<PAGE>   1
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


  [ X ]            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

            For the quarterly period ended:       May 31, 1998
                                                  ------------
                                       OR
  [   ]            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 1-8738
                               ------


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


              DELAWARE                                      36-3284147
              --------                                      ----------
  (State or other jurisdiction of                         (I.R.S. Employer
  incorporation or organization)                         Identification No.)
               



  520 PIKE STREET,  SEATTLE, WASHINGTON                            98101
  -------------------------------------                      -----------------
 (Address of principal executive offices)*                      (Zip Code)


        Registrant's telephone number, including area code (206) 625-1233
                                                           ---------------

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 and Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.           Yes   X   No
                                                 -----   -----


The number of shares of the registrant's common stock outstanding as of July 6,
1998 was 30,344,756.2711.


*  All Corporate and administrative services are provided by Sealy, Inc., 10th
   Floor Halle Building, 1228 Euclid Avenue, Cleveland, Ohio 44115.


================================================================================

<PAGE>   2

<TABLE>
<CAPTION>



                          PART I. FINANCIAL INFORMATION
                          -----------------------------

Item 1 - Financial Statements
                                                  SEALY CORPORATION
                                     CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                     (UNAUDITED)


                                                                                  QUARTER ENDED           QUARTER ENDED
                                                                                   MAY 31, 1998           JUNE 1, 1997
                                                                                   ------------           ------------
                                                                                    

<S>                                                                                <C>                      <C>      
Net sales                                                                          $ 213,572                $ 180,625
                                                                                   ---------                ---------



Costs and expenses:

   Cost of goods sold                                                                121,167                  100,432

   Selling, general and administrative                                                74,033                   60,387

   Amortization of intangibles                                                         3,336                    3,198

   Interest expense, net                                                              17,517                    8,206
                                                                                   ---------                ---------

                                                                                     216,053                  172,223
                                                                                   ---------                ---------


(Loss) income before income tax
         and extraordinary item                                                       (2,481)                   8,402

                                                                                        (831)                   5,120
                                                                                   ---------                ---------
Income tax (benefit) expense

         (Loss) income before
                   extraordinary item                                                 (1,650)                   3,282



Extraordinary item - loss from early
   extinguishment of debt (net of income
    tax benefit of $57)                                                                   82                     --
                                                                                   ---------                ---------
         Net (loss) income                                                         $  (1,732)               $   3,282
                                                                                   =========                =========



(Loss)/earnings per common share - basic:

   (Loss) income before extraordinary item                                         $   (0.06)               $    0.11
   Extraordinary item                                                                     --                       --
                                                                                   ---------                ---------
   Net (loss) income                                                               $   (0.06)               $    0.11
                                                                                   =========                =========




(Loss)/earnings per common share - diluted:

   (Loss) income before extraordinary item                                         $   (0.06)               $    0.11
   Extraordinary item                                                                     --                       --
                                                                                   ---------                ---------
   Net (loss) income                                                               $   (0.06)               $    0.11
                                                                                   =========                =========


Weighted average number of common shares outstanding:
         Basic                                                                        30,345                   29,934
         Diluted                                                                      30,345                   30,276



</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       2
<PAGE>   3
<TABLE>
<CAPTION>


                                SEALY CORPORATION
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)


                                                                                       SIX MONTHS              SIX MONTHS
                                                                                          ENDED                   ENDED
                                                                                      MAY 31, 1998             JUNE 1, 1997
                                                                                      ------------            -------------

<S>                                                                                     <C>                     <C>      
Net sales                                                                               $ 422,831               $ 349,529
                                                                                        ---------               ---------



Costs and expenses:

   Cost of goods sold                                                                     242,651                 197,130

   Selling, general and administrative                                                    161,630                 115,961

   Amortization of intangibles                                                              6,498                   6,678

   Interest expense, net                                                                   33,045                  15,006
                                                                                        ---------               ---------
                                                                                          443,824                 334,775
                                                                                        ---------               ---------


(Loss) income before income tax and
   extraordinary item                                                                     (20,993)                 14,754
Income tax (benefit) expense                                                               (1,578)                  8,284
                                                                                        ---------               ---------

         (Loss) income before
                  extraordinary item                                                      (19,415)                  6,470



Extraordinary item - loss from early
   extinguishment of debt (net of income
    tax benefit of $9,693 and $1,353, respectively)                                        14,537                   2,030
                                                                                        ---------               ---------
         Net (loss) income                                                              $ (33,952)              $   4,440
                                                                                        =========               =========



(Loss)/earnings per common share - basic:

   (Loss) income before extraordinary item                                              $   (0.64)              $    0.22
   Extraordinary item                                                                       (0.48)                  (0.07)
                                                                                        ---------               ---------
   Net (loss) income                                                                    $   (1.12)              $    0.15
                                                                                        =========               =========



(Loss)/earnings per common share - diluted:

   (Loss) income before extraordinary item                                              $   (0.64)              $    0.21
   Extraordinary item                                                                       (0.48)                  (0.06)
                                                                                        ---------               ---------
   Net (loss) income                                                                    $   (1.12)              $    0.15
                                                                                        =========               =========


Weighted average number of common shares outstanding:
         Basic                                                                             30,345                  29,830
         Diluted                                                                           30,345                  30,171

</TABLE>

     See accompanying notes to condensed consolidated financial statements.



                                       3
<PAGE>   4
<TABLE>
<CAPTION>

                                SEALY CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

                                                                                   MAY 31,                NOVEMBER 30,
                                                                                    1998                      1997
                                                                                 -----------              -----------

ASSETS

Current assets:

<S>                                                                               <C>                      <C>      
   Cash and cash equivalents                                                      $   3,755                $   6,057

   Accounts receivable, less allowance for doubtful
      accounts (1998 - $8,445; 1997 - $7,696)                                       101,759                   93,918

   Inventories                                                                       50,818                   46,007

   Prepaid expenses and deferred taxes                                                9,286                   22,529
                                                                                  ---------                ---------
                                                                                    165,618                  168,511



Property, plant and equipment - at cost                                             184,369                  169,603

Less:  accumulated depreciation                                                     (48,919)                 (43,995)
                                                                                  ---------                ---------
                                                                                    135,450                  125,608

Other assets:

   Goodwill and other intangibles - net of
      accumulated amortization
      (1998 - $70,299; 1997 - $63,801)                                              404,771                  411,269
   Debt issuance costs, net, and other assets                                        37,319                   15,679
                                                                                  ---------                ---------
                                                                                    442,090                  426,948
                                                                                  ---------                ---------
                                                                                  $ 743,158                $ 721,067
                                                                                  =========                =========




LIABILITIES AND STOCKHOLDERS'  (DEFICIT) EQUITY


Current liabilities:

   Current portion of long-term obligations                                       $   4,000                $    --

   Accounts payable                                                                  37,516                   49,676

   Accrued interest                                                                  13,601                    2,038

   Accrued incentives and advertising                                                33,684                   30,704

   Accrued compensation                                                               9,625                   17,771

   Other accrued expenses                                                            24,015                   20,098
                                                                                  ---------                ---------

                                                                                    122,441                  120,287

Long-term obligations                                                               707,021                  330,000

Other noncurrent liabilities                                                         35,463                   35,713

Deferred income taxes                                                                 8,184                   30,001

Stockholders' (deficit) equity:

   Common stock                                                                         303                      299

   Additional paid-in capital                                                       134,414                  257,320

   Retained deficit                                                                (262,012)                 (50,614)

   Foreign currency translation adjustment                                           (2,656)                  (1,939)
                                                                                  ---------                ---------
                                                                                   (129,951)                 205,066
Commitments and contingencies                                                          --                       --
                                                                                  ---------                ---------

                                                                                  $ 743,158                $ 721,067
                                                                                  =========                =========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.




