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


Delaware		36-3284147
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
Sealy Drive One Office Parkway Trinity, North Carolina		27370
(Address of principal executive offices)		(Zip Code)
Registrant's telephone number, including area code—(336) 861-3500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class		Name of Each Exchange on which Registered
Common Stock, par value $0.01 per share		New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

The aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates as of June 1, 2008 was $276,118,725.

The number of shares of the registrant's common stock outstanding as of January 2, 2009 is approximately: 91,806,885.

Portions of the Registrant's proxy statement for the 2009 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K to the extent described herein.

Sealy Corporation (hereinafter referred to as the "Company", "Sealy", "we", "our", or "us"), a Delaware corporation organized in 1984, is the largest bedding manufacturer in the world. Based on Furniture/Today, a furniture industry publication, we are also the leading bedding manufacturer in the United States with a wholesale market share of approximately 20.9% in 2007, 1.34 times greater than that of our next largest competitor.

We manufacture and market a complete line of bedding products, including mattresses and mattress foundations. Our conventional (innerspring) bedding products are manufactured and marketed in the Americas under our Sealy, Sealy Posturepedic, Stearns & Foster and Bassett brand names. In addition, we manufacture and market specialty (non-innerspring) latex and visco-elastic bedding products under the PurEmbrace, TrueForm, SpringFree, Stearns & Foster, Reflexions, Carrington Chase, MirrorForm and Pirelli brand names, which we sell in the profitable specialty bedding category in the United States and internationally.

We believe that our Sealy brand name has been the number one selling brand in the domestic bedding industry for over 25 years and our Stearns & Foster brand name is one of the leading brands devoted to the attractive luxury category in the industry. We believe that going to market with the best selling and most recognized brand in the domestic bedding industry (Sealy), one of the leading luxury brands (Stearns & Foster), and differentiated specialty bedding offerings gives us a competitive advantage and strengthens our relationships with our customers by allowing us to offer sleep solutions to a broad group of consumers.

We maintain an internet website at www.sealy.com. We make available on our website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Proxy Statements, and other reports, as soon as reasonably practicable after they are electronically filed or furnished to the Securities and Exchange Commission ("SEC").

On April 12, 2006, we completed an initial public offering ("IPO") of our common stock, raising $299.2 million of net proceeds after deducting the underwriting discount. We used a portion of the proceeds to pay a cash dividend to shareholders of record immediately prior to the IPO of $125 million. We also used a portion of the proceeds from the IPO to repurchase and retire $47.5 million aggregate principal amount of our 8.25% Senior Subordinated Notes due 2014 in a series of open market transactions completed on April 26, 2006 at prices ranging from 105.25% to 105.92% of par, plus accrued interest. On April 21, 2006, we used approximately $90.0 million of IPO proceeds to redeem the entire outstanding balance of the senior subordinated pay-in-kind notes ("PIK Notes"), along with accrued interest and prepayment penalties through the date of the redemption. For a detailed presentation of the sources and uses of cash from the IPO, see Note 2 to our Consolidated Financial Statements in Item 8.

On April 6, 2004, we completed a merger with an affiliate of Kohlberg Kravis Roberts & Co. L.P., which we refer to collectively as KKR, whereby KKR acquired approximately 92% of our capital stock. Certain of our stockholders prior to the merger, including affiliates of Bain Capital, LLC and others, which we refer to collectively as Rollover Stockholders, retained approximately an 8% interest in our stock. In connection with the merger, we recapitalized substantially all of our outstanding debt. At November 30, 2008, KKR controlled approximately 51% of our issued and outstanding common stock.

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 of our reportable segments manufacture and market conventional and specialty bedding products. The Americas segment operations are concentrated in the United States, Canada, Mexico, Argentina, Uruguay, Brazil, and Puerto Rico, with our dominant operations being in the United States. Europe operations are concentrated in western Europe. We derived approximately 9.9% of our fiscal 2008 net sales from our Europe segment, with the remainder of our net sales coming from the Americas segment. For more information regarding revenues, income and assets by reportable segment, see Note 19 to our Consolidated Financial Statements in Item 8.

We produce sleep sets across a range of technologies, including innerspring, latex foam and visco-elastic "memory foam", and sell them in diverse geographies in the Americas and Europe. While our strategy is to drive one-third of our sales growth through domestic specialty products, the majority of our products continue to be in the domestic innerspring market where we offer a complete line of innerspring bedding products in sizes ranging from twin to king size, selling at retail price points from under $300 to approximately $5,000 per queen set domestically. While we sell conventional products at all retail price points, we focus our product development and sales efforts toward mattress and box spring sets that sell at retail price points above $750 domestically. Though the higher priced market sectors have shown more of a downturn due to the slowdown of the global economy in 2008, we believe that the higher priced sectors of the market will return to their historical growth trends, offering faster growth and greater profitability in the long-term. For fiscal 2008, we derived approximately 64% of our total domestic sales from products with retail price points of $750 and above.

Our product development efforts include regular introductions across our lines in order to maintain the competitiveness and the profitability of our products. In the first quarter of fiscal 2007, we introduced a new line of Stearns & Foster branded mattresses and box springs. We also introduced a new line of Posturepedic Reserve branded mattresses and box springs. These launches were essentially completed in the third quarter of fiscal 2007. In addition, we introduced new Sealy-branded products that are compliant with the Federal flame retardant standard, 16 CFR Part 1633 passed by the U.S. Consumer Product Safety Commission, which became effective July 1, 2007.

In January 2008, we unveiled an innovative new Sealy Posturepedic innerspring line, which is designed to eliminate tossing and turning caused by pressure points. The line was designed in conjunction with orthopedic surgeons, and reviewed by an independent Orthopedic Advisory Board. These mattresses come in three series: Preferred, Reserve and Signature, and range in retail price points from $599 to more than $1,000 per queen set.

In June 2008, we announced the introduction of the Sealy Posturepedic PurEmbrace mattress featuring the Company's proprietary SmartLatex. The line delivers unsurpassed pressure relief combined with the best of Sealy Posturepedic support to eliminate virtually all the uncomfortable pressure points that cause tossing and turning, making it the Company's most advanced sleep system ever. This new latex sleep system aligns with our corporate growth strategy, which focuses, in part, on innovation within the specialty mattress category. As with earlier major product launches, we expect our sales and profitability growth to be limited during the period in which our customers complete the transition to our new product lines.

In the Americas and Europe, we also produce a variety of innovative latex foam, and visco-elastic "memory foam" bedding products for the specialty bedding category. The specialty bedding category has experienced substantial growth in recent years but has taken a downturn during fiscal 2008 along with other luxury priced bedding. These products are often sold with financing terms provided by

retailers that have struggled recently to offer the same terms as those in the past. However, we believe that by successfully leveraging our strong premium brand positions, existing relationships with customers, marketing and distribution capabilities, product development capabilities and latex manufacturing technology, we have been able to gain market share in the specialty bedding category. We believe that the potential to increase market share continues to exist for future periods even with the slowdown of overall bedding sales. We believe this is especially true given our planned expansion of the distribution of our SmartLatex products to additional customers in fiscal 2009. Due to continued new specialty product introductions, we have experienced growth in the specialty bedding category from 2006 through 2008 at a combined rate of 42%. In our other international markets within the Americas, we also offer a wide range of products. In each market, we offer a full line of innerspring and specialty products under the Sealy and local brand names.

In Europe, we produce, market and distribute latex products that are produced through a proprietary, continuous production process and sold to customers in the European retail market primarily under the Pirelli brand name. Additionally, Europe sells latex components to other mattress, furniture and automotive manufacturers worldwide. While our primary focus in Europe is on latex products, we also produce and sell innerspring products within the European retail market.

Our five largest customers on a consolidated basis accounted for approximately 25.4% of our net sales for fiscal 2008 and no single customer, represented more than 10% of our net sales during fiscal 2008. In the U.S., we serve a large and well diversified base of approximately 3,300 customers, including furniture stores, specialty bedding stores, department stores and warehouse club stores. During 2008, the economic environment became more challenging and caused a higher occurrence of bankruptcies for mattress retailers. It has also caused many of the smaller mattress retailers to exit the market. We have remained focused on monitoring our customer relationships and working with our customers during these uncertain times. However, even with this uncertainty, we have been able to maintain a leading market share among the top 25 U.S. bedding retailers by wholesale dollars. We believe this is due, in part, to the strength of our customer relationships, our large and well trained sales force, effective marketing, leading brand names and a broad portfolio of quality product offerings.

We believe our sales force is the largest and best trained in the U.S. bedding industry, as evidenced by our high market share among our major retail accounts, new account growth and strong customer retention rates. Our sales strategy supports strong retail relationships through the use of cooperative advertising programs, in-store product displays, sales associate training and a national advertising campaign to support our multiple brand platforms. A key component of our sales strategy is the leveraging of our portfolio of multiple leading brands across the full range of retail price points to capture and retain profitable long term customer relationships.

In Europe, we sell finished mattresses to approximately 4,000 customers including furniture stores, specialty bedding stores and department stores. Additionally, Europe sells latex components to original equipment manufacturers (OEMs) in a variety of industries, though the primary focus is bedding or furniture applications. One customer comprises approximately 30.2% of total sales within Europe in fiscal 2008.

Our sales depend primarily on our ability to provide quality products with recognized brand names at competitive prices. Additionally, we work to build brand loyalty with our end-use consumers, principally through targeted in-country national advertising and cooperative advertising with our dealers, along with superior "point-of-sale" materials designed to emphasize the various features and benefits of our products that differentiate them from other brands.

In 2008, we launched our first national advertising campaign in over a decade, "Get a Better Six", which was designed not only to deliver a strong direct-to-consumer message but also to serve as a platform for our retailers to better leverage their cooperative advertising dollars. The objective of this campaign is to motivate consumers to ask for Sealy Posturepedic products by name by achieving over one billion impressions through an integrated marketing campaign including television, print and the Internet.

In January 2008, we realigned our sales force by creating a new position of Executive Vice President of Sales. This position has the responsibility for overseeing all aspects of our U.S. sales force, including field sales, national accounts, regional accounts, and sales training. This change was made to align our sales force with our overall strategic vision and to enable us to operate in a more coordinated and effective fashion.

In the U.S., our national account and regional account sales forces are organized along customer lines, and our field sales force is generally structured based on regions of the country and districts within those regions. We have a comprehensive training and development program for our sales force, including our University of Sleep curriculum, which provides ongoing training sessions with programs focusing on advertising, merchandising and sales education, including techniques to help optimize a dealer's business and profitability.

Our sales force emphasizes follow-up service to retail stores and provides retailers with promotional and merchandising assistance, as well as extensive specialized professional training and instructional materials. Training for retail sales personnel focuses on several programs designed to assist retailers in maximizing the effectiveness of their own sales personnel, store operations, and advertising and promotional programs, thereby creating loyalty to, and enhanced sales of, our products.

We manufacture and distribute products to our customers primarily on a just-in-time basis from our network of 30 company-operated bedding and component manufacturing facilities located around the world. We manufacture most bedding to order and employ just-in-time inventory techniques in our manufacturing process to more efficiently serve our dealers' needs and to minimize their inventory carrying costs. Most bedding orders are scheduled, produced and shipped within five business days of receipt from our plants located in close proximity to a majority of our customers. We believe there are a number of important advantages to this operating model such as the ability to provide superior service and custom products to regional, national and global accounts, a significant reduction in our required inventory investment and short delivery times. We believe these operating capabilities, and the ability to serve our customers, provide us with a competitive advantage.

We believe we are the most vertically integrated U.S. manufacturer of innerspring, box spring and latex components. We distinguish ourselves from our major competitors by maintaining our own component parts manufacturing capability for producing substantially all of our mattress innerspring, box spring and latex component parts requirements. This vertical integration lessens our reliance upon certain key suppliers to the innerspring bedding manufacturing industry and provides us with the following competitive advantages:

Our Europe segment is a leading manufacturer of latex bedding products in Europe, with manufacturing operations in France and Italy. The Europe segment has a proprietary, low cost, high

quality continuous latex production capability. This same process was placed into service at our domestic production facility in Pennsylvania in the second quarter of fiscal 2007 and expanded in the second quarter of fiscal 2008 to supply domestic production requirements. We believe that these processes position us well so that we can offer differentiated products at lower cost.

In the U.S., we rely upon a single supplier for certain polyurethane foam components in our mattress units. Such components are purchased under a measured supply agreement. We continue to develop alternative supply sources, allowing acquisition of similar component parts that meet the functional requirements of various product lines. We also purchase a portion of our box spring parts from third party sources and manufacture the remainder of these parts. We are also dependent on a single supplier for the visco-elastic components and assembly of our TrueForm product line. Except for our dependence regarding polyurethane foam, visco-elastic components and assembly of our TrueForm product line, we do not consider ourselves to be dependent upon any single outside vendor as a source of supply to our bedding business, and we believe that sufficient alternative sources of supply for the same, similar or alternative components are available.

We derived approximately 29.5% of our fiscal 2008 net sales internationally, primarily from Canada and Europe. We also generate income from royalties by licensing our brands, technology and trademarks to other manufacturers, including twelve international independent licensees.

We have 100% owned subsidiaries in Canada, Mexico, Puerto Rico, Argentina, Uruguay, Brazil, France and Italy, which have marketing and manufacturing responsibilities for those markets. We have three manufacturing and distribution center facilities in Canada and one each in Mexico, Puerto Rico, Argentina, Uruguay, Brazil, France and Italy, which comprise all of the company-owned manufacturing operations outside of the U.S. at November 30, 2008. In fiscal 2008, we made the decision to cut back our manufacturing operations in Brazil and move to a business model under which significantly more product will be supplied by production from other Sealy manufacturing facilities. In 2000, we formed a joint venture with our Australian licensee to import, manufacture, distribute and sell Sealy products in Southeast Asia. On December 1, 2008, a fifty percent interest in our operations in South Korea was sold for $1.4 million to our Australian licensee and these operations became part of the joint venture. The South Korean operation principally consists of a sales office that uses a contract manufacturer to service the South Korean market. On December 4, 2008, we acquired a 50% interest in a joint venture with our Australian licensee which owns the assets of our New Zealand licensee for $1.9 million. In addition to the above, we also ship products directly into many small international markets.

Our international operations are subject to the risks of operating in an international environment, including the potential imposition of trade or foreign exchange restrictions, tariff and other tax increases, fluctuations in exchange rates, inflation and unstable political situations, see "Risk Factors" in Item 1A.

For information regarding revenues and long lived assets by geographic area, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" in Item 7 as well as Note 19 to our Consolidated Financial Statements in Item 8.

Our U.S. business within our Americas segment represents the dominant portion of our operations. The U.S. bedding industry generated wholesale revenues of approximately $6.9 billion during the calendar year 2007, according to the International Sleep Products Association. Based on a sample of leading mattress manufacturers, including Sealy, the International Sleep Products Association

estimates that wholesale revenues for these manufacturers increased approximately 1.4% in 2007. The U.S. bedding industry has historically displayed healthy revenue growth, driven by both growing unit demand and rising average unit selling prices. However, based on information published by the International Sleep Products Association, during the first eleven months of calendar 2008, the sample of leading mattress manufacturers has seen a significant slowdown in volume, which has caused wholesale revenues to decrease approximately 11.5% from the revenues experienced in the first eleven months of 2007.

