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: February 26, 2006            
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 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 o No ý

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

Large accelerated filer o

Accelerated Filer o

Non-accelerated filer ý


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

The number of shares of the registrant's common stock outstanding as of May 15, 2006 is approximately: 90,517,239.



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PART I. FINANCIAL INFORMATION

Item 1Financial Statements

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

|                                                                                                                                          |                                                                     | Quarter Ended                     |        
|----------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------- | -------
|
|Net sales                                                                                                                                 |                                                                     | $                                 | 395,735
|Cost of goods sold                                                                                                                        |                                                                     |                                   | 219,038
|                                                                                                                                          |                                                                     |                                   |        
|                                                                                                                                          |                                                                     | Gross Profit                      |        
|Selling, general and administrative                                                                                                       |                                                                     |                                   | 123,604
|Amortization of intangibles                                                                                                               |                                                                     |                                   | 122    
|Royalty income, net of royalty expense                                                                                                    |                                                                     |                                   | (3,689 
|                                                                                                                                          |                                                                     |                                   |        
|                                                                                                                                          |                                                                     | Income from operations            |        
|Interest expense                                                                                                                          |                                                                     |                                   | 18,736 
|Other income, net                                                                                                                         |                                                                     |                                   | (187   
|                                                                                                                                          |                                                                     |                                   |        
|Income before income tax expense                                                                                                          |                                                                     |                                   | 38,111 
|Income tax expense                                                                                                                        |                                                                     |                                   | 14,852 
|                                                                                                                                          |                                                                     |                                   |        
|Income before cumulative effect of a change in accounting principle                                                                       |                                                                     |                                   | 23,259 
|Cumulative effect on prior years (to November 28, 2005) of the adoption of FASB Interpretation No. 47, net of related tax benefit of $191 |                                                                     |                                   | 287    
|                                                                                                                                          |                                                                     |                                   |        
|                                                                                                                                          |                                                                     | Net income                        |        
|                                                                                                                                          |                                                                     |                                   |        
|Earnings per common shareBasic                                                                                                           |                                                                     |                                   |        
|                                                                                                                                          | Income before cumulative effect of a change in accounting principle |                                   | $      
|                                                                                                                                          | Cumulative effect of a change in accounting principle               |                                   |        
|                                                                                                                                          |                                                                     |                                   |        
|                                                                                                                                          |                                                                     | Earnings per common shareBasic   |        
|                                                                                                                                          |                                                                     |                                   |        
|Earnings per common shareDiluted                                                                                                         |                                                                     |                                   |        
|                                                                                                                                          | Income before cumulative effect of a change in accounting principle |                                   | $      
|                                                                                                                                          | Cumulative effect of a change in accounting principle               |                                   |        
|                                                                                                                                          |                                                                     |                                   |        
|                                                                                                                                          |                                                                     | Earnings per common shareDiluted |        
|                                                                                                                                          |                                                                     |                                   |        
|Weighted average number of common shares outstanding:                                                                                     |                                                                     |                                   |        
|                                                                                                                                          | Basic                                                               |                                   |        
|                                                                                                                                          | Diluted                                                             |                                   |        

See
accompanying notes to condensed consolidated financial statements.

1

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SEALY CORPORATION        Condensed Consolidated Balance Sheets        (in thousands)

|                                               |                                                                                                                                                                             | February 26,
2006 |          | November 27,
2005 |  
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -------- | ----------------- | -
|
|Assets                                         |                                                                                                                                                                             |                   |          |                   |  
|Current assets:                                |                                                                                                                                                                             |                   |          |                   |  
|                                               | Cash and cash equivalents                                                                                                                                                   |                   | $        | 13,760            |  
|                                               | Accounts receivable, net of allowances for bad debts, cash discounts and returns                                                                                            |                   |          | 203,977           |  
|                                               | Inventories                                                                                                                                                                 |                   |          | 66,485            |  
|                                               | Assets held for sale                                                                                                                                                        |                   |          | 1,405             |  
|                                               | Prepaid expenses and other current assets                                                                                                                                   |                   |          | 14,976            |  
|                                               | Deferred income taxes                                                                                                                                                       |                   |          | 16,661            |  
|                                               |                                                                                                                                                                             |                   |          |                   |  
|                                               |                                                                                                                                                                             |                   | 317,264  |                   |  
|Property, plant and equipmentat cost          |                                                                                                                                                                             |                   | 335,415  |                   |  
|Less: accumulated depreciation                 |                                                                                                                                                                             |                   | (166,447 | )                 |  
|                                               |                                                                                                                                                                             |                   |          |                   |  
|                                               |                                                                                                                                                                             |                   | 168,968  |                   |  
|Other assets:                                  |                                                                                                                                                                             |                   |          |                   |  
|                                               | Goodwill                                                                                                                                                                    |                   |          | 385,487           |  
|                                               | Other intangibles                                                                                                                                                           |                   |          | 4,486             |  
|                                               | Debt issuance costs, net, and other assets                                                                                                                                  |                   |          | 32,309            |  
|                                               |                                                                                                                                                                             |                   |          |                   |  
|                                               |                                                                                                                                                                             |                   | 422,282  |                   |  
|                                               |                                                                                                                                                                             |                   |          |                   |  
|                                               |                                                                                                                                                                             | $                 | 908,514  |                   | $
|                                               |                                                                                                                                                                             |                   |          |                   |  
|Liabilities and Stockholders' Deficit          |                                                                                                                                                                             |                   |          |                   |  
|Current liabilities:                           |                                                                                                                                                                             |                   |          |                   |  
|                                               | Current portion of long-term obligations                                                                                                                                    |                   | $        | 11,288            |  
|                                               | Accounts payable                                                                                                                                                            |                   |          | 110,473           |  
|                                               | Accrued incentives and advertising                                                                                                                                          |                   |          | 34,480            |  
|                                               | Accrued compensation                                                                                                                                                        |                   |          | 46,168            |  
|                                               | Accrued interest                                                                                                                                                            |                   |          | 10,019            |  
|                                               | Other accrued expenses                                                                                                                                                      |                   |          | 57,105            |  
|                                               |                                                                                                                                                                             |                   |          |                   |  
|                                               |                                                                                                                                                                             |                   | 269,533  |                   |  
|Long-term obligations, net of current portion  |                                                                                                                                                                             |                   | 949,677  |                   |  
|Other noncurrent liabilities                   |                                                                                                                                                                             |                   | 43,194   |                   |  
|Deferred income taxes                          |                                                                                                                                                                             |                   | 12,492   |                   |  
|Commitments and contingencies                  |                                                                                                                                                                             |                   |         |                   |  
|Common stock and options subject to redemption |                                                                                                                                                                             |                   | 21,478   |                   |  
|Stockholders' deficit:                         |                                                                                                                                                                             |                   |          |                   |  
|                                               | Common stock, $0.01 par value; Authorized 200,000 shares; Issued: 200670,488; 200570,480 (including shares classified above as subject to redemption: 2006265; 2005263) |                   |          | 702               |  
|                                               | Additional paid-in capital                                                                                                                                                  |                   |          | 366,294           |  
|                                               | Accumulated deficit                                                                                                                                                         |                   |          | (758,491          | )
|                                               | Accumulated other comprehensive income                                                                                                                                      |                   |          | 3,755             |  
|                                               | Treasury stock                                                                                                                                                              |                   |          | (120              | )
|                                               |                                                                                                                                                                             |                   |          |                   |  
|                                               |                                                                                                                                                                             |                   | (387,860 | )                 |  
|                                               |                                                                                                                                                                             |                   |          |                   |  
|                                               |                                                                                                                                                                             | $                 | 908,514  |                   | $
|                                               |                                                                                                                                                                             |                   |          |                   |  

See
accompanying notes to condensed consolidated financial statements.

2

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

|                                                    |                                                                                             | Quarter Ended                                       |                                              
|--------------------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------------------
|
|Cash flows from operating activities:               |                                                                                             |                                                     |                                              
|                                                    | Net income                                                                                  |                                                     | $                                            
|                                                    | Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                     |                                              
|                                                    |                                                                                             | Depreciation and amortization                       |                                              
|                                                    |                                                                                             | Deferred income taxes                               |                                              
|                                                    |                                                                                             | Non-cash interest expense:                          |                                              
|                                                    |                                                                                             |                                                     | Senior Subordinated PIK Notes                
|                                                    |                                                                                             |                                                     | Amortization of debt issuance costs and other
|                                                    |                                                                                             | Stock-based compensation                            |                                              
|                                                    |                                                                                             | (Gain) loss on sale of assets                       |                                              
|                                                    |                                                                                             | Cumulative effect of accounting change              |                                              
|                                                    |                                                                                             | Other, net                                          |                                              
|                                                    | Changes in operating assets and liabilities:                                                |                                                     |                                              
|                                                    |                                                                                             | Accounts receivable                                 |                                              
|                                                    |                                                                                             | Inventories                                         |                                              
|                                                    |                                                                                             | Prepaid expenses and other current assets           |                                              
|                                                    |                                                                                             | Accounts payable                                    |                                              
|                                                    |                                                                                             | Accrued expenses                                    |                                              
|                                                    |                                                                                             | Other liabilities                                   |                                              
|                                                    |                                                                                             |                                                     |                                              
|Net cash provided by (used in) operating activities |                                                                                             |                                                     | (14,056                                      
|                                                    |                                                                                             |                                                     |                                              
|Cash flows from investing activities:               |                                                                                             |                                                     |                                              
|                                                    | Purchase of property, plant and equipment, net                                              |                                                     |                                              
|                                                    | Proceeds from the sale of property, plant and equipment                                     |                                                     |                                              
|                                                    |                                                                                             |                                                     |                                              
|                                                    |                                                                                             | Net cash used in investing activities               |                                              
|Cash flows from financing activities:               |                                                                                             |                                                     |                                              
|                                                    | Repayments of long-term obligations                                                         |                                                     |                                              
|                                                    | Net borrowings (repayments) under revolving credit facilities                               |                                                     |                                              
|                                                    | Other                                                                                       |                                                     |                                              
|                                                    |                                                                                             |                                                     |                                              
|                                                    |                                                                                             | Net cash provided by (used in) financing activities |                                              
|                                                    |                                                                                             |                                                     |                                              
|Effect of exchange rate changes on cash             |                                                                                             |                                                     | 122                                          
|                                                    |                                                                                             |                                                     |                                              
|Change in cash and cash equivalents                 |                                                                                             |                                                     | (22,794                                      
|Cash and cash equivalents:                          |                                                                                             |                                                     |                                              
|                                                    | Beginning of period                                                                         |                                                     |                                              
|                                                    |                                                                                             |                                                     |                                              
|                                                    | End of period                                                                               |                                                     | $                                            
|                                                    |                                                                                             |                                                     |                                              

See
accompanying notes to condensed consolidated financial statements.

