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

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FORM 10-Q

|ý                                                             |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|For the quarterly period ended: March 2, 2008                
|o                                                             |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the Transition Period
from                             to

Commission file number 001-08738

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

|Delaware(State or other jurisdiction of incorporation)                                         |  | 36-3284147(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|Sealy Drive One Office Parkway
Trinity, North Carolina(Address of principal executive offices) |  | 27370(Zip Code)                               

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

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

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

Large accelerated filer ý

Accelerated filer o

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

Smaller reporting company o


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

The number of shares of the registrant's common stock outstanding as of March 28, 2008 is approximately: 90,982,170.



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PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

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

Three Months EndedMarch 2,
2008

February 25,
2007Net sales

$
391,929

$
412,567Cost of goods sold


238,734


235,293Gross profit


153,195


177,274Selling, general and administrative expenses


116,744


126,913Amortization of intangibles


915


783Royalty income, net of royalty expense


(4,860
)

(5,292
)Income from operations


40,396


54,870Interest expense


15,376


15,905Other income, net


(99
)

(80
)Income before income tax expense


25,119


39,045Income tax expense


8,905


14,411Net income

$
16,214

$
24,634Earnings per common shareBasic

$
0.18

$
0.27Earnings per common shareDiluted

$
0.17

$
0.26Weighted average number of common shares outstanding:Basic


90,865


91,349Diluted


95,167


96,585


See
accompanying notes to condensed consolidated financial statements.

1

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

|                                               |                                                                                                                                                                                                           | March 2,
2008 |           | December 2,
2007 |  
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | --------- | ---------------- | -
|ASSETS                                         |                                                                                                                                                                                                           |               |           |                  |  
|Current assets:                                |                                                                                                                                                                                                           |               |           |                  |  
|                                               | Cash and cash equivalents                                                                                                                                                                                 |               | $         | 21,303           |  
|                                               | Accounts receivable, net of allowances for bad debts, cash discounts and returns                                                                                                                          |               |           | 216,093          |  
|                                               | Inventories                                                                                                                                                                                               |               |           | 71,412           |  
|                                               | Prepaid expenses and other current assets                                                                                                                                                                 |               |           | 22,623           |  
|                                               | Deferred income taxes                                                                                                                                                                                     |               |           | 19,043           |  
|                                               |                                                                                                                                                                                                           |               |           |                  |  
|                                               |                                                                                                                                                                                                           |               | 350,474   |                  |  
|                                               |                                                                                                                                                                                                           |               |           |                  |  
|Property, plant and equipmentat cost          |                                                                                                                                                                                                           |               | 457,757   |                  |  
|Less accumulated depreciation                  |                                                                                                                                                                                                           |               | (207,013  | )                |  
|                                               |                                                                                                                                                                                                           |               |           |                  |  
|                                               |                                                                                                                                                                                                           |               | 250,744   |                  |  
|                                               |                                                                                                                                                                                                           |               |           |                  |  
|Other assets:                                  |                                                                                                                                                                                                           |               |           |                  |  
|                                               | Goodwill                                                                                                                                                                                                  |               |           | 397,457          |  
|                                               | Other intangibles, net of accumulated amortization                                                                                                                                                        |               |           | 8,232            |  
|                                               | Deferred income taxes                                                                                                                                                                                     |               |           | 6,934            |  
|                                               | Debt issuance costs, net, and other assets                                                                                                                                                                |               |           | 35,117           |  
|                                               |                                                                                                                                                                                                           |               |           |                  |  
|                                               |                                                                                                                                                                                                           |               | 447,740   |                  |  
|                                               |                                                                                                                                                                                                           |               |           |                  |  
|                                               |                                                                                                                                                                                                           | $             | 1,048,958 |                  | $
|                                               |                                                                                                                                                                                                           |               |           |                  |  
|LIABILITIES AND STOCKHOLDERS' DEFICIT          |                                                                                                                                                                                                           |               |           |                  |  
|Current liabilities:                           |                                                                                                                                                                                                           |               |           |                  |  
|                                               | Current portionlong-term obligations                                                                                                                                                                     |               | $         | 35,926           |  
|                                               | Accounts payable                                                                                                                                                                                          |               |           | 140,563          |  
|                                               | Accrued incentives and advertising                                                                                                                                                                        |               |           | 30,293           |  
|                                               | Accrued compensation                                                                                                                                                                                      |               |           | 31,822           |  
|                                               | Accrued interest                                                                                                                                                                                          |               |           | 11,341           |  
|                                               | Other accrued expenses                                                                                                                                                                                    |               |           | 52,833           |  
|                                               |                                                                                                                                                                                                           |               |           |                  |  
|                                               |                                                                                                                                                                                                           |               | 302,778   |                  |  
|                                               |                                                                                                                                                                                                           |               |           |                  |  
|Long-term obligations, net of current portion  |                                                                                                                                                                                                           |               | 780,587   |                  |  
|Other noncurrent liabilities                   |                                                                                                                                                                                                           |               | 74,101    |                  |  
|Deferred income taxes                          |                                                                                                                                                                                                           |               | 6,261     |                  |  
|Common stock and options subject to redemption |                                                                                                                                                                                                           |               | 15,242    |                  |  
|Stockholders' deficit:                         |                                                                                                                                                                                                           |               |           |                  |  
|                                               | Common stock, $0.01 par value; Authorized shares: 2008 and 2007200,000 Issued and outstanding: 200890,982; 200790,814 (including shares classified above as subject to redemption: 2008399;
2007401) |               |           | 906              |  
|                                               | Additional paid-in capital                                                                                                                                                                                |               |           | 655,876          |  
|                                               | Accumulated deficit                                                                                                                                                                                       |               |           | (795,217         | )
|                                               | Accumulated other comprehensive income                                                                                                                                                                    |               |           | 8,424            |  
|                                               |                                                                                                                                                                                                           |               |           |                  |  
|                                               |                                                                                                                                                                                                           |               | (130,011  | )                |  
|                                               |                                                                                                                                                                                                           |               |           |                  |  
|                                               |                                                                                                                                                                                                           | $             | 1,048,958 |                  | $
|                                               |                                                                                                                                                                                                           |               |           |                  |  

See accompanying notes to condensed consolidated financial statements.

2

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

|                                                              |                                                  |   |        | Common Stock |        |  |   |     |  | Accumulated
Other
Comprehensive
Income |         |     |  
|------------------------------------------------------------- | ------------------------------------------------ | - | ------ | ------------ | ------ |  | - | --- |  | -------------------------------------- | ------- | --- | -
|
|
|Balance at December 2, 2007                                   |                                                  |   |        |              | 90,814 |  | $ | 902 |  | $                                      | 654,626 |     | $
|Net income                                                    |                                                  |   | 16,214 |              |        |  |   |     |  |                                        |         |     |  
|Foreign currency translation adjustment                       |                                                  |   | 3,255  |              |        |  |   |     |  |                                        |         |     |  
|Adjustment to defined benefit plan liability,                 |                                                  |   |        |              |        |  |   |     |  |                                        |         |     |  
|                                                              | net of tax of $28                                |   |        | 41           |        |  |   |     |  |                                        |         |     |  
|Change in fair value of cash flow hedge, net of tax of $2,449 |                                                  |   | (4,111 | )            |        |  |   |     |  |                                        |         |     |  
|Cumulative effect of a change in accounting principle -       |                                                  |   |        |              |        |  |   |     |  |                                        |         |     |  
|                                                              | adoption of FIN 48                               |   |        |              |        |  |   |     |  |                                        |         |     |  
|Share-based compensation:                                     |                                                  |   |        |              |        |  |   |     |  |                                        |         |     |  
|                                                              | Compensation associated with stock option grants |   |        |              |        |  |   |     |  |                                        |         | 534 |  
|                                                              | Directors' deferred stock compensation           |   |        |              |        |  |   |     |  |                                        |         | (36 | )
|Cash dividend                                                 |                                                  |   |        |              |        |  |   |     |  |                                        |         |     |  
|Exercise of stock options                                     |                                                  |   |        |              | 168    |  |   | 4   |  |                                        | (938    | )   |  
|Excess tax benefit on options exercised                       |                                                  |   |        |              |        |  |   |     |  |                                        | 776     |     |  
|Adjustment of temporary equity subject to redemption          |                                                  |   |        |              |        |  |   |    |  |                                        | 914     |     |  
|                                                              |                                                  |   |        |              |        |  |   |     |  |                                        |         |     |  
|Balance at March 2, 2008                                      |                                                  | $ | 15,399 |              | 90,982 |  | $ | 906 |  | $                                      | 655,876 |     | $
|                                                              |                                                  |   |        |              |        |  |   |     |  |                                        |         |     |  