Our strategy to weather the current economic environment is based on our breadth of product offerings at various price points. Once the global economy begins to recover, we plan to take advantage of an area which we believe has significant opportunity for growth: mattress sales at the premium end of the market (that is, greater than $1,000 per set) and sales of queen and king size mattresses. According to the International Sleep Products Association, mattress units sold in the United States by manufacturers at retail price points of at least $1,000, as a percentage of total industry mattress units sold, rose from 14.5% in 2001 to 26.3% in 2007. For 2007, this data was based on data representing 38.6% of total industry units shipped. Additionally, queen and king size mattress units sold in the United States, as a percentage of total mattress units sold, rose from 43.3% in 2000 to 49.4% in 2007, according to the International Sleep Products Association. In addition to the recent slowdown of the global economy, which has caused wholesale domestic innerspring sales levels to decrease 7.2% from 2007 levels through the first nine months of 2008 based on information provided by the International Sleep Products Association, we have seen a shift to products at lower price points. This shift, a sharp increase in raw material costs and the overall retail slowdown has caused lower profitability levels than in previous years.

The specialty bedding category, which represents non-innerspring bedding products including visco-elastic ("memory foam"), latex foam and other mattress products, accounted for approximately 18.9% of the overall U.S. mattress market revenue in 2007 according to the International Sleep Products Association. Though growth in this sector had been seen through 2007, through the first nine months of 2008, wholesale revenue from the specialty bedding category has decreased 15.8% from the levels experienced in the first nine months of 2007. We believe that once the retail environment begins to strengthen, consumers will return to purchases of specialty product and we are positioning ourselves to take advantage of this through continued new product introductions.

The bedding industry is highly competitive and we encounter competition from many manufacturers in both domestic and foreign markets. Manufacturers in the industry principally compete by developing new products and distributing these new products in retail outlets. While many bedding manufacturers, including Sealy, offer multiple types of bedding products, some of our competitors focus on single product types. The single product focus of these competitors may afford them with a competitive advantage, particularly in the specialty bedding market, but we believe going to market with the best selling and most recognized brand in the domestic bedding industry (Sealy) and differentiated specialty bedding offerings provides us a competitive advantage. We, together with Simmons Company and Serta, Inc., collectively accounted for approximately 49.5% of wholesale revenues in 2007, based on figures obtained from International Sleep Products Association and Furniture/Today industry publications.

We intend to deliver profitable sales growth from three sources: U.S. innerspring products, U.S. specialty products and our International markets. We also intend to leverage our scale and vertical integration to reduce costs and maintain our leading position with bedding retailers.

We continue to focus on the growth of our average unit selling price (AUSP) through:

During fiscal 2008, we introduced a new Sealy Posturepedic innerspring line and our new Sealy Posturepedic PurEmbrace line of latex specialty products. These new products have helped us to improve our sales mix which has begun translating into AUSP growth. We gained some benefit in fiscal 2008 from the accelerated rollout of these products which was significantly faster than launches in prior years and are hopeful that the AUSP growth of these product lines seen in the third and fourth quarters of 2008 will continue as we expand the distribution of these products in fiscal 2009. Additionally, we implemented price increases in December 2007 and July 2008 which have also contributed to AUSP growth, particularly in the latter half of fiscal 2008. The AUSP growth seen in the third and fourth quarters of 2008 has been partially offset by a shift in mix to lower priced product during fiscal 2008 due to the global economic slowdown.

Implement new advertising and marketing strategies for our retail and direct-to-consumer advertising

In order to better connect directly with consumers and continue to deliver a strong and compelling brand message, we implemented new advertising and marketing strategies for our Sealy Posturepedic brand during fiscal 2008. First, we developed and distributed new simplified point-of-sale and advertising materials for this line based on the "No-Toss-And-Turn" positioning. Afterwards, we launched our first national advertising campaign in over a decade, "Get a Better Six", which was designed not only to deliver a strong direct-to-consumer message but also to serve as a platform for our retailers to better leverage their cooperative advertising dollars. The objective of this campaign is to motivate consumers to ask for Sealy Posturepedic products by name by achieving over one billion impressions through television, print and the Internet.

We intend to increase our profit margins over time. We seek to accomplish this by increasing AUSP as discussed above and in the following principal ways:

In 2008, we experienced unprecedented increases in the cost of our steel innerspring, polyurethane foam, polyester and polyethylene component parts, due to the rising cost of steel and petroleum. In order to counter these rising costs and drive increases in our profit margins, we have implemented pricing increases and measures to remove non-value added costs out of the domestic production process. We have also begun the process of implementing similar measures at our international locations. Due to the completion of our second domestic latex production line at our Mountain Top,

Pennsylvania facility, we have been able to achieve more vertical integration for our SmartLatex product.

Over the course of the past two years, we have implemented actions designed to reduce our fixed operating expenses, selling, logistics and infrastructure, as well as product launch costs. These actions have focused primarily on controlling costs, organizational realignments and more efficient product launches in the U.S. Through these actions, we have streamlined our workforce in the U.S. and have worked to reduce costs in areas such as travel and entertainment and professional fees without sacrificing our execution or performance. Additionally, we have been able to significantly reduce our product launch costs during 2008 by accelerating the process through which these launches are made, enabling us to not only reduce our costs but also bring innovative new products to market more rapidly.

While many of these actions have focused on the domestic operations, we plan to also implement these same types of initiatives in our international locations, particularly Canada and Europe in future periods.

The specialty bedding category includes visco-elastic "memory foam" and latex foam and has experienced substantial growth both domestically and internationally. We believe that by successfully leveraging our strong brand advantage, proprietary latex manufacturing technology, and marketing and distribution capabilities, we have the potential to continue to make significant market share gains in the specialty bedding category, which according to consumer and market research, will continue to be a significant category of the market.

Since our introduction of specialty bedding products in 2005 to take advantage of the growth in the specialty bedding category, we have continued innovative product introductions including significant changes to our Sealy Posturepedic TrueForm product designs and supply chain during fiscal 2007 and the introduction of the Sealy Posturepedic PurEmbrace mattress featuring the Company's proprietary SmartLatex in June 2008. Additionally in 2006, we began the construction of a proprietary, continuous latex production facility in Mountain Top, Pennsylvania utilizing the technology employed in our European manufacturing facilities. This facility now has two operational production lines, which have allowed us to discontinue importing latex product from our European facilities and to gain vertical integration in the specialty category in the U.S. With the completion of this facility in fiscal 2007 and the second production line in fiscal 2008, we have now shifted our focus towards optimizing the efficiency of the production process and developing innovative new formulations for use in our specialty product.

We plan to grow our international business through market-oriented strategies. In Canada, where we have the leading market share position, we also intend to expand our presence by executing a strategy which is similar to that utilized in the U.S. market. In Europe, we seek to gain market share from regional competition in a fragmented market by building on our foundation of OEM business and leveraging our sales, marketing and proprietary manufacturing expertise. In Mexico, where we recently launched specialty products for the first time, we have continued to see sales growth in fiscal 2008. In Argentina and Uruguay, we plan to profitably grow our positions by leveraging our sales, marketing and product development capabilities. In Brazil, we have implemented a plan to cut back our manufacturing operations and move to a business model under which significantly more product will be supplied by production from other Sealy manufacturing facilities. In addition, we anticipate further growth from international licensees.

We believe ongoing product innovation is central to increasing market share and driving revenue growth in our industry. With respect to Sealy's ability to introduce new products, we employ a cross-functional product development process and make substantial investments in consumer research and analysis. The combination of this research-based approach to satisfying customer needs and the collaborative input of our sales, marketing, research and development, engineering, purchasing, finance and manufacturing departments into the product design process will maximize our potential for successful new product introductions over time.

In addition to developing new product, we have made significant investments in people and tools to increase our capacity for conducting research on new materials and designs. In 2005, we built our own flammability testing facility, which allows us to experiment with materials and designs that ensure that our new products meet the federal flame retardant standard 16 CFR Part 1633 passed by the U.S. Consumer Product Safety Commission and allows us to accelerate the product development cycle.

In 2008, we unveiled our new Center of Excellence pressure mapping laboratory. The Center is an innovative, state of the art research laboratory that uses the latest technologies to identify uncomfortable pressure points that lead to tossing and turning. This will allow us to better quantify sleep quality and directly link it to sleep surfaces. We will then be able to use this proprietary research to further enhance our products and develop new technologically advanced beds.

At November 30, 2008, there were 20 separate license arrangements in effect with 8 domestic and 12 foreign independent licensees. Sealy New Jersey (a bedding manufacturer), Klaussner Corporation Services (a furniture manufacturer), Kolcraft Enterprises, Inc. (a crib mattress manufacturer), Pacific Coast Feather Company (a pillow, comforter and mattress pad manufacturer), Chairworks Manufacturing Group Limited (an office seating manufacturer), Mantua Manufacturing Co. (a bed frame manufacturer) and KCB Enterprises (a futon manufacturer) and SG Footwear (a slipper manufacturer) are the only domestic manufacturers that are licensed to use the Sealy trademark, subject to the terms of license agreements. Pacific Coast Feather also has a license to use the Stearns & Foster brand on certain approved products. Under license agreements between Sealy New Jersey and us, Sealy New Jersey has the perpetual right to use certain of our trademarks in the manufacture and sale of Sealy brand and Stearns & Foster brand products in selected markets in the United States.

Our 12 foreign license agreements provide exclusive rights to market the Sealy brand in Thailand, Japan, the United Kingdom, Spain, Australia, New Zealand, South Africa, Israel, Saudi Arabia, Jamaica, Bahamas and the Dominican Republic. These licensing agreements allow us to reduce our exposure to political and economic risk abroad by minimizing investments in those markets. On December 4, 2008, we acquired a 50% interest in a joint venture with our Australian licensee which owns the assets of our New Zealand licensee for $1.9 million.

Our licensing group generates royalties by licensing Sealy brand technology and trademarks to manufacturers located throughout the world. We also provide our licensees with product specifications, research and development, statistical services and marketing programs. In the fiscal years ended November 30, 2008, December 2, 2007, and November 26, 2006, the licensing group as a whole

generated unaffiliated gross royalties of approximately $17.6 million, $19.2 million, and $19.2 million, respectively.

We have approximately 200 worldwide patents, of which the patents and pending patent applications relating to our UniCased technology, those patents that protect our proprietary spring and coil designs and our latex production process, are believed by us to be our most valuable. These patents, having been just recently issued or still pending, afford us multiple years of continuing protection of certain mattress designs. We have filed for patent protection for the core UniCased technology in 30 countries to date and expect similar competitive benefits from the issuance of those patents in those countries. The patents covering our proprietary spring and coil designs also provide Sealy with a competitive advantage in the U.S. and in other countries where we have a presence, and these patents have a remaining enforceable period of at least 13 years.

We own thousands of trademarks, tradenames, service marks, logos and design marks, including Sealy, Stearns & Foster and Posturepedic. We also license the Bassett and Pirelli tradenames in various territories under certain long term agreements. With the exception of the Sealy New Jersey license, the domestic licenses are predominantly trademark licenses. Also, with the exception of the Sealy New Jersey license (which is of perpetual duration), each domestic license is limited by a period of years, all of which are for a length of five years or less.

Of our over 675 worldwide trademarks, we believe that our Sealy, Posturepedic, and Stearns & Foster marks and affiliated logos (the Sealy script, the "butterfly logo" and the Stearns & Foster "seal") are the most well known. We have registered the Sealy and Posturepedic marks in over 35 countries.

Our licenses include rights for the licensees to use trademarks as well as current proprietary or patented technology utilized by us. We also provide our licensees with product specifications, quality control inspections, research and development, statistical services and marketing programs. Only the New Jersey, Australia, United Kingdom and Jamaica licenses are of perpetual duration (with some rights of termination), while the other licenses are for a set duration or are indeterminate in length and subject to reasonable notice provisions. All licenses have provisions for termination for cause (such as bankruptcy, misuse of the mark or violation of standards), approval of marketing materials, audit rights and confidentiality of proprietary data.

Sealy, Stearns & Foster and Bassett bedding offer limited warranties on our manufactured products. The periods for "no-charge" warranty service vary among products. Prior to fiscal year 1995, such warranties ranged from one year on promotional bedding to 20 years on certain Posturepedic and Stearns & Foster bedding. All currently manufactured Sealy Posturepedic models, Stearns & Foster bedding, Bassett and some other Sealy branded products offer a ten year non-prorated warranty service period. Our TrueForm visco-elastic line of bedding as well as our SpringFree latex line of bedding, carry a twenty year warranty on the major component, the last ten years of which are prorated on a straight-line basis. In 2006, we introduced Right Touch (which was discontinued in the third quarter of fiscal 2008), that had a twenty year limited warranty that covers only certain parts of the product and is prorated for part of the twenty years. In fiscal 2000, we amended our warranty policy to no longer require the mattress to be periodically flipped. In fiscal 2007, we amended our warranty policy on Sealy brand promotional bedding to three years for our new line introduced in January 2007 and shipped in the second quarter of fiscal 2007. The impact of the changes to the warranty policies did not have a significant impact on our financial results or position.

As of November 30, 2008 we had 4,817 full time employees. Approximately 58% of our employees at our 25 North American plants are represented by various labor unions with separate collective bargaining agreements. Due to the large number of collective bargaining agreements, we are periodically in negotiations with certain of the unions representing our employees. We consider our overall relations with our work force to be satisfactory. We have only experienced two work stoppages by some of our employees in the last ten years due to labor disputes. Due to the ability to shift production from one plant to another, these lost workdays have not had a material adverse effect on our financial results. The only significant organizing activity at our non-union plants during the last ten years was a petition filed by the Teamsters seeking to organize the production employees at our Mountain Top, Pennsylvania facility. At the subsequent election, the union was defeated by a wide margin. Our current collective bargaining agreements, which are typically three years in length, expire at various times beginning in 2009 through 2011. As of November 30, 2008, our domestic manufacturing plants employed 534, 1,003 and 283 employees covered under collective bargaining agreements expiring in fiscal 2009, 2010, and 2011, respectively. At our international facilities, there were 706, 817 and 698 employees covered under collective bargaining agreements expiring in fiscal 2009, 2010 and 2011, respectively.

Our third fiscal quarter sales are typically 5% to 15% higher than other fiscal quarters. See Note 17 to our Consolidated Financial Statements in Item 8.

Most of our sales are by short term purchase orders. Since the level of production of products is generally promptly adjusted to meet customer order demand, we have a negligible backlog of orders. Most finished goods inventories of bedding products are physically stored at manufacturing locations until shipped (usually within five business days of accepting the order). See "Risk Factors—We may experience fluctuations in our operating results due to seasonality, which could make sequential quarter to quarter comparison an unreliable indication of our performance." in Item 1A below.

