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



FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended: August 31, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                             to


Commission file number 001-08738



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

Delaware(State or other jurisdiction of incorporation)

36-3284147(I.R.S. Employer Identification No.)Sealy Drive One Office Parkway
Trinity, North Carolina(Address of principal executive offices)

27370(Zip Code)


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



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

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

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller
reporting company)

Smaller reporting company o


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

The number of shares of the registrant's common stock outstanding as of September 26, 2008 is approximately:
91,797,044.



---





PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

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

Three Months EndedAugust 31, 2008

August 26, 2007Net sales

$
404,963

$
446,380Cost of goods sold


240,843


266,492Gross profit


164,120


179,888Selling, general and administrative expenses


132,892


140,097Amortization of intangibles


981


871Restructuring expenses


2,448


Royalty income, net of royalty expense


(4,422
)

(3,771
)Income from operations


32,221


42,691Interest expense


14,379


15,936Debt extinguishment and refinancing expenses





249Other income, net


(117
)

(70
)Income before income tax expense


17,959


26,576Income tax expense


7,017


5,105Net income

$
10,942

$
21,471Earnings per common shareBasic

$
0.12

$
0.23Earnings per common shareDiluted

$
0.12

$
0.22Weighted average number of common shares outstanding:Basic


91,269


91,465Diluted


93,538


96,376


See
accompanying notes to condensed consolidated financial statements.

1

---



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

Nine Months EndedAugust 31,
2008

August 26,
2007Net sales

$
1,172,267

$
1,260,775Cost of goods sold


706,579


731,095Gross profit


465,688


529,680Selling, general and administrative expenses


365,536


402,542Amortization of intangibles


2,850


2,484Restructuring expenses


2,907


Royalty income, net of royalty expense


(13,558
)

(13,474
)Income from operations


107,953


138,128Interest expense


45,124


47,070Debt extinguishment and refinancing expenses





249Other income, net


(297
)

(284
)Income before income tax expense


63,126


91,093Income tax expense


24,013


28,855Net income

$
39,113

$
62,238Earnings per common shareBasic

$
0.43

$
0.68Earnings per common shareDiluted

$
0.42

$
0.64Weighted average number of common shares outstanding:Basic


91,044


91,427Diluted


94,066


96,586


See
accompanying notes to condensed consolidated financial statements.

2

---





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

August 31,
2008

December 2,
2007ASSETSCurrent assets:Cash and cash equivalents

$
30,699

$
14,607Accounts receivable, net of allowances for bad debts, cash discounts and returns


225,115


208,821Inventories


73,059


73,682Prepaid expenses and other current assets


26,977


26,497Deferred income taxes


17,057


20,087372,907


343,694Property, plant and equipmentat cost


462,890


442,306Less accumulated depreciation


(219,754
)

(198,434
)243,136


243,872Other assets:Goodwill


393,507


395,460Other intangibles, net of accumulated amortization


6,277


8,866Deferred income taxes


3,909


Debt issuance costs, net, and other assets


31,400


33,187435,093


437,513$
1,051,136

$
1,025,079LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilities:Current portionlong-term obligations

$
37,937

$
36,433Accounts payable


160,654


135,352Accrued incentives and advertising


39,861


47,754Accrued compensation


26,160


32,422Accrued interest


10,765


16,526Other accrued expenses


48,124


53,398323,501


321,885Long-term obligations, net of current portion


741,680


757,322Other noncurrent liabilities


67,955


50,814Deferred income taxes


6,990


8,295Common stock and options subject to redemption


9,424


16,156Stockholders' deficit:Common stock, $0.01 par value; Authorized shares: 2008 and 2007200,000 Issued and outstanding: 200891,743; 200790,814 (including shares classified above as
subject to redemption: 2008308; 2007401)


916


902Additional paid-in capital


667,480


654,626Accumulated deficit


(772,318
)

(794,160
)Accumulated other comprehensive income


5,508


9,239(98,414
)

(129,393
)$
1,051,136

$
1,025,079


See accompanying notes to condensed consolidated financial statements.

3

---





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

Common Stock





Accumulated
Other
Comprehensive
IncomeComprehensive
Income

Additional
Paid-in
Capital

Accumulated
DeficitShares

Amount

TotalBalance at December 2, 2007





90,814

$
902

$
654,626

$
(794,160
)
$
9,239

$
(129,393
)Net income

$
39,113











39,113





39,113Foreign currency translation adjustment


(3,890
)













(3,890
)

(3,890
)Adjustment to defined benefit plan liability, net of tax of $156


234














234


234Change in fair value of cash flow hedge, net of tax
of $24


(75
)













(75
)

(75
)Cumulative effect of a change in accounting principleadoption of FIN 48














(10,460
)




(10,460
)Share-based compensation:Compensation associated with stock option grants











2,276








2,276Directors' deferred stock compensation











54








54Current period expense from restricted stock awards











56








56Cash dividend














(6,811
)




(6,811
)Exercise of stock options





929


13


(927
)







(914
)Excess tax benefit on options exercised











796








796Reversal of retiree put liability











2,372








2,372Adjustment of common stock and options subject to redemption








1


8,227








8,228Balance at August 31, 2008

$
35,382


91,743

$
916

$
667,480

$
(772,318
)
$
5,508

$
(98,414
)


See accompanying notes to condensed consolidated financial statements.

4

---





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

Nine Months EndedAugust 31,
2008

August 26,
2007Cash flows from operating activities:Net income

$
39,113

$
62,238Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


25,763


23,064Deferred income taxes


1,847


(332
)Impairment charges


873


Amortization of debt issuance costs and other


1,761


2,171Share-based compensation


2,550


2,411Excess tax benefits from share-based payment arrangements


(781
)

(6,443
)Loss (gain) on sale of assets


348


(2,318
)Write-off of debt issuance costs related to debt extinguishments





709Other, net


1,083


(1,003
)Changes in operating assets and liabilities:Accounts receivable


(16,538
)

(31,275
)Inventories


715


1,814Prepaid expenses and other current assets


2,549


4,012Other assets


3,049


Accounts payable


25,731


17,858Accrued expenses


(26,824
)

(19,655
)Other liabilities


3,539


199Net cash provided by operating activities


64,778


53,450Cash flows from investing activities:Purchase of property, plant and equipment


(21,102
)

(33,526
)Proceeds from sale of property, plant and equipment


34


4,998Net cash used in investing activities


(21,068
)

(28,528
)Cash flows from financing activities:Cash dividends


(6,811
)

(20,578
)Proceeds from issuance of long-term obligations


8,114


Repayments of long-term obligations


(23,821
)

(37,540
)Borrowings under revolving credit facilities


277,658


116,596Repayments under revolving credit facilities


(281,085
)

(110,821
)Repurchase of common stock





(7,100
)Exercise of employee stock options, including related excess tax benefits


824


6,898Other





(2,695
)Net cash used in financing activities


(25,121
)

(55,240
)Effect of exchange rate changes on cash


(2,497
)

(654
)Change in cash and cash equivalents


16,092


(30,972
)Cash and cash equivalents:Beginning of period


14,607


45,620End of period

$
30,699

$
14,648


See accompanying notes to condensed consolidated financial statements.

5

---





SEALY CORPORATION        Notes to Condensed Consolidated Financial Statements        (unaudited)

Note 1: Basis of Presentation

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

On
April 6, 2004, the Company completed a merger with affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") whereby KKR acquired 92% of the Company's
capital stock. Certain of the Company's previous stockholders, including affiliates of Bain Capital, LLC and others, retained an 8% interest in the Company's stock. The merger was accounted for
as a recapitalization. Subsequent to the recapitalization, the Company contributed all of its interest in Sealy Mattress Company, of which it was the sole shareholder, to a newly formed subsidiary
holding company, Sealy Mattress Corporation, which also replaced the Company as the parent-guarantor of the 8.25% Senior Subordinated Notes due 2014 (the "2014 Notes") issued by Sealy Mattress
Company. Effective May 25, 2006, Sealy Corporation was named a guarantor of the 2014 Notes. At August 31, 2008, KKR controlled approximately 51% of the issued and outstanding common
stock of the Company.

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

Note 2: Recently Issued Accounting Pronouncements

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

In
September 2006, the FASB issued FAS 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles ("GAAP") and expands disclosure about fair value measurements. In February 2008, the FASB issued

6

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 2: Recently Issued Accounting Pronouncements (Continued)

FASB
Staff Position No. FAS 157-b, "Effective Date of FASB Statement No. 157", which provides a one year deferral of the effective date of FAS 157 for
non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance
with this interpretation, the Company has only adopted the provisions of FAS 157 with respect to its financial assets and liabilities that are measured at fair value within the financial
statements as of December 3, 2007. The provisions of FAS 157 have not been applied to non-financial assets and non-financial liabilities. The major categories of
assets and liabilities that are measured at fair value, for which the Company has not applied the provisions of FAS 157 are as follows: asset retirement obligations, reporting units measured at
fair value in the first step of a goodwill impairment test under FAS 142, long-lived assets measured at fair value for an impairment assessment under FAS 144.

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

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

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

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

In
March 2008, the FASB issued FAS 161, "Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133", which amends and expands
the disclosure requirements of FAS 133 to require qualitative disclosure about objectives and strategies for using

7

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 2: Recently Issued Accounting Pronouncements (Continued)

derivatives,
quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features
in derivative agreements. This statement will be effective for the Company beginning in fiscal 2009. The adoption of this statement will increase the disclosures in the financial statements related to
derivative instruments held by the Company.

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

In
June 2008, the FASB issued FASB Staff Position FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities", which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the
earnings allocation in computing earnings per share. This interpretation is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods
within those years. The Company will adopt this interpretation as of the beginning of fiscal 2010 and is still assessing the potential impact of adoption.

Note 3: Change in Estimate

During the second quarter of fiscal 2008, the Company completed an analysis of its returns claims experience based on historical return trends for the Company's U.S. business, which is a
component of the Americas segment, using newly available information as a result of a new and improved product return process that allows it to better track and match claims received to the sales for
which those claims were initially recorded. This analysis was applied to both its warrantable and other product returns. The effect of this change in estimate for warranty claims was to reduce other
accrued liabilities and cost of sales by approximately $4.5 million. The change in estimate for other product returns increased accounts receivable balances by approximately
$3.7 million, with a corresponding increase in net sales. For the nine month period ended August 31, 2008, the change in estimate increased operating income by $8.2 million and
net income by $5.1 million. This change in estimate also increased net income per basic and diluted share by $0.06 and $0.05, respectively for the nine months ended August 31, 2008.

Note 4: Share-Based Compensation

Stock Option Awards

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

8

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4: Share-Based Compensation (Continued)

During
the three and nine months ended August 31, 2008, the Company granted new options to purchase 307,750 and 1,660,205 shares, respectively, of common stock and recognized
compensation expense associated with these grants of approximately $0.1 million and $0.3 million during the three and nine months ended August 31, 2008. During the three and nine
months ended August 26, 2007, the Company granted new options to purchase 28,332 and 478,614 shares, respectively, of common stock, and recognized compensation expense associated with these
grants of approximately $0.6 million and $1.2 million during the three and nine months ended August 26, 2007, respectively. The options granted during the third quarter of fiscal
2008 and the third quarter of fiscal 2007 had a weighted average grant-date fair value of $3.09 and $5.37, respectively, per option. The Company valued these stock option grants using the
trinomial lattice valuation model with the following assumptions:

Three Months
Ended
August 31, 2008

Three Months
Ended
August 26, 2007Expected volatility


40%


30%Expected dividend yield


0.00%


1.76%2.03%Expected term (in years)


5.716.31


6.717.88Risk-free rate


3.48%


4.54%4.85%


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

A
summary of option activity under the 1998 Plan for the nine months ended August 31, 2008, is presented below:

Shares Subject to
Options

Weighted Average
Exercise Price
Per ShareOutstanding December 2, 2007


3,109,454

$
1.44Exercised


(1,102,439
)

1.31Outstanding August 31, 2008 (all fully vested and exercisable)


2,007,015

$
1.52Weighted average remaining contractual term


5.6 yearsAggregate intrinsic value at August 31, 2008 (in thousands)

$
10,373


9

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4: Share-Based Compensation (Continued)

A
summary of option activity under the 2004 Plan for the nine months ended August 31, 2008, is presented below:

Shares Subject to
Options

Weighted Average
Exercise Price
Per ShareOutstanding December 2, 2007


9,304,343

$
8.06Granted


1,660,205


8.53Exercised


(162,154
)

5.78Forfeited


(2,223,688
)

8.65Outstanding August 31, 2008


8,578,706

$
8.04Weighted average remaining contractual term


6.4 yearsAggregate intrinsic value (in thousands)

$
0Exercisable at August 31, 2008


4,804,672Weighted average remaining contractual term


6.2 yearsAggregate intrinsic value (in thousands)

$
0


As
of August 31, 2008, the Company had approximately $5.5 million of unrecognized compensation expense which is expected to be recognized over a weighted average period of
5.1 years.