See accompanying notes to condensed consolidated financial statements.

3

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

|                                        |                                                                           | Three Months Ended                                        |                                              
|--------------------------------------- | ------------------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------------------------
|
|Cash flows from operating activities:   |                                                                           |                                                           |                                              
|                                        | Net income                                                                |                                                           | $                                            
|                                        | Adjustments to reconcile net income to                                    |                                                           |                                              
|                                        | net cash provided by operating activities:                                |                                                           |                                              
|                                        |                                                                           | Depreciation and amortization                             |                                              
|                                        |                                                                           | Deferred income taxes                                     |                                              
|                                        |                                                                           | Non-cash interest expense:                                |                                              
|                                        |                                                                           |                                                           | Amortization of debt issuance costs and other
|                                        |                                                                           | Share-based compensation                                  |                                              
|                                        |                                                                           | Excess tax benefits from share-based payment arrangements |                                              
|                                        |                                                                           | Loss on sale of assets                                    |                                              
|                                        |                                                                           | Other, net                                                |                                              
|                                        | Changes in operating assets and liabilities:                              |                                                           |                                              
|                                        |                                                                           | Accounts receivable                                       |                                              
|                                        |                                                                           | Inventories                                               |                                              
|                                        |                                                                           | Prepaid expenses and other current assets                 |                                              
|                                        |                                                                           | Accounts payable                                          |                                              
|                                        |                                                                           | Accrued expenses                                          |                                              
|                                        |                                                                           | Other liabilities                                         |                                              
|                                        |                                                                           |                                                           |                                              
|                                        |                                                                           |                                                           |                                              
|                                        |                                                                           |                                                           |                                              
|Cash flows from investing activities:   |                                                                           |                                                           |                                              
|                                        | Purchase of property, plant and equipment                                 |                                                           |                                              
|                                        | Proceeds from sale of property, plant and equipment                       |                                                           |                                              
|                                        |                                                                           |                                                           |                                              
|                                        |                                                                           |                                                           |                                              
|                                        |                                                                           |                                                           |                                              
|Cash flows from financing activities:   |                                                                           |                                                           |                                              
|                                        | Cash dividends                                                            |                                                           |                                              
|                                        | Repayments of long-term obligations                                       |                                                           |                                              
|                                        | Borrowings under revolving credit facilities                              |                                                           |                                              
|                                        | Repayments under revolving credit facilities                              |                                                           |                                              
|                                        | Exercise of employee stock options, including related excess tax benefits |                                                           |                                              
|                                        | Other                                                                     |                                                           |                                              
|                                        |                                                                           |                                                           |                                              
|                                        |                                                                           |                                                           |                                              
|                                        |                                                                           |                                                           |                                              
|Effect of exchange rate changes on cash |                                                                           |                                                           | (839                                         
|                                        |                                                                           |                                                           |                                              
|Change in cash and cash equivalents     |                                                                           |                                                           | 6,696                                        
|Cash and cash equivalents:              |                                                                           |                                                           |                                              
|                                        | Beginning of period                                                       |                                                           |                                              
|                                        |                                                                           |                                                           |                                              
|                                        | End of period                                                             |                                                           | $                                            
|                                        |                                                                           |                                                           |                                              

See
accompanying notes to condensed consolidated financial statements.

4

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SEALY CORPORATION    Notes to Condensed Consolidated Financial Statements    (unaudited)

Note 1:Basis of Presentation

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

On
April 6, 2004, the Company completed a merger with affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") whereby KKR acquired 92% of the Company's
capital stock. Certain of the Company's previous stockholders, including affiliates of Bain Capital, LLC and others, retained an 8% interest in the Company's stock. The merger was accounted for
as a recapitalization. Subsequent to the recapitalization, the Company contributed all of its interest in Sealy Mattress Company, of which it was the sole shareholder, to a newly formed subsidiary
holding company, Sealy Mattress Corporation, which also replaced the Company as the parent-guarantor of the 8.25% Senior Subordinated Notes due 2014 (the "2014 Notes") issued by Sealy Mattress
Company. Effective May 25, 2006, Sealy Corporation was named a guarantor of the 2014 Notes. At March 2, 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 approximate
$10.5 million increase 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 14.

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

5

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

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

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

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

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

In
March 2008, the FASB issued FAS 161, "Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133", which amends and expands
the disclosure requirements of FAS 133 to require qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains
and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This statement will be effective for the Company
beginning in fiscal 2009. The adoption of this statement will change the disclosures related to derivative instruments held by the Company.

6

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Note 3:Share-Based Compensation

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

During
the three months ended March 2, 2008, the Company granted no new options to purchase shares, of common stock. During the three months ended February 25, 2007, the
Company granted new options to purchase 432,461 shares of common stock, and recognized compensation expense associated with these grants of approximately $0.2 million. The options granted
during the first quarter of fiscal 2007 had a weighted average grant-date fair value of $5.08 per option. The Company valued these stock option grants using the trinomial lattice valuation
model with the following assumptions:

Three Months
Ended
February 25, 2007Expected volatility

30
%Expected dividend yield

2.011  2.031
%Expected term (in years)

6.71  7.88Risk-free rate

4.54%  4.72
%


Due
to the lack of sufficient historical trading information with respect to its own shares, the Company estimates expected volatility based on a portfolio of selected stocks of
companies believed to have market and economic characteristics similar to its own. The expected dividend yield is based on the Company's current quarterly dividend of $0.075 per share relative to the
fair value of the underlying stock at grant date. 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 three months ended March 2, 2008, is presented below:

Shares Subject
to Options

Weighted Average
Exercise Price
Per ShareOutstanding December 2, 2007


3,109,454

$
1.44Exercised


(206,769
)

2.39Outstanding March 2, 2008 (all fully vested and exercisable)


2,902,685

$
1.38Weighted average remaining contractual term


6.1 yearsAggregate intrinsic value at December 2, 2007 (in thousands)

$
22,446


7

---



A
summary of option activity under the 2004 Plan for the three months ended March 2, 2008, is presented below:

Shares Subject
to Options

Weighted Average
Exercise Price
Per ShareOutstanding December 2, 2007


9,304,343

$
8.06Exercised


(162,154
)

5.78Forfeited


(136,589
)

9.32Outstanding March 2, 2008


9,005,600

$
8.08Weighted average remaining contractual term


6.9 yearsAggregate intrinsic value (in thousands)

$
9,254Exercisable at March 2, 2008


5,336,420Weighted average remaining contractual term


6.7 yearsAggregate intrinsic value (in thousands)

$
10,270


As
of March 2, 2008, the Company had approximately $5.5 million of unrecognized compensation expense which is expected to be recognized over a weighted average period of
5.0 years.

