<PAGE>   1

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

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

                                    FORM 10-Q


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

           For the quarterly period ended:  August 30, 1998
                                            ---------------

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

For the transition period from _________ to __________________
Commission file number 1-8738
                       ------

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


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



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


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

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


The number of shares of the registrant's common stock outstanding as of October
5, 1998 was 30,461,630.2711.


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


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

<PAGE>   2




                          PART I. FINANCIAL INFORMATION
                          -----------------------------
Item 1 - Financial Statements

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


<TABLE>
<CAPTION>

                                                    QUARTER ENDED     QUARTER ENDED
                                                   AUGUST 30, 1998   AUGUST 31, 1997
                                                   ---------------   ---------------

<S>                                                   <C>               <C>     
Net sales                                             $242,603          $229,919
                                                      --------          --------



Costs and expenses:
   Cost of goods sold                                  134,008           128,770
   Selling, general and administrative                  82,225            72,867
   Amortization of intangibles                           3,207             3,299
   Interest expense, net                                17,344             8,270
                                                      --------          --------

                                                       236,784           213,206
                                                      --------          --------


Income before income tax                                 5,819            16,713
Income tax expense                                       1,456             8,796
                                                      --------          --------
         Net income                                   $  4,363          $  7,917
                                                      ========          ========


Earnings per common share:
         Basic                                        $   0.14          $   0.26
                                                      ========          ========
         Diluted                                      $   0.14          $   0.26
                                                      ========          ========

Weighted average number of common
shares outstanding:
         Basic                                          30,363            29,964
         Diluted                                        31,441            30,428
</TABLE>




     See accompanying notes to condensed consolidated financial statements.


                                       2

<PAGE>   3


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


<TABLE>
<CAPTION>

                                                           NINE MONTHS         NINE MONTHS
                                                         ENDED AUGUST 30,    ENDED AUGUST 31,
                                                               1998                1997
                                                           -----------         ---------

<S>                                                          <C>               <C>      
Net sales                                                    $ 665,434         $ 579,448
                                                             ---------         ---------


Costs and expenses:
   Cost of goods sold                                          376,659           325,900
   Selling, general and administrative                         243,855           188,828
   Amortization of intangibles                                   9,705             9,977
   Interest expense, net                                        50,389            23,276
                                                             ---------         ---------
                                                               680,608           547,981
                                                             ---------         ---------


(Loss) income before income tax and
   extraordinary item                                          (15,174)           31,467
Income tax (benefit) expense                                      (122)           17,080
                                                             ---------         ---------
         (Loss) income before
                  extraordinary item                           (15,052)           14,387


Extraordinary item - loss from early
   extinguishment of debt (net of income
   tax benefit of $9,693 and $1,353, respectively)              14,537             2,030
                                                             ---------         ---------
         Net (loss) income                                   $ (29,589)        $  12,357
                                                             =========         =========


(Loss)/earnings per common share - basic:
   (Loss) income before extraordinary item                   $   (0.49)        $    0.48
   Extraordinary item                                            (0.48)            (0.07)
                                                             ---------         ---------
   Net (loss) income                                         $   (0.97)        $    0.41
                                                             =========         =========
                                                                              

(Loss)/earnings per common share - diluted:
   (Loss) income before extraordinary item                   $   (0.49)             0.48
   Extraordinary item                                            (0.48)            (0.07)
                                                             ---------         ---------
   Net (loss) income                                         $   (0.97)        $    0.41
                                                             =========         =========


Weighted average number of common shares outstanding:
         Basic                                                  30,351            29,875
         Diluted                                                30,351            30,339
</TABLE>



     See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>   4

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

<TABLE>
<CAPTION>

                                                           AUGUST 30,       NOVEMBER 30,
                                                              1998              1997
                                                           ---------         ---------

<S>                                                        <C>               <C>      
ASSETS
Current assets:
   Cash and cash equivalents                               $   7,484         $   6,057
   Accounts receivable, less allowance for doubtful
      accounts (1998 -$8,083; 1997 - $7,696)                 110,889            93,918
   Inventories                                                47,368            46,007
   Income tax refund receivable                               12,811               -
   Prepaid expenses and deferred taxes                        21,663            22,529
                                                           ---------         ---------
                                                             200,215           168,511



Property, plant and equipment - at cost                      189,666           169,603

Less:  accumulated depreciation                              (51,359)          (43,995)
                                                           ---------         ---------
                                                             138,307           125,608

Other assets:
   Goodwill and other intangibles - net of
      accumulated amortization
      (1998 - $73,506; 1997 - $63,801)                       401,564           411,269
   Debt issuance costs, net, and other assets                 37,251            15,679
                                                           ---------         ---------
                                                             438,815           426,948
                                                           ---------         ---------
                                                           $ 777,337         $ 721,067
                                                           =========         =========


LIABILITIES AND STOCKHOLDERS'  (DEFICIT) EQUITY
Current liabilities:
   Current portion of long-term obligations                $   6,500         $    --
   Accounts payable                                           40,991            49,676
   Accrued interest                                           10,630             2,038
   Accrued incentives and advertising                         36,444            30,704
   Accrued compensation                                       12,726            17,771
   Other accrued expenses                                     25,390            20,098
                                                           ---------         ---------
                                                             132,681           120,287

Long-term obligations                                        701,383           330,000
Other noncurrent liabilities                                  39,052            35,713
Deferred income taxes                                         31,188            30,001
Stockholders' (deficit) equity:
   Common stock                                                  305               299
   Additional paid-in capital                                134,427           257,320
   Retained deficit                                         (257,650)          (50,614)
   Foreign currency translation adjustment                    (4,049)           (1,939)
                                                           ---------         ---------
                                                            (126,967)          205,066
Commitments and contingencies                                   --                --
                                                           ---------         ---------
                                                           $ 777,337         $ 721,067
                                                           =========         =========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                       4
<PAGE>   5





                                SEALY CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                              NINE MONTHS        NINE MONTHS
                                                                                 ENDED               ENDED
                                                                            AUGUST 30, 1998     AUGUST 31, 1997
                                                                            ---------------     ---------------


<S>                                                                              <C>               <C>      
Net cash provided by operating activities                                        $   1,394         $  19,815
                                                                                 ---------         ---------

Investing activities:
   Proceeds from sale of subsidiary                                                   --              35,000
   Proceeds from sale of insulator pad operation assets                               --               5,150
   Purchase of property and equipment, net                                         (21,002)          (18,622)
                                                                                 ---------         ---------
       Net cash (used in) provided by investing activities                         (21,002)           21,528
                                                                                 ---------         ---------