During
the three and nine months ended August 31, 2008 and August 26, 2007, the Company recognized total non-cash compensation expense associated with stock
options of $0.6 million and $2.3 million, respectively for fiscal 2008 and $0.5 million and $1.6 million, respectively, for fiscal 2007. The non-cash
compensation expense recognized for the nine months ended August 31, 2008 includes a charge of approximately $0.7 million related to a modification of awards given to our former
President and Chief Executive Officer. This charge has been recorded as a component of selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

During
the three and nine months ended August 31, 2008 and August 26, 2007, the Company recognized expense of $0.0 million and $0.2 million, respectively for
fiscal 2008 and $0.1 million and $0.6 million, respectively, for fiscal 2007, resulting from the accretion of an obligation to certain executives of the Company for their right to sell
to the Company, upon their retirement, vested shares of the Company's common stock. These rights to sell the vested shares have expired and the related liability has been reclassified to common stock
and options subject to redemption and additional paid in capital within the accompanying Condensed Consolidated Balance Sheet as of August 31, 2008.

The
Company has granted stock options to employees that have accelerated vesting provisions which take effect if certain performance levels are achieved by the Company. If the Company
does not meet these performance targets, then the vesting of the options, in some cases, occurs over the remainder of the requisite service period or, in other cases, the options will not vest. As of
August 31, 2008, it is the Company's expectation that the performance targets for these stock options will not be met. As such, the recognition of the related unrecognized compensation cost is
being recognized over the remainder of the requisite service period for those options that vest over the remaining service period. The Company has not recognized compensation cost in the current
period for options to purchase 674,532 shares of common stock that do not vest if the performance targets are not achieved.

10

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 4: Share-Based Compensation (Continued)

Restricted Share Awards

During the third quarter of fiscal 2008 Board of Directors of the Company approved a grant to Mr. Rogers of 291,971 restricted
shares of Company common stock. Two-thirds of such restricted shares will vest on the second anniversary of the grant date, and one-third of such restricted shares will vest on
the third anniversary of the grant date. This grant is subject in its entirety to the Company's shareholders' approval of an amendment to the Company's current 2004 Stock Option Plan for Key Employees
of Sealy Corporation and Its Subsidiaries, which amendment would, if adopted, permit the grant of restricted stock awards under such plan. The plan currently only permits the Company to grant stock
options, stock appreciation rights, and dividend equivalent rights to employees of the Company and its subsidiaries.
Given that the Board of Directors has approved the issuance of these shares and the related amendments to the plan documents and since shareholder approval is considered perfunctory, we treated these
shares as having been granted for accounting purposes during the third quarter of fiscal 2008.

The
291,971 restricted shares considered outstanding have a grant date fair value of $6.85 based on the closing price of the Company's common stock as of the grant date which represents
fair value. Compensation expense recognized during the three and nine months ended August 31, 2008 related to these restricted shares was $0.1 million. As of August 31, 2008, the
remaining unrecognized compensation cost related to restricted stock awards was $1.9 million which is expected to be recognized over the remaining vesting period of three years. As of
August 31, 2008, none of the outstanding restricted stock awards have vested.

Note 5: Inventories

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

August 31, 2008

December 2, 2007Raw materials

$
31,822

$
30,327Work in process


29,041


27,647Finished goods


12,196


15,708$
73,059

$
73,682


Note 6: Warranty Costs

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

11

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 6: Warranty Costs (Continued)

As
indicated in Note 3, during the second quarter of fiscal 2008, the Company completed an analysis of its warranty claims experience. The analysis was based on historical return
trends using newly available information as a result of a new and improved product return process that allows the Company to better track and match claims received to the sales for which those claims
were initially recorded. As a result of the analysis performed, the Company changed its estimate of its accrued warranty obligations. This resulted in a reduction of accrued warranty obligations and
cost of sales of approximately $4.5 million. The change in the Company's accrued warranty obligations for each of the nine months ended August 31, 2008 and August 26, 2007 and the
year ended December 2, 2007 was as follows (in thousands):

August 31, 2008

December 2, 2007

August 26, 2007Accrued warranty obligations at beginning of period

$
15,964

$
15,349

$
15,349Warranty claims


(14,611
)

(17,389
)

(12,240
)Warranty provisions


18,147


18,004


12,237Change in estimate


(4,484
)




Accrued warranty obligations at end of period

$
15,016

$
15,964

$
15,346


Warranty
claims for the year ended December 2, 2007 included approximately $14.0 million for claims associated with products sold prior to November 26, 2006 that
were still under warranty. In estimating its warranty obligations, the Company considers the impact of recoverable salvage value on warranty cost in determining its estimate of future warranty
obligations. Warranty claims and provisions shown above do not include estimated salvage recoveries that reduced cost of sales by $4.2 million, $6.2 million and $4.5 million for
the nine months ended August 31, 2008, the year ended December 2, 2007 and the nine months ended August 26, 2007, respectively.

Note 7: Assets Held for Sale

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

Note 8: Assets Constructed on Behalf of the Company

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

12

---





SEALY CORPORATION        Notes to Condensed Consolidated Financial Statements        (unaudited)

Note 9: Goodwill and Other Intangible Assets

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

The
changes in the carrying amount of goodwill for the nine months ended August 31, 2008 are as follows:

Americas

Europe

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


366,943


28,517


395,460Increase (decrease) due to foreign currency translation


(2,033
)

80


(1,953
)Balance as of August 31, 2008

$
364,910

$
28,597

$
393,507


Total
other intangibles of $6.3 million (net of accumulated amortization of $14.2 million) as of August 31, 2008 consist primarily of licenses, which are amortized
using a straight-line method over periods ranging from 5 to 15 years.

Note 10: Long-Term Obligations

Long-term obligations as of August 31, 2008 and December 2, 2007 consisted of the following:

August 31, 2008

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

$
38,200

$
41,600Senior secured term loans


392,181


403,393Senior subordinated notes


273,945


273,945Financing obligations


42,615


41,674Other


32,676


33,143779,617


793,755Less current portion


(37,937
)

(36,433
)$
741,680

$
757,322


The
total borrowing capacity under the senior revolving credit facility is $125 million, of which up to $25 million may be borrowed in Canada. At August 31, 2008,
amounts outstanding under the senior revolving credit facility included $38.2 million under the U.S. portion of the facility. No amounts were outstanding under the Canadian portion at
August 31, 2008. At August 31, 2008, the Company had approximately $70.9 million available under the revolving credit facility after taking into account letters of credit issued
totaling $15.9 million.

During
the third quarter of fiscal 2007, the Company repurchased and retired $28.0 million aggregate principal amount of the 2014 Notes on the open market at prices ranging from
98.0% to 98.5% of par, plus accrued interest. In connection with these transactions, the Company recorded a gain on the retirement of $0.5 million offset by non-cash charges of
$0.7 million resulting from the

13

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 10: Long-Term Obligations (Continued)

write-off
of debt issuance costs associated with the retired debt. This net expense of $0.2 million was recorded in the debt extinguishment and refinancing expenses on the Condensed
Consolidated Statements of Operations.

Annually,
the Company may be required to make principal prepayments depending on certain financial ratios, as defined in its senior secured credit agreement. At August 31, 2008,
the Company is unable to estimate the amount of such required payment, if any, that would be due following the first quarter of fiscal 2009 with respect to excess cash flow for the 2008 fiscal year.
No prepayments based on these conditions have been made prior to August 31, 2008. The senior credit agreements and the senior subordinated notes also restrict the Company's ability to pay
dividends.

At
August 31, 2008, the Company was in compliance with the covenants contained within its senior credit agreements and indenture governing the senior subordinated notes. Given
current economic conditions the Company may not remain in full compliance with its debt covenants over the next twelve months. Non-compliance with such covenants could prevent the Company from being
able to access these facilities for liquidity purposes and could require the Company to immediately repay all amounts outstanding under these facilities. In the event of this occurrence, the Company
intends to take such actions available to it in respect thereof as it determines to be appropriate at such time which may include refinancing all or a portion of the senior secured credit facilities
under modified terms or amending the terms of such facilities. There can be no assurance that any such actions will be successful. Any such action, if successful, may also result in interest being
payable by the Company at higher interest rates.

Note 11: Hedging Strategy

Use of hedging contracts allows the Company to reduce its overall exposure to interest rate changes, since gains and losses on these contracts will offset losses and gains on the
transactions being hedged. The Company formally documents qualifying hedged transactions and hedging instruments, and assesses, both at inception of the contract and on an ongoing basis, whether the
hedging instruments are effective in offsetting changes in cash flows of the hedged transaction. The fair values of the interest rate agreements are estimated by obtaining valuations from brokers and
are the estimated amounts that the Company would receive or pay to terminate the agreements at the reporting date, taking into consideration current interest rates and the current creditworthiness of
the counterparties.

In
June 2004, the Company entered into a swap agreement having the effect of converting $200 million of the floating-rate debt under the Company's senior credit
facilities to a fixed-rate basis, declining to $150 million from December 2005 through December 3, 2007. The Company formally designated this swap agreement as a cash flow
hedge and expected the hedge to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. For the three and nine months
ended August 26, 2007, $0.6 million and $1.8 million respectively, was recorded as a reduction of interest expense related to this swap agreement.

On
June 15, 2007, the Company entered into an interest rate swap agreement effective December 3, 2007 fixing the floating portion of the interest rate at 5.495% on
$242 million of the outstanding balance under the senior secured term loan through November 2008, declining to $240 million from December 2008 through November 2009, and further
declining to $180 million from

14

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 11: Hedging Strategy (Continued)

December
2009 through November 2010. The Company has formally designated this swap agreement as a cash flow hedge and expects the hedge to be highly effective in offsetting fluctuations in the
designated interest payments resulting from charges in the benchmark interest rate. The Company will select the Eurodollar rate on the hedged portion of the senior secured term loan during the term of
the swap. The fair value of this swap instrument was recorded in the Condensed Consolidated Balance Sheets as a liability of $10.3 and $10.2 million at August 31, 2008 and
December 2, 2007, respectively. Over the next 12 months, the Company expects to reclassify $4.6 million of deferred losses from accumulated other comprehensive income to interest
expense as related interest payments that are being hedged are recognized.

Additionally,
the Company entered into three interest rate swaps for 2.3 million Euro, 2.9 million Euro and 3.5 million Euro which fix the floating interest rates on
the Company's debt of its Europe segment at 4.92%, 4.85% and 4.50%, respectively. The notional amounts of these contracts amortize over the life of the agreement and the agreements expire in May 2019,
January 2013 and October 2013. The fair value of these swaps was an insignificant amount as of August 31, 2008 and was recorded as a component of other noncurrent assets in the accompanying
Condensed Consolidated Balance Sheet. The Company has not formally documented these interest rate swaps as hedges. Therefore, the change in the fair value of these contracts for the three and nine
months ended August 31, 2008 of an insignificant amount has been recorded as a reduction to interest expense.

At
August 31, 2008 and December 2, 2007, the fair value carrying amount of the instruments indicated above was recorded as follows:

August 31, 2008

December 2, 2007(in thousands)Accrued interest receivable

$


$
711Other noncurrent assets


18


Accrued interest payable


(1,740
)

Other current liabilities


(4,637
)

(3,237
)Other liabilities


(5,657
)

(7,006
)Total net liability

$
(12,016
)
$
(9,532
)


At
August 31, 2008 and December 2, 2007, accumulated other comprehensive income associated with interest rate swaps qualifying for hedge accounting treatment was
$(6.4 million) and $(6.3 million), respectively, net of income tax effects.