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SEALY CORPORATION        Notes to Condensed Consolidated Financial Statements

Note 1:Basis of Presentation

The condensed consolidated interim 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. In the opinion of management, the accompanying unaudited consolidated financial statements were prepared following the same policies and procedures used in the
preparation of the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Sealy Corporation and its
subsidiaries (the "Company"). The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements for the year ended November 27, 2005 included within the Company's Registration Statement on
Form S-1 (File No. 333-126280).

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

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

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

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

On April 12, 2006, the Company completed an initial public offering ("IPO") of its common stock, raising $299.2 million of net proceeds after
deducting the underwriting discount. During the second quarter, the Company has used or expects to use the net proceeds from the IPO as follows: (i) on April 12, 2006,
$125 million was distributed as a cash dividend to stockholders of record as of April 6, 2006, immediately prior to the IPO; (ii) on April 21, 2006, approximately
$90.0 million was paid to redeem the Company's Senior Subordinated PIK Notes, including accrued interest and prepayment penalties thereon; (iii) on April 26, 2006, the Company
completed a series of open market transactions whereby approximately $51.6 million was paid to repurchase and retire $47.5 million aggregate principal amount of the Company's 8.25%
Senior Subordinated Notes (the "Notes") due in 2014, at market prices ranging from 105.25% to 105.94% of par, along with accrued interest thereon; (iv) on April 12, 2006 the Company paid
$11.0 million to KKR to terminate the management services agreement; (v) the Company has paid approximately $17.2 million to members of management for transaction-related bonuses;
and (vi) approximately $4.4 million will be used for other costs associated with the IPO, including the reimbursement of approximately $2.1 million of IPO-related
costs incurred through

4

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February 26,
2006, included in prepaid expenses and other current assets in the accompanying balance sheet.

Note 3:Share-Based Compensation

Effective August 29, 2005 (the beginning of the fourth quarter of fiscal 2005) the Company adopted the provisions of FAS No. 123 (revised 2004)
"Share-Based Payment" (FAS 123(R)). Previously, as permitted by FAS No. 123, "Accounting for Stock-Based Compensation" (FAS 123), the Company accounted for its stock option and
stock incentive plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and recorded no charges (except to the extent required
by APB Opinion No. 25) against earnings with respect to options granted. Prior to the Sealy Corporation's June 30, 2005 filing of a registration statement on Form S-1,
the Company had been considered a nonpublic entity as defined by both FAS 123 and FAS 123(R), and had
used the minimum value method of measuring equity share options for pro forma disclosure purposes. Accordingly, the Company is required to apply the provisions of FAS 123(R) prospectively to
new awards and to awards modified, repurchased, or cancelled after the date of adoption. The Company has continued to account for any portion of awards outstanding at August 29, 2005 using the
provisions of APB 25 as previously permitted under FAS 123. In addition, the Company has discontinued pro forma disclosures previously required by FAS 123 for equity share options
accounted for using the intrinsic value method of APB 25.

Since
the date of its adoption of FAS 123(R) and through February 26, 2006, the Company has neither issued nor modified any equity share option awards or other forms of
share-based payment. Therefore, the Company has recognized no compensation expense with respect to equity share options during the three months ended February 26, 2006. The Company will
recognize compensation expense when new awards are granted, in accordance with the standard. During the second quarter of fiscal 2006, the Company expects to begin recognizing share-based compensation
expense for options to purchase the Company's stock granted in connection with the IPO, as well as for other stock options granted in the ordinary course of business.

The
Company recognized approximately $0.3 million and $0.2 million of expense during the three months ended February 26, 2006 and February 27, 2005,
respectively, resulting from the accretion of an obligation to three executives of the Company for their right to sell to the Company, upon their retirement, shares of the Company's common stock
currently held as vested or partially vested options.

Note 4:Inventories

The major components of inventories were as follows:

February 26,
2006

November 27,
2005(in thousands)Raw materials

$
36,320

$
32,336Work in process


20,340


18,945Finished goods


9,825


8,860$
66,485

$
60,141


Note 5:Warranty Costs

The
Company's warranty policy provides a 10-year non-prorated warranty service period on all currently manufactured Sealy Posturepedic, Stearns & Foster
and Bassett bedding products and some other Sealy-branded products, and a 20-year warranty on its new TrueForm product line introduced late in the first quarter of fiscal 2005. The
Company's policy is to accrue the estimated cost of warranty

5

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coverage
at the time the sale is recorded. The change in the Company's accrued warranty obligations for each of the quarters ended February 26, 2006 and February 27, 2005 and the year
ended November 27, 2005 was as follows (in thousands):

February 26, 2006

November 27, 2005

February 27, 2005Accrued warranty obligations at beginning of period

$
14,321

$
13,857

$
13,857Warranty claims


(3,453
)

(14,484
)

(3,814
)Warranty provisions


3,691


14,948


3,271Accrued warranty obligations at end of period

$
14,559

$
14,321

$
13,314


Warranty
claims for the year ended November 27, 2005 include approximately $8.9 million for claims associated with products sold prior to November 28, 2004 that were
still under warranty. In estimating its warranty obligations, the Company considers the impact of recoverable salvage value on warranty cost in determining its estimate of future warranty obligations.
Warranty claims and provisions shown above do not include estimated salvage recoveries that reduced cost of sales by $1.4 million, $4.3 million and $1.0 million for the quarter
ended February 26, 2006, the year ended November 27, 2005 and the quarter ended February 27, 2005, respectively.

Note 6:Goodwill and Other Intangible Assets

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

The
changes in the carrying amount of goodwill for the quarter ended February 26, 2006 are as follows (in thousands):

Balance as of November 27, 2005

$
384,646Increase due to foreign currency translation


841Balance as of February 26, 2006

$
385,487


Total
other intangibles of $4.5 million (net of accumulated amortization of $5.0 million) as of February 26, 2006 consist primarily of acquired licenses, which are
amortized on the straight-line method over periods ranging from 5 to 15 years, and unamortized pension prior service costs of $1.4 million.

6

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Note 7:Long-Term Obligations

Long-term debt as of February 26, 2006 and November 27, 2005 consisted of the following:

February 26,
2006

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

$
15,446

$
18,814Senior Secured Term Loan


450,000


450,000Senior Subordinated Notes


389,500


389,500Senior Subordinated PIK Notes


87,879


85,766Other


18,140


17,664960,965


961,744Less current portion


(11,288
)

(12,769
)$
949,677

$
948,975


The
total borrowing capacity under the senior revolving credit facility is $125 million, of which up to $25 million may be borrowed in Canada. At February 26, 2006,
amounts outstanding under the senior revolving credit facility included $5.0 million and $10.4 million under the U.S. and Canadian portions of the facility, respectively. At
February 26, 2006, the Company had approximately $77.6 million available under the revolving credit facility after taking into account letters of credit issued totaling
$32.0 million.

Annually,
the Company may be required to make principal prepayments equal to 25% of excess cash flow for the preceding fiscal year, as defined in its senior secured credit agreement. At
February 26, 2006, the Company is unable to determine the amount of such required payment, if any, that would be due following the first quarter of fiscal 2007 with respect to excess cash flow
for the 2006 fiscal year.

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

Note 8:Other Income

Other income includes interest income of $0.2 million and $0.1 million for the three months ended February 26, 2006 and February 27,
2005, respectively.

Note 9:Conditional Asset Retirement Obligations

In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligationsan interpretation of FASB
Statement No. 143" ("FIN 47"). This interpretation clarifies the term "conditional asset retirement obligation" as used in FAS 143 and provides additional guidance on the timing and
method for the recognition and measurement of such conditional obligations. FIN 47 becomes effective for fiscal years ending after December 15, 2005. The Company adopted FIN 47 as of the
beginning of fiscal 2006 and has recorded an adjustment as of November 28, 2005, the first day of fiscal 2006, of approximately $0.3 million, net of income tax benefit of
$0.2 million, to recognize the cumulative effect of the accounting change. In addition, the Company recorded $0.1 million in property, plant and equipment and a liability of
$0.6 million in other noncurrent liabilities. These resulted from obligations in certain of the Company's facility leases that

7

---



require
the Company to return those properties to the same or similar condition at the end of the lease as existed when the Company began using those facilities. Although the lease termination dates
range from 2008 to 2032, the Company may be able to renegotiate such leases to extend the terms. On a pro forma basis for the quarter ended February 27, 2005, the effects would have been
immaterial.

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

Note 10:Recently Issued Accounting Pronouncements

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

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

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

Note 11:Hedging Strategy

In 2000, the Company entered into an interest rate swap agreement that effectively converted $236 million of its floating-rate debt to a
fixed-rate basis through December 2006, thereby hedging against the impact of interest rate changes on future interest expense (forecasted cash flows). 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

8

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Company
formally documents all hedged transactions and hedging instruments, and assesses, both at inception of the contract and on an ongoing basis, whether the hedging instruments are effective in
offsetting changes in cash flows of the hedged transaction. The fair values of the interest rate agreements are estimated by obtaining quotes from brokers and are the estimated amounts that the
Company would receive or pay to terminate the agreements at the reporting date, taking into consideration current interest rates and the current creditworthiness of the counterparties. Effective
June 3, 2002, the Company dedesignated the interest rate swap agreement for hedge accounting. As a result of the dedesignation, $12.9 million previously recorded in accumulated other
comprehensive loss as of the date of dedesignation was being amortized into interest expense over the remaining life of the interest rate swap agreement. Due to the retirement of the existing debt in
connection with the April 2004 recapitalization, the remaining unamortized balance of $4.7 million included in accumulated other comprehensive loss was charged to expense during the
second fiscal quarter of 2004. Subsequent to the June 3, 2002 dedesignation, changes in the fair market value of the interest rate swap have been recorded in interest expense. For the three
months ended February 26, 2006 and February 27, 2005, $(0.1) million and $0.4 million, respectively, was recorded as net addition to (reduction of) interest expense as a result of
the cash requirements of the swap net of the non-cash interest associated with the change in its fair market value. At February 26, 2006 and November 27, 2005, the fair value
carrying amount of this instrument was a current liability of $0.9 million and $1.6 million, respectively.