Financing activities:
   Treasury stock repurchase                                                      (413,078)             --
   Proceeds from long-term obligations, net                                        344,785            51,948
   Equity contributions                                                            121,317              --
   Dividend                                                                           --             (99,776)
   Debt issuance costs                                                             (31,989)           (6,130)
                                                                                 ---------         ---------
       Net cash provided by (used in) financing activities                          21,035           (53,958)
                                                                                 ---------         ---------


Change in cash and cash equivalents                                                  1,427           (12,615)

Cash and cash equivalents:
   Beginning of period                                                               6,057            16,619
                                                                                 ---------         ---------
   End of period                                                                 $   7,484         $   4,004
                                                                                 =========         =========


Supplemental disclosures:
-------------------------
Cash paid for:
   Taxes                                                                         $   4,182         $  10,695
   Interest                                                                      $  31,067         $  16,900

Selected noncash items:
   Depreciation                                                                  $   8,156         $   8,996
   Issuance of Junior Notes                                                      $  25,000         $    --
   Rollover Equity                                                               $  15,235         $    --
</TABLE>








     See accompanying notes to condensed consolidated financial statements.



                                       5
<PAGE>   6


                                SEALY CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                        NINE MONTHS ENDED AUGUST 30, 1998


NOTE A - BASIS OF PRESENTATION

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

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

      The accompanying unaudited condensed consolidated financial statements
contain all adjustments which, in the opinion of management, are necessary to
present fairly the financial position of the Company at August 30, 1998, and its
results of operations and cash flows for the periods presented herein. All
adjustments in the periods presented herein are normal and recurring in nature
except for the Recapitalization (see Note C).

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


NOTE B - INVENTORIES

      The major components of inventories were as follows:

<TABLE>
<CAPTION>

                                        AUGUST 30,         NOVEMBER 30,
                                           1998               1997
                                         -------            -------
                                              (IN THOUSANDS)


<S>                                      <C>                <C>    
Raw materials                            $24,069            $26,251
Work in process                           18,671             12,594
Finished goods                             4,628              7,162
                                         -------            -------

                                         $47,368            $46,007
                                         =======            =======
</TABLE>


NOTE C - RECAPITALIZATION

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



                                       6
<PAGE>   7

                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998


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

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

      After the Recapitalization, the outstanding stock options of the Company
("Recapitalization Stock Options") consist of fully-vested ten-year stock
options to acquire 1,309,644 shares of Class A Common Stock at an exercise price
of $0.125 per share and 145,516 shares of Class L Common Stock at an exercise
price of $10.125 per share.

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

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

      The Recapitalization transaction resulted in an aggregate direct net
charge to APIC and retained deficit totaling $421.7 million primarily comprised
of the costs associated with the purchase of the then outstanding Class A and
Class B Common Stock, the repurchase of Merger Warrants and the repurchase of
Series A and Series B Restructure Warrants. The Recapitalization transaction
also resulted in a pretax charge within selling, general and administrative
expense of $18.8 million comprised of accelerated vesting of stock options and
restricted stock and other incentive based compensation payments to 


                                       7
<PAGE>   8

                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998


employees in connection with the transaction. The Company recorded a $14.5
million charge, net of income tax benefit of $9.6 million, representing the
writeoff of the remaining unamortized debt issue costs related to long-term
obligations repaid in connection with the Recapitalization as well as consent
fees and premiums paid related to the Tender Offer of the Parent Notes (each of
which as defined in Note D) in connection with the Recapitalization.

NOTE D - LONG-TERM OBLIGATIONS

<TABLE>
<CAPTION>

                                                                  AUGUST 30,            NOVEMBER 30,
                                                                     1998                  1997
                                                                   --------              --------
                                                                          (IN THOUSANDS)

<S>                                                                <C>                   <C>     
Senior AXELs Credit Agreement                                      $329,250              $      -
Senior Revolving Credit Agreement:
     Tranche A Term Loans                                           120,000                     -
     Revolving Credit Facility                                       15,000                     -
High Point Corporate Complex Mortgage                                10,088                     -
Senior Subordinated Notes                                           125,000                     -
Senior Subordinated Discount Notes                                   81,348                     -
Junior Subordinated Note                                             27,197                     -
$275,000,000 Second Restated Secured
   Credit Agreement - Revolving Credit
   Facility                                                               -               130,000
10-1/4% Senior Subordinated Notes Due 2003                                -               200,000
                                                                   --------              --------
                                                                    707,883               330,000
Less current portion                                                  6,500                     -
                                                                   --------              --------
                                                                   $701,383              $330,000
                                                                   ========              ========
</TABLE>


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

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

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


                                       8
<PAGE>   9

                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998


the Revolving Credit Facility to Parent to provide a portion of the funds
necessary to consummate the Recapitalization. Indebtedness of the Issuer under
the Senior Credit Agreements is secured and guaranteed by Parent and certain of
the Issuer's current and all of the Issuer's future U.S. subsidiaries and will
bear interest at a floating rate. See Note I for further details regarding
guarantees including consolidating condensed financial statements for guarantors
and non-guarantors. The Senior Credit Agreements will require the Company to
meet certain financial tests, including minimum levels of adjusted EBITDA as
determined in the agreements, minimum interest coverage and maximum leverage
ratio. The Senior Credit Agreements also contain covenants which, among other
things, limit capital expenditures, indebtedness and/or the incurrence of
additional indebtedness, investments, dividends, transactions with affiliates,
asset sales, mergers and consolidations, prepayments of other indebtedness
(including the Notes), liens and encumbrances and other matters customarily
restricted in such agreements.

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

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

      On June 23, 1998, the Company secured permanent financing for the
property, manufacturing facility and office building in High Point, North
Carolina ("High Point Corporate Complex") as purchased on April 13, 1998 and to
fund the construction of the new Corporate headquarters facility at this site.
The initial purchase price of $8.4 million was paid at closing and was financed
on a temporary basis with a draw from the Revolving Credit Facility. The
permanent loan arrangement provides for borrowings not to exceed $14.5 million.
The loan arrangement requires monthly principal payments based on a twenty year
amortization commencing three months after the completion of construction, with
a balloon payment at the end of year seven of all then outstanding principal and
interest. Interest accrues at LIBOR plus 3.25% and is payable monthly.