During
the three months ended March 2, 2008 and February 25, 2007, the Company recognized total non-cash compensation expense associated with stock options of
$0.5 million and $0.3 million, respectively.

During
the three months ended March 2, 2008 and February 25, 2007, the Company recognized expense of $0.1 million, resulting from the accretion of an obligation to
certain executives of the Company for their right to sell to the Company, upon their retirement, vested shares of the Company's common stock.

The
Company has granted stock options to employees that have accelerated vesting provisions which take effect if certain performance levels are achieved by the Company. If the Company
does not meet these performance targets, then the vesting of the options occurs over the remainder of the requisite service period. As of March 2, 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.

Note 4:Inventories

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

March 2, 2008

December 2, 2007Raw materials

$
29,632

$
30,327Work in process


22,536


27,647Finished goods


19,244


15,708$
71,412

$
73,682


Note 5:Warranty Costs

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

8

---



coverage
at the time the sale is recorded. The change in the Company's accrued warranty obligations for each of the three months ended March 2, 2008 and February 25, 2007 and the year
ended December 2, 2007 was as follows (in thousands):

March 2, 2008

December 2, 2007

February 25, 2007Accrued warranty obligations at beginning of period

$
15,964

$
15,349

$
15,349Warranty claims


(4,580
)

(17,389
)

(3,425
)Warranty provisions


7,109


18,004


2,930Accrued warranty obligations at end of period

$
18,493

$
15,964

$
14,854


Warranty
claims for the year ended December 2, 2007 include 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 $1.4 million, $6.2 million
and $1.3 million for the three months ended March 2, 2008, the year ended December 2, 2007 and the three months ended February 25, 2007, respectively.

Note 6: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. Accordingly, in the first quarter of fiscal 2007, the Company recorded an additional
$5.2 million in property, plant and equipment with an offsetting financing obligation in the Condensed Consolidated Balance Sheets for a facility that was placed in service in February 2007.
During the lease terms, the Company recognizes building depreciation and interest expense for the obligations.

Note 7: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 three months ended March 2, 2008 are as follows:

Americas

Europe

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

$
366,943

$
28,517

$
395,460Increase due to foreign currency translation


859


1,138


1,997Balance as of March 2, 2008

$
367,802

$
29,655

$
397,457


Total
other intangibles of $8.2 million (net of accumulated amortization of $12.9 million) as of March 2, 2008 consist primarily of licenses, which are amortized
using a straight-line method over periods ranging from 5 to 15 years.

9

---



Note 8:Long-Term Obligations

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

March 2, 2008

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

$
67,400

$
41,600Senior secured term loans


399,681


403,393Senior subordinated notes


273,945


273,945Financing obligations


42,939


41,674Other


32,548


33,143816,513


793,755Less current portion


(35,926
)

(36,433
)$
780,587

$
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 March 2, 2008,
amounts outstanding under the senior revolving credit facility included $67.4 million under the U.S. portion of the facility. No amounts were outstanding under the Canadian portion at
March 2, 2008. At March 2, 2008, the Company had approximately $33.9 million available under the revolving credit facility after taking into account letters of credit issued
totaling $23.7 million.

Annually,
the Company may be required to make principal prepayments depending on certain financial ratios, as defined in its senior secured credit agreement. At March 2, 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 March 2, 2008.

At
March 2, 2008, the Company was in compliance with the covenants contained within its senior credit agreements and indenture governing the senior subordinated notes. The senior
credit agreements and the senior subordinated notes restrict the Company's ability to pay dividends.

Note 9: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 that has the effect of converting $200 million of the floating-rate debt under the Company's senior credit
facilities to a fixed-rate basis, declining to $150 million from December 2005 through December 3, 2007. The Company has formally designated this swap agreement as a cash
flow hedge and expects the hedge to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. For the three months ended
February 25, 2007, $0.6 million 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

10

---



outstanding
balance under the senior secured term loan through November 2008, declining to $240 million from December 2008 through November 2009, and further declining to $180 million
from December 2009 through November 2010. The Company has formally designated this swap agreement as a cash flow hedge and expects the hedge to be highly effective in offsetting fluctuations in the
designated interest payments resulting from charges in the benchmark interest rate. The Company will select the Eurodollar rate on the hedged portion of the senior secured term loan during the term of
the swap. The fair value of this swap instrument was recorded in the consolidated balance sheets as a liability of $17.0 and $10.2 million at March 2, 2008 and December 2, 2007,
respectively. Over the next 12 months, the Company expects to reclassify $7.5 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 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 totaled $0.3 million as of March 2, 2008 and were 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 of
$0.3 million for the first quarter of fiscal 2008 has been recorded as a reduction of interest expense.

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

March 2, 2008

December 2, 2007(in thousands)Accrued interest receivable

$


$
711Other noncurrent assets


327


Accrued interest payable


(227
)

Other current liabilities


(7,319
)

(3,237
)Other liabilities


(9,484
)

(7,006
)Total net liability

$
(16,703
)
$
(9,532
)


At
March 2, 2008 and December 2, 2007, accumulated other comprehensive income associated with interest rate swaps qualifying for hedge accounting treatment was
$(10.4 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 March 2,
2008, the Company had an outstanding forward contract to sell a total of 6.0 million Canadian dollars with an expiration date of March 4, 2008. At March 2, 2008, the fair value of
the Company's forward contracts was an asset of an insignificant amount. At December 2, 2007, the Company did not have any foreign currency forward contracts outstanding. For the three months
ended March 2, 2008, recognized foreign currency transaction gains were $0.7 million, compared with gains of $0.1 million for the three months ended February 25, 2007,
respectively.

11

---



Note 10: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 9 above. These
contracts are valued using an income approach which consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts using
current market information as of the reporting date such as prevailing interest rates and foreign currency spot and forward rates. As noted in Note 2 above, the Company has only adopted the
provisions of FAS 157 with respect to its financial assets and liabilities that are
measured at fair value within the condensed consolidated financial statements. The Company has deferred the application of the provisions of this statement to its non-financial assets and
liabilities in accordance with FSP 157-b. The following table provides a summary of the fair values of assets and liabilities under FAS 157:

Fair Value Measurements at March 2, 2008 UsingMarch 2, 2008

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

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)Derivatives

$
(16,461
)
$


$
(16,461
)
$



Note 11:Other Income, Net

Other income, net, includes interest income for the three months ended March 2, 2008 and February 25, 2007 of $0.1 million.

Note 12:Conditional Asset Retirement Obligations

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

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

12

---



Note 13: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 months ended
March 2, 2008 and February 25, 2007 are as follows:

Three Months EndedMarch 2, 2008

February 25, 2007(in thousands)Service cost

$
272

$
147Interest cost


339


207Expected return on plan assets


(335
)

(218
)Amortization of unrecognized gains and losses


39


30Amortization of unrecognized transition asset


(22
)

(22
)Amortization of unrecognized prior service cost


69


50Net periodic pension cost*

$
362

$
194Cash contributions

$
444

$
145




The
Company expects to make additional cash contributions to the plans of approximately $1.7 million during the remainder of fiscal 2008. The funded status of the plans as of
March 2, 2008 and December 2, 2007 was $7.3 million and $7.4 million, respectively.

Note 14: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 months ended March 2, 2008 and February 25, 2007 was approximately 35.5% and 36.9%, respectively. The effective rate
for the three months ended March 2, 2008 was lower than the
rate for the three months ended February 25, 2007 primarily due to the incremental benefit of the U.S. manufacturing deduction.