                                       4
<PAGE>   5
<TABLE>
<CAPTION>


                                SEALY CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)
                                                                              SIX MONTHS            SIX MONTHS
                                                                                 ENDED                 ENDED
                                                                             MAY 31, 1998          JUNE 1, 1997
                                                                             ------------          ------------



<S>                                                                           <C>                    <C>       
Net cash used in operating activities                                         $ (14,128)             $  (5,167)
                                                                              ---------              ---------



Investing activities:
   Proceeds from sale of subsidiary                                                --                   35,000
   Proceeds from sale of insulator pad operation assets                            --                    5,150

   Purchase of property and equipment, net                                      (15,531)               (10,584)
                                                                              ---------              ---------
       Net cash (used in) provided by investing activities                      (15,531)                29,566
                                                                              ---------              ---------

Financing activities:

   Treasury stock repurchase                                                   (413,078)                  --

   Proceeds from long-term obligations, net                                     350,872                 69,048

   Equity contributions                                                         121,317                   --

   Dividend                                                                        --                  (99,776)

   Debt issuance costs                                                          (31,754)                (6,130)
                                                                              ---------              ---------
       Net cash provided by (used in) financing activities                       27,357                (36,858)
                                                                              ---------              ---------



Change in cash and cash equivalents                                              (2,302)               (12,459)

Cash and cash equivalents:
   Beginning of period                                                            6,057                 16,619
                                                                              ---------              ---------
   End of period                                                              $   3,755              $   4,160
                                                                              =========              =========





Supplemental disclosures:
-------------------------
                                                                          

Cash paid for:

   Taxes paid, net                                                            $   2,966              $  10,236

   Cash interest paid                                                         $  14,491              $  13,885

Selected noncash items:

   Depreciation                                                               $   5,427              $   6,093

   Issuance of Junior Notes                                                   $  25,000              $    --

   Rollover Equity                                                            $  15,235              $    --




</TABLE>




     See accompanying notes to condensed consolidated financial statements.




                                       5
<PAGE>   6



                                SEALY CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                          SIX MONTHS ENDED MAY 31, 1998


NOTE A - BASIS OF PRESENTATION

      This report covers Sealy Corporation and its subsidiaries (collectively,
the "Company").

      The accompanying unaudited condensed consolidated financial statements
should be read together with the Company's Annual Report on Form 10-K for the
year ended November 30, 1997.

      The accompanying unaudited condensed consolidated financial statements
contain all adjustments which, in the opinion of management, are necessary to
present fairly the financial position of the Company at May 31, 1998, and its
results of operations and cash flows for the periods presented herein. All
adjustments in the periods presented herein are normal and recurring in nature.

      Certain reclassifications of previously reported financial information
were made to conform to the 1998 presentation.


NOTE B - INVENTORIES

      The major components of inventories were as follows:
<TABLE>
<CAPTION>

                                          MAY 31,          NOVEMBER, 30
                                           1998              1997
                                        ---------           ------
                                               (IN THOUSANDS)




<S>                                      <C>                <C>    
Raw materials                            $25,822            $26,251

Work in process                           20,031             12,594

Finished goods                             4,965              7,162
                                           -----              -----

                                         $50,818            $46,007
                                         =======            =======
</TABLE>

NOTE C - RECAPITALIZATION

      On October 30, 1997, Sealy Corporation ("Parent") entered into an
agreement and plan of merger (the "Merger Agreement") with Sandman Merger
Corporation, a transitory Delaware merger corporation ("Sandman"), and
Zell/Chilmark Fund, L.P., a Delaware limited partnership ("Zell"). Zell owned
approximately 87% of the issued and outstanding common stock of Parent (the
"Existing Common Stock"). Pursuant to the Merger Agreement, upon the
satisfaction of certain conditions, Sandman was merged with and into Parent with
Parent being the surviving corporation effective on December 18, 1997 (the
"Closing Date") and the Company was recapitalized (the "Recapitalization")
whereby certain equity investors, including members of management, acquired an
approximate 90.0% economic equity stake (85.3% voting equity stake) in the
Company. A portion of the issued and outstanding shares of common stock of the
Company was converted into the right to receive aggregate cash equal to $419.3
million less (i) certain seller fees and expenses and (ii) certain costs in
connection with the extinguishment of certain outstanding options and warrants
of the Company and the remaining portion was converted into voting preferred
stock and then reconverted into $25.0 million in aggregate principal amount of a
junior subordinated note of the Company ("Junior Note") and a retained voting
common stock interest in the Company of approximately 14.7%. Concurrent with the
Recapitalization, the Company refinanced existing indebtedness (the
"Refinancing") by Sealy Mattress Company (the "Issuer"), a wholly owned

                                       6
<PAGE>   7

                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998


subsidiary of the Parent, issuing $125 million of Senior Subordinated Notes and
$128 million, with net proceeds to the Company of $75.4 million, of Senior
Subordinated Discount Notes (the "Notes") and by entering into and borrowing
$460 million under the Senior Credit Agreements.

      After the Recapitalization, the issued and outstanding capital stock of
the Company consists of Class A common stock, par value $0.01 per share ("Class
A Common"), Class B common stock, par value $0.01 per share ("Class B Common"),
Class L common stock, par value $0.01 per share ("Class L Common"), and Class M
common stock, par value $0.01 per share ("Class M Common" and collectively with
the Class A Common, Class B Common and Class L Common, "Common Stock"). The
Class L Common and the Class M Common are senior in right of payment to the
Class A Common and Class B Common. Holders of Class B Common and Class M Common
have no voting rights except as required by law. The holders of Class A Common
and Class L Common are entitled to one vote per share on all matters to be voted
upon by the stockholders of the Company, including the election of directors.
The Board of Directors of the Company is authorized to issue preferred stock,
par value $0.01 per share, with such designations and other terms as may be
stated in the resolutions providing for the issue of any such preferred stock
adopted from time to time by the Board of Directors.

      Upon the consummation of the Recapitalization, Parent and certain of its
stockholders, including the Bain Funds, Harvard Private Capital, Inc.
("Harvard"), Sealy Investors 1, LLC, Sealy Investors 2, LLC, Sealy Investors 3,
LLC (the "LLCs") and Zell (collectively, the "Stockholders") entered into a
stockholders agreement (the "Stockholders Agreement"). The Stockholders
Agreement (i) required that each of the parties thereto vote all of its voting
securities of Parent and take all other necessary or desirable actions to cause
the size of the Board of Directors of Parent to be established at seven members
and to cause three designees of the Bain Funds and one designee of Harvard to be
elected to the Board of Directors; (ii) granted Parent and the Bain Funds a
right of first offer on any proposed transfer of shares of capital stock of
Parent held by Zell, Harvard or the LLCs, (iii) granted Harvard a right of first
offer on any proposed transfer of shares of capital stock of Parent held by Bain
Funds; (iv) granted tag-along rights on certain transfers of shares of capital
stock of Parent; (v) required the Stockholders to consent to a sale of Parent to
an independent third party if such sale is approved by holders constituting a
majority of the then outstanding shares of voting common stock of Parent; and
(vi) except in certain instances, prohibits Zell from transferring any shares of
capital stock of Parent until the tenth anniversary of the date of the
consummation of the Recapitalization. Certain of the foregoing provisions of the
Stockholders Agreement terminate upon the consummation of an Initial Public
Offering or an Approved Sale (as each is defined in the Stockholders Agreement).

      Immediately prior to the closing of the Recapitalization (the "Closing"),
Parent contributed (the "Capital Contribution") all of the issued and
outstanding stock of Sealy, Inc., an Ohio corporation, the Stearns & Foster
Bedding Company, a Delaware corporation, Advanced Sleep Products, a California
corporation, Sealy Components-Pad, Inc., a Delaware corporation and Sealy
Mattress Company of San Diego, a California corporation, to the capital of the
Issuer. Immediately after the Capital Contribution, the Issuer became the only
direct subsidiary of Parent and owns 100% of the operations of Parent. At the
Closing, Sandman was merged with and into Parent with Parent the surviving
corporation.

      The Recapitalization transaction resulted in an aggregate direct net
charge to APIC and retained deficit totaling $421.7 million primarily comprised
of the costs associated with the purchase of the then outstanding Class A and
Class B Common Stock, the repurchase of Merger Warrants and the repurchase of
Series A and Series B Restructure Warrants. The Recapitalization transaction
also resulted in a pretax charge within selling, general and administrative
expense of $18.8 million comprised of accelerated vesting of stock options and
restricted stock and other incentive based compensation payments to employees in
connection with the transaction. The Company recorded a $14.5 million charge,
net of income tax benefit of $9.6 million, representing the writeoff of the
remaining unamortized debt issue costs related to long-term obligations repaid
in connection with the Recapitalization as well as consent fees and premiums
paid related to the Tender Offer of the Parent Notes (each of which as defined
in Note D) in connection with the Recapitalization.

