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 September 29, 2007

Commission File Number: 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.)
9800 59th Avenue 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 October 26, 2007, 44,676,000 shares of Common Stock of the Registrant were outstanding.

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

INDEX

PART I:  FINANCIAL INFORMATION
Item 1.	Financial Statements	Page
	Condensed Consolidated Balance Sheets as of September 29, 2007 and December 30, 2006	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 29, 2007 and September 30, 2006	4
	Condensed Consolidated Statement of Shareholders’ Equity for the Nine Months ended September 29, 2007	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 29, 2007 and September 30, 2006	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	19
Item 4.	Controls and Procedures	19
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults upon Senior Securities	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 5.	Other Information	21
Item 6.	Exhibits	21
SIGNATURES		22

PART I:   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

SELECT COMFORT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

	(unaudited) September 29, 2007		December 30, 2006
Assets
Current assets:
Cash and cash equivalents	$	8,522	$	8,819
Marketable debt securities – current		—		37,748
Accounts receivable, net of allowance for doubtful accounts of $1,025 and $529, respectively		16,625		12,164
Inventories		29,983		24,120
Prepaid expenses		8,948		10,227
Deferred income taxes		6,236		5,785
Other current assets		3,363		4,305
Total current assets		73,677		103,168
Marketable debt securities – non-current		—		43,608
Property and equipment, net		70,545		59,384
Deferred income taxes		22,086		19,275
Other assets		5,433		3,526
Total assets	$	171,741	$	228,961
Liabilities and Shareholders’ Equity
Current liabilities:
Borrowings under revolving credit facility	$	21,900	$	—
Accounts payable		65,200		46,061
Customer prepayments		10,414		9,552
Accruals:
Sales returns		4,063		3,907
Compensation and benefits		16,048		20,057
Taxes and withholding		8,911		5,053
Other current liabilities		8,108		12,901
Total current liabilities		134,644		97,531
Warranty liabilities		7,250		7,769
Other long-term liabilities		9,021		7,967
Total liabilities		150,915		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, 44,653 and 51,544 shares issued and outstanding, respectively		447		515
Additional paid-in capital		—		4,039
Retained earnings		20,379		111,140
Total shareholders’ equity		20,826		115,694
Total liabilities and shareholders’ equity	$	171,741	$	228,961

See accompanying notes to condensed consolidated financial statements.

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SELECT COMFORT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

	Three Months Ended					Nine Months Ended
	September 29, 2007			September 30, 2006		September 29, 2007		September 30, 2006
Net sales	$	213,070		$	207,661	$	608,570	$	608,025
Cost of sales		81,892			79,000		233,697		238,200
Gross profit		131,178			128,661		374,873		369,825
Operating expenses:
Sales and marketing		95,741			87,725		280,635		258,107
General and administrative		14,872			16,125		49,102		50,375
Research and development		1,290			1,142		4,231		2,907
Asset impairment charges		198			1,763		198		1,763
Total operating expenses		112,101			106,755		334,166		313,152
Operating income		19,077			21,906		40,707		56,673
Interest (expense) income, net		(261	)		618		169		2,248
Income before income taxes		18,816			22,524		40,876		58,921
Income tax expense		6,953			8,583		15,424		22,505
Net income	$	11,863		$	13,941	$	25,452	$	36,416
Net income per share – basic	$	0.27		$	0.26	$	0.54	$	0.68
Weighted average shares – basic		44,447			52,766		47,381		53,201
Net income per share – diluted	$	0.26		$	0.25	$	0.52	$	0.65
Weighted average shares – diluted		46,137			55,304		49,264		56,068

See accompanying notes to condensed consolidated financial statements.

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SELECT COMFORT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Shareholders’ Equity

(unaudited – in thousands)

	Common Stock					Additional Paid-In			Retained
	Shares		Amount			Capital			Earnings			Total
Balance at December 30, 2006	51,544		$	515		$	4,039		$	111,140		$	115,694
Exercise of common stock options	532			6			3,393			—			3,399
Tax benefit from stock-based compensation	—			—			1,754			—			1,754
Stock-based compensation	—			—			5,560			—			5,560
Repurchases of common stock	(7,617	)		(76	)		(15,623	)		(116,213	)		(131,912	)
Issuances of common stock	194			2			877			—			879
Net income	—			—			—			25,452			25,452
Balance at September 29, 2007	44,653		$	447		$	—		$	20,379		$	20,826

See accompanying notes to condensed consolidated financial statements.