During
the second quarter of 2002, the Company entered into another interest rate swap agreement that has the effect of reestablishing as floating rate debt the $236 million of
debt previously converted to fixed rate debt through December 2006. This interest rate swap agreement was not designated for hedge accounting and, accordingly, any changes in the fair value are
recorded in interest expense. For the three months ended February 26, 2006 and February 27, 2005, $0.1 million and $0.4 million, respectively, was recorded as an addition
to net interest expense as a result of the cash interest paid on the swap net of the non-cash interest associated with the change in its fair market value. At February 26, 2006 and
November 27, 2005, the fair value carrying amount of this instrument was a net obligation of $0.5 million and $0.3 million, respectively, with $0.1 million and
$0.4 million recorded in accrued interest and other accrued expenses, and $0.3 million recorded in other accrued expenses, respectively.

In
June 2004, the Company entered into an additional swap agreement that has the effect of converting $200 million of the floating-rate debt under the Company's
new senior credit facilities to
a fixed-rate basis, declining to $150 million from December 2005 through November 2007. The Company has formally designated this swap agreement as a cash flow hedge
and expects the hedge to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. Accordingly, the effective portion of
changes in the market value of the swap is recorded in other comprehensive income. For the three months ended February 26, 2006 and February 27, 2005, $(0.3) million and
$0.6 million, respectively, was recorded as an addition to (reduction of) interest expense. At February 26, 2006 and November 27, 2005, the fair value carrying amount of the
instrument was recorded as follows:

February 26, 2006

November 27, 2005(In thousands)Accrued interest receivable

$
0.3

$
Other current assets


1.4


1.1Long term receivable


1.9


1.7Total net asset

$
3.6

$
2.8


9

---



At February 26, 2006 and November 27, 2005, accumulated other comprehensive income associated with the interest rate swaps was $2.0 million and $1.6 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 has instituted a forecasted cash flow
hedging program. The Company hedges portions of its purchases denominated in foreign currencies with forward and option contracts. The Company does not designate its foreign currency hedges for
accounting purposes, therefore all changes in fair value are charged to earnings. At February 26, 2006, the Company had forward contracts to sell a total of 9.0 million Canadian dollars
with expiration dates ranging from March 15, 2006 through November 15, 2006. At February 26, 2006 and November 27, 2005, the fair value of the Company's net obligation
under the forward contracts was a liability of $0.3 million and $0.3 million, respectively. For the quarter ended February, 26, 2006, recognized foreign currency transaction gains were
insignificant, compared with gains of $2.4 million for the first quarter of 2005.

Note 12:Defined Benefit Pension Expense

The components of net periodic pension cost recognized for the Company's defined benefit pension plan for the three months ended February 26, 2006 and
February 27, 2005 are as follows (in thousands):

Three months endedFebruary 26, 2006

February 27, 2005Service cost

$
150

$
158Interest cost


219


191Expected return on plan assets


(221
)

(178
)Amortization of unrecognized losses


67


63Amortization of unrecognized transition asset


(22
)

(22
)Amortization of unrecognized prior service cost


51


44Net periodic pension cost*

$
244

$
256Cash contributions

$
274

$



---

The
Company expects to make additional cash contributions to the plan of approximately $1.8 million during the remainder of fiscal 2006.

Note 13:Stockholders' Deficit

Total comprehensive income for the quarters ended February 26, 2006 and February 27, 2005 was $24.1 million and $17.9 million,
respectively.

10

---



Activity
in Stockholders' deficit is as follows (in thousands):

|                                                     |                                                         | Comprehensive
Income |        | Common
Stock |   | Additional
Paid-in
Capital |   | Accumulated
Deficit |         | Accumulated
Other
Comprehensive
Income |   | Treasury
Stock |        | Total |      
|---------------------------------------------------- | ------------------------------------------------------- | -------------------- | ------ | ------------ | - | -------------------------- | - | ------------------- | ------- | -------------------------------------- | - | -------------- | ------ | ----- | -----
|Balance at November 27, 2005                         |                                                         |                      |        |              | $ | 702                        |   | $                   | 365,900 |                                        | $ | (781,463       | )      | $     | 2,638
|Comprehensive income:                                |                                                         |                      |        |              |   |                            |   |                     |         |                                        |   |                |        |       |      
|                                                     | Net income for the three months ended February 26, 2006 |                      | $      | 22,972       |   |                            |  |                     |         |                                       |   |                | 22,972 |       |      
|                                                     | Change in fair value of cash flow hedge                 |                      |        | 365          |   |                            |  |                     |         |                                       |   |                |       |       |      
|                                                     | Foreign currency translation adjustment                 |                      |        | 752          |   |                            |  |                     |         |                                       |   |                |       |       |      
|Exercise of stock options                            |                                                         |                      |       |              |   |                           |   |                     | 107     |                                        |   |               |        |       |     
|Purchase of treasury stock                           |                                                         |                      |       |              |   |                           |   |                     |        |                                        |   |               |        |       |     
|Directors' deferred stock compensation               |                                                         |                      |       |              |   |                           |   |                     | 111     |                                        |   |               |        |       |     
|Adjustment of temporary equity subject to redemption |                                                         |                      |       |              |   |                           |   |                     | 176     |                                        |   |               |        |       |     
|                                                     |                                                         |                      |        |              |   |                            |   |                     |         |                                        |   |                |        |       |      
|Balance at February 26, 2006                         |                                                         | $                    | 24,089 |              | $ | 702                        |   | $                   | 366,294 |                                        | $ | (758,491       | )      | $     | 3,755
|                                                     |                                                         |                      |        |              |   |                            |   |                     |         |                                        |   |                |        |       |      

Note 14:Contingencies

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

The
Company is currently conducting an environmental cleanup at a formerly owned facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial Site Recovery Act. The
Company and one of its subsidiaries are parties to an Administrative Consent Order issued by the New Jersey Department of Environmental Protection. Pursuant to that order, the Company and its
subsidiary agreed to conduct soil and groundwater remediation at the property. The Company does not believe that its manufacturing processes were the source of contamination. The Company sold the
property in 1997. The Company and its subsidiary retained primary responsibility for the required remediation. The Company has completed essentially all soil remediation with the New Jersey Department
of Environmental Protection approval, and has concluded a pilot test of the groundwater remediation system. During 2005, with the approval of the New Jersey Department of Environmental Protection, the
Company removed and disposed of sediment in Oakeys Brook adjoining the site. The Company continues to monitor ground water at the site. The Company has recorded a reserve for $1.9 million
($2.4 million prior to discounting at 4.50%) associated with this remediation project, and it is reasonably possible that up to an additional $0.2 million may be incurred to complete the
project.

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

11

---



monitoring
groundwater at the site. The Company has identified cadmium in the ground water at the site and intends to address that during fiscal 2006. The Company has recorded a reserve of
approximately $0.7 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, these matters could have a material adverse effect.

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

Significant
judgment is required in evaluating the Company's federal, state and foreign tax positions and in the determination of its tax provision. Despite the Company's belief that its
tax return positions are fully supportable, reserves have been established where the Company believes that certain tax positions are likely to be challenged and the Company may not fully prevail in
overcoming these challenges. The Company may adjust these reserves as relevant circumstances evolve, such as guidance from the relevant tax authority, the Company's tax advisors, or resolution of
issues in the courts. The Company's tax expense includes the impact of reserve positions and changes to reserves that it considers appropriate, as well as related interest. Because the Company is not
currently undergoing examinations of any of its corporate income tax returns by tax authorities, the Company believes that it is unlikely that an audit could be initiated which would result in an
assessment and payment of taxes related to these positions during the one year following February 26, 2006. The Company also cannot predict when or if any other future tax payments related to
these tax positions may occur. Therefore, substantially all of the reserves for these positions are classified as noncurrent liabilities in the accompanying balance sheet.

Note 15:Common Stock and Options Subject to Redemption

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

Note 16:Related Party Transactions

During the three months ended February 26, 2006 and February 27, 2005, the Company incurred management fees of $0.5 million and
$0.5 million, respectively, payable to KKR, Sealy Corporation's primary owners. As a result of the IPO, these fees will no longer be paid after the second quarter of fiscal 2006. Also during
the three months ended February 27, 2005, the Company incurred $0.7 million for consulting services provided by Capstone Consulting LLC, the chief executive officer of which is on the
Company's board of directors.

12

---



Note 17:Segment Information

The Company has determined that it has two operating segments, domestic and international, that qualify for aggregation as prescribed in SFAS 131.
Accordingly, the Company has one reportable industry segment, the manufacture and marketing of innerspring and specialty bedding. Sales outside the United States were $81.2 million and
$72.3 million for the first quarter of 2006 and 2005, respectively. In addition, long-lived assets (principally property, plant and equipment and other investments) outside the
United States were $52.1 million and $50.4 million as of February 26, 2006 and November 27, 2005, respectively.

Geographic distribution of sales:

February 26,
2006

February 27,
2005(dollars in millions)US domestic

$
314.5

79.5
%
$
286.7

79.9
%International:Canada


36.3

9.2


28.4

7.9Europe


24.1

6.1


25.6

7.1Other International Locations


20.8

5.2


18.3

5.1Total international


81.2

20.5


72.3

20.1Total company

$
395.7

100.0
%
$
359.0

100.0
%


Note 18:Guarantor/Non-Guarantor Financial Information

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

The
following supplemental consolidating condensed 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.