                                       9
<PAGE>   10

                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998


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

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

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


<TABLE>
<CAPTION>

                                                     PERCENTAGE OF 
                  YEAR                             PRINCIPAL AMOUNT
                  ----                             ----------------
                  
                  
                  
<S>                                                    <C>     
                  2002.........................        104.937%
                  
                  2003.........................        103.292%
                  
                  2004.........................        101.646%
                  
                  2005 and thereafter..........        100.000%
</TABLE>
         
      Notwithstanding the foregoing, during the first 36 months after December
11, 1997, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Senior Subordinated Notes originally issued under
the Senior Subordinated Note Indenture at a redemption price of 109.875% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages thereon, if any, to the redemption date, with the net cash proceeds of
any Equity Offerings; (as defined in the Indentures) provided that at least
$80.0 million in aggregate principal amount of Senior Subordinated Notes remain
outstanding immediately after the occurrence of such redemption (excluding
Senior Subordinated Notes held by the Company and its Subsidiaries); and
provided further that such redemption shall occur within 120 days of the date of
closing of any such Equity Offering.

      The Senior Subordinated Discount Notes are limited in aggregate principal
amount at maturity to $275.0 million, of which $128.0 million were issued in the
Offering, and mature on December 15, 2007. The Senior Subordinated Discount
Notes were offered at a substantial discount from their principal amount at
maturity. Until December 15, 2002 (the "Full Accretion Date"), no interest
(other than liquidated damages, if applicable) will accrue or be paid in cash on
the Senior Subordinated Discount Notes, but the Accreted Value will accrete
(representing the amortization of original issue discount) between the issuance
date and the Full Accretion Date, on a semi-annual bond equivalent basis.
Beginning on the Full Accretion Date, interest on the Senior Subordinated
Discount Notes will accrue at 


                                       10
<PAGE>   11

                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998


the rate of 10-7/8% per annum and will be payable in cash semi-annually in
arrears on June 15 and December 15 of each year, commencing on June 15, 2003, to
Holders of record on the immediately preceding June 1 and December 1.
Additionally Senior Subordinated Discount Notes may be issued from time to time
after the date of the Senior Subordinated Discount Note Indenture, subject to
the provisions of the Senior Subordinated Discount Note Indenture. Interest on
the Senior Subordinated Discount Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the Full
Accretion Date.

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


<TABLE>
<CAPTION>

                                                      PERCENTAGE OF 
                  YEAR                               PRINCIPAL AMOUNT
                  ----                               ----------------
                  
                  
                  
<S>                                                       <C>     
                  2002...........................         105.437%
                  
                  2003...........................         103.625%
                  
                  2004...........................         101.812%
                  
                  2005 and thereafter............         100.000%
</TABLE>

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

      The Junior Note had an initial principal balance outstanding of $25.0
million and matures on December 18, 2008. Interest on the Junior Note accrues at
10% per annum if paid within ten days of the end of each calendar quarter or at
12% if the Company elects to add accrued interest for such quarter to the then
outstanding principal balance. The Company has the option, at each quarter end,
to elect to pay the interest due for the quarter or add such interest to the
principal balance through the term of the Note. From inception to August 30,
1998, the Company has elected to add accrued interest to the principal balance
increasing the total outstanding balance to $27.2 million at August 30, 1998.

      NOTE E - CONTINGENCIES

      In accordance with procedures established under the Environmental Cleanup
Responsibility Act (now known as the Industrial Site Recovery Act), Sealy and
one of its subsidiaries are parties to an Administrative Consent Order ("ACO")
issued by the New Jersey Department of Environmental Protection ("DEP").
Pursuant to the ACO, the Company and such subsidiary agreed to conduct soil and



                                       11
<PAGE>   12

                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998


groundwater investigation and remediation at the plant previously owned by the
subsidiary in South Brunswick, New Jersey. The Company does not believe that its
manufacturing processes were a source of the contaminants found to exist above
regulatorily acceptable levels in the groundwater. The Company and its
subsidiary have retained primary responsibility for the investigation and any
necessary clean up plan approved by the DEP under the terms of the ACO.

      In 1997, the Company, with DEP approval, completed essentially all soil
remediation and conducted a pilot test for a company-proposed revision to the
groundwater remediation program. The Company's revised groundwater remediation
plan was submitted in May, 1998 to the DEP for approval.

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

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

      In January 1997, the Company filed a claim in the U.S. District Court of
New Jersey against former insurance companies for the Company under the
Comprehensive Environmental Response, Compensation and Liability Act seeking
contribution for site investigation and remedial costs. A parallel case seeking
a judgment of non-liability was filed by some (but not all) of these insurance
companies in the U.S. District Court for the Northern District of Ohio. Both the
New Jersey and Ohio District Courts have ruled that New Jersey law applies.
Settlement of this matter is currently pending.

      The Company also has begun to remediate soil and groundwater contamination
at an inactive facility located in Oakville, Connecticut. Although the Company
is conducting the remediation voluntarily, it obtained Connecticut Department of
Environmental Protection approval of the remediation plan. The Company believes
the contamination is attributable to the manufacturing operations of previous
unaffiliated occupants of the facility. In 1994, the Company filed a cost
recovery action in U.S. District Court to require these entities to complete the
remediation and reimburse the Company for its cleanup costs. This litigation is
pending and settlement negotiations will commence in the near term. Based on the
facts currently known, management does not believe that resolution of this
matter will have a material adverse effect on the Company's financial position
or future operations.

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



                                       12
<PAGE>   13

                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998


NOTE F - STOCK OPTION PLAN

      The Recapitalization Stock Options consist of fully-vested ten-year stock
options to acquire 1,309,644 shares of Class A Common Stock at an exercise price
of $0.125 per share and 145,516 shares of Class L Common Stock at an exercise
price of $10.125 per share. Recapitalization Stock Options totaling 116,874
Class A Common Shares were exercised during the quarter ended August 30, 1998.

      On December 18, 1997, the Company's Board of Directors adopted the 1998
Stock Option Plan ("1998 Plan") and reserved 5,000,000 shares of Class A Common
Stock of the Company for issuance. Options under the 1998 Plan may be granted
either as Incentive Stock Options as defined in Section 422A of the Internal
Revenue Code or Nonqualified Stock Options subject to the provisions of Section
83 of the Internal Revenue Code. On March 18, 1998, the Company granted ten-year
stock options to acquire 2,072,250 shares of Class A Common Stock at an exercise
price of $0.50 per share (representing fair market value at the time of grant),
and 1,175,000 shares of Class A Common Stock at an exercise price of $4.18 per
share (representing a premium to fair market value at the time of grant). The
options vest 40% upon the second anniversary, and 20% on the third, fourth and
fifth anniversary dates of the grant. Due to employee resignations, 130,250 and
50,000 of the options with an exercise price of $0.50 and $4.18 per share,
respectively, were cancelled subsequent to issuance.