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 implementation, the Company recognized a $10.5 million net increase to the liability for uncertain tax positions including interest and penalties of $0.7 million and
$2.5 million, respectively. These increases were accounted for as a cumulative effect adjustment and recognized as an increase in the beginning accumulated deficit in the consolidated balance
sheet (unaudited). Including the cumulative effect adjustment, the Company had approximately $25.9 million of total unrecognized tax benefits as of December 3, 2007. The statement of
financial position as of March 2, 2008 includes accrued interest of $4.8 million and penalties of $3.8 million due to unrecognized tax benefits of which $4.3 million and
$3.6 million were recorded in connection with the implementation, with an additional $0.5 million interest and $0.2 million penalties recorded in income tax expense in the first
quarter. As of December 3, 2007, $13.9 million represents the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate in future periods.
The remaining $12.0 million represents the correlative relief for state and international items, plus the valuation allowance applied to state net operating loss adjustments. The Company does
not expect a significant decrease in unrecognized tax benefits within the next twelve months. Federal years open to examination are fiscal year 2004 and

13

---



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 believes that such audits will not result in an assessment or payment of taxes related to these positions during the one year
period following March 2, 2008. The Company also cannot predict when or if any other future tax payments related to these tax positions may occur.

Note 15:Comprehensive Income

Comprehensive income for the three months ended March 2, 2008 and February 25, 2007 was $15.4 million and $23.7 million, respectively.

Note 16: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 Sheets for $2.3 million ($2.8 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.

14

---



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

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

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

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.

Note 17:Related Party Transactions

During the three months ended March 2, 2008, the Company paid premiums of $0.1 million for excess directors and officers liability insurance and
excess liability insurance to KKR.

Note 18: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.

15

---



Sales
by geographic area are as follows:

Three Months EndedMarch 2, 2008

February 25, 2007Americas:United States

$
281,290

$
316,707Canada


44,367


40,446Other International


27,441


23,409Total Americas


353,098


380,562Europe


38,831


32,005Total

$
391,929

$
412,567Total International

$
110,639

$
95,860


Sales
from Europe to the Americas for the three months ended March 2, 2008 and February 25, 2007 were $1.9 million and $2.4 million,
respectively. Long lived assets (principally property, plant and equipment) outside the United States were $73.5 million and $68.6 million as of March 2, 2008 and
December 2, 2007, respectively.

March 2, 2008

February 25, 2007(in thousands)Net sales to external customers:Americas

$
353,098

$
380,562Europe


38,831


32,005391,929


412,567Capital expenditures:Americas


8,546


11,770Europe


516


1,1439,062


12,913EBITDA:Americas


46,926


62,040Europe


2,020


717Inter-segment eliminations


(74
)

(485
)48,872


62,272Reconciliation of EBITDA to net income:EBITDA from segments


48,872


62,272Interest


15,376


15,905Income taxes


8,905


14,411Depreciation and amortization


8,377


7,322Net Income

$
16,214

$
24,634


|
|

March 2, 2008

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

$
888,069

$
902,986Europe


129,857


122,630Intersegment eliminations


31,032


(537
)$
1,048,958

$
1,025,079


16

---



Note 19:Earnings per Share

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

Three months endedMarch 2, 2008

February 25,
2007(in thousands)Numerator:Net income available to common shareholders

$
16,214

$
24,634Denominator:Denominator for basic earnings per shareweighted average shares


90,865


91,349Effect of dilutive securities:Stock options


4,219


5,177Other


83


59Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversions


95,167


96,585


Note 20:Restructuring Activities

On January 4, 2008, management made the decision to cease manufacturing operations in Brazil and move to a distribution business model that is supplied by
production from other Sealy manufacturing facilities. As a result, the Company incurred certain costs related to one time termination costs of employees at this facility of approximately
$0.5 million in the first quarter of fiscal 2008.

Note 21:Subsequent Event

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. The total of these payments, which were accrued subsequent
to the end of the fiscal quarter was $2.7 million. Additionally, Mr. McIlquham holds a total of 5,392,952 stock options as of March 12, 2008 of which 3,691,296 were then vested
and may be exercised during the two year period following his resignation.

Note 22: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") 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

17

---



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.

18

---





SEALY CORPORATION        Supplemental Condensed Consolidating Balance Sheets        March 2, 2008        (in thousands)

|                                               |                                                                  | Sealy
Corporation |          | Sealy
Mattress
Corporation |   | Sealy
Mattress
Company |          | Combined
Guarantor
Subsidiaries |           | Combined
Non-Guarantor
Subsidiaries |  | Eliminations |         | Consolidated |        
|---------------------------------------------- | ---------------------------------------------------------------- | ----------------- | -------- | -------------------------- | - | ---------------------- | -------- | ------------------------------- | --------- | ----------------------------------- |  | ------------ | ------- | ------------ | -------
|Assets                                         |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        
|Current assets:                                |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        
|                                               | Cash and cash equivalents                                        |                   | $        | 23                         |   | $                      |         |                                 | $         | 1                                   |  | $            | 3,624   |              | $      
|                                               | Accounts receivable, net                                         |                   |          |                           |   |                        |         |                                 |           | 18                                  |  |              | 121,687 |              |        
|                                               | Inventories                                                      |                   |          |                           |   |                        |         |                                 |           | 1,522                               |  |              | 47,107  |              |        
|                                               | Prepaid expenses, deferred income taxes and other current assets |                   |          | 1,457                      |   |                        |         |                                 |           | 400                                 |  |              | 34,073  |              |        
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        
|                                               |                                                                  |                   | 1,480    |                            |   |                       |          |                                 | 1,941     |                                     |  | 206,491      |         |              | 141,265
|Property, plant and equipment, at cost         |                                                                  |                   |         |                            |   |                       |          |                                 | 9,308     |                                     |  | 346,538      |         |              | 101,911
|Less accumulated depreciation                  |                                                                  |                   |         |                            |   |                       |          |                                 | (3,966    | )                                   |  | (165,967     | )       |              | (37,080
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        
|                                               |                                                                  |                   |         |                            |   |                       |          |                                 | 5,342     |                                     |  | 180,571      |         |              | 64,831 
|Other assets:                                  |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        
|                                               | Goodwill                                                         |                   |          |                           |   |                        |         |                                 |           | 24,741                              |  |              | 304,773 |              |        
|                                               | Other intangibles, net                                           |                   |          | 6,060                      |   |                        |         |                                 |           |                                    |  |              | 2,172   |              |        
|                                               | Net investment in subsidiaries                                   |                   |          | (146,657                   | ) |                        | 269,087  |                                 |           | 421,420                             |  |              | 58,745  |              |        
|                                               | Due from (to) affiliates                                         |                   |          | 33,651                     |   |                        | (415,744 | )                               |           | 559,349                             |  |              | (88,958 | )            |        
|                                               | Debt issuance costs, net and other assets                        |                   |          |                           |   |                        |         |                                 |           | 10,348                              |  |              | 24,069  |              |        
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        
|                                               |                                                                  |                   | (106,946 | )                          |   | (146,657               | )        |                                 | 1,015,858 |                                     |  | 300,801      |         |              | (12,874
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        
|                                               | Total assets                                                     |                   | $        | (105,466                   | ) | $                      | (146,657 | )                               | $         | 1,023,141                           |  | $            | 687,863 |              | $      
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        
|Liabilities and Stockholders' (Deficit) Equity |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        
|Current liabilities:                           |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        
|                                               | Current portionlong-term obligations                            |                   | $        |                           |   | $                      |         |                                 | $         | 15,000                              |  | $            | 2,392   |              | $      
|                                               | Accounts payable                                                 |                   |          |                           |   |                        |         |                                 |           | 409                                 |  |              | 75,841  |              |        
|                                               | Accrued customer incentives and advertising                      |                   |          |                           |   |                        |         |                                 |           |                                    |  |              | 25,127  |              |        
|                                               | Accrued compensation                                             |                   |          |                           |   |                        |         |                                 |           | 334                                 |  |              | 21,663  |              |        
|                                               | Accrued interest                                                 |                   |          | 52                         |   |                        |         |                                 |           | 707                                 |  |              | 10,263  |              |        
|                                               | Other accrued expenses                                           |                   |          | 4,316                      |   |                        |         |                                 |           | 7,481                               |  |              | 35,389  |              |        
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        
|                                               |                                                                  |                   | 4,368    |                            |   |                       |          |                                 | 23,931    |                                     |  | 170,675      |         |              | 103,804
|Long-term obligations                          |                                                                  |                   |         |                            |   |                       |          |                                 | 726,026   |                                     |  | 42,598       |         |              | 11,963 
|Other noncurrent liabilities                   |                                                                  |                   | 4,475    |                            |   |                       |          |                                 | 9,484     |                                     |  | 47,813       |         |              | 12,329 
|Deferred income taxes                          |                                                                  |                   | 460      |                            |   |                       |          |                                 | (5,387    | )                                   |  | 5,177        |         |              | 6,011  
|Common stock and options subject to redemption |                                                                  |                   | 15,242   |                            |   |                       |          |                                 |          |                                     |  |             |         |              |       
|Stockholders' equity (deficit)                 |                                                                  |                   | (130,011 | )                          |   | (146,657               | )        |                                 | 269,087   |                                     |  | 421,600      |         |              | 59,115 
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        
|                                               | Total liabilities and stockholders' equity (deficit)             |                   | $        | (105,466                   | ) | $                      | (146,657 | )                               | $         | 1,023,141                           |  | $            | 687,863 |              | $      
|                                               |                                                                  |                   |          |                            |   |                        |          |                                 |           |                                     |  |              |         |              |        