Our conventional bedding product lines are subject to various federal and state laws and regulations relating to flammability and other standards. We believe that we are in compliance with all such laws and regulations, including the California flame retardant regulations related to manufactured mattresses and box springs, which became effective January 1, 2005. In addition, we introduced new Sealy-branded products that are compliant with the Federal flame retardant standards, 16 CFR Part 1633 passed by the U.S. Consumer Product Safety Commission, which became effective July 1, 2007. The impact of these regulations increased our costs to develop and manufacture our products.

Our principal waste products in North America are foam and fabric scraps, wood, cardboard and other non-hazardous materials derived from product component supplies and packaging. We also periodically dispose of (primarily by recycling) small amounts of used machine lubricating oil and air compressor waste oil. In the United States, we are subject to federal, state and local laws and regulations relating to environmental health and safety, including the Federal Water Pollution Control Act and the Comprehensive Environmental Response, Compensation and Liability Act. In our facilities in Mountain Top, Pennsylvania, Argentina, France and Italy, we also manufacture foam. We believe that we are in compliance with all applicable international, federal, state and local environmental statutes and regulations. Except as set forth in "Item 3—Legal Proceedings" below, compliance with international, federal, state or local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, should not have any material effect upon our capital expenditures, earnings or competitive position. We are not aware of any pending federal environmental legislation which would have a material impact on our operations. Except as set forth in "Item 3—Legal Proceedings" below, we have not been required to make and do not expect to make any material capital expenditures for environmental control facilities in the foreseeable future.

The bedding industry is highly competitive, and if we are unable to compete effectively, we may lose customers and our sales may decline.

The bedding industry is highly competitive, and we encounter competition from many manufacturers in both domestic and foreign markets. We, along with Simmons Company and Serta, Inc., accounted for approximately 49.5% of wholesale revenues in 2007, according to figures obtained from International Sleep Products Association and Furniture/Today industry publications. The highly competitive nature of the bedding industry means we are continually subject to the risk of loss of our market share, loss of significant customers, reduction in margins, the inability for us to gain market share or acquire new customers, and difficulty in raising our prices. Some of our principal competitors have less debt than we have and may be better able to withstand changes in market conditions within the bedding industry. Additionally, we may encounter increased future competition and further consolidation in our industry which could magnify the competitive risks previously outlined.

Our new product launches may not be successful due to development delays, failure of new products to achieve anticipated levels of market acceptance and significant costs associated with failed product introductions, which could adversely affect our revenues and profitability.

Each year we invest significant time and resources in research and development to improve our product offerings. There are a number of risks inherent in our new product line introductions, such as the anticipated level of market acceptance may not be realized, which could negatively impact our sales. Also, introduction costs and manufacturing inefficiencies may be greater than anticipated, which could impact our profitability.

We may experience fluctuations in our operating results due to seasonality, which could make sequential quarter to quarter comparison an unreliable indication of our performance.

We have historically experienced, and we expect to continue to experience, seasonal and quarterly fluctuations in net sales and operating income. As is the case with many bedding customers, the retail business is subject to seasonal influences, characterized by strong sales for the months of June through September, which impacts our third fiscal quarter results. Our third fiscal quarter sales are typically 5% to 15% higher than other fiscal quarters. Our first fiscal quarter cash flows are typically the most unfavorable due to coupon payments on our 2014 Notes and working capital demands. This seasonality means that a sequential quarter to quarter comparison may not be a good indication of our performance or of how we will perform in the future.

A substantial decrease in business from our significant customers could have a material adverse effect on our sales and market share.

Our top five customers on a consolidated basis accounted for approximately 25.4% of our net sales for fiscal 2008 and no single customer represented more than 10% of net sales for fiscal 2008. While we believe our relationships with these customers are stable, many arrangements are made by purchase order or are terminable at will at the option of either party. A substantial decrease or interruption in business from our significant customers could result in material write offs or loss of future business. During 2008, the economic environment has become more challenging and has caused a higher occurrence of bankruptcies for mattress retailers. It has also caused many of the smaller mattress retailers to exit the market. This has resulted in additional write-offs and customer losses during fiscal 2008. Furthermore, many of our customers rely in part on consumers' ability to finance their mattress purchases with credit from third parties. If consumers are unable to obtain financing, they may defer their purchases.

In the future, retailers may consolidate, restructure, reorganize or realign their affiliations, any of which could decrease the number of stores that carry our products or increase the ownership concentration in the retail industry. Some of these retailers may decide to carry only one brand of mattress products which could affect our ability to sell our products on favorable terms or to maintain or increase market share. As a result, our sales and profitability may decline.

Our profitability may be materially and adversely affected by increases in the cost of petroleum-based products, steel and other raw materials.

Our industry has been challenged by the unprecedented 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. due to the weakened dollar and other forces beyond our control. During fiscal 2007 and 2008, the cost of these components saw significant increases above their recent historical averages. The manufacturers of products such as petro-chemicals and wire rod, which are the materials 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.

Our profitability may be materially and adversely affected by any interruption in supply from third party vendors.

We purchase our raw materials and certain components from a variety of suppliers, including box spring components from Leggett & Platt Inc., foam materials from Carpenter Co., and various subassemblies and components from national raw material and component suppliers. If we experience a loss or disruption in our supply of these components, we may have difficulty sourcing substitute components on terms favorable to us. In addition, any alternate source may impair product performance or require us to alter our manufacturing process, which could have an adverse effect on our profitability.

We are dependent upon a single supplier for certain polyurethane foam components in our mattress units. A disruption in the supply of these products and services could adversely affect our operations.

We are dependent upon a single supplier for certain key polyurethane foam components which make up our various mattress brands. Such components are purchased under a measured supply agreement and are manufactured in accordance with proprietary process designs exclusive to the supplier. If we experience a loss or disruption in our supply of these components, we may have difficulty sourcing substitute components on terms favorable to us. In addition, any alternative source may impair product performance or require us to alter our manufacturing process, which could have an adverse effect on our profitability.

We are dependent upon a single supplier for the visco-elastic components and assembly of our TrueForm product line. A disruption in the supply of these products and services could adversely affect our operations.

We are dependent upon a single supplier for certain structural components and assembly of our TrueForm product line. These products are purchased under a measured supply agreement and are manufactured in accordance with proprietary designs jointly owned by us and the supplier. If we experience a loss or disruption in our supply of these products, we may have difficulty sourcing substitute components on terms favorable to us. In addition, any alternative source may impair product performance or require us to alter our manufacturing process, which could have an adverse effect on our profitability. The related product in which these components and assembly processes are used does not represent a significant portion of our overall sales.

Our significant international operations are subject to foreign exchange, tariff, tax, inflation and political risks and our ability to expand in certain international markets is limited by the terms of licenses we have granted to manufacture and sell Sealy products.

We currently conduct significant international operations and may pursue additional international opportunities. Our international operations are subject to the risks of operating in an international environment, including the potential imposition of trade or foreign exchange restrictions, tariff and other tax increases, fluctuations in exchange rates, inflation and unstable political situations. We have also limited our ability to independently expand in certain international markets where we have granted licenses to manufacture and sell Sealy bedding products. Our licensees in Australia, Jamaica and the United Kingdom have perpetual licenses, subject to limited termination rights. Our licensees in the Dominican Republic, the Bahamas, Israel, Japan, New Zealand, Saudi Arabia, Spain, South Africa and Thailand hold licenses for fixed terms with limited renewal rights. Fluctuations in the rate of exchange between the U.S. dollar and other currencies may affect stockholders' equity and our financial condition or results of operations.

The loss of the services of one or more members of our senior management team could impair our ability to execute our business strategy and adversely affect our business.

We are dependent on the continued services of our senior management team, most of whom have substantial industry specific experience. For example, Lawrence J. Rogers, our current President and Chief Executive Officer (former President, Sealy North America from December 2006 through March 2008), has served in numerous capacities within our operations since joining us in 1979. The loss of key personnel could impair our ability to execute our business strategy and have a material adverse effect on our business.

We have a substantial amount of indebtedness, which may adversely affect our cash flow, our ability to comply with our debt covenants and operate our business.

At November 30, 2008, we had outstanding indebtedness, of approximately $783.4 million, with additional availability of $44.7 million under the revolving credit facility after taking into account letters of credit for $15.9 million.

We paid $58.2 million of interest during fiscal 2008. In November 2008, we amended our senior credit facility, which increased the applicable interest rate margins by 275 to 325 basis points. Due to the significant amount of debt outstanding under this agreement, this amendment will have a significant impact on our required interest payments to be made in future periods. Subsequent to year-end, we entered into two interest rate swap agreements which converted an additional $107.0 million of our floating rate debt to a fixed rate through February 4, 2010 and an additional $20.0 million of our floating rate debt to a fixed rate through November 4, 2009. After considering these hedges and giving effect to the amended interest rates, a 1% increase in the interest rates applicable to the unhedged portion of our variable rate debt would result in approximately $0.8 million in additional annual cash interest expense. We have scheduled quarterly principal payments due on Tranche A of our senior secured term loan of 1.25% of the then outstanding principal from November 2008 through August 2010 and quarterly principal payments of 21.25% of the then outstanding principal amount from November 2010 through the maturity date in August 2011. As of November 30, 2008, we have prepaid these quarterly principal payments on Tranche A through the end of the third quarter of fiscal 2009. On Tranche E of our senior secured term loan, we have no scheduled quarterly principal prepayments due until the maturity date in August 2012 due to prepayments made in fiscal 2007. There are no scheduled principal prepayments due on our senior subordinated debt until the maturity date in June 2014. In addition, each year our senior secured term notes remain outstanding, we may be required to make principal prepayments depending on certain financial ratios, as defined in our senior secured

credit agreement. We do not expect there to be any mandatory prepayments due in fiscal 2009. We are unable to estimate whether any such prepayments may continue to be required after 2009.

Our substantial indebtedness could have important consequences. For example, it could:

Any of the above listed factors could materially and adversely affect our business, financial condition or results of operations.

Despite our current leverage, we may still be able to incur significant additional indebtedness. This could further exacerbate the risks that we face.

We may be able to incur significant additional indebtedness in the future. Although the indenture governing our 8.25% senior subordinated notes due June 2014 (the "2014 Notes") and the instruments governing our senior secured indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions and the indebtedness incurred in compliance with these restrictions could be substantial. If new debt is added to our existing debt levels, the related risks that we now face, including those described above, could intensify.

The terms of the senior secured credit facilities and the indenture governing the 2014 Notes may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.

Our senior secured credit facilities and the indenture governing the 2014 Notes contain, and any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on our subsidiaries, including restrictions that may limit our ability to engage in acts that may be in our best long term interests. The senior secured credit facilities include financial covenants, including requirements that we:

The financial covenants contained in the senior secured credit facilities were amended in fiscal 2008 to make them less restrictive, but they will become more restrictive over time. In addition, the

senior secured credit facilities limit our subsidiaries' ability to make capital expenditures and require that they use proceeds of certain asset sales that are not reinvested in our business to repay indebtedness under them.

The senior secured credit facilities also include covenants restricting, among other things, our subsidiaries' ability to:

The indenture relating to the 2014 Notes also contains numerous covenants including, among other things, restrictions on our subsidiaries' ability to:

The operating and financial restrictions and covenants in our existing debt agreements and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities. A breach of any of the restrictive covenants in our debt agreements could result in a default under such agreements. If any such default occurs, the lenders under the debt agreements may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable, enforce their security interest or require us to apply all of our available cash to repay these borrowings, any of which would result in an event of default under our notes. Those lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under the senior secured credit facilities will have the right to proceed against the collateral granted to them to secure the debt owed to them. If the debt payments under the senior secured credit facilities were to be accelerated, our assets may not be sufficient to repay such debt in full or to repay our notes and our other debt.

Unfavorable economic conditions could continue to negatively affect our revenues and profitability.

Our business, financial condition and results of operations have and may continue to be affected by various economic factors. The global economy is undergoing a period of slowdown, which is

characterized as a recession, and the future economic environment may continue to be less favorable than that of recent years. The U.S. economy, which contains our largest market, has been in a recession throughout much of fiscal 2008. This slowdown has, and could further lead to, reduced consumer and business spending in the foreseeable future, including by our customers, and the purchasers of their products. Reduced access to credit has and may continue to adversely affect the ability of consumers to purchase our products from retailers. It has and may continue to adversely affect the ability of our customers to pay us. If such conditions continue or further deteriorate in 2009 or through fiscal 2010, our industry, business and results of operations may be severely impacted

The time and expense of defending against challenges to our trademarks, patents and other intellectual property could divert our management's attention and substantial financial resources from our business. Our goodwill and ability to differentiate our products in the marketplace could be negatively affected if we were unsuccessful in defending against such challenges.

We hold over 675 worldwide trademarks, which we believe have significant value and are important to the marketing of our products to customers. We own 42 U.S. patents, a number of which have been registered in a total of 31 countries, and we have 6 domestic patents pending. In addition, we own U.S. and foreign registered trade names and service marks and have applications for the registration of trade names and service marks pending domestically and abroad. We also own several U.S. copyright registrations, and a wide array of unpatented proprietary technology and know-how. We also license certain intellectual property rights from third parties.

Our ability to compete effectively with other companies depends, to a significant extent, on our ability to maintain the proprietary nature of our owned and licensed intellectual property. Although our trademarks are currently registered in the United States and registered or pending in 96 foreign countries, we still face risks that our trademarks may be circumvented or violate the proprietary rights of others and we may be prevented from using our trademarks if challenged. A challenge to our use of our trademarks could result in a negative ruling regarding our use of our trademarks, their validity or their enforceability, or could prove expensive and time consuming in terms of legal costs and time spent defending against it. In addition, we may not have the financial resources necessary to enforce or defend our trademarks. We also face risks as to the degree of protection offered by the various patents, the likelihood that patents will be issued for pending patent applications or, with regard to the licensed intellectual property, that the licenses will not be terminated. If we were unable to maintain the proprietary nature of our intellectual property and our significant current or proposed products, our goodwill and ability to differentiate our products in the marketplace could be negatively affected and our market share and profitability could be materially and adversely affected.

We are a holding company and rely on dividends, interest and other payments, advances and transfers of funds from our subsidiaries to enable us to pay dividends.

We are a holding company and conduct all of our operations through our subsidiaries and currently have no significant assets other than the capital stock of Sealy Mattress Corporation and the license to use the Pirelli brand name in European territories. As a result, we rely on dividends and other payments or distributions from our subsidiaries to enable us to pay dividends. The ability of our subsidiaries to pay dividends or make other payments or distributions to us will depend on their respective operating results and may be restricted by, among other things, the laws of their jurisdiction of organization (which may limit the amount of funds available for the payment of dividends), agreements of those subsidiaries and the covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including Sealy Mattress Company's senior secured credit facilities and the indenture governing the 2014 Notes. For instance, the agreement governing Sealy Mattress Company's senior secured credit facilities contains restrictions on the ability of Sealy Mattress Corporation to pay dividends or make other distributions to us subject to specified exceptions including an amount based

upon 50% of cumulative consolidated net income from April 2004. We are also required under this agreement to meet a minimum leverage ratio test in order to pay a dividend. We currently do not meet this requirement and therefore are not able to pay a dividend. In addition, the indenture governing the 2014 Notes contains restrictions on the ability of Sealy Mattress Company to pay dividends or make other distributions to Sealy Mattress Corporation subject to specified exceptions including an amount based upon 50% of cumulative consolidated net income from April 2004.