13

---





SEALY CORPORATION        Supplemental Consolidating Condensed Balance Sheet        February 26, 2006        (in thousands)

|                                                                 |  | Sealy
Corporation
Non-guarantor
Parent |          | Sealy
Mattress
Corporation |   | Sealy
Mattress
Company |   | Combined
Guarantor
Subsidiaries |         | Combined Non-Guarantor
Subsidiaries |   | Eliminations |   | Consolidated |        
|---------------------------------------------------------------- |  | -------------------------------------- | -------- | -------------------------- | - | ---------------------- | - | ------------------------------- | ------- | ----------------------------------- | - | ------------ | - | ------------ | -------
|Assets                                                           |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        
|Current assets:                                                  |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        
|Cash and cash equivalents                                        |  | $                                      |         |                            | $ |                       |   | $                               | 1       |                                     | $ | 5,485        |   | $            | 8,274  
|Accounts receivable, net                                         |  |                                        |         |                            |   |                       |   |                                 | 292     |                                     |   | 136,770      |   |              | 66,915 
|Inventories                                                      |  |                                        |         |                            |   |                       |   |                                 | 1,515   |                                     |   | 49,278       |   |              | 15,692 
|Assets held for sale                                             |  |                                        |         |                            |   |                       |   |                                 |        |                                     |   | 1,405        |   |              |       
|Prepaid expenses, deferred income taxes and other current assets |  |                                        | 2,086    |                            |   |                       |   |                                 | 2,569   |                                     |   | 25,053       |   |              | 1,929  
|                                                                 |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        
|                                                                 |  |                                        | 2,086    |                            |   |                       |   |                                 | 4,377   |                                     |   | 217,991      |   |              | 92,810 
|Property, plant and equipment, at cost                           |  |                                        |         |                            |   |                       |   |                                 | 7,571   |                                     |   | 255,625      |   |              | 72,219 
|Less accumulated depreciation                                    |  |                                        |         |                            |   |                       |   |                                 | (4,029  | )                                   |   | (139,146     | ) |              | (23,272
|                                                                 |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        
|                                                                 |  |                                        |         |                            |   |                       |   |                                 | 3,542   |                                     |   | 116,479      |   |              | 48,947 
|Other assets:                                                    |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        
|Goodwill                                                         |  |                                        |          |                            |   |                       |   |                                 | 24,741  |                                     |   | 304,774      |   |              | 55,972 
|Other intangibles, net                                           |  |                                        |          |                            |   |                       |   |                                 |        |                                     |   | 4,122        |   |              | 364    
|Net investment in and advances to (from) subsidiaries            |  |                                        | (287,802 | )                          |   | (287,802               | ) |                                 | 931,204 |                                     |   | (170,421     | ) |              | (64,578
|Debt issuance costs, net, and other assets                       |  |                                        | 297      |                            |   |                       |   |                                 | 24,510  |                                     |   | 5,580        |   |              | 1,922  
|                                                                 |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        
|                                                                 |  |                                        | (287,505 | )                          |   | (287,802               | ) |                                 | 980,455 |                                     |   | 144,055      |   |              | (6,320 
|                                                                 |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        
|Total assets                                                     |  | $                                      | (285,419 | )                          | $ | (287,802               | ) | $                               | 988,374 |                                     | $ | 478,525      |   | $            | 135,437
|                                                                 |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        
|Liabilities And Stockholders' deficit                            |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        
|Current liabilities:                                             |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        
|Current portionlong-term obligations                            |  | $                                      |         |                            | $ |                       |   | $                               |        |                                     | $ | 2,038        |   | $            | 9,250  
|Accounts payable                                                 |  |                                        |         |                            |   |                       |   |                                 | 267     |                                     |   | 73,290       |   |              | 36,916 
|Accrued customer incentives and advertising                      |  |                                        |         |                            |   |                       |   |                                 |        |                                     |   | 30,374       |   |              | 4,106  
|Accrued compensation                                             |  |                                        |         |                            |   |                       |   |                                 | 259     |                                     |   | 38,603       |   |              | 7,306  
|Accrued interest                                                 |  |                                        |         |                            |   |                       |   |                                 | 497     |                                     |   | 9,464        |   |              | 58     
|Other accrued expenses                                           |  |                                        | (59      | )                          |   |                       |   |                                 | 1,097   |                                     |   | 51,304       |   |              | 4,763  
|                                                                 |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        
|                                                                 |  |                                        | (59      | )                          |   |                       |   |                                 | 2,120   |                                     |   | 205,073      |   |              | 62,399 
|Due to (from) Parent Company                                     |  |                                        | (6,857   | )                          |   |                       |   |                                 |        |                                     |   | 6,857        |   |              |       
|Long-term obligations                                            |  |                                        | 87,879   |                            |   |                       |   |                                 | 844,500 |                                     |   | 985          |   |              | 16,313 
|Other noncurrent liabilities                                     |  |                                        |         |                            |   |                       |   |                                 |        |                                     |   | 34,854       |   |              | 8,340  
|Deferred income taxes                                            |  |                                        |         |                            |   |                       |   |                                 | 4,659   |                                     |   | 2,066        |   |              | 5,767  
|Common stock & options subject to redemption                     |  |                                        | 21,478   |                            |   |                       |   |                                 |        |                                     |   |             |   |              |       
|Stockholders' deficit                                            |  |                                        | (387,860 | )                          |   | (287,802               | ) |                                 | 137,095 |                                     |   | 228,690      |   |              | 42,618 
|                                                                 |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        
|Total liabilities and stockholders' deficit                      |  | $                                      | (285,419 | )                          | $ | (287,802               | ) | $                               | 988,374 |                                     | $ | 478,525      |   | $            | 135,437
|                                                                 |  |                                        |          |                            |   |                        |   |                                 |         |                                     |   |              |   |              |        

14

---





SEALY CORPORATION        Supplemental Consolidating Condensed Balance Sheet        November 27, 2005        (in thousands)

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

15

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SEALY CORPORATION        Supplemental Consolidating Condensed Statements of Operations        Three Months Ended February 26, 2006        (in thousands)

|                                |                                                     | Sealy
Corporation
Non-guarantor
Parent |        | Sealy
Mattress
Corporation |   | Sealy
Mattress
Company |         | Combined
Guarantor
Subsidiaries |        | Combined
Non-Guarantor
Subsidiaries |   | Eliminations |         | Consolidated |       
|------------------------------- | --------------------------------------------------- | -------------------------------------- | ------ | -------------------------- | - | ---------------------- | ------- | ------------------------------- | ------ | ----------------------------------- | - | ------------ | ------- | ------------ | ------
|Net sales                       |                                                     | $                                      |       |                            | $ |                       |         | $                               | 15,707 |                                     | $ | 304,657      |         | $            | 78,446
|Costs and expenses:             |                                                     |                                        |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |       
|                                | Cost of goods sold                                  |                                        |        |                           |   |                        |        |                                 |        | 9,410                               |   |              | 164,922 |              |       
|                                | Selling, general and administrative                 |                                        |        |                           |   |                        |        |                                 |        | 1,550                               |   |              | 100,557 |              |       
|                                | Amortization of intangibles                         |                                        |        |                           |   |                        |        |                                 |        |                                    |   |              | 72      |              |       
|                                | Royalty (income) expense, net                       |                                        |        |                           |   |                        |        |                                 |        |                                    |   |              | (4,216  | )            |       
|                                |                                                     |                                        |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |       
|Income from operations          |                                                     |                                        |       |                            |   |                       |         |                                 | 4,747  |                                     |   | 43,322       |         |              | 8,591 
|                                | Interest expense                                    |                                        |        | 2,120                      |   |                        | 120     |                                 |        | 16,076                              |   |              | (82     | )            |       
|                                | Other income                                        |                                        |        |                           |   |                        |        |                                 |        |                                    |   |              | (19     | )            |       
|                                | Income from equity investees                        |                                        |        | (24,298                    | ) |                        | (24,371 | )                               |        | (21,987                             | ) |              |        |              |       
|                                | Income from nonguarantor equity investees           |                                        |        |                           |   |                        |        |                                 |        |                                    |   |              | (4,263  | )            |       
|                                | Capital charge and intercompany interest allocation |                                        |        |                           |   |                        |        |                                 |        | (15,232                             | ) |              | 14,217  |              |       
|                                |                                                     |                                        |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |       
|Income before income taxes      |                                                     |                                        | 22,178 |                            |   | 24,251                 |         |                                 | 25,890 |                                     |   | 33,469       |         |              | 7,242 
|                                | Income tax expense (benefit)                        |                                        |        | (794                       | ) |                        | (47     | )                               |        | 1,519                               |   |              | 11,195  |              |       
|                                |                                                     |                                        |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |       
|Income before cumulative effect |                                                     |                                        | 22,972 |                            |   | 24,298                 |         |                                 | 24,371 |                                     |   | 22,274       |         |              | 4,263 
|                                | Cumulative effect of change in accounting principle |                                        |        |                           |   |                        |        |                                 |        |                                    |   |              | 287     |              |       
|                                |                                                     |                                        |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |       
|Net income                      |                                                     | $                                      | 22,972 |                            | $ | 24,298                 |         | $                               | 24,371 |                                     | $ | 21,987       |         | $            | 4,263 
|                                |                                                     |                                        |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |       

