10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2007

Commission File No. 0-25121

____________________

SELECT COMFORT CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota (State or other jurisdiction of incorporation or organization)	41-1597886 (I.R.S. Employer Identification No.)
6105 Trenton Lane North Minneapolis, Minnesota (Address of principal executive offices)	55442 (Zip code)

Registrant’s telephone number, including area code: (763) 551-7000

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  x  NO  o

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

Large accelerated filer  x Accelerated filer  o Non-accelerated filer  o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).

YES o NO  x

As of April 27, 2007, 49,297,000 shares of Common Stock of the Registrant were outstanding.

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

INDEX

PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements	Page
	Consolidated Balance Sheets
	March 31, 2007 and December 30, 2006	3
	Consolidated Statements of Operations
	for the Three Months ended
	March 31, 2007 and April 1, 2006	4
	Consolidated Statements of Cash Flows
	for the Three Months ended
	March 31, 2007 and April 1, 2006	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of
	Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17
Item 4.	Controls and Procedures	17
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults upon Senior Securities	19
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 5.	Other Information	20
Item 6.	Exhibits	20

PART I:  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SELECT COMFORT CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share amounts)

	(unaudited) March31, 2007			December30, 2006
Assets
Current assets:
Cash and cash equivalents	$	15,476		$	8,819
Marketable debt securities – current		20,568			37,748
Accounts receivable, net of allowance for doubtful accounts of $533 and $529, respectively		14,544			12,164
Inventories		25,035			24,120
Prepaid expenses		11,803			10,227
Deferred income taxes		6,273			5,785
Other current assets		3,201			4,305
Total current assets		96,900			103,168
Marketable debt securities – non-current		30,763			43,608
Property and equipment, net		60,976			59,384
Deferred income taxes		18,786			19,275
Other assets		3,522			3,526
Total assets	$	210,947		$	228,961
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	57,008		$	46,061
Customer prepayments		10,205			9,552
Accruals:
Sales returns		4,779			3,907
Compensation and benefits		17,679			20,057
Taxes and withholding		8,797			5,053
Other current liabilities		9,589			12,901
Total current liabilities		108,057			97,531
Warranty liabilities		7,475			7,769
Other long-term liabilities		7,986			7,967
Total liabilities		123,518			113,267
Shareholders’ equity:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $0.01 par value; 142,500 shares authorized, 49,551 and 51,544 shares issued and outstanding, respectively		496			515
Additional paid-in capital		—			4,039
Retained earnings		87,162			111,140
Accumulated other comprehensive loss		(229	)		—
Total shareholders’ equity		87,429			115,694
Total liabilities and shareholders’ equity	$	210,497		$	228,961

See accompanying notes to consolidated financial statements.

3

SELECT COMFORT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

	Three Months Ended
	March 31, 2007		April 1, 2006
Net sales	$	216,509	$	212,278
Cost of sales		82,341		84,756
Gross profit		134,168		127,522
Operating expenses:
Sales and marketing		98,138		91,755
General and administrative		17,619		16,732
Research and development		1,584		730
Total operating expenses		117,341		109,217
Operating income		16,827		18,305
Interest income, net		394		869
Income before income taxes		17,221		19,174
Income tax expense		6,544		7,440
Net income	$	10,677	$	11,734
Net income per share – basic	$	0.21	$	0.22
Weighted average shares – basic		49,713		53,430
Net income per share – diluted	$	0.21	$	0.21
Weighted average shares – diluted		51,798		56,517

See accompanying notes to consolidated financial statements.

4

SELECT COMFORT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited – in thousands)

	Three Months Ended
	March 31, 2007			April 1, 2006
Cash flows from operating activities:
Net income	$	10,677		$	11,734
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,813			4,571
Stock-based compensation		2,072			1,828
Excess tax benefits from stock-based compensation		(756	)		(3,632	)
Changes in deferred income taxes		1			(2,156	)
Changes in operating assets and liabilities:
Accounts receivable		(2,380	)		(4,126	)
Inventories		(915	)		(210	)
Prepaid expenses and other assets		(478	)		(3,615	)
Accounts payable		10,016			6,816
Customer prepayments		653			507
Accrued sales returns		872			(241	)
Accrued compensation and benefits		(2,378	)		(4,680	)
Accrued taxes and withholding		4,587			(26	)
Warranty liabilities		(386	)		2,469
Other accruals and liabilities		(873	)		437
Net cash provided by operating activities		27,525			9,676
Cash flows from investing activities:
Purchases of property and equipment		(8,395	)		(6,613	)
Investments in marketable debt securities		—			(26,180	)
Proceeds from sales and maturity of marketable debt securities		29,796			6,755
Net cash provided by (used in) investing activities		21,401			(26,038	)
Cash flows from financing activities:
Net (decrease) increase in short-term borrowings		(370	)		35
Repurchases of common stock		(43,825	)		(18,413	)
Proceeds from issuance of common stock		1,170			4,118
Excess tax benefits from stock-based compensation		756			3,632
Net cash used in financing activities		(42,269	)		(10,628	)
Increase (decrease) in cash and cash equivalents		6,657			(26,990	)
Cash and cash equivalents, at beginning of period		8,819			43,867
Cash and cash equivalents, at end of period	$	15,476		$	16,877

See accompanying notes to consolidated financial statements.

5

SELECT COMFORT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

1.   Basis of Financial Statement Presentation

The consolidated financial statements as of and for the three months ended March 31, 2007 of Select Comfort Corporation and subsidiaries (“Select Comfort” or the “Company”) have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the financial position of the Company as of March 31, 2007 and December 30, 2006 and the results of operations and cash flows for the periods presented. Our historical results of operations may not be indicative of the results that may be achieved for any future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006. Operating results for any quarterly period may not be indicative of operating results for the full-year. Certain prior-year amounts have been reclassified to conform to the current-year presentation.

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Critical accounting policies consist of revenue recognition, sales returns, warranty liabilities, asset impairment charges and stock-based compensation.

2.   Marketable Debt Securities

Through December 30, 2006, we classified our marketable debt securities as “held-to-maturity” in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” We historically valued our marketable debt securities at amortized cost based upon our intent and ability to hold these securities to maturity.