To
protect against the reduction in value of forecasted foreign currency cash flows resulting from purchases in a foreign currency, the Company enters into foreign currency forward
contracts. The Company does not designate its foreign currency forward contracts as hedges for accounting purposes, therefore all changes in fair value are charged to earnings. At August 31,
2008 and December 2, 2007, the Company did not have any foreign currency forward contracts outstanding. For the three and nine months ended August 31, 2008, recognized foreign currency
transaction (losses) gains were $(0.1 million) and $0.6 million, respectively, compared with gains (losses) of $0.3 million and $(1.0 million) for the three and nine months
ended August 26, 2007, respectively.

15

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 12: Fair Value of Financial Instruments

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

Fair Value Measurements at August 31, 2008 UsingAugust 31, 2008

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs (Level 3)Derivatives

$
(12,016
)
$


$
(12,016
)
$



Note 13: Other Income, Net

Other income, net, includes interest income for the three and nine months ended August 31, 2008 and August 26, 2007 of $0.1 million and $0.3 million,
respectively for fiscal 2008 and $0.1 million and $0.3 million, respectively for fiscal 2007.

Note 14: Conditional Asset Retirement Obligations

Under the provisions of FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"), the Company recorded an additional
$0.1 million in property, plant and equipment and other noncurrent liabilities in the first quarter of fiscal 2007. These amounts resulted from obligations in certain of the Company's facility
leases that require the Company to return those properties to the same or similar condition at the end of the lease as existed when the Company began using those facilities. An additional
$0.3 million in property, plant and equipment and other noncurrent liabilities was recognized in the third quarter of fiscal 2008 related to new and amended facility leases which have similar
requirements to those indicated above. Although the lease termination dates range from 2010 to 2027, the Company may be able to renegotiate such leases to extend the terms. Also, during the third
quarter, the Company reversed the unused portion of the asset retirement obligation related to a leased facility that was exited. This resulted in the recognition of a reduction of $0.1 million
to selling, general and administrative expenses for the three and nine months ended August 31, 2008.

In
addition to the above obligations, the Company also owns certain factories that contain asbestos. Current regulations require that the Company remove and dispose of asbestos if the
factory undergoes major renovations or is demolished. Although the Company is not required to remove the asbestos unless renovation or demolition occurs, it is required to monitor the asbestos and
ensure that

16

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 14: Conditional Asset Retirement Obligations (Continued)

it
remains stable and is required to notify any potential buyer of its existence. In fiscal 2007, the Company removed asbestos at a European facility and a domestic facility. The Company has
recognized an asset retirement obligation of $0.2 million for the remaining asbestos in its European facilities. The Company has not recognized asset retirement obligations in the Condensed
Consolidated Financial Statements for asbestos at other facilities because management believes that there is an indeterminate settlement date for the retirement obligation as the range of time over
which the Company may be required to remove and dispose of the asbestos is unknown or cannot be estimated. The Company currently has no plans to demolish a factory or to undertake a major renovation
that would require removal of the asbestos at any of these other facilities. Management will continue to monitor this issue and will record an asset retirement obligation when sufficient information
becomes available to estimate the obligation.

Note 15: Defined Benefit Pension Expense

The components of net periodic pension cost recognized for the Company's defined benefit pension plans in the U.S., Canada and France for the three and nine months ended
August 31, 2008 and August 26, 2007 are as follows:

Three Months Ended

Nine Months EndedAugust 31, 2008

August 26, 2007

August 31, 2008

August 26, 2007(in thousands)

(in thousands)Service cost

$
272

$
177

$
816

$
501Interest cost


339


245


1,018


697Expected return on plan assets


(335
)

(268
)

(1,004
)

(754
)Curtailment loss


213





213


Amortization of unrecognized gains and losses


39


38


118


106Amortization of unrecognized transition asset


(22
)

(22
)

(66
)

(66
)Amortization of unrecognized prior service cost


69


56


208


162Net periodic pension cost*

$
575

$
226

$
1,303

$
646Cash contributions

$
501

$
698

$
1,447

$
1,287


---

The
Company expects to make additional cash contributions to the plans of approximately $0.7 million during the remainder of fiscal 2008. The plans were underfunded by
$6.4 million and $7.4 million as of August 31, 2008 and December 2, 2007, respectively.

17

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 16: Income Taxes

The Company's effective income tax rates differ from the Federal statutory rate principally because of the effect of certain foreign tax rate differentials and state and local income
taxes. The effective tax rate for the three and nine months ended August 31, 2008 was 39.1% and 38.0%, respectively compared to approximately 19.2% and 31.7%, respectively, for the three and
nine months ended August 26, 2007. The effective rate for the three and nine months ended August 31, 2008 was higher than the three and nine months ended August 26, 2007 primarily
due to the recognition of capital loss benefits and a reduction in tax reserves due to expiring income tax statutes of limitations in fiscal 2007 and lower pre-tax income in fiscal 2008
compared to fiscal 2007.

The
Company adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes", effective December 3, 2007. As a
result of the adoption, the Company recognized a $10.5 million net increase to the liability for uncertain tax positions including interest and penalties of $0.7 million and
$2.5 million, respectively. These increases were accounted for as a cumulative effect adjustment and recognized as an increase in the beginning accumulated deficit in the consolidated balance
sheet (unaudited). Including the cumulative effect adjustment, the Company had approximately $25.9 million of total unrecognized tax benefits as of December 3, 2007. The Condensed
Consolidated Balance Sheet as of August 31, 2008 includes accrued interest of $6.1 million and penalties of $4.0 million due to unrecognized tax benefits of which
$4.3 million and $3.6 million were recorded in connection with the adoption. An additional $0.6 million interest and $0.1 million penalties were recorded in income tax
expense in the three months ended August 31, 2008, and an additional $1.7 million interest and $0.4 million penalties were recorded in income tax expense in the nine months ended
August 31, 2008. As of December 3, 2007, $13.9 million represents the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate in
future periods. The remaining $12.0 million represents the correlative relief for state and international items, plus the valuation allowance applied to state net operating loss adjustments.
The Company expects the liability for uncertain tax positions to decrease by $5.8 million within the succeeding twelve months due to expiration of income tax statutes of limitations. Federal
years open to examination are fiscal year 2004 and forward. State and international jurisdictions remain open to examination for fiscal year 2000 and forward.

Significant
judgment is required in evaluating the Company's federal, state and foreign tax positions and in the determination of its tax provision. Despite the Company's belief that its
liability for
unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matter. The Company may adjust these liabilities as
relevant circumstances evolve, such as guidance from the relevant tax authority, or resolution of issues in the courts. These adjustments are recognized as a component of income tax expense entirely
in the period in which they are identified. While the Company is currently undergoing examinations of certain of its corporate income tax returns by tax authorities, no issues related to these
reserves have been presented to the Company and the Company has not been informed that such audits will result in an assessment or payment of taxes related to these positions during the one year
period following August 31, 2008. The Company also cannot predict when or if any other future tax payments related to these tax positions may occur.

18

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 17: Comprehensive Income

Comprehensive income for the three and nine months ended August 31, 2008 was $3.6 million and $35.4 million, respectively, and for the three and nine months ended
August 26, 2007, was $22.9 million and $66.8 million. The decrease in comprehensive income for the three and nine months ended August 31, 2008 as compared to the three and
nine months ended August 26, 2007 has been primarily driven by the decrease in net income and the effects of the foreign currency translation adjustment.

Note 18: Commitments and Contingencies

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

The
Company is currently conducting an environmental cleanup at a formerly owned facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial Site Recovery Act. The
Company and one of its subsidiaries are parties to an Administrative Consent Order issued by the New Jersey Department of Environmental Protection. Pursuant to that order, the Company and its
subsidiary agreed to conduct soil and groundwater remediation at the property. The Company does not believe that its manufacturing processes were the source of contamination. The Company sold the
property in 1997. The Company and its subsidiary retained primary responsibility for the required remediation. The Company has completed essentially all soil remediation with New Jersey Department of
Environmental Protection approval and operates a groundwater remediation system on the site. During 2005, with the approval of the New Jersey Department of Environmental Protection, the Company
removed and disposed of sediment in Oakeys Brook adjoining the site. The Company continues to monitor ground water at the site. The Company has recorded a reserve as a component of other accrued
expenses and other noncurrent liabilities in the accompanying Condensed Consolidated Balance Sheet as of August 31, 2008 for $2.7 million ($3.6 million prior to discounting at
4.75%) associated with this remediation project. Also in connection with this site, the Company received a written complaint from the New Jersey Department of Environmental Protection alleging natural
resources damages in an unspecified amount. Because the natural resources damages claim is in an early stage and the Company's liability, if any, cannot be reasonably estimated at this time, no
amounts have been accrued related to this matter.

The
Company is also remediating soil and groundwater contamination at an inactive facility located in Oakville, Connecticut. Although the Company is conducting the remediation
voluntarily, it obtained Connecticut Department of Environmental Protection approval of the remediation plan. The Company has completed essentially all soil remediation under the remediation plan and
is currently monitoring groundwater at the site. The Company identified cadmium in the soil and ground water at the site and removed the cadmium contaminated soil and rock from the site during fiscal
2007. The Company has recorded a reserve of approximately $0.2 million at August 31, 2008 associated with the additional work
and ongoing monitoring. The Company believes the contamination is attributable to the manufacturing operations of previous unaffiliated occupants of the facility.

The
Company removed three underground storage tanks previously used for diesel, gasoline, and waste oil from its South Gate, California facility in March 1994 and remediated the soil in
the area.

19

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 18: Commitments and Contingencies (Continued)

Since
August 1998, the Company has been working with the California Regional Water Quality Control Board, Los Angeles Region to monitor ground water at the site.

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

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

The
Company has employment agreements with certain of its executive officers and key employees which, among other things, provide severance benefits to those employees. On
March 12, 2008, David J. McIlquham resigned as President, Chief Executive Officer and Chairman of the Board of Directors of the Company. In accordance with his employment agreement and Company
Policy, certain benefits are to be paid to Mr. McIlquham in connection with his resignation. Additionally, during the second quarter, the Company terminated other employees who were also
entitled to severance benefits. In connection with Mr. McIlquham's resignation and the termination of the other employees, the Company recorded charges related to severance obligations due to
these individuals. For the three months ended August 31, 2008, an insignificant adjustment to reduce estimated severance liabilities was recorded. For the nine months ended August 31,
2008 severance costs of $4.2 million, were recorded as a component of operating income within the accompanying Condensed Consolidated Statements of Operations. The expense for the nine months
ended August 31, 2008 is inclusive of the $0.7 million of compensation cost that was recognized in connection with a modification of the terms of Mr. McIlquham's stock options
made in connection with his resignation (Note 4). Severance benefits of $2.0 million have been accrued as of August 31, 2008. Of this amount, $1.0 million is included as a
component of accrued liabilities and $1.0 million is included as a component of other noncurrent liabilities within the accompanying Condensed Consolidated Balance Sheet as of August 31,
2008.

Note 19: Related Party Transactions

During the nine months ended August 31, 2008, the Company was billed for premiums of $0.2 million for excess directors and officers liability insurance and excess liability
insurance to KKR. During the three and nine months ended August 31, 2008, the Company incurred costs of $0.1 million for consulting services provided by Capstone Consulting LLC, a
subsidiary of KKR. Additionally, during the three and nine months ended August 31, 2008, the Company was billed for $0.5 million of CEO search costs performed by KKR. As of
August 31, 2008, the $0.1 million of consulting services and $0.5 million of CEO search costs were accrued as a component of other accrued expenses in the accompanying Condensed
Consolidated Balance Sheets.

20

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 20: Segment Information

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

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

Sales
by geographic area are as follows:

Three Months Ended

Nine Months EndedAugust 31, 2008

August 26, 2007

August 31, 2008

August 26, 2007Americas:United States

$
296,105

$
335,084

$
836,073

$
954,963Canada


49,438


51,031


138,697


132,028Other International


27,688


24,433


81,830


71,453Total Americas


373,231


410,548


1,056,600


1,158,444Europe


31,732


35,832


115,667


102,331Total

$
404,963

$
446,380

$
1,172,267

$
1,260,775Total International

$
108,858

$
111,296

$
336,194

$
305,812


Sales
from Europe to the Americas for the three and nine months ended August 31, 2008 and August 26, 2007 were $0.0 million and $3.6 million, respectively for
fiscal 2008 and $1.1 million and $7.6 million, respectively, for fiscal 2007. Long lived assets (principally property, plant and equipment)

21

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 20: Segment Information (Continued)

outside
the United States were $69.5 million and $68.6 million as of August 31, 2008 and December 2, 2007, respectively.