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SELECT COMFORT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

	Nine Months Ended
	September 29, 2007			September 30, 2006
Cash flows from operating activities:
Net income	$	25,452		$	36,416
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		18,869			14,267
Stock-based compensation		5,560			6,115
Disposals and impairments of assets		391			1,806
Excess tax benefits from stock-based compensation		(1,389	)		(6,526	)
Changes in deferred income taxes		(3,262	)		(4,797	)
Other non-cash items affecting net income		270			(6	)
Changes in operating assets and liabilities:
Accounts receivable		(4,461	)		(6,615	)
Inventories		(5,863	)		(4,048	)
Prepaid expenses and other assets		286			(218	)
Accounts payable		18,174			15,570
Customer prepayments		862			(4,229	)
Accrued sales returns		156			(1,235	)
Accrued compensation and benefits		(3,996	)		(25	)
Accrued taxes and withholding		5,612			6,140
Warranty liabilities		(682	)		3,389
Other accruals and liabilities		265			1,407
Net cash provided by operating activities		56,244			57,411
Cash flows from investing activities:
Purchases of property and equipment		(30,393	)		(20,953	)
Investments in marketable debt securities		—			(28,369	)
Proceeds from sales and maturity of marketable debt securities		81,086			20,900
Net cash provided by (used in) investing activities		50,693			(28,422	)
Cash flows from financing activities:
Net increase (decrease) in short-term borrowings		21,564			(10,681	)
Repurchases of common stock		(134,452	)		(49,512	)
Proceeds from issuance of common stock		4,265			7,163
Excess tax benefits from stock-based compensation		1,389			6,526
Net cash used in financing activities		(107,234	)		(46,504	)
Decrease in cash and cash equivalents		(297	)		(17,515	)
Cash and cash equivalents, at beginning of period		8,819			43,867
Cash and cash equivalents, at end of period	$	8,522		$	26,352

See accompanying notes to condensed consolidated financial statements.

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SELECT COMFORT CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.   Basis of Financial Statement Presentation

The condensed consolidated financial statements as of and for the three and nine months ended September 29, 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 September 29, 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. These condensed 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 three and nine months ended September 29, 2007, marketable debt securities with a cost of $1.6 million and $64.4 million, respectively, were sold at a realized loss of $15,000 and $270,000, respectively. Marketable debt securities are summarized as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 29, 2007
Total marketable debt securities	$	—	$	—	$	—		$	—
December 30, 2006
U.S. government agencies	$	5,998		—	$	(23	)	$	5,975
Municipal securities		75,358		—		(279	)		75,079
Total marketable debt securities	$	81,356	$	—	$	(302	)	$	81,054

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3.   Inventories

Inventories consist of the following (in thousands):

	September 29, 2007		December 30, 2006
Raw materials	$	7,872	$	6,576
Work in progress		188		111
Finished goods		21,923		17,433
Inventories	$	29,983	$	24,120

4.   Credit Agreement

In June 2006, we entered into a five-year Syndicated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a $100 million senior unsecured revolving credit facility available to be used for general corporate purposes. Borrowings available under the credit facility can be increased by an additional amount up to $75 million.

Borrowings under the credit facility bear interest at a floating rate and may be maintained as base rate loans (tied to the greater of the prime rate or the federal funds rate plus 0.5%) or as Eurocurrency rate loans tied to LIBOR, plus a margin up to 0.8% depending on our leverage ratio, as defined. The Company is subject to certain financial covenants under the agreement principally consisting of maximum leverage and minimum interest coverage ratios. The Company was in compliance with all covenants as of September 29, 2007. The Company had borrowings of $21.9 million outstanding against the credit facility as of September 29, 2007 and no outstanding borrowings as of December 30, 2006.