16

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SEALY CORPORATION        Supplemental Consolidating Condensed Statements of Operations        Three Months Ended February 27, 2005        (in thousands)

|                             |                                                     | Sealy
Corporation
Non-guarantor
Parent |        | Sealy
Mattress
Corporation |   | Sealy
Mattress
Company |         | Combined
Guarantor
Subsidiaries |        | Combined
Non-Guarantor
Subsidiaries |   | Eliminations |         | Consolidated |       
|---------------------------- | --------------------------------------------------- | -------------------------------------- | ------ | -------------------------- | - | ---------------------- | ------- | ------------------------------- | ------ | ----------------------------------- | - | ------------ | ------- | ------------ | ------
|Net sales                    |                                                     | $                                      |       |                            | $ |                       |         | $                               | 15,385 |                                     | $ | 280,555      |         | $            | 68,739
|Costs and expenses:          |                                                     |                                        |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |       
|                             | Cost of goods sold                                  |                                        |        |                           |   |                        |        |                                 |        | 9,130                               |   |              | 152,495 |              |       
|                             | Selling, general and administrative                 |                                        |        |                           |   |                        |        |                                 |        | 1,537                               |   |              | 87,487  |              |       
|                             | Amortization of intangibles                         |                                        |        |                           |   |                        |        |                                 |        |                                    |   |              | 72      |              |       
|                             | Royalty (income) expense, net                       |                                        |        |                           |   |                        |        |                                 |        |                                    |   |              | (3,102  | )            |       
|                             |                                                     |                                        |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |       
|Income from operations       |                                                     |                                        |       |                            |   |                       |         |                                 | 4,718  |                                     |   | 43,603       |         |              | 4,851 
|                             | Interest expense                                    |                                        |        | 1,928                      |   |                        | 76      |                                 |        | 17,517                              |   |              | (73     | )            |       
|                             | Other income, net                                   |                                        |        |                           |   |                        |        |                                 |        |                                    |   |              | (2      | )            |       
|                             | Income from equity investees                        |                                        |        | (21,853                    | ) |                        | (21,900 | )                               |        | (19,590                             | ) |              |        |              |       
|                             | Income from non-guarantor equity investees          |                                        |        |                           |   |                        |        |                                 |        |                                    |   |              | (2,423  | )            |       
|                             | Capital charge and intercompany interest allocation |                                        |        |                           |   |                        |        |                                 |        | (16,549                             | ) |              | 15,803  |              |       
|                             |                                                     |                                        |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |       
|Income before income taxes   |                                                     |                                        | 19,925 |                            |   | 21,824                 |         |                                 | 23,340 |                                     |   | 30,298       |         |              | 3,917 
|Income tax expense (benefit) |                                                     |                                        | (709   | )                          |   | (29                    | )       |                                 | 1,440  |                                     |   | 10,708       |         |              | 1,494 
|                             |                                                     |                                        |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |       
|Net income                   |                                                     | $                                      | 20,634 |                            | $ | 21,853                 |         | $                               | 21,900 |                                     | $ | 19,590       |         | $            | 2,423 
|                             |                                                     |                                        |        |                            |   |                        |         |                                 |        |                                     |   |              |         |              |       

17

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SEALY CORPORATION        Supplemental Consolidating Condensed Statements of Cash Flows        Three Months Ended February 26, 2006        (in thousands)

|                                                    |                                                                                  | Sealy
Corporation
Non-guarantor
Parent |   | Sealy
Mattress
Corporation |   | Sealy
Mattress
Company |   | Combined
Guarantor
Subsidiaries |       | Combined
Non-Guarantor
Subsidiaries |   | Eliminations |        | Consolidated |       
|--------------------------------------------------- | -------------------------------------------------------------------------------- | -------------------------------------- | - | -------------------------- | - | ---------------------- | - | ------------------------------- | ----- | ----------------------------------- | - | ------------ | ------ | ------------ | ------
|Net cash provided by (used in) operating activities |                                                                                  | $                                      |  |                            | $ |                       |   | $                               | 1,949 |                                     | $ | (17,316      | )      | $            | 676   
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |       |                                     |   |              |        |              |       
|Cash flows from investing activities:               |                                                                                  |                                        |   |                            |   |                        |   |                                 |       |                                     |   |              |        |              |       
|                                                    | Purchase of property, plant and equipment, net                                   |                                        |   |                           |   |                        |  |                                 |       | (31                                 | ) |              | (3,326 | )            |       
|                                                    | Proceeds from the sale of property, plant, and equipment                         |                                        |   |                           |   |                        |  |                                 |       |                                    |   |              | 16     |              |       
|                                                    | Net activity in investment in and advances to (from) subsidiaries and affiliates |                                        |   |                           |   |                        |  |                                 |       | (6,918                              | ) |              | (668   | )            |       
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |       |                                     |   |              |        |              |       
|                                                    | Net cash provided by (used in) investing activities                              |                                        |   |                           |   |                        |  |                                 |       | (6,949                              | ) |              | (3,978 | )            |       
|Cash flows from financing activities:               |                                                                                  |                                        |   |                            |   |                        |   |                                 |       |                                     |   |              |        |              |       
|                                                    | Net borrowings (repayments) under revolving credit facilities                    |                                        |   |                           |   |                        |  |                                 |       | 5,000                               |   |              |       |              |       
|                                                    | Other borrowings                                                                 |                                        |   |                           |   |                        |  |                                 |       |                                    |   |              |       |              |       
|                                                    | Other                                                                            |                                        |   |                           |   |                        |  |                                 |       |                                    |   |              | 1,392  |              |       
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |       |                                     |   |              |        |              |       
|                                                    | Net cash provided by (used in) financing activities                              |                                        |   |                           |   |                        |  |                                 |       | 5,000                               |   |              | 1,392  |              |       
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |       |                                     |   |              |        |              |       
|Effect of exchange rate changes on cash             |                                                                                  |                                        |  |                            |   |                       |   |                                 |      |                                     |   |             |        |              | 122   
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |       |                                     |   |              |        |              |       
|Change in cash and cash equivalents                 |                                                                                  |                                        |  |                            |   |                       |   |                                 |      |                                     |   | (19,902      | )      |              | (2,892
|Cash and cash equivalents:                          |                                                                                  |                                        |   |                            |   |                        |   |                                 |       |                                     |   |              |        |              |       
|                                                    | Beginning of period                                                              |                                        |   |                           |   |                        |  |                                 |       | 1                                   |   |              | 25,387 |              |       
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |       |                                     |   |              |        |              |       
|                                                    | End of period                                                                    |                                        | $ |                           |   | $                      |  |                                 | $     | 1                                   |   | $            | 5,485  |              | $     
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |       |                                     |   |              |        |              |       

18

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SEALY CORPORATION        Supplemental Consolidating Condensed Statements of Cash Flows        Three Months Ended February 27, 2005        (in thousands)

|                                                    |                                                                                  | Sealy
Corporation
Non-guarantor
Parent |   | Sealy
Mattress
Corporation |   | Sealy
Mattress
Company |   | Combined
Guarantor
Subsidiaries |        | Combined
Non-Guarantor
Subsidiaries |   | Eliminations |        | Consolidated |       
|--------------------------------------------------- | -------------------------------------------------------------------------------- | -------------------------------------- | - | -------------------------- | - | ---------------------- | - | ------------------------------- | ------ | ----------------------------------- | - | ------------ | ------ | ------------ | ------
|Net cash provided by (used in) operating activities |                                                                                  | $                                      |  |                            | $ |                       |   | $                               | (1,501 | )                                   | $ | 249          |        | $            | 3,144 
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |        |                                     |   |              |        |              |       
|Cash flows from investing activities:               |                                                                                  |                                        |   |                            |   |                        |   |                                 |        |                                     |   |              |        |              |       
|                                                    | Purchase of property, plant and equipment, net                                   |                                        |   |                           |   |                        |  |                                 |        | (34                                 | ) |              | (5,599 | )            |       
|                                                    | Proceeds from the sale of property, plant and equipment                          |                                        |   |                           |   |                        |  |                                 |        |                                    |   |              | 4,648  |              |       
|                                                    | Net activity in investment in and advances to (from) subsidiaries and affiliates |                                        |   |                           |   |                        |  |                                 |        | (4,965                              | ) |              | (354   | )            |       
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |        |                                     |   |              |        |              |       
|                                                    | Net cash provided by (used in) investing activities                              |                                        |   |                           |   |                        |  |                                 |        | (4,999                              | ) |              | (1,305 | )            |       
|Cash flows from financing activities:               |                                                                                  |                                        |   |                            |   |                        |   |                                 |        |                                     |   |              |        |              |       
|                                                    | Repayments of long-term obligations, net                                         |                                        |   |                           |   |                        |  |                                 |        | (5,000                              | ) |              |       |              |       
|                                                    | Net borrowings under revolving credit facilities                                 |                                        |   |                           |   |                        |  |                                 |        | 11,500                              |   |              |       |              |       
|                                                    | Other                                                                            |                                        |   |                           |   |                        |  |                                 |        |                                    |   |              | 29     |              |       
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |        |                                     |   |              |        |              |       
|                                                    | Net cash provided by financing activities                                        |                                        |   |                           |   |                        |  |                                 |        | 6,500                               |   |              | 29     |              |       
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |        |                                     |   |              |        |              |       
|Effect of exchange rate changes on cash             |                                                                                  |                                        |  |                            |   |                       |   |                                 |       |                                     |   |             |        |              | (972  
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |        |                                     |   |              |        |              |       
|Change in cash and cash equivalents                 |                                                                                  |                                        |  |                            |   |                       |   |                                 |       |                                     |   | (1,027       | )      |              | 16,086
|Cash and cash equivalents:                          |                                                                                  |                                        |   |                            |   |                        |   |                                 |        |                                     |   |              |        |              |       
|                                                    | Beginning of period                                                              |                                        |   |                           |   |                        |  |                                 |        | 2                                   |   |              | 5,142  |              |       
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |        |                                     |   |              |        |              |       
|                                                    | End of period                                                                    |                                        | $ |                           |   | $                      |  |                                 | $      | 2                                   |   | $            | 4,115  |              | $     
|                                                    |                                                                                  |                                        |   |                            |   |                        |   |                                 |        |                                     |   |              |        |              |       

19

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SEALY CORPORATION

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

The following management's discussion and analysis is provided as a supplement to, and should be read in conjunction with, our Condensed
Consolidated Financial Statements and accompanying notes included in this Quarterly Report on Form 10-Q as well as our management's discussion and analysis included in our
Registration Statement on Form S-1 (File No. 333-126280) and related prospectus dated April 6, 2006, and all of our other filings with the SEC from
April 6, 2006 through the date of this report. Except where the context suggests otherwise, the terms "we," "us" and "our" refer to Sealy Corporation and its
subsidiaries.