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

NOTE G - YEAR 2000 ISSUE

      The Company believes that the new business systems, including appropriate
software, being installed both alongside and as part of an upgrade of its
existing computer system will address the dating system flaw inherent in most
operating systems (the "Year 2000 Issue"). There can be no assurance, however,
that the new Business Systems will be installed and fully operational at all
locations and for all applications prior to the turn of the century, and
management has therefore deemed it necessary to convert its current system to be
Year 2000 compliant.

      The Company conducted a comprehensive impact analysis to determine what
computing platforms and date-aware functions with respect to its existing
computer operating systems will be disrupted by the Year 2000 Issue. In January
1998, the Company completed a prioritization of the impacted areas identified to
date and commenced the detailed program code changes through a contracted third
party vendor which has experience in Year 2000 conversions for the Company's
existing system including the same release of such system. The Company has
received converted source code, from the contracted vendor, for all applications
with the exception of EDI and is currently testing the converted programs.
Programming with respect to EDI applications is projected to be completed by
December 1998. The Company's current timetable anticipates completion of all
conversions and necessary testing by January, 1999 and the rollout and
implementation to all locations by June, 1999. At this time, the Company has not
deemed it necessary to develop contingency plans for any of the applications
being converted, however, the Company will continue to assess this and will
develop contingency plans for any applications not converted and operating by
June, 1999.

      The Company is currently in the process of replacing personal computers
and phone systems that are not Year 2000 compliant. The Company has confirmed
that its primary manufacturing equipment is Year 2000 compliant. Major suppliers
to the Company have been contacted and the Company has received confirmation of
Year 2000 compliance or a timetable to be compliant from such suppliers. The
Company is in the preliminary stages of assessment of its customer status with
respect to the Year 2000 Issue. Contingency plans will be developed for any
significant suppliers or customers that are not Year 2000 compliant by June 1999
or earlier if the Company becomes aware that such entities may not be Year 2000
compliant in a timely manner.


                                       13
<PAGE>   14

                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998


      The required code changes, testing and implementation necessary to address
the Year 2000 Issue are expected to cost approximately $4.0 million and the
Company has incurred $0.8 million through August 1998. The Company estimates
that it is approximately 35% complete with the efforts required to be Year 2000
compliant.

      Even though the Company's Year 2000 plan should adequately address the
Year 2000 Issue, there can be no assurance that unforeseen difficulties will not
arise. If the Company does not identify and fix all Year 2000 problems, or if a
major supplier or customer is unable to adequately address its Year 2000 Issue,
the Company's results of operations or financial condition could be materially
impacted.

NOTE H - HEADQUARTERS AND RESEARCH & DEVELOPMENT CENTER RELOCATION

      On March 10, 1998, the Company announced its plans to relocate its
Corporate headquarters and Research & Development Center from Cleveland, Ohio to
High Point, North Carolina. The Company purchased a property, on April 13, 1998,
which currently includes an office building and a manufacturing facility. The
Company is constructing an additional office building on this property to house
its Corporate headquarters. The Company also relocated its Lexington, North
Carolina manufacturing plant to High Point, North Carolina on June 22, 1998. The
Company established permanent financing for the property purchase and
construction project on June 23, 1998. The Company estimates total costs
associated with this relocation will result in a pretax charge of approximately
$8.5 million, which will be recognized primarily in fiscal 1998 with the balance
in fiscal 1999. The Company recognized $3.1 and $5.3 million of expense for the
three and nine month periods ended August 30, 1998, respectively, related to the
relocation.

NOTE I - GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION

      As discussed in Note D, the Parent and each of the Guarantor Subsidiaries
has fully and unconditionally guaranteed, on a joint and several basis, the
obligation to pay principal and interest with respect to the Notes. The
Guarantor Subsidiaries are wholly-owned subsidiaries of the Company.
Substantially all of the Issuer's operating income and cash flow is generated by
its subsidiaries. As a result, funds necessary to meet the Issuer's debt service
obligations are provided in part by distributions or advances from its
subsidiaries. Under certain circumstances, contractual and legal restrictions,
as well as the financial condition and operating requirements of the Issuer's
subsidiaries, could limit the Issuer's ability to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations, including
the payment of principal and interest on the Notes. The Notes contain certain
convenants that, among other things, limit the ability of the Issuer and its
Restricted Subsidiaries (as defined in the Senior Credit Agreement) to incur
additional indebtedness and issue Disqualified Stock (as defined in the Senior
Credit Agreement), pay dividends or distributions or make investments or make
certain other Restricted Payments (as defined in the Senior Credit Agreement),
enter into certain transactions with affiliates, dispose of certain assets,
incur liens and engage in mergers and consolidations. Although holders of the
Notes will be direct creditors of the Issuer's principal direct subsidiaries by
virtue of the guarantees, the Issuer has subsidiaries ("Non-Guarantor
Subsidiaries") that are not included among the Guarantor Subsidiaries, and such
subsidiaries will not be obligated with respect to the Notes. As a result, the
claims of creditors of the Non-Guarantor Subsidiaries will effectively have
priority with respect to the assets and earnings of such companies over the
claims of creditors of the Issuer, including the holders of the Notes.