5.   Repurchases of Common Stock

We repurchased and retired 2,259,000 and 7,617,000 shares through open market purchases at a cost of $37.6 million and $131.9 million (based on trade dates), respectively, during the three and nine months ended September 29, 2007. During the three and nine months ended September 30, 2006, we repurchased and retired 1,310,000 and 2,316,000 shares through open market purchases at a cost of $25.8 million and $49.5 million (based on trade dates), respectively. As of September 29, 2007, the remaining authorization under our share repurchase program was $207 million. There is no expiration date governing the period over which we can repurchase shares.

6.   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, performance shares and restricted stock under these plans. Stock-based compensation expense is determined based on the grant-date fair value and is recognized ratably over the vesting period of each grant, which is generally four years. Stock-based compensation expense for the three and nine months ended September 29, 2007 was $1,493,000 and $5,560,000, respectively, and for the three and nine months ended September 30, 2006 was $2,143,000 and $6,115,000, respectively.

7.   Asset Impairment Charges

During the three months ended September 29, 2007, we determined that certain store assets at two underperforming stores were impaired and recognized an impairment charge for the difference between fair value and net book value of $198,000. During the three months ended September 30, 2006, we recorded asset impairment charges of $1,763,000, including $1,248,000 related to the abandonment of software and $515,000 for certain store assets at underperforming stores.

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8.   Interest (Expense) Income, Net

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

	Three Months Ended					Nine Months Ended
	September 29, 2007			September 30, 2006		September 29, 2007			September 30, 2006
Interest income	$	94		$	618	$	1,055		$	2,248
Interest expense		(449	)		—		(793	)		—
Capitalized interest expense		109			—		177			—
Realized loss on sales of marketable debt securities		(15	)		—		(270	)		—
Interest (expense) income, net	$	(261	)	$	618	$	169		$	2,248

9.   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				Nine Months Ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Net income	$	11,863	$	13,941	$	25,452	$	36,416
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding		44,447		52,766		47,381		53,201
Effect of dilutive securities:
Options		1,443		2,350		1,614		2,639
Warrants		—		3		—		35
Restricted shares		247		185		269		193
Diluted weighted-average shares outstanding		46,137		55,304		49,264		56,068
Net income per share – basic	$	0.27	$	0.26	$	0.54	$	0.68
Net income per share – diluted	$	0.26	$	0.25	$	0.52	$	0.65

Additional potentially dilutive securities of approximately 1,991,000 and 1,668,000 for the three and nine month periods ended September 29, 2007, respectively, and approximately 1,068,000 for both the three and nine month periods ended September 30, 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.

10.   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 and related interpretations define when benefits of tax positions in the financial statements are recognized and provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. The adoption of FIN 48 and related interpretations did not materially affect our consolidated financial statements and, as a result, we did not record any cumulative effect adjustment upon adoption.

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. The unrecognized tax benefits have not changed materially since the date of adoption and are not expected to change materially within the next 12 months.

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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 and nine months ended September 29, 2007 and September 30, 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 2004. We are no longer subject to state income tax examinations for years prior to 2003.

11.   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, but do not expect its adoption to have a material impact 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, but do not expect its adoption to have a material impact on our consolidated financial statements.

12.   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.

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

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Risk Factors

The following discussion and analysis should be read in conjunction with the Condensed 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 -- growth in the size and complexity of our business has placed, and will continue to place, significant strains on our management, operations, information systems and other resources;

• Competition -- the level of competition in the mattress industry and our ability to successfully identify and respond to emerging and competitive trends in the mattress industry;

• Consumer Acceptance -- the level of consumer acceptance of our products, new product offerings and brand image;

• Need for Continuous Product Improvement -- our ability to continuously improve our products to offer new and enhanced consumer benefits, better quality and reduced costs;

• Marketing Effectiveness and Efficiency -- 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;

• Execution of our Distribution Strategy -- 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;

• Retention of Senior Leadership and other Key Executives -- our ability to retain senior leadership and other key employees in the wake of recent business performance that has not met our expectations;

• Our Ability to Manage Wholesale Accounts -- our ability to profitably manage growth in wholesale distribution, including the impact on our retail stores and other company-controlled distribution channels;

• International Growth -- our ability to cost-effectively execute plans to expand our distribution internationally;