BUSINESS OVERVIEW

We believe that we are the largest bedding manufacturer in the world, with a wholesale domestic market share of 20.7% in 2004. Based on preliminary data from the
International Sleep Products Association, we believe our market share in 2005 is comparable to 2004. We manufacture and market a complete line of bedding (innerspring and non-innerspring)
products including mattresses and box springs, holding leading positions in key market segments, such as luxury bedding products, and among leading retailers. According toHome
Furnishing Newsin 2005, the Sealy brand ranked 15th among the top 150 home products brands. Our conventional bedding products include the Sealy, Sealy Posturepedic, Stearns & Foster,
 and Bassettbrands and accounted for approximately 88.9% of our total net sales for the year ended
November 27, 2005. In addition to our innerspring bedding, we also produce a variety of visco-elastic (memory foam) and latex foam bedding products. Though sales of such products were not
significant through the first quarter of 2006, we expect to experience growth in these product lines as we seek to strengthen our competitive position in the specialty bedding
(non-innerspring mattress) market. We distinguish ourselves from our major competitors by maintaining our own component parts manufacturing capability and producing substantially all of
our mattress innerspring requirements and approximately 48% of our box spring component parts requirements. We believe that our industry is resilient to economic downturns due in part to the large
portion of purchases, approximately 70%, which are for mattress replacements. The growth of the
bedding industry has been supported by economic and demographic factors such as increasing disposable income among the "baby boomer" segment of the population, an increase in the number of bedrooms
per home and second home purchases, and growing awareness of the health benefits of quality sleep.

In
2004, we successfully completed the rollout of our single-sided, "no-flip" Sealy Posturepedic UniCased® and Stearns & Foster product lines in the United
States, Canada, and Mexico, representing the broadest product redesign in our history. The manufacture and sale of these products for our Sealy Posturepedic lines began in mid-2003,
followed by the introduction of the new Stearns & Foster lines in the first fiscal quarter of 2004. Our initial profitability from the sales of these new products was limited as we worked to
gain manufacturing efficiency with the new designs and supported our customers' transition to the new products with price rollbacks. In 2004, with these issues substantially behind us, we began to
realize the anticipated contribution of these products to our sales growth and profitability, which has continued into the first quarter of fiscal 2006. Our profitability has been further enhanced by
rapid growth among our luxury bedding lines ($1,000 and up retail price points). Our shares of the Luxury and Ultra-Luxury product segments are greater than our overall market share, and our
Stearns & Foster and Luxury Posturepedic lines directly target these segments.

In
the first quarter of fiscal 2006, we introduced our latest product offerings from the Stearns & Foster lines, to be followed in the second through fourth quarters by our newest
Sealy Posturepedic products. 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.

20

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Late
in the first quarter of 2005, we introduced our newTrueFormvisco-elastic bedding product line to take advantage of the rapid growth
of the specialty bedding category. This market, which includes latex foam, visco-elastic, air-adjustable and other non-innerspring mattress products, has experienced
substantial growth both domestically and internationally. We believe that by successfully leveraging our strong brand advantage and our marketing and distribution capabilities, we have the potential
to make significant gains in the specialty bedding category.

Our
industry continues to be challenged by the high cost of steel and petroleum products, which affect the cost of our steel innerspring and our polyurethane foam and polyethylene
component parts. During fiscal 2005 and into the first quarter of fiscal 2006, the cost of these components has continued to remain elevated above their recent historical averages, and we expect this
trend to continue for the remainder of fiscal 2006. Through February 26, 2006, we have been able to successfully address these cost pressures through a price increase announced in
November 2005, and through cost reduction efforts.

Historically,
the bedding industry has had limited exposure to competition from imports due to high shipping costs, short lead times, the large number of finished goods SKUs and the
importance of brands. Furthermore, we also believe that the relatively low labor content of our domestically produced mattresses lessens any competitive advantage provided by lower Asian labor costs.
Although Asian bedding manufacturers have begun to explore the feasibility of exporting their products into the United States, we do not expect that competition from Asian bedding imports will have a
significant impact on our business. We believe that by focusing on further improvements in the efficiency of our supply chain, controlling costs, and continuing to invest in product innovation and our
brands, we can ensure that our domestically produced products will remain competitive with Asian bedding imports.

We
have continued to see sales growth in our international operations over the last several years, with our foreign subsidiaries contributing 20.5% during the first quarter of fiscal
2006. However, our Brazilian subsidiary, contributing less than 1% of our total revenues for fiscal 2005 and the first quarter of fiscal 2006, has continued to perform below our expectations and has
not yet achieved profitability. While we do not believe that we have, as yet, suffered any impairment with respect to our investment in long-lived assets in Brazil, we will continue to
monitor that operation closely as we evaluate our strategic alternatives in that market.

On
April 6, 2004 we completed a merger with affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") whereby KKR acquired approximately 92% of our capital stock. In
connection with the merger, we recapitalized substantially all of our outstanding debt. A full description of the effects of the merger and recapitalization is included in our Registration Statement
on Form S-1 (File No. 333-126280) and related prospectus dated April 6, 2006, filed with the Securities and Exchange Commission. Although we incurred
substantially increased levels of debt in the recapitalization, our cost of capital was reduced due to lower interest rates on the new debt compared with our earlier financing. On April 14,
2005, we further reduced our cost of capital by amending and restating our senior secured credit agreement. The amendment provided an additional $100 million of senior secured term loans which
were used to repay our senior unsecured term loans, reducing our future interest costs. Utilizing our strong operating cash flow since the recapitalization, we have been able to repay
$210 million of our senior secured term debt significantly ahead of schedule. Our strategy for 2006 is to continue to deleverage our business through additional prepayments of our
long-term debt as permitted by our senior credit agreements and our operating cash flow.



On April 12, 2006, we completed an initial public offering ("IPO") of our common stock, raising $299.2 million of net proceeds after deducting the
underwriting discount. During the second quarter, we have used or expect to use the net proceeds from the IPO as follows: (i) on April 12, 2006,

21

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$125 million
was distributed as a cash dividend to stockholders of record as of April 6, 2006, immediately prior to the IPO; (ii) on April 21, 2006, approximately
$90.0 million was paid to redeem our Senior Subordinated PIK Notes, including accrued interest and prepayment penalties thereon; (iii) on April 26, 2006, we completed a series of
open market transactions whereby approximately $51.6 million was paid to repurchase and retire approximately $47.5 million aggregate principal amount of the our Senior Subordinated Notes
(the "Notes") due in 2014, at market prices ranging from 105.25% to 105.94% of par, along with accrued interest thereon; (iv) on April 12, 2006 we paid $11.0 million to KKR to
terminate the management services agreement with them; (v) we have paid approximately $17.2 million to members of management for transaction-related bonuses; and
(vi) approximately $4.4 million will be used for other costs associated with the IPO, including the reimbursement of approximately $2.1 million of IPO-related costs
incurred through February 26, 2006, included in prepaid expenses and other current assets on our balance sheet, included in Part I, Item 1 herein.

On
a pro forma basis, had the IPO occurred at the beginning of the first quarter of fiscal 2006, our interest expense would have been approximately $3.2 million lower than
reported, and selling, general and administrative expenses would have been reduced by approximately $0.1 million due to the elimination of $0.5 million in management fees paid to KKR,
partially offset by $0.4 million of share-based compensation expense arising from options to purchase our stock granted to certain of our management employees in connection with the IPO.

22

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RESULTS OF OPERATIONS



The following table sets forth our summarized results of operations for three months ended February 26, 2006 and February 27, 2005, expressed in
millions of dollars as well as a percentage of each year's net sales:

|                                                    |                                                                   | For the three months ended |      
|--------------------------------------------------- | ----------------------------------------------------------------- | -------------------------- | -----
|
|
|Total net sales                                     |                                                                   | $                          | 395.7
|Total cost of goods sold                            |                                                                   |                            | 219.0
|                                                    |                                                                   |                            |      
|Gross Profit                                        |                                                                   |                            | 176.7
|Selling, general and administrative                 |                                                                   |                            | 123.6
|Amortization of intangibles                         |                                                                   |                            | 0.1  
|Royalty income, net of royalty expense              |                                                                   |                            | (3.7 
|                                                    |                                                                   |                            |      
|                                                    | Income from operations                                            |                            |      
|Interest expense                                    |                                                                   |                            | 18.7 
|Other income, net                                   |                                                                   |                            | (0.2 
|                                                    |                                                                   |                            |      
|                                                    | Income before income taxes                                        |                            |      
|Income taxes                                        |                                                                   |                            | 14.9 
|                                                    |                                                                   |                            |      
|                                                    | Income before cumulative effect of change in accounting principle |                            |      
|Cumulative effect of change in accounting principle |                                                                   |                            | 0.3  
|                                                    |                                                                   |                            |      
|                                                    | Net Income                                                        |                            |      
|                                                    |                                                                   |                            |      
|Effective tax rate                                  |                                                                   |                            | 39.0 

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

Geographic distribution of sales:

Three Months Ended:February 26,
2006

February 27,
2005US Domestic

79.5
%
79.9
%International:Canada

9.2

7.9Europe

6.1

7.1Other

5.2

5.1Total

100.0
%
100.0
%


23

---



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

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



Net Sales.Our net sales for the quarter ended February 26, 2006, were $395.7 million, an increase of
$36.7 million, or 10.2% from the quarter ended February 27, 2005. Total domestic net sales were $314.5 million for the first quarter of 2006 compared to $286.7 million for
the first quarter of 2005. The domestic net sales increase of $27.8 million was attributable to a 10.1% increase in average unit selling price, slightly offset by a 0.4% decrease in volume. The
increase in average unit selling price is due to improved sales mix from our Stearns & Foster and specialty bedding product lines, which we

24

---



define
as those products utilizing visco-elastic or latex foam cores rather than innersprings, and due to price increases announced in November 2005 to offset the effects of rising raw material
costs. Total international sales were $81.2 million in the first quarter of 2006 compared to $72.3 million in the first quarter of 2005, an increase of $8.9 million, or 12.3%. In
our Canadian market, local currency sales gains of 21.7% translated into gains of 27.8% in US Dollars. Local currency sales gains in our Canadian market were driven by a 23.6% increase in average unit
selling price resulting from sales mix improvement and the November 2005 price increases, combined with a 3.4% increase in volume. In our European market, local currency sales gains of 4.1%
translated into a decrease of 5.9% in US dollars. Local currency sales gains in the European market were primarily attributable to a 12.8% increase in volume attributable to increased OEM sales of
latex bed cores, partially offset by a 7.7% decline in average unit selling price associated with the increased sales of lower-priced latex bed cores. Non-OEM sales in our European market
decreased approximately 11.8%. Elsewhere, sales gains in our Mexico and Argentina markets were slightly offset by a sales volume decline in Brazil.