On March 23, 2007, all marketable debt securities carried at an amortized cost of $67.8 million with an unrealized net loss of $250,000 were transferred from “held-to-maturity” classification to “available-for-sale” classification. Investments classified as “available-for-sale” are carried at fair market value. The classification change was made to increase liquidity and fund our common stock repurchase program. Based on the change in classification, we reduced both the carrying value of our marketable debt securities and shareholders’ equity (accumulated other comprehensive loss) by $250,000 on the date the securities were transferred to “available-for-sale” classification.

During the first quarter of fiscal 2007 and subsequent to the classification change, marketable debt securities with a cost of $16.2 million were sold and a realized loss of $5,000 was recognized. At March 31, 2007, $229,000 of unrealized net losses related to our marketable debt securities were included in accumulated other comprehensive loss on our consolidated balance sheet.

Available-for-sale securities are reported at fair value with net unrealized gains or losses reported, net-of-tax, within shareholders’ equity. If a decline in fair value of a marketable debt security is deemed by management to be other than temporary, the cost basis of the investment is written down to fair value, and the amount of the impairment is included in the determination of income. Realized gains and losses are recorded based on the specific identification method and average cost method, as appropriate, based upon the investment type.

6

Marketable debt securities are summarized as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2007
Municipal securities	$	51,560	$	—	$	(229	)	$	51,331
December 30, 2006
U.S. government agencies	$	5,998			$	(23	)	$	5,975
Municipal securities		75,358				(279	)		75,079
	$	81,356	$	—	$	(302	)	$	81,054

As of March 31, 2007, the contractual maturities were as follows (in thousands):

	Amortized Cost		Fair Value
0 – 12 Months	$	20,568	$	20,568
12 – 24 Months		30,992		30,763
	$	51,560	$	51,331

3.   Inventories

Inventories consist of the following (in thousands):

	March 31, 2007		December 30, 2006
Raw materials	$	6,380	$	6,576
Work in progress		163		111
Finished goods		18,492		17,433
	$	25,035	$	24,120

4.   Repurchases of Common Stock

We repurchased and retired 2,359,000 and 772,000 shares at a cost of $42.8 million and $18.4 million, during the three months ended March 31, 2007 and April 1, 2006, respectively (based on trade date). On April 20, 2007, our Board of Directors authorized the repurchase of up to an additional $250 million of our common stock, bringing the total availability under our share repurchase program to $290 million. There is no expiration date governing the period over which we can repurchase shares.

5.   Stock-Based Compensation

We compensate officers, directors and key employees with stock-based compensation under three plans approved by our shareholders in 1990, 1997 and 2004 and administered under the supervision of our Board of Directors. Stock-based compensation awards are generally granted annually during the first quarter. We have awarded stock options, employee stock purchase plan shares, performance shares and restricted stock under these plans. At March 31, 2007, a total of 1,449,000 shares were available for future grant under these plans. Stock-based compensation expense is determined based on the grant-date fair value and is recognized proportionally over the vesting period of each grant, which is generally four years. Stock-based compensation expense for the three months ended March 31, 2007 and April 1, 2006 was $2,072,000 and $1,828,000, respectively.

7

6.   Interest Income, Net

Net interest income consists of the following (in thousands):

	Three Months Ended
	March 31, 2007			April 1, 2006
Interest income	$	618		$	869
Interest expense		(224	)		—
Interest income, net	$	394		$	869

7.   Comprehensive Income

Comprehensive income is computed as net income plus certain other items that are recorded directly to shareholders’ equity. Our comprehensive income reflects net income and unrealized losses on available-for-sale marketable debt securities. Comprehensive income was $10,448,000 and $11,734,000 for the three months ended March 31, 2007 and April 1, 2006, respectively.

8.   Net Income per Common Share

The following computations reconcile net income per share – basic with net income per share – diluted (in thousands, except per share amounts):

	Three Months Ended
	March 31, 2007		April 1, 2006
Net income	$	10,677	$	11,734
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding		49,713		53,430
Effect of dilutive securities:
Options		1,879		2,839
Warrants		1		81
Restricted shares		205		167
Diluted weighted-average shares outstanding		51,798		56,517
Net income per share – basic	$	0.21	$	0.22
Net income per share – diluted		0.21		0.21

Additional potentially dilutive securities of approximately 1,442,000 and 849,000 for the three month periods ended March 31, 2007 and April 1, 2006, respectively, have been excluded from diluted net income per share because these securities’ exercise prices were greater than the average market price of our common shares.

9.   Income Taxes

Effective December 31, 2006, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 defines the threshold for recognizing the benefits of tax positions in the financial statements as “more-likely-than-not” to be sustained upon examination. FIN 48 also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. In May 2007, the FASB issued Staff Position FIN No. 48-1, “Definition of ‘Settlement’ in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how a company should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The adoption of FIN 48 and FSP FIN 48-1 did not materially affect our consolidated financial statements and, as a result, we did not record any cumulative effect adjustment upon adoption.

8

As of the date of adoption, the total amount of unrecognized tax benefits for uncertain tax positions was approximately $252,000. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was approximately $252,000. We do not expect the unrecognized tax benefits to change materially within the next 12 months.

We classify interest and penalties on tax uncertainties as a component of income tax expense in our consolidated statements of operations. The total amount of interest and penalties recorded in liabilities as of the date of adoption were not significant. In addition, the total amount of interest and penalties recorded in our consolidated statements of operations during the three months ended March 31, 2007 and April 1, 2006 were not significant.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In the normal course of business, we are subject to examination by federal and state taxing authorities. We are no longer subject to federal income tax examinations for years prior to 2003. The Internal Revenue Service is currently examining our 2004 U.S. consolidated federal income tax return. This examination is anticipated to be completed during fiscal 2007. We are no longer subject to state income tax examinations for years prior to 2002. No states are currently examining any of our state income tax returns.

