2005 were $96.7 million and $263.1 million and $77.8 million and $221.7 million, respectively. In addition,
long-lived assets (principally property, plant and equipment and other investments) outside the United States were $55.9 million and $50.7 million as of August 27,
2006 and November 27, 2005, respectively.

Geographic Distribution of Sales (in thousands):

|               |                               | Three months ended |         | Nine months ended |      
|-------------- | ----------------------------- | ------------------ | ------- | ----------------- | -----
|
|US domestic    |                               | $                  | 318,394 |                   | 76.7 
|International: |                               |                    |         |                   |      
|               | Canada                        |                    |         | 42,927            |      
|               | Europe                        |                    |         | 31,357            |      
|               | Other international locations |                    |         | 22,446            |      
|               |                               |                    |         |                   |      
|               | Total international           |                    |         | 96,730            |      
|               |                               |                    |         |                   |      
|Total company  |                               | $                  | 415,124 |                   | 100.0
|               |                               |                    |         |                   |      

17

---



Note 21:Guarantor/Non-Guarantor Financial Information

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

The
following supplemental 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.

18

---





SEALY CORPORATION        Supplementa l Condensed Consolidating Balance Sheet  August 27, 2006  (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                                        |  | $                 | 4,456    |                            | $ |                       |   | $                               | 1       |                                      | $ | 11,080       |   | $            | 6,669  
|Accounts receivable, net                                         |  |                   | 17       |                            |   |                       |   |                                 | 604     |                                      |   | 133,487      |   |              | 74,652 
|Inventories                                                      |  |                   |         |                            |   |                       |   |                                 | 1,233   |                                      |   | 46,080       |   |              | 21,414 
|Assets held for sale                                             |  |                   |         |                            |   |                       |   |                                 |        |                                      |   | 2,338        |   |              |       
|Prepaid expenses, deferred income taxes and other current assets |  |                   |         |                            |   |                       |   |                                 | 2,969   |                                      |   | 33,390       |   |              | 2,183  
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|                                                                 |  |                   | 4,473    |                            |   |                       |   |                                 | 4,807   |                                      |   | 226,375      |   |              | 104,918
|Property, plant and equipment, at cost                           |  |                   |         |                            |   |                       |   |                                 | 8,338   |                                      |   | 260,368      |   |              | 79,005 
|Less accumulated depreciation                                    |  |                   |         |                            |   |                       |   |                                 | (4,618  | )                                    |   | (142,295     | ) |              | (26,410
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|                                                                 |  |                   |         |                            |   |                       |   |                                 | 3,720   |                                      |   | 118,073      |   |              | 52,595 
|Other assets:                                                    |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Goodwill                                                         |  |                   |          |                            |   |                       |   |                                 | 24,741  |                                      |   | 304,773      |   |              | 58,765 
|Other intangibles, net                                           |  |                   |          |                            |   |                       |   |                                 |        |                                      |   | 3,976        |   |              | 423    
|Net investment in and advances to (from) subsidiaries            |  |                   | (253,727 | )                          |   | (253,727               | ) |                                 | 909,508 |                                      |   | (109,180     | ) |              | (53,923
|Debt issuance costs, net, and other assets                       |  |                   |          |                            |   |                        |   |                                 | 17,448  |                                      |   | 8,145        |   |              | 2,022  
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|                                                                 |  |                   | (253,727 | )                          |   | (253,727               | ) |                                 | 951,697 |                                      |   | 207,714      |   |              | 7,287  
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Total assets                                                     |  | $                 | (249,254 | )                          | $ | (253,727               | ) | $                               | 960,224 |                                      | $ | 552,162      |   | $            | 164,800
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Liabilities And Stockholders' deficit                            |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Current liabilities:                                             |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Current portionlong-term obligations                            |  | $                 |         |                            | $ |                       |   | $                               | 1,400   |                                      | $ | 1,898        |   | $            | 12,090 
|Accounts payable                                                 |  |                   |         |                            |   |                       |   |                                 | 209     |                                      |   | 74,513       |   |              | 41,315 
|Accrued customer incentives and advertising                      |  |                   |         |                            |   |                       |   |                                 |        |                                      |   | 31,174       |   |              | 7,107  
|Accrued compensation                                             |  |                   |         |                            |   |                       |   |                                 | 497     |                                      |   | 24,018       |   |              | 7,455  
|Accrued interest                                                 |  |                   |         |                            |   |                       |   |                                 | 317     |                                      |   | 6,033        |   |              | 117    
|Other accrued expenses                                           |  |                   | 116      |                            |   |                       |   |                                 | 1,290   |                                      |   | 33,452       |   |              | 6,333  
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|                                                                 |  |                   | 116      |                            |   |                       |   |                                 | 3,713   |                                      |   | 171,088      |   |              | 74,417 
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Due to (from) Parent Company                                     |  |                   | (81,235  | )                          |   |                       |   |                                 |        |                                      |   | 81,235       |   |              |       
|Long-term obligations                                            |  |                   |         |                            |   |                       |   |                                 | 780,600 |                                      |   | 875          |   |              | 14,307 
|Other noncurrent liabilities                                     |  |                   |         |                            |   |                       |   |                                 |        |                                      |   | 35,220       |   |              | 8,839  
|Deferred income taxes                                            |  |                   |         |                            |   |                       |   |                                 | 4,584   |                                      |   | 1,192        |   |              | 6,176  
|Common stock & options subject to redemption                     |  |                   | 20,263   |                            |   |                       |   |                                 |        |                                      |   |             |   |              |       
|Stockholders' deficit                                            |  |                   | (188,398 | )                          |   | (253,727               | ) |                                 | 171,327 |                                      |   | 262,552      |   |              | 61,061 
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Total liabilities and stockholders' deficit                      |  | $                 | (249,254 | )                          | $ | (253,727               | ) | $                               | 960,224 |                                      | $ | 552,162      |   | $            | 164,800
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        

19

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SEALY CORPORATION        Supplemental Condensed Consolidating Balance Sheet  November 27, 2005  (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                                        |  | $                 |         |                            | $ |                       |   | $                               | 1       |                                      | $ | 25,387       |   | $            | 11,166 
|Accounts receivable, net                                         |  |                   |         |                            |   |                       |   |                                 | 60      |                                      |   | 106,559      |   |              | 68,795 
|Inventories                                                      |  |                   |         |                            |   |                       |   |                                 | 1,429   |                                      |   | 42,836       |   |              | 15,876 
|Assets held for sale                                             |  |                   |         |                            |   |                       |   |                                 |        |                                      |   | 1,405        |   |              |       
|Prepaid expenses, deferred income taxes and other current assets |  |                   | 1,948    |                            |   |                       |   |                                 | 2,200   |                                      |   | 24,349       |   |              | 2,378  
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|                                                                 |  |                   | 1,948    |                            |   |                       |   |                                 | 3,690   |                                      |   | 200,536      |   |              | 98,215 
|Property, plant and equipment, at cost                           |  |                   |         |                            |   |                       |   |                                 | 7,542   |                                      |   | 252,190      |   |              | 69,203 
|Less accumulated depreciation                                    |  |                   |         |                            |   |                       |   |                                 | (3,949  | )                                    |   | (135,176     | ) |              | (21,833
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|                                                                 |  |                   |         |                            |   |                       |   |                                 | 3,593   |                                      |   | 117,014      |   |              | 47,370 
|Other assets:                                                    |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Goodwill                                                         |  |                   |         |                            |   |                       |   |                                 | 24,741  |                                      |   | 304,774      |   |              | 55,131 
|Other intangibles, net                                           |  |                   |         |                            |   |                       |   |                                 |        |                                      |   | 4,192        |   |              | 367    
|Net investment in and advances to (from) subsidiaries            |  |                   | (313,217 | )                          |   | (313,217               | ) |                                 | 901,550 |                                      |   | (177,037     | ) |              | (56,964
|Debt issuance costs, net, and other assets                       |  |                   | 304      |                            |   |                        |   |                                 | 25,168  |                                      |   | 5,793        |   |              | 1,851  
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|                                                                 |  |                   | (312,913 | )                          |   | (313,217               | ) |                                 | 951,459 |                                      |   | 137,722      |   |              | 385    
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Total assets                                                     |  | $                 | (310,965 | )                          | $ | (313,217               | ) | $                               | 958,742 |                                      | $ | 455,272      |   | $            | 145,970
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Liabilities And Stockholders' deficit                            |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Current liabilities:                                             |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Current portionlong-term obligations                            |  | $                 |         |                            | $ |                       |   | $                               |        |                                      | $ | 922          |   | $            | 11,847 
|Accounts payable                                                 |  |                   |         |                            |   |                       |   |                                 | 269     |                                      |   | 82,894       |   |              | 36,395 
|Accrued customer incentives and advertising                      |  |                   |         |                            |   |                       |   |                                 |         |                                      |   | 31,184       |   |              | 6,774  
|Accrued compensation                                             |  |                   |         |                            |   |                       |   |                                 | 411     |                                      |   | 35,506       |   |              | 8,221  
|Accrued interest                                                 |  |                   |         |                            |   |                       |   |                                 | 824     |                                      |   | 17,471       |   |              | 119    
|Other accrued expenses                                           |  |                   | 69       |                            |   |                       |   |                                 | 1,599   |                                      |   | 37,451       |   |              | 8,310  
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|                                                                 |  |                   | 69       |                            |   |                        |   |                                 | 3,103   |                                      |   | 205,428      |   |              | 71,666 
|Due to (from) Parent Company                                     |  |                   | (6,231   | )                          |   |                       |   |                                 |        |                                      |   | 6,231        |   |              |       
|Long-term obligations                                            |  |                   | 85,766   |                            |   |                       |   |                                 | 839,500 |                                      |   | 858          |   |              | 22,851 
|Other noncurrent liabilities                                     |  |                   |         |                            |   |                       |   |                                 | 116     |                                      |   | 35,421       |   |              | 8,122  
|Deferred income taxes                                            |  |                   |         |                            |   |                       |   |                                 | 4,416   |                                      |   | 2,247        |   |              | 5,693  
|Common stock & options subject to redemption                     |  |                   | 21,654   |                            |   |                       |   |                                 |        |                                      |   |             |   |              |       
|Stockholders' deficit                                            |  |                   | (412,223 | )                          |   | (313,217               | ) |                                 | 111,607 |                                      |   | 205,087      |   |              | 37,638 
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        
|Total liabilities and stockholders' deficit                      |  | $                 | (310,965 | )                          | $ | (313,217               | ) | $                               | 958,742 |                                      | $ | 455,272      |   | $            | 145,970
|                                                                 |  |                   |          |                            |   |                        |   |                                 |         |                                      |   |              |   |              |        

