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

BUSINESS OVERVIEW

Our mattress and foundation products include the Sealy, Sealy Posturepedic, Stearns & Foster, and Bassett brands. We produce a variety of innerspring, visco-elastic (memory foam) and latex foam products.

The current economic and weak retail environments have affected the level of spending by end consumers and have caused a decrease in U.S. mattress sales across the industry and we are experiencing a slowdown in our international markets as well. We expect this challenging business environment to continue through 2009. Furthermore, changes in foreign exchange rates contributed favorably to international results in fiscal 2008 and these trends have begun to reverse.

We have continued our focus on new product development to bring new and innovative products to the market. In February 2009, we introduced our redesigned Stearns & Foster product line which features our Variable Response Technology foam to provide a softer, more indulgent sleep surface. Earlier, in January 2008, we introduced our new Sealy Posturepedic innerspring line which is designed to eliminate tossing and turning caused by pressure points. We have also invested capital in the business to increase our capability to design products including the opening of our Center of Excellence pressure-mapping laboratory in 2008.

Our industry continues to recover from volatility in the price of petroleum-based and steel products, which affects the cost of our polyurethane foam, polyester, polyethylene foam and steel innerspring component parts. Domestic supplies of these raw materials are being limited by supplier consolidation, the exporting of these raw materials outside of the U.S. and other forces beyond our control. During fiscal 2008, the cost of these components saw significant increases above their recent historical averages. These costs, particularly those related to steel and polyurethane and latex foams, decreased during the third quarter of fiscal 2009 and we expect these prices to stabilize during the fourth quarter of fiscal 2009 due to reduced volatility in related commodity prices. The manufacturers of products such as petro-chemicals and wire rod, which are the feed stocks purchased by our suppliers of foam and drawn wire, may reduce supplies in an effort to maintain higher prices. These actions would delay or eliminate price reductions from our suppliers.

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

RESULTS OF OPERATIONS

     Tabular Information-Current Fiscal Quarter

    The following table sets forth our summarized results of operations for the
three months ended August 30, 2009 and August 31, 2008, expressed in thousands
of dollars, as well as a percentage of each period's net sales:

                                              For the three months ended:
                                 August 30, 2009                      August 31, 2008
                                             (percentage                          (percentage
                         (in thousands)     of net sales)     (in thousands)     of net sales)
Net sales                $       349,573             100.0 %  $       404,963             100.0 %
Cost of goods sold               203,508              58.2            240,843              59.5

     Gross profit                146,065              41.8            164,120              40.5
Selling, general and
administrative
expenses                         110,256              31.5            132,892              32.8
Amortization expense                 842               0.2                981               0.2
Restructuring
expenses and asset
impairment                             -                 -              2,448               0.6
Royalty income, net
of royalty expense                (4,216 )            (1.2 )           (4,422 )            (1.1 )

     Income from
     operations                   39,183              11.2             32,221               8.0
Interest expense                  22,127               6.3             14,379               3.6
Loss on rights for
convertible notes                  1,820               0.5                  -                 -
Refinancing and
extinguishment of
debt and interest
rate derivatives                      39                 -                  -                 -
Other income, net                    (14 )               -               (117 )               -

     Income before
     income taxes                 15,211               4.4             17,959               4.4
Income tax provision               3,155               0.9              7,017               1.7

     Net income          $        12,056               3.4 %  $        10,942               2.7 %

Effective tax rate                  20.7 %                               39.1 %

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

                                            Three Months Ended:
                                        August 30,      August 31,
                                           2009            2008
                   Americas:
                     United States             73.4 %          73.1 %
                     Canada                    12.9            12.2
                     Other                      5.7             6.9

                       Total Americas          92.0            92.2
                   Europe                       8.0             7.8

                       Total                  100.0 %         100.0 %

                                                       For the three months ended
                                          August 30, 2009                      August 31, 2008
                                                      (percentage                          (percentage
                                  (in thousands)     of net sales)     (in thousands)     of net sales)
Total Americas (US Dollars):
    Net sales                     $       321,719             100.0 %  $       373,231             100.0 %
    Cost of goods sold                    183,105              56.9            214,593              57.5

        Gross profit                      138,614              43.1            158,638              42.5
United States (US Dollars):
    Net sales                             256,755             100.0            296,105             100.0
    Cost of goods sold                    143,943              56.1            169,223              57.1

        Gross profit                      112,812              43.9            126,882              42.9
Total International (US
Dollars):
    Net sales                              92,818             100.0            108,858             100.0
    Cost of goods sold                     59,565              64.2             71,620              65.8