                                       7
<PAGE>   8



                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                          SIX MONTHS ENDED MAY 31, 1998


NOTE D - LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>

                                                                     MAY 31,          NOVEMBER 30,
                                                                      1998               1997
                                                                 ------------         --------
                                                                          (IN THOUSANDS)

<S>                                                                <C>                   <C>     
Senior AXELs Credit Agreement                                      $329,625              $     --
Senior Revolving Credit Agreement:
     Tranche A Term Loans                                           120,000                    --
     Revolving Credit Facility                                       30,800                    --
Senior Subordinated Notes                                           125,000                    --
Senior Subordinated Discount Notes                                   79,200                    --
Junior Subordinated Note                                             26,396                    --
$275,000,000 Second Restated Secured
   Credit Agreement - Revolving Credit
   Facility                                                              --               130,000
10 1/4% Senior Subordinated Notes Due 2003                               --               200,000
                                                                   --------              ---------
                                                                    711,021               330,000
Less current portion                                                  4,000                    --
                                                                   --------              -------- 
                                                                   $707,021              $330,000
                                                                   ========              ========
</TABLE>


      On November 18, 1997 Parent commenced an offer (the "Tender Offer") to
purchase for cash up to all (but not less than a majority in principal amount
outstanding) of its 10 1/4% Senior Subordinated Notes due 2003 (the "Parent
Notes") and a related solicitation (the "Consent Solicitation") of consents to
modify certain terms of the Indenture under which the Parent Notes were issued
(the "Parent Note Indenture"). The purchase price to be paid in respect to
validly tendered Parent Notes and related consents were determined by a formula
set forth in the offer to purchase with respect to the Tender Offer. The
Offerings were conditioned upon the consummation of the Tender Offer for, and
the obtaining of consents with respect to, at least a majority in aggregate
principal amount of the Parent Notes outstanding. Parent's obligation to accept
for purchase and to pay for the Parent Notes validly tendered pursuant to the
Tender Offer was conditioned upon, among other things, consummation of the other
elements of the Recapitalization.

      On March 30, 1998, the Company announced a call for redemption of all
outstanding Parent Notes. The redemption price of 106.33%, plus accrued
interest, or $2.5 million, was paid on May 1, 1998, after which time interest
ceased to accrue on the Notes.

      The Company's 1997 Credit Agreement was terminated in connection with the
Recapitalization. The 1997 Credit Agreement provided for a $275.0 million
reducing revolving credit facility inclusive of a discretionary swing loan
facility of up to $20.0 million. Upon consummation of the Transactions, the
Issuer entered into the AXELs credit agreement (the "Senior AXELs Credit
Agreement") and a credit agreement providing for Tranche A Term Loans and
revolving borrowings (the "Senior Revolving Credit Agreement and, together with
the Senior AXELs Credit Agreement, the "Senior Credit Agreements"). The Senior
Credit Agreements provide for loans of up to $550.0 million, consisting of a
$450.0 million term loan facility (the "Term Loan Facility") and a $100.0
million revolving credit facility (the "Revolving Credit Facility"). The Issuer
distributed the proceeds of the Term Loan Facility and its initial borrowings
under the Revolving Credit Facility to Parent to provide a portion of the funds
necessary to consummate the Recapitalization. Indebtedness of the Issuer under
the Senior Credit Agreements is secured and guaranteed by Parent and certain of
the Issuer's current and all of the Issuer's future U.S. subsidiaries

                                       8
<PAGE>   9
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998


and will bear interest at a floating rate. See Note J for further details
regarding guarantees including consolidating condensed financial statements for
guarantors and non-guarantors. The Senior Credit Agreements will require the
Company to meet certain financial tests, including minimum levels of adjusted
EBITDA as determined in the agreements, minimum interest coverage and maximum
leverage ratio. The Senior Credit Agreements also contain covenants which, among
other things, limit capital expenditures, indebtedness and/or the incurrence of
additional indebtedness, investments, dividends, transactions with affiliates,
asset sales, mergers and consolidations, prepayments of other indebtedness
(including the Notes), liens and encumbrances and other matters customarily
restricted in such agreements.


      Indebtedness under the Senior Credit Agreements bears interest at a
floating rate. Indebtedness under the Revolving Credit Facility and the Term
Loans initially bears interest at a rate (subject to reduction based on
attainment of certain leverage ratio levels) based upon (i) the Base Rate
(defined as the highest of (x) the rate of interest announced publicly by
Morgan Guaranty Trust   Company of New York from time to time, as its base rate
or (y) the Federal funds effective rate from time to time plus 0.50%) plus
1.25% in respect of the Tranche A Term Loans and the loans under the Revolving
Credit Facility (the "Revolving Loans"), 1.50% in respect of the AXELs Series
B, 1.75% in respect of the AXELs Series C and 2.00% in respect of the AXELs
Series D, or (ii) the Adjusted Eurodollar Rate (as defined in the Senior Credit
Agreements) for one, two, three or six months (or, subject to general
availability, two weeks to twelve months), in each case plus 2.25% in respect
of Tranche A Term Loans and Revolving Loans, 2.50% in respect of AXELs Series
B, 2.75% in respect of AXELs Series C and 3.00% in respect to AXELs Series D.
To mitigate its exposure to interest rate fluctuations, in January 1998 the
Company effected a $350 million notional value interest rate protection program
consisting of five year caps at a cost of $0.6 million and three year collars
tied to three month Eurodollar rates at no net cost to the Company.

      The Tranche A Term Loans mature in December 2002. The AXELs Series B
mature in December 2004. The AXELs Series C mature in December 2005. The AXELs
Series D mature in December 2006. The Tranche A Term Loans are subject to
quarterly amortization payments commencing in March 1999, the AXELs Series B,
the AXELs Series C and the AXELs Series D are subject to quarterly amortization
payments commencing in March 1998 with the AXELs Series B amortizing in nominal
amounts until the maturity of the Tranche A Term Loans, the AXELs Series C
amortizing in nominal amounts until the maturity of the AXELs Series B and the
AXELs Series D amortizing in nominal amounts until the maturity of the AXELs
Series C. The Revolving Credit Facility matures in December 2002. In addition,
the Senior Credit Agreements provide for mandatory repayments, subject to
certain exceptions, of the Term Loans, and reductions in the Revolving Credit
Facility, based on the net proceeds of certain asset sales outside the ordinary
course of business of the Issuer and its subsidiaries, the net proceeds of
insurance, the net proceeds of certain debt and equity issuances, and excess
cash flow (as defined in the Senior Credit Agreements).

      The Junior Note has an initial principal balance outstanding of $25.0
million and matures on December 18, 2008. Interest on the Junior Note accrues at
10% per annum if paid within ten days of the end of each calendar quarter or at
12% if the Company elects to add accrued interest for such quarter to the then
outstanding principal balance. The Company has the option, at each quarter end,
to elect to pay the interest due for the quarter or add such interest to the
principal balance through the term of the Note.

      The Notes were issued pursuant to an Indenture (the "Senior Subordinated
Note Indenture") among the Issuer, the Guarantors and The Bank of New York, as
trustee (the "Senior Subordinated Note Trustee"). The Senior Subordinated
Discount Notes were issued pursuant to an Indenture (the "Senior Subordinated
Discount Note Indenture" and together with the Senior Subordinated Note
Indenture, the "Indentures") among the Issuer, the Guarantors, and The Bank of
New York, as trustee (the "Senior Subordinated Discount Note Trustee" and,
together with the Senior Subordinated Note Trustee, the "Trustees").

      The Senior Subordinated Notes are limited in aggregate principal amount to
$300.0 million, of which $125.0 million was issued in the Offering, and matures
on December 15, 2007. Interest on the Senior Subordinated Notes accrues at the
rate of 9-7/8% per annum and is payable semi-annually in arrears on June 15 and
December 15 of each year, commencing on June 15, 1998, to Holders of record on
the immediately preceding June 1 and December 1. Additional Senior Subordinated
Notes may be issued

                                       9
<PAGE>   10
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998


from time to time after the date of the Senior Subordinated Note Indenture,
subject to the provisions of the Senior Subordinated Note Indenture.

      Except as provided below, the Senior Subordinated Notes are not redeemable
at the Company's option prior to December 15, 2002. Thereafter, the Senior
Subordinated Notes are subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages thereon
to the applicable redemption date, if redeemed during the twelve-month period
beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>


                                                       PERCENTAGE OF PRINCIPAL
          YEAR                                                   AMOUNT
          ----                                                   ------



          <S>                                                 <C>
          2002 .....................................              104.937%

          2003 .....................................              103.292%

          2004 .....................................              101.646%

          2005 and thereafter ......................              100.000%
          </TABLE>

      Notwithstanding the foregoing, during the first 36 months after December
11, 1997, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Senior Subordinated Notes originally issued under
the Senior Subordinated Note Indenture at a redemption price of 109.875% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages thereon, if any, to the redemption date, with the net cash proceeds of
any Equity Offerings; (as defined in the Indentures) provided that at least
$80.0 million in aggregate principal amount of Senior Subordinated Notes remain
outstanding immediately after the occurrence of such redemption (excluding
Senior Subordinated Notes held by the Company and its Subsidiaries); and
provided further that such redemption shall occur within 120 days of the date of
closing of any such Equity Offering.