20

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SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations  Three Months Ended August 27, 2006  (in thousands)

|                           |                                                     | Sealy Corporation |        | Sealy Mattress Corporation |   | Sealy Mattress Company |         | Combined Guarantor Subsidiaries |        | Combined Non-
Guarantor Subsidiaries |   | Eliminations |         | Consolidated |       
|-------------------------- | --------------------------------------------------- | ----------------- | ------ | -------------------------- | - | ---------------------- | ------- | ------------------------------- | ------ | ------------------------------------ | - | ------------ | ------- | ------------ | ------
|Net sales                  |                                                     | $                 |       |                            | $ |                       |         | $                               | 16,989 |                                      | $ | 310,037      |         | $            | 94,891
|Costs and expenses:        |                                                     |                   |        |                            |   |                        |         |                                 |        |                                      |   |              |         |              |       
|                           | Cost of goods sold                                  |                   |        |                           |   |                        |        |                                 |        | 9,823                                |   |              | 168,374 |              |       
|                           | Selling, general and administrative                 |                   |        | 133                        |   |                        |        |                                 |        | 1,714                                |   |              | 101,354 |              |       
|                           | Amortization of intangibles                         |                   |        |                           |   |                        |        |                                 |        |                                     |   |              | 73      |              |       
|                           | Royalty (income) expense, net                       |                   |        |                           |   |                        |        |                                 |        |                                     |   |              | (4,400  | )            |       
|                           |                                                     |                   |        |                            |   |                        |         |                                 |        |                                      |   |              |         |              |       
|Income from operations     |                                                     |                   | (133   | )                          |   |                       |         |                                 | 5,452  |                                      |   | 44,636       |         |              | 11,282
|                           | Interest expense                                    |                   |        |                           |   |                        | 138     |                                 |        | 15,342                               |   |              | (122    | )            |       
|                           | Other income (loss)                                 |                   |        | (17                        | ) |                        |        |                                 |        | 4,566                                |   |              | 10      |              |       
|                           | Income from equity investees                        |                   |        | (29,498                    | ) |                        | (29,582 | )                               |        | (29,563                              | ) |              |        |              |       
|                           | Income from nonguarantor equity investees           |                   |        |                           |   |                        |        |                                 |        |                                     |   |              | (6,984  | )            |       
|                           | Capital charge and intercompany interest allocation |                   |        |                           |   |                        |        |                                 |        | (14,392                              | ) |              | 13,484  |              |       
|                           |                                                     |                   |        |                            |   |                        |         |                                 |        |                                      |   |              |         |              |       
|Income before income taxes |                                                     |                   | 29,382 |                            |   | 29,444                 |         |                                 | 29,499 |                                      |   | 38,248       |         |              | 9,818 
|                           | Income tax expense (benefit)                        |                   |        | 14                         |   |                        | (54     | )                               |        | (83                                  | ) |              | 8,782   |              |       
|                           |                                                     |                   |        |                            |   |                        |         |                                 |        |                                      |   |              |         |              |       
|Net income                 |                                                     | $                 | 29,368 |                            | $ | 29,498                 |         | $                               | 29,582 |                                      | $ | 29,466       |         | $            | 6,741 
|                           |                                                     |                   |        |                            |   |                        |         |                                 |        |                                      |   |              |         |              |       

21

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SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations  Three Months Ended August 28, 2005  (in thousands)

|                             |                                                     | Sealy Corporation |        | Sealy Mattress Corporation |   | Sealy Mattress Company |         | Combined Guarantor Subsidiaries |        | Combined Non-
Guarantor Subsidiaries |   | Eliminations |         | Consolidated |       
|---------------------------- | --------------------------------------------------- | ----------------- | ------ | -------------------------- | - | ---------------------- | ------- | ------------------------------- | ------ | ------------------------------------ | - | ------------ | ------- | ------------ | ------
|Net sales                    |                                                     | $                 |       |                            | $ |                       |         | $                               | 17,241 |                                      | $ | 303,325      |         | $            | 75,098
|Costs and expenses:          |                                                     |                   |        |                            |   |                        |         |                                 |        |                                      |   |              |         |              |       
|                             | Cost of goods sold                                  |                   |        |                           |   |                        |        |                                 |        | 9,915                                |   |              | 162,631 |              |       
|                             | Selling, general and administrative                 |                   |        | 3                          |   |                        |        |                                 |        | 1,713                                |   |              | 95,630  |              |       
|                             | Amortization of intangibles                         |                   |        |                           |   |                        |        |                                 |        |                                     |   |              | 73      |              |       
|                             | Royalty (income) expense, net                       |                   |        |                           |   |                        |        |                                 |        |                                     |   |              | (4,117  | )            |       
|                             |                                                     |                   |        |                            |   |                        |         |                                 |        |                                      |   |              |         |              |       
|Income from operations       |                                                     |                   | (3     | )                          |   |                       |         |                                 | 5,613  |                                      |   | 49,108       |         |              | 6,800 
|                             | Interest expense                                    |                   |        | 2,022                      |   |                        | 103     |                                 |        | 16,781                               |   |              | (155    | )            |       
|                             | Other income, net                                   |                   |        |                           |   |                        |        |                                 |        |                                     |   |              | (13     | )            |       
|                             | Income from equity investees                        |                   |        | (27,553                    | ) |                        | (27,608 | )                               |        | (24,806                              | ) |              |        |              |       
|                             | Income from non-guarantor equity investees          |                   |        |                           |   |                        |        |                                 |        |                                     |   |              | (4,341  | )            |       
|                             | Capital charge and intercompany interest allocation |                   |        |                           |   |                        |        |                                 |        | (15,763                              | ) |              | 15,099  |              |       
|                             |                                                     |                   |        |                            |   |                        |         |                                 |        |                                      |   |              |         |              |       
|Income before income taxes   |                                                     |                   | 25,528 |                            |   | 27,505                 |         |                                 | 29,401 |                                      |   | 38,518       |         |              | 5,636 
|Income tax expense (benefit) |                                                     |                   | (727   | )                          |   | (48                    | )       |                                 | 1,793  |                                      |   | 13,712       |         |              | 1,295 
|                             |                                                     |                   |        |                            |   |                        |         |                                 |        |                                      |   |              |         |              |       
|Net income                   |                                                     | $                 | 26,255 |                            | $ | 27,553                 |         | $                               | 27,608 |                                      | $ | 24,806       |         | $            | 4,341 
|                             |                                                     |                   |        |                            |   |                        |         |                                 |        |                                      |   |              |         |              |       