10.   Accounting Standards Issued and Not Yet Implemented

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for our 2008 fiscal year beginning December 30, 2007, with early adoption permitted. We are currently evaluating the potential impact of adopting SFAS 157 on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities – Including an Amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits us to choose to measure certain financial assets and liabilities at fair value that are not currently required to be measured at fair value (the “Fair Value Option”). Election of the Fair Value Option is made on an instrument-by-instrument basis and is irrevocable. At the adoption date, unrealized gains and losses on financial assets and liabilities for which the Fair Value Option has been elected would be reported as a cumulative adjustment to beginning retained earnings. If we elect the Fair Value Option for certain financial assets and liabilities, we will report unrealized gains and losses due to changes in their fair value in earnings at each subsequent reporting date. SFAS 159 is effective for our 2008 fiscal year beginning December 30, 2007. We are currently evaluating the potential impact of adopting SFAS 159 on our consolidated financial statements.

11.   Commitments and Contingencies

We are involved in various legal proceedings arising in the ordinary course of business. In the opinion of management, any material losses that may occur from any currently pending matters are adequately covered by insurance or are provided for in the consolidated financial statements if the liability is probable and estimable in accordance with generally accepted accounting principles. The ultimate outcomes of these matters are not expected to have a material effect on our consolidated results of operations or financial position.

9

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in six sections:

• Risk Factors

• Overview

• Results of Operations

• Liquidity and Capital Resources

• Off-Balance-Sheet Arrangements and Contractual Obligations

• Significant Accounting Policies

Risk Factors

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included herein. This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projects,” “predicts,” “potential” or “continue” or the negative of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors known to us that could cause such material differences are identified and discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2006, which discussion is incorporated herein by reference. These important factors include, but are not limited to:

• Our ability to manage growth in the size and complexity of our business, which has placed, and will continue to place, significant strains on our management, operations, information systems and other resources;

• The level of consumer acceptance of our products, new product offerings and brand image;

• Our ability to continuously improve our products to offer new and enhanced consumer benefits, better quality and reduced costs;

• The effectiveness of our marketing messages and the efficiency of our advertising expenditures and other marketing programs in building product and brand awareness, driving traffic to our points of sale and increasing sales;

• Our ability to execute our company-owned retail store distribution strategy, including increasing sales and profitability through our existing stores, securing suitable and cost-effective locations for additional retail stores and cost-effectively closing under-performing store locations;

• Our ability to hire, train, motivate and retain qualified retail store management and sales professionals;

• Our ability to secure and retain wholesale accounts on a profitable basis and to profitably manage growth in wholesale distribution, including the impact on our retail stores and other company-controlled distribution channels;

• Our ability to cost-effectively expand our distribution internationally;

• Our ability to cost-effectively implement information systems changes, product design changes, manufacturing and procurement processes and document retention processes to comply with new federal flame retardancy standards applicable to mattresses and mattress and foundation sets effective as of July 1, 2007;

• Our ability to secure adequate sources of supply at reasonable cost, especially considering our single sources of supply for some components and just-in-time manufacturing processes, as well as potential shortages of commodities;

• Our ability to maintain sales volumes and profit margins and effectively manage the effects of inflationary pressures caused by rising fuel and commodity costs as well as fluctuating currency rates and increasing industry regulatory requirements, all of which could increase product and service costs;

10

• Our ability to cost-effectively offer consumer credit options through third-party credit providers;

• The capability of our management information systems to continue to meet the requirements of our business and our ability to successfully implement our planned SAP-based enterprise-wide information technology architecture;

• General economic conditions and consumer confidence; and

• Global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events.

We have no obligation to publicly update or revise any of the forward-looking statements contained in this quarterly report on Form 10-Q.

Overview

Business Overview

Select Comfort is the leading developer, manufacturer and marketer of premium-quality, adjustable-firmness beds. The air-chamber technology of our proprietary Sleep Number^® bed allows adjustable firmness on each side of the mattress and provides a sleep surface that is clinically proven to provide better sleep quality and greater relief of back pain compared to traditional mattress products. In addition, we market and sell accessories and other sleep related products which focus on providing personalized comfort to complement the Sleep Number bed and provide a better night’s sleep to the consumer.

We generate revenue by selling our products through four complementary distribution channels. Three of these channels: retail, direct marketing and e-commerce, are company-controlled and sell directly to consumers. Our wholesale channel sells to leading home furnishings retailers, specialty bedding retailers, the QVC shopping channel and to several end users such as Radisson Hotels and Resorts^®.

Strategy and Key Fiscal 2007 Initiatives

Our vision is to be the leading brand in the bedding industry, while improving people’s lives through better sleep. We have established long-term financial growth targets of 15% annual net sales growth or higher and annual earnings growth of 20% or higher.

As further outlined in our fiscal 2006 Form 10-K, we are executing against a defined growth strategy which focuses on the following key components:

• Building brand awareness to increase consumers’ knowledge of the unique benefits of our products;

• Expanding distribution with a long-term goal of operating between 600 and 650 company-owned stores in the U.S. and growth in our retail partner program;

• Accelerating product innovation to lead the industry in innovative sleep products; and

• Leveraging our infrastructure in order to facilitate long-term profitable growth.

We have also identified four key initiatives for fiscal 2007 which are intended to benefit our business performance in the current fiscal year and beyond. These initiatives include:

• Increasing planned marketing support behind new creative and media plans by approximately 10% for the year;

• Increasing our store base by approximately 10%, while holding retail partner doors in-line with prior year and working to ensure incremental market growth;

• Developing product innovation capability and a pipeline for further competitive advantage and incremental sales opportunity late in fiscal 2007 and into fiscal 2008; and

• Enhancing infrastructure for productivity and capacity, including delivery logistics, information technology systems and physical office space.

11

Outlook

We continue to project fiscal 2007 net sales of between $900 million and $925 million, and full-year earnings per diluted share of between $1.02 and $1.09. This guidance anticipates net sales growth of between 12% and 15%, and earnings growth of 20% or higher. We expect second quarter 2007 earnings to be below one year-ago, reflecting a continuation of near-term sales trends and investments in long-term growth initiatives. In addition, we expect our second quarter gross profit rate will be approximately 3 percent of net sales below the first quarter of fiscal 2007 rate of 62.0%, primarily due to the launch of our fire retardant product across our core mattress line and the seasonality of our business. Our outlook anticipates an improvement during the second half of fiscal 2007 as comparisons to our prior year results ease. Our full-year guidance also anticipates that our growth initiatives will begin to have a meaningful effect on our results in the third quarter. If the macro-economic environment further deteriorates, or if the benefits from our growth initiatives take longer than expected, the lower end of our sales and earnings ranges could be pressured.