      The following supplemental consolidating condensed financial statements
present:

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


                                       14
<PAGE>   15

                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998


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

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

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



                                       15
<PAGE>   16
                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998



                                SEALY CORPORATION
          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
                        NINE MONTHS ENDED AUGUST 30, 1998
                                 (in thousands)


<TABLE>
<CAPTION>

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

<S>                                       <C>            <C>            <C>            <C>            <C>            <C>      
Net sales                                 $    --        $  31,631      $ 591,335      $  54,968      $ (12,500)     $ 665,434

Costs and expenses:
  Cost of goods sold                           --           20,172        335,255         33,732        (12,500)       376,659
  Selling, general and administrative        17,789          9,636        201,051         15,379           --          243,855
  Amortization of intangibles                  --              298          8,699            708           --            9,705
  Interest expense, net                       4,005         46,504             25           (145)          --           50,389
  (Income) loss from equity investees        (4,525)       (45,303)          --             --           49,828           --   
  (Income) loss from non-guarantor
    equity investees                           --             --           (2,174)          --            2,174           --
  Capital charge and intercompany                 
    interest allocation                        --              418         (1,709)         1,291           --             --   
                                          -------------------------------------------------------------------------------------

(Loss) income before income
    taxes and extraordinary item            (17,269)           (94)        50,188          4,003        (52,002)       (15,174)

  Income taxes                               (2,217)        (4,619)         4,885          1,829           --             (122)
                                          -------------------------------------------------------------------------------------
(Loss) income before extraordinary
  item                                      (15,052)         4,525         45,303          2,174        (52,002)       (15,052)

Extraordinary item - loss from
 early extinguishment of debt (net
 of income tax benefit of $9,693)            14,537           --             --             --             --           14,537
                                          -------------------------------------------------------------------------------------
Net (loss) income                         $ (29,589)     $   4,525      $  45,303      $   2,174      $ (52,002)     $ (29,589)
                                          =====================================================================================
</TABLE>


                                       16
<PAGE>   17
                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998



                                SEALY CORPORATION
          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
                        NINE MONTHS ENDED AUGUST 31, 1997
                                 (in thousands)


<TABLE>
<CAPTION>

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

<S>                                         <C>            <C>            <C>            <C>            <C>            <C>      
Net sales                                   $    --        $  27,775      $ 507,801      $  54,901      $ (11,029)     $ 579,448

Costs and expenses:
  Cost of goods sold                             --           17,207        283,602         36,120        (11,029)       325,900
  Selling, general and administrative           1,328          8,326        167,063         12,111           --          188,828
  Amortization of intangibles                    --              298          8,835            844           --            9,977
  Interest expense, net                        23,895           --              (55)          (564)          --           23,276
  (Income) loss from equity investees         (25,913)       (28,638)          --             --           54,551           --
  (Income) loss from non-guarantor
    equity investees                             --            3,446         (5,945)          --            2,499           --
  Capital charge and intercompany
    interest allocation                          --              366         (1,288)           922           --             --
                                            -------------------------------------------------------------------------------------

Income before income taxes and
  extraordinary item                              690         26,770         55,589          5,468        (57,050)        31,467

  Income taxes                                (13,697)           857         26,951          2,969           --           17,080
                                            -------------------------------------------------------------------------------------

Income before extraordinary
  item                                         14,387         25,913         28,638          2,499        (57,050)        14,387
 Extraordinary item - loss from
  early extinguishment of debt
  (net of income tax benefit of $1,353)         2,030           --             --             --             --            2,030
                                            -------------------------------------------------------------------------------------

Net income                                  $  12,357      $  25,913      $  28,638      $   2,499      $ (57,050)     $  12,357
                                            =====================================================================================
</TABLE>


                                       17
<PAGE>   18
                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998



                                SEALY CORPORATION
          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
                       THREE MONTHS ENDED AUGUST 30, 1998
                                 (in thousands)


<TABLE>
<CAPTION>

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


<S>                                       <C>            <C>            <C>            <C>            <C>            <C>      
Net sales                                 $    --        $  11,743      $ 215,319      $  19,524      $  (3,983)     $ 242,603

Costs and expenses:
  Cost of goods sold                           --            7,321        119,182         11,488         (3,983)       134,008
  Selling, general and administrative            37          3,613         73,332          5,243           --           82,225
  Amortization of intangibles                  --               99          2,877            231           --            3,207
  Interest expense, net                         917         16,387            109            (69)          --           17,344
  (Income) loss from equity investees        (5,297)       (19,616)          --             --           24,913           --
  (Income) loss from non-guarantor
    equity investees                           --             --           (1,192)          --            1,192           --
  Capital charge and intercompany
    interest allocation                        --              142           (578)           436           --             --
                                          --------------------------------------------------------------------------------------

Income before income taxes                    4,343          3,797         21,589          2,195        (26,105)         5,819

  Income taxes                                  (20)        (1,500)         1,973          1,003           --            1,456
                                          --------------------------------------------------------------------------------------

Net income                                $   4,363      $   5,297      $  19,616      $   1,192      $ (26,105)     $   4,363
                                          ======================================================================================
</TABLE>



                                       18
<PAGE>   19
                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998



                                SEALY CORPORATION
          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
                       THREE MONTHS ENDED AUGUST 31, 1997
                                 (in thousands)


<TABLE>
<CAPTION>

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

<S>                                       <C>            <C>            <C>            <C>            <C>            <C>      
Net sales                                 $    --        $  10,949      $ 202,327      $  19,656      $  (3,013)     $ 229,919

Costs and expenses:
  Cost of goods sold                           --            6,639        113,125         12,019         (3,013)       128,770
  Selling, general and administrative           726          3,232         64,533          4,376           --           72,867
  Amortization of intangibles                  --              108          2,945            246           --            3,299
  Interest expense, net                       8,340           --              (20)           (50)          --            8,270
  (Income) loss from equity investees       (12,340)       (13,355)          --             --           25,695           --   
  (Income) loss from non-guarantor
    equity investees                           --            1,407         (2,695)          --            1,288           --
  Capital charge and intercompany
    interest allocation                        --              142           (499)           357           --             --
                                          ------------------------------------------------------------------------------------

Income before income taxes                    3,274         12,776         24,938          2,708        (26,983)        16,713


  Income taxes                               (4,643)           436         11,583          1,420           --            8,796
                                          ------------------------------------------------------------------------------------

Net income                                $   7,917      $  12,340      $  13,355      $   1,288      $ (26,983)     $   7,917
                                          ====================================================================================
</TABLE>

















                                       19
<PAGE>   20
                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998



                                SEALY CORPORATION
               SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
                                 AUGUST 30, 1998
                                 (in thousands)



<TABLE>
<CAPTION>

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

<S>                                            <C>            <C>            <C>            <C>            <C>            <C>      
ASSETS

Current assets:
  Cash and cash equivalents                    $    --        $    --        $   3,883      $   3,601      $    --        $   7,484
  Accounts receivable, net                          --            4,208         95,373         11,308           --          110,889
  Inventories                                       --            1,529         41,434          4,405           --           47,368
  Income tax refund receivable                    12,811           --             --             --             --           12,811
  Prepaid expenses and deferred taxes             (9,236)           295         29,398          1,206           --           21,663
                                               -------------------------------------------------------------------------------------
                                                   3,575          6,032        170,088         20,520           --          200,215