22

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SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations  Nine Months Ended August 27, 2006  (in thousands)

|                                |                                                     | Sealy Corporation |        | Sealy Mattress Corporation |   | Sealy Mattress Company |         | Combined Guarantor Subsidiaries |        | Combined Non-Guarantor Subsidiaries |   | Eliminations |         | Consolidated |        
|------------------------------- | --------------------------------------------------- | ----------------- | ------ | -------------------------- | - | ---------------------- | ------- | ------------------------------- | ------ | ----------------------------------- | - | ------------ | ------- | ------------ | -------
|Net sales                       |                                                     | $                 |       |                            | $ |                       |         | $                               | 49,089 |                                     | $ | 899,487      |         | $            | 262,311
|Costs and expenses:             |                                                     |                   |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |        
|                                | Cost of goods sold                                  |                   |        |                           |   |                        |        |                                 |        | 28,869                              |   |              | 488,170 |              |        
|                                | Selling, general and administrative                 |                   |        | 130                        |   |                        |        |                                 |        | 4,806                               |   |              | 300,589 |              |        
|                                | Expenses Associated with IPO                        |                   |        |                           |   |                        |        |                                 |        |                                    |   |              | 27,958  |              |        
|                                | Amortization of intangibles                         |                   |        |                           |   |                        |        |                                 |        |                                    |   |              | 217     |              |        
|                                | Royalty (income) expense, net                       |                   |        |                           |   |                        |        |                                 |        |                                    |   |              | (12,872 | )            |        
|                                |                                                     |                   |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |        
|Income from operations          |                                                     |                   | (130   | )                          |   |                       |         |                                 | 15,414 |                                     |   | 95,425       |         |              | 30,490 
|                                | Interest expense                                    |                   |        | 3,360                      |   |                        | 389     |                                 |        | 47,670                              |   |              | (325    | )            |        
|                                | Other (income) expense, net                         |                   |        | 1,143                      |   |                        |        |                                 |        | 8,701                               |   |              | (265    | )            |        
|                                | Income from equity investees                        |                   |        | (55,197                    | ) |                        | (55,426 | )                               |        | (53,027                             | ) |              |        |              |        
|                                | Income from nonguarantor equity investees           |                   |        |                           |   |                        |        |                                 |        |                                    |   |              | (16,623 | )            |        
|                                | Capital charge and intercompany interest allocation |                   |        |                           |   |                        |        |                                 |        | (45,027                             | ) |              | 42,161  |              |        
|                                |                                                     |                   |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |        
|Income before income taxes      |                                                     |                   | 50,564 |                            |   | 55,037                 |         |                                 | 57,097 |                                     |   | 70,477       |         |              | 26,466 
|                                | Income tax expense (benefit)                        |                   |        | (1,902                     | ) |                        | (160    | )                               |        | 1,671                               |   |              | 16,864  |              |        
|                                |                                                     |                   |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |        
|Income before cumulative effect |                                                     |                   | 52,466 |                            |   | 55,197                 |         |                                 | 55,426 |                                     |   | 53,613       |         |              | 18,465 
|                                | Cumulative effect of change in accounting principle |                   |        |                           |   |                        |        |                                 |        |                                    |   |              | 287     |              |        
|                                |                                                     |                   |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |        
|Net income                      |                                                     | $                 | 52,466 |                            | $ | 55,197                 |         | $                               | 55,426 |                                     | $ | 53,326       |         | $            | 18,465 
|                                |                                                     |                   |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |        

23

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SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations  Nine Months Ended August 28, 2005  (in thousands)

|                             |                                                     | Sealy Corporation |        | Sealy Mattress Corporation |   | Sealy Mattress Company |         | Combined Guarantor Subsidiaries |        | Combined Non-Guarantor Subsidiaries |   | Eliminations |         | Consolidated |        
|---------------------------- | --------------------------------------------------- | ----------------- | ------ | -------------------------- | - | ---------------------- | ------- | ------------------------------- | ------ | ----------------------------------- | - | ------------ | ------- | ------------ | -------
|Net sales                    |                                                     | $                 |       |                            | $ |                       |         | $                               | 47,585 |                                     | $ | 859,942      |         | $            | 213,731
|Costs and expenses:          |                                                     |                   |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |        
|                             | Cost of goods sold                                  |                   |        |                           |   |                        |        |                                 |        | 28,184                              |   |              | 465,437 |              |        
|                             | Selling, general and administrative                 |                   |        | 6                          |   |                        |        |                                 |        | 4,750                               |   |              | 271,144 |              |        
|                             | Amortization of intangibles                         |                   |        |                           |   |                        |        |                                 |        |                                    |   |              | 217     |              |        
|                             | Royalty (income) expense, net                       |                   |        |                           |   |                        |        |                                 |        |                                    |   |              | (11,484 | )            |        
|                             |                                                     |                   |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |        
|Income from operations       |                                                     |                   | (6     | )                          |   |                       |         |                                 | 14,651 |                                     |   | 134,628      |         |              | 15,669 
|                             | Interest expense                                    |                   |        | 5,923                      |   |                        | 279     |                                 |        | 52,258                              |   |              | (246    | )            |        
|                             | Other (income) expense                              |                   |        |                           |   |                        |        |                                 |        | 6,248                               |   |              | (13     | )            |        
|                             | Income from equity investees                        |                   |        | (57,067                    | ) |                        | (57,241 | )                               |        | (53,884                             | ) |              |        |              |        
|                             | Income from non-guarantor equity investees          |                   |        |                           |   |                        |        |                                 |        |                                    |   |              | (5,964  | )            |        
|                             | Capital charge and intercompany interest allocation |                   |        |                           |   |                        |        |                                 |        | (49,272                             | ) |              | 47,223  |              |        
|                             |                                                     |                   |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |        
|Income before income taxes   |                                                     |                   | 51,138 |                            |   | 56,962                 |         |                                 | 59,301 |                                     |   | 93,628       |         |              | 12,636 
|Income tax expense (benefit) |                                                     |                   | (2,172 | )                          |   | (105                   | )       |                                 | 2,060  |                                     |   | 39,744       |         |              | 6,672  
|                             |                                                     |                   |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |        
|Net income                   |                                                     | $                 | 53,310 |                            | $ | 57,067                 |         | $                               | 57,241 |                                     | $ | 53,844       |         | $            | 5,964  
|                             |                                                     |                   |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |        

24

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Cash Flows  Nine Months Ended August 27, 2006  (in thousands)

|                                                    |                                                                                  | Sealy Corporation |        | Sealy Mattress Corporation |   | Sealy Mattress Company |   | Combined Guarantor Subsidiaries |         | Combined Non-Guarantor Subsidiaries |   | Eliminations |         | Consolidated |       
|--------------------------------------------------- | -------------------------------------------------------------------------------- | ----------------- | ------ | -------------------------- | - | ---------------------- | - | ------------------------------- | ------- | ----------------------------------- | - | ------------ | ------- | ------------ | ------
|Net cash provided by (used in) operating activities |                                                                                  | $                 |       |                            | $ |                       |   | $                               | 9,146   |                                     | $ | (22,473      | )       | $            | 10,209
|                                                    |                                                                                  |                   |        |                            |   |                        |   |                                 |         |                                     |   |              |         |              |       
|Cash flows from investing activities:               |                                                                                  |                   |        |                            |   |                        |   |                                 |         |                                     |   |              |         |              |       
|                                                    | Purchase of property, plant and equipment, net                                   |                   |        |                           |   |                        |  |                                 |         | (400                                | ) |              | (15,564 | )            |       
|                                                    | Proceeds from the sale of property, plant, and equipment                         |                   |        |                           |   |                        |  |                                 |         |                                    |   |              | 460     |              |       
|                                                    | Net activity in investment in and advances to (from) subsidiaries and affiliates |                   |        | (73,129                    | ) |                        |  |                                 |         | 49,411                              |   |              | 26,072  |              |       
|                                                    |                                                                                  |                   |        |                            |   |                        |   |                                 |         |                                     |   |              |         |              |       
|                                                    | Net cash provided by (used in) investing activities                              |                   |        | (73,129                    | ) |                        |  |                                 |         | 49,011                              |   |              | 10,968  |              |       
|Cash flows from financing activities:               |                                                                                  |                   |        |                            |   |                        |   |                                 |         |                                     |   |              |         |              |       
|                                                    | Proceeds from issuance of common stock                                           |                   |        | 295,511                    |   |                        |  |                                 |         |                                    |   |              |        |              |       
|                                                    | Dividend                                                                         |                   |        | (131,824                   | ) |                        |  |                                 |         |                                    |   |              |        |              |       
|                                                    | Proceeds from issuance of long-term debt                                         |                   |        |                           |   |                        |  |                                 |         | 440,000                             |   |              |        |              |       
|                                                    | Repayment of existing long-term debt                                             |                   |        | (89,114                    | ) |                        |  |                                 |         | (497,500                            | ) |              |        |              |       
|                                                    | Equity received upon exercise of stock including related excess tax benefits     |                   |        | 3,012                      |   |                        |  |                                 |         |                                    |   |              |        |              |       
|                                                    | Borrowings under revolving credit facilities                                     |                   |        |                           |   |                        |  |                                 |         | 120,600                             |   |              |        |              |       
|                                                    | Repayments on revolving credit facilities                                        |                   |        |                           |   |                        |  |                                 |         | (120,600                            | ) |              |        |              |       
|                                                    | Debt Issuance Cost                                                               |                   |        |                           |   |                        |  |                                 |         | (657                                | ) |              |        |              |       
|                                                    | Other borrowings                                                                 |                   |        |                           |   |                        |  |                                 |         |                                    |   |              | (2,802  | )            |       
|                                                    |                                                                                  |                   |        |                            |   |                        |   |                                 |         |                                     |   |              |         |              |       
|Net cash provided by (used in) financing activities |                                                                                  |                   | 77,585 |                            |   |                       |   |                                 | (58,157 | )                                   |   | (2,802       | )       |              | (8,801
|                                                    |                                                                                  |                   |        |                            |   |                        |   |                                 |         |                                     |   |              |         |              |       
|Effect of exchange rate changes on cash             |                                                                                  |                   |       |                            |   |                       |   |                                 |        |                                     |   |             |         |              | 1,125 
|                                                    |                                                                                  |                   |        |                            |   |                        |   |                                 |         |                                     |   |              |         |              |       
|Change in cash and cash equivalents                 |                                                                                  |                   | 4,456  |                            |   |                       |   |                                 |        |                                     |   | (14,307      | )       |              | (4,497
|Cash and cash equivalents:                          |                                                                                  |                   |        |                            |   |                        |   |                                 |         |                                     |   |              |         |              |       
|                                                    | Beginning of period                                                              |                   |        |                           |   |                        |  |                                 |         | 1                                   |   |              | 25,387  |              |       
|                                                    |                                                                                  |                   |        |                            |   |                        |   |                                 |         |                                     |   |              |         |              |       
|                                                    | End of period                                                                    |                   | $      | 4,456                      |   | $                      |  |                                 | $       | 1                                   |   | $            | 11,080  |              | $     
|                                                    |                                                                                  |                   |        |                            |   |                        |   |                                 |         |                                     |   |              |         |              |       