We anticipate increasing our retail store count by 40 net new retail stores, and relocating or expanding 30 or more stores in 2007. Our 2007 capital expenditures are expected to be approximately $50 million, compared to $31.1 million in 2006. The increase in capital expenditures is due to our expected implementation of SAP in the first half of fiscal year 2008 and leasehold improvement costs necessary to furnish our new corporate headquarters that we plan to move into in the fall of 2007.

Quarterly and Annual Results

Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in comparable-store sales, the timing, amount and effectiveness of advertising expenditures, any changes in sales return rates or warranty experience, the timing of new store openings and related expenses, net sales contributed by new stores, the timing of promotional offerings, competitive factors, changes in commodity costs, any disruptions in supplies or third-party service providers, seasonality of retail sales, timing of QVC shows and wholesale sales, consumer confidence and general economic conditions. As a result, we may be unable to adjust spending in a timely manner, and our business, financial condition and operating results may be significantly harmed. Our historical results of operations may not be indicative of the results that may be achieved for any future period.

Highlights

Key financial highlights for the three months ended March 31, 2007 were as follows:

• Earnings per diluted share of $0.21 remained unchanged compared to the first quarter of the prior fiscal year. Net income totaled $10.7 million compared to $11.7 million in the prior fiscal year. Earnings per share benefited from a lower share count, reflecting our ongoing common stock repurchase program.

• Net sales increased 2% to $216.5 million, compared with $212.3 million in the first quarter of fiscal 2006, driven by the addition of 45 net new company-owned retail stores in the past 12 months and strong performance in our e-commerce and wholesale distribution channels, partially offset by an 11% comparable-store sales decline for our company-owned retail stores.

• Our gross profit rate for the first quarter of fiscal 2007 increased to 62.0% of net sales, compared to 60.1% of net sales for the prior year’s first quarter. The gross profit rate increase was driven by improvements in sourcing, manufacturing productivity and reduced warranty costs, partially offset by an increased percentage of sales from lower gross margin channels and lower margin products.

• Sales and marketing expenses increased to 45.3% of net sales in the first quarter of fiscal 2007, compared to 43.2% of net sales in the first quarter of fiscal 2006. The rate increase was driven by a higher number of stores and markets served and the deleveraging impact of an 11% comparable-store sales decline.

• General and administrative expenses increased to 8.1% of net sales in the first quarter of fiscal 2007, compared with 7.9% of net sales for the prior year’s first quarter. The rate increase was primarily due to additional headcount to support ongoing business growth, partially offset by lower incentive-based compensation expense.

12

• Cash from operating activities totaled $27.5 million in the first quarter of fiscal 2007, compared with $9.7 million in the prior year’s first fiscal quarter.

• During the first quarter of fiscal 2007, we repurchased $42.8 million of common stock or 2.4 million shares (based on trade date).

Results of Operations

The following table sets forth, for the periods indicated, our results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences.

	Three Months Ended
	March 31, 2007				April 1, 2006
Net sales	$	216.5	100.0	%	$	212.3	100.0	%
Cost of sales		82.3	38.0	%		84.8	39.9	%
Gross profit		134.2	62.0	%		127.5	60.1	%
Operating expenses:
Sales and marketing		98.1	45.3	%		91.8	43.2	%
General and administrative		17.6	8.1	%		16.7	7.9	%
Research and development		1.6	0.7	%		0.7	0.3	%
Total operating expenses		117.3	54.2	%		109.2	51.4	%
Operating income		16.8	7.8	%		18.3	8.6	%
Interest income, net		0.4	0.2	%		0.9	0.4	%
Income before income taxes		17.2	8.0	%		19.2	9.0	%
Income tax expense		6.5	3.0	%		7.4	3.5	%
Net income	$	10.7	4.9	%	$	11.7	5.5	%
Net income per share:
Basic		$ 0.21				$ 0.22
Diluted		$ 0.21				$ 0.21
Weighted-average number of common shares:
Basic		49.7				53.4
Diluted		51.8				56.5

The percentage of our total net sales, by dollar volume, from each of our channels was as follows:

	Three Months Ended
	March 31, 2007		April 1, 2006
Percent of sales:
Retail	76.1	%	78.3	%
Direct	8.7	%	10.0	%
E-commerce	6.6	%	5.3	%
Wholesale	8.6	%	6.4	%
Total	100.0	%	100.0	%

13

The components of total sales growth, including comparable-store sales changes, were as follows:

	Three Months Ended
	March 31, 2007		April 1, 2006
Sales growth rates:
Comparable-store sales	(11	)%	18	%
Net new stores	10	%	8	%
Retail total	(1	)%	26	%
Direct	(11	)%	1	%
E-commerce	27	%	39	%
Wholesale	37	%	22	%
Total sales growth	2	%	23	%

The number of company-operated retail stores and independently owned and operated retail partner doors was as follows:

	Three Months Ended
	March 31, 2007		April 1, 2006
Company-owned retail stores:
Beginning of period	442		396
Opened	7		8
Closed	(2	)	(2	)
End of period	447		402
Retail partner doors	841		494

Comparison of Three Months Ended March 31, 2007 with Three Months Ended April 1, 2006

Net sales

Net sales increased 2% to $216.5 million for the three months ended March 31, 2007 compared with $212.3 million for the three months ended April 1, 2006. The sales increase was driven by the addition of 45 net new company-owned retail stores in the past 12 months and strong performance in our e-commerce and wholesale distribution channels, partially offset by an 11% comparable-store sales decline in our company-owned retail stores. Sales of mattress units increased 4% compared to the prior year’s first quarter primarily due to distribution expansion. The average selling price per bed (mattress sales only divided by mattress units) in our company-controlled channels and the related sales of other product and services were both essentially flat compared to the first quarter of the prior year.

The $4.2 million net sales increase compared with the prior year was comprised of the following: (i) a $5.0 million increase in wholesale sales, (ii) a $3.0 million increase in e-commerce sales, partially offset by, (iii) a $1.4 million decrease in sales from our retail stores, comprised of a $17.8 million decrease from comparable-stores and a $16.4 million increase from new stores, net of stores closed and (iv) a $2.4 million decrease in direct marketing sales.