19

---



SEALY CORPORATION        Supplemental Condensed Consolidating Balance Sheets (Continued)        December 2, 2008        (in thousands)

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

20

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations        Three Months Ended March 2, 2008        (in thousands)

Sealy
Corporation

Sealy Mattress
Corporation

Sealy
Mattress
Company

Combined
Guarantor
Subsidiaries

Combined Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
18,130

$
270,513

$
110,690

$
(7,404
)
$
391,929Cost and expenses:Cost of goods sold








10,982


164,379


70,915


(7,542
)

238,734Selling, general and administrative


(54
)




1,741


86,739


28,318





116,744Amortization of intangibles


800








72


43





915Royalty (income) expense, net


(1,044
)







(4,860
)

1,044





(4,860
)Income from operations


298





5,407


24,183


10,370


138


40,396Interest expense


77


143


14,063


451


642





15,376Other (income) expense, net














(99
)




(99
)Loss (income) from equity investees


(16,150
)

(16,191
)

(14,894
)







47,235


Loss (income) from non-guarantor equity investees











(10,746
)




10,746


Capital charge and intercompany interest allocation








(13,128
)

11,375


1,753





Income (loss) before income taxes


16,371


16,048


19,366


23,103


8,074


(57,843
)

25,119Income tax expense (benefit)


157


(102
)

3,175


8,228


(2,598
)

45


8,905Net income (loss)

$
16,214

$
16,150

$
16,191

$
14,875

$
10,672

$
(57,888
)
$
16,214


21

---



SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Operations (Continued)        Three Months Ended February 25, 2007        (in thousands)

Sealy
Corporation

Sealy Mattress
Corporation

Sealy Mattress
Company

Combined
Guarantor
Subsidiaries

Combined Non-
Guarantor
Subsidiaries

Eliminations

ConsolidatedNet sales

$


$


$
19,470

$
306,519

$
95,699

$
(9,121
)
$
412,567Costs and expenses:Cost of goods sold








11,473


172,901


60,539


(9,620
)

235,293Selling, general and administrative


64





1,917


100,851


24,081





126,913Amortization of intangibles


710








73








783Royalty (income) expense, net


(1,124
)







(4,909
)

741





(5,292
)Income from operations


350





6,080


37,603


10,338


499


54,870Interest expense


95


143


14,495


149


1,023





15,905Other income (expense), net


(8
)







(1
)

(71
)




(80
)Loss (income) from equity investees


(24,470
)

(24,559
)

(21,332
)







70,361


Loss (income) from nonguarantor equity investees











(5,696
)




5,696


Capital charge and intercompany interest allocation








(13,579
)

12,447


1,132





Income (loss) before income taxes


24,733


24,416


26,496


30,704


8,254


(75,558
)

39,045Income tax expense (benefit)


99


(54
)

1,937


9,381


3,043


5


14,411Net income (loss)

$
24,634

$
24,470

$
24,559

$
21,323

$
5,211

$
(75,563
)
$
24,634


22

---





SEALY CORPORATION        Supplemental Condensed Consolidating Statements of Cash Flows        Three Months Ended March 2, 2008        (in thousands)

|                                          |                                                                                  | Sealy Corporation |        | Sealy Mattress Corporation |   | Sealy Mattress Company |   | Combined Guarantor Subsidiaries |        | Combined Non- Guarantor Subsidiaries |   | Eliminations |        | Consolidated |       
|----------------------------------------- | -------------------------------------------------------------------------------- | ----------------- | ------ | -------------------------- | - | ---------------------- | - | ------------------------------- | ------ | ------------------------------------ | - | ------------ | ------ | ------------ | ------
|Net cash provided by
operating activities |                                                                                  | $                 |       |                            | $ |                       |   | $                               | 2,093  |                                      | $ | (17,421      | )      | $            | 17,846
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |        |              |       
|Cash flows from investing
activities:     |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |        |              |       
|                                          | Purchase of property, plant and equipment                                        |                   |        |                           |   |                        |  |                                 |        | (73                                  | ) |              | (7,849 | )            |       
|                                          | Proceeds from the sale of property, plant, and equipment                         |                   |        |                           |   |                        |  |                                 |        | (1                                   | ) |              | 2      |              |       
|                                          | Net activity in investment in and advances from (to) subsidiaries and affiliates |                   |        | 6,045                      |   |                        |  |                                 |        | (24,107                              | ) |              | 26,359 |              |       
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |        |              |       
|                                          | Net cash provided by (used in) investing activities                              |                   |        | 6,045                      |   |                        |  |                                 |        | (24,181                              | ) |              | 18,512 |              |       
|Cash flows from financing activities:     |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |        |              |       
|                                          | Dividend                                                                         |                   |        | (6,811                     | ) |                        |  |                                 |        |                                     |   |              |       |              |       
|                                          | Equity received upon exercise of stock including related excess tax benefits     |                   |        | 785                        |   |                        |  |                                 |        |                                     |   |              |       |              |       
|                                          | Repurchase of common stock                                                       |                   |        |                           |   |                        |  |                                 |        |                                     |   |              |       |              |       
|                                          | Repayments of long-term obligations                                              |                   |        |                           |   |                        |  |                                 |        | (3,712                               | ) |              |       |              |       
|                                          | Borrowings under revolving credit facilities                                     |                   |        |                           |   |                        |  |                                 |        | 134,800                              |   |              |       |              |       
|                                          | Repayments on revolving credit facilities                                        |                   |        |                           |   |                        |  |                                 |        | (109,000                             | ) |              |       |              |       
|                                          | Other                                                                            |                   |        |                           |   |                        |  |                                 |        |                                     |   |              | (1,479 | )            |       
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |        |              |       
|Net cash used in financing activities     |                                                                                  |                   | (6,026 | )                          |   |                       |   |                                 | 22,088 |                                      |   | (1,479       | )      |              | (505  
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |        |              |       
|Effect of exchange rate changes on cash   |                                                                                  |                   |       |                            |   |                       |   |                                 |       |                                      |   |             |        |              | (839  
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |        |              |       
|Change in cash and cash equivalents       |                                                                                  |                   | 19     |                            |   |                       |   |                                 |       |                                      |   | (388         | )      |              | 7,065 
|Cash and cash equivalents:                |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |        |              |       
|                                          | Beginning of period                                                              |                   |        | 4                          |   |                        |  |                                 |        | 1                                    |   |              | 4,012  |              |       
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |        |              |       
|                                          | End of period                                                                    |                   | $      | 23                         |   | $                      |  |                                 | $      | 1                                    |   | $            | 3,624  |              | $     
|                                          |                                                                                  |                   |        |                            |   |                        |   |                                 |        |                                      |   |              |        |              |       