      The Senior Subordinated Discount Notes are limited in aggregate principal
amount at maturity to $275.0 million, of which $128.0 million were issued in the
Offering, and mature on December 15, 2007. The Senior Subordinated Discount
Notes were offered at a substantial discount from their principal amount at
maturity. Until December 15, 2002 (the "Full Accretion Date"), no interest
(other than liquidated damages, if applicable) will accrue or be paid in cash on
the Senior Subordinated Discount Notes, but the Accreted Value will accrete
(representing the amortization of original issue discount) between the issuance
date and the Full Accretion Date, on a semi-annual bond equivalent basis.
Beginning on the Full Accretion Date, interest on the Senior Subordinated
Discount Notes will accrue at the rate of 10-7/8% per annum and will be payable
in cash semi-annually in arrears on June 15 and December 15 of each year,
commencing on June 15, 2003, to Holders of record on the immediately preceding
June 1 and December 1. Additionally Senior Subordinated Discount Notes may be
issued from time to time after the date of the Senior Subordinated Discount Note
Indenture, subject to the provisions of the Senior Subordinated Discount Note
Indenture. Interest on the Senior Subordinated Discount Notes will accrue from
the most recent date to which interest has been paid or, if no interest has been
paid, from the Full Accretion Date.




                                       10
<PAGE>   11
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998



      Except as provided below, the Senior Subordinated Discount Notes will not
be redeemable at the Company's option prior to December 15, 2002. Thereafter,
the Senior Subordinated Discount Notes will be subject to redemption at any time
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest and
liquidated damages thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>



                                                        PERCENTAGE OF PRINCIPAL
          YEAR                                                    AMOUNT
          ----                                                    ------



          <S>                                                     <C>     
          2002 .....................................              105.437%

          2003 .....................................              103.625%

          2004 .....................................              101.812%

          2005 and thereafter ......................              100.000%
</TABLE>

      Notwithstanding the foregoing, during the first 36 months after December
11, 1997, the Company may on any one or more occasions redeem up to 35% of the
Accreted Value of Senior Subordinated Discount Notes originally issued under the
Senior Subordinated Discount Note Indenture at a redemption price of 110.875% of
the Accreted Value, plus accrued and unpaid liquidated damages thereon, if any,
to the redemption date, with the net cash proceeds of any Equity Offerings; (as
defined in the Indentures) provided that at least $50.0 million in aggregate
Accreted Value of Senior Subordinated Discount Notes remain outstanding
immediately after the occurrence of such redemption (excluding Senior
Subordinated Discount Notes held by the Company and its Subsidiaries); and
provided, further, that such redemption shall occur within 120 days of the date
of the closing of any such Equity Offering.

NOTE E - CONTINGENCIES

      In accordance with procedures established under the Environmental Cleanup
Responsibility Act (now known as the Industrial Site Recovery Act), Sealy and
one of its subsidiaries are parties to an Administrative Consent Order ("ACO")
issued by the New Jersey Department of Environmental Protection ("DEP").
Pursuant to the ACO, the Company and such subsidiary agreed to conduct soil and
groundwater investigation and remediation at the plant previously owned by the
subsidiary in South Brunswick, New Jersey. The Company does not believe that its
manufacturing processes were a source of the contaminants found to exist above
regulatorily acceptable levels in the groundwater. The Company and its
subsidiary have retained primary responsibility for the investigation and any
necessary clean up plan approved by the DEP under the terms of the ACO.

      Since issuance of the ACO, the DEP has approved the Company's soil
remediation plans and its initial groundwater remediation plan. Further
investigation in 1996 revealed certain additional areas of soil contamination
resulting from activities at the South Brunswick facility prior to the Company's
acquisition of the site. In 1997, the Company, with DEP approval, completed
essentially all soil remediation and conducted a pilot test for a
company-proposed revision to the groundwater remediation program. The Company's
revised groundwater remediation plan was submitted in May, 1998 to the DEP for
approval.

      While the Company cannot predict the ultimate timing or cost to remediate
this facility based on facts currently known, management believes the previously
established accrual for site investigation and remediation costs is adequate to
cover the Company's reasonably estimable liability and does not believe the
resolution of this matter will have a material adverse effect on the Company's
financial position or future operations.




                                       11
<PAGE>   12
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998


      In March, 1994, the Company filed a claim in the U.S. District Court for
the District of New Jersey against former owners of the site and their lenders
under the Comprehensive Environmental Response, Compensation and Liability Act
seeking contribution for site investigation and remedial costs. In March, 1997,
the Company received $1.7 million from a former owner of the site and one of the
lenders to the former owner in the final settlement of this litigation which was
recorded as an increase to other noncurrent liabilities.

      In January 1997, the Company filed a claim in the U.S. District Court of
New Jersey against former insurance companies for the Company under the
Comprehensive Environmental Response, Compensation and Liability Act seeking
contribution for site investigation and remedial costs. A parallel case seeking
a judgment of non-liability was filed by some (but not all) of these insurance
companies in the U.S. District Court for the Northern District of Ohio. Both the
New Jersey and Ohio District Courts have ruled that New Jersey law applies and
the Company has filed a motion seeking a favorable decision holding the
insurance companies liable for investigation and remediation costs without the
need for trial.

      The Company also has begun to remediate 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 believes
the contamination is attributable to the manufacturing operations of previous
unaffiliated occupants of the facility. In 1994, the Company filed a cost
recovery action in U.S. District Court to require these entities to complete the
remediation and reimburse the Company for its cleanup costs. This litigation is
pending. Based on the facts currently known, management does not believe that
resolution of this matter will have a material adverse effect on the Company's
financial position or future operations.

      On May 22, 1997 the Company filed in the United States District Court for
the Northern District of Illinois a motion to terminate certain antitrust final
judgments (the "Judgments") entered on December 30,1964 and December 26, 1967.
These Judgments, among other things, prohibited the Company from suggesting
resale prices to its dealers. During the pendency of the Company's motion to
terminate the Judgments the Department of Justice (the "Department") on
September 8, 1997, issued to the Company a Civil Investigative Demand ("CID")
seeking documents relating to, among other things, communications between the
Company and dealers concerning the retail prices of mattresses. In response to
the CID, the Company produced certain documents and the deposition of a Company
executive was taken. Immediately following such document production and
deposition, the Department consented to the termination of the Judgments and an
order terminating the Judgments was entered by the Court on September 19, 1997.
The Company is currently negotiating with the Department concerning its response
to the CID, and is cooperating with the Department in its investigation.





                                       12
<PAGE>   13
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998



 NOTE F - STOCK OPTION PLAN

      On December 18, 1997, the Company's Board of Directors adopted the 1998
Stock Option Plan ("1998 Plan") and reserved 5,000,000 shares of Class A Common
Stock of the Company for issuance. Options under the 1998 Plan may be granted
either as Incentive Stock Options as defined in Section 422A of the Internal
Revenue Code or Nonqualified Stock Options subject to the provisions of Section
83 of the Internal Revenue Code. On March 18, 1998, the Company granted ten-year
stock options to acquire 2,072,250 shares of Class A Common Stock at an exercise
price of $0.50 per share (representing fair market value at the time of grant),
and 1,175,000 shares of Class A Common Stock at an exercise price of $4.18 per
share (representing a premium to fair market value at the time of grant). The
options vest 40% upon the second anniversary, and 20% on the third, fourth and
fifth anniversary dates of the grant. Due to employee resignations, 100,250 and
50,000 of the options with an exercise price of $0.50 and $4.18 per share,
respectively,  were cancelled during the quarter ended May 31, 1998.

      On June 17, 1998, the Company's Board of Directors granted additional
ten-year stock options, under the 1998 Plan, to acquire 27,000 shares of Class A
Common Stock at an exercise price of $0.50 per share (representing fair market
value at the time of grant).

NOTE G - YEAR 2000 ISSUE

      The Company believes that the new Business Systems, including appropriate
software, being installed both alongside and as part of an upgrade of its
existing computer system will address the dating system flaw inherent in most
operating systems (the "Year 2000 Issue"). There can be no assurance, however,
that the new Business Systems will be installed and fully operational at all
locations and for all applications prior to the turn of the century, and
management has therefore deemed it necessary to convert its current system to be
Year 2000 compliant. The Company has conducted a comprehensive impact analysis
to determine what computing platforms and date-aware functions with respect to
its existing computer operating systems will be disrupted by the Year 2000
Issue. In January 1998, the Company completed a prioritization of the impacted
areas identified to date and commenced the detailed program code changes through
a contracted third party vendor which has experience in Year 2000 conversions
for the Company's existing system including the same release of such system. The
Company is currently in the process of replacing personal computers and phone
systems that are not Year 2000 compliant. The Company has confirmed that its
primary manufacturing equipment is Year 2000 compliant. Major suppliers to the
Company have been contacted and the Company has received confirmation of Year
2000 compliance or a timetable to be compliant from such suppliers. The Company
is in the preliminary stages of assessment of its customer status with respect
to the Year 2000 Issue. The required code changes, testings and implementation
necessary to address the Year 2000 Issue are projected to be completed by May,
1999, and are expected to cost approximately $4.0 million.