Gross profit

The gross profit rate increased to 62.0% of net sales for the three months ended March 31, 2007 as compared with 60.1% for the three months ended April 1, 2006. The gross profit rate benefited from improvements in sourcing, manufacturing productivity and the company’s ongoing implementation of a hub-and-spoke logistics network which reduced our cost of sales. The first quarter gross profit rate also benefited from the absence of a warranty accrual correction (to include freight costs) which occurred in the first quarter of the prior fiscal year. These items were partially offset by an increase in the percentage of net sales from lower gross margin channels which reduced the gross profit rate by approximately 0.6 percentage points and a shift in product mix to lower margin products which reduced the gross profit rate by approximately 0.5 percentage points.

14

Sales and marketing expenses

Sales and marketing expenses for the three months ended March 31, 2007 increased 7% to $98.1 million compared with $91.8 million in the prior year’s first quarter and increased as a percentage of net sales to 45.3% from 43.2%. The $6.3 million increase was primarily due to a higher number of stores and markets served, and an increased use of promotional financing offers in lieu of other promotional offers. The 2.1 percentage point sales and marketing expense rate increase was primarily due to the deleveraging impact of an 11% comparable-store sales decline for our company-owned retail stores which resulted in sales and marketing expenses growing at a faster rate than first quarter of fiscal 2007 net sales. Total media spending was essentially even with the prior year’s first quarter and declined slightly as a percentage of net sales.

General and administrative expenses

General and administrative (G&A) expenses increased 5% to $17.6 million for the three months ended March 31, 2007 compared with $16.7 million for the three months ended April 1, 2006 and increased as a percentage of net sales to 8.1% from 7.9% for the prior-year period. The dollar and percentage increases in G&A were primarily due to a $2.5 million increase in compensation and benefit costs as additional headcount were added to support the ongoing growth of the business, partially offset by a $1.4 million reduction in incentive compensation costs. We generally expect future G&A growth rates to be lower than the rate of sales growth due to leveraging the fixed component of G&A expenses across a higher sales base.

Research and development expenses

Research and development expenses increased to $1.6 million for the first quarter of fiscal 2007 compared with $0.7 million in the prior year’s first quarter, and increased as a percentage of net sales to 0.7% from 0.3% for the comparable prior-year period. The significant dollar and percentage of net sales increases in R&D expenses were the result of our strategic decision to accelerate our investment in new product innovation.

Interest income, net

Net interest income decreased by $0.5 million to $0.4 million for the three months ended March 31, 2007 compared with $0.9 million for the three months ended April 1, 2006. The decrease in net interest income was due to interest expense on short-term borrowings used to fund common stock repurchases during the first quarter of fiscal 2007 and lower average cash and investment balances compared with the prior year’s first quarter.

Income tax expense

Income tax expense decreased $0.9 million to $6.5 million for the three months ended March 31, 2007 compared with $7.4 million for the three months ended April 1, 2006. The effective tax rate was 38.0% for the first quarter of fiscal 2007 and 38.8% for the prior year’s first quarter. The effective tax rate in the first quarter of fiscal 2007 was consistent with the full-year fiscal 2006 effective tax rate of 37.8%.

Liquidity and Capital Resources

As of March 31, 2007, we had cash, cash equivalents and marketable securities of $66.8 million, of which $36.0 million was classified as a current asset, compared to $90.2 million of cash, cash equivalents and marketable debt securities as of December 30, 2006, of which $46.6 million was classified as a current asset. The $23.4 million decrease in cash, cash equivalents and marketable debt securities was primarily due to $43.8 million of common stock repurchases and $8.4 million of capital expenditures, partially offset by $27.5 million of cash provided by operating activities.

Cash provided by operating activities for the three months ended March 31, 2007 and April 1, 2006 was $27.5 million and $9.7 million, respectively. The $17.8 million year-over-year increase in cash from operations was comprised of a $7.5 million increase in adjustments to reconcile net income to cash provided by operating activities, $11.4 million due to increased cash from changes in operating assets and liabilities, partially offset by a $1.1 million decline in net income. The year-over-year increase in adjustments to reconcile net income to cash provided by operating activities was the result of higher depreciation and amortization compared to the prior year, and the reduced impact from deferred income taxes and excess tax benefits from stock based-compensation. The increased cash from changes in operating assets and liabilities was primarily due to increases in accounts payable and accrued taxes and withholding, a lower increase in accounts receivable and prepaid expenses, a reduced use of cash related to accrued compensation and benefit liabilities, partially offset by a lower increase in warranty liabilities.

15

Net cash provided by investing activities was $21.4 million for the three months ended March 31, 2007 compared with net cash used in investing activities of $26.0 million for the three months ended April 1, 2006. The $47.4 million increase in net cash provided by investing activities was principally due to $29.8 million of proceeds from the sales and maturity of marketable debt securities in the current year’s first quarter, compared to $19.4 million of net investment in marketable debt securities for the first three months of fiscal 2006. During the first quarter of fiscal 2007, we invested $8.4 million in property and equipment, compared to $6.6 million in the same period one year ago. In both periods, our capital expenditures related primarily to new and remodeled retail stores and investments in information technology. In the first three months of 2007 we opened seven retail stores, while in the first three months of 2006 we opened eight stores.

Net cash used in financing activities increased to $42.3 million for the three months ended March 31, 2007, compared to $10.6 million for the three months ended April 1, 2006. The $31.6 million increase in cash used in financing activities resulted from a $25.4 million year-over-year increase in common stock repurchases, $2.9 million in reduced proceeds from the issuance of common stock related to stock options and employee purchases, and $2.9 million reduction in tax benefits from stock-based compensation. We may make additional purchases of our common stock from time-to-time, subject to market conditions and at prevailing market prices, through open market purchases. On April 20, 2007, our Board of Directors authorized the company to repurchase up to an additional $250 million of its common stock, providing a total of $290 million of repurchase authority. We may terminate or limit the stock repurchase program at any time.