Regulatory requirements relating to our products may increase our costs, alter our manufacturing processes and impair our product performance.

Our products and raw materials are and will continue to be subject to regulation in the United States by various federal, state and local regulatory authorities. In addition, other governments and agencies in other jurisdictions regulate the sale and distribution of our products and raw materials. These rules and regulations may change from time to time. Compliance with these regulations may negatively impact our business. For example, the California Home Furnishings Bureau adopted new open flame resistance standards under Technical Bulletin 603, that became effective in January 2005. There may be continuing costs of regulatory compliance including continuous testing, additional quality control processes and appropriate auditing of design and process compliance.

In February 2005, the U.S. Consumer Product Safety Commission (CPSC) passed 16 CFR Part 1633 that effectively applies the California open flame standard, but added significant quality control, record keeping and testing requirements on mattress manufacturers, including Sealy. This rule became effective on July 1, 2007. Further, some states and the U.S. Congress continue to consider open flame regulations for mattresses and bed sets or integral components that may be different or more stringent than the California or CPSC standard and we may be required to make different products for different states or change our processes or distribution practices nationwide. It is possible that some states' more stringent standards, if adopted and enforceable, could make it difficult to manufacture a cost effective product in those jurisdictions and compliance with proposed new rules and regulations may increase our costs, alter our manufacturing processes and impair the performance of our products.

In addition, our marketing and advertising practices could become the subject of proceedings before regulatory authorities or the subject of claims by other parties, which could require us to alter or end these practices or adopt new practices that are not as effective or are more expensive.

Environmental, health and safety requirements could expose us to material liabilities and changes in our operations as a result of environmental contamination, among other things.

As a manufacturer of bedding and related products, we use and dispose of a number of substances, such as glue, lubricating oil, solvents and other petroleum products, as well as certain foam ingredients that may subject us to regulation under numerous federal and state statutes governing the environment (including those environmental regulations that are applicable to our foreign operations such as Argentina, Brazil, Canada, France, Italy, Mexico, Uruguay and other jurisdictions). Among other statutes, we are subject to the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Clean Air Act and related state statutes and regulations. As we abide by certain new open flame regulations, our products and processes may be governed more rigorously by certain state and federal environmental and OSHA standards as well as the provisions of California Proposition 65 and 16 CFR Part 1633.

We have made and will continue to make capital and other expenditures to comply with environmental requirements. We also have incurred and will continue to incur costs related to certain remediation activities. Under various environmental laws, we may be held liable for the costs of remediating releases of hazardous substances at any properties currently or previously owned or

operated by us or at any site to which we sent hazardous substances for disposal. We are currently addressing the clean-up of environmental contamination at our former facility in South Brunswick, New Jersey and our former facility in Oakville, Connecticut. At November 30, 2008, we have accrued approximately $0.2 million and $2.8 million for the Oakville and South Brunswick clean-ups, respectively, and we believe that these reserves are adequate. While uncertainty exists as to the ultimate resolution of these two environmental matters and we believe that the accruals recorded are adequate, in the event of an adverse decision by one or more of the governing environmental authorities or if additional contamination is discovered, these matters could have a material effect on our profitability.

A change or deterioration in labor relations could disrupt our business or increase costs, which could lead to a material decline in sales or profitability.

As of November 30, 2008, we had 4,817 full time employees. Approximately 58% of our employees at our 25 North American plants are represented by various labor unions with separate collective bargaining agreements. Our current collective bargaining agreements, which are typically three years in length, expire at various times beginning in 2009 through 2011. Due to the large number of collective bargaining agreements, we are periodically in negotiations with certain of the unions representing our employees. We may at some point be subject to work stoppages by some of our employees and, if such events were to occur, there may be a material adverse effect on our operations and profitability. Further, we may not be able to renew the various collective bargaining agreements on a timely basis or on favorable terms, or at all.

Our pension plans are currently underfunded and we will be required to make cash payments to the plans, reducing the cash available for our business.

We have noncontributory, defined benefit pension plans covering current and former hourly employees at four of our active plants and eight previously closed facilities as well as the employees of a facility of our Canadian operations and our manufacturing facility in France. We record a liability associated with these plans equal to the excess of the benefit obligation over the fair value of plan assets. The benefit liability recorded under the provisions of Statement of Financial Accounting Standards No. 158 "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)" at November 30, 2008 was $9.2 million, and we expect to make estimated minimum funding contributions totaling approximately $1.2 million in 2009. The amount of these estimated contributions has increased for our domestic pension plan for next year due, in part, to the underperformance of the plan assets relative to our expectations given the overall market downturn during fiscal 2008. If the performance of the assets in these pension plans does not meet our expectations, or if other actuarial assumptions are modified, our future cash payments to the plans could be higher than we expect. The domestic pension plan is subject to the Employee Retirement Income Security Act of 1974, or ERISA. Under ERISA, the Pension Benefit Guaranty Corporation, or PBGC, has the authority to terminate an underfunded pension plan under limited circumstances. In the event our pension plan is terminated for any reason while it is underfunded, we will incur a liability to the PBGC that may be equal to the entire amount of the underfunding.

Our principal executive offices are located on Sealy Drive at One Office Parkway, Trinity, North Carolina, 27370. Corporate and administrative services are provided to us by Sealy, Inc. (our 100%-owned subsidiary).

We administer our component operations at our Rensselaer, Indiana facility. Our leased facilities are occupied under operating leases, which expire from fiscal 2009 to 2043, including renewal options.

The following table sets forth certain information regarding manufacturing and distribution facilities operated by us at January 2, 2009:

Location				Title

United States
	Arizona	Phoenix	76,000	Owned(a)
	California	Richmond	238,000	Owned(a)
		South Gate	185,000	Leased
	Colorado	Colorado Springs	70,000	Owned(a)
		Denver	92,900	Owned(a)
	Florida	Orlando	225,000	Owned(b)
	Georgia	Atlanta	292,500	Owned(a)
	Illinois	Batavia	212,700	Leased
	Indiana	Rensselaer	131,000	Owned(a)
		Rensselaer	124,000	Owned(a)
	Kansas	Kansas City	102,600	Leased
	Maryland	Williamsport	144,000	Leased
	Minnesota	St. Paul	93,600	Owned(a)
	New York	Green Island	257,000	Owned(b)
	North Carolina	High Point	151,200	Owned(a)
	Ohio	Medina	140,000	Owned(a)
	Oregon	Portland	140,000	Owned(a)
	Pennsylvania	Delano	143,000	Owned(a)
		Mountain Top	210,000	Owned(b)
	Texas	Brenham	220,000	Owned(a)
		North Richland Hills	124,500	Owned(a)
Canada
	Alberta	Edmonton	144,500	Owned(a)
	Quebec	Saint Narcisse	76,000	Owned(a)
	Ontario	Toronto	130,200	Leased
Argentina		Buenos Aires	85,000	Owned
Brazil		Sorocaba	92,000	Owned
Puerto Rico		Carolina	58,600	Owned(a)
Italy		Silvano d'Orba	170,600	Owned(a)(c)
France		Saleux	239,400	Owned(c)
Mexico		Toluca	157,100	Owned
Uruguay		Montevideo	39,500	Leased

			4,565,900

In addition to the locations listed above, we maintain additional warehousing facilities in several of the states and countries where our manufacturing facilities are located. We consider our present facilities to be generally well maintained and in sound operating condition.

We are subject to legal proceedings, claims, and litigation arising in the ordinary course of business. A negative outcome of these matters is considered remote, and management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

We are currently conducting an environmental cleanup at a formerly owned facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial Site Recovery Act. We and one of our subsidiaries are parties to an Administrative Consent Order issued by the New Jersey Department of Environmental Protection. Pursuant to that order, we and our subsidiary agreed to conduct soil and groundwater remediation at the property. We do not believe that our manufacturing processes were the source of contamination. We sold the property in 1997. We and our subsidiary retained primary responsibility for the required remediation. We have completed essentially all soil remediation with the New Jersey Department of Environmental Protection's approval, and have installed a groundwater remediation system on the site. During 2005, with the approval from the New Jersey Department of Environmental Protection, we removed and disposed of sediment in Oakeys Brook adjoining the site. We continue to monitor groundwater remediation at this site. We have recorded a reserve as of November 30, 2008 of $2.8 million ($3.7 million prior to discounting at 4.75%) associated with this remediation project. Also in connection with this site, we received a written complaint from the New Jersey Department of Environmental Protection alleging natural resources damages in an unspecified amount. In November 2008, the trial court in this matter granted the Company's summary judgment motion and the time to appeal this ruling has passed.

We are also remediating soil and groundwater contamination at an inactive facility located in Oakville, Connecticut. Although we are conducting the remediation voluntarily, we obtained Connecticut Department of Environmental Protection approval of the remediation plan. We have completed essentially all soil remediation under the remediation plan and are currently monitoring groundwater at the site. We identified cadmium in the soil and ground water at the site and removed the cadmium contaminated soil and rock from the site during fiscal 2007. At November 30, 2008, we have recorded a reserve of approximately $0.2 million associated with the additional work and ongoing monitoring. We believe the contamination is attributable to the manufacturing operations of previous unaffiliated occupants of the facility.

We removed three underground storage tanks previously used for diesel, gasoline, and waste oil from our South Gate, California facility in March 1994 and remediated the soil in the area. Since August 1998, we have been working with the California Regional Water Quality Control Board, Los Angeles Region to monitor groundwater at the site. On December 1, 2008, we sold this facility and the buyer assumed responsibility for the environmental issues related to the site.

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

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Our common stock trades on the New York Stock Exchange under the symbol "ZZ." The table below highlights quarterly stock market information and the amount of cash dividends declared per share of our common stock for the past two fiscal years.

Our ability to pay dividends is restricted by our debt agreements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7."

During fiscal 2008, a total of 3,396,805 options to purchase our common stock were granted to certain of our employees and non-employee directors under the Sealy Corporation 2004 Stock Option Plan. Options under the 2004 Plan are granted in part as: 1) "time options," which vest and become exercisable ratably on a monthly basis generally over the first three to five years following the date of grant; 2) "old performance options," which vest and become exercisable each fiscal year through fiscal 2008 upon the achievement of certain financial performance targets, and in any event by the eighth anniversary of the date of grant; and 3) "new performance options," issued during fiscal 2008 which vest and become exercisable only upon achievement of certain financial performance targets and do not have a time vesting component.

As of January 2, 2009, there were approximately 194 holders of record of our common stock.

Our common stock repurchase program, which authorizes us to repurchase up to $100 million of our Company's common stock, was initially approved by our Board of Directors on February 19, 2007. During the fourth quarter of fiscal 2008, no shares were repurchased under this program. However, during the fourth quarter of fiscal 2008, 13,640 shares were surrendered or withheld to cover the exercise price and/or tax withholding obligations in stock option exercises, as permitted under the Company's 1998 and 2004 Stock Option Plans. See table below:

The following table presents selected historical financial and other data about us. The selected historical financial data for the years ended and as of November 30, 2008, December 2, 2007, November 26, 2006, November 27, 2005 and November 28, 2004 are derived from our audited Consolidated Financial Statements and the notes thereto. The consolidated financial statements for the three years ended November 30, 2008 have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, and are included in "Financial Statements and Supplementary Data" in Item 8 below.

The selected historical financial and other data set forth below should be read together with the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 below. and our financial statements and the notes thereto, appearing elsewhere in this report.

			Fiscal Year(1)

			2008			2007			2006		2005			2004
			(in millions, except per share data)
Statement of Operations Data:
	Net sales		$	1,498.0		$	1,702.1		$	1,582.8	$	1,469.6		$	1,314.0
	Cost of goods sold			914.0			992.5			874.9		818.0			740.1
	Selling, general and administrative expenses			482.6			545.6			499.6		456.3			430.9
	Other (income) expense(2)			17.0			(15.2	)		15.4		(12.7	)		120.8

	Income from operations			84.4			179.2			192.9		208.0			22.2
	Interest expense			60.5			64.0			72.0		79.6			72.7
	Other (income) expense, net			4.9			0.7			9.1		5.4			(0.8	)

	Income (loss) before provision for income taxes			19.0			114.5			111.8		123.0			(49.7	)
	Provision for income tax expense (benefit)			21.9			35.1			37.6		54.5			(9.6	)

	Income (loss) before cumulative effect of change in accounting principle			(2.9	)		79.4			74.2		68.5			(40.1	)
	Cumulative effect of change in accounting principle, net of tax			—			—			0.3		—			—

	Net income (loss)			(2.9	)		79.4			73.9		68.5			(40.1	)
	Liquidation preference for common L&M shares			—			—			—		—			7.8

	Income (loss) available to common shareholders		$	(2.9	)	$	79.4		$	73.9	$	68.5		$	(47.9	)

Basic net income (loss) per share:
	Net income (loss) per share		$	(0.03	)	$	0.87		$	0.89	$	0.97		$	(0.53	)
	Cumulative effect of change in accounting principle			—			—			—		—			—
	Liquidation preference for common L&M shares			—			—			—		—			(0.11	)

		Earnings per common share—Basic	$	(0.03	)	$	0.87		$	0.89	$	0.97		$	(0.64	)

Weighted average shares				91.2			91.3			83.6		70.4			75.3
Diluted net income (loss) per share:
	Net income (loss) per share		$	(0.03	)	$	0.82		$	0.83	$	0.91		$	(0.53	)
	Cumulative effect of change in accounting principle			—			—			—		—			—
	Liquidation preference for common L&M shares			—			—			—		—			(0.11	)

		Earnings (losses) per common share—Diluted	$	(0.03	)	$	0.82		$	0.83	$	0.91		$	(0.64	)

	Weighted average shares			91.2			96.3			89.6		75.4			75.3

			Fiscal Year(1)

			2008			2007			2006			2005			2004
			(in millions, except per share data)
Balance Sheet Data (at end of period):
	Current assets		$	295.6		$	343.7		$	345.3		$	304.4		$	300.0
	Total assets			920.9			1,025.1			1,002.7			915.9			898.5
	Current liabilities			238.5			321.9			288.2			282.0			255.2
	Long term debt, net of current portion			762.2			757.3			814.2			959.8			1,043.6
	Total debt			783.4			793.8			832.5			972.8			1,052.1
	Common stock and options subject to redemption			8.9			16.2			20.3			21.6			—
	Stockholders' deficit			(164.8	)		(129.4	)		(172.8	)		(412.2	)		(456.8	)
Other Financial Data:
	Dividends per common share		$	0.08		$	0.30		$	0.23		$	—		$	—
	Depreciation and amortization			34.0			30.5			30.2			21.9			25.4
	Capital expenditures			(25.0	)		(42.4	)		(30.9	)		(29.4	)		(22.8	)
	Cash flows provided by (used in):
		Operating activities		53.7			94.4			58.2			135.0			43.5
		Investing activities		(24.9	)		(37.4	)		(30.3	)		(19.4	)		(7.4	)
		Financing activities		(18.7	)		(86.2	)		(18.9	)		(101.5	)		(116.0	)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying notes included in this filing. Except where the context suggests otherwise, the terms "we," "us" and "our" refer to Sealy Corporation and its subsidiaries.