NOTE H - HEADQUARTERS AND RESEARCH & DEVELOPMENT CENTER RELOCATION

      On March 10, 1998, the Company announced its plans to relocate its
Corporate headquarters and Research & Development Center from Cleveland, Ohio to
High Point, North Carolina. The Company purchased a property, on April 13, 1998,
which currently includes an office building and a manufacturing facility. The
Company will construct an additional office building on this property to house
its Corporate headquarters. The Company also relocated its Lexington, North
Carolina manufacturing plant to High Point, North Carolina on June 22, 1998. The
Company established permanent financing for the property purchase and
construction project on June 23, 1998 (See Note I). The Company estimates total
costs associated with this relocation will result in a pretax charge of
approximately $8.5 million which will be recognized primarily in fiscal 1998
with the balance in fiscal 1999.


NOTE I - SUBSEQUENT EVENT

      On June 23, 1998, the Company secured permanent financing for the
property, manufacturing facility and office building in High Point, North
Carolina as purchased on April 13, 1998 and to fund the construction of the new
Corporate headquarters facility at this site. The initial purchase price of $8.4


                                       13
<PAGE>   14
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998



million was paid at closing and was financed on a temporary basis with a draw
from the Revolving Credit Facility. The permanent loan arrangement provides for
borrowings not to exceed $14.5 million and the Company made an initial draw of
$8.2 million. The loan arrangement requires monthly principal payments based on
a twenty year amortization with a balloon payment at the end of year seven of
all then outstanding principal and interest. Interest accrues at a LIBOR plus
3.25% and is payable monthly.


NOTE J - GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION

      As discussed in Note D, the Parent and each of the Guarantor Subsidiaries
has fully and unconditionally guaranteed, on a joint and several basis, the
obligation to pay principal and interest with respect to the Notes. The
Guarantor Subsidiaries are wholly-owned subsidiaries of the Company.
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. The Notes contain certain
convenants that, among other things, limit the ability of the Issuer and its
Restricted Subsidiaries (as defined in the Senior Credit Agreement) to incur
additional indebtedness and issue Disqualified Stock (as defined in the Senior
Credit Agreement), pay dividends or distributions or make investments or make
certain other Restricted Payments (as defined in the Senior Credit Agreement),
enter into certain transactions with affiliates, dispose of certain assets,
incur liens and engage in mergers and consolidations. Although holders of the
Notes will be direct creditors of the Issuer's principal direct subsidiaries by
virtue of the guarantees, the Issuer has subsidiaries ("Non-Guarantor
Subsidiaries") that are not included among the Guarantor Subsidiaries, and such
subsidiaries will not be obligated with respect to the Notes. As a result, the
claims of creditors of the Non-Guarantor Subsidiaries will effectively have
priority with respect to the assets and earnings of such companies over the
claims of creditors of the Issuer, including the holders of the Notes.

      The following supplemental consolidating condensed financial statements
present:

               1.   Consolidating condensed balance sheets as of May 31, 1998
                    and November 30, 1997, consolidating condensed statements of
                    operations for the quarters and six months ended May 31,
                    1998 and June 1, 1997, and consolidating condensed
                    statements of cash flows for the six months ended May 31,
                    1998 and June 1, 1997.

               2.   Sealy Corporation (the "Parent" and a "guarantor"), Sealy
                    Mattress Company (the "Issuer"), combined Guarantor
                    Subsidiaries and combined Non-Guarantor Subsidiaries with
                    their investments in subsidiaries accounted for using the
                    equity method.

               3.   Elimination entries necessary to consolidate the Parent and
                    all of its subsidiaries.

     Management does not believe that separate financial statements of the
Issuer or Guarantor Subsidiaries are material to investors in the Notes.




                                       14
<PAGE>   15
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998


<TABLE>
<CAPTION>


                                SEALY CORPORATION
          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
                          SIX MONTHS ENDED MAY 31, 1998
                                 (in thousands)



                                                      Sealy        Combined       Combined
                                        Sealy       Mattress      Guarantor    Non-Guarantor
                                     Corporation     Company     Subsidiaries   Subsidiaries   Eliminations  Consolidated

<S>                                   <C>          <C>             <C>          <C>              <C>          <C>          
 Net sales                            $    --      $  19,888       $ 376,016    $  35,444        $  (8,517)   $ 422,831    
                                                                                                                           
 Costs and expenses:                                                                                                       
   Cost of goods sold                      --         12,851         216,073       22,244           (8,517)     242,651    
   Selling, general and 
     administrative                      17,752        6,023         127,719       10,136             --        161,630    
   Amortization of intangibles             --            199           5,822          477             --          6,498    
   Interest expense, net                  3,088       30,117             (84)         (76)            --         33,045  
   Loss (income) from equity investees      772      (25,687)           --           --             24,915         --      
   Loss (income) from                          
     non-guarantor equity investees        --           --              (982)        --                982         --    
                                                                                                                        
   Capital charge and                      
     intercompany interest allocation      --            276          (1,131)         855             --           --      
                                                                                                        
                                   -------------------------------------------------------------------------------------- 
 Income/(loss) before income                                                                                               
   taxes and extraordinary item         (21,612)      (3,891)         28,599        1,808          (25,897)     (20,993)   
                                                                                                     
                                                                                                                           
   Income taxes                          (2,197)      (3,119)          2,912          826             --         (1,578)   
                                   --------------------------------------------------------------------------------------        
                                                                                                                           
 Income/(loss) before                  
   extraordinary item                   (19,415)        (772)         25,687          982          (25,897)     (19,415)   
                                                                                                                       
                                                                                                                           
                                                                                                                           
   Extraordinary item                    14,537         --              --           --               --         14,537    

                                   --------------------------------------------------------------------------------------           
                                                                                                                           
                                                                                                                           
 Net income/(loss)                    $ (33,952)   $    (772)      $  25,687    $     982        $ (25,897)   $ (33,952)   
                                   ======================================================================================  
</TABLE>
                                                                                


                                       15
                                                                                
<PAGE>   16
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998


<TABLE>
<CAPTION>


                                SEALY CORPORATION
          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
                         SIX MONTHS ENDED JUNE 1, 1997
                                 (in thousands)



                                                              Sealy       Combined       Combined
                                                Sealy       Mattress     Guarantor    Non-Guarantor
                                             Corporation     Company    Subsidiaries   Subsidiaries   Eliminations  Consolidated

<S>                                           <C>           <C>           <C>           <C>           <C>           <C>      
Net sales                                     $    --       $  16,826     $ 305,474     $  35,245     $  (8,016)    $ 349,529

Costs and expenses:
  Cost of goods sold                               --          10,568       170,477        24,101        (8,016)      197,130
  Selling, general and administrative               602         5,094       102,530         7,735          --         115,961
  Amortization of intangibles                      --             190         5,890           598          --           6,678
  Interest expense, net                          15,555          --             (35)         (514)         --          15,006
  Loss (income) from equity investees           (13,573)      (15,283)         --            --          28,856          --
  Loss (income) from
    non-guarantor equity investees                 --           2,039        (3,250)         --           1,211          --
  Capital charge and
    intercompany interest allocation               --             224          (789)          565          --            --
                                           -----------------------------------------------------------------------------------------
Income/(loss) before income
  taxes and extraordinary item                   (2,584)       13,994        30,651         2,760       (30,067)       14,754



  Income taxes                                   (9,054)          421        15,368         1,549          --           8,284
                                           -----------------------------------------------------------------------------------------

Income/(loss) before             
  extraordinary item                              6,470        13,573        15,283         1,211       (30,067)        6,470


  Extraordinary item                              2,030          --            --            --            --           2,030

                                           -----------------------------------------------------------------------------------------


Net income/(loss)                             $   4,440     $  13,573     $  15,283     $   1,211     $ (30,067)    $   4,440
                                           =========================================================================================


</TABLE>

                                       16
<PAGE>   17
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998


<TABLE>
<CAPTION>



                                SEALY CORPORATION
          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
                         THREE MONTHS ENDED MAY 31, 1998
                                 (in thousands)



                                                            Sealy        Combined       Combined
                                               Sealy       Mattress      Guarantor    Non-Guarantor
                                           Corporation     Company     Subsidiaries   Subsidiaries   Eliminations   Consolidated

<S>                                         <C>           <C>           <C>           <C>           <C>           <C>      
Net sales                                   $    --       $  10,107     $ 190,481     $  17,422     $  (4,438)    $ 213,572