Cash generated from operations should be a sufficient source of liquidity for the short- and long-term and should provide adequate funding for capital expenditures. In addition, our business model, which can operate with minimal working capital, does not require significant additional capital to fund operations and organic growth. In 2006, we obtained a $100 million bank revolving line of credit for general corporate purposes including the funding of any short-term cash needs or investment opportunities. This line of credit is a five-year senior unsecured revolving facility expiring June 2011. Borrowings under the credit facility bear interest at a floating rate and may be maintained as base rate loans (tied to the prime rate or the federal funds rate plus 0.5%) or as Eurocurrency rate loans tied to LIBOR, plus a margin up to 1.0% depending on our leverage ratio, as defined. We are subject to certain financial covenants under the agreement, principally consisting of interest coverage and leverage ratios. We have remained and expect to remain in full compliance with the financial covenants. Although we had no borrowings against the credit facility as of March 31, 2007, we may incur borrowings during 2007 as we continue to repurchase our common stock at a rate that may exceed our available cash balances.

Off-Balance-Sheet Arrangements and Contractual Obligations

Other than operating leases, we do not have any off-balance-sheet financing. We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships. As of March 31, 2007, we are not involved in any unconsolidated special purpose entity transactions.

There has been no material change in our contractual obligations other than in the ordinary course of business since the end of fiscal 2006. See our Annual Report on Form 10-K for the fiscal year ended December 30, 2006 for additional information regarding our contractual obligations.

Significant Accounting Policies

We describe our significant accounting policies in Note 1, Business and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006. We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006. There were no significant changes in our accounting policies since the end of fiscal 2006 other than the change in our marketable debt securities classification as described in Note 2 of the Notes to our Consolidated Financial Statements.

16

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial instruments that potentially subject us to concentrations of credit risk consist principally of investments. The counterparties to the agreements consist of government agencies and various major corporations of investment grade credit standing. We do not believe we are exposed to significant risk of non-performance by these counterparties because we limit the amount of credit exposure to any one financial institution and any one type of investment.

Changes in the overall level of interest rates affect income generated from our short- and long-term investments in cash, cash equivalents and marketable debt securities. If overall interest rates were one percentage point lower than current rates, our annual interest income would decline by approximately $0.7 million based on our short- and long-term investments as of March 31, 2007. We do not manage our investment interest-rate volatility risk through the use of derivative instruments.

ITEM 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effectiveas of the end of the period covered by this report.

Changes in Internal Controls

There was no change in our internal control over financial reporting that occurred during our quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

17

PART II:  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

We are involved in various legal proceedings arising in the ordinary course of business. In the opinion of management, any material losses that may occur from any currently pending matters are adequately covered by insurance or are provided for in the consolidated financial statements if the liability is probable and estimable in accordance with generally accepted accounting principles. The ultimate outcomes of these matters are not expected to have a material effect on our consolidated results of operations or financial position.

ITEM 1A.   RISK FACTORS

Our business, financial condition and operating results are subject to a number of risks and uncertainties, including both those that are specific to our business and others that affect all businesses operating in a global environment. Investors should carefully consider the information in this report under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and also the information under the heading, “Risk Factors” in our most recent Annual Report on Form 10-K. There has been no material change in those risk factors since the date of our Annual Report on Form 10-K.

18

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) – (b)	Not applicable.
(c)	Issuer Purchases of Equity Securities
	(in thousands, except per share amounts)

Fiscal Period	Total Number of Shares including Non-Qualified	Average Price Paid per Share	Total number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Availability
January 2007	1,054	$17.75	1,054
February 2007	565	18.71	565
March 2007	740	18.27	740
Total	2,359	18.14	2,359	$45,875

(1) The Finance Committee of the Board of Directors reviews, on a quarterly basis, the authority granted as well as any repurchases under this program. On April 20, 2007, our Board authorized the repurchase of up to an additional $250 million of our common stock, providing a total of $290 million of availability.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

Not applicable.

19

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.   OTHER INFORMATION

Not applicable.

ITEM 6.   EXHIBITS

Exhibit Number	Description	Method of Filing
10.1	Separation Agreement between the Company and Keith C. Spurgeon as of April 12, 2007	Filed herewith
31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Filed herewith
32.2	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Filed herewith

20

SIGNATURES

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

	SELECT COMFORT CORPORATION
	(Registrant)
Dated: May 9, 2007	By:	/s/ William R. McLaughlin
		William R. McLaughlin
		Chairman and Chief Executive Officer (principal executive officer)
	By:	/s/ James C. Raabe
		James C. Raabe
		Senior Vice President and Chief Financial Officer (principal financial and accounting officer)

21

EXHIBIT INDEX

Exhibit Number	Description	Method of Filing
10.1	Separation Agreement between the Company and Keith C. Spurgeon as of April 12, 2007	Filed herewith
31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Filed herewith
32.2	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Filed herewith

22

EX-10.1

Exhibit 10.1

SEPARATION AGREEMENT

THIS AGREEMENT, dated as of April 12, 2007, is entered into by and between Select Comfort Corporation, a Minnesota corporation (“Company”), and Keith C. Spurgeon, an individual resident of the State of Minnesota (“Employee”).

RECITALS

A. Company and Employee have agreed to certain terms and conditions relating to the termination of Employee’s employment with Company as set forth herein.

B. Except as otherwise expressly set forth below, all of the terms and conditions relating to the termination of Employee’s employment with Company are set forth herein and this Agreement supersedes and replaces in its entirety any previous agreement, letter or understanding between Company and Employee relating to the termination of Employee’s employment with Company.

In consideration of the foregoing and the mutual agreements set forth below, the parties hereto agree as follows:

1. Termination of Service. Company and Employee agree that Employee’s employment with Company will terminate effective as of June 30, 2007, as of which date Employee agrees to resign all of his positions as an officer of Company.

2. Compensation. Subject to reasonable compliance by Employee with the terms and conditions of this Agreement and the agreement referred to in Section 8 below, and subject to the execution and delivery by Employee (on or after Employee’s last day of employment with Company) of the release in the form of Exhibit A attached hereto (the “Release”) and the effectiveness of the Release following the passage of any applicable period of time during which the Release may be revoked or rescinded by Employee, Company agrees to pay, and Employee agrees to accept, in lieu of all other severance or other compensation set forth in any other agreement, letter or understanding between Company and Employee, or any other plan or arrangement of Company, the following amounts:

A. Employee’s current annual base salary;

B. The amount of Employee’s targeted annual bonus equal to 55% of Employee’s current annual base salary; and

C. Assuming Employee’s engagement in continued employment through June 2007, a pro rata bonus with respect to 2007 calculated at the target level.