Three Months Ended

Nine Months EndedAugust 31, 2008

August 26, 2007

August 31, 2008

August 26, 2007(in thousands)

(in thousands)Net sales to external customers:Americas

$
373,231

$
410,548

$
1,056,600

$
1,158,444Europe


31,732


35,832


115,667


102,331404,963


446,380


1,172,267


1,260,775Capital expenditures:Americas


7,142


8,067


19,720


29,071Europe


94


3,055


1,382


4,4557,236


11,122


21,102


33,526EBITDA:Americas


44,893


51,222


134,110


160,198Europe


(3,775
)

(495
)

(352
)

1,760Inter-segment eliminations


(137
)

(334
)

254


(731
)40,981


50,393


134,012


161,227Reconciliation of EBITDA to net income:EBITDA from segments


40,981


50,393


134,012


161,227Interest


14,379


15,936


45,124


47,070Income taxes


7,017


5,105


24,013


28,855Depreciation and amortization


8,643


7,881


25,763


23,064Net Income

$
10,942

$
21,471

$
39,112

$
62,238




August 31, 2008

December 2, 2007(in thousands)Total assets:Americas

$
934,519

$
902,986Europe


116,900


122,630Intersegment eliminations


(283
)

(537
)$
1,051,136

$
1,025,079


22

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 21: Earnings per Share

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

Three Months Ended

Nine Months EndedAugust 31,
2008

August 26,
2007

August 31,
2008

August 26,
2007(in thousands)

(in thousands)Numerator:Net income available to common shareholders

$
10,942

$
21,471

$
39,113

$
62,238Denominator:Denominator for basic earnings per shareweighted average shares


91,269


91,465


91,044


91,427Effect of dilutive securities:Stock options


2,014


4,842


2,772


5,095Restricted shares


148





154


Other


107


69


96


64Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversions


93,538


96,376


94,066


96,586


Note 22: Restructuring Activities

For the three and nine months ended August 31, 2008, the Company recognized restructuring charges related to several initiatives, including facility closures and organizational
changes. The pretax restructuring charges recognized by the Company during the three and nine months ended August 31, 2008 and August 26, 2007 were as follows:

Three Months Ended

Nine Months EndedAugust 31,
2008

August 26,
2007

August 31,
2008

August 26,
2007(in thousands)

(in thousands)Americas Segment

$
2,217

$


$
2,676

$
Europe Segment


231





231


$
2,448

$


$
2,907

$



The
following table summarizes the restructuring activity for the nine months ended August 31, 2008, and the related restructuring liabilities balance (included as a component of
other accrued

23

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 22: Restructuring Activities (Continued)

liabilities
within the accompanying Condensed Consolidated Balance Sheets) as of December 2, 2007 and August 31, 2008:

Liabilities
December 2,
2007

Charges to
Expense

Cash
Payments

Non-cash
Utilized

Liabilities
August 31,
2008

Cumulative
Charges to Date(in thousands)Severance and employee benefits

$


$
2,034

$
(389
)
$


$
1,645Asset impairment charges





873





(873
)

Other restructuring costs














Total

$


$
2,907

$
(389
)
$
(873
)
$
1,645

$
2,907


In
the first quarter, management made the decision to cease manufacturing operations in Brazil and move to a distribution business model that is supplied by production from other Sealy
manufacturing facilities. As a result, the Company incurred charges of $0.5 million related to employee severance and
related benefits. The Company may incur additional restructuring charges related to this activity. The plan is expected to be completed in the fourth quarter of fiscal 2008.

In
the third quarter, management elected to close its administrative offices near Milan, Italy and relocate these activities to its manufacturing facility in Silvano, Italy. This closure
will result in the elimination of approximately 10 employees who elected not to relocate in the fourth quarter of fiscal 2008. We recorded a pre-tax restructuring charge related to this
action of $0.2 million during the quarter ended August 31, 2008, which was entirely related to employee severance and benefits. The Company expects to incur additional restructuring
charges related to this activity of approximately $0.4 million to $0.6 million, principally in the form of relocation and other employee benefit costs, which is expected to be recorded
in the fourth quarter of fiscal 2008, after which time the plan should be complete.

In
the third quarter, management also made the decision to close its manufacturing facility in Clarion, Pennsylvania. This facility is expected to be closed on October 17, 2008.
This closure will result in the elimination of approximately 114 positions through the fourth quarter of fiscal 2008. We recorded a pre-tax restructuring and impairment charge related to
this action of $2.2 million during the quarter ended August 31, 2008, of which $1.3 million was related to employee severance and benefits and other exit costs, and
$0.9 million which was non-cash in nature, related to fixed asset impairment charges. The Company expects to incur additional restructuring charges related to this activity of
approximately $0.5 million to $0.7 million, principally in the form of equipment and employee relocation costs, which are expected to be recorded in the fourth quarter of fiscal 2008,
after which time the plan should be complete.

The
accrued balance related to these restructuring activities as of August 31, 2008 is $1.6 million and is recorded as a component of other accrued expenses in the
accompanying Condensed Consolidated Balance Sheet.

24

---



SEALY CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Note 23: Guarantor/Non-Guarantor Financial Information

Sealy Corporation, Sealy Mattress Corporation (a 100% owned subsidiary of Sealy Corporation) and each of the subsidiaries of Sealy Mattress Company (the "Issuer") that guarantee the 2014
Notes (the "Guarantor Subsidiaries"), and are 100% owned subsidiaries of the Issuer, have fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and
interest with respect to the 2014 Notes of the Issuer. Substantially all of the Issuer's operating income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the
Issuer's debt service obligations are provided in part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial
condition and operating requirements of the Issuer's subsidiaries, could limit the Issuer's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations,
including the payment of principal and interest on the 2014 Notes. Although holders of the 2014 Notes will be direct creditors of the Issuer's principal direct subsidiaries by virtue of the
guarantees, the Issuer has subsidiaries ("Non-Guarantor Subsidiaries") that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated with respect to
the 2014 Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the
claims of creditors of the Issuer, including the holders of the 2014 Notes.

The
following Supplemental Condensed Consolidating Financial Statements present:



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

25

---





SEALY CORPORATION    Supplemental Condensed Consolidating Balance Sheets    August 31, 2008    (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedAssetsCurrent assets:Cash and cash equivalents

$
416

$


$
1

$
2,272

$
28,010

$


$
30,699Accounts receivable, net








4


131,993


93,118





225,115Inventories








1,753


46,638


25,201


(533
)

73,059Prepaid expenses, deferred income taxes and other current assets


1,456





368


34,280


7,930





44,0341,872





2,126


215,183


154,259


(533
)

372,907Property, plant and equipment, at cost








9,632


352,502


100,756





462,890Less accumulated depreciation








(4,417
)

(177,003
)

(38,334
)




(219,754
)





5,215


175,499


62,422





243,136Other assets:Goodwill








24,741


304,773


63,993





393,507Other intangibles, net


4,250








2,027








6,277Net investment in subsidiaries


(126,912
)

288,967


431,621


57,446





(651,122
)

Due from (to) affiliates


38,713


(415,879
)

529,386


(59,777
)

(92,613
)

170


Debt issuance costs, net and other assets








9,174


19,961


6,174





35,309(83,949
)

(126,912
)

994,922


324,430


(22,446
)

(650,952
)

435,093Total assets

$
(82,077
)
$
(126,912
)
$
1,002,263

$
715,112

$
194,235

$
(651,485
)
$
1,051,136Liabilities and Stockholders' (Deficit) EquityCurrent liabilities:Current portionlong-term obligations

$


$


$
15,000

$
3,354

$
19,583

$


$
37,937Accounts payable








426


99,193


61,035





160,654Accrued customer incentives and advertising











29,423


10,438





39,861Accrued compensation








346


16,813


9,001





26,160Accrued interest


38





696


9,711


320





10,765Other accrued expenses


4,238





4,759


32,541


6,586





48,1244,276





21,227


191,035


106,963





323,501Long-term obligations








689,326


42,069


10,285





741,680Other noncurrent liabilities


2,177





5,657


47,443


12,678





67,955Deferred income taxes


460





(2,914
)

2,703


6,741





6,990Common stock and options subject to redemption


9,424

















9,424Stockholders' equity (deficit)


(98,414
)

(126,912
)

288,967


431,862


57,568


(651,485
)

(98,414
)Total liabilities and stockholders' equity (deficit)

$
(82,077
)
$
(126,912
)
$
1,002,263

$
715,112

$
194,235

$
(651,485
)
$
1,051,136


26

---





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

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedAssetsCurrent assets:Cash and cash equivalents

$
4

$


$
1

$
4,012

$
10,590

$


$
14,607Accounts receivable, net


29





720


101,675


106,397





208,821Inventories








1,483


49,841


23,200


(842
)

73,682Prepaid expenses, deferred income taxes and other current assets


1,458





1,693


38,568


4,865





46,5841,491





3,897


194,096


145,052


(842
)

343,694Property, plant and equipment, at cost








9,051


336,196


97,059





442,306Less accumulated depreciation








(3,685
)

(160,839
)

(33,910
)




(198,434
)





5,366


175,357


63,149





243,872Other assets:Goodwill








24,741


304,773


65,946





395,460Other intangibles, net


6,622








2,244








8,866Net investment in subsidiaries


(151,637
)

264,066


413,585


46,521





(572,535
)

Due from (to) affiliates


40,091


(415,703
)

535,242


(63,875
)

(95,954
)

199


Debt issuance costs, net and other assets








10,935


17,869


4,383





33,187(104,924
)

(151,637
)

984,503


307,532


(25,625
)

(572,336
)

437,513Total assets

$
(103,433
)
$
(151,637
)
$
993,766

$
676,985

$
182,576

$
(573,178
)
$
1,025,079Liabilities and Stockholders' (Deficit) EquityCurrent liabilities:Current portionlong-term
obligations

$


$


$
15,000

$
3,323

$
18,110

$


$
36,433Accounts payable








508


77,009


57,835





135,352Accrued customer incentives and advertising











36,949


10,805





47,754Accrued compensation








420


21,210


10,792





32,422Accrued interest


56





1,040


15,216


214





16,526Other accrued expenses


3,931





3,431


39,019


7,017





53,3983,987





20,399


192,726


104,773





321,885Long-term obligations








703,938


41,517


11,867





757,322Other noncurrent liabilities


5,356





7,006


25,483


12,969





50,814Deferred income taxes


461





(1,643
)

3,479


5,998





8,295Common stock and options subject to redemption


16,156

















16,156Stockholders' equity (deficit)


(129,393
)

(151,637
)

264,066


413,780


46,969


(573,178
)

(129,393
)Total liabilities and stockholders' equity (deficit)

$
(103,433
)
$
(151,637
)
$
993,766

$
676,985

$
182,576

$
(573,178
)
$
1,025,079


27

---





SEALY CORPORATION    Supplemental Condensed Consolidating Statements of Operations    Three Months Ended August 31, 2008    (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
19,415

$
285,425

$
107,266

$
(7,143
)
$
404,963Cost and expenses:Cost of goods sold








11,424


166,106


70,647


(7,334
)

240,843Selling, general and administrative


106





1,912


102,474


28,400





132,892Amortization of intangibles


844








72


65





981Restructuring expenses











2,217


231





2,448Royalty (income) expense, net


(1,168
)







(4,419
)

1,165





(4,422
)Income from operations


218





6,079


18,975


6,758


191


32,221Interest expense


62


99


12,649


607


962





14,379Other (income) expense, net











1


(118
)




(117
)Loss (income) from equity investees


(10,838
)

(10,902
)

(7,814
)







29,554


Loss (income) from non- guarantor equity investees











(2,339
)




2,339


Capital charge and intercompany interest allocation








(11,792
)

11,002


790





Income (loss) before income taxes


10,994


10,803


13,036


9,704


5,124


(31,702
)

17,959Income tax expense (benefit)


52


(35
)

2,134


1,916


2,922


28


7,017Net income (loss)

$
10,942

$
10,838

$
10,902

$
7,788

$
2,202

$
(31,730
)
$
10,942


28

---



SEALY CORPORATION    Supplemental Condensed Consolidating Statements of Operations    Three Months Ended August 26, 2007    (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
20,928