• Impact of Federal Flame Retardancy Standards -- new federal flame retardancy standards for mattress products effective since mid-2007 have added significant costs of compliance to our business and any alleged or actual failure to comply with the new requirements could significantly disrupt our business;

• Sources of Supply -- our ability to secure adequate sources of supply at a 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;

• Inflationary Pressures -- rising fuel and commodity costs as well as fluctuating currency rates and increasing industry regulatory requirements may significantly increase our cost of goods and may adversely impact our profit margins or may adversely impact our sales volumes if we choose to increase prices;

• Consumer Credit -- our sales volumes or profit margins could be adversely impacted if access to consumer credit is restricted or if we are unable to cost-effectively offer consumer credit options through third-party credit providers;

• Management Information Systems. -- our current management information systems may not adequately meet the requirements of our evolving business and our business could be materially and adversely impacted if we are unable to successfully implement our planned SAP-based enterprise-wide information technology architecture;

• General Economic Conditions and Consumer Confidence -- adverse trends in general economic conditions, including the housing market and consumer confidence, could adversely impact the growth of our business; and

• Global Events -- such as terrorist attacks or a pandemic outbreak, or the threat of such events, could adversely impact our financial condition or results of operations.

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.

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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 and through leading home furnishings retailers, specialty bedding retailers, the QVC shopping channel and to several end users such as Radisson Hotels and Resorts^®.

New Product Launch

During the current fiscal year we upgraded our entire line of bed models which we believe represent the highest-quality, most technologically advanced beds we have ever produced. Our top-end 7000 and 9000 models were re-launched in mid-June. The new versions of our 3000, 4000 and 5000 models were introduced to all of our stores in late-July. All of our new models emphasize enhanced comfort-layer materials, and selected models also feature advancements in temperature regulation.

Vision and Strategy

Our vision is to be the leading brand in the bedding industry, while improving people’s lives through better sleep.

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, primarily through our company-owned stores, with a long-term goal of operating between 600 and 650 company-owned stores in the U.S.;

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

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

Outlook

On October 24, 2007, we announced results for the third quarter of fiscal 2007 and also lowered our fiscal 2007 full-year net sales and earnings outlook. The revised fiscal 2007 outlook includes net sales of between $820 million and $830 million and earnings of between $0.75 and $0.81 per diluted share. The revised outlook equates to fourth quarter of fiscal 2007 net sales growth of between 7% and 12% and diluted earnings per share growth of between 15% and 45% compared with the same period one year ago. The previous outlook included projected fiscal 2007 net sales of between $840 million and $860 million, and earnings per diluted share of between $0.87 and $0.93. The revised outlook assumes an improved comparable store sales change compared to the third quarter of fiscal 2007 and increased media spending compared to the same period one year ago.

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 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. Furthermore, a substantial portion of our net sales is often realized in the last month of a quarter, due in part to our promotional schedule and commission structure. 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.

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Highlights

Key financial highlights for the three months ended September 29, 2007 were as follows:

• Net income totaled $11.9 million, or $0.26 per diluted share, compared to $13.9 million or $0.25 per diluted share, for the same period one year ago.

• Net sales increased 3% to $213.1 million, compared with $207.7 million for the same period one year ago, primarily due to sales from 46 net new company-owned retail stores opened in the past 12 months, partially offset by a 6% comparable-store sales decline for our company-owned retail stores.

• Our gross profit rate for the third quarter of fiscal 2007 decreased to 61.6% of net sales, compared to 62.0% of net sales for the same period last year. The gross profit rate decrease was due to a sales mix shift to lower margin products, increased manufacturing costs associated with the full roll-out of fire retardant products and increased material costs for our new bed line, partially offset by continued efficiency gains in manufacturing and logistics.

• Sales and marketing expenses increased to 44.9% of net sales for the third quarter of fiscal 2007, compared to 42.2% of net sales for the same period one year ago. The rate increase was driven by a higher number of stores and the deleveraging impact of a 6% comparable-store sales decrease.

• General and administrative expenses were 7.0% of net sales for the third quarter of fiscal 2007 compared with 7.8% of net sales for the same period one year ago. The rate decline was primarily due to lower incentive-based compensation expense.

• Cash from operating activities totaled $56.2 million for the first nine months of fiscal 2007, compared with $57.4 million for the same period one year ago.