Costs and expenses:
  Cost of goods sold                             --           6,593       108,061        10,944        (4,431)      121,167
  Selling, general and administrative             326         3,143        66,388         4,176          --          74,033
  Amortization of intangibles                    --             100         2,908           328          --           3,336
  Interest expense, net                           891        16,722           (43)          (53)         --          17,517
  Loss (income) from equity investees           1,831       (12,168)         --            --          10,337          --   
  Loss (income) from non-guarantor  
     equity investees                            --            --            (801)         --             801          --          
  Capital charge and
    intercompany interest allocation             --             142          (550)          408          --            --

                                         -----------------------------------------------------------------------------------------
Income/(loss) before income
  taxes and extraordinary item                 (3,048)       (4,425)       14,518         1,619       (11,145)       (2,481)



  Income taxes                                 (1,405)       (2,594)        2,350           818          --            (831)
                                         -----------------------------------------------------------------------------------------

Income/(loss) before        
  extraordinary item                           (1,643)       (1,831)       12,168           801       (11,145)       (1,650)



  Extraordinary item                               82          --            --            --            --              82

                                         -----------------------------------------------------------------------------------------

Net income/(loss)                           $  (1,725)    $(  1,831)    $  12,168     $     801     $ (11,145)    $  (1,732)
                                         =========================================================================================

</TABLE>



                                       17
<PAGE>   18
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998


<TABLE>
<CAPTION>







                                SEALY CORPORATION
          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
                         THREE MONTHS ENDED JUNE 1, 1997
                                 (in thousands)



                                                             Sealy        Combined       Combined
                                               Sealy       Mattress      Guarantor    Non-Guarantor
                                            Corporation     Company     Subsidiaries   Subsidiaries  Eliminations   Consolidated

<S>                                         <C>           <C>           <C>           <C>           <C>           <C>      
Net sales                                   $    --       $   9,276     $ 160,212     $  16,146     $  (5,009)    $ 180,625

Costs and expenses:
  Cost of goods sold                             --           5,743        89,319        10,379        (5,009)      100,432
  Selling, general and administrative             348         2,833        53,519         3,687          --          60,387
  Amortization of intangibles                    --              91         2,860           247          --           3,198
  Interest expense, net                         8,256          --             (19)          (31)         --           8,206
  Loss (income) from equity investees          (6,593)       (7,435)         --            --          14,028          --
  Loss (income) from
    non-guarantor equity investees               --           1,031        (1,627)         --             596          --
  Capital charge and intercompany
    interest allocation                          --             139          (468)          329          --            --

                                        ----------------------------------------------------------------------------------------
Income/(loss) before income
  taxes and extraordinary item                 (2,011)        6,874        16,628         1,535       (14,624)        8,402
   


  Income taxes                                 (5,294)          282         9,193           939          --           5,120
                                        ----------------------------------------------------------------------------------------

Income/(loss) before           
  extraordinary item                            3,283         6,592         7,435           596       (14,624)        3,282


  Extraordinary item                               --            --            --            --            --            --

                                        ----------------------------------------------------------------------------------------

Net income/(loss)                           $   3,283     $   6,592     $   7,435     $     596     $ (14,624)    $   3,282
                                        ========================================================================================

</TABLE>




                                       18





<PAGE>   19
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998


<TABLE>
<CAPTION>



                                SEALY CORPORATION
               SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
                                  MAY 31, 1998
                                 (in thousands)



                                                           Sealy        Combined       Combined
                                             Sealy        Mattress     Guarantor     Non-Guarantor
                                          Corporation     Company     Subsidiaries   Subsidiaries    Eliminations  Consolidated

ASSETS

Current assets:
<S>                                         <C>           <C>           <C>           <C>           <C>           <C>      
  Cash and cash equivalents                 $    --       $      19     $   1,581     $   2,155     $    --       $   3,755
  Accounts receivable, net                       --           3,094        87,520        11,145          --         101,759
  Inventories                                    --           1,722        43,866         5,230          --          50,818
  Prepaid expenses and                         
   deferred taxes                              (9,237)          294        16,767         1,462          --           9,286
                                        -----------------------------------------------------------------------------------
                                               (9,237)        5,129       149,734        19,992          --         165,618

Property, plant and equipment -at cost           --           4,804       166,774        12,791          --         184,369
Less:  accumulated depreciation                  --          (1,413)      (45,219)       (2,287)         --         (48,919)
                                        -----------------------------------------------------------------------------------

                                                 --           3,391       121,555        10,504          --         135,450

Other assets:
  Goodwill and other intangibles, net            --          14,263       356,152        34,356          --         404,771
  Net investment in and advances
    to (from) subsidiaries and
    affiliates                                (97,500)      550,335      (355,138)      (29,539)      (68,158)         --
  Debt issuance costs, net and
    other assets                                 --          30,435         6,853            31          --          37,319
                                        -----------------------------------------------------------------------------------

                                              (97,500)      595,033         7,867         4,848       (68,158)      442,090
                                        -----------------------------------------------------------------------------------

Total assets                                $(106,737)    $ 603,553     $ 279,156     $  35,344     $ (68,158)    $ 743,158
                                        ===================================================================================



LIABILITIES AND STOCKHOLDER'S
(DEFICIT) EQUITY

Current liabilities:
  Current portion -long-term obligations    $    --       $   4,000     $    --       $    --       $    --       $   4,000
  Accounts payable                               --           2,063        30,831         4,622          --          37,516
  Accrued interest                               --          13,590            11          --            --          13,601
  Accrued incentives and advertising             --           1,494        30,042         2,148          --          33,684
  Accrued compensation                           --             249         8,423           953          --           9,625
  Other accrued expenses                        1,950           977        22,347        (1,259)         --          24,015
                                        -----------------------------------------------------------------------------------

                                                1,950        22,373        91,654         6,464          --         122,441

Long-term obligations                          26,396       680,625          --            --            --         707,021
Other noncurrent liabilities                    3,585          --          31,878          --            --          35,463
Deferred income taxes                          (8,717)       (2,223)       14,502         4,622          --           8,184

Stockholders' (deficit) equity               (129,951)      (97,222)      141,122        24,258       (68,158)     (129,951)
                                        -----------------------------------------------------------------------------------

Total liabilities and
stockholders' (deficit) equity              $(106,737)    $ 603,553     $ 279,156     $  35,344     $ (68,158)    $ 743,158
                                        ===================================================================================
</TABLE>



                                       19

<PAGE>   20
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998


<TABLE>
<CAPTION>




                                SEALY CORPORATION
               SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
                                NOVEMBER 30, 1997
                                 (in thousands)



                                                              Sealy       Combined       Combined
                                                 Sealy       Mattress     Guarantor    Non-Guarantor
                                             Corporation     Company    Subsidiaries   Subsidiaries      Eliminations  Consolidated

ASSETS

Current assets:
<S>                                          <C>          <C>              <C>          <C>              <C>          <C>         
  Cash and cash equivalents                  $    --      $      20        $   2,062    $   3,975        $    --      $   6,057   
  Accounts receivable, net                        --          3,434           79,150       11,334             --         93,918 
  Inventories                                     --          1,912           39,240        5,190             (335)      46,007 
  Prepaid expenses and deferred    
   taxes                                        (9,206)         294           29,819        1,622             --         22,529
                                         -----------------------------------------------------------------------------------------
                                                (9,206)       5,660          150,271       22,121             (335)     168,511 
                                                                                                                                
Property, plant and equipment                                                                                                   
   -at cost                                       --          4,664          152,045       12,894             --        169,603 
Less:  accumulated depreciation                   --         (1,254)         (40,603)      (2,138)            --        (43,995)
                                         -----------------------------------------------------------------------------------------
                                                                                                                                
                                                  --          3,410          111,442       10,756             --        125,608 
                                                                                                                                
Other assets:                                                                                                                   
  Goodwill and other                     
    intangibles, net                              --         14,461          361,976       34,832             --        411,269 
  Net investment in and advances                                                                                                
    to (from) subsidiaries and affiliates      543,783        2,636         (357,823)     (28,591)        (160,005)        --   
  Debt issuance costs, net and                                                                                                  
    other assets                                 8,918           35            6,641           85             --         15,679 
                                         ----------------------------------------------------------------------------------------- 
                                                                                                                                
                                               552,701       17,132           10,794        6,326         (160,005)     426,948 
                                         ----------------------------------------------------------------------------------------- 
                                                                                                                                
Total assets                                 $ 543,495    $  26,202        $ 272,507    $  39,203        $(160,340)   $ 721,067 
                                         =========================================================================================
                                                                                                                                
                                                                                                                                
                                                                                                                                