$
323,370

$
109,594

$
(7,512
)
$
446,380Costs and expenses:Cost of goods sold








12,382


191,884


70,048


(7,822
)

266,492Selling, general and administrative


73





1,985


109,490


28,549





140,097Amortization of intangibles


740








72


59





871Royalty (income) expense, net


(851
)







(3,771
)

851





(3,771
)Income from operations


38





6,561


25,695


10,087


310


42,691Interest expense


86


171


14,284


511


884





15,936Other income (expense), net








249





(70
)




179Loss (income) from equity investees


(21,507
)

(21,600
)

(18,715
)







61,822


Loss (income) from nonguarantor equity investees











(4,738
)




4,738


Capital charge and intercompany interest allocation








(13,358
)

12,337


1,021





Income (loss) before income taxes


21,459


21,429


24,101


17,585


8,252


(66,250
)

26,576Income tax expense (benefit)


(12
)

(78
)

2,501


(1,142
)

3,848


(12
)

5,105Net income (loss)

$
21,471

$
21,507

$
21,600

$
18,727

$
4,404

$
(66,238
)
$
21,471


29

---



SEALY CORPORATION    Supplemental Condensed Consolidating Statements of Operations    Nine Months Ended August 31, 2008    (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
55,879

$
804,025

$
334,875

$
(22,512
)
$
1,172,267Cost and expenses:Cost of goods sold








33,060


479,335


217,004


(22,820
)

706,579Selling, general and administrative


73





5,503


274,159


85,801





365,536Amortization of intangibles


2,491








217


142





2,850Restructuring expenses











2,217


690





2,907Royalty (income) expense, net


(3,382
)







(13,555
)

3,379





(13,558
)Income from operations


818





17,316


61,652


27,859


308


107,953Interest expense


211


369


39,963


1,662


2,919





45,124Other (income) expense, net











1


(298
)




(297
)Loss (income) from equity investees


(38,823
)

(38,999
)

(32,059
)







109,881


Loss (income) from non- guarantor equity investees











(18,568
)




18,568


Capital charge and intercompany interest allocation








(37,193
)

33,740


3,453





Income (loss) before income taxes


39,430


38,630


46,605


44,817


21,785


(128,141
)

63,126Income tax expense (benefit)


317


(193
)

7,606


12,784


3,471


28


24,013Net income (loss)

$
39,113

$
38,823

$
38,999

$
32,033

$
18,314

$
(128,169
)
$
39,113


30

---



SEALY CORPORATION    Supplemental Condensed Consolidating Statements of Operations    Nine Months Ended August 26, 2007    (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
60,085

$
921,851

$
305,980

$
(27,141
)
$
1,260,775Costs and expenses:Cost of goods sold








35,154


528,773


194,954


(27,786
)

731,095Selling, general and administrative


194





5,777


317,425


79,146





402,542Amortization of intangibles


2,178








216


90





2,484Royalty (income) expense, net


(2,813
)







(13,090
)

2,429





(13,474
)Income from operations


441





19,154


88,527


29,361


645


138,128Interest expense


272


467


43,031


818


2,482





47,070Other income, net


(8
)




249


(46
)

(230
)




(35
)Loss (income) from equity investees


(62,132
)

(62,411
)

(52,772
)







177,315


Loss (income) from non-guarantor equity investees











(15,052
)




15,052


Capital charge and intercompany interest allocation








(40,238
)

37,137


3,101





Income (loss) before income taxes


62,309


61,944


68,884


65,670


24,008


(191,722
)

91,093Income tax expense (benefit)


71


(188
)

6,473


12,847


9,687


(35
)

28,855Net income (loss)

$
62,238

$
62,132

$
62,411

$
52,823

$
14,321

$
(191,687
)
$
62,238


31

---





SEALY CORPORATION    Supplemental Condensed Consolidating Statements of Cash Flows    Nine Months Ended August 31, 2008    (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet cash provided by operating activities

$


$


$
8,956

$
25,573

$
30,249

$


$
64,778Cash flows from investing activities:Purchase of property, plant and equipment








(136
)

(16,685
)

(4,281
)




(21,102
)Proceeds from the sale of property, plant, and equipment








53


(38
)

19





34Net activity in investment in and advances from (to) subsidiaries and affiliates


6,399





5,739


(6,307
)

(5,831
)




Net cash provided by (used in) investing activities


6,399





5,656


(23,030
)

(10,093
)




(21,068
)Cash flows from financing activities:Dividend


(6,811
)
















(6,811
)Equity received upon exercise of stock including related excess tax benefits


824

















824Repurchase of common stock




















Proceeds from issuance of long term obligations














8,114





8,114Repayments of long-term obligations








(11,212
)

(4,283
)

(8,326
)




(23,821
)Borrowings under revolving credit facilities








260,700





16,958





277,658Repayments on revolving credit facilities








(264,100
)




(16,985
)




(281,085
)Other




















Net cash used in financing activities


(5,987
)




(14,612
)

(4,283
)

(239
)




(25,121
)Effect of exchange rate changes on cash














(2,497
)




(2,497
)Change in cash and cash equivalents


412








(1,740
)

17,420





16,092Cash and cash equivalents:Beginning of period


4





1


4,012


10,590





14,607End of period

$
416

$


$
1

$
2,272

$
28,010

$


$
30,699


32

---



SEALY CORPORATION    Supplemental Condensed Consolidating Statements of Cash Flows    Nine Months Ended August 26, 2007    (in thousands)

Sealy
Corporation

Sealy
Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedNet cash provided by operating activities

$


$


$
11,976

$
17,737

$
23,737

$


$
53,450Cash flows from investing activities:Purchase of property, plant and equipment








(2,033
)

(25,721
)

(5,772
)




(33,526
)Proceeds from the sale of property, plant, and equipment











4,932


66





4,998Net activity in investment in and advances to (from) subsidiaries and affiliates


19,896





7,612


(23,366
)

(4,142
)




Net cash provided by (used in) investing activities


19,896





5,579


(44,155
)

(9,848
)




(28,528
)Cash flows from financing activities:Dividend


(20,578
)
















(20,578
)Equity received upon exercise of stock including related excess tax benefits


6,898

















6,898Repurchase of common stock


(7,100
)
















(7,100
)Repayment of long-term obligations








(37,540
)










(37,540
)Borrowings under revolving credit facilities








94,500





22,096





116,596Repayments under revolving credit facilities








(74,500
)




(36,321
)




(110,821
)Other


50





(15
)

(2,567
)

(163
)




(2,695
)Net cash provided by (used in) financing activities


(20,730
)




(17,555
)

(2,567
)

(14,388
)




(55,240
)Effect of exchange rate changes on cash














(654
)




(654
)Change in cash and cash equivalents


(834
)







(28,985
)

(1,153
)




(30,972
)Cash and cash equivalents:Beginning of period


934





1


36,182


8,503





45,620End of period

$
100

$


$
1

$
7,197

$
7,350

$


$
14,648


33

---





SEALY CORPORATION

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

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

BUSINESS OVERVIEW

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

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

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

In
June 2008, we announced the introduction of theSealy Posturepedic PurEmbracemattress featuring the Company's proprietary SmartLatex.
The line delivers unsurpassed pressure relief combined with the best ofSealy Posturepedicsupport to eliminate virtually all the uncomfortable pressure
points that cause tossing and turning, making it the Company's most advanced sleep system ever. This new latex sleep system aligns with our corporate growth strategy which focuses in part on
innovation within the specialty mattress category.

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

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

We
have two reportable segments: the Americas and Europe. These segments have been identified and aggregated based on our organizational structure which is organized around geographic
areas. Both reportable segments manufacture and market conventional and specialty bedding. The Americas

34

---



segment's
operations are concentrated in the United States, Canada, Mexico, Argentina, Brazil and Puerto Rico. Europe's operations are concentrated in western Europe.

RESULTS OF OPERATIONS



The following table sets forth our summarized results of operations for the three months ended August 31, 2008 and
August 26, 2007, expressed in thousands of dollars, as well as a percentage of each period's net sales:

For the three months endedAugust 31, 2008

August 26, 2007(in thousands)

(percentage
of net sales)

(in thousands)

(percentage
of net sales)Net sales

$
404,963


100.0
%
$
446,380


100.0
%Cost of goods sold


240,843


59.5


266,492


59.7Gross profit


164,120


40.5


179,888


40.3Selling, general and administrative expenses


132,892


32.8


140,097


31.4Amortization of intangibles


981


0.2


871


0.2Restructuring expenses


2,448


0.6





Royalty income, net of royalty expense


(4,422
)

(1.1
)

(3,771
)

(0.8
)Income from operations


32,221


8.0


42,691


9.5Interest expense


14,379


3.6


15,936


3.6Debt extinguishment and refinancing








249


0.1Other income, net


(117
)




(70
)

Income before income taxes


17,959


4.4


26,576


5.8Income tax expense


7,017


1.7


5,105


1.1Net income

$
10,942


2.7
%
$
21,471


4.7
%Effective tax rate


39.1
%




19.2
%


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

Three Months Ended:August 31,
2008

August 26,
2007Americas:United States


73.1
%

75.1
%Canada


12.2


11.4Other


6.9


5.5Total Americas


92.2


92.0Europe


7.8


8.0Total


100.0
%

100.0
%


35

---



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

For the three months endedAugust 31, 2008

August 26, 2007(in thousands)

(percentage
of net sales)

(in thousands)

(percentage
of net sales)Total Americas (US Dollars):Net sales

$
373,231


100.0
%
$
410,548


100.0
%Cost of goods sold


214,593


57.5


239,653


58.4Gross profit


158,638


42.5


170,895


41.6United States (US Dollars):Net sales


296,105


100.0


335,084


100.0Cost of goods sold


169,223


57.1


196,173


58.5Gross profit


126,882


42.9


138,911


41.5Total International (US Dollars):Net sales


108,858


100.0


111,296


100.0Cost of goods sold


71,620


65.8


70,319


63.2Gross profit


37,238


34.2


40,977


36.8Canada:US Dollars:Net sales


49,438


100.0


51,031


100.0Cost of goods sold


28,705


58.1


29,136


57.1Gross profit


20,733


41.9


21,895


42.9Canadian Dollars:Net sales


50,525


100.0


54,121


100.0Cost of goods sold


29,343


58.1


30,896


57.1Gross profit


21,182


41.9


23,225


42.9Other Americas (US Dollars):Net sales


27,688


100.0


24,433


100.0Cost of goods sold


16,665


60.2


14,344


58.7Gross profit


11,023


39.8


10,089


41.3Europe:US Dollars:Net sales


31,732


100.0


35,832


100.0Cost of goods sold


26,250


82.7


26,839


74.9Gross profit


5,482


17.3


8,993


25.1Euros:Net sales


20,407


100.0


26,323


100.0Cost of goods sold


16,891


82.8


19,712


74.9Gross profit

$
3,516


17.2
%
$
6,611


25.1
%


36

---







Net Sales.Our consolidated net sales for the quarter ended August 31, 2008 were $405.0 million, a decrease of $41.4 million, or 9.3% from the
quarter ended August 26, 2007. Total Americas net sales were $373.2 million for the third quarter of fiscal 2008, a decrease of 9.1% from the third quarter of fiscal 2007. This decrease
was primarily related to our U.S. operations within the Americas segment. Total U.S. net sales were $296.1 million for the third quarter of fiscal 2008, a decrease of 11.6% from the third
quarter of fiscal 2007. The U.S. net sales decrease of $39.0 million was attributable to a 15.5% decrease in wholesale unit volume partially offset by a 3.3% increase in wholesale average unit
selling price. The decrease in unit volume was affected by weak retail demand. Sales of the Company's newPosturepedicand Smart Latex lines and Sealy
branded products outperformed the rest of the U.S. portfolio. Average unit selling price as compared to the third quarter of fiscal 2007 was favorably impacted by the December 2007 and July 2008 price
increases, an increased allocation of cooperative advertising costs to selling expenses and lower floor sample discounts due to accelerating the rollout of the new Posturepedicline into the second
quarter. These increases were partially offset by the unfavorable impact of product mix on our other lines. In Canada,
sales declines of 3.1% in U.S. dollars translate to local currency sales decreases of 6.6%. Local currency sales performance in Canada was driven primarily by a 6.8% decrease in unit volume. The sales
results were negatively impacted by the slowing economy and the disruption caused by the relocation of our Toronto manufacturing facility. Elsewhere in the Americas, we experienced strong sales
increases in our Mexico and Argentina markets. In our European segment, sales decreases of 11.5% in U.S. dollars translate to local currency sales decreases of 22.5%. Sales decreases in Europe were
driven primarily by the deteriorating retail environment.