We believe we are the largest bedding manufacturer in the world, with a domestic market share of approximately 20.9% in 2007. We believe our market share in 2008 is comparable to 2007. We manufacture and market a complete line of bedding (innerspring and non-innerspring) products, including mattresses and box springs, holding leading positions in key market categories such as luxury bedding products and among leading retailers. Our conventional bedding products include the Sealy, Sealy Posturepedic, Stearns & Foster and Bassett brands and accounted for approximately 87% of our total domestic net sales for the year ended November 30, 2008. In addition to our innerspring bedding, we also produce a variety of visco-elastic ("memory foam") and latex foam bedding products. We expect to experience continued market share growth in these product lines as we seek to strengthen our competitive position in the specialty bedding (non-innerspring mattress) market. We distinguish ourselves from our major competitors by maintaining our own component parts manufacturing capability and producing substantially all of our mattress innerspring and latex mattress components requirements and approximately half of our box spring component parts requirements.

The current economic and weak retail environments have affected the level of spending by end consumers and has caused a decrease in mattress sales across the industry. From January 2008 through November 2008, the total decrease in sales levels was 11.5% as reported by the International Sleep Products Association. We expect this challenging business environment to continue into 2009.

We have continued our focus on lean manufacturing principles which results in continuing improvements in our manufacturing processes and cost savings. Additionally, we continue to focus on new product development to bring new and innovative product to the market. In January 2008, we introduced our new Sealy Posturepedic innerspring line which is designed to eliminate tossing and turning caused by pressure points. This product line was designed in conjunction with orthopedic surgeons, and reviewed by an independent Orthopedic Advisory Board. In June 2008, we introduced a new line of specialty bedding products in the form of our Sealy Posturepedic PurEmbrace mattresses featuring our proprietary SmartLatex. This product line, as with our new Sealy Posturepedic product, was designed to eliminate pressure points that cause tossing and turning.

We have also invested capital in the business to increase our capability to design products. In 2008, we opened our new Center of Excellence pressure mapping laboratory which allows us to use the latest technologies available to identify uncomfortable pressure points. It also allows us to better quantify sleep quality and directly link it to sleep surfaces.

Our industry continues to be challenged by the unprecedented 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. due to the weakened dollar and other forces beyond our control. During fiscal 2007 and 2008, the cost of these components saw significant increases above their recent historical averages. We expect these costs, particularly those related to steel and polyurethane and latex foams to decrease during fiscal 2009 due to an expected decline in related commodity prices, but these decreases may not occur. The manufacturers of products such as petro-chemicals and wire rod, which are the materials 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 continued to see sales growth in our international operations over the last several years, with our foreign subsidiaries contributing 29.5% of our total revenues during fiscal 2008. However, the economic slowdown we have been experiencing in the U.S. has begun to spread and we are experiencing a slowdown in international markets as well. Furthermore, changes in foreign exchange rates contributed favorably to international results and these trends have begun to reverse. Local currency sales declined in fiscal 2008 in Canada and Europe, our two largest international markets, and profits in these markets were also negatively impacted by rising raw material costs.

The cost of our steel innerspring, polyurethane foam, polyester, and polyethlylene component parts were impacted sharply by the volatility in the prices of steel and petroleum. We expect the cost of these components to decrease from the all-time highs experienced in our fiscal fourth quarter. During fiscal 2008, we entered into commodity-based physical contracts to buy natural gas at agreed-upon fixed prices. These contracts were entered into in the normal course of business. We do not engage in commodity hedging programs.

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements that have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP). The preparation of financial statements in accordance with US GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. We choose accounting policies within US GAAP that our management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Our management regularly assesses these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note 1 to our Consolidated Financial Statements included in Item 8. We believe the following accounting estimates are critical to understanding our results of operations and affect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

Cooperative Advertising, Rebate and Other Promotional Programs—We enter into agreements with our customers to provide funds to the customer for advertising and promotion of our products. We also enter into volume and other rebate programs with our customers whereby funds may be rebated to the customer. When sales are made to these customers, we record liabilities pursuant to these agreements. We periodically assess these liabilities based on actual sales and claims to determine whether all of the cooperative advertising earned will be used by the customer or whether the customers will meet the requirements to receive rebate funds. We generally negotiate these agreements on a customer-by-customer basis. Some of these agreements extend over several periods and are linked with supply agreements. Most of these agreements coincide with our fiscal year; however, our customers typically have ninety days following the end of a period to submit claims for reimbursement of advertising and promotional costs. Therefore, significant estimates are required at any point in time with regard to the ultimate reimbursement to be claimed by our customers. Subsequent revisions to such estimates are recorded and charged to earnings in the period in which they are identified. Costs of these programs totaled $235.0 million, $275.7 million and $247.9 million in fiscal 2008, 2007 and 2006, respectively. Of these costs, amounts associated with volume rebates, supply agreement amortization, slotting fees, end consumer rebates and other customer allowances which were recorded as a reduction

of sales were $101.4 million, $104.4 million and $96.7 million in fiscal 2008, 2007 and 2006, respectively. The costs associated with cooperative advertising were recorded as selling, general and administrative expenses and were $133.6 million, $171.2 million and $151.2 million in fiscal 2008, 2007 and 2006, respectively.

Allowance for Doubtful Accounts—During 2008, the economic environment became more challenging and caused a higher occurrence of bankruptcies for mattress retailers. It has also caused many of the smaller mattress retailers to exit the market. We actively monitor the financial condition of our customers to determine the potential for any nonpayment of trade receivables. In determining our reserve for bad debts, we also consider other general economic factors. Our management believes that our process of specific review of customers, combined with overall analytical review provides a reliable evaluation of ultimate collectibility of trade receivables. We recorded a bad debt provision of $10.3 million, or approximately 0.7% percent of sales, in fiscal 2008. Provisions for bad debts recorded in fiscal 2007 and 2006 were $6.6 million and $2.7 million, respectively.

Warranties and Product Returns—Our warranty policy provides a 10 year non-pro rated warranty service period on all currently manufactured Sealy Posturepedic, Stearns & Foster and Bassett bedding products and some other Sealy branded products and a 20 year warranty period on the major components of our TrueForm and MirrorForm visco-elastic products as well as our SpringFree latex product, introduced in 2005, the last ten years of which are pro rated on a straight-line basis. In 2006, we introduced and subsequently discontinued Right Touch, which has a twenty year limited warranty that covers only certain parts of the product and is pro rated for part of the twenty years. In fiscal 2007, we amended our warranty policy on Sealy brand promotional bedding to three years for our new line introduced in January 2007 and shipped in the second quarter of fiscal 2007. The impact of the changes to the warranty policies did not have a significant impact on our financial results or position. Our policy is to accrue the estimated cost of warranty coverage at the time the sale is recorded based on historical trends of warranty costs. We utilize warranty trends on existing similar product in order to estimate future warranty claims associated with newly introduced product. Our accrued warranty liability totaled $16.5 million and $16.0 million as of November 30, 2008 and December 2, 2007, respectively.

In fiscal 2008, we completed an analysis of our returns claims experience for the U.S. business within the Americas segment based on historical return trends using new information that is available which allows us to better track and match claims received to the sales for which those claims were initially recorded. This change in estimate resulted in a reduction of cost of sales of approximately $2.5 million for fiscal 2008 as well as a corresponding reduction in the accrued returns obligation. Our estimate involves an application of the lag time in days between the sale date and the date of its return applied to the current rate of returns.

Share-Based Compensation Plans—We have five share based compensation plans, as described more fully in Note 3 to our Consolidated Financial Statements included in Item 8. We have adopted the provisions of FAS No. 123 (revised 2004) "Share-Based Payment" (FAS 123(R)). For new awards issued and awards modified, repurchased, or cancelled, the cost is equal to the fair value of the award at the date of the grant, and compensation expense is recognized for those awards earned over the service period. Certain of the equity awards vest based upon the Company achieving certain EBITDA performance targets. During the service period, management estimates whether or not the EBITDA performance targets will be met in order to determine the vesting period for those awards and what amount of compensation cost should be recognized related to these awards. At the date of grant, we determine the fair value of the awards using the Black-Scholes option pricing formula or the trinomial lattice model, as appropriate under the circumstances. Management estimates the period of time the employee will hold the option prior to exercise and the expected volatility of Sealy Corporation's stock,

each of which impacts the fair value of the stock options. The fair value of restricted shares is based upon the closing price of the Company's common stock as of the grant date.

Self-Insurance Liabilities—We are self-insured for certain losses related to medical claims with excess loss coverage of $375,000 per claim per year. The Company also utilizes large deductible policies to insure claims related to general liability, product liability, automobile, and workers' compensation. Our recorded liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. The estimated liability is discounted and is established based upon analysis of historical data and actuarial estimates, and is reviewed by us and third-party actuaries on a quarterly basis to ensure that the liability is appropriate. While management believes these estimates are reasonable based on the information currently available, if actual trends, including the severity or frequency of claims, medical cost inflation, or fluctuations in premiums, differ from our estimates, our results of operations could be impacted. During fiscal 2008, we recognized a reduction of reserves of $1.3 million. This was in part due to a continued reduction in the severity and number of claims. Also contributing to the decrease in the reserve was a prepayment of claims that was made prior to November 30, 2008. During fiscal 2007, we recognized a reduction of reserves totaling $0.9 million due to favorable loss development from a reduction in both the frequency and severity of historical claims experience. During fiscal 2006, we recognized a reduction of reserves totaling $5.7 million, which included a $2.3 million change in estimate due to a change from industry loss development factors to our own historical loss development factors. The remaining change relates to favorable loss development due to a reduction in both the frequency and severity of historical claims experience. All such charges relate to plant labor and are therefore included in cost of goods sold for the period.

Impairment of Goodwill—We assess goodwill at least annually for impairment as of the beginning of the fiscal fourth quarter or whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable from future cash flows. We assess recoverability using several methodologies, including the present value of estimated future cash flows and comparisons of multiples of enterprise values to earnings before interest, taxes, depreciation and amortization (EBITDA). The analysis is based upon available information regarding expected future cash flows of each reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit. If the carrying value of the reporting unit exceeds the indicated fair value of the reporting unit, a second analysis is performed to measure the fair value of all assets and liabilities. If, based on the second analysis, it is determined that the implied fair value of the goodwill of the reporting unit is less than the carrying value, goodwill is considered impaired.

In the fourth quarter of fiscal 2008, market conditions deteriorated significantly. This deterioration resulting from the global economic downturn had not yet matured or been considered in our annual test of goodwill. Because of the potential impact of these conditions on our projections and the indicated fair value of our reporting units, we performed an interim evaluation of goodwill in the fourth quarter of 2008 reflecting our current views regarding the impact of the changed economic environment. This analysis indicated potential impairment in the goodwill of our Europe and Puerto Rico reporting units. As a result, we estimated the implied fair value of the goodwill in those reporting units compared to carrying amounts and recorded an impairment charge of $27.5 million to impair goodwill of $2.8 million recorded in the Puerto Rico reporting unit and $24.7 million in the Europe reporting unit. This impairment charge is based upon estimates of the fair value of property and equipment and certain intangible assets, including customer relationships. We will finalize these estimates in the first quarter of fiscal 2009.

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

carrying value of our goodwill was $357.1 million and $395.5 million at November 30, 2008 and December 2, 2007, respectively.

Commitments and Contingencies—We are subject to legal proceedings, claims, and litigation arising in the ordinary course of business. A negative outcome of these matters is considered remote, and management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Income Taxes—We record an income tax valuation allowance when the realization of certain deferred tax assets, including net operating losses and capital loss carryforwards, is not more likely than not. These deferred tax items represent expenses recognized for financial reporting purposes, which may result in tax deductions in the future. Certain judgments, assumptions and estimates may affect the carrying value of the valuation allowance and income tax expense in the Consolidated Financial Statements. Our net deferred tax assets at November 30, 2008 were $15.2 million, net of a $27.9 million valuation allowance.

Effective December 3, 2007, we adopted the provisions of FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109" ("FIN 48"), as described in Note 1 to the Consolidated Financial Statements included in Item 8 herein. Significant judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax provision. Despite our belief that our liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. We may adjust these liabilities as relevant circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. These adjustments are recognized as a component of income tax expense entirely in the period in which they are identified.

Conditional Asset Retirement Obligations—In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143" ("FIN 47"). This interpretation clarifies the term "conditional asset retirement obligation" as used in FAS 143 and provides additional guidance on the timing and method for the recognition and measurement of such conditional obligations. FIN 47 became effective for fiscal years ending after December 15, 2005. We adopted FIN 47 as of the beginning of fiscal 2006 and have recorded an adjustment as of November 28, 2005, the first day of fiscal 2006, of approximately $0.3 million, net of income tax benefit of $0.2 million, to recognize the cumulative effect of the accounting change. In addition, we recorded $0.1 million in property, plant and equipment and a liability of $0.6 million in other noncurrent liabilities as of November 28, 2005. During fiscal 2008, 2007 and 2006, we recognized an additional $0.3 million, $0.1 million, and $0.3 million, respectively, in property, plant and equipment and other noncurrent liabilities for leases entered into during the year. We also recognized accretion expense of $0.1 million during fiscal 2008 and 2007. An insignificant amount of accretion expense was recognized during fiscal 2006. These resulted from obligations in certain of our facility leases that require us to return those properties to the same or similar condition at the end of the lease as existed when we began using those facilities. Although the lease termination dates range from 2009 to 2023, we may be able to renegotiate such leases to extend the terms.

In addition to the above obligations, we also own certain factories that contain asbestos. Current regulations require that we remove and dispose of asbestos if the factory undergoes major renovations or is demolished. Although we are not required to remove the asbestos unless renovation or demolition occurs, we are required to monitor and ensure that it remains stable and notify any potential buyer of its existence. In the fourth quarter of 2006, we recognized an asset retirement obligation of $0.1 million to remove asbestos at a U.S. facility that was renovated in the second quarter of fiscal 2007. Also, in fiscal 2007, we removed asbestos at a European facility. We have recognized an asset retirement obligation of $0.2 million for the remaining asbestos in our European facilities. We have not recognized asset retirement obligations in our financial statements for asbestos at any other facilities because

management believes that there is an indeterminate settlement date for the retirement obligation as the range of time over which we may be required to remove and dispose of the asbestos is unknown or cannot be estimated. We currently have no plans to demolish a factory or to undertake a major renovation that would require removal of the asbestos at any of these other facilities. Management will continue to monitor this issue and will record an asset retirement obligation when sufficient information becomes available to estimate the obligation.