23

---



SEALY CORPORATION

Supplemental Condensed Consolidating Statements of Cash Flows (Continued)

Three Months Ended February 25, 2007

(in thousands)

|                                          |                                                     | Sealy Corporation                                                                |      | Sealy Mattress Corporation |        | Sealy Mattress Company |   | Combined Guarantor Subsidiaries |       | Combined Non- Guarantor Subsidiaries |        | Eliminations |        | Consolidated |      
|----------------------------------------- | --------------------------------------------------- | -------------------------------------------------------------------------------- | ---- | -------------------------- | ------ | ---------------------- | - | ------------------------------- | ----- | ------------------------------------ | ------ | ------------ | ------ | ------------ | -----
|Net cash provided by operating activities |                                                     | $                                                                                |     |                            | $      |                       |   | $                               | 3,866 |                                      | $      | (6,957       | )      | $            | 7,344
|                                          |                                                     |                                                                                  |      |                            |        |                        |   |                                 |       |                                      |        |              |        |              |      
|Cash flows from investing activities:     |                                                     |                                                                                  |      |                            |        |                        |   |                                 |       |                                      |        |              |        |              |      
|                                          |                                                     | Purchase of property, plant and equipment                                        |      |                            |       |                        |   |                                |       |                                      | (690   | )            |        | (10,945      | )    
|                                          |                                                     | Proceeds from the sale of property, plant, and equipment                         |      |                            |       |                        |   |                                |       |                                      |       |              |        | 61           |      
|                                          |                                                     | Net activity in investment in and advances to (from) subsidiaries and affiliates |      |                            | 1,740  |                        |   |                                |       |                                      | (3,176 | )            |        | 5,489        |      
|                                          |                                                     |                                                                                  |      |                            |        |                        |   |                                 |       |                                      |        |              |        |              |      
|                                          | Net cash provided by (used in) investing activities |                                                                                  |      | 1,740                      |        |                        |  |                                 |       | (3,866                               | )      |              | (5,395 | )            |      
|                                          |                                                     |                                                                                  |      |                            |        |                        |   |                                 |       |                                      |        |              |        |              |      
|Cash flows from financing activities:     |                                                     |                                                                                  |      |                            |        |                        |   |                                 |       |                                      |        |              |        |              |      
|                                          |                                                     | Dividend                                                                         |      |                            | (6,856 | )                      |   |                                |       |                                      |       |              |        |             |      
|                                          |                                                     | Equity received upon exercise of stock including related excess tax benefits     |      |                            | 4,592  |                        |   |                                |       |                                      |       |              |        |             |      
|                                          |                                                     | Borrowings under revolving credit facilities                                     |      |                            |       |                        |   |                                |       |                                      |       |              |        |             |      
|                                          |                                                     | Repayments under revolving credit facilities                                     |      |                            |       |                        |   |                                |       |                                      |       |              |        |             |      
|                                          |                                                     | Other                                                                            |      |                            | 50     |                        |   |                                |       |                                      |       |              |        | (927         | )    
|                                          |                                                     |                                                                                  |      |                            |        |                        |   |                                 |       |                                      |        |              |        |              |      
|                                          | Net cash provided by (used in) financing activities |                                                                                  |      | (2,214                     | )      |                        |  |                                 |       |                                     |        |              | (927   | )            |      
|                                          |                                                     |                                                                                  |      |                            |        |                        |   |                                 |       |                                      |        |              |        |              |      
|Effect of exchange rate changes on cash   |                                                     |                                                                                  |     |                            |        |                       |   |                                 |      |                                      |        |             |        |              | (57  
|                                          |                                                     |                                                                                  |      |                            |        |                        |   |                                 |       |                                      |        |              |        |              |      
|Change in cash and cash equivalents       |                                                     |                                                                                  | (474 | )                          |        |                       |   |                                 |      |                                      |        | (13,279      | )      |              | (117 
|Cash and cash equivalents:                |                                                     |                                                                                  |      |                            |        |                        |   |                                 |       |                                      |        |              |        |              |      
|Beginning of period                       |                                                     |                                                                                  | 934  |                            |        |                       |   |                                 | 1     |                                      |        | 36,182       |        |              | 8,503
|                                          |                                                     |                                                                                  |      |                            |        |                        |   |                                 |       |                                      |        |              |        |              |      
|End of period                             |                                                     | $                                                                                | 460  |                            | $      |                       |   | $                               | 1     |                                      | $      | 22,903       |        | $            | 8,386
|                                          |                                                     |                                                                                  |      |                            |        |                        |   |                                 |       |                                      |        |              |        |              |      

24

---





SEALY CORPORATION

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

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

BUSINESS OVERVIEW

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

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

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

Our
industry continues to be challenged by the extreme volatility in the price of petroleum and steel products, which affects the cost of our polyurethane foam, polyester, polyethylene
foam and steel innerspring and box spring components. During fiscal 2007 and into the first quarter of fiscal 2008, the cost of these components has continued to remain elevated above their recent
historical averages, and we expect these costs, particularly those related to steel and polyurethane foam, to increase significantly over the remainder of fiscal 2008.

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

25

---



RESULTS OF OPERATIONS



The following table sets forth our summarized results of operations for the three months ended March 2, 2008 and February 25, 2007, expressed in
thousands of dollars, as well as a percentage of each period's net sales:

For the three months ended:March 2, 2008

February 25, 2007(in thousands)

(percentage of
net sales)

(in thousands)

(percentage of
net sales)Net sales

$
391,929

100.0
%
$
412,567

100.0
%Cost of goods sold


238,734

60.9


235,293

57.0Gross profit


153,195

39.1


177,274

43.0Selling, general and administrative expenses


116,744

29.8


126,913

30.8Amortization of intangibles


915

0.2


783

0.2Royalty income, net of royalty expense


(4,860
)
(1.2
)

(5,292
)
(1.3
)Income from operations


40,396

10.3


54,870

13.3Interest expense


15,376

3.9


15,905

3.8Other income, net


(99
)