        Gross profit                       33,253              35.8             37,238              34.2
Canada:
    US Dollars:
        Net sales                          45,201             100.0             49,438             100.0
        Cost of goods sold                 27,263              60.3             28,705              58.1

            Gross profit                   17,938              39.7             20,733              41.9
    Canadian Dollars:
        Net sales                          49,996             100.0             50,525             100.0
        Cost of goods sold                 30,164              60.3             29,343              58.1

            Gross profit                   19,832              39.7             21,182              41.9
Other Americas (US Dollars):
    Net sales                              19,763             100.0             27,688             100.0
    Cost of goods sold                     11,899              60.2             16,665              60.2

        Gross profit                        7,864              39.8             11,023              39.8
Europe:
    US Dollars:
        Net sales                          27,854             100.0             31,732             100.0
        Cost of goods sold                 20,403              73.2             26,250              82.7

            Gross profit                    7,451              26.8              5,482              17.3
    Euros:
        Net sales                          19,672             100.0             20,407             100.0
        Cost of goods sold                 14,405              73.2             16,891              82.8

            Gross profit                    5,267              26.8 %            3,516              17.2 %

Net Sales. Our consolidated net sales for the quarter ended August 30, 2009, were $349.6 million, a decrease of $55.4 million, or 13.7%, from the quarter ended August 31, 2008. Total Americas net sales were $321.7 million for the third quarter of fiscal 2009, a decrease of 13.8% from the third quarter of fiscal 2008. This decrease was primarily related to decreased sales in the U.S. coupled with decreases in the Canada and Other Americas businesses. Total U.S. net sales were $256.8 million for the third quarter of fiscal 2009, a decrease of 13.3% from the third quarter of fiscal 2008. The U.S. net sales decrease of $39.4 million was attributable to a 12.9% decrease in wholesale unit volume, which excludes third party sales from our component plants, partially offset by a 0.1% increase in wholesale average unit selling price. The decrease in unit volume is primarily attributable to continued weak retail demand as described above under "Business Overview". International net sales decreased $16.0 million or 14.7%, from the third quarter of fiscal 2008 to $92.8 million. Excluding the effects of currency fluctuation, net sales declined 4.3% from the third quarter of fiscal 2008. This decline was primarily due to declines in finished goods sales in Europe and, to a lesser extent, the weak retail environment in the Other Americas. In Canada, local currency sales decreases of 1.0% translated into decreases of 8.6% in U.S. dollars due to a lower average value of the Canadian dollar versus the U.S. dollar. Local currency sales performance in Canada was driven by a 1.8% decrease in average unit selling price, which was partially offset by a 0.8% increase in unit volume. The decreased average unit selling price was driven by the increased volume of lower priced products as well as increased promotional activities. The increase in unit volume is primarily attributable to relatively more promotional activity compared to the third quarter of fiscal 2008 when our business was disrupted by the relocation of our Toronto facility. Elsewhere in the Americas, we have experienced sales decreases in our Mexico and South American markets. In our Europe segment, local currency sales decreases of 3.6% translated into decreases of 12.2% in U.S. dollars due to the decline in value of the Euro versus the U.S. dollar. The decline in local currency sales was driven by a 16.1% decrease in finished goods sales which we believe is reflective of the overall economic slowdown in Europe, which was offset by increases in OEM sales.

Gross Profit. Our consolidated gross profit for the quarter was $146.1 million, a decrease of $18.1 million from the comparable prior year period. As a percentage of net sales, gross profit increased 1.3 percentage points to 41.8% due to an increase in gross profit margins in both of our segments. Total Americas gross profit for the quarter was $138.6 million, a decrease of $20.0 million from the comparable prior year period. As a percentage of net sales, gross profit for the Americas increased 0.6 percentage points to 43.1%. This increase as a percentage of sales was primarily due to an increase in gross profit margins in our U.S. operations partially offset by decreased gross profit margins in Canada. U.S. gross profit decreased $14.1 million to $112.8 million, which, as a percent of sales, represents an increase of 1.0 percentage points to 43.9% of net sales. The increase in percentage of net sales was driven primarily by lower material costs as the related commodity prices remained below prior year levels through the third quarter. Conversely, margins were negatively impacted by less absorption of fixed costs as a result of lower volume. In local currency, the gross profit margin in Canada was 39.7% as a percentage of net sales which represents a decrease of 2.2 percentage points. This decrease was driven by the impact of higher material costs per unit and the lower average unit selling price discussed above. In our Europe segment, the local currency gross profit margin increase of 9.6 percentage points was primarily due to decreased prices of raw materials due to deflation in the prices of the underlying commodities.