• During the third quarter of fiscal 2007, we repurchased $37.6 million of common stock or 2.3 million shares (based on trade dates) and have repurchased $131.9 million or 7.6 million shares for the first nine months of fiscal 2007.

13

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									Nine Months Ended
	September 29, 2007					September 30, 2006				September 29, 2007				September 30, 2006
Net sales	$	213.1		100.0	%	$	207.7	100.0	%	$	608.6	100.0	%	$	608.0	100.0	%
Cost of sales		81.9		38.4	%		79.0	38.0	%		233.7	38.4	%		238.2	39.2	%
Gross profit		131.2		61.6	%		128.7	62.0	%		374.9	61.6	%		369.8	60.8	%
Operating expenses:
Sales and marketing		95.7		44.9	%		87.7	42.2	%		280.6	46.1	%		258.1	42.5	%
General and administrative		14.9		7.0	%		16.1	7.8	%		49.1	8.1	%		50.4	8.3	%
Research and development		1.3		0.6	%		1.1	0.5	%		4.2	0.7	%		2.9	0.5	%
Asset impairment charges		0.2		0.1	%		1.8	0.8	%		0.2	0.0	%		1.8	0.3	%
Total operating expenses		112.1		52.6	%		106.8	51.4	%		334.2	54.9	%		313.2	51.5	%
Operating income		19.1		9.0	%		21.9	10.5	%		40.7	6.7	%		56.7	9.3	%
Interest (expense) income, net		(0.3	)	(0.1	%)		0.6	0.3	%		0.2	0.0	%		2.2	0.4	%
Income before income taxes		18.8		8.8	%		22.5	10.8	%		40.9	6.7	%		58.9	9.7	%
Income tax expense		7.0		3.3	%		8.6	4.1	%		15.4	2.5	%		22.5	3.7	%
Net income	$	11.9		5.6	%	$	13.9	6.7	%	$	25.5	4.2	%	$	36.4	6.0	%

Net income per share:
Basic	$	0.27	$	0.26	$	0.54	$	0.68
Diluted	$	0.26	$	0.25	$	0.52	$	0.65
Weighted-average number of common shares:
Basic		44.4		52.8		47.4		53.2
Diluted		46.1		55.3		49.3		56.1

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

	Three Months Ended				Nine Months Ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Percent of sales:
Retail	76.6	%	76.2	%	75.7	%	76.6	%
Direct	7.2	%	8.7	%	8.1	%	9.7	%
E-commerce	6.7	%	5.3	%	6.8	%	5.4	%
Wholesale	9.5	%	9.8	%	9.4	%	8.3	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

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

	Three Months Ended				Nine Months Ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Sales growth rates:
Comparable stores	(6	%)	7	%	(10	%)	13	%
Net new stores	9	%	10	%	9	%	9	%
Retail total	3	%	17	%	(1	%)	22	%
Direct	(15	%)	4	%	(16	%)	3	%
E-commerce	30	%	26	%	26	%	35	%
Wholesale	(1	%)	47	%	14	%	27	%
Total sales growth	3	%	18	%	0	%	21	%

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

	Three Months Ended				Nine Months Ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Company-owned retail stores:
Beginning of period	460		412		442		396
Opened	14		15		37		33
Closed	(3	)	(2	)	(8	)	(4	)
End of period	471		425		471		425
Retail partner doors	770		727		770		727

Comparison of Three Months Ended September 29, 2007 with Three Months Ended September 30, 2006

Net sales

Net sales increased 3% to $213.1 million for the three months ended September 29, 2007 compared with $207.7 million for the same period one year ago. The sales increase was driven by sales from 46 net new company-owned retail stores opened in the past 12 months and sales growth in our e-commerce channel, partially offset by a 6% comparable-store sales decline in our company-owned retail stores, and a sales decrease in our direct channel. Sales of mattress units increased 1% overall compared to the same period one year ago, and the average selling price per bed (mattress sales only divided by mattress units) in our company-controlled channels increased 1% to $1,726, while sales of other products and services increased by 8%.