(80
)
Income before income taxes


25,119

6.4


39,045

9.5Income taxes


8,905

2.3


14,411

3.5Net income

$
16,214

4.1
%
$
24,634

6.0
%Effective tax rate


35.5
%



36.9
%


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

Three Months Ended:March 2, 2008

February 25, 2007Americas:United States

71.8
%
76.8
%Canada

11.3

9.8Other

7.0

5.6Total Americas

90.1

92.2Europe

9.9

7.8Total

100.0
%
100.0
%


26

---



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

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

27

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Net Sales.Our consolidated net sales for the quarter ended March 2, 2008, were $391.9 million, a decrease of
$20.6 million, or 5.0% from the quarter ended February 25, 2007. Total Americas net sales were $353.1 million for the first quarter of fiscal 2008, a decrease of 7.2% from the
first quarter of fiscal 2007. This decrease was primarily related to our U.S. operations within the Americas segment. Total U.S. net sales were $281.3 million for the first quarter of fiscal
2007, a decrease of 11.2% from the first quarter of fiscal 2007. The U.S. net sales decrease of $35.4 million was attributable to a 10.5% decrease in wholesale unit volume and a 1.4% decrease
in wholesale average unit selling price. The decrease in unit volume is primarily attributable to ourSealybrand promotional product sales which were
down 22% from the prior year period as we have successfully shifted unit sales into Sealy Posturepedic product because of the success of our Reserve collection. Also, partially offsetting the decline
in Sealy brand promotional product revenues is the continued growth of our specialty bedding product sales which increased 17% over the comparable prior year period. The average unit selling price has
begun to increase sequentially from the fiscal fourth quarter 2007 primarily due to a price increase on orders taken after December 17, 2007. In Canada, local currency sales decreases of 5.8%
translated into gains of 9.7% in U.S. dollars. Local currency sales performance in Canada was driven by a 6.6% decrease in unit volume, which was partially offset by a 1.0% increase in average unit
selling price. The decrease in unit volume is partially attributable to ourSealybrand promotional product sales, which were down 28.5%. Elsewhere in
the Americas, we experienced sales gains in our Mexico and Argentina markets. In our European segment, local currency sales gains of 7.5% translated into gains of 21.3% in U.S. dollars. Local currency
gains in Europe were driven by a 43.6% increase in unit volume, partially offset by a 25.1% decrease in average unit selling price. Increased sales of OEM latex bed cores, which have lower prices,
drove the unit growth and the decrease in average unit selling price. Local currency finished goods sales in Europe increased 0.4%.

Gross Profit.Our consolidated gross profit for the quarter was $153.2 million, a decrease of $24.1 million
from the comparable prior year period. As a percentage of net sales, gross profit decreased 3.9 percentage points to 39.1%. This was due to a decrease in gross profit margins in both of our
segments. Total Americas gross profit for the quarter was $143.0 million, a decrease of $24.8 million from the comparable prior year period. As a percentage of net sales, gross profit
for the Americas decreased 3.6 percentage points to 40.5%. This decrease was primarily due to a decrease in gross profit margins in our U.S. operations. U.S. gross profit decreased
$28.0 million to $112.7 million, which, as a percentage of sales, represents a decrease of 4.3 percentage points to 40.1% of net sales. The decrease in percentage of net sales was
driven primarily by a an increase in material costs including an
incremental $5.1 million in costs required for the Company's products to be in compliance with the July 2007 federal flame retardant regulations as well as higher inflation on core inputs such
as steel and foam. In addition, the domestic profit margin was negatively impacted by higher warranty reserves and a deleveraging of overhead expenses on lower volume. Partially offsetting these
effects were continued improvements in our manufacturing efficiencies particularly factory labor and product scrap costs. The gross profit margin in Canada remained flat at 42.9% of net sales. In our
European segment, the gross profit margin decrease resulted from a shift in sales mix toward more latex bed cores to other manufacturers and finished goods sales to lower margin accounts.

Selling, General, Administrative.Our consolidated selling, general, and administrative expense decreased
$10.2 million to $116.7 million. As a percent of net sales this expense was 29.8% and 30.8% for the quarters ended March 2, 2008 and February 25, 2007, respectively, a
decrease of 1.0 percentage points. This decrease in both absolute dollars and as a percent of sales is primarily due to a $5.4 million reduction in volume driven variable expenses
including an $8.7 million decrease in cooperative advertising costs partially offset by a $2.1 million increase in delivery costs due primarily to higher diesel fuel costs higher foreign
currency valuations relative to the US dollar and increased International unit volume. In addition, salary and fringe related costs decreased $2.9 million and there

28

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was
lower spending on professional services relative to the first quarter of fiscal 2007. Promotional expenses related to launching new products in the U.S. were $1.1 million lower than in 2007
which included costs associated with the 2007 roll out of our Stearns & Foster products and Sealy Posturepedic Reserve collection. These decreases were partially offset by $0.9 million
of severance costs associated with a reduction in personnel.

Royalty income, net of royalty expense.Our consolidated royalty income, net of royalty expenses, for the three months ended
March 2, 2008 remained flat as compared with the prior year period at $4.9 million.

Interest Expense.Our consolidated interest expense for the first quarter of fiscal 2008 declined $0.5 million as
compared with the prior year period at $15.4 million. Our net weighted average borrowing cost was 7.6% and 7.7% for the three months ended March 2, 2008 and February 25, 2007,
respectively. Our borrowing cost was favorably impacted by the retirement of $68.1 million of our 2014 Notes late in fiscal 2007. This was offset by higher interest rates on the unhedged
variable rate component of our floating rate debt.

Income Tax.Our effective income tax rates differ from the Federal statutory rate principally because of the effect of
certain foreign tax rate differentials and state and local income taxes. Our effective tax rate for the three months ended March 2, 2008 was 35.5% compared to 36.9% for the three months ended
February 25, 2007. The effective rate for the fiscal 2008 period was lower than the fiscal 2007 period primarily due to the incremental benefit of the U.S. manufacturing deduction.

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

LIQUIDITY AND CAPITAL RESOURCES



Our principal sources of funds are cash flows from operations and borrowings under our senior secured revolving credit facility. Our principal use of funds
consists of operating expenditures, payments of principal and interest on our senior credit agreements, capital expenditures, interest payments on our outstanding senior subordinated notes, and
dividend payments to shareholders. Capital expenditures totaled $9.1 million for the three months ended March 2, 2008. We expect total 2008 capital expenditures to be approximately $35.0
to $40.0 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
March 2, 2008, we had approximately $33.9 million available under our revolving credit facility after taking into account letters of credit issued totaling $23.7 million. Our net
weighted average borrowing cost was 7.6% and 7.7% for the three months ended March 2, 2008 and February 25, 2007, respectively.

29

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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 $467.1 million at March 2, 2008 for the senior facilities. We also have an outstanding principal balance of $273.9 million at
March 2, 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 $32.8 million of the original $140 million outstanding
on our term loan maturing August 25, 2012 and $7.5 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 March 28, 2008, we had
$69.1 million outstanding under the U.S. portion of our revolving credit facility and $2.0 million outstanding under the Canadian portion. After taking into account letters of credit
issued totaling $23.7 million, the Company had approximately $30.2 million available under the revolving credit facility at March 28, 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 March 2, 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,
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 Company has not 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.

30

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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 March 2, 2008, the outstanding
balance of the 2014 Notes was $274 million.

At
March 2, 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 March 2, 2008, we had repurchased shares for $16.3 million under
this program, none of which was repurchased during the first quarter of fiscal 2008. From March 2 through March 28, 2008, we did not repurchase any additional shares under this program.

Our
ability to make scheduled payments of principal, or to pay the interest or liquidated damages, if any, on or to refinance our indebtedness, or to fund planned capital expenditures
will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based
upon the current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under the senior credit agreement, will be adequate to meet the
future liquidity needs during the one year following March 2, 2008. We will be required to make scheduled principal payments of $35.9 million during the next twelve months, with
$15.0 million for our senior secured term loans, $2.1 million for our financing obligations and capital leases and the remainder for debt owed by our international subsidiaries. However,
as we continually evaluate our ability to make additional prepayments as permitted under our senior credit agreements, it is possible that we will make additional voluntary prepayments on our senior
debt during that time.