25

---



SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Cash Flows  Nine Months Ended August 28, 2005  (in thousands)  (unaudited)

|                                                               |                                                                   | Sealy
Corporation
Non-Guarantor
Parent |   | Sealy
Mattress
Corporation |   | Sealy
Mattress
Company |   | Combined
Guarantor
Subsidiaries |         | Combined
Non-Guarantor
Subsidiaries |   | Eliminations |         | Consolidated |        
|-------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------------------- | - | -------------------------- | - | ---------------------- | - | ------------------------------- | ------- | ----------------------------------- | - | ------------ | ------- | ------------ | -------
|Net cash provided by operating activities                      |                                                                   | $                                      |  |                            | $ |                       |   | $                               | 3,860   |                                     | $ | 55,977       |         | $            | 3,964  
|                                                               |                                                                   |                                        |   |                            |   |                        |   |                                 |         |                                     |   |              |         |              |        
|Cash flows from investing activities:                          |                                                                   |                                        |   |                            |   |                        |   |                                 |         |                                     |   |              |         |              |        
|                                                               | Purchase of property, plant and equipment, net                    |                                        |   |                           |   |                        |  |                                 |         | (609                                | ) |              | (18,170 | )            |        
|                                                               | Proceeds from the sale of property, plant and equipment           |                                        |   |                           |   |                        |  |                                 |         |                                    |   |              | 9,800   |              |        
|                                                               | Net activity in investment in and advances to (from) subsidiaries |                                        |   |                           |   |                        |  |                                 |         | 61,954                              |   |              | (64,518 | )            |        
|                                                               |                                                                   |                                        |   |                            |   |                        |   |                                 |         |                                     |   |              |         |              |        
|                                                               | Net cash provided by (used in) investing activities               |                                        |   |                           |   |                        |  |                                 |         | 61,345                              |   |              | (72,888 | )            |        
|Cash flows from financing activities:                          |                                                                   |                                        |   |                            |   |                        |   |                                 |         |                                     |   |              |         |              |        
|Repayments of senior secured term loan                         |                                                                   |                                        |  |                            |   |                       |   |                                 | (60,000 | )                                   |   |             |         |              |       
|Net borrowings under revolving credit facilities               |                                                                   |                                        |  |                            |   |                       |   |                                 | (5,000  | )                                   |   |             |         |              | 9,802  
|Other borrowings                                               |                                                                   |                                        |  |                            |   |                       |   |                                 |        |                                     |   |             |         |              | 7,069  
|Intercompany dividend associated with international reparation |                                                                   |                                        |  |                            |   |                       |   |                                 |        |                                     |   | 26,449       |         |              | (26,449
|Other                                                          |                                                                   |                                        |  |                            |   |                       |   |                                 | (205    | )                                   |   | 148          |         |              |       
|                                                               |                                                                   |                                        |   |                            |   |                        |   |                                 |         |                                     |   |              |         |              |        
|Net cash provided by (used in) financing activities            |                                                                   |                                        |  |                            |   |                       |   |                                 | (65,205 | )                                   |   | 26,597       |         |              | (9,578 
|                                                               |                                                                   |                                        |   |                            |   |                        |   |                                 |         |                                     |   |              |         |              |        
|Effect of exchange rate changes on cash                        |                                                                   |                                        |  |                            |   |                       |   |                                 |        |                                     |   |             |         |              | (427   
|Change in cash and cash equivalents                            |                                                                   |                                        |  |                            |   |                       |   |                                 |        |                                     |   | 9,686        |         |              | (4,454 
|Cash and cash equivalents:                                     |                                                                   |                                        |   |                            |   |                        |   |                                 |         |                                     |   |              |         |              |        
|                                                               | Beginning of period                                               |                                        |   |                           |   |                        |  |                                 |         | 2                                   |   |              | 5,142   |              |        
|                                                               |                                                                   |                                        |   |                            |   |                        |   |                                 |         |                                     |   |              |         |              |        
|                                                               | End of period                                                     |                                        | $ |                           |   | $                      |  |                                 | $       | 2                                   |   | $            | 14,828  |              | $      
|                                                               |                                                                   |                                        |   |                            |   |                        |   |                                 |         |                                     |   |              |         |              |        

26

---





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
Registration Statement on Form S-1 (File No. 333-126280) and related prospectus dated April 6, 2006, and all of our other filings with the SEC from
April 6, 2006 through the date of this report. 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 nearly 90% of our total net sales for the year ended November 27, 2005. In addition to our innerspring bedding, we also produce a variety of specialty bedding products
which are made of materials such as visco-elastic (memory foam) and latex foam.

In
the first quarter of fiscal 2006, we introduced our latest product offerings from the Stearns & Foster lines, followed in the second quarter by the introduction of our newest
line up of Sealy Posturepedic products. The launch of the Posturepedic line, which accounts for approximately one-half of our sales in the United States, will be completed in the fourth
quarter of fiscal 2006. 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 high cost of petroleum products and steel, which affect the cost of our polyurethane foam and polyethylene component parts and our steel
innerspring. During
fiscal 2005 and into the third quarter of fiscal 2006, the cost of these components has continued to remain elevated above their recent historical averages, and we expect these costs to continue at
current levels over the remainder of fiscal 2006.



On April 12, 2006, we completed an initial public offering ("IPO") of our common stock, raising $299.2 million of net proceeds after deducting the
underwriting discount. For a detailed presentation of the sources and uses of cash from the IPO, see Note 2 to our condensed consolidated financial statements, included in Part I, Item 1
herein.

On
a pro forma basis, had the IPO occurred at the beginning of fiscal 2006, our interest expense for the nine months ended August 27, 2006 would have been lower than reported by
approximately $5.0 million. Selling, general and administrative expenses would have been reduced by approximately $0.4 million for the nine month period ended August 27, 2006 due
to the elimination of management fees paid to KKR, partially offset by share-based compensation expense arising from options to purchase our stock granted to certain of our management employees in
connection with the IPO. Interest expense and selling, general and administrative expenses would not have changed for the three months ended August 27, 2006.

27

---



RESULTS OF OPERATIONS



The following table sets forth our summarized results of operations for three months ended August 27, 2006 and August 28, 2005, expressed in
thousands of dollars as well as a percentage of each year's net sales:

|                                       |                            | For the three months ended |        
|-------------------------------------- | -------------------------- | -------------------------- | -------
|
|
|Total net sales                        |                            | $                          | 415,124
|Total cost of goods sold               |                            |                            | 229,941
|                                       |                            |                            |        
|Gross Profit                           |                            |                            | 185,183
|Selling, general and administrative    |                            |                            | 127,207
|Amortization of intangibles            |                            |                            | 144    
|Royalty income, net of royalty expense |                            |                            | (3,830 
|                                       |                            |                            |        
|                                       | Income from operations     |                            |        
|Interest expense                       |                            |                            | 15,981 
|Debt extinguishment and refinancing    |                            |                            | 4,567  
|Other income, net                      |                            |                            | (75    
|                                       |                            |                            |        
|                                       | Income before income taxes |                            |        
|Income tax expense                     |                            |                            | 11,821 
|                                       |                            |                            |        
|                                       | Net Income                 |                            | $      
|                                       |                            |                            |        
|Effective tax rate                     |                            |                            | 28.7   

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

Geographic distribution of sales:

Three Months
Ended:August 27,
2006

August 28,
2005US Domestic

76.7
%
80.1
%International:Canada

10.3

8.7Europe

7.6

6.8Other

5.4

4.4Total

100.0
%
100.0
%


28

---



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

|                                  |                          | For the Three Months Ended: |             
|--------------------------------- | ------------------------ | --------------------------- | ------------
|
|
|Total Domestic (US Dollars):      |                          |                             |             
|                                  | Total net sales          |                             | $           
|                                  | Total cost of goods sold |                             |             
|                                  |                          |                             |             
|                                  |                          | Gross profit                |             
|Total International (US Dollars): |                          |                             |             
|                                  | Total net sales          |                             |             
|                                  | Total cost of goods sold |                             |             
|                                  |                          |                             |             
|                                  |                          | Gross profit                |             
|Canada:                           |                          |                             |             
|                                  | US Dollars:              |                             |             
|                                  |                          | Total net sales             |             
|                                  |                          | Total cost of goods sold    |             
|                                  |                          |                             |             
|                                  |                          |                             | Gross profit
|                                  | Canadian Dollars:        |                             |             
|                                  |                          | Total net sales             |             
|                                  |                          | Total cost of goods sold    |             
|                                  |                          |                             |             
|                                  |                          |                             | Gross profit
|Europe:                           |                          |                             |             
|                                  | US Dollars:              |                             |             
|                                  |                          | Total net sales             |             
|                                  |                          | Total cost of goods sold    |             
|                                  |                          |                             |             
|                                  |                          |                             | Gross profit
|                                  | Euros:                   |                             |             
|                                  |                          | Total net sales             |             
|                                  |                          | Total cost of goods sold    |             
|                                  |                          |                             |             
|                                  |                          |                             | Gross profit
|Other International (US Dollars): |                          |                             |             
|                                  | Total net sales          |                             |             
|                                  | Total cost of goods sold |                             |             
|                                  |                          |                             |             
|                                  |                          | Gross profit                |             



Net Sales.Our net sales for the quarter ended August 27, 2006, were $415.1 million, an increase of
$25.1 million, or 6.4% from the quarter ended August 28, 2005. Total unit sales for the quarter increased 1.3% over the comparable prior year period. Total domestic net sales were
$318.4 million for the third quarter of fiscal 2006 compared to $312.2 million for the third quarter of fiscal 2005. The domestic net sales increase of $6.2 million was
attributable to a 5.9% increase in average unit selling price, partially offset by a 3.7% decrease in volume. The decrease in volume is primarily attributable to

29

---



the
impact of our customers transitioning to the new Posturepedic product line as they replace existing inventories and existing floor models. Because the core Posturepedic product line represents
over half our sales, we expect the impact of this transition to continue into the fourth quarter. The most significant change in the line is that it now complies with federal fire safety standards
that go into effect on July 1, 2007 for all mattress manufacturers. In 2007, we will re-merchandise the promotional line to comply with these new federal standards. Rapid growth in
our promotional and specialty bedding lines, which we define as those products utilizing cores made of foam or other materials rather than innersprings, has partially offset declines due to the
transition. The increase in average unit selling price is primarily due to price increases announced in November 2005 to offset the effects of rising raw material costs and the growth of
specialty product lines which carry significantly higher prices. This increase was partially offset by a shift in the mix of sales to include a higher volume of sales of our promotional products, such
as our 125th Anniversary products, which have a lower average unit selling price, and a higher volume of Posturepedic floor samples sales, which are sold at a discount. Total
international sales were $96.7 million in the third quarter of fiscal 2006 compared to $77.8 million in the third quarter of fiscal 2005, an increase of $18.9 million, or 24.3%.
Excluding the effects of foreign exchange rates, total international sales increased 18.9%. In our Canadian market, local currency sales gains of 15.3% translated into gains of 25.6% in US dollars.
Local currency sales gains in our Canadian market were driven by a 15.1% increase in unit volume and 9.2% increase in average unit selling price. In our European market, local currency sales gains of
13.4% translated into an increase of 17.6% in US dollars. Local currency sales gains in the European market were attributable to a 10.2% increase in unit volume driven primarily by increased sales of
latex bed cores to other manufacturers and a 2.9% increase in average unit selling price. Other international sales gains were primarily due to volume gains in Mexico and Argentina.

Gross Profit.Our gross profit for the quarter was $185.2 million, an increase of $9.2 million over the
comparable prior year period. As a percentage of net sales, gross profit decreased 0.5 percentage points to 44.6%. This decrease (as a percentage of net sales) was due primarily to a decline in
our domestic gross profit margin percentage, and an increase in the mix of international sales despite improvements in international gross margin. Domestic gross profit increased $1.3 million
to $148.1 million, which, as a percentage of sales, represented a decrease of 0.5 percentage points to 46.5% of net sales. This decrease was driven by an increase in floor sample
discounts associated with the transition to our new Posturepedic line and an increase in the sales mix of lower margin promotional bedding, partially offset by price increases and improved
manufacturing efficiencies. The margin improvement from the 5.9% increase in average unit selling price was partially offset by increases in the cost of materials. On a per unit basis, material costs
increased 9.3% relative to the third quarter of 2005 due primarily to increased foam and packaging costs. Gross profit for the international business increased $7.9 million to
$37.1 million, which represented an increase of 0.9 percentage points to 38.4% of net sales. This increase is primarily due to a decrease in material costs in Canada resulting from
favorable exchanges rates on imported raw materials.

Selling, General, Administrative.Our selling, general, and administrative expense as a percent of net sales was 30.6% and
30.2% for the quarters ended August 27, 2006 and August 28, 2005, respectively, an increase of 0.4 percentage points. This increase is primarily due to $3.5 million of
higher promotional expenses in the U.S. associated with the roll out of our new Posturepedic product line, and higher national advertising costs. In addition, the three month period ending
August 28, 2005 included a $2 million gain on the disposal of two former facilities.

Royalty income, net of royalty expense.Our royalty income, net of royalty expenses, for the three months ended
August 27, 2006 was $3.8 million, up slightly compared with the three months ended August 28, 2005, with respect to both domestic and international royalty revenue.

30

---



Interest Expense.Our interest expense for the third quarter of fiscal 2006 decreased $3.3 million from the prior year
period to $16.0 million, primarily due to lower debt levels resulting from $86 million in voluntary prepayments of our senior term debt since May 29, 2005, as well as the
retirement of the PIK Notes and a portion of the 8.25% Senior Subordinated Notes in the second quarter of fiscal 2006 using proceeds from the IPO. These reductions were partially offset by slightly
higher borrowing costs. Our weighted average borrowing costs for the third quarter of fiscal 2006 and 2005 were 7.8% and 7.7%, respectively. The increase in our borrowing cost was due to higher
interest rates on the variable rate component of our floating rate debt.

Debt Extinguishment and Refinancing Expenses.During the three months ended August 27, 2006, we incurred
$4.6 million of debt extinguishment costs consisting of $0.5 million of cash expenses and $4.1 million of non-cash charges related to the refinancing of our senior
secured term loans.

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 three months ended August 27, 2006 is approximately 28.7% compared to 37.9% for the three
months ended August 28, 2005. The effective rate for the fiscal 2006 period is primarily impacted by recognition of benefits of approximately $2.4 million from a reduction in our income
tax reserve as a result of the elimination of certain federal and state tax exposures and approximately $1.0 million from the reduction of the valuation allowance on capital loss carry-forwards
due to the availability of capital gains.



The following table sets forth our summarized results of operations for nine months ended August 27, 2006 and August 28, 2005, expressed in
thousands of dollars as well as a percentage of each year's net sales:

|                                                    |                                                                                    | For the nine months ended |          
|--------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------- | ---------
|
|
|Total net sales                                     |                                                                                    | $                         | 1,187,571
|Total cost of goods sold                            |                                                                                    |                           | 657,115  
|                                                    |                                                                                    |                           |          
|Gross Profit                                        |                                                                                    |                           | 530,456  
|Selling, general and administrative                 |                                                                                    |                           | 373,922  
|Expenses associated with IPO                        |                                                                                    |                           | 28,510   
|Amortization of intangibles                         |                                                                                    |                           | 399      
|Royalty income, net of royalty expense              |                                                                                    |                           | (11,225  
|                                                    |                                                                                    |                           |          
|                                                    | Income from operations                                                             |                           |          
|Interest expense                                    |                                                                                    |                           | 52,610   
|Debt extinguishment and refinancing                 |                                                                                    |                           | 9,862    
|Other expense, net                                  |                                                                                    |                           | (641     
|                                                    |                                                                                    |                           |          
|                                                    | Income before income taxes and cumulative effect of change in accounting principle |                           |          
|Income taxes                                        |                                                                                    |                           | 24,266   
|                                                    |                                                                                    |                           |          
|                                                    | Income before cumulative effect of change in accounting principle                  |                           |          
|Cumulative effect of change in accounting principle |                                                                                    |                           | 287      
|                                                    |                                                                                    |                           |          
|Net Income                                          |                                                                                    | $                         | 52,466   
|                                                    |                                                                                    |                           |          
|Effective tax rate                                  |                                                                                    |                           | 31.5     