The foregoing amount will be paid in a single, lump sum payment (less all applicable withholdings) promptly following (i) the execution and delivery of the Release and (ii) the passage of any applicable period of time during which the Release may be revoked or rescinded by Employee.

1

3. Welfare Benefits. Subject to the succeeding provisions of this Section 3, if Employee timely elects continued coverage under Company’s group medical plan and/or group dental plan pursuant to section 4980B of the Code (“COBRA”), in accordance with ordinary plan practices and provides appropriate documentation of such payment as requested by Company’s plan administrator, during the Premium Reimbursement Period (as defined below) Company will reimburse Employee each month an amount equal to the difference between the amount Employee pays for such COBRA continuation coverage each such month and the amount paid by a full-time active employee of Company each such month for the same level of coverage elected by Employee. For purposes of the preceding sentence, the Premium Reimbursement Period is the period that begins on the date of termination of employment and ends on the earlier of:

A. One (1) year after termination of Employee’s employment;

B. The date on which Employee’s eligibility for COBRA continuation coverage under Company’s group medical or group dental plan ends; or

C The date on which Employee becomes eligible to participate in another group medical plan or group dental plan, as the case may be, because of reemployment or otherwise, whether or not Employee elects to participate in such plan and whether or not such plan provides comparable benefits or includes limitations or exclusions (unless such other group medical plan contains a pre-existing condition exclusion that affects Employee’s coverage under such plan).

Other than the Premium Reimbursement Period payments described in this Section 3, Employee’s coverage under any employee benefit plan of Company is subject to the terms of such employee benefit plan and applicable law.

4. Outplacement Services. Company will assist Employee by paying for up to Fifteen Thousand Dollars ($15,000) for outplacement services from a consultant approved by Company. Such payments will be made directly to the consultant by Company.

5. Paid Time Off. Regardless of whether Employee signs this Agreement or executes and delivers the Release, Company will pay Employee for all Paid Time Off (“PTO”) that Employee has earned but not used as of the Separation Date, in accordance with the current Company policy with respect to PTO payout.

6. No Other Compensation; Withholding. Employee agrees and understands that he is not entitled to any compensation other than as expressly provided in this Agreement and will not accrue or become entitled to any benefits other than as expressly provided herein. Employee also understands that payments made pursuant to this Agreement may be subject to withholding of applicable income and other employment-related taxes (as well as FICA and Medicare) and consents to Company’s right to withhold from such payments as required by applicable tax laws.

2

7. Stock Options and Restricted Stock Awards. Stock options and restricted stock awards previously granted to Employee by Company that are currently outstanding will continue to vest and remain exercisable only in accordance with the existing terms of such options. Nothing contained in this Agreement shall be construed to alter or modify in any way any of the terms or conditions of any such stock options or restricted stock awards.

8. Employee Inventions, Confidentiality and Non-Compete Agreement. Employee and Company agree that the Employee Inventions, Confidentiality and Non-Compete Agreement dated as of February 22, 2002, shall remain in full force and effect and binding on Employee in accordance with its terms, except that the term referenced in Section 3 of such agreement shall be extended from one (1) year to two (2) years.

9. Non-Disparagement. Employee agrees that he will not at any time disparage, demean or criticize, or do or say anything to cause injury to, the business, reputation, management, employees or products of Company. Company agrees that it will not at any time disparage, demean or criticize, or do or say anything to cause injury to the reputation or career development of Employee. In addition to any other damages or remedies that may be available to a non-breaching party for any breach of this Section 9, any breaching party shall further be obligated to the non-breaching party for any reasonable attorneys’ fees and costs incurred by the non-breaching party to enforce the provisions of this Section 9.

10. Confidentiality. Company and Employee each agree that they will hold the facts and circumstances of this Agreement in strict confidence and will not reveal the existence or the terms of this Agreement to anyone except as may be required by law. Employee acknowledges that Company may be required to file a copy of this Agreement with the Securities and Exchange Commission in which event this Agreement would be publicly available. Notwithstanding the foregoing, each of the parties hereto will be entitled to advise their respective professional advisors of the terms hereof, and Employee will be entitled to discuss the terms hereof with immediate family members.

11. Knowing and Willful Agreement. Employee hereby acknowledges he fully understands and accepts the terms of this Agreement, that his signature is freely, voluntarily and knowingly given, and that he has been provided a full opportunity to review and reflect on the terms of this Agreement.

12. Opportunity to Consider and Seek Advice. Employee has been advised by Company to consult with an attorney prior to signing this Agreement, and that he has twenty-one (21) days from the date on which he received this Agreement to consider whether or not he wishes to sign it. To accept this Agreement, Employee must sign it and deliver it to Mark Kimball at Select Comfort Corporation, 6105 Trenton Lane North, Minneapolis, Minnesota, 55442.

3

13. Opportunity to Rescind or Revoke Release. Employee understands that Employee has the right to rescind or revoke the Release by giving written notice of such rescission or revocation to Company within fifteen (15) calendar days following Employee’s execution and delivery of the Release. Any such notice of rescission or revocation must be in writing and hand-delivered to Company or, if sent by mail, postmarked within the applicable time period, sent by certified mail, return receipt requested, and addressed as follows: Select Comfort Corporation, 6105 Trenton Lane North, Minneapolis, MN 55442, Attn.: General Counsel.

14. Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all previous negotiations, representations and agreements heretofore made by the parities with respect to the subject matter hereof. No amendment waiver or discharge hereof shall be valid unless in writing and executed by both parties hereto.

15. Governing Law. The laws of the State of Minnesota will govern the validity, construction and performance of this Agreement, without regard to the conflict of law provisions of any jurisdictions. Any legal proceeding related to this Agreement, will be brought in a Minnesota court of competent jurisdiction, and both Company and Employee hereby consent to the exclusive jurisdiction of any such court for this purpose.

16. Severability. Whenever possible, each provision of this Agreement will be interpreted so that it is valid under applicable law. If any provision of the Agreement is to any extent rendered invalid under applicable law, that provision will still be effective to the extent it remains valid. The remainder of this Agreement also will continue to be valid, and the entire Agreement will continue to be valid in other jurisdictions.