Property, plant and equipment -at cost              --            4,817        172,679         12,170           --          189,666
Less:  accumulated depreciation                     --           (1,480)       (47,585)        (2,294)          --          (51,359)
                                               -------------------------------------------------------------------------------------
                                                    --            3,337        125,094          9,876           --          138,307

Other assets:
  Goodwill and other intangibles, net               --           14,163        353,276         34,125           --          401,564
  Net investment in and advances
    to (from) subsidiaries and affiliates       (106,573)       536,128       (309,945)       (28,723)       (90,887)          --
  Debt issuance costs, net and other
    assets                                          --           29,471          7,750             30           --           37,251
                                               -------------------------------------------------------------------------------------
                                                (106,573)       579,762         51,081          5,432        (90,887)       438,815
                                               -------------------------------------------------------------------------------------
Total assets                                   $(102,998)     $ 589,131      $ 346,263      $  35,828      $ (90,887)     $ 777,337
                                               =====================================================================================

LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY

Current liabilities:
  Current portion-long-term obligations        $    --        $   6,500      $    --        $    --        $    --        $   6,500
  Accounts payable                                  --            1,432         34,769          4,790           --           40,991
  Accrued interest                                  --           10,529            101           --             --           10,630
  Accrued incentives and advertising                --            2,198         32,005          2,241           --           36,444
  Accrued compensation                              --              329         11,494            903           --           12,726
  Other accrued expenses                           1,924          1,087         24,263         (1,884)          --           25,390
                                               -------------------------------------------------------------------------------------
                                                   1,924         22,075        102,632          6,050           --          132,681

Long-term obligations                             27,197        664,098         10,088           --             --          701,383
Other noncurrent liabilities                       3,585           --           35,467           --             --           39,052
Deferred income taxes                             (8,737)        (3,723)        37,981          5,667           --           31,188

Stockholders' (deficit) equity                  (126,967)       (93,319)       160,095         24,111        (90,887)      (126,967)
                                               -------------------------------------------------------------------------------------
 Total liabilities and stockholders' equity    $(102,998)     $ 589,131      $ 346,263      $  35,828      $ (90,887)     $ 777,337
                                               =====================================================================================
</TABLE>





                                       20
<PAGE>   21

                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998


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

<TABLE>
<CAPTION>

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

<S>                                           <C>            <C>            <C>            <C>            <C>            <C>      
ASSETS

Current assets:
  Cash and cash equivalents                   $    --        $      20      $   2,062      $   3,975      $    --        $   6,057
  Accounts receivable, net                         --            3,434         79,150         11,334           --           93,918
  Inventories                                      --            1,912         39,240          5,190           (335)        46,007
  Prepaid expenses and deferred taxes            (9,206)           294         29,819          1,622           --           22,529
                                              -------------------------------------------------------------------------------------
                                                 (9,206)         5,660        150,271         22,121           (335)       168,511

Property, plant and equipment -at cost             --            4,664        152,045         12,894           --          169,603
Less:  accumulated depreciation                    --           (1,254)       (40,603)        (2,138)          --          (43,995)
                                              -------------------------------------------------------------------------------------
                                                   --            3,410        111,442         10,756           --          125,608

Other assets:
  Goodwill and other intangibles, net              --           14,461        361,976         34,832           --          411,269
  Net investment in and advances
    to (from) subsidiaries and affiliates       543,783          2,636       (357,823)       (28,591)      (160,005)          --
  Debt issuance costs, net and
    other assets                                  8,918             35          6,641             85           --           15,679
                                              -------------------------------------------------------------------------------------
                                                552,701         17,132         10,794          6,326       (160,005)       426,948
                                              -------------------------------------------------------------------------------------
Total assets                                  $ 543,495      $  26,202      $ 272,507      $  39,203      $(160,340)     $ 721,067
                                              =====================================================================================


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                            $    --        $   2,086      $  40,743      $   6,847      $    --        $  49,676
  Accrued interest                                1,973           --               65           --             --            2,038
  Accrued incentives and advertising               --            1,473         26,782          2,449           --           30,704
  Accrued compensation                             --              246         16,244          1,281           --           17,771
  Other accrued expenses                            314            222         18,107          1,573           (118)        20,098
                                              -------------------------------------------------------------------------------------
                                                  2,287          4,027        101,941         12,150           (118)       120,287

Long-term obligations                           330,000           --             --             --             --          330,000
Other noncurrent liabilities                      2,969           --           32,744           --             --           35,713
Deferred income taxes                             3,173            896         22,693          3,239           --           30,001

Stockholders' equity                            205,066         21,279        115,129         23,814       (160,222)       205,066
                                              -------------------------------------------------------------------------------------

Total liabilities and stockholders'
    equity                                    $ 543,495      $  26,202      $ 272,507      $  39,203      $(160,340)     $ 721,067
                                              =====================================================================================
</TABLE>




                                       21
<PAGE>   22
                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998



                                SEALY CORPORATION
          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
                        NINE MONTHS ENDED AUGUST 30, 1998
                                 (in thousands)


<TABLE>
<CAPTION>

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

<S>                                        <C>            <C>            <C>            <C>            <C>            <C>      
Net cash provided by (used in)
  operating activities                     $ (20,309)     $ (27,638)     $  45,014      $    (367)     $   4,694      $   1,394
                                           ---------------------------------------------------------------------------------------
Cash flows from investing activities:
  Purchase of property
    and equipment, net                          --             (172)       (20,830)          --             --          (21,002)
  Net activity in investment in and
    advances to (from) subsidiaries and
    affiliates                               642,070       (603,602)       (31,912)           132         (6,688)          --
                                           ---------------------------------------------------------------------------------------
    Net cash provided by (used in)
      investing activities                   642,070       (603,774)       (52,742)           132         (6,688)       (21,002)

Cash flows from financing activities:
  Treasury stock repurchase costs           (413,078)          --             --             --             --         (413,078)
  Proceeds from (repayment of) long-
    term obligations, net                   (330,000)       664,697         10,088           --             --          344,785
  Equity contributions                       121,317           --             --             --             --          121,317
  Debt issuance costs                           --          (31,795)          (194)          --             --          (31,989)
  Net equity activity with Parent               --           (1,510)          (345)          (139)         1,994           --
                                           ---------------------------------------------------------------------------------------

      Net cash (used in) provided by
        financing activities                (621,761)       631,392          9,549           (139)         1,994         21,035
                                           ---------------------------------------------------------------------------------------
Change in cash and cash equivalents             --              (20)         1,821           (374)          --            1,427