31

---



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



Nine Months Ended:August 27,
2006

August 28,
2005US Domestic

77.8
%
79.9
%International:Canada

9.9

8.1Europe

7.1

7.1Other

5.2

4.9Total

100.0
%
100.0
%


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

|                                  |                          | For the Nine Months Ended: |             
|--------------------------------- | ------------------------ | -------------------------- | ------------
|
|
|Total Domestic (US Dollars):      |                          |                            |             
|                                  | Total net sales          |                            | $           
|                                  | Total cost of goods sold |                            |             
|                                  |                          |                            |             
|                                  |                          | Gross profit               |             
|Total International (US Dollars): |                          |                            |             
|                                  | Total net sales          |                            |             
|                                  | Total cost of goods sold |                            |             
|                                  |                          |                            |             
|                                  |                          | Gross profit               |             
|Canada:                           |                          |                            |             
|                                  | US Dollars:              |                            |             
|                                  |                          | Total net sales            |             
|                                  |                          | Total cost of goods sold   |             
|                                  |                          |                            |             
|                                  |                          |                            | Gross profit
|                                  | Canadian Dollars:        |                            |             
|                                  |                          | Total net sales            |             
|                                  |                          | Total cost of goods sold   |             
|                                  |                          |                            |             
|                                  |                          |                            | Gross profit
|Europe:                           |                          |                            |             
|                                  | US Dollars:              |                            |             
|                                  |                          | Total net sales            |             
|                                  |                          | Total cost of goods sold   |             
|                                  |                          |                            |             
|                                  |                          |                            | Gross profit
|                                  | Euros:                   |                            |             
|                                  |                          | Total net sales            |             
|                                  |                          | Total cost of goods sold   |             
|                                  |                          |                            |             
|                                  |                          |                            | Gross profit
|Other International (US Dollars): |                          |                            |             
|                                  | Total net sales          |                            |             
|                                  | Total cost of goods sold |                            |             
|                                  |                          |                            |             
|                                  |                          |                            | Gross profit
|                                  |                          |                            |             

32

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Net Sales.Our net sales for the nine months ended August 27, 2006, were $1,187.6 million, an increase of
$82.7 million, or 7.5% from the nine months ended August 28, 2005. Total unit sales for the period ended August 27, 2006 were 0.2% above the comparable prior year period. Total
domestic net sales were $924.4 million for the first nine months of 2006 compared to $883.2 million for the first nine months of fiscal 2005. The domestic net sales increase of
$41.2 million was attributable to a 8.3% increase in average unit selling price, partially offset by a 3.3% decrease in volume. The decrease in volume is primarily attributable to the impact of
our customers transitioning to our new Posturepedic and Stearns & Foster models, partially offset by the strong growth of our promotional and specialty lines, which we define as those products
utilizing cores made of foam or other materials rather than innersprings. Because the core Posturepedic and Stearns & Foster product lines represent over two-thirds of our sales, we
expect this transition to continue until the fourth quarter. The most significant change in the lines is that the new products comply with federal fire safety standards that go into effect
July 1, 2007 for all mattress manufacturers. In 2007, we will re-merchandise the promotional line to comply with these new federal standards. The increase in average unit selling
price is primarily due to price increases announced in November 2005 to offset the effects of rising raw material costs, and due to improved sales mix from our specialty bedding product lines,
partially offset by a greater portion of sales coming from lower priced promotional units. Total international sales were $263.1 million in the first nine months of fiscal 2006 compared to
$221.7 million in the first nine months of fiscal 2005, an increase of $41.4 million, or 18.7%. Excluding
the effect of currency fluctuations, international sales increased 16.3%. In our Canadian market, local currency sales gains of 21.0% translated into gains of 29.9% in US Dollars. Local currency sales
gains in our Canadian market were driven by a 12.2% increase in volume, combined with a 7.8% increase in average unit selling price resulting from sales mix improvement and the November 2005
price increases. In our European market, local currency sales gains of 6.0% translated into an increase of 6.4% in US dollars. Local currency sales gains in the European market were attributable to a
14.7% increase in volume driven by increased sales of latex bed cores to other manufacturers, offset by a 7.6% decline in average unit selling price associated with the increased sales of lower-priced
latex bed cores. Other international sales gains were primarily due to volume gains in Mexico and Argentina.

Gross Profit.Our gross profit for the nine months ended August 27, 2006 was $530.5 million, an increase of
$38.4 million over the comparable prior year period. As a percentage of net sales, gross profit increased 0.2 percentage points to 44.7%. This increase (as a percentage of net sales) is
due primarily to improvements in international operations. Domestic gross profit increased $17.4 million to $428.4 million or 46.3% of net sales, which is a decrease of
0.2 percentage points of net sales from the prior year period. This decrease was attributable to higher floor sample discounts associated with the transition to the new product lines and an
increase in the sales mix of lower margin promotional bedding, partially offset by the higher average unit selling price and improved manufacturing efficiencies. On a per unit basis, material costs
increased 11.5% relative to the first nine months of 2005 due primarily to increased foam and packaging costs. On a per unit basis, all other manufacturing costs increased 4.0%. Gross profit for the
international business increased 2.2 percentage points to 38.8% of net sales. This increase is primarily due to higher average unit selling prices in Canada, as well as in our South American
markets, partially offset by decreased average unit selling prices in Europe due to increased sales of lower-priced latex bed cores, which carry a lower unit price.

Selling, General, Administrative.Our selling, general, and administrative expense as a percent of net sales was 31.5% and
30.5% for the nine months ended August 27, 2006 and August 28, 2005, respectively, an increase of 1.0 percentage point. This increase is primarily due to $13.1 million of
higher promotional expenses in the U.S. associated with the roll out of our new Posturepedic and Stearns & Foster product lines, higher advertising costs, and higher volume driven variable
expenses such as cooperative advertising costs and delivery costs in both the domestic and international

33

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operations.
In addition, the nine month period ending August 28, 2005 included a $2 million gain on the disposal of two former facilities.

Expenses Associated With IPO.We incurred $28.5 million of expenses directly related to the IPO in the second quarter
2006, which included approximately $17.5 million of transaction-related bonuses paid to management employees, and $11.0 million paid to KKR for the termination of the Management Services
Agreement.

Royalty income, net of royalty expense.Our royalty income, net of royalty expenses, for the nine months ended August 27, 2006
increased $1.3 million to $11.2 million from the nine months ended August 28, 2005, primarily due to increased sales to licensees.

Interest Expense.Our interest expense for the first nine months of fiscal 2006 decreased $6.8 million from the prior
year period to $52.6 million, primarily due to lower debt levels resulting from $130 million in voluntary prepayments of our senior term debt since November 28, 2004, as well as
the retirement of the PIK Notes and a portion of the 8.25% Senior Subordinated Notes in the second quarter of fiscal 2006 using proceeds from the IPO. These reductions were partially offset by
slightly higher borrowing costs. Our weighted average borrowing costs for the first nine months of fiscal 2006 and 2005 were 7.7% and 7.4%, respectively. The increase in our borrowing cost was due to
higher interest rates on the unhedged variable rate of our floating rate debt, largely offset by lower interest rates on the fixed component of our senior secured term debt interest rate as a result
of the April 2005 amendment of our senior secured credit agreement and the related extinguishment of our senior unsecured term loan.

Debt Extinguishment and Refinancing Expenses.During the nine months ended August 27, 2006 we incurred
$9.9 million of debt extinguishment costs consisting of $3.6 million of cash expenses and $1.7 million of non-cash charges related to the extinguishment of debt
retired using proceeds from the IPO as well as $0.5 million of cash expenses and $4.1 million of non-cash charges related to the refinancing of our senior term debt in
August, 2006. During the nine months ended August 28, 2005, we incurred $6.2 million of debt extinguishment costs consisting of $2.8 million of cash expenses and
$3.4 million of non-cash charges related to the refinancing of our senior term debt in April, 2005.

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 nine months ended August 27, 2006 is approximately 31.5% compared to 46.4% for the nine
months ended August 28, 2005. The effective rate for the fiscal 2006 period was reduced by a benefit of approximately $3.9 million resulting from a reduction in our income tax reserve as
a result of the elimination of certain federal and state tax exposures and approximately $1.0 million from the reduction of the valuation allowance on capital loss carry-forwards due to the
availability of capital gains. Our effective rate for the first nine months of 2005 was significantly increased due to the provision of approximately $7.2 million of income taxes on foreign
earnings repatriated to the United States during fiscal 2005.

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 $20.7 million for the nine months ended August 27, 2006. We expect total 2006 capital expenditures to be approximately
$45 million, including approximately $17.9 million for additional production capacity in the United States and Europe. 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

34

---



inventory
for foreign sourced materials, 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 August 27, 2006, we had
approximately $86.6 million available under our revolving credit facility after taking into account letters of credit issued totaling $32.1 million. Our net weighted average borrowing
cost was 7.7% and 7.4% for the nine months ended August 27, 2006 and August 28, 2005, respectively. The increase in our borrowing cost was due to higher interest rates on the variable
rate component of our floating rate debt, largely offset by lower interest rates on the fixed component of our senior secured term debt interest rate as a result of the April 2005 amendment of
our senior secured credit agreement and the related extinguishment of our senior unsecured term loan. As a result of the IPO completed April 12, 2006, approximately $90.0 million of the
net proceeds were used to retire the Senior Subordinated PIK Notes including accrued interest and prepayment penalties thereon, and approximately $51.6 million was used to repurchase and retire
$47.5 million of the aggregate principal amount outstanding under the 8.25% Senior Subordinated Notes (the "Notes") along with accrued interest and market premiums thereon. In addition, on
August 25, 2006, we amended our senior secured credit agreement which reduced the applicable interest rate margins charged on the senior secured term loans, as discussed below. Due to these
debt reductions, we expect to reduce our annual interest costs by approximately $14.7 million.