Gross Profit.Our gross profit for the quarter was $176.7 million, an increase of $17.7 million over the
comparable prior year period. As a percentage of net sales, gross profit increased 0.4 percentage points to 44.7%. This increase (as a percentage of net sales) is due primarily to improvements
in international operations, partially offset by a decrease in our domestic gross profit margin. Domestic gross profit increased $12.0 million to $145.1 million, which represented a
decline of 0.3 percentage points to 46.1%. This decrease is driven by higher floor sample costs associated with the launch of our new Stearns & Foster product line. The 10.1% increase in
average unit selling price was more than offset by increases in the cost of materials. On a per unit basis, material costs increased 14.0% relative to the first quarter of 2005 due primarily to
increased foam and wood product costs as well as changes in the sales mix toward higher price-point products. Variable conversion costs as a percentage of sales decreased due to continued improvements
in manufacturing efficiencies. Fixed manufacturing costs as a percentage of sales were consistent with the prior year period. On a per unit basis, variable conversion costs and fixed manufacturing
costs increased 5.4% primarily due to higher employee health insurance costs. We believe this increase is temporary and is associated with the transition to a new third party administrator. We expect
such costs to return to historical levels in subsequent periods. Gross profit for the international business increased 3.1 percentage points to 38.9% of net sales. This increase is primarily
due to higher average unit selling prices in Canada, as well as in our South American markets, partially offset by increased material costs.

Selling, General, Administrative.Our selling, general, and administrative expense as a percent of net sales was 31.2% and
30.2% for the quarters ended February 26, 2006 and February 27, 2005, respectively, an increase of 1.0 percentage point. This increase is primarily the result of higher
promotional expenses associated with the roll out of our new Stearns & Foster and Posturepedic product lines, higher marketing costs, and a decline in foreign currency exchange gains, which
were $2.4 million higher in the
prior year period, partially offset by lower cooperative advertising costs and salary costs, which declined as a percentage of net sales.

Royalty income, net of royalty expense.Our royalty income, net of royalty expenses, for the three months ended
February 26, 2006 increased $1.1 million from the three months ended February 27, 2005, primarily due to higher domestic royalty revenue.

Interest Expense.Our interest expense for the first quarter of fiscal 2006 decreased $1.0 million from the prior year
period to $18.7 million, primarily due to lower debt levels resulting from $115 million in voluntary prepayments of our senior term debt, partially offset by slightly higher borrowing
costs. Our weighted average borrowing costs for the first quarter of fiscal 2006 and 2005 were 7.7% and 7.4%, respectively. The increase in our borrowing cost was due to higher interest rates on the
variable rate component of our floating rate debt, largely offset by lower interest rates on the fixed component of our senior secured term debt interest rate as a result of the April 2005
amendment

25

---



of
our senior secured credit agreement and the related extinguishment of our senior unsecured term loan.

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 quarter ended February 26, 2006 is approximately 39.0% compared to 38.5% for quarter
ended February 27, 2005.

LIQUIDITY AND CAPITAL RESOURCES



Our principal sources of funds are cash flows from operations and borrowings under our senior secured revolving credit facility. Our principal use of funds
consists of operating expenditures, payments of principal and interest on our senior credit agreements, capital expenditures and interest payments on our outstanding senior subordinated notes. Capital
expenditures totaled $5.6 million for the three months ended February 26, 2006. We expect total 2006 capital expenditures to be approximately
$53 million, including approximately $20.5 million for additional production capacity in the United States and Europe. We believe that annual capital expenditure limitations in our
current debt agreements will not significantly 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 February 26, 2006, we had approximately $77.6 million available under
our revolving credit facility after taking into account letters of credit issued totaling $32 million. Our net weighted average borrowing cost was 7.7% and 7.4% for the three months ended
February 26, 2006 and February 27, 2005, respectively. The increase in our borrowing cost was due to higher interest rates on the variable rate component of our floating rate debt,
largely offset by lower interest rates on the fixed component of our senior secured term debt interest rate as a result of the April 2005 amendment of our senior secured credit agreement and
the related extinguishment of our senior unsecured term loan. As a result of the IPO completed April 12, 2006, approximately $90.0 million of the net proceeds were used to retire the
Senior Subordinated PIK Notes including accrued interest and prepayment penalties thereon, and approximately $51.6 million was used to repurchase and retire $47.5 million of the
aggregate principal amount outstanding under the 8.25% Senior Subordinated Notes along with accrued interest and market premiums thereon. Due to these debt reductions, we expect to reduce our annual
interest costs by approximately $12.8 million.



As part of the April 2004 recapitalization, we incurred substantial debt, including new senior credit facilities consisting of a $125 million senior
secured revolving credit facility with a six-year maturity, and a $560 million senior secured term loan facility with an eight-year maturity. We also borrowed
$100 million under a senior unsecured term loan, due in 2013, and issued $390 million aggregate principal amount of the Notes. Since the recapitalization and through February 26,
2006, we have repaid $210 million of the original $560.0 million outstanding under our senior secured term loan. In doing so, we have effectively prepaid all principal payments due prior
to the maturity of the loan in 2012. Most of the prepayments have been funded from our operating cash flow, along with $15.4 million outstanding under our senior secured revolving credit
facility at February 26, 2006. As of May 15, 2006, we have $8.1 million outstanding under our revolving credit facility.

26

---





Borrowings under our new senior secured credit facilities bear interest at our choice of the Eurodollar rate or adjusted base rate ("ABR"), in each case, plus an applicable margin,
subject to adjustment based on a pricing grid. Annually, we may be required to make principal prepayments equal to 25% of excess cash flow for the preceding fiscal year, as defined in our senior
secured credit agreement. At February 26, 2006, we were unable to determine the amount of such required prepayment, if any, that would be due following the first quarter of fiscal 2007 with
respect to any excess cash flow for the 2006 fiscal year.

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

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

The
outstanding Notes consist of $389.5 million aggregate principal amount maturing June 15, 2014, bearing interest at 8.25% per annum payable semiannually in arrears on
June 15 and December 15, commencing on December 15, 2004. On September 29, 2004, we completed an exchange offer whereby all of the Notes were exchanged for publicly traded,
registered securities with identical terms (other than certain terms relating to registration rights and certain interest rate provisions otherwise applicable to the original senior subordinated
notes). During the fourth quarter of fiscal 2005, we repurchased $0.5 million principal amount of the Notes. During the second quarter of fiscal 2006, we used a portion of the proceeds from the
IPO to retire approximately $47.5 million aggregate principal amount of the Notes. We expect this retirement to reduce our annual interest cost by approximately $3.9 million, including a
reduction of approximately $0.2 million in the amortization of debt issuance costs related to the Notes.

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

At
February 26, 2006 we were in compliance with the covenants contained within our senior credit agreements and note indenture.

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.

27

---



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 February 26, 2006. We will be required to make scheduled principal payments of approximately $11.3 million during the next twelve
months, substantially all of which is 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 substantial 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. In addition, the expiration of the revolving credit facility in 2010, followed by the
maturities of the senior and subordinated debt in the following years through 2015, will likely require us to refinance such debt as it matures. We may not be able to effect any future refinancing of
our debt on commercially reasonable terms or at all.



The following table summarizes our changes in cash:

Three Months Ended:February 26,
2006

February 27,
2005(in millions)Statement of Cash Flow Data:Cash flows provided by (used in):Operating activities

$
(14.1
)
$
1.9Investing activities


(5.5
)

(1.1
)Financing activities


(3.3
)

15.2Effect of exchange rate changes on cash


0.1


(1.0
)Change in cash and cash equivalents


(22.8
)

15.0Cash and cash equivalents:Beginning of period


36.6


22.8End of period

$
13.8

$
37.8


Quarter Ended February 26, 2006 Compared With Quarter Ended February 27, 2005

Cash Flows from Operating Activities.Our cash flow from operations decreased $16 million to a $14.1 million
net use of cash for the three months ended February 26, 2006, compared to $1.9 million net source of cash for the three months ended February 27, 2005. This decline was primarily
the result of changes in working capital, timing of various vendor payments and lower cash requirements for tax payments in the prior year period due to operating losses in fiscal 2004, partially
offset by lower cash payments for interest in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005 due to a larger initial interest payment on the Notes made in December,
2004.

28

---



Cash Flows from Investing Activities.Our cash flows used in investing activities increased approximately $4.4 million
from the first quarter of 2005 primarily due to $4.6 million of proceeds from the sale of our former Randolph, Massachusetts manufacturing facility received in the first quarter of fiscal 2005.

Cash Flows from Financing Activities.Our cash flow from financing activities for the three months ended February 26,
2006 decreased $18.5 million to a net use of $3.3 million from a net source of $15.2 million for the three months ended February 27, 2005. Cash flows from net borrowings
under our revolving credit facilities decreased $21 million from the first quarter of fiscal 2005, as we reduced the net outstanding balance by $3.3 million during the first quarter of
fiscal 2006, compared to net borrowings of $17.3 million during the prior year period. There were no prepayments of our senior secured term debt during the first quarter of fiscal 2006,
compared with prepayments of $5 million during the first quarter of fiscal 2005.



Through February 26, 2006, we have incurred approximately $2.1 million of costs in connection with the IPO. Total direct costs of the IPO, excluding
underwriting fees deducted directly from IPO proceeds, are currently estimated to be $4.4 million (including the $2.1 million already incurred). We expect all such costs, along with
approximately $34.5 million of expenses to be incurred in connection with the IPO, to be recovered from the net proceeds of the IPO during the second quarter of fiscal 2006.