Cash and cash equivalents:
  Beginning of period                           --               20          2,062          3,975           --            6,057
                                           ---------------------------------------------------------------------------------------
   End of period                           $    --        $    --        $   3,883      $   3,601      $    --        $   7,484
                                           =======================================================================================
</TABLE>



                                       22
<PAGE>   23
                                SEALY CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                        NINE MONTHS ENDED AUGUST 30, 1998



                                SEALY CORPORATION
          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
                        NINE MONTHS ENDED AUGUST 31, 1997
                                 (in thousands)

<TABLE>
<CAPTION>
                                                            Sealy       Combined     Combined
                                             Sealy         Mattress    Guarantor   Non-Guarantor
                                          Corporation      Company    Subsidiaries  Subsidiaries  Eliminations   Consolidated

<S>                                        <C>           <C>           <C>           <C>           <C>           <C>     
Net cash provided by (used in)
  operating activities                     $(23,310)     $  1,437      $ 41,214      $    529      $    (55)     $ 19,815
                                           --------------------------------------------------------------------------------
Cash flows from investing activities:
 Proceeds from sale of subsidiary              --          35,000          --            --            --          35,000
 Proceeds from sale of insulator pad
    operation assets                           --           5,150          --            --            --           5,150
 Purchase of property and
    equipment, net                             --            (208)      (18,304)         (110)         --         (18,622)
 Net activity in investment in and
    advances to (from) subsidiaries and
    affiliates                               77,234        11,476       (23,245)      (12,792)      (52,673)         --
                                           --------------------------------------------------------------------------------
   Net cash provided by (used in)
    investing activities                     77,234        51,418       (41,549)      (12,902)      (52,673)       21,528

Cash flows from financing activities:
 Proceeds from (repayment of) long-
  term obligations, net                      51,982          --               1           (35)         --          51,948
 Dividend                                   (99,776)         --            --            --            --         (99,776)
 Debt issuance costs                         (6,130)         --            --            --            --          (6,130)
 Net equity activity with Parent               --         (52,799)         (146)          217        52,728          --
                                           --------------------------------------------------------------------------------
   Net cash (used in) provided by
    financing activities                    (53,924)      (52,799)         (145)          182        52,728       (53,958)
                                           --------------------------------------------------------------------------------

Change in cash and cash equivalents            --              56          (480)      (12,191)         --         (12,615)

Cash and cash equivalents:
 Beginning of period                           --              54         3,118        13,447          --          16,619
                                           --------------------------------------------------------------------------------
End of period                              $   --        $    110      $  2,638      $  1,256      $   --        $  4,004
                                           ================================================================================
</TABLE>



                                       23
<PAGE>   24




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

Item 2 -

QUARTER ENDED AUGUST 30, 1998 COMPARED WITH QUARTER ENDED AUGUST 31, 1997

     NET SALES Net sales increased $12.7 million, or 5.5% for the quarter ended
August 30, 1998, when compared to the quarter ended August 31, 1997 attributable
to an increase in average unit selling price, in addition to a slight increase
in unit volume. The increase in average unit selling price is primarily
attributable to the introduction of new or re-engineered higher-end products.

     COST OF GOODS SOLD Cost of goods sold for the quarter, as a percentage of
net sales, decreased 0.8 percentage points to 55.2%. This decrease is primarily
attributable to production efficiencies, movement to higher-end products and
production economies of scale from increased volume.

     SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and administrative
expenses increased $9.4 million due to increases in marketing spending, $5.2
million, Corporate Headquarters and Research and Development Center relocation
expenses, $3.1 million and delivery expenses, $0.8 million. Increased marketing
spending was due to increased sales, along with an increased spending rate for
cooperative advertising and promotions partially offset by lower national
advertising. Increased delivery expenses were due to increased sales, along with
an increased spending rate.

     INTEREST EXPENSE Interest expense, net of interest income, increased
$9.1 million primarily as a result of significantly higher debt levels due to 
the Recapitalization and a higher interest rate spread.

     INCOME TAX The Company's provision for income taxes decreased $7.3 million
to $1.5 million, due to lower pretax income of $10.9 million partially offset by
a lower effective tax rate. The effective income tax rate for the quarter ended
August 30, 1998 is approximately 25.0% as compared to 52.6% for the quarter
ended August 31, 1997. The relatively low effective tax rate is due to low full
year projected pretax income, after adjusting for non-deductible items,
resulting from increased leverage and compensation charges associated with the
Recapitalization, as well as the charges related to the Corporate Headquarters,
Research & Development Center and Lexington plant relocation to High Point,
North Carolina.

     NET INCOME For the reasons set forth above, the Company recorded net income
of $4.4 million for the quarter ended August 30, 1998 versus net income of $7.9
million for the quarter ended August 31, 1997.




                                       24
<PAGE>   25





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


NINE MONTHS ENDED AUGUST 30, 1998 COMPARED WITH NINE MONTHS ENDED AUGUST 31,
1997

     NET SALES Net sales increased $86.0 million, or 14.8% for the nine months
ended August 30, 1998, when compared to the nine months ended August 31, 1997.
The increase is attributable to a $91.3 million increase in conventional bedding
sales offset by a $5.3 million decrease in sales of wood bedroom furniture.

     Conventional bedding sales increased 15.9% over the prior year, driven by a
10.4% or $60.0 million increase in conventional bedding unit shipments and a
4.9% or $31.3 million increase in average unit selling price. These increases
were due to sales growth in Posturepedic, Stearns & Foster and promotional
product lines, in addition to continued positive results from successful
strategic distribution initiatives that included sole-source multi-year
arrangements of varying lengths with several retailers. The increase in average
unit selling price is primarily attributable to the introduction of new or
re-engineered higher-end products.

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

     COST OF GOODS SOLD Cost of goods sold for the nine months, as a percentage
of net sales, increased 0.4 percentage point to 56.6%. This increase is
primarily attributable to higher start-up costs associated with the integration
of new products into production, the introduction of lower price point products,
partially offset by production economies of scale from increased volume.

     SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and administrative
expenses increased $55.0 million due to increased operating expenses of $36.2
million and compensation related costs associated with the Recapitalization of
$18.8 million. Increased operating costs were primarily due to increases in
marketing spending, $22.7 million, Corporate Headquarters and Research and
Development Center relocation expenses, $5.3 million and delivery expenses, $4.9
million. Increased marketing spending was due to increased sales volume, along
with an increased spending rate for cooperative advertising and promotions
partially offset by lower national advertising. Increased delivery expenses were
due to increased sales volume, along with an increased spending rate.
Recapitalization costs of $18.8 million were primarily comprised of accelerated
vesting of stock options and restricted stock and other incentive based
compensation payments to employees in connection with the transaction.