Selling, General, Administrative. Our consolidated selling, general and administrative expense decreased $22.6 million to $110.3 million. As a percent of net sales this expense was 31.5% and 32.8% for the quarters ended August 30, 2009 and August 31, 2008, respectively, a decrease of 1.3 percentage points. The decrease as a percent of sales is primarily due to our efforts to improve efficiencies and our cost structure to compensate for the current retail environment. The decrease in absolute dollars is primarily due to a $14.9 million reduction in volume driven variable expenses including a $7.6 million

reduction in cooperative advertising and promotional costs, a $4.8 million reduction in delivery costs due primarily to a decrease in unit volume shipped and a decrease in bad debt expense of $2.5 million. Fixed operating costs, exclusive of compensation expense, decreased $17.0 million from the prior year period primarily due to a $10.1 million reduction in national advertising expenses as well as reductions in other discretionary expenditures such as travel and entertainment. Improvements of $2.5 million on foreign exchange related transactions also contributed positively to the third quarter of fiscal 2009. Compensation expense increased by $9.3 million compared to the third quarter of fiscal 2008. This increase is primarily due to increases of $5.8 million for incentive-based payments and our expected defined contribution plan payments based on operating results through the third quarter of fiscal 2009 coupled with non-cash compensation expense recognized for new grants and the modification of share-based awards of $4.1 million the effects of which were partially offset by lower compensation expense due to reduced headcount.

Restructuring expenses and asset impairment. We recognized no pretax restructuring costs during the quarter ended August 30, 2009 as compared with costs of $2.4 million recognized during the comparable prior year period.

In the third quarter of fiscal 2008, management made the decision to close its manufacturing facility in Clarion, Pennsylvania. We recorded a pre-tax restructuring and impairment charge related to this action of $2.2 million during the quarter ended August 31, 2008, of which $1.3 million was related to employee severance and benefits and other exit costs, and $0.9 million which was non-cash in nature, related to fixed asset impairment charges. This plan was completed in the first quarter of fiscal 2009 and we do not expect to incur additional costs related to this restructuring activity.

In the third quarter of fiscal 2008, management also elected to close its administrative offices near Milan, Italy and relocate these activities to its manufacturing facility in Silvano, Italy. We recorded a pre-tax restructuring charge related to this action of $0.2 million during the quarter ended August 31, 2008, which was entirely related to employee severance and benefits. This plan was completed in the fourth quarter of fiscal 2008.

Royalty income, net of royalty expense. Our consolidated royalty income, net of royalty expenses, of $4.2 million for the three months ended August 30, 2009 remained relatively flat as compared with the prior year period.

Interest Expense. Our consolidated interest expense for the third quarter of fiscal 2009 increased $7.7 million as compared with the prior year period to $22.1 million which included $4.2 million of non-cash interest expense. Our net weighted average borrowing cost was 10.4% and 7.2% for the three months ended August 30, 2009 and August 31, 2008, respectively. Our borrowing cost was unfavorably impacted by the Refinancing which resulted in increased interest rates and outstanding debt balances.

Income Tax. Our effective income tax rates regularly differ from the Federal statutory rate principally because of the effect of non-deductible paid in kind interest, non-deductible mark to market adjustments for derivatives associated with the Convertible Notes subscription rights, certain foreign tax rate differentials and state and local income taxes. Our effective tax rate for the three months ended August 30, 2009 was 20.7% compared to 39.1% for the three months ended August 31, 2008. The effective rate for the fiscal 2009 period was lower than the fiscal 2008 period primarily due to the reversal of $10.2 million of the liability for uncertain tax positions and related interest (net) and penalties due to the expiration of statutes of limitations, offset by lower pre-tax income in fiscal 2009.

     Tabular Information-Year to Date

    The following table sets forth our summarized results of operations for the
nine months ended August 30, 2009 and August 31, 2008, expressed in thousands of
dollars, as well as a percentage of each period's net sales:

                                                        For the nine months ended:
                                           August 30, 2009                      August 31, 2008
                                                       (percentage                          (percentage
                                   (in thousands)     of net sales)     (in thousands)     of net sales)
Net sales                          $       958,004             100.0 %  $     1,172,267             100.0 %
Cost of goods sold                         571,538              59.7            706,579              60.3

     Gross profit                          386,466              40.3            465,688              39.7
Selling, general and
administrative expenses                    302,533              31.6            365,536              31.2
Amortization expense                         2,435               0.3              2,850               0.2
Restructuring expenses and
asset impairment                             1,448               0.2              2,907               0.2
Royalty income, net of royalty
expense                                    (12,186 )            (1.3 )          (13,558 )            (1.2 )