Gross Profit.Our consolidated gross profit for the quarter was $164.1 million, a decrease of $15.8 million from the comparable prior year period. As
a percentage of net sales, gross profit increased 0.2 percentage points to 40.5%. This was due to an increase in gross profit margins in our Americas segment. Total Americas gross profit for
the quarter was $158.6 million, a decrease of $12.3 million from the comparable prior year period. As a percentage of net sales, gross profit for the Americas increased
0.9 percentage points to 42.5%. This increase was primarily due to an increase in gross profit margins in our U.S. operations. U.S. gross profit decreased $12.0 million to
$126.9 million, which, as a percentage of sales, represents an increase of 1.4 percentage points to 42.9% of net sales. The increase in percentage of net sales was driven primarily by
the price increases discussed above. Also contributing to the increase were a favorable mix shift towards higher end products in the Company's new Posturepedicline, continued improvements in
manufacturing efficiencies and lower sales discounts on floor samples versus the comparable period in the
prior year due to an accelerated rollout of the new line. These factors have been partially offset by continued inflation on core inputs such as steel and foam, the continued deleveraging of overhead
expenses on lower volume and $1.4 million in charges related to the exit of our air bed business. The gross profit margin in Canada in local currency decreased to 41.9% of net sales, a decrease
of 1.0 percentage point driven by increased manufacturing expenses, partially attributed to the relocation of our Toronto manufacturing facility. In our European segment, local currency gross
profit margin decreased 7.9 percentage points to 17.2% of net sales. This decrease resulted from inefficiencies related to lower sales volume. We expect the economic environment in Europe to
become more challenging, which may have a negative impact on sales and gross profit.

Selling, General, Administrative.Our consolidated selling, general, and administrative expense decreased $7.2 million to $132.9 million. As a
percent of net sales this expense was 32.8% and 31.4% for the quarters ended August 31, 2008 and August 26, 2007, respectively, an increase of 1.4 percentage points. The decrease
in absolute dollars is primarily due to a $6.3 million reduction in volume driven variable expenses and cost reduction efforts. Actions taken to reduce costs included a $3.6 million
reduction in promotional expenses related to a more efficient launch of the new Sealy Posturepedic line

37

---



of
products in the U.S. as compared to the same prior year period, which included costs associated with the 2007 roll out of our Stearns & Foster products and Sealy Posturepedic Reserve
collection. In addition, salary and fringe related costs decreased $1.7 million and spending on professional services and other discretionary items declined relative to the third quarter of
fiscal 2007. These reductions were partially offset by the expenses associated with our new Better 6 advertising campaign. Reduced sales drove a reduction in volume variable expenses of
$6.3 million comprised primarily of a $5.1 million decrease in cooperative advertising costs partially offset by a $2.0 million increase in bad debt expense due to a higher level
of customer bankruptcies as compared to the third quarter of the prior year. The third quarter of fiscal 2007 included $0.7 million of additional costs associated with an organizational
realignment.

Restructuring and related costs.We recognized pretax restructuring costs of $2.4 million during the three
months ended August 31, 2008. No such costs were recognized during the three months ended August 26, 2007. These charges primarily relate to the following actions:

In
the third quarter, management elected to close its administrative offices near Milan, Italy and relocate these activities to its manufacturing facility in Silvano, Italy. This closure
will result in the elimination of approximately 10 employees who elected not to relocate in the fourth quarter of fiscal 2008. We recorded a pre-tax restructuring charge related to this
action of $0.2 million during the quarter ended August 31, 2008, which was entirely related to employee severance and benefits. The Company expects to incur additional restructuring
charges related to this activity of approximately $0.4 million to $0.6 million, principally in the form of relocation and other employee benefit costs, which is expected to be recorded
in the fourth quarter of fiscal 2008, after which time the plan should be complete.

In
the third quarter, management also made the decision to close its manufacturing facility in Clarion, Pennsylvania. This facility is expected to be closed on October 17, 2008.
This closure will result in the elimination of approximately 114 positions through the fourth quarter of fiscal 2008. We recorded a pre-tax restructuring and impairment charge related to
this action of $2.2 million during the quarter ended August 31, 2008, of which $1.3 million was related to employee severance and benefits and other exit costs, and
$0.9 million which was non-cash in nature, related to fixed asset impairment charges. The Company expects to incur additional restructuring charges related to this activity of
approximately $0.5 million to $0.7 million, principally in the form of equipment and employee relocation costs, which is expected to be recorded in the fourth quarter of fiscal 2008,
after which time the plan should be complete.

Royalty income, net of royalty expense.Our consolidated royalty income, net of royalty expenses, for the three months ended August 31, 2008 increased by
$0.7 million as compared with the prior year period to $4.4 million. This increase was driven by an increase in international royalty revenue.

Interest Expense.Our consolidated interest expense for the third quarter of fiscal 2008 was $14.4 million as compared with the prior year period at
$15.9 million. The decrease in interest expense of approximately $1.6 million is primarily due to the retirement of $68.1 million of our 2014 Notes in late fiscal 2007. Our net
weighted average borrowing cost was 7.2% and 7.8% for the three months ended August 31, 2008 and August 26, 2007, respectively. Our borrowing cost decreased because of lower interest
rates on the unhedged variable rate component of our floating rate debt partially offset by an increase in the outstanding amount on our revolving credit facility.

Debt Extinguishment and Refinancing Expenses.During the three months ended August 26, 2007, we
incurred $0.2 million of debt extinguishment costs consisting of $0.7 million of non-cash charges offset by a $0.5 million gain relating to the retirement of
$28 million of our 2014 Notes.

Income Tax.Our effective income tax rates differ from the Federal statutory rate principally because of the effect of certain foreign tax rate differentials and
state and local income taxes. The

38

---



effective
tax rate for the three months ended August 31, 2008 was 39.1% compared to 19.2% for the three months ended August 26, 2007. The effective rate for the fiscal 2008 period was
higher than the fiscal 2007 period primarily due to the recognition of capital loss benefits and a reduction in tax reserves due to expiring income tax statutes of limitations in fiscal 2007 and lower
pre-tax income in fiscal 2008 compared to fiscal 2007.



The following table sets forth our summarized results of operations for the nine months ended August 31, 2008 and
August 26, 2007, expressed in thousands of dollars, as well as a percentage of each period's net sales:

For the nine months ended:August 31, 2008

August 26, 2007(in thousands)

(percentage
of net sales)

(in thousands)

(percentage
of net sales)Net sales

$
1,172,267


100.0
%
$
1,260,775


100.0
%Cost of goods sold


706,579


60.3


731,095


58.0Gross profit


465,688


39.7


529,680


42.0Selling, general and administrative expenses


365,536


31.2


402,544


31.9Amortization of intangibles


2,850


0.2


2,484


0.2Restructuring expenses


2,907


0.2





Royalty income, net of royalty expense


(13,558
)

(1.2
)

(13,474
)

(1.1
)Income from operations


107,953


9.3


138,126


11.0Interest expense


45,124


3.8


47,070


3.7Debt extinguishment and refinancing








249


Other income, net


(297
)




(284
)

Income before income taxes


63,126


5.5


91,091


7.3Income taxes


24,013


2.0


28,855


2.3Net income

$
39,113


3.5
%
$
62,236


5.0
%Effective tax rate


38.0
%




31.7
%


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

Nine Months Ended:2008

2007Americas:United States


71.3
%

75.7
%Canada


11.8


10.5Other


7.0


5.7Total Americas


90.1


91.9Europe


9.9


8.1Total


100.0
%

100.0
%


39

---



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

For the nine months ended:August 31, 2008

August 26, 2007(in thousands)

(percentage
of net sales)

(in thousands)

(percentage
of net sales)Total Americas (US Dollars):Net sales

$
1,056,600


100.0
%
$
1,158,444


100.0
%Cost of goods sold


617,750


58.5


655,929


56.6Gross profit


438,850


41.5


502,515


43.4United States (US Dollars):Net sales


836,073


100.0


954,963


100.0Cost of goods sold


490,127


58.6


539,855


56.5Gross profit


345,946


41.4


415,108


43.5Total International (US Dollars):Net sales


336,194


100.0


305,812


100.0Cost of goods sold


216,452


64.4


191,240


62.5Gross profit


119,742


35.6


114,572


37.5Canada:US Dollars:Net sales


138,697


100.0


132,028


100.0Cost of goods sold


79,161


57.1


75,610


57.3Gross profit


59,536


42.9


56,418


42.7Canadian Dollars:Net sales


139,949


100.0


146,824


100.0Cost of goods sold


79,882


57.1


84,070


57.3Gross profit


60,067


42.9


62,754


42.7Other Americas (US Dollars):Net sales


81,830


100.0


71,453


100.0Cost of goods sold


48,462


59.2


40,464


56.6Gross profit


33,368


40.8


30,989


43.4Europe:US Dollars:Net sales


115,667


100.0


102,331


100.0Cost of goods sold


88,829


76.8


75,166


73.5Gross profit


26,838


23.2


27,165


26.5Euros:Net sales


75,643


100.0


76,558


100.0Cost of goods sold


58,049


76.7


56,221


73.4Gross profit

$
17,594


23.3
%
$
20,337


26.6
%




Net Sales.Our consolidated net sales for the nine months ended August 31, 2008 were $1,172.3 million, a decrease of $88.5 million, or 7.0%
from the nine months ended August 26, 2007.

40

---



Total
Americas net sales were $1,056.6 million for the first three quarters of fiscal 2008, a decrease of 8.8% from the first three quarters of fiscal 2007. This decrease was primarily related
to our U.S. operations within the Americas segment. Total U.S. net sales were $836.1 million for the first three quarters of fiscal 2008, a decrease of 12.4% from the first three quarters of
fiscal 2007. The U.S. net sales decrease of $118.9 million was attributable to a 14.0% decrease in wholesale unit volume and a 0.9% increase in wholesale average unit selling price. The
decrease in unit volume was affected by weak retail demand. The slight increase in average unit selling price was due in part to the price increases taken in December 2007 and July 2008. Average unit
selling price was also favorably impacted by the $3.7 million favorable impact from the change in the estimated reserve for non-warranty product returns. Partially offsetting these
favorable effects was the impact of increased floor sample discounts related to new product introductions. In Canada, sales increases of 5.1% in U.S. dollars translate to local currency decreases of
4.7%. Local currency sales performance in Canada was driven by a 4.7% decrease in unit volume. The decrease in unit volume is primarily attributable to declines in our Sealybrand promotional products.
Elsewhere in the Americas, sales increased in the Mexico and Argentina markets. In our European segment, sales
increases of 13.0% in U.S. dollars translate to local currency decreases of 1.2%. Decreased sales of OEM and finished goods sales in Europe reflect a softening economic environment.

Gross Profit.Our consolidated gross profit for the nine months ended August 31, 2008 was $465.7 million, a decrease of $64.0 million from the
comparable prior year period. As a percentage of net sales, gross profit decreased 2.3 percentage points to 39.7%. This was due to a decrease in gross profit margins in both segments. Total
Americas gross profit for the nine months was $438.9 million, a decrease of $63.7 million from the comparable prior year period. As a percentage of net sales, gross profit for the
Americas decreased 1.9 percentage points to 41.5%. This decrease was primarily due to a decrease in gross profit margin in our U.S. operations. U.S. gross profit decreased $69.2 million
to $345.9 million, which, as a percentage of sales, represents a decrease of 2.1 percentage points to 41.4% of net sales. The decrease in percentage of net sales was driven primarily by
higher inflation on core inputs such as steel and foam. In addition, the domestic profit margin relative to prior year was negatively impacted by a deleveraging of overhead expenses on lower volume.
The U.S. gross profit was positively impacted by a change in accounting estimate related to our returns reserves recorded in the second quarter of fiscal 2008 which resulted in a reduction of cost of
sales of approximately $4.5 million and an increase to sales of approximately $3.7 million. Also, U.S. gross profit was positively impacted by continued improvements in manufacturing
efficiencies particularly factory labor and product scrap costs. The results of the first three quarters of fiscal 2007 include $2.5 million of refunds on lumber tariffs received from Canadian
suppliers as well as $2.0 million more startup costs associated with the latex facility in Mountain Top, PA. The gross profit margin in Canada in local currency was 42.9% as a percentage of net
sales which represents an increase of 0.2 percentage points from the first three quarters of fiscal 2007. In our European segment, the local currency gross profit margin decrease of
3.3 percentage points to 23.2% resulted from lower sales volume and an unfavorable shift in customer mix.