On April 12, 2006, we completed an initial public offering ("IPO") of our common stock, raising $299.2 million of net proceeds after deducting the underwriting discount. We used a portion of the proceeds to pay a cash dividend to shareholders of record immediately prior to the IPO of $125 million. We also used a portion of the proceeds from the IPO to repurchase and retire $47.5 million aggregate principal amount of our 8.25% senior subordinated notes due June 2014 (the "2014 Notes") in a series of open market transactions completed on April 26, 2006 at prices ranging from 105.25% to 105.92% of par, plus accrued interest. On April 21, 2006, we used approximately $90.0 million of IPO proceeds to redeem the entire outstanding balance of the senior subordinated pay-in-kind notes ("PIK Notes"), along with accrued interest and prepayment penalties through the date of the redemption. For a detailed presentation of the sources and uses of cash from the IPO, see Note 2 to our Consolidated Financial Statements, included in Item 8.

On April 6, 2004, we completed a merger with an entity owned by affiliates of KKR whereby KKR acquired approximately 92% of our capital stock. Certain of our stockholders prior to the merger, including affiliates of Bain Capital, LLC and others, which we refer to collectively as Rollover Stockholders, retained approximately an 8% interest in our capital stock. Additionally, we refinanced our existing credit agreements in connection with this merger. Subsequently on September 29, 2004, Sealy Mattress Company (a 100% owned subsidiary of the Company), completed an exchange offer whereby all of the senior subordinated notes were exchanged for publicly traded, registered securities with identical terms (other than certain terms relating to registration rights and certain interest rate provisions otherwise applicable to the original senior subordinated notes).

The following table sets forth our summarized results of operations for fiscal years 2008, 2007 and 2006, expressed in thousands of dollars as well as a percentage of each year's net sales:

		Fiscal year(1)

		2008						2007						2006
		(in thousands)			(percentage of net sales)			(in thousands)			(percentage of net sales)			(in thousands)			(percentage of net sales)
Net sales		$	1,498,023			100.0	%	$	1,702,065			100.0	%	$	1,582,843			100.0	%
Cost of goods sold(2)			913,982			61.0			992,455			58.3			874,927			55.3

	Gross profit		584,041			39.0			709,610			41.7			707,916			44.7
Selling, general and administrative expenses(2)			482,566			32.2			545,608			32.1			499,614			31.6
Expenses associated with IPO			—			—			—			—			28,510			1.8
Goodwill impairment loss			27,475			1.8			—						—			—
Amortization of intangibles			3,692			0.2			3,356			0.2			5,707			0.4
Restructuring expenses			3,126			0.2			—			—			—			—
Royalty income, net of royalty expense			(17,327	)		(1.2	)		(18,562	)		(1.1	)		(18,855	)		(1.2	)

	Income from operations		84,509			5.8			179,208			10.5			192,940			12.1
Interest expense			60,464			4.0			63,976			3.8			71,961			4.5
Debt extinguishment and refinancing			5,378			0.4			1,222			0.1			9,899			0.6
Other income, net			(397	)		—			(421	)		—			(750	)		—

	Income before income taxes and cumulative effect		19,064			1.4			114,431			6.6			111,830			7.0
Income taxes			21,931			1.5			35,058			2.1			37,576			2.4

	Income before cumulative effect of change in accounting principle		(2,867	)		(0.1	)		79,373			4.5			74,254			4.6
Cumulative effect of change in accounting principle			—			—			—			—			287			—

	Net income (loss)	$	(2,867	)		(0.1	)%	$	79,373			4.5	%	$	73,967			4.6	%

Effective tax rate			115.0	%					30.6	%					33.6	%

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

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

				Fiscal year(1)

				2008					2007					2006
				(in thousands)		(percentage of net sales)			(in thousands)		(percentage of net sales)			(in thousands)		(percentage of net sales)
Total Americas (US Dollars):
	Net sales			$	1,349,283		100.0	%	$	1,561,739		100.0	%	$	1,460,972		100.0	%
	Cost of goods sold				799,026		59.2			887,975		56.9			788,221		54.0

		Gross profit			550,257		40.8			673,764		43.1			672,751		46.0
United States (US Dollars):
	Net sales				1,055,682		100.0			1,266,355		100.0			1,209,012		100.0
	Cost of goods sold				626,678		59.4			719,537		56.8			645,131		53.4

		Gross profit			429,004		40.6			546,818		43.2			563,881		46.6
Total International (US Dollars):
	Net sales				442,341		100.0			435,710		100.0			373,831		100.0
	Cost of goods sold				287,304		65.0			272,918		62.6			229,796		61.5

		Gross profit			155,037		35.0			162,792		37.4			144,035		38.5
Canada:
	US Dollars:
		Net sales			187,672		100.0			196,264		100.0			167,763		100.0
		Cost of goods sold			108,795		58.0			111,737		56.9			93,699		55.9

			Gross profit		78,877		42.0			84,527		43.1			74,064		44.1
	Canadian Dollars:
		Net sales			195,373		100.0			210,724		100.0			190,371		100.0
		Cost of goods sold			113,431		58.1			120,004		56.9			106,336		55.9

			Gross profit		81,942		41.9			90,720		43.1			84,035		44.1
Other Americas (US Dollars):
	Net sales				105,929		100.0			99,120		100.0			84,197		100.0
	Cost of goods sold				63,553		60.0			56,701		57.2			49,391		58.7

		Gross profit			42,376		40.0			42,419		42.8			34,806		41.3
Europe:
	US Dollars:
		Net sales			148,740		100.0			140,326		100.0			121,871		100.0
		Cost of goods sold			114,956		77.3			104,480		74.5			86,706		71.1

			Gross profit		33,784		22.7			35,846		25.5			35,165		28.9
	Euros:
		Net sales			99,699		100.0			103,350		100.0			97,982		100.0
		Cost of goods sold			76,947		77.2			76,885		74.4			69,530		71.0

			Gross profit		22,752		22.8	%		26,465		25.6	%		28,452		29.0	%

Net Sales. Our consolidated net sales for the year ended November 30, 2008 were $1,498.0 million, a decrease of $204.0 million, or 12.0% from the year ended December 2, 2007. Fiscal

year 2007 was a 53 week year, while fiscal year 2008 was a 52 week year. The decrease in net sales attributable to the 53^rd week in fiscal 2007 was $32.3 million or 1.9% of fiscal 2007 net sales. Total Americas net sales were $1,349.3 million for fiscal 2008, a decrease of 13.6% from fiscal 2007. This decrease was primarily related to our U.S. operations within the Americas segment. Total U.S. net sales of $1,055.7 million for fiscal 2008 declined $210.7 million from $1,266.4 million in fiscal 2007, a decrease of 16.6%. The net sales attributable to the 53^rd week in 2007 for the U.S. were $26.2 million. The U.S. net sales decrease of $210.7 million was attributable primarily to a 19.0% decrease in wholesale unit volume, partially offset by a 1.6% increase in wholesale average unit selling price. The decrease in unit volume was affected by weak retail demand, which intensified in our fiscal fourth quarter. Sales of our new Posturepedic, SmartLatex and Sealy branded products outperformed the rest of the portfolio. The slight increase in average unit selling price was due in part to the price increases taken in December 2007 and July 2008. Average unit selling price was also favorably impacted by the $3.7 million favorable impact from the change in the estimated reserve for non-warranty product returns. Partially offsetting these favorable effects was the impact of increased floor sample discounts related to new product introductions as well as softer sales of higher price point products such as Stearns & Foster. In Canada, local currency sales decreases of 7.3% translated into decreases of 4.4% in U.S. dollars as retail demand in this market increasingly deteriorated during the year. Local currency sales decreases in our Canadian market were driven by a 7.5% decrease in unit volume, offset by a 0.2% increase in average unit selling price. The decrease in unit volume is primarily attributable to declines brought about because of a weak retail environment in this market. Elsewhere in the Americas, we experienced sales gains in our Mexico and Argentina markets. However, retail demand in these markets has also begun to decline. In our Europe segment, local currency sales decreases of 3.5% translated into an increase of 6.0% in U.S. dollars. Local currency sales decreases in the European market were attributable to an 11.5% decrease in unit volume driven by decreased sales of latex bed cores to other manufacturers, partially offset by a 9.0% increase in average unit selling price associated with price increases to our customers to offset some of the increased cost of raw materials. Finished goods sales in Europe decreased 3.4% in local currency in fiscal 2008.

Gross Profit. Gross profit for fiscal 2008 was $584.0 million, a decrease of $125.6 million compared to fiscal 2007. The 2007 results include the impact of the 53^rd week, which represented $13.1 million. As a percentage of net sales, gross profit in fiscal 2008 decreased 2.7 percentage points to 39.0%. This was due to a decrease in gross profit margins within both of our segments. Total Americas gross profit in fiscal 2008 decreased $123.5 million to $550.3 million, which as a percentage of sales, represented a decrease of 2.3 percentage points to 40.8%. The decrease in gross profit for the Americas segment was primarily driven by a decrease in the U.S. gross profit in fiscal 2008. U.S. gross profit decreased $117.8 million to $429.0 million or 40.6% of net sales, which is a decrease of 2.6 percentage points of net sales from the prior year period. The decrease in percentage of net sales was driven primarily by higher inflation on core inputs such as steel and foam. In addition, the domestic gross profit margin relative to the prior year was negatively impacted by less absorption of overhead expenses due to lower volume and reduced sales of higher price point products such as Stearns & Foster. Additionally, incremental costs of approximately $8.1 million were incurred in fiscal 2008 as compared to fiscal 2007 related to compliance with July 2007 federal flame retardant regulations. The U.S. gross profit was positively impacted by a change in accounting estimate related to our warranty returns reserves recorded in the second quarter of fiscal 2008 which resulted in a reduction of cost of sales of approximately $2.5 million. Also, U.S. gross profit was positively impacted by continued improvements in manufacturing efficiencies, particularly factory labor and product scrap costs. The results of fiscal 2007 include $2.5 million of refunds on lumber tariffs received from Canadian suppliers (see Note 18 of the Consolidated Financial Statements in Item 8) as well as $2.1 million more startup costs associated with the latex facility in Mountain Top, Pennsylvania. In Canada, our gross profit margin decreased 1.1 percentage points to 42.0% of net sales primarily due to less absorption of overhead expenses due to lower sales volumes and rising material costs. In our

Europe segment, the gross profit margin decrease resulted from manufacturing ineffiencies experienced related to lower production volume and price competition experienced in the OEM business.

Selling, General, and Administrative. Selling, general, and administrative expenses decreased $63.0 million to $482.6 million for fiscal 2008 compared to $545.6 million for fiscal 2007. As a percentage of net sales, selling, general, and administrative expenses was 32.2% for fiscal 2008 compared to 32.1% for fiscal 2007. The decrease in selling, general and administrative expenses is primarily due to $41.3 million of lower volume driven variable expenses and reductions in fixed costs. Actions taken to reduce fixed costs included $14.4 million of reductions in compensation related expenses, and $12.9 million less promotional expenses related to more efficient launches of new products in the U.S. as compared to fiscal 2007. In addition, spending on professional services and other discretionary items declined relative to fiscal 2007. Reduced sales drove a reduction of $41.3 million in volume variable expenses comprised of a $37.6 million decrease in cooperative advertising costs partially offset by higher transportation costs, a $3.7 million increase in bad debt costs and the impact of significantly higher foreign currency valuations relative to the U.S. dollar. The fixed cost reductions were partially offset by $6.6 million of costs associated with a reduction in personnel and executive search costs. The selling, general and administrative expense recorded in fiscal 2007 also reflected the gain on the sale of our Orlando facility of $2.6 million as well as $3.9 million of costs associated with an organizational realignment.

Goodwill impairment loss. During fiscal 2008, we recognized a total non-cash charge of $27.5 million related to the impairment of goodwill of our Puerto Rico and Europe reporting units. The impairment was indicated by an update to our fiscal 2008 annual impairment testing of goodwill performed in the fourth quarter of fiscal 2008. The goodwill impairment reflected an estimated reduction in the fair value of Puerto Rico and Europe as a result of lower expected cash flows for the business and represents the entire goodwill balances for those reporting units. We will complete our analysis of these fair values in the first quarter of fiscal 2009 and reflect any change in the estimate at that time, if necessary. No such impairments were identified in fiscal 2007.

Restructuring and related costs. We recognized pretax restructuring costs of $3.1 million during the year ended November 30, 2008. No such costs were recognized during the year ended December 2, 2007. These charges primarily relate to the following actions:

In the first quarter of fiscal 2008, management made the decision to cut back the manufacturing operations in Brazil and move to a business model under which significantly more product will be supplied by production from other Sealy manufacturing facilities. As a result, the Company incurred charges of $0.5 million related to employee severance and related benefits. The Company does not expect to incur additional restructuring charges related to this activity. The plan was completed in the fourth quarter of fiscal 2008.

In the third quarter of fiscal 2008, management elected to close its administrative offices near Milan, Italy and relocate these activities to its manufacturing facility in Silvano, Italy. This closure resulted in the elimination of approximately 10 employees who elected not to relocate in the fourth quarter of fiscal 2008. We recorded a pre-tax restructuring charge related to this action of $0.2 million during the year ended November 30, 2008, the majority of which related to employee severance and benefits. An insignificant amount of this charge was related to relocation costs. This plan was completed in the fourth quarter of fiscal 2008.

In the third quarter of fiscal 2008, management also made the decision to close its manufacturing facility in Clarion, Pennsylvania. This facility was closed on October 17, 2008. This closure resulted in the elimination of approximately 114 positions, the majority of which occurred in the fourth quarter of fiscal 2008. We recorded a pre-tax restructuring and impairment charge related to this action of $2.5 million during fiscal 2008, of which $1.6 million was related to employee severance and benefits

and other exit costs, and $0.9 million of which was non-cash in nature, related to fixed asset impairment charges. The impairment charges were recognized based on the difference between the carrying value and the amount expected to be recovered through sale of the property, plant and equipment. The Company expects to incur additional restructuring charges related to this activity of approximately $0.1 million to $0.2 million, principally in the form of relocation costs, which are expected to be recorded in first quarter of fiscal 2009, after which time the plan should be complete.

Royalty Income, net of royalty expense. Our consolidated royalty income, net of royalty expense, for fiscal 2008 decreased $1.2 million to $17.3 million from fiscal 2007, primarily due to a decrease in international licensee sales.

Interest Expense. Our consolidated interest expense in fiscal 2008 decreased $3.5 million from fiscal 2007. Our weighted average borrowing costs for fiscal 2008 and 2007 were 7.5% and 7.8%, respectively. Our borrowing cost and the related interest expense decreased because of lower interest rates on the unhedged variable rate component of our floating rate debt offset partially by an increase in the outstanding amount on our revolving credit facility. The borrowing cost was also reduced because of the retirement of $68.1 million of our 2014 Notes late in fiscal 2007.

Debt Extinguishment and Refinancing Expenses. During fiscal 2008, we incurred cash charges of $5.4 million related to the amendment of our senior credit facility which represents amounts paid to the creditors in connection with the amendment. During fiscal 2007, we incurred $1.2 million of debt extinguishment costs consisting of $1.7 million of non-cash charges offset by a $0.5 million gain related to the retirement of $68.1 million of our 2014 Notes.