LIABILITIES AND STOCKHOLDER'S                                                                                                   
EQUITY                                                                                                                          
Current liabilities:                                                                                                            
  Current portion - long-term                                                                                                   
     obligations                             $    --      $    --          $    --      $    --          $    --      $    --   
  Accounts payable                                --          2,086           40,743        6,847             --         49,676 
  Accrued interest                               1,973         --                 65         --               --          2,038 
  Accrued incentives and                                                                                                         
     advertising                                  --          1,473           26,782        2,449             --         30,704  
  Accrued compensation                            --            246           16,244        1,281             --         17,771  
  Other accrued expenses                           314          222           18,107        1,573             (118)      20,098  
                                         -----------------------------------------------------------------------------------------
                                                                                                                                
                                                 2,287        4,027          101,941       12,150             (118)     120,287 
                                                                                                                                
Long-term obligations                          330,000         --               --           --               --        330,000 
Other noncurrent liabilities                     2,969         --             32,744         --               --         35,713 
Deferred income taxes                            3,173          896           22,693        3,239             --         30,001 
                                                                                                                                
Stockholders' equity                           205,066       21,279          115,129       23,814         (160,222)     205,066 
                                         ----------------------------------------------------------------------------------------- 
                                                                                                                                
Total liabilities and                                                                                                           
  stockholders'  equity                      $ 543,495    $  26,202        $ 272,507    $  39,203        $(160,340)   $ 721,067 
                                         =========================================================================================
                                                                                                         
</TABLE>


                                       20

<PAGE>   21
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998


<TABLE>
<CAPTION>



                                SEALY CORPORATION
          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
                          SIX MONTHS ENDED MAY 31, 1998
                                 (in thousands)



                                                              Sealy       Combined       Combined
                                               Sealy        Mattress     Guarantor    Non-Guarantor
                                            Corporation      Company    Subsidiaries   Subsidiaries   Eliminations    Consolidated

<S>                                          <C>           <C>           <C>           <C>           <C>              <C>         
Net cash provided by (used in)
  operating activities                       $ (18,750)    $ (11,435)    $  15,451     $  (2,523)    $   3,129        $ (14,128)  
                                          ----------------------------------------------------------------------------------------
                                                                                                                                  
Cash flows from investing activities:                                                                                             
  Purchase of property                      
    and equipment, net                            --            (143)      (15,282)         (106)         --            (15,531) 
  Net activity in investment                                                                                                      
    in and advances to (from)                                                                                                     
    subsidiaries and affiliates                640,511      (637,425)         (722)          948        (3,312)            --     
                                         ----------------------------------------------------------------------------------------  
 Net proceeds provided by                                                                                                         
    (used in) investing activities             640,511      (637,568)      (16,004)          842        (3,312)         (15,531)  
                                                                                                                                  
                                                                                                                                  
Cash flows from financing activities:                                                                                             
  Treasury stock repurchase costs             (413,078)         --            --            --            --           (413,078)  
  Proceeds from (repayment of)                 
    long-term obligations, net                (330,000)      680,872          --            --            --            350,872   
  Equity contributions                         121,317          --            --            --            --            121,317   
  Debt issuance costs                             --         (31,754)         --            --            --            (31,754)  
  Net equity activity with Parent                 --            (116)         72            (139)          183             --     
                                         ----------------------------------------------------------------------------------------  
      Net cash (used in) provided by                                                                                              
         financing activities                 (621,761)      649,002          72            (139)          183           27,357   

                                         ----------------------------------------------------------------------------------------   
Change in cash and cash equivalents               --              (1)         (481)       (1,820)         --             (2,302)  
                                                                                                                                  
Cash and cash equivalents:                                                                                                        
  Beginning of period                             --              20         2,062         3,975          --              6,057   
                                         ----------------------------------------------------------------------------------------  

   End of period                             $    --       $      19     $   1,581     $   2,155     $    --          $   3,755   
                                         ========================================================================================   

</TABLE>




                                       21

<PAGE>   22
                              SEALY CORPORATION
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        SIX MONTHS ENDED MAY 31, 1998


<TABLE>
<CAPTION>


                                SEALY CORPORATION
          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
                         SIX MONTHS ENDED JUNE 1, 1997
                                 (in thousands)



                                                           Sealy       Combined       Combined
                                             Sealy       Mattress     Guarantor    Non-Guarantor
                                          Corporation     Company    Subsidiaries   Subsidiaries   Eliminations  Consolidated

<S>                                        <C>           <C>           <C>           <C>           <C>           <C>      
Net cash provided by (used in)             
  operating activities                     $(18,935)     $    513      $ 12,424      $    810      $     21      $ (5,167)
                                      -----------------------------------------------------------------------------------------

Cash flows from investing
activities:
  Proceeds from sale of
    subsidiary                                   --        35,000            --            --            --        35,000
  Proceeds from sale of
    insulator pad operation assets               --         5,150            --            --            --         5,150

  Purchase of property and
    equipment, net                               --           (83)      (10,499)           (2)           --       (10,584)
  Net activity in investment in
    and advances to (from)
    subsidiaries and affiliates              55,759        12,259        (2,004)      (13,265)      (52,749)           --
                                      -----------------------------------------------------------------------------------------


    Net proceeds provided by             
      (used in) investing
      activities                             55,759        52,326       (12,503)      (13,267)      (52,749)       29,566

Cash flows from financing activities:
  Proceeds from (repayment of)
    long-term obligations, net               69,082            --             1           (35)           --        69,048
  Dividend                                  (99,776)           --            --            --            --       (99,776)
  Debt issuance costs                        (6,130)           --            --            --            --        (6,130)
  Net equity activity with Parent                --       (52,893)          (42)          207        52,728            --
                                      -----------------------------------------------------------------------------------------

      Net cash used in
         financing activities               (36,824)      (52,893)          (41)          172        52,728       (36,858)
                                      -----------------------------------------------------------------------------------------

Change in cash and cash                
equivalents                                      --           (54)         (120)      (12,285)           --       (12,459)

Cash and cash equivalents:               
  Beginning of period                            --            54         3,118        13,447            --        16,619
                                      -----------------------------------------------------------------------------------------

 End of period                             $     --      $     --      $  2,998      $  1,162      $     --      $  4,160
                                      =========================================================================================
</TABLE>



                                       22


<PAGE>   23


                                SEALY CORPORATION
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2 -

QUARTER ENDED MAY 31, 1998 COMPARED WITH QUARTER ENDED JUNE 1, 1997

     NET SALES Net sales increased $32.9 million, or 18.2% for the quarter ended
May 31, 1998, when compared to the quarter ended June 1, 1997 attributable to
increased conventional bedding sales.

     The conventional bedding sales increase over the prior year was driven by a
13.0% or $23.5 million increase in conventional bedding unit shipments and a
4.6% or $9.4 million increase in average unit selling price. These increases
were due to sales growth in Posturepedic, Stearns & Foster and promotional
product lines, in addition to continued positive results from successful
strategic distribution initiatives that included sole-source, multi-year
arrangements of varying lengths with several retailers. The increase in average
unit selling price is primarily attributable to the introduction of new or
re-engineered higher-end products.

     COST OF GOODS Sold Cost of goods sold for the quarter, as a percentage of
net sales, increased 1.1 percentage points to 56.7%. This increase is primarily
attributable to higher start-up costs associated with the integration of new
products into production partially offset by production economies of scale from
increased volume.

     SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and administrative
expenses increased $13.6 million due to increases in marketing spending, $8.6
million, Corporate Headquarters and Research and Development Center relocation
expenses, $2.2 million and delivery expenses, $1.6 million. Increased marketing
spending was due to increased sales volume, along with an increased spending
rate for cooperative advertising and promotions partially offset by lower
national advertising. Increased delivery expenses were due to increased sales
volume, along with an increased spending rate.

     INTEREST EXPENSE Interest expense, net of interest income, increased $9.3
million primarily as a result of significantly higher debt levels due to the
Recapitalization and a higher interest rate spread.

     INCOME TAX The Company's provision for income taxes decreased $6.0 million
to a benefit of $0.8 million, due to a loss before income tax and extraordinary
item of $2.5 million as compared to $8.4 million pretax income, for the quarters
ended May 31, 1998 and June 1, 1997, respectively, partially offset by a lower
effective tax rate. The effective income tax rate for the quarter ended May 31,
1998 is approximately 33.5% as compared to 60.9% for the quarter ended June 1,
1997. The relatively low effective tax rate is due to low full year projected
pretax income resulting from increased leverage and compensation charges
associated with the Recapitalization, as well as the charges related to the
Corporate Headquarters, Research & Development Center and Lexington plant
relocation to High Point, North Carolina.

     EXTRAORDINARY ITEM . The Company recorded a $82 thousand charge, net of
income tax benefit of $57 thousand, representing the premiums paid related to
the call for redemption of all outstanding Parent Notes paid on May 1, 1998.