     INTEREST EXPENSE Interest expense, net of interest income, increased $27.1
million primarily as a result of significantly higher debt levels due to the
Recapitalization and a higher interest rate spread.

     INCOME TAX The Company's provision for income taxes decreased $17.2 million
to a benefit of $0.1 million, due to a loss before income tax and extraordinary
item of $15.2 million as compared to income before income tax and extraordinary
item of $31.5 million, for the nine months ended August 30, 1998 and August 31,
1997, respectively, partially offset by a lower effective tax rate. The
effective income tax rate for the nine months ended August 30, 1998 is
approximately 0.8% as compared to the nine months ended August 31, 1997 rate of
54.3%. The relatively low effective tax rate is due to low full year projected
pretax income, after adjusting for non-deductible items, resulting from
increased leverage and compensation charges associated with the Recapitalization
as well as the charges related to the Corporate Headquarters, Research &
Development Center and Lexington plant relocation to High Point, North Carolina.

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



                                       25
<PAGE>   26

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


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

     NET (LOSS) INCOME For the reasons set forth above, the Company recorded a
net loss of $29.6 million for the nine months ended August 30, 1998 versus net
income of $12.4 million for the nine months ended August 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal sources of funds are cash flows from operations and
borrowings under its Revolving Credit Facility. The Company's principal use of
funds consists of payments of principal and interest on its Senior Credit
Agreements, capital expenditures and interest payments on its outstanding Notes.
Capital expenditures totaled $21.2 million for the nine months ended August 30,
1998 and are projected to be $33.8 million for fiscal 1998. Management believes
that annual capital expenditure limitations in its current debt agreements will
not significantly inhibit the Company from meeting its ongoing capital needs. On
June 23, 1998, the Company secured permanent financing for the property,
manufacturing facility and office building in High Point, North Carolina as
purchased on April 13, 1998 and to fund the construction of the new Corporate
headquarters facility at this site. The initial purchase price of $8.4 million
was paid at closing and was financed on a temporary basis with a draw from the
Revolving Credit Facility. The permanent loan agreement provides for borrowings
not to exceed $14.5 million and the Company made an initial draw of $8.2
million. In conjunction with the permanent financing, senior lenders approved an
amendment to the senior credit facilities and related covenants to permit the
transaction. Additionally, the Company estimates total costs associated with the
Corporate Headquarters, Research & Development Center and Lexington plant
relocation to High Point, North Carolina will result in a pretax charge of
approximately $8.5 million which will be recognized primarily in fiscal 1998
with the balance in fiscal 1999. At August 30, 1998, the Company had
approximately $73.3 million available under its Revolving Credit Facility with
Letters of Credit issued totaling approximately $11.7 million. The weighted
average interest rate on the Revolving Credit Facility at August 30, 1998 was
7.9%.

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

     Management believes that the Company will have the necessary liquidity
through cash flow from operations, and availability under the Revolving Credit
Facility for the next several years to fund its expected capital expenditures,
the estimated $8.5 million of relocation costs, obligations under its credit
agreement and subordinated note indentures, Year 2000 costs, environmental
liabilities, and for other needs required to manage and operate its business.

YEAR 2000 ISSUE

      The Company believes that the new business systems, including appropriate
software, being installed both alongside and as part of an upgrade of its
existing computer system will address the dating system flaw inherent in most
operating systems (the "Year 2000 Issue"). There can be no assurance, however,
that the new Business Systems will be installed and fully operational at all
locations and for all applications prior to the turn of the century, and
management has therefore deemed it necessary to convert its current system to be
Year 2000 compliant.

      The Company conducted a comprehensive impact analysis to determine what
computing platforms and date-aware functions with respect to its existing
computer operating systems will be disrupted by the Year 2000 Issue. In January
1998, the Company completed a prioritization of the impacted areas identified to
date and commenced the detailed program code changes through a contracted third
party vendor which has experience in Year 2000 conversions for the Company's
existing system including the 



                                       26
<PAGE>   27

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


same release of such system. The Company has received converted source code,
from the contracted vendor, for all applications with the exception of EDI and
is currently testing the converted programs. Programming with respect to EDI
applications is projected to be completed by December 1998. The Company's
current timetable anticipates completion of all conversions and necessary
testing by January, 1999 and the rollout and implementation to all locations by
June, 1999. At this time, the Company has not deemed it necessary to develop
contingency plans for any of the applications being converted, however, the
Company will continue to assess this and will develop contingency plans for any
applications not converted and operating by June, 1999.

      The Company is currently in the process of replacing personal computers
and phone systems that are not Year 2000 compliant. The Company has confirmed
that its primary manufacturing equipment is Year 2000 compliant. Major suppliers
to the Company have been contacted and the Company has received confirmation of
Year 2000 compliance or a timetable to be compliant from such suppliers. The
Company is in the preliminary stages of assessment of its customer status with
respect to the Year 2000 Issue. Contingency plans will be developed for any
significant suppliers or customers that are not Year 2000 compliant by June 1999
or earlier if the Company becomes aware that such entities may not be Year 2000
compliant in a timely manner.

      The required code changes, testing and implementation necessary to address
the Year 2000 Issue are expected to cost approximately $4.0 million and the
Company has incurred $0.8 million through August 1998. The Company estimates
that it is approximately 35% complete with the efforts required to be Year 2000
compliant.

      Even though the Company's Year 2000 plan should adequately address the
Year 2000 Issue, there can be no assurance that unforeseen difficulties will not
arise. If the Company does not identify and fix all Year 2000 problems, or if a
major supplier or customer is unable to adequately address its Year 2000 Issue,
the Company's results of operations or financial condition could be materially
impacted.

INFLATION

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

FORWARD LOOKING STATEMENTS

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



                                       27
<PAGE>   28

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


Item 1.    Legal Proceedings.

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

Item 6.    Exhibits and Reports on Form 8-K

           (a)   Exhibits:

                 10.1      First Amendment to Credit Agreement

                 27.1      Financial Data Schedule.




                                       28
<PAGE>   29



                                   SIGNATURES


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


                                SEALY CORPORATION



           Signature                              Title
           ---------                              -----



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



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







Date:  October 14, 1998




                                       29