Income Tax. Our effective income tax rate generally differs from the federal statutory rate due to the effects of certain foreign tax rate differentials and state and local income taxes. Our effective tax rate for fiscal 2008 and fiscal 2007 was 115.0% and 30.6%, respectively. The effective rate for the fiscal 2008 period was increased by 84.4% due to lower pre-tax income and the impairment of goodwill for our Puerto Rico and Europe reporting units which is not tax deductible. The effective rate for the fiscal 2007 period was reduced by a benefit of approximately $4.4 million resulting from a reduction in our income tax reserve as a result of the elimination of certain federal and state tax exposures due to the expiration of statutes of limitations and approximately $1.8 million from the reduction of the valuation allowance on capital loss carryforwards due to the availability of capital gains, and the reversal of previously established valuation allowances for Mexican deferred tax assets, partially offset by valuation allowances established during the year.

Net Sales. Our consolidated net sales for the year ended December 2, 2007 were $1,702.1 million, an increase of $119.2 million, or 7.5% from the year ended November 26, 2006. Fiscal year 2006 was a 52 week year, while fiscal year 2007 was a 53 week year. The increase in net sales attributable to the 53^rd week was $32.3 million. Total Americas net sales were $1,561.7 million for fiscal 2007, an increase of 6.9% over fiscal 2006. This increase was primarily related to our U.S. and Canadian operations within the Americas segment. Total U.S. net sales were $1,266.4 million for fiscal 2007 compared to $1,209.0 million for fiscal 2006. In response to the challenging market conditions in the U.S. bedding industry and increased competition in the luxury portion of the market, our focus has been on driving unit volume. By driving unit volume, we were able to maintain the number of slots on the floors of our retail customers. We believe that by maintaining these slots, we are in a better position to take advantage of any improvement in industry conditions, and more importantly, insure that we will have sufficient distribution points for new products. This strategy drove a U.S. net sales increase of $57.3 million which was attributable to an 8.8% increase in unit volume, partially offset by a 3.7% decrease in average unit selling price. The increase in unit volume is primarily attributable to the strong performance of our Sealy brand promotional product sales, which were up 16% from the prior year

period, and growth of our specialty bedding product sales, which increased 64% over the comparable prior year period. The decrease in our average unit selling price is primarily due to the higher volume of lower priced mattresses, such as our Sealy brand promotional products and lower sales of higher priced luxury innerspring products. In addition, strategic pricing actions were taken on selected products such as the Stearns & Foster and TrueForm lines to drive unit volume. In Canada, local currency sales gains of 10.7% translated into gains of 17.0% in U.S. dollars. Local currency sales gains in our Canadian market were driven by a 16.2% increase in unit volume, combined with a 4.8% decrease in average unit selling price. The changes in unit volume and average unit selling price were the result of selective pricing actions and promotional activity with national accounts. Elsewhere in the Americas, we experienced sales gains in our Mexico and Argentina markets. In our Europe segment, local currency sales gains of 5.5% translated into an increase of 15.1% in U.S. dollars. Local currency sales gains in the European market were attributable to a 67.5% increase in unit volume driven by increased sales of latex bed cores to other manufacturers, combined with a 37.0% decrease in average unit selling price associated with the increased sales of lower priced latex bed cores. Finished goods sales in Europe increased 7.0% in local currency or 16.3% in U.S. dollars in fiscal 2007.

Gross Profit. Gross profit for fiscal 2007 was $709.6 million, an increase of $1.7 million compared to fiscal 2006. The 2007 results include the impact of the 53^rd week, which represented $13.1 million. As a percentage of net sales, gross profit decreased 3.0 percentage points to 41.7%. This was due primarily to a decrease in our U.S. and Canada gross profit margins within our Americas segment. Total Americas gross profit increased $1.0 million to $673.8 million, which as a percentage of sales, represented a decrease of 2.9 percentage points to 43.1%. U.S. gross profit decreased $17.1 million to $546.8 million or 43.2% of net sales, which is a decrease of 3.4 percentage points of net sales from the prior year period. This decrease in percentage of net sales was driven by the addition of $26.4 million of flame retardant materials to our products, the change in product mix and strategic pricing actions mentioned above and $2.6 million of start-up costs associated with the new latex facility in Mountain Top, Pennsylvania. In addition, 2006 results included a $5.7 million favorable adjustment due to changes in estimates underlying the reserves for workers' compensation claims in 2006 and prior years. Partially offsetting these effects were continued improvements in our manufacturing efficiencies, lower employee health insurance costs arising from our transition to a new third party administrator, as well as $2.5 million of refunds on lumber tariffs received from Canadian suppliers (see Note 18 of the Consolidated Financial Statements in Item 8). On a per unit basis, U.S. material costs increased 5.1% over the prior year due primarily to additional costs to make our products compliant with the 2007 federal flame retardancy regulations, partially offset by improved yield on raw materials. In Canada, our gross profit margin decreased 1.0 percentage points to 43.1% of net sales primarily due to pricing actions taken that reduced average unit selling prices. In our Europe segment, the gross profit margin decrease resulted from increased sales of lower priced latex bed cores to other manufacturers, which carry a lower unit price and gross margin.

Selling, General, and Administrative. Selling, general, and administrative expenses increased $46.0 million to $545.6 million for fiscal 2007 compared to $499.6 million for fiscal 2006. As a percentage of net sales, selling, general, and administrative expenses were 32.1% and 31.6% for the years ended December 2, 2007 and November 26, 2006. This increase as a percent of sales is primarily due to $34.7 million of volume driven variable expenses, including a $20.1 million increase in cooperative advertising costs and a $10.5 million increase in delivery costs due primarily to higher unit volume. Other cost increases included a $4.7 million increase in promotional expenses in the U.S. operations associated with the 2007 roll out of our new Posturepedic Reserve products and Stearns & Foster product line and other promotional expenses, a $6.4 million increase in spending on national advertising and $3.9 million of costs associated with an organizational realignment in the U.S. This increase was partially offset by a $2.9 million reduction in compensation and other sales and administration costs in addition to a gain on the sale of our Orlando facility of $2.6 million.

Expenses Associated With IPO. During fiscal 2006, we incurred $34.2 million of expenses directly related to the IPO, which included approximately $17.5 million of transaction related bonuses paid to management employees and $11.0 million paid to KKR for the termination of the Management Services Agreement, and $5.7 million in expenses related to debt retirement and non-cash compensation. (see Note 2 of the Consolidated Financial Statements in Item 8).

Royalty Income, net of royalty expense. Our consolidated royalty income, net of royalty expense, for fiscal 2007 decreased $0.3 million to $18.6 million from fiscal 2006, primarily due to a decrease in international royalty revenue.

Interest Expense. Our consolidated interest expense in fiscal 2007 decreased $8.0 million from fiscal 2006, primarily due to lower debt levels resulting from $46.6 million in voluntary prepayments of our senior term debt since November 27, 2005, the retirement of $89.1 million of PIK Notes and $47.5 million of the 2014 Notes in the second quarter of fiscal 2006 using proceeds from the IPO as well as the retirement of $68.1 million of the 2014 Notes in fiscal 2007. These reductions were partially offset by slightly higher borrowing costs. Our weighted average borrowing costs for fiscal 2007 and 2006 were 7.8% and 7.7%, respectively.

Debt Extinguishment and Refinancing Expenses. During fiscal 2007, we incurred $1.2 million of debt extinguishment costs consisting of $1.7 million of non-cash charges offset by a $0.5 million gain relating to the retirement of $68.1 million of our 2014 Notes. During fiscal 2006, we incurred $9.9 million of debt extinguishment costs consisting of $3.6 million of cash expenses and $1.7 million of non-cash charges related to the extinguishment of debt retired using proceeds from the IPO as well as $0.5 million of cash expenses and $4.1 million of non-cash charges related to the refinancing of our senior term debt in August, 2006.

Income Tax. Our effective income tax rate generally differs from the federal statutory rate due to the effects of certain foreign tax rate differentials and state and local income taxes. Our effective tax rate for fiscal 2007 and fiscal 2006 was 30.6% and 33.6%, respectively. The effective rate for the fiscal 2007 period was reduced by a benefit of approximately $4.4 million resulting from a reduction in our income tax reserve as a result of the elimination of certain federal and state tax exposures due to the expiration of statutes of limitations and approximately $1.8 million from the reduction of the valuation allowance on capital loss carryforwards due to the availability of capital gains, and the reversal of previously established valuation allowances for Mexican deferred tax assets, partially offset by valuation allowances established during the year. The effective rate for the fiscal 2006 period was reduced by a benefit of approximately $2.7 million resulting from a reduction in our income tax reserve as a result of the elimination of certain federal and state tax exposures and approximately $1.4 million from the reduction of the valuation allowance on capital loss carryforwards due to the availability of capital gains.

Our principal sources of funds are cash flows from operations and borrowings under our senior secured revolving credit facility. Our principal uses of funds consist of operating expenditures, payments of principal and interest on our senior credit agreements, capital expenditures, and interest payments on our outstanding senior subordinated notes. Capital expenditures totaled $25.0 million for the year ended November 30, 2008 and we expect the level of capital expenditures to reduce significantly in fiscal 2009. During fiscal 2008, there was no significant spending for additional production capacity. We believe that annual capital expenditure limitations in our current credit agreements will not prevent us from meeting our ongoing capital needs. Our introductions of new products typically require us to make initial cash investments in inventory, promotional supplies and employee training which may not

be immediately recovered through new product sales. However, we believe that we have sufficient liquidity to absorb such expenditures related to new products and that these expenses will not have a significant adverse impact on our operating cash flow. At November 30, 2008, we had approximately $44.7 million available under our revolving credit facility, which is scheduled to mature in 2010, after taking into account letters of credit issued totaling $15.9 million. Our net weighted average borrowing cost was 7.5% and 7.8% for the years ended November 30, 2008 and December 2, 2007, respectively.

Due to concern over our ability to remain in compliance with our maximum leverage and minimum interest coverage ratios under our senior credit facility, we entered into the Second Amendment to the Third Amended and Restated Credit Agreement on November 14, 2008. This amendment loosened the restrictions provided by these ratios in the near term. These ratios are currently 5.85 times for the maximum leverage ratio and 2.00 for the minimum interest coverage ratio and become more restrictive over time under the amended agreement and reduce to 4.00 times for the maximum leverage ratio and increase to 2.75 times for the minimum interest coverage ratio by June 2010. In connection with the amendment, we paid an amendment fee to the lenders of $3.9 million which represents 75 basis points on the outstanding balance under the senior credit facility as well as an arrangement fee of approximately $1.5 million. Additionally, the amendment had the effect of significantly increasing the applicable margin rates for our senior secured term loans by 300 to 325 basis points and by 275 basis points for our senior revolving credit facility. Given the significant amount of debt outstanding under the senior credit facility, the increased interest rates will have a significant impact on our required interest payments to be made in future periods. However, we believe that we will have sufficient liquidity provided by operating cash flow to be able to satisfy the level of debt service requirements as revised by this amendment.

Based on our ability to amend the secured credit facility as discussed above and our periodic borrowings under the senior revolving credit facility during fiscal 2008 for amounts above the amounts required to fund operations in order to ensure the availability of funds under the agreement, we believe that we will be able to obtain additional funds as necessary under this arrangement during fiscal 2009 in order to support our operations.

As a result of the IPO completed April 12, 2006, approximately $90 million of the net proceeds were used to retire the Senior Subordinated PIK Notes including accrued interest and prepayment penalties thereon, and approximately $52 million was used to repurchase and retire $47.5 million of the aggregate principal amount outstanding under our 2014 Notes along with accrued interest and market premiums thereon. We also retired $68.1 million of our 2014 Notes during fiscal 2007. Since August 25, 2006, the date of the Third Amended and Restated Credit Agreement, we have repaid $62.9 million of the outstanding balance of the term loans, including $26.2 million of payments made in fiscal 2008.

We have incurred debt, including senior credit facilities consisting of a $125 million senior secured revolving credit facility maturing in April 2010 and senior secured term loan facilities maturing in August 2011 and August 2012. Outstanding balances on these senior facilities were $441.6 million at November 30, 2008. We also have an outstanding principal balance of $273.9 million at November 30, 2008 on our 2014 Notes.

On August 25, 2006, we amended our senior secured credit agreement to provide for two senior secured term loans, one for $300 million maturing August 25, 2011 and one for $140 million maturing August 25, 2012. As indicated above, we amended our senior secured credit agreement in fiscal 2008 to make the financial leverage and interest coverage ratios less restrictive. The 2008 amendment also increased the applicable interest rate margins charged on the senior secured term loans and senior revolving credit facility, by 325 basis points on the $300 million term loan, 300 basis points on the $140 million term loan and 275 basis points on the senior revolving credit facility. In addition, this

amendment also increased the percentage of excess cash flow that is required to be used to prepay loans beginning with the 2009 fiscal year. The total amount of $125 million available under our senior revolving credit facility was unchanged by the amendment. However, certain amendments were made to the availability of these funds through the swing-line provisions of the agreement. In connection with the 2008 amendment, we incurred a charge of $5.4 million during the fourth fiscal quarter of 2008 for fees and expenses related to the amendment. Since August 25, 2006 we have repaid $33.9 million of the original $140 million outstanding on our term loan maturing August 25, 2012 and $28.9 million of the original $300 million outstanding on our term loan maturing August 25, 2011.

Future principal debt payments are expected to be paid out of cash flows from operations and borrowings on our revolving credit facility. As of January 2, 2009, we have $76.5 million outstanding under our revolving credit facility.

Borrowings under the new senior secured credit facilities bear interest at our choice of the Eurodollar rate or adjusted base rate ("ABR"), in each case, plus an applicable margin of 4.50% for Eurodollar loans and 3.75% for ABR loans. As amended, beginning in fiscal 2009, we may be required to make principal prepayments that are equal to 75% of excess cash flow for the preceding fiscal year, as defined in our senior secured credit agreement, reducing to 50% if our leverage ratio is less than or equal to 4.00 to 1.00. We do not expect there to be any mandatory prepayments due in fiscal 2009.

On June 15, 2007, we entered into an interest rate swap agreement effective December 3, 2007 fixing the floating portion of the interest rate at 5.495% on $242 million of the outstanding balance under the senior secured term loan through November 2008, declining to $240 million from December 2008 through November 2009, and further declining to $180 million from December 2009 through November 2010. We will select the Eurodollar rate on the hedged portion of the senior secured term loan during the term of the swap.

Additionally, we entered into three interest rate swaps for 2.3 million Euro, 2.9 million Euro, and 3.5 million Euro which fix the floating interest rate on the debt of our Europe segment at 4.92%, 4.85%, and 4.50%, respectively. The notional amounts of these contracts amortize over the life of the agreement and the agreements expire in May 2019, January 2013 and October 2013. We have not formally documented these interest rate swaps as hedges. Therefore, changes in the fair value of these interest rate swaps are recorded as a component of interest expense.

Subsequent to year-end, on December 1, 2008, the Company entered into two interest rate swap agreements effective December 4, 2008. The first of these swaps fixes the floating portion of the interest rate at 1.952% on $20.0 million of the outstanding balance under the senior credit facility through November 4, 2009. The second of these swaps fixes the floating portion of the interest rate at 1.991% on $107.0 million of the outstanding balance under the senior credit facility through February 4, 2010. The Company will select the Eurodollar rate on the hedged portion of the senior credit facility during the term of these swaps.