     NET (LOSS) INCOME For the reasons set forth above, the Company recorded a
net loss of $1.7 million for the quarter ended May 31, 1998 versus net income of
$3.3 million for the quarter ended June 1, 1997.

                                       23
<PAGE>   24



                                SEALY CORPORATION
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)



SIX MONTHS ENDED MAY 31, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 1, 1997

     NET SALES Net sales increased $73.3 million, or 21.0% for the six months
ended May 31, 1998, when compared to the six months ended June 1, 1997. The
increase is attributable to a $78.6 million increase in conventional bedding
sales offset by a $5.3 million decrease in sales of wood bedroom furniture.

     Conventional bedding sales increased 22.8% over the prior year, driven by a
18.8% or $64.6 million increase in conventional bedding unit shipments and a
3.4% or $14.0 million increase in average unit selling price. These increases
were due to sales growth in Posturepedic, Stearns & Foster and promotional
product lines, in addition to continued positive results from successful
strategic distribution initiatives. The increase in average unit selling price
is primarily attributable to the introduction of new or re-engineered higher-end
products.

     The decrease in sales of wood bedroom furniture, sold under the Samuel
Lawrence brand, is due to the sale of this business on January 15, 1997. A
description of the disposition of this business unit is provided in Note 14 to
the consolidated financial statements contained in the Company's Form 10-K for
the year ended November 30, 1997.

     COST OF GOODS SOLD Cost of goods sold for the six months, as a percentage
of net sales, increased 1.0 percentage point to 57.4%. This increase is
primarily attributable to higher start-up costs associated with the integration
of new products into production, the introduction of lower price point products,
partially offset by production economies of scale from increased volume.

     SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and administrative
expenses increased $45.7 million due to increased operating expenses of $26.9
million and compensation related costs associated with the Recapitalization of
$18.8 million. Increased operating costs were primarily due to increases in
marketing spending, $17.5 million, delivery expenses, $4.1 million and Corporate
Headquarters and Research and Development Center relocation expenses, $2.2
million. Increased marketing spending was due to increased sales volume, along
with an increased spending rate for cooperative advertising and promotions
partially offset by lower national advertising. Increased delivery expenses were
due to increased sales volume, along with an increased spending rate.
Recapitalization costs of $18.8 million were primarily comprised of accelerated
vesting of stock options and restricted stock and other incentive based
compensation payments to employees in connection with the transaction.

     INTEREST EXPENSE Interest expense, net of interest income, increased $18.0
million primarily as a result of significantly higher debt levels due to the
Recapitalization and a higher interest rate spread.

     INCOME TAX The Company's provision for income taxes decreased $9.9 million
to a benefit of $1.6 million, due to a loss before income tax and extraordinary
item of $21.0 million as compared to income before income tax and extraordinary
item of $14.8 million, for the six months ended May 31, 1998 and June 1, 1997,
respectively, partially offset by a lower effective tax rate. The effective
income tax rate for the six months ended May 31, 1998 is approximately 7.5% as
compared to the six months ended June 1, 1997 rate of 56.1%. The relatively low
effective tax rate is due to low full year projected pretax income resulting
from increased leverage and compensation charges associated with the
Recapitalization as well as the charges related to the Corporate Headquarters,
Research & Development Center and Lexington plant relocation to High Point,
North Carolina.

     EXTRAORDINARY ITEM The Company recorded a $14.5 million charge, net of
income tax benefit of $9.7 million, representing the writeoff of the remaining
unamortized debt issue costs related to long-term obligations repaid in
connection with the Recapitalization as well as consent fees and premiums paid


                                       24
<PAGE>   25
                              SEALY CORPORATION
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)



related to the Tender Offer of the Parent Notes in connection with the
Recapitalization and the call for redemption of all remaining outstanding Parent
Notes paid on May 1, 1998.

     NET (LOSS) INCOME For the reasons set forth above, the Company recorded a
net loss of $34.0 million for the six months ended May 31, 1998 versus net
income of $4.4 million for the six months ended June 1, 1997.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal sources of funds are cash flows from operations and
borrowings under its Revolving Credit Facility. The Company's principal use of
funds consists of payments of principal and interest on its Senior Credit
Agreements, capital expenditures and interest payments on its outstanding Notes.
Capital expenditures totaled $15.7 million for the six months ended May 31, 1998
and are projected to be $33.8 million for fiscal 1998. Management believes that
annual capital expenditure limitations in its current debt agreements will not
significantly inhibit the Company from meeting its ongoing capital needs. On
June 23, 1998, the Company secured permanent financing for the property,
manufacturing facility and office building in High Point, North Carolina as
purchased on April 13, 1998 and to fund the construction of the new Corporate
headquarters facility at this site. The initial purchase price of $8.4 million
was paid at closing and was financed on a temporary basis with a draw from the
Revolving Credit Facility. The permanent loan agreement provides for borrowings
not to exceed $14.5 million and the Company made an initial draw of $8.2
million. In conjunction with the permanent financing senior lenders approved an
amendment to the senior credit facilities and related covenants to permit the
transaction. Additionally, the Company estimates total costs associated with the
Corporate Headquarters, Research & Development Center and Lexington plant
relocation to High Point, North Carolina will result in a pretax charge of
approximately $8.5 million which will be recognized primarily in fiscal 1998
with the balance in fiscal 1999. At May 31, 1998, the Company had approximately
$57 million available under its Revolving Credit Facility with Letters of Credit
issued totaling approximately $12 million. The weighted average interest rate on
the Revolving Credit Facility at May 31, 1998 was 8.7%.

     On January 15, 1997, the Company sold its subsidiary that manufactured wood
bedroom furniture under the Samuel Lawrence brand name. Gross proceeds from the
sale of $35.0 million were used to reduce amounts outstanding under the 1994
Restated Credit Agreement.

     Management believes that the Company will have the necessary liquidity
through cash flow from operations, and availability under the Revolving Credit
Facility for the next several years to fund its expected capital expenditures,
the estimated $8.5 million of relocation costs, obligations under its credit
agreement and subordinated note indentures, environmental liabilities, and for
other needs required to manage and operate its business.

YEAR 2000 ISSUE

      The Company believes that the new Business Systems, including appropriate
software, being installed both alongside and as part of an upgrade of its
existing computer system will address the dating system flaw inherent in most
operating systems (the "Year 2000 Issue"). There can be no assurance, however,
that the new Business Systems will be installed and fully operational at all
locations and for all applications prior to the turn of the century, and
management has therefore deemed it necessary to convert its current system to be
Year 2000 compliant. The Company has conducted a comprehensive impact analysis
to determine what computing platforms and date-aware functions with respect to
its existing computer operating systems will be disrupted by the Year 2000
Issue. In January 1998, the Company completed a prioritization of the impacted
areas identified to date and commenced the detailed program code changes through
a contracted third party vendor which has experience in Year 2000 conversions
for the Company's existing system including the same release of such system. The
Company is currently in the process of replacing personal computers and phone
systems that are not Year 2000 compliant. The Company has confirmed that its
primary manufacturing equipment is Year 2000 compliant. Major suppliers to the
Company have been contacted and the Company has received confirmation of Year
2000 compliance or a timetable to be compliant from such suppliers. The Company
is in the preliminary stages of assessment of its customer status with respect
to the Year 2000 Issue. The required code changes, testings and implementation
necessary to address the Year 2000 Issue are projected to be completed by May,
1999, and are expected to cost approximately $4.0 million.




                                       25
<PAGE>   26


                                SEALY CORPORATION
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)


INFLATION

     The Company maintains operations in Mexico which has experienced high
inflation levels. Neither the operations of Mexico nor the effects of the
inflation are material to the results of operations of the Company.

FORWARD LOOKING STATEMENTS

     This document contains forward-looking statements. Although the Company
believes its plans are based upon reasonable assumptions as of the current date,
it can give no assurances that such expectations can be attained. Factors that
could cause actual results to differ materially from the Company's expectations
include: general business and economic conditions, competitive factors, raw
materials pricing, and fluctuations in demand.







                                       26
<PAGE>   27





                           PART II. OTHER INFORMATION
                           --------------------------


Item 1.    Legal Proceedings.

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

Item 6.    Exhibits and Reports on Form 8-K

           (a)   Exhibits:

                 27.1      Financial Data Schedule.







                                       27



<PAGE>   28

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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
          ---------                                     -----



By: /s/ Ronald L. Jones                   President and Chief Executive Officer
   ----------------------------------        (Principal Executive Officer)
          Ronald L. Jones                         



By: /s/ Richard F. Sowerby                Vice President of Finance
   ---------------------------------         (Principal Financial and 
        Richard F. Sowerby                     Accounting Officer)
                                                   







Date: July 15, 1998