Selling, General, Administrative.Our consolidated selling, general, and administrative expense decreased $37.0 million to $365.5 million. As a
percent of net sales this expense was 31.2% and 31.9% for the nine months ended August 31, 2008 and August 26, 2007, respectively, a decrease of 0.7 percentage points. This
decrease in both absolute dollars and as a percent of sales is primarily due a $19.4 million reduction in volume driven variable expenses and reductions in fixed costs. Actions taken to reduce
fixed costs included $9.5 million of reductions in compensation related expenses, $9.0 million less promotional expenses related to more efficient launches of new products in the U.S. as
compared to the same prior year period. In addition, spending on professional services and other discretionary items declined relative to the first three quarters of fiscal 2007. Reduced sales drove a
reduction of $19.4 million in volume variable expenses comprised of a $22.5 million decrease in cooperative advertising costs partially offset by a $4.5 million increase in
delivery costs due primarily to

41

---



higher
diesel fuel costs, higher foreign currency valuations relative to the US dollar. These decreases were partially offset by $4.2 million of costs associated with a reduction in personnel
and costs associated with a search for a new chief executive officer. The selling, general and administrative expense recorded in the first three quarters of fiscal 2007 also reflected the gain on the
sale of our Orlando facility of $2.6 million as well as $3.3 million of costs associated with an organizational realignment.

Restructuring and related costs.We recognized pretax restructuring costs of $2.9 million during the nine months ended August 31, 2008. No such costs
were recognized during the nine months ended August 26, 2007. These charges primarily relate to the following actions:

In
the first quarter, management made the decision to cease manufacturing operations in Brazil and move to a distribution business model that is supplied by production from other Sealy
manufacturing facilities. As a result, the Company incurred charges of $0.5 million related to employee severance and related benefits. The Company may incur additional restructuring charges
related to this activity. The plan is expected to be completed in the fourth quarter of fiscal 2008.

In
the third quarter, management elected to close its administrative offices near Milan, Italy and relocate these activities to its manufacturing facility in Silvano, Italy. This closure
will result in the elimination of approximately 10 employees who elected not to relocate in the fourth quarter of fiscal 2008. We recorded a pre-tax restructuring charge related to this
action of $0.2 million during the quarter ended August 31, 2008, of which was entirely related to employee severance and benefits. The Company expects to incur additional restructuring
charges related to this activity of approximately $0.4 million to $0.6 million, principally in the form of relocation and other employee benefit costs, which is expected to be recorded
in the fourth quarter of fiscal 2008, after which time the plan should be complete.

In
the third quarter, management also made the decision to close its manufacturing facility in Clarion, Pennsylvania. This facility is expected to be closed on October 17, 2008.
This closure will result in the elimination of approximately 114 employees through the fourth quarter of fiscal 2008. We recorded a pre-tax restructuring and impairment charge related to
this action of $2.2 million during the quarter ended August 31, 2008, of which $1.3 million was related to employee severance and benefits and other exit costs, and
$0.9 million which was non-cash in nature, related to fixed asset impairment charges. The Company expects to incur additional restructuring charges related to this activity of
approximately $0.5 million to $0.7 million, principally in the form of equipment and employee relocation costs, which is expected to be recorded in the fourth quarter of fiscal 2008,
after which time the plan should be complete.

Royalty income, net of royalty expense.Our consolidated royalty income, net of royalty expenses, for the nine months ended August 31, 2008 has remained
relatively flat as compared with the prior year period at $13.6 million.

Debt Extinguishment and Refinancing Expenses.During the three months ended August 26, 2007, we incurred $0.2 million of debt extinguishment costs
consisting of $0.7 million of non-cash charges offset by a $0.5 million gain relating to the retirement of $28 million of our 2014 Notes.

Interest Expense.Our consolidated interest expense for the first three quarters of fiscal 2008 declined $1.9 million as compared with the prior year period
to $45.1 million. Our net weighted average borrowing cost was 7.5% and 7.6% for the nine months ended August 31, 2008 and August 26, 2007, respectively. Our borrowing cost
decreased because of lower interest rates on the unhedged variable rate component of our floating rate debt offset partially by an increase in the outstanding amount on our revolving credit facility.
The borrowing cost was also reduced because of the retirement of $68.1 million of our 2014 Notes late in fiscal 2007.

42

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Income Tax.Our effective income tax rates differ from the Federal statutory rate principally because of the effect of certain foreign tax rate differentials and
state and local income taxes. Our effective tax rate for the nine months ended August 31, 2008 was 38.0% compared to 31.7% for the nine months
ended August 26, 2007. The effective rate for the fiscal 2008 period was higher than the fiscal 2007 period primarily due to the recognition of capital loss benefits and a reduction in tax
reserves due to expiring income tax statutes of limitations in fiscal 2007 and lower pre-tax income in fiscal 2008 compared to fiscal 2007.

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

LIQUIDITY AND CAPITAL RESOURCES



Our principal sources of funds are cash flows from operations and borrowings under our senior secured revolving credit facility. Our
principal use of funds consists of operating expenditures, payments of principal and interest on our senior credit agreements, capital expenditures, and interest payments on our outstanding senior
subordinated notes. Capital expenditures totaled $21.1 million for the nine months ended August 31, 2008. We expect total 2008 capital expenditures to be approximately
$28 million. We believe that annual capital expenditure limitations in our current debt agreements will not prevent us from meeting our ongoing capital needs. Our introductions of new products
typically require us to make initial cash investments in inventory, promotional supplies and employee training which may not be immediately recovered through new product sales. However, we believe
that we have sufficient liquidity to absorb such expenditures related to new products and that these expenses will not have a significant adverse impact on our operating cash flow. At
August 31, 2008, we had approximately $70.9 million available under our revolving credit facility after taking into account letters of credit issued totaling $15.9 million. Our
net weighted average borrowing cost was 7.5% and 7.6% for the nine months ended August 31, 2008 and August 26, 2007, respectively.

While
we believe that we will have the necessary liquidity through our operating cash flow and revolving credit facility for the next several years to fund our debt service requirements,
capital expenditures and other operational cash requirements, we may not be able to generate sufficient cash flow from operations, realize anticipated revenue growth and operating improvements or
obtain future borrowings under the senior credit agreements in an amount sufficient to enable us to do so. For
example, our senior secured credit facilities require us to meet a minimum interest coverage ratio and a maximum leverage ratio. Non-compliance with such ratios could prevent us from being
able to access these facilities for liquidity purposes and could require us to immediately repay all amounts outstanding under such facilities. Given current economic conditions we may not remain in
full compliance with these ratios over the next twelve months. In the event of this occurrence, we intend to take such actions available to us in respect thereof as we determine to be appropriate at
such time, which may include refinancing all or a portion of our senior secured credit facilities under modified terms or amending the terms of such facilities, including the required ratios described
above. There can be no assurance that any such actions will be successful. Any such action, if successful, may also result in interest being payable by us at higher interest rates.

43

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We have incurred debt, including senior credit facilities consisting of a $125 million senior secured revolving credit facility
maturing in 2010 and senior secured term loan facilities maturing in August 2011 and August 2012 with outstanding balances of $430.4 million at August 31, 2008 for the senior facilities.
We also have an outstanding principal balance of $273.9 million at August 31, 2008 on the 2014 Notes.

On
August 25, 2006, we amended our senior secured credit agreement to provide for two senior secured term loans, one for $300 million maturing August 25, 2011 and
one for $140 million maturing August 25, 2012. This amendment reduced the applicable interest rate margins charged on the senior secured term loans, provided certain financial leverage
ratio tests are met, by 50 basis points on the $300 million loan and 25 basis points on the $140 million loan. In addition, this amendment provides us with greater flexibility for Sealy
Mattress Company to make dividend payments to us, or to repay certain subordinated debt, provided certain leverage ratio tests and other conditions are met. The terms and conditions of our
$125 million senior revolving credit facility were unchanged by the amendment. Since August 25, 2006 we have repaid $33.9 million of the original $140 million outstanding
on our term loan maturing August 25, 2012 and $13.9 million of the original $300 million outstanding on our term loan maturing August 25, 2011.

Future
principal debt payments are expected to be paid out of cash flows from operations and borrowings on our revolving credit facility. As of September 26, 2008, we had
$68.2 million outstanding under the U.S. portion of our revolving credit facility and no amounts outstanding under the Canadian portion. These amounts include approximately $20.0 million
borrowed above the required borrowings for September and are held as cash and short-term investments as of September 26, 2008. These borrowings were made in order to ensure the
availability of the funds under our credit
facility in light of the current economic conditions. After taking into account letters of credit issued totaling $15.9 million, we had approximately $40.9 million available under the
revolving credit facility at September 26, 2008.

Borrowings
under our senior secured credit facilities bear interest at our choice of the Eurodollar rate or adjusted base rate ("ABR"), in each case, plus an applicable margin, subject
to adjustment based on a pricing grid. Annually, we may be required to make principal prepayments equal to 25% of excess cash flow for the preceding fiscal year, as defined in our senior secured
credit agreement, if our leverage ratio is less than 4.00 to 1.00 reducing to 0% if our leverage ratio is less than 3.25 to 1.00. At August 31, 2008, we are unable to determine the amount of
such required payment, if any, that would be due following the first quarter of fiscal 2009 with respect to excess cash flow for the 2008 fiscal year.

On
June 3, 2004, we entered into an interest rate swap agreement effectively fixing the floating portion of the interest rate at 3.725% on $200 million of the outstanding
balance under the senior secured term loan through November 2005, declining to $150 million from December 2005 through December 3, 2007. This swap terminated on December 3, 2007.

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

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

44

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

The
outstanding 2014 Notes consist of an original $314 million aggregate principal amount maturing June 15, 2014, bearing interest at 8.25% per annum payable semiannually
in arrears on June 15 and December 15, commencing on December 15, 2004. On September 29, 2004, we completed an exchange offer whereby all of the 2014 Notes were exchanged
for publicly traded, registered securities with identical terms (other than certain terms relating to registration rights and certain interest rate provisions otherwise applicable to the original
senior subordinated notes). During the third and fourth quarters of fiscal 2007, we retired $68.1 million aggregate principal amount of the 2014 Notes. At August 31, 2008, the
outstanding balance of the 2014 Notes was $273.9 million.

At
August 31, 2008, we were in compliance with the covenants contained within our senior credit agreements and indenture governing the 2014 Notes.

As
part of our ongoing evaluation of our capital structure, we continually assess opportunities to reduce our debt, which opportunities may from time to time include voluntary
prepayments of our senior secured term debt, or redemption or repurchase of a portion of our senior subordinated notes to the extent permitted by our debt covenants. In addition, our Board authorized
a common stock repurchase program under which we may repurchase up to $100 million of our Company's stock. As of August 31, 2008, we had repurchased shares for $16.3 million under
this program, none of which was repurchased during the first three quarters of fiscal 2008. From September 1 through September 26, 2008, we did not repurchase any additional shares under
this program.

Our
ability to make scheduled payments of principal, or to pay the interest or liquidated damages, if any, on or to refinance our indebtedness, or to fund planned capital expenditures
will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We
will be required to make scheduled principal payments of $37.9 million during the next twelve months, with $15.0 million for our senior secured term loans, $1.8 million for our
financing obligations and capital leases and the remainder for debt owed by our international subsidiaries. However, as we continually evaluate our ability to make additional prepayments as permitted
under our senior credit agreements, it is possible that we will make additional voluntary prepayments on our senior debt during that time.



The Company announced on April 8, 2008 that its Board of Directors voted to suspend the Company's quarterly dividend. This
decision is intended to increase the Company's financial flexibility and will enable it to better allocate its capital in order to enhance shareholder returns over time. We do not currently expect a
dividend will be declared during the fiscal fourth quarter.