As part of the April 2004 recapitalization, we incurred substantial debt, including new senior credit facilities consisting of a $125 million senior
secured revolving credit facility with a six-year maturity, and a $560 million senior secured term loan facility with an eight-year maturity. We also borrowed
$100 million under a senior unsecured term loan, due in 2013, and issued $390 million aggregate principal amount of Notes.

On
April 14, 2005, we amended our senior secured credit agreement to provide for an additional $100 million of senior secured term borrowings. The proceeds from the
additional borrowing were used to repay the $100 million outstanding under our senior unsecured term loan, effectively reducing the interest rate on this amount of debt by 275 basis points. The
amendment also reduced the applicable interest rate margin charged on our senior secured term loan, provided certain financial leverage ratio tests are met. This amendment, along with a prior
amendment on August 6, 2004, reduced the applicable margin by a total of 50 basis points.

Since
the recapitalization and through August 24, 2006, we repaid $220 million of the original $560 million outstanding under our senior secured term loan. 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. In connection with the amendment, we incurred a charge of $4.6 million during the three months ended
August 27, 2006, including a non-cash charge of $4.1 million for the write-off of deferred finance charges and $0.5 million of related fees and expenses.
We expect this amendment to reduce our annual interest cost by approximately $1.9 million, in addition to a reduction of approximately $0.8 million in the amortization of related debt
issuance costs.

Future
principal debt payments are expected to be paid out of cash flows from operations and borrowings on our revolving credit facility. As of October 9, 2006, we have
$2.7 million outstanding under our revolving credit facility.

35

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Borrowings
under our new senior secured credit facilities bear interest at our choice of the Eurodollar rate or adjusted base rate ("ABR"), in each case, plus an applicable margin,
subject to adjustment based on a pricing grid. 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 August 27, 2006, we estimate that we will not have
to make a prepayment on these facilities since we expect our leverage ratio to be less than 3.25 by year end.

On
June 3, 2004, we entered into an interest rate swap agreement effective July 6, 2004 effectively fixing the floating portion of the interest rate at 3.725% on
$200 million of the outstanding balance under the senior secured term loan through November 2005, declining to $150 million from December 2005 through November 2007.
Concurrent with the refinancing of our senior secured term loan, we
de-designated $13 million of this swap as a hedging instrument and recorded a reduction of interest expense of $0.2 million related to this de-designation. To
retain the designation of this swap as a hedging instrument, we must select the Eurodollar rate on the hedged portion of the senior secured term loan during the term of the swap.

The
outstanding Notes consist of $342 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 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 fourth quarter of fiscal 2005, we repurchased $0.5 million principal amount of the Notes. During the second quarter of fiscal 2006, we used a portion of the proceeds from the
IPO to retire approximately $47.5 million aggregate principal amount of the Notes. We expect this retirement to reduce our annual interest cost by approximately $3.9 million, including a
reduction of approximately $0.2 million in the amortization of debt issuance costs related to the Notes.

On
July 16, 2004, we issued $75.0 million aggregate principal amount of senior subordinated pay-in-kind (PIK) notes to certain institutional
investors in transactions exempt from registration under the Securities Act of 1933. The PIK notes accrue interest in-kind at 10% per year, compounded semi-annually, and mature
on July 15, 2015. On April 21, 2006, we used approximately $90 million of the proceeds from the IPO to redeem the entire outstanding principal amount of the PIK notes and pay
accrued interest thereon through the date of the redemption, along with a related redemption premium. We expect this redemption to reduce our annual interest cost by approximately $8.9 million.

At
August 27, 2006 we were in compliance with the covenants contained within our senior credit agreements and indenture governing the 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.

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 August 27, 2006. We will be required to make scheduled principal payments of approximately $15.4 million during the next twelve
months, with $1.4 million for the $140 million tranche of senior secured term debt 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.

36

---



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. 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 through 2015, 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.



On October 11, 2006, our Board of Directors declared a cash dividend in the amount of $0.075 per share of common stock payable on November 1, 2006
to stockholders of record as of October 23, 2006. This will result in a dividend distribution of approximately $6.8 million to be paid during the fourth quarter of fiscal 2006.



The following table summarizes our changes in cash:

Nine Months Ended:August 27, 2006

August 28, 2005(in thousands)Statement of Cash Flow Data:Cash flows provided by (used in):Operating activities

$
(3,118
)
$
63,801Investing activities


(20,180
)

(9,956
)Financing activities


7,825


(48,186
)Effect of exchange rate changes on cash


1,125


(427
)Change in cash and cash equivalents


(14,348
)

5,232Cash and cash equivalents:Beginning of period


36,554


22,779End of period

$
22,206

$
28,011


Nine Months Ended August 27, 2006 Compared With Nine Months Ended August 28, 2005

Cash Flows from Operating Activities.Our cash flow from operations decreased $66.9 million to a $3.1 net use of cash
for the nine months ended August 27, 2006, compared to a $63.8 million net source of cash for the nine months ended August 28, 2005. Contributing to this decline were
approximately $30.8 million of cash expenses and interest payments associated with the IPO and related debt extinguishments, approximately $16.3 million lower cash payments for taxes in
the prior year period due to operating losses incurred in fiscal 2004, with the remaining decline primarily the result of changes in
working capital and timing of various vendor payments, partially offset by lower cash payments for interest in the first nine months of fiscal 2006 as compared to the first nine months of fiscal 2005
due to a larger initial interest payment on the Notes made in December, 2004.

Cash Flows from Investing Activities.Our cash flows used in investing activities increased approximately
$10.2 million from the first nine months of fiscal 2005 primarily due to $9.8 million of proceeds from the sale of three of our former manufacturing facilities received in the first nine
months of fiscal 2005 as compared with only $0.5 million of proceeds received in the first nine months of fiscal

37

---



2006,
and $0.9 million higher capital expenditures for the first nine months of fiscal 2006 as compared with the prior year period.

Cash Flows from Financing Activities.Our cash flow from financing activities for the nine months ended August 27,
2006 increased $56.0 million to a net source of $7.8 million from a net use of $48.2 million for the nine months ended August 28, 2005. During the second quarter of 2006, a
portion of the $295.5 million of IPO proceeds was used to make a $125 million dividend payment and to retire $139.3 million of debt. An additional $6.8 million dividend
payment was made in the third quarter of 2006. Notwithstanding debt retired with IPO proceeds, debt repayments, net of borrowings, were approximately $26.5 million higher during the nine months
ended August 28, 2005 due to $60 million of voluntary prepayments on the senior term debt made in the prior year period.



Significant judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax provision. Despite our belief that
our tax return positions are fully supportable, we have established reserves where we believe that certain tax positions are likely to be challenged and we may not fully prevail in overcoming these
challenges. We may adjust these reserves as relevant circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. In addition, the
FASB recently issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109" ("FIN 48"), as described in
Note 11 to the Condensed Consolidated Financial Statements, Part I, Item 1, included herein. We are still assessing the potential impact of adopting this interpretation. Our tax expense
includes the impact of reserve positions and changes to reserves that we consider appropriate, as well as related interest. While the Company is currently undergoing examinations of certain of its
corporate income tax returns by tax authorities, no issues have been presented to the Company and the Company believes that such audits will not result in assessment and payment of taxes related to
these positions during the one year following August 27, 2006. We also cannot predict when or if any other future tax payments related to these tax positions may occur. Therefore, substantially
all of the reserves for these positions are classified as noncurrent liabilities in our balance sheet.



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 new senior subordinated notes also requires us to meet a fixed charge coverage ratio in order to incur additional indebtedness,
subject to certain exceptions. We are currently in compliance with all debt covenants. The specific covenants and related definitions can be found in the applicable debt agreements, each of which we
have previously filed with the Securities and Exchange Commission.

The
covenants contained in our senior secured credit facilities are based on what we refer to herein as "Adjusted EBITDA". In the senior secured credit facilities, EBITDA is defined as
net income plus interest, taxes, depreciation and amortization and Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments permitted in calculating
covenant compliance as discussed above. Adjusted EBITDA is presented herein as it is a material component of these covenants. 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 GAAP and do not purport to be alternatives to net income as a measure of operating performance or to cash flows from operating

38

---



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.