     Income from operations                 92,236               9.6            107,953               9.2
Interest expense                            56,551               5.9             45,124               3.8
Loss on rights for convertible
notes                                        4,549               0.5                  -                 -
Refinancing and extinguishment
of debt and interest rate
derivatives                                 17,461               1.8                  -                 -
Gain on sale of subsidiary
stock                                       (1,292 )            (0.1 )                -                 -
Other income, net                              (60 )               -               (297 )               -

     Income before income taxes             15,027               1.6             63,126               5.5
Income tax provision                         3,463               0.4             24,013               2.0

     Net income                    $        11,564               1.2 %  $        39,113               3.5 %

Effective tax rate                            23.0 %                               38.0 %

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

                                                Nine Months
                                                  Ended:
                                              2009      2008
                        Americas:
                          United States         74.5 %    71.3 %
                          Canada                11.4      11.8
                          Other                  6.1       7.0

                            Total Americas      92.0      90.1
                        Europe                   8.0       9.9

                            Total              100.0 %   100.0 %

                                                                For the nine months ended:
                                                   August 30, 2009                      August 31, 2008
                                                               (percentage                          (percentage
                                           (in thousands)     of net sales)     (in thousands)     of net sales)
Total Americas (US Dollars):
    Net sales                              $       881,722             100.0 %  $     1,056,600             100.0 %
    Cost of goods sold                             514,927              58.4            617,750              58.5

        Gross profit                               366,795              41.6            438,850              41.5
United States (US Dollars):
    Net sales                                      713,988             100.0            836,073             100.0
    Cost of goods sold                             410,283              57.5            490,127              58.6

        Gross profit                               303,705              42.5            345,946              41.4
Total International (US Dollars):
    Net sales                                      244,016             100.0            336,194             100.0
    Cost of goods sold                             161,255              66.1            216,452              64.4

        Gross profit                                82,761              33.9            119,742              35.6
Canada:
    US Dollars:
        Net sales                                  108,982             100.0            138,697             100.0
        Cost of goods sold                          68,996              63.3             79,161              57.1

            Gross profit                            39,986              36.7             59,536              42.9
    Canadian Dollars:
        Net sales                                  127,604             100.0            139,949             100.0
        Cost of goods sold                          80,959              63.4             79,882              57.1

            Gross profit                            46,645              36.6             60,067              42.9
Other Americas (US Dollars):
    Net sales                                       58,752             100.0             81,830             100.0
    Cost of goods sold                              35,648              60.7             48,462              59.2

        Gross profit                                23,104              39.3             33,368              40.8
Europe:
    US Dollars:
        Net sales                                   76,282             100.0            115,667             100.0
        Cost of goods sold                          56,611              74.2             88,829              76.8

            Gross profit                            19,671              25.8             26,838              23.2
    Euros:
        Net sales                                   56,127             100.0             75,643             100.0
        Cost of goods sold                          41,644              74.2             58,049              76.7

            Gross profit                            14,483              25.8 %           17,594              23.3 %

Net Sales. Our consolidated net sales for the nine months ended August 30, 2009, were $958.0 million, a decrease of $214.3 million, or 18.3%, from the nine months ended August 31, 2008. Total Americas net sales were $881.7 million for the first three quarters of fiscal 2009, a decrease of 16.6% from the first three quarters of fiscal 2008. This decrease was primarily related to our U.S. and Canadian operations within the Americas segment. Total U.S. net sales were $714.0 million for the first three quarters of fiscal 2009, a decrease of 14.6% from the first three quarters of fiscal 2008. The U.S. net sales decrease of $122.1 million was attributable to a 14.2% decrease in wholesale unit volume, which excludes third party sales from our component plants, and a 0.2% decrease in wholesale average unit selling price. The decrease in unit volume is primarily attributable to continued weak retail demand as described above under "Business Overview". Of the 0.2% decrease in wholesale average unit selling price, 0.4% was attributable to the $3.7 million favorable impact received from the change in the estimated reserve for non-warranty product returns in fiscal 2008. These factors were partially offset by the favorable impact of the July 2008 price increase, increased delivery revenue and fewer discounted floor samples in the second quarter of fiscal 2009 as the Stearns & Foster product launch was not distributed as widely as the Posturepedic product launched in the second quarter of fiscal 2008. International net sales decreased $92.2 million, or 27.4%, from the first three quarters of fiscal 2008 to $244.0 million. Excluding the effects of currency fluctuation, net sales declined 15.4% from the first three quarters of fiscal 2008. This decline was primarily due to declines in sales in Europe and, to a lesser extent, the weak retail environment in Canada and the Other Americas. In Canada, local currency sales decreases of 8.8% translated into decreases of 21.4% in U.S. dollars due to a lower average value . . .