The outstanding 2014 Notes, which are publicly traded, registered securities, consist of $273.9 million aggregate principal amount maturing June 15, 2014, bearing interest at 8.25% per annum payable semiannually in arrears on June 15 and December 15, commencing on December 15, 2004. During the second quarter of fiscal 2006, we used a portion of the proceeds from the IPO to retire approximately $47.5 million aggregate principal amount of the 2014 Notes. During the third and fourth quarters of fiscal 2007, we retired an additional $28.0 million and $40.1 million, respectively, aggregate principal amount of the 2014 Notes. There were no retirements of the 2014 Notes in fiscal 2008.

At November 30, 2008 we were in compliance with the covenants contained within our senior credit agreements and indenture governing the 2014 Notes.

As part of our ongoing evaluation of our capital structure, we continually assess opportunities to reduce our debt, which opportunities may from time to time include voluntary prepayments of our senior secured term debt, or redemption or repurchase of a portion of our senior subordinated notes to the extent permitted by our debt covenants. During the fourth quarter of fiscal 2008, the Company made a voluntary prepayment on its Tranche A term loan of $11.3 million. This prepayment was allocated to the mandatory principal payments under Tranche A due in February, May and August of 2009. In addition, our Board authorized a common stock repurchase program under which we may repurchase up to $100 million of our Company's stock. Our ability to repurchase common stock under this program is restricted by the Company's Third Amended and Restated Credit Agreement as amended. As of November 30, 2008, we had repurchased $16.3 million under this program, of which none was repurchased during the fourth quarter of fiscal 2008. From December 1, 2008 through January 2, 2009, there were no repurchases of shares under this program.

Our ability to make scheduled payments of principal, or to pay the interest on or to refinance our indebtedness, or to fund planned capital expenditures will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based upon the current level of operations and our current expectations for future periods in light of the current economic environment, we believe that cash flow from operations and available cash, together with available borrowings under the senior credit agreement, will be adequate to meet the future liquidity needs during the one year following November 30, 2008. We will be required to make scheduled principal payments of approximately $21.3 million during the next twelve months, with $3.8 million for our senior secured term loans, $1.9 million for our financing obligations and capital leases and the remainder for debt owed by our international subsidiaries. However, as we continually evaluate our ability to make additional prepayments as permitted under our senior credit agreements, it is possible that we will make additional voluntary prepayments on our senior debt during that time to the extent permitted by our debt covenants.

While we believe that we will have the necessary liquidity through our operating cash flow and revolving credit facility for the next year to fund our debt service requirements, capital expenditures and other operational cash requirements, we may not be able to generate sufficient cash flow from operations, realize anticipated revenue growth and operating improvements or obtain future borrowings under the senior credit agreements in an amount sufficient to enable us to do so. In addition, we rely on the revolving credit facility to provide a significant portion of our operational cash flow needs and debt service requirements. While this facility remains in place through April 2010, we expect there will be a need to refinance this debt upon its maturity. Additionally, the senior and subordinated debt mature in the following years through 2014, and we will likely be required to refinance this debt as it matures. We may not be able to affect any future refinancing of our debt on commercially reasonable terms or at all.

The Company announced on April 8, 2008 that its Board of Directors voted to suspend the Company's quarterly dividend. This decision is intended to increase our financial flexibility and will enable it to better allocate its capital in order to enhance shareholder returns over time. Our senior secured credit facilities contain restrictions on our ability to pay dividends such as meeting a minimum leverage ratio. We currently do not meet this requirement. Therefore, we do not currently expect a dividend will be declared during the first fiscal quarter of 2009.

Cash Flows from Operating Activities. Our cash flow from operations decreased $40.7 million to a $53.7 million net source of cash for the year ended November 30, 2008, compared to a $94.4 million net source of cash for the year ended December 2, 2007. This decrease has been primarily driven by a reduction in net income from fiscal 2007 of $82.2 million. This decrease has been partially offset by changes in working capital driven primarily by a reduction in accounts receivable balances.

Cash Flows used in Investing Activities. Our cash flows used in investing activities decreased approximately $12.5 million from fiscal 2007 primarily due to $17.5 million lower capital expenditures for fiscal 2008 as compared with the prior fiscal year. The decreased capital expenditures were primarily due to the completion of our new facility in Orlando, Florida, the completion of the Mountain Top, Pennsylvania facility and the commencement of work on a second production line at the same facility and the construction of a warehouse at our production site in Italy in fiscal 2007. These expenditures were partially offset by $5.0 million lower proceeds on sales of assets. Fiscal 2007 results included $4.8 million received from the sale of our Orlando, Florida facility.

Cash Flows used in Financing Activities. Our cash flow used in financing activities for the year ended November 30, 2008 decreased $67.5 million to a net use of $18.7 million from a net use of $86.2 million for the year ended December 2, 2007. This decrease has been driven by $20.6 million less of dividend payments and $4.4 million less net borrowings against our senior revolving credit facility in fiscal 2008. Further, in fiscal 2007, $16.3 million was used to repurchase our common stock, $68.1 million was used to retire a portion of our 2014 Notes and $11.6 million was used for payments on our senior secured term loans.

Cash Flows from Operating Activities. Our cash flow from operations increased $36.2 million to a $94.4 million net source of cash for the year ended December 2, 2007, compared to a $58.2 million net source of cash for the year ended November 26, 2006. Contributing to this increase was the inclusion of

approximately $32.1 million of expenses in net income and interest payments associated with the IPO and related debt extinguishments in the prior year, with the remaining increase primarily the result of changes in working capital and timing of various vendor payments.

Cash Flows from Investing Activities. Our cash flows used in investing activities increased approximately $7.0 million from fiscal 2006 primarily due to $11.6 million higher capital expenditures for fiscal 2007 as compared with the prior fiscal year. The increased capital expenditures were primarily due to the completion of our new facility in Orlando, Florida, the completion of the Mountain Top, Pennsylvania facility and the commencement of work on a second production line at the same facility and the construction of a warehouse at our production site in Italy. These expenditures were partially offset by $4.5 million higher proceeds on sales of assets, including $4.8 million received from the sale of our Orlando, Florida facility.

Cash Flows from Financing Activities. Our cash flow used in financing activities for the year ended December 2, 2007 increased $67.3 million to a net use of $86.2 million from a net use of $18.9 million for the year ended November 26, 2006. This increase has been primarily driven by $16.3 million used to repurchase our common stock, the retirement of $68.1 million of our 2014 Notes and $11.6 million of payments on our senior secured term loans in fiscal 2007. These uses have been partially offset by an increase in the net borrowings against our outstanding senior revolving credit facility of $32.3 million in fiscal 2007. In fiscal 2006, we received $295.3 million of IPO proceeds which were used to make a $125 million dividend payment and to retire $139.3 million of debt.

Our long term obligations contain various financial tests and covenants. The senior secured credit facilities require us to meet a minimum interest coverage ratio and a maximum leverage ratio. The indenture governing the 2014 Notes also requires us to meet a fixed charge coverage ratio in order to incur additional indebtedness, subject to certain exceptions. We are currently in compliance with all debt covenants. The specific covenants and related definitions can be found in the applicable debt agreements, each of which we have previously filed with the Securities and Exchange Commission. As of November 30, 2008 our calculated maximum leverage ratio was 4.69 times compared with a requirement of 5.85 times and our minimum interest coverage ratio was 2.87 times compared with a requirement of 2.00 times.

Certain covenants contained in the senior secured credit facilities and 2014 Notes are based on what we refer to herein as "Adjusted EBITDA." In those agreements, EBITDA is defined as net income plus interest, taxes, depreciation and amortization and Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance as discussed above. Adjusted EBITDA is presented herein as it is a material component of these covenants. For instance, the indenture governing the 2014 Notes and the agreement governing Sealy Mattress Company's senior secured credit facilities each contain financial covenant ratios, specifically leverage and interest coverage ratios, that are calculated by reference to Adjusted EBITDA. Non-compliance with the financial ratio maintenance covenants contained in Sealy Mattress Company's senior secured credit facilities could result in the requirement to immediately repay all amounts outstanding under such facilities, while non-compliance with the debt incurrence ratios contained in the indenture governing the 2014 Notes would prohibit Sealy Mattress Company and its subsidiaries from being able to incur additional indebtedness other than pursuant to specified exceptions. In addition, under the restricted payment covenants contained in the indenture governing the 2014 Notes, the ability of Sealy Mattress Company to pay dividends is restricted by formula based on the amount of Adjusted EBITDA. While the determination of "unusual items" is subject to interpretation and requires judgment, we believe the adjustments listed below are in accordance with the covenants discussed above and are pursuant to the terms of the debt agreement or approval of the debtors.

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

The following table sets forth a reconciliation of net loss to EBITDA and EBITDA to Adjusted EBITDA for the year ended November 30, 2008 (in thousands):


Net loss		$	(2,867	)
	Interest expense		60,464
	Income taxes		21,931
	Depreciation and amortization		33,954

EBITDA			113,482
Unusual and nonrecurring losses:
	Goodwill impairment		27,475
	Debt refinancing costs		5,378
	Executive severance		3,470
	Non-cash compensation		3,375
	Restructuring related costs		3,402
	Non-executive severance		2,549
	Other (various)(a)		7,795

Adjusted EBITDA		$	166,926

The following table reconciles EBITDA to cash flows from operations for the year ended November 30, 2008 (in thousands):


EBITDA		$	113,482
Adjustments to EBITDA to arrive at cash flow from operations:
	Interest expense		(60,464	)
	Income taxes		(21,931	)
Non-cash charges against (credits to) net income:
	Deferred income taxes		8,317
	Non-cash interest expense		2,395
Other, net			27,855
Changes in operating assets & liabilities			(15,941	)

Cash flow from operations		$	53,713

As of and during the fiscal years ended November 30, 2008, December 2, 2007 and November 26, 2006, we were in compliance with the covenants contained within our debt instruments.

We occupy premises and utilize equipment under operating leases that expire at various dates through 2023. In accordance with generally accepted accounting principles, the obligations under those leases are not recorded on our balance sheet. Many of these leases provide for payment of certain expenses and contain renewal and purchase options. During the fiscal years ended November 30, 2008,

December 2, 2007 and November 26, 2006, we recognized lease expenses of $21.6 million, $20.7 million and $19.6 million, respectively.

We are involved in a joint venture to develop markets for Sealy branded products in Asia. The joint venture is not considered to be a variable interest entity and is therefore not consolidated for financial statement purposes. We account for our interest in the joint venture under the equity method, and our net investment of $3.1 million is recorded as a component of "Debt issuance costs, net", and other assets within the Consolidated Balance Sheet at November 30, 2008. We believe that any possible commitments arising from this joint venture will not be significant to our consolidated financial position or results of operations.

As previously discussed, our debt at November 30, 2008 consists of $64.4 million outstanding under a $125 million senior secured revolving credit facility maturing in 2010, $270.0 million outstanding under a senior secured term loan facility maturing in 2011, $107.2 million outstanding under a senior secured term loan facility maturing in 2012, $273.9 million outstanding aggregate principal amount of senior subordinated notes due 2014, $42.3 million due on our financing obligations and an additional $25.5 million of other borrowings, most of which are owed by our international subsidiaries.

We engage in various hedging activities in order to mitigate the risk of variability in future cash flows resulting from floating interest rates on our debt and projected foreign currency purchase requirements. Accordingly, we have entered into contractual arrangements for interest rate swaps and forward purchases of foreign currency. The related assets and liabilities associated with the fair value of such derivative instruments are recorded on our balance sheet. Changes in the fair value of these derivatives are recorded in our income statement, except for those associated with those agreements which have been designated as cash flow hedges for accounting purposes.

Significant judgment is required in evaluating the Company's federal, state and foreign tax positions and in the determination of its tax provision. Despite the Company's belief that its liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matter. The Company may adjust these liabilities as relevant circumstances evolve, such as guidance from the relevant tax authority, or resolution of issues in the courts. These adjustments are recognized as a component of income tax expense entirely in the period in which they are identified. While the Company is currently undergoing examinations of certain of its corporate income tax returns by tax authorities, no issues related to these reserves have been presented to the Company and the Company has not been informed that such audits will result in an assessment or payment of taxes related to these positions during the one year period following November 30, 2008.

We adopted FIN 48, "Accounting for Uncertainty in Income Taxes", effective December 3, 2007. As of the date of the adoption, our reserve for uncertain tax positions (including penalties and interest) was $10.5 million. At November 30, 2008, the entire reserve for uncertain tax positions of $22.6 million (including penalties and interest) of which $8.8 million is classified as a noncurrent asset and $31.4 million is classified as a noncurrent liability. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of the effective settlement of tax positions. As such, the unrecognized tax benefit liabilities are not included in the table below.

Our contractual obligations and other commercial commitments as of November 30, 2008 are summarized below (in thousands):

Contractual Obligations	2009		2010		2011		2012			2013			After 2014			Total Obligations

Principal maturities of long-term debt	$	21,243	$	143,012	$	194,557	$	110,545		$	3,278		$	310,770		$	783,405
Projected interest on long-term debt(1)		59,371		58,442		47,739		33,526			24,990			25,262			249,330
Projected cash flows on derivatives(2)		7,865		6,594		1,343		(61	)		(41	)		(103	)		15,597
Operating leases(3)		13,571		12,125		9,658		6,898			4,536			15,759			62,547
Obligations under license agreements(4)		3,810		953		—		—			—			—			4,763
Purchase commitments related to capital expenditures(5)		929		—		—		—			—			—			929

Total	$	106,789	$	221,126	$	253,297	$	150,908		$	32,763		$	351,688		$	1,116,571

Other Commercial Commitments	2009		2010		2011		2012			2013			After 2014			Total Commitments


ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2008
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 333-117081-27


Large accelerated filer o		Accelerated filer ý		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

	Sales Price ($)

	Sales Price ($)				Cash Dividend Declared ($)
	High		Low		Cash Dividend Declared ($)
Fiscal 2008
First quarter		13.39		8.87		0.075
Second quarter		9.14		5.63		—
Third quarter		7.90		5.12		—
Fourth quarter		8.41		1.62		—

	Sales Price ($)

	Sales Price ($)				Cash Dividend Declared ($)
	High		Low		Cash Dividend Declared ($)
Fiscal 2007
First quarter		18.00		14.28		0.075
Second quarter		18.13		16.00		0.075
Third quarter		17.15		13.95		0.075
Fourth quarter		15.60		11.80		0.075

Period			Average price paid per share			Approximate dollar value of shares that may yet be purchased under program

September 1 - September 28, 2008		13,640	$	7.47	—	$	83,746,985
September 29 - October 26, 2008		—			—		83,746,985
October 27 - November 30, 2008		—			—		83,746,985

	Total	13,640			—

			Fiscal year(1)

			2008			2007			2006
Americas:
	United States			70.5	%		74.5	%		76.4	%
	Canada			12.5			11.5			10.6
	Other			7.1			5.8			5.3

		Total Americas		90.1			91.8			92.3
Europe				9.9			8.2			7.7

		Total		100.0	%		100.0	%		100.0	%