The
following table sets forth a reconciliation of net income to EBITDA and EBITDA to Adjusted EBITDA for the three and nine months ended August 27, 2006 and August 28,
2005 (in thousands):

Three months ended

Nine months endedAugust 27,
2006

August 28,
2005

August 27,
2006

August 28,
2005Income before cumulative effect of change in accounting principle

$
29,368

$
26,255

$
52,753

$
53,310Interest cost


15,981


19,308


52,610


59,413Income taxes


11,821


16,025


24,266


46,199Depreciation and amortization


5,632


5,661


16,625


16,379EBITDA

$
62,802

$
67,249

$
146,254

$
175,301Management fees to KKR





525


775


1,539Unusual and nonrecurring losses:IPO expenses








28,510


Post-closing residual plant costs


171


(1,319
)

604


(490
)Non-cash compensation


966


607


3,040


920Debt extinguishment or refinancing charges


4,566





9,862


6,248Other (various)


321


150


751


(653
)Adjusted EBITDA

$
68,826

$
67,212

$
189,796

$
182,865


The
following table reconciles EBITDA to cash flow from operations (in thousands):

Nine Months EndedAugust 27,
2006

August 28,
2005Income before cumulative effect of change in accounting principle

$
52,753

$
53,310Interest


52,610


59,413Income Taxes


24,266


46,199Depreciation & Amortization


16,625


16,379EBITDA


146,254


175,301Adjustments to EBITDA to arrive at cash flow from operations:Interest expense


(52,610
)

(59,413
)Income taxes


(24,266
)

(46,199
)Non-cash charges against (credits to) net income


11,018


30,249Changes in operating assets & liabilities.


(83,514
)

(36,137
)Cash flow from operations

$
(3,118
)
$
63,801




"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,"

39

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"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:



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 include 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.

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 Registration Statement on Form S-1 (File No. 333-126280) and related prospectus dated
April 6, 2006.



Our earnings are affected by fluctuations in the value of our subsidiaries' functional currency as compared to the currencies of our foreign denominated
purchases. Foreign currency forward, swap and

40

---



option
contracts are used to hedge against the earnings effects of such fluctuations. The result of a uniform 10% change in the value of the U.S. dollar relative to currencies of countries in which we
manufacture or sell our products would not be material to our earnings or financial position. This calculation assumes that each exchange rate would change in the same direction relative to the U.S.
dollar.

To
protect against the reduction in value of forecasted foreign currency cash flows resulting from purchases in a foreign currency, we have instituted a forecasted cash flow hedging
program. We hedge portions of our purchases denominated in foreign currencies with forward and option contracts. At August 27, 2006, we had forward contracts to sell a total of 7 million
Canadian dollars and 10 million Mexican pesos with expiration dates ranging from September 15, 2006 through February 15, 2007. At August 27, 2006, the fair value of our net
obligation under the forward contracts was $0.2 million. We do not designate our foreign currency hedges for accounting purposes, therefore all changes in fair value are charged to earnings.



As more fully discussed in Note 12 to our Condensed Consolidated Financial Statements (Part I, Item 1 included herein), we entered into two interest
rate swap agreements associated with debt existing prior to the April 2004 recapitalization. Although the related debt was repaid in connection with the recapitalization, the related swaps
remain in effect and are scheduled to expire in December 2006. Because the first swap converted a portion of our floating rate debt to a fixed rate and a subsequent swap effectively
re-established a floating rate on the same debt, the effect of the two instruments on both cash flows and earnings is largely off-setting. The combined fair value carrying
amount of these swap instruments at August 27, 2006 and November 27, 2005 was a net obligation of $0.5 million and $1.9 million, respectively.

On
June 3, 2004, we entered into an interest rate swap agreement on July 6, 2004 effectively fixing the floating portion of the interest rate at 3.725% on
$200 million of our outstanding balance under the senior secured term loan through November 2005, declining to $150 million through November 2007. On
August 25, 2006, we de-designated $13 million of this swap as a result of the refinancing of our senior secured term loans and reduced interest expense by $0.2 million
related to the de-designation. The fair value of this swap instrument was an asset of $3.4 million at August 27, 2006 and $2.8 million at November 27, 2005.

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

Based
on the unhedged portion of our variable rate debt outstanding at August 27, 2006, a 12.5 basis point increase or decrease in variable interest rates would have an
approximately $0.4 million dollar impact on our annual interest expense.



The cost of our steel innerspring and our polyurethane foam and polyethylene component parts are impacted by volatility in the price of steel and petroleum. We
expect the cost of the components to remain elevated above their recent historical averages, and we expect these costs to continue at current levels or increase further throughout fiscal 2006. Thus
far, we have been able to successfully address these cost pressures through a price increase announced in May of 2004 and November of 2005, and through cost reduction efforts. We do not engage in
commodity hedging programs.

41

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Item 4.Internal Control 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 our principal executive and principal accounting officer, as appropriate to allow timely decisions regarding required disclosure.

In
connection with the evaluation of our disclosure controls and procedures for the year ended November 28, 2004, and in connection with observations by our independent registered
public accountants identified in their 2004 audit of our consolidated financial statements for fiscal 2004, management identified certain deficiencies in our financial statement close process
primarily related to the review and approval process for various account analyses and reserve/accrual calculations and the consolidated financial/balance sheet review process. Management discussed
these deficiencies with our Audit Committee and we are currently addressing these deficiencies. Beginning with the financial statement close process for the first fiscal quarter of 2005, we instituted
an enhanced management review and approval process for various reserves and accruals. In addition, we enhanced our balance sheet review procedures for the individual plant locations. The Company
continued these enhanced procedures for the financial statement close process for the quarter ended August 27, 2006. While the Company made progress during fiscal 2005 and continued this
progress through the first nine months of 2006 as it relates to the overall control of the financial statement close process, management believes that such deficiencies have not been sufficiently
remediated to conclude that significant deficiencies no longer exist. We expect to continue to improve the financial statement close process in 2006 as we continue to prepare for compliance with
Section 404 of the Sarbanes-Oxley Act of 2002 for fiscal 2007.

In
connection with the evaluation of our disclosure controls and procedures for the period ended May 28, 2006, management identified unremediated deficiencies in our internal
controls over financial reporting, as noted above, that resulted in the correction of an error in a footnote disclosure in the financial statements as of and for the three and six months ended May 28,
2006. In the third quarter of fiscal 2006, the Company changed the process for preparing the guarantor/non-guarantor footnote disclosures to include requirements for more detailed documentation and
support for adjusting and eliminating amounts in the worksheets used to prepare the footnote disclosure. Further, the Company has implemented a more detailed review process that includes review of
supporting documentation by the financial reporting group as well as additional analytical comparisons.

There
were no other changes in our internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the third quarter of fiscal 2006
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

See Note 14 to the Condensed Consolidated Financial Statements, Part I, Item 1 included herein.

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

On
April 12, 2006, we completed our initial public offering (the "IPO") of 32,200,000 shares of common stock (the "IPO Shares"). We sold 20,000,0000 shares (the "Company Shares")
at a price to the public of $16.00 per share and selling stockholders sold 12,200,000 shares (the "Selling Stockholder Shares") at a price to the public of $16.00 per share. The IPO Shares were
registered under the Securities Act of 1933, as amended, on a registration statement on Form S-1 (Registration No. 333-126280). The registration statement was
declared effective by the Securities and Exchange Commission on April 6, 2006. Citigroup Global Markets Inc., Goldman, Sachs & Co, J.P. Morgan Securities Inc. and Banc of
America Securities LLC served as joint book-running managers. The net proceeds to us from the sale of the Company Shares, after deducting the underwriting discount, were approximately
$299.2 million. The underwriters received a discount of $1.04 per share on the Company Shares, for a total underwriting discount of $20.8 million. During the second and third quarters,
we have used the net proceeds from the IPO as follows: (i) on April 12, 2006, $125 million was distributed as a cash dividend to stockholders of record as of April 6, 2006,
immediately prior to the IPO; (ii) on April 21, 2006, approximately $90.0 million was paid to redeem our Senior Subordinated PIK Notes, including accrued interest and prepayment
penalties thereon; (iii) on April 26,
2006, we completed a series of open market transactions whereby approximately $51.6 million was paid to repurchase and retire approximately $47.5 million aggregate principal amount of
the our Senior Subordinated Notes (the "Notes") due in 2014, at market prices ranging from 105.25% to 105.94% of par, along with accrued interest thereon; (iv) on April 12, 2006 we paid
$11.0 million to KKR to terminate the management services agreement with them; (v) we paid approximately $17.5 million to members of management for transaction-related bonuses;
and (vi) approximately $3.7 million has been used for other costs associated with the IPO. We did not receive any proceeds from the sale by the selling stockholders of the Selling
Stockholder Shares.

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

Item 3.Defaults Upon Senior Securities

None

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

None

Item 5.Other Information

None

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Item 6.Exhibits

|10.1 |  | Third Amended and Restated Credit Agreement, dated August 25, 2006 (incorporated herein by reference to Sealy Corporation Report on Form 8-K (File No. 1-8738) filed on August 30, 2006).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.2 |  | Amended Employment Agreement, dated September 12, 2006 by and between Sealy Corporation and James B. Hirshorn.                                                                           
|10.3 |  | Employment Agreement, dated September 12, 2006 by and between Sealy Corporation and Jeffrey C. Ackerman.                                                                                 
|31.1 |  | Chief Executive Officer Certification of the Quarterly Financial Statements.                                                                                                             
|31.2 |  | Principal Accounting 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/DAVID J. MCILQUHAMDavid J. McIlquham |  | Chairman and Chief Executive Officer
(Principal Executive Officer)                                        
|/s/JAMES B. HIRSHORNJames B. Hirshorn   |  | Senior Executive Vice President Finance, Operations, Research & Development
(Principal Accounting Officer)

Date:
October 11, 2006

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