17. No Assignment. Employee may not assign this Agreement to any third party for whatever purpose without the express written consent of Company. Company may not assign this Agreement to any third party, except by operation of law through merger, consolidation, liquidation or recapitalization, or by sale of all or substantially all of the assets of Company, without the express written consent of Employee.

18. Remedies. The parties hereto agree that the rights granted by this Agreement are both unique and special, and the parties contemplate that enforcement of this Agreement may be had by recourse to the equitable remedies available in courts of competent jurisdiction in addition to any other remedies which may be or may become available at law.

19. Binding Effect. This Agreement and the obligations of the respective parties hereunder shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. In furtherance of, and not in limitation of, the foregoing, Company agrees that the provisions of this Agreement shall be binding upon any successor to the business and assets of Company and the provisions of this Agreement for the benefit of Employee shall inure to the benefit of Employee’s estate in the event of Employee’s death, including all benefits and payments due hereunder.

4

The parties have duly executed this Agreement as of the date set forth above.

SELECT COMFORT CORPORATION
By:	/s/ Mark A. Kimball
Its:	SVP & General Counsel

KEITH C. SPURGEON
	/s/ Keith C. Spurgeon

5

EXHIBIT A TO SEPARATION AGREEMENT

(To be executed and delivered only on or after Employee’s last date of employment)

RELEASE

The undersigned, Keith C. Spurgeon (“Employee”) understands that, pursuant to the terms of the Separation Agreement between Employee and Select Comfort Corporation (“Company”) dated as of ____________, 2007, Employee is receiving substantial compensation that Employee would not otherwise be entitled to receive in the absence of the Separation Agreement and the execution, delivery and effectiveness of this Release, and Employee agrees that such compensation is sufficient consideration for all aspects of the Separation Agreement and this Release. In return for this compensation, Employee, on behalf of himself and his heirs, executors, administrators, agents, attorneys, successors, assigns, and representatives, hereby releases Company and all of its officers, agents, directors, employees, and representatives, both individually and in any representative capacity, all of Company’s parent, subsidiary and affiliated companies, businesses and entities, and all other persons and entities, from each and every legal claim or demand of any kind that Employee ever had or might now have, arising out of any action, conduct or decision relating to Employee’s employment with Company or Employee’s separation from employment with Company, whether or not any such claim is known to Employee at the present time.

Employee fully understands that the claims Employee is releasing include, but are not limited to, all claims under Title VII of the Civil Rights Act of 1964, the Family and Medical Leave Act, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Employee Retirement Income Security Act, the Fair Labor Standards Act, the National Labor Relations Act, the Older Workers Benefit Protection Act, the Equal Pay Act, the Worker Adjustment and Retraining Notification Act, any applicable state non-discrimination laws, and any other local, state, or federal laws, rules, regulations or executive orders relating to discrimination in the workplace. Employee also understands that Employee is releasing any claims Employee may have for payment of compensation of any kind, fraud or misrepresentation, breach of contract (including, but not limited to, any employment agreement), promissory estoppel, wrongful or constructive discharge, defamation, invasion of privacy, breach of the covenant of good faith and fair dealing, reprisal or retaliation, unjust enrichment, negligent hiring, supervision or retention, intentional or negligent infliction of emotional distress, assault or battery, violation of whistleblower protection laws, violation of public policy, and any other claims arising under the common law of any state.

This Agreement does not release any rights or claims under the Minnesota Human Rights Act, the Age Discrimination in Employment Act or any of Company’s benefits plans that arise after Employee signs this Agreement or that arise from acts occurring after Employee signs this Agreement.

Further, nothing in this Agreement shall waive or release Employee’s right, where applicable, to file or participate in an investigative proceeding of any federal, state or local government agency. If, however, any claim released in this Release is prosecuted in Employee’s name before any government agency, Employee will waive any benefits Employee may obtain through such prosecution and agree not to accept an award of money or other damages from the claim.

1

Rights to Rescind or Revoke

Employee understands that Employee has the right to rescind or revoke this Release by giving written notice of such rescission or revocation to Company within fifteen (15) calendar days following Employee’s execution and delivery of this Release. Any such notice of rescission or revocation must be in writing and hand-delivered to Company or, if sent by mail, postmarked within the applicable time period, sent by certified mail, return receipt requested, and addressed as follows: Select Comfort Corporation, 6105 Trenton Lane North, Minneapolis, MN 55442, Attn.: General Counsel.

Employee agrees that if Employee exercises any right of rescission or revocation, Company may at its option nullify the Separation Agreement in its entirety. In the event Company opts to nullify the entire Separation Agreement, neither Employee nor Company will have any rights orobligations whatsoever under the Separation Agreement or this Release.

Employee has read this Release carefully and understands all its terms. Employee has reviewed this Release with his own attorney or has knowingly and voluntarily chosen not to do so. In agreeing to sign this Release, Employee has not relied on any statements or explanations made by Company or its counsel.

Employee understands and agrees that this Release, the Separation Agreement pursuant to which it is given, and the Employee Inventions, Confidentiality and Non-Compete Agreement dated as of February 22, 2002 referred to in the Separation Agreement, contain all the agreements between Employee and Company. We have no other written or oral agreements.

Dated:	, 2007
		Keith C. Spurgeon
Subscribed and sworn to before me this ______ day of ________, 2007.
Notary Public

2

EX-31.1

Exhibit 31.1

Certification by Chief Executive Officer

I, William R. McLaughlin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Select Comfort Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2007

/s/   William R. McLaughlin

William R. McLaughlin
Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification by Chief Financial Officer

I, James C. Raabe, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Select Comfort Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2007

/s/   James C. Raabe

James C. Raabe
Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Select Comfort Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, William R. McLaughlin, Chairman and Chief Executive Officer of the Company, solely for the purposes of 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, does hereby certify, to his knowledge, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 9, 2007

/s/   William R. McLaughlin

William R. McLaughlin
Chairman and Chief Executive Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Select Comfort Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, James C. Raabe, Senior Vice President and Chief Financial Officer of the Company, solely for the purposes of 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, does hereby certify, to his knowledge, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 9, 2007

/s/   James C. Raabe

James C. Raabe
Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.