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



The Company announced on April 8, 2008 that its Board of Directors voted to suspend the Company's quarterly dividend. This decision is intended to increase
the Company's financial flexibility and will enable it to better allocate its capital in order to enhance shareholder returns over time.

31

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The following table summarizes our changes in cash:

Three Months Ended:March 2,
2008

February 25,
2007(in thousands)Statement of Cash Flow Data:Cash flows provided by (used in):Operating activities

$
2,518

$
4,253Investing activities


(9,061
)

(12,836
)Financing activities


14,078


(5,230
)Effect of exchange rate changes on cash


(839
)

(57
)Change in cash and cash equivalents


6,696


(13,870
)Cash and cash equivalents:Beginning of period


14,607


45,620End of period

$
21,303

$
31,750


Three Months Ended March 2, 2008 Compared With Three Months Ended February 25, 2007

Cash Flows from Operating Activities.Our cash flow from operations decreased $1.7 million to $2.5 million net
cash provided for the three months ended March 2, 2008, compared to a $4.3 million net cash provided for the three months ended February 25, 2007. This decrease is primarily the
result of a
reduction in net income, partially offset by changes in working capital and timing of various vendor payments.

Cash Flows from Investing Activities.Our cash flows used in investing activities decreased approximately $3.7 million
to $9.1 million net use of cash for the three months ended March 2, 2008, compared to the three months ended February 25, 2007 due to $3.9 million of lower capital
expenditures for the first three 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 three months ended February 25, 2007.

Cash Flows from Financing Activities.Our cash flow provided by financing activities for the three months ended
March 2, 2008 was $14.1 million compared with a net use of cash in financing activities of $5.2 million for the three months ended February 25, 2007. This change has been
primarily driven by $25.8 million of net borrowings on our revolving credit facility during the three months ended March 2, 2008 compared with net payments of $2.6 million on our
revolving credit facility during the three months ended February 25, 2007.



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
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

32

---



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 believes that such audits will not result in assessment and payment of taxes
related to these positions during the one year period following March 2, 2008. We also cannot predict when or if any other future tax payments related to these tax positions may occur.



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

The
covenants contained in our senior secured credit facilities are based on what we refer to herein as "Adjusted EBITDA". In the senior secured credit facilities, EBITDA is defined as
net income plus interest, taxes, depreciation and amortization and Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments permitted in calculating
covenant compliance as discussed above. Adjusted EBITDA is presented herein as it is a material component of these covenants. Non-compliance with such covenants could result in the
requirement to immediately repay all amounts outstanding under such facilities. While the determination of "unusual items" is subject to interpretation and requires judgment, we believe the
adjustments listed below are in accordance with the covenants.

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

The
following table sets forth a reconciliation of net income to EBITDA and EBITDA to Adjusted EBITDA for the three months ended March 2, 2008:

Three Months EndedMarch 2, 2008(in thousands)Net income

$
16,214Interest expense


15,376Income taxes


8,905Depreciation and amortization


8,377EBITDA


48,872Unusual and nonrecurring losses:Reorganization charges


1,056Other (various)(a)


1,978Adjusted EBITDA

$
51,906




33

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The following table reconciles EBITDA to cash flow from operations:

Three Months Ended:
March 2, 2008(in thousands)EBITDA

$
48,872Adjustments to EBITDA to arrive at cash flow from operations:Interest expense


(15,376
)Income taxes


(8,905
)Non-cash charges against (credits to) net income


686Changes in operating assets & liabilities


(22,759
)Cash flow from operations

$
2,518




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:

Income Taxes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 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:



34

---





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 three months ended March 2, 2008, the liability for uncertain tax positions increased
$1.4 million (including penalties and interest), partially offset by an adjustment to deferred taxes of $0.6 million. At March 2, 2008, $31.4 million of the 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

35

---



products
would have an approximately $1.0 million dollar impact on our financial position for the three months ended March 2, 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 March 2, 2008, the Company had an outstanding forward contract to sell a total of
$6.0 million Canadian dollars with an expiration date of March 4, 2008. At March 2, 2008, the fair value of the Company's forward contracts was an asset of an insignificant
amount.. We do not designate our foreign currency hedges for accounting purposes, therefore all changes in fair value are charged to earnings.



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

On
June 15, 2007 the Company entered into an interest rate swap agreement effective December 3, 2007 fixing the floating portion of the interest rate at 5.495% on
$242 million of the outstanding balance under the senior secured term loan through November 2008, declining to $240 million from December 2008 through November 2009, and further
declining to $180 million from December 2009 through November 2010. The fair value of this swap instrument was a liability of $17.0 million at March 2, 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 totaled $0.3 million as of March 2, 2007 and were recorded as a component of other noncurrent assets in the
accompanying Condensed Consolidated Balance Sheet.

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

Based
on the unhedged portion of our variable rate debt outstanding at March 2, 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 extreme volatility in the price of steel and
petroleum. We expect the cost of the 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 quarter of fiscal 2008, we entered into commodity-based physical contracts to buy natural gas at agreed-upon fixed prices. These contracts were entered into in the
normal course of business. We do not engage in commodity hedging programs.

36

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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 first quarter of fiscal 2008 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Effective
March 12, 2008, David J. McIlquham resigned as President, Chief Executive Officer and Chairman of the Board of Directors of the Company. Concurrent with this date,
Lawrence J. Rogers was appointed interim Chief Executive Officer and Paul Norris was appointed Non-Executive Chairman of the Board of Directors. The full transition and performance of our
internal controls as they relate to our Chief Executive Officer have been completed with no impact to the effectiveness of the design and operation of our disclosure controls and procedures.

37

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

See Note 16 to the Condensed Consolidated Financial Statements, Part I, Item 1 included herein.

Item 1A.Risk Factors

Subsequent to the quarter ended March 2, 2008, David J. McIlquham resigned as President, Chief Executive Officer and Chairman of the Board of Directors of
the Company. Lawrence J. Rogers was appointed interim Chief Executive Officer and Paul Norris was appointed Non-Executive Chairman of the Board of Directors. While Mr. McIlquham had
substantial industry experience, we do not believe that his departure will have a material adverse effect on our business. Mr. Rogers has served in numerous capacities within our operations,
since 1979 most recently as President of Sealy North America.

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

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

|Period                              |       | Total number of
shares purchased(1) |         | Average price
paid per share |       | Total number of
shares purchased
during quarter
as part of publicly
announced program(2) |   | Approximate dollar
value of shares
that may yet
be purchased
under program
|----------------------------------- | ----- | ----------------------------------- | ------- | ---------------------------- | ----- | ---------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------
|December 3, 2007
December 30, 2007 |       |                                    |         |                              |       |                                                                                          |  |                                                                           
|December 31, 2007
January 27, 2008 |       |                                    |         |                              |       |                                                                                          |  |                                                                           
|January 28, 2008March 2, 2008      |       | 200,729                             |         | $                            | 11.80 |                                                                                          |  |                                                                           
|                                    |       |                                     |         |                              |       |                                                                                          |   |                                                                           
|                                    | Total |                                     | 200,729 |                              |       |                                                                                          |   |                                                                          
|                                    |       |                                     |         |                              |       |                                                                                          |   |                                                                           

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

Item 3.Defaults Upon Senior Securities



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



38

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Item 5.Other Information



Item 6.Exhibits

39

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SIGNATURES

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

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

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

Date: April 8, 2008

40

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