Significant judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax provision. Despite our belief that
our tax return positions are fully supportable, we have established reserves where we believe that certain tax positions are likely to be challenged and we may not fully prevail in overcoming these
challenges. We may adjust these reserves as relevant circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. Our tax expense
includes the impact of reserve positions and changes to reserves that we consider appropriate, as well as related interest. Because we are not currently undergoing examinations of any of our corporate
income tax returns by tax authorities, we believe that it is unlikely that an audit could be initiated which would result in assessment and payment of taxes related to these positions during the
remainder of 2006. We also cannot predict when or if any other future tax payments related to these tax positions may occur. Therefore, substantially all of the reserves for these positions are
classified as noncurrent liabilities in our balance sheet.



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

The
covenants contained in our senior secured credit facilities are based on what we refer to herein as "Adjusted EBITDA". In the senior secured credit facilities, EBITDA is defined as
net income plus interest, taxes, depreciation and amortization and Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments permitted in calculating
covenant compliance as discussed above. Adjusted EBITDA is presented herein as it is a material component of

29

---



these
covenants. Non-compliance with such covenants could result in the requirement to immediately repay all amounts outstanding under such facilities. While the determination of "unusual
items" is subject to interpretation and requires judgment, we believe the adjustments listed below are in accordance with the covenants.

EBITDA
and Adjusted EBITDA are not recognized terms under GAAP and do not purport to be alternatives to net income as a measure of operating performance or to cash flows from operating
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 February 26, 2006 and February 27, 2005:

Three Months EndedFebruary 26, 2006

February 27, 2005Income before cumulative effect of change in accounting principle

$
23.3

$
21.9Interest cost


18.7


17.8Income taxes


14.9


13.6Depreciation and amortization


5.7


5.5EBITDA


62.6


58.8Management fees to KKR


0.5


0.5Unusual and nonrecurring losses:Post-closing residual plant costs


0.3


0.5Non-cash compensation


0.4


Other (various)


0.1


(0.2
)Adjusted EBITDA

$
63.9

$
59.6


The
following table reconciles EBITDA to cash flow from operations:

February 26, 2006

February 27, 2005Income before cumulative effect of change in accounting principle

$
23.3

$
21.9Interest


18.7


17.8Income Taxes


14.9


13.6Depreciation & Amortization


5.7


5.5EBITDA


62.6


58.8Adjustments to EBITDA to arrive at cash flow from operations:Interest expense


(18.7
)

(17.8
)Income taxes


(14.9
)

(13.6
)Non-cash charges against (credits to) net income


1.3


10.4Changes in operating assets & liabilities.


(44.4
)

(35.9
)Cash flow from operations

$
(14.1
)
$
1.9


30

---





"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:



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

Item 3.Quantitative and Qualitative Disclosures About Market Risk

The information appearing below relating to our market risk sensitive instruments by major category should be read in conjunction with the related disclosure
contained in the management's discussion and analysis section of our Registration Statement on Form S-1 (File No. 333-126280) and related prospectus dated
April 6,.

31

---





Our earnings are affected by fluctuations in the value of our subsidiaries' functional currency as compared to the currencies of our foreign denominated
purchases. Foreign currency forward, swap and option contracts are used to hedge against the earnings effects of such fluctuations. The result of a uniform 10% change in the value of the U.S. dollar
relative to currencies of countries in which we manufacture or sell our products would not be material to our earnings or financial position. This calculation assumes that each exchange rate would
change in the same direction relative to the U.S. dollar.

To
protect against the reduction in value of forecasted foreign currency cash flows resulting from purchases in a foreign currency, we have instituted a forecasted cash flow hedging
program. We hedge portions of our purchases denominated in foreign currencies with forward and option contracts. At February 26, 2006, we had forward contracts to sell a total of
9.0 million Canadian dollars with expiration dates ranging from March 15, 2006 through November 15, 2006. At February 26, 2006, the fair value of our net obligation under
the forward contracts was $0.3 million. We do not designate our foreign currency hedges for accounting purposes, therefore all changes in fair value are charged to earnings.



As more fully discussed in Note 10 to our Condensed Consolidated Financial Statements (Part I, Item 1 included herein), we had entered into two
interest rate swap agreements associated with debt existing prior to the April 2004 recapitalization. Although the related debt was repaid in connection with the recapitalization, the related
swaps remain in effect and are scheduled to expire in December 2006. Because the first swap converted a portion of our floating rate debt to a fixed rate and a subsequent swap effectively
re-established a floating rate on the same debt, the effect of the two instruments on both cash flows and earnings is largely off-setting. The combined fair value carrying
amount of these swap instruments at February 26, 2006 and November 27, 2005 was a net obligation of $1.4 million and $1.9 million, respectively.

On
June 3, 2004, we entered into an interest rate swap agreement on July 6, 2004 effectively fixing the floating portion of the interest rate at 3.725% on
$200 million of our outstanding balance under the senior secured term loan through November 2005, declining to $150 million through November 2007. The fair value of this
swap instrument was an asset of $3.6 million at February 26, 2006 and $2.8 million at November 27, 2005.

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

Based
on the unhedged portion of our variable rate debt outstanding at February 26, 2006, 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 cost of our steel innerspring and our polyurethane foam and polyethylene component parts are impacted by volatility in the price of steel and petroleum. We
expect the cost of the components to remain elevated above their recent historical averages throughout 2006. Thus far, we have been able to successfully address these cost pressures through a price
increase announced in May of 2004 and November of 2005, and through cost reduction efforts. We do not engage in commodity hedging programs.

32

---



Item 4.Internal Control and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial 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 financial 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 financial officer, as appropriate to allow timely decisions regarding required
disclosure.

In
connection with the evaluation of our disclosure controls and procedures for the year ended November 28, 2004, and in connection with observations by our independent registered
public accountants identified in their 2004 audit of our consolidated financial statements for fiscal 2004, management identified certain deficiencies in our financial statement close process
primarily related to the review and approval process for various account analyses and reserve/accrual calculations and the consolidated financial/balance sheet review process. Management discussed
these deficiencies with our Audit Committee and we are currently addressing these deficiencies. Beginning with the financial statement close process for the first fiscal quarter of 2005, we instituted
an enhanced management review and approval process for various reserves and accruals. In addition, we enhanced our balance sheet review procedures for the individual plant locations. The Company
continued these enhanced procedures for the financial statement close process for the quarter ended February 26, 2006. While the Company made progress during fiscal 2005 and continued this
progress through the first quarter of 2006 as it relates to the overall control of the financial statement close process, management believes
that such deficiencies have not been sufficiently remediated to conclude that significant deficiencies no longer exist. We expect to continue to improve the financial statement close process in 2006
as we continue to prepare for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 for fiscal 2007.

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

33

---





PART II. OTHER INFORMATION

Item 1.Legal Proceedings

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

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

On
April 12, 2005, we completed our initial public offering (the "IPO") of 32,200,000 shares of common stock (the "IPO Shares"). We sold 20,000,0000 shares (the "Company Shares")
at a price to the public of $16.00 per share and selling stockholders sold 12,200,000 shares (the "Selling Stockholder Shares") at a price to the public of $16.00 per share. The IPO Shares were
registered under the Securities Act of 1933, as amended, on a registration statement on Form S-1 (Registration No. 333-126280). The registration statement was
declared effective by the Securities and Exchange Commission on April 6, 2006. Citigroup Global Markets Inc., Goldman, Sachs & Co, J.P. Morgan Securities Inc. and Banc of
America Securities LLC served as joint book-running managers. The net proceeds to us from the sale of the Company Shares, after deducting the underwriting discount, were approximately
$299.2 million. The underwriters received a discount of $1.04 per share on the Company Shares, for a total underwriting discount of $20.8 million. During the second quarter, we have used
or expect to use the net proceeds from the IPO as follows: (i) on April 12, 2006, $125 million was distributed as a cash dividend to stockholders of record as of April 6,
2006, immediately
prior to the IPO; (ii) on April 21, 2006, approximately $90.0 million was paid to redeem our Senior Subordinated PIK Notes, including accrued interest and prepayment penalties
thereon; (iii) on April 26, 2006, we completed a series of open market transactions whereby approximately $51.6 million was paid to repurchase and retire approximately
$47.5 million aggregate principal amount of the our Senior Subordinated Notes (the "Notes") due in 2014, at market prices ranging from 105.25% to 105.94% of par, along with accrued interest
thereon; (iv) on April 12, 2006 we paid $11.0 million to KKR to terminate the management services agreement with them; (v) we have paid approximately $17.2 million
to members of management for transaction-related bonuses; and (vi) approximately $4.4 million will be used for other costs associated with the IPO, including the reimbursement of
approximately $2.1 million of IPO-related costs incurred through February 26, 2006, included in prepaid expenses and other current assets on our balance sheet, included in
Part I, Item 1 herein. We did not receive any proceeds from the sale by the selling stockholders of the Selling Stockholder Shares.

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

Item 3.Defaults Upon Senior Securities

None

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

None

Item 5.Other Information

None

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Item 6.Exhibits

|31.1 |  | Chief Executive Officer Certification of the Quarterly Financial Statements.
|---- |  | ----------------------------------------------------------------------------
|31.2 |  | Chief Financial Officer Certification of the Quarterly Financial Statements.
|32   |  | Certification pursuant to 18 U.S.C. Section 1350.                           

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Sealy Corporation has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

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

|Signature                               |  | Title                                                                                                     
|--------------------------------------- |  | ----------------------------------------------------------------------------------------------------------
|                                        |  |                                                                                                           
|/s/DAVID J. MCILQUHAMDavid J. McIlquham |  | Chairman and Chief Executive Officer (Principal Executive Officer)                                        
|/s/JAMES B. HIRSHORNJames B. Hirshorn   |  | Senior Executive Vice President Finance, Operations, Research & Development (Principal Accounting Officer)

Date: May 17, 2006

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