45

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The following table summarizes our changes in cash:

Nine Months Ended:August 31,
2008

August 26,
2007(in thousands)Statement of Cash Flow Data:Cash flows provided by (used in):Operating activities

$
64,778

$
53,450Investing activities


(21,068
)

(28,528
)Financing activities


(25,121
)

(55,240
)Effect of exchange rate changes on cash


(2,497
)

(654
)Change in cash and cash equivalents


16,092


(30,972
)Cash and cash equivalents:Beginning of period


14,607


45,620End of period

$
30,699

$
14,648




Cash Flows from Operating Activities.Our cash flow from operations increased $11.3 million to $64.8 million net cash provided for the nine months
ended August 31, 2008, compared to a $53.5 million net cash provided for the nine months ended August 26, 2007. This increase is primarily the result of a reduction in customer
accounts receivable balances and the timing of various vendor payments. These increases have been partially offset by a reduction in net income during the first three quarters of fiscal 2008.

Cash Flows from Investing Activities.Our cash flows used in investing activities decreased approximately $7.5 million to $21.1 million net use of
cash for the nine months ended August 31, 2008, compared to the nine months ended August 26, 2007 due to $12.4 million of lower capital expenditures for the first nine months of
fiscal 2008 as compared to the same fiscal period in the prior year. The decrease in our capital expenditures was primarily due to the inclusion of expenditures related to the construction of our
facility in Mountain Top, PA in the nine months ended August 26, 2007. Partially offsetting this change were the cash proceeds from the sale of our Orlando facility in the second quarter of
fiscal 2007.

Cash Flows from Financing Activities.Our cash flow used in financing activities for the nine months ended August 31, 2008 was $25.1 million compared
with $55.2 million for the nine months ended August 26, 2007. The decrease in cash used for financing activities has been driven by the suspension of our quarterly dividend in the second
quarter of fiscal 2008 and no repurchases of common stock during the first three quarters of fiscal 2008 versus $7.1 million used to repurchase stock in the first three quarters of fiscal 2007.
These decreases have been offset by increased repayments of long-term obligations, primarily for our international subsidiaries.



Effective December 3, 2007, we adopted the provisions of FASB Interpretation No. 48 "Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement No. 109" ("FIN 48"), as described in Note 2 to the Condensed Consolidated Financial Statements, Part I, Item 1,
included herein. Significant judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax provision. Despite our belief that our liability for
unrecognized tax

46

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benefits
is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. We may adjust these liabilities as relevant circumstances
evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. These adjustments are recognized as a component of income tax expense entirely in the
period in which they are identified. While the Company is currently undergoing examinations of its corporate income tax returns by tax authorities, no issues related to these reserved positions have
been presented to the Company. The Company has no indication that such audits will result in assessment and payment of taxes related to these positions during the one year period following
August 31, 2008. We also cannot predict when or if any other future tax payments related to these tax positions may occur.



Our long-term obligations contain various financial tests and covenants. Our senior secured credit facilities require us to
meet a minimum interest coverage ratio and a maximum leverage ratio. The indenture governing our senior subordinated notes also requires us to meet a fixed charge coverage ratio in order to incur
additional indebtedness, subject to certain exceptions. As of August 31, 2008 we are in compliance with all debt covenants. Non-compliance with such ratios could prevent us from
being able to access these facilities for liquidity purposes and could require us to immediately repay all amounts outstanding under such facilities. Given current economic conditions we may not
remain in full compliance with these ratios over the next twelve months. In the event of this occurrence, we intend to take such actions available to us in respect thereof as we determine to be
appropriate at such time, which may include refinancing all or a portion of our senior secured credit facilities under modified terms or amending the terms of such facilities, including the required
ratios described above. There can be no assurance that any such actions will be successful. Any such action, if successful, may also result in interest being payable by us at higher interest rates.

The
covenants contained in the Company's senior secured credit facilities are based on what is referred to herein as "Adjusted EBITDA". In the senior secured credit facilities, EBITDA is
defined as net
income plus interest, taxes, depreciation and amortization and Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments permitted in calculating covenant
compliance as discussed above. Adjusted EBITDA is presented herein as it is a material component of these covenants. Non-compliance with such covenants could result in the requirement to
immediately repay all amounts outstanding under such facilities. While the determination of "unusual items" is subject to interpretation and requires judgment, we believe the adjustments listed below
are in accordance with the covenants. The specific covenants and related definitions can be found in the applicable debt agreements, each of which we have previously filed with the Securities and
Exchange Commission.

EBITDA
and Adjusted EBITDA are not recognized terms under generally accepted accounting principles ("GAAP") and do not purport to be alternatives to net income as a measure of operating
performance or to cash flows from operating activities as a measure of liquidity. Additionally, they are not intended to be measures of free cash flow for management's discretionary use, as they do
not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Because not all companies use identical calculations, these presentations may not be
comparable to other similarly titled measures of other companies.

47

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The following table sets forth a reconciliation of net income to EBITDA and EBITDA to Adjusted EBITDA for the three and nine months ended August 31, 2008:

Three Months Ended:
August 31, 2008

Nine Months Ended:
August 31, 2008(in thousands)

(in thousands)Net income

$
10,942

$
39,113Interest expense


14,379


45,124Income taxes


7,017


24,013Depreciation and amortization


8,643


25,763EBITDA


40,981


134,013Unusual and nonrecurring losses:Executive severance


66


3,271Non-cash compensation


555


2,530Restructuring related costs


2,189


2,894Product line discontinuance


1,356


1,356Other (various)(a)


1,641


3,744Adjusted EBITDA

$
46,788

$
147,808






The
following table reconciles EBITDA to cash flow from operations:

Nine Months Ended:
August 31, 2008(in thousands)EBITDA

$
134,013Adjustments to EBITDA to arrive at cash flow from operations:Interest expense


(45,124
)Income taxes


(24,013
)Non-cash charges against (credits to) net income


7,681Changes in operating assets & liabilities


(7,779
)Cash flow from operations

$
64,778




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

Warranties and Product ReturnsOur warranty policy provides a 10 year non-pro rated warranty service period on all currently manufactured Sealy Posturepedic,
Stearns & FosterandBassettbedding products and some otherSealybranded products and a 20 year warranty period on the major components of ourTrueFormand MirrorFormvisco-elastic products as well as ourSpringFreelatex product, introduced in 2005, the last
ten years of which are pro rated on a straight-line basis. In 2006, we introducedRight Touch, which has a twenty year limited warranty that
covers only certain parts of the product and is pro rated for part of the twenty years. In fiscal 2007, we amended our warranty policy onSealybrand
promotional bedding to three years for our new line introduced in January 2007 and shipped in the second quarter of fiscal 2007. The impact of the changes to the warranty policies did not have a
significant impact on our financial results or position. Our policy is to accrue the estimated cost of warranty coverage at the time the sale is recorded based on historical trends of

48

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warranty
costs. We utilize warranty trends on existing similar product in order to estimate future warranty claims associated with newly introduced product. Our accrued warranty liability totaled
$15.0 million and $16.0 million as of August 31, 2008 and December 2, 2007, respectively.

During
the second quarter of fiscal 2008, we completed an analysis of our returns claims experience for the U.S. business within the Americas segment based on historical return trends
using new information that is available which allows us to better track and match claims received to the sales for which those claims were initially recorded. This change in estimate resulted in a
reduction of cost of sales of approximately $4.5 million for the nine month period ended August 31, 2008 as well as a corresponding reduction in the accrued returns obligation. Our
estimate involves an application of the lag time in days between the sale date and the date of its return applied to the current rate of returns.

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



"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995.When used in this Quarterly Report on Form 10-Q, the words
"believes," "anticipates," "expects," "intends," "projects" and similar expressions are used to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements relate to future financial and operational results. Any forward-looking statements contained in this report represent our management's current expectations,
based on present information and current assumptions, and are thus prospective and subject to risks and uncertainties which could cause actual results to differ materially from those expressed in such
forward-looking statements. Actual results could differ materially from those anticipated or projected due to a number of factors. These factors include, but are not limited
to:



49

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



We adopted FIN 48, "Accounting for Uncertainty in Income Taxes", effective December 3, 2007. As of the date of the
adoption, our reserve for uncertain tax positions (including penalties and interest) was $10.5 million. In the nine months ended August 31, 2008, the liability for uncertain tax
positions increased $3.7 million (including penalties and interest), partially offset by an adjustment to deferred taxes of $1.5 million. At August 31, 2008, the entire reserve
for uncertain tax positions (including penalties and interest) was classified as a noncurrent liability. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in
individual years beyond 12 months due to uncertainties in the timing of the effective settlement of tax positions.

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

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

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



Our earnings are affected by fluctuations in the value of our subsidiaries' functional currency as compared to the currencies of our
foreign denominated purchases. Foreign currency forward contracts are used to hedge against the earnings effects of such fluctuations. The result of a uniform 10% change in the value of the U.S.
dollar relative to currencies of countries in which we manufacture or sell our products would have an approximate $0.5 million dollar impact on our financial position for the nine months ended
August 31, 2008. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.

To
protect against the reduction in value of forecasted foreign currency cash flows resulting from purchases in a foreign currency, we have instituted a forecasted cash flow hedging
program. We hedge portions of our purchases denominated in foreign currencies with forward contracts. At August 31, 2008, the Company had no outstanding foreign currency forward contracts. We
do not designate our foreign currency hedges for accounting purposes, therefore all changes in fair value are charged to earnings.



On June 3, 2004, we entered into an interest rate swap agreement effective July 6, 2004 effectively fixing the floating
portion of the interest rate at 3.725% on $200 million of our outstanding balance under the senior secured term loan through November 2005, declining to $150 million through
December 3, 2007. This swap expired on December 3, 2007 and we had recognized a receivable of $0.7 million at December 2, 2007.

50

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On
June 15, 2007 the Company entered into an interest rate swap agreement effective December 3, 2007 fixing the floating portion of the interest rate at 5.495% on
$242 million of the outstanding balance under the senior secured term loan through November 2008, declining to $240 million from December 2008 through November 2009, and further
declining to $180 million from December 2009 through November 2010. The fair value of this swap instrument was a liability of $10.3 million at August 31, 2008 and
$10.2 million at December 2, 2007.

Additionally,
the Company has entered into three interest rate swaps for 2.3 million Euro, 2.9 million Euro and 3.5 million Euro which fix the floating interest
rates on the Company's debt of its Europe segment at 4.92%, 4.85% and 4.50%, respectively. The notional amounts of these contracts amortize over the life of the agreement and the agreements expire in
May 2019, January 2013 and October 2013. The fair values of these swaps was an insignificant amount as of August 31, 2008 and were recorded as a component of other noncurrent assets in the
accompanying Condensed Consolidated Balance Sheets.

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

Based
on the unhedged portion of our variable rate debt outstanding at August 31, 2008, a 12.5 basis point increase or decrease in variable interest rates would have an
approximately $0.3 million dollar impact on our annual interest expense.



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

Item 4.    Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal accounting
officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, our principal
executive officer and principal accounting officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company,
including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our principal executive and principal accounting officers, as
appropriate to allow timely decisions regarding required disclosure.

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

51

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

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

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

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

Period

Total number
of shares
purchased(1)

Average
price paid
per share

Total number of
shares purchased
during quarter as
part of publicly
announced program(2)

Approximate dollar
value of shares
that may yet
be purchased
under programJune 2June 29, 2008




$





$
83,746,985June 30July 27, 2008


39,235


6.48





83,746,985July 28August 31, 2008


95,432


6.97





83,746,985Total


134,667








---

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

Item 3.    Defaults Upon Senior Securities

None

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

None

Item 5.    Other Information

None

52

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Item 6.    Exhibits

10.1

Amended Employment Agreement dated July 22, 2008 by and between Sealy Corporation and Lawrence J. Rogers.10.2

Restricted Stock Award Agreement dated July 22, 2008 by and between Sealy Corporation and Lawrence J. Rogers.31.1

Chief Executive Officer Certification of the Quarterly Financial Statements.31.2

Chief Financial Officer Certification of the Quarterly Financial Statements.32

Certification pursuant to 18 U.S.C. Section 1350.


53

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SIGNATURES

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

SEALY CORPORATION


Signature

Title/s/LAWRENCE J. ROGERSLawrence J. Rogers

President and Chief Executive Officer (Principal Executive Officer)/s/JEFFREY C. ACKERMANJeffrey C. Ackerman

Executive Vice President and Chief Financial Officer (Principal Accounting Officer)


Date:
October 7, 2008

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