The $5.4 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $5.0 million increase in sales from our retail stores, comprised of a $14.9 million increase from new stores, net of stores closed and a $9.9 million decrease from comparable-stores and (ii) a $3.3 million increase in e-commerce sales, partially offset by, (iii) a $2.8 million decrease in direct marketing sales and (iv) a $0.1 million decrease in wholesale sales.

Gross profit

The gross profit rate decreased to 61.6% of net sales for the three months ended September 29, 2007 as compared with 62.0% for the same period one year ago. A sales mix shift to lower margin products reduced the gross profit rate by approximately 0.4 percentage points (ppt). In addition, the third quarter of fiscal 2007 gross profit percentage included the full burden of costs for compliance with the new open flame fire retardancy standards and increased production costs associated with our new line of beds. These incremental costs were partially offset by improvements in sourcing, manufacturing productivity and our ongoing implementation of a hub-and-spoke logistics network. Finally, increased use of promotional financing offers (which increased sales and marketing expenses) in lieu of product discounts, benefited the third quarter gross profit rate by 0.2 ppt.

Sales and marketing expenses

Sales and marketing expenses for the three months ended September 29, 2007 increased 9% to $95.7 million, or 44.9% of net sales, compared with $87.7 million, or 42.2% of net sales, for the same period one year ago. The $8.0 million increase was primarily due to a higher number of stores and an increased use of promotional financing offers. The 2.7 ppt sales and marketing expense rate increase was principally due to the deleveraging impact of a 6% comparable store sales decline and the $8.0 million expense increase compared with the same period one year ago. Total media spending decreased 3% compared with the same period one year ago and was 0.7 ppt lower on a rate basis.

General and administrative expenses

General and administrative (G&A) expenses decreased 8% to $14.9 million for the three months ended September 29, 2007 compared with $16.1 million for the same period one year ago and decreased 0.8 ppt on a rate basis. The $1.3 million decrease in G&A expenses was comprised of a $1.9 million reduction in incentive-based compensation costs, partially offset by a $0.4 million increase in occupancy costs and a $0.2 million increase in other G&A expenses.

Research and development expenses

Research and development (R&D) expenses increased to $1.3 million for the third quarter of fiscal 2007 compared with $1.1 million for the same period one year ago, and increased as a percentage of net sales to 0.6% from 0.5% for the comparable prior-year period. The increase in R&D expenses was the result of continued investment in new product innovation.

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Asset impairment charges

Asset impairment charges decreased to $0.2 million for the three months ended September 29, 2007, compared with $1.8 million for the same period one year ago. The fiscal 2007 third quarter asset impairment charges related to assets at two underperforming stores. The fiscal 2006 third quarter asset impairment charges included $1.2 million for abandoned software and $0.5 million related to assets at underperforming stores.

Interest (expense) income, net

Net interest expense was $0.3 million for the three months ended September 29, 2007 compared to net interest income of $0.6 million for the same period one year ago. The change was primarily due to interest expense from borrowings under our revolving line of credit to fund fiscal 2007 common stock repurchases and lower average cash and investment balances compared with the same period one year ago.

Income tax expense

Income tax expense decreased to $7.0 million for the three months ended September 29, 2007 compared with $8.6 million for the same period one year ago. The effective tax rate was 37.0% for the third quarter of fiscal 2007 and 38.1% for the same period one year ago. The third quarter of fiscal 2007 tax rate included $0.2 million of discrete tax adjustments related to the resolution of certain federal and state income tax matters.

Comparison of Nine Months Ended September 29, 2007 with Nine Months Ended September 30, 2006

Net sales

Net sales for the first nine months of fiscal 2007 increased to $608.6 million compared with $608.0 million for the same period one year ago. The increase was due to sales from 46 net new company-owned retail stores opened in the past 12 months and sales growth in our e-commerce and wholesale distribution channels, partially offset by a 10% comparable-store sales decline in our company-owned retail stores and a decrease in direct channel sales. Sales of mattress units and the total company average selling price were both consistent with the prior year. The average selling price per bed (mattress sales only divided by mattress units) in our company-controlled channels was essentially flat at $1,706, while sales of other products and services in our company-controlled channels increased by 2%.

The $0.5 million net sales increase compared with the prior year was comprised of the following: (i) a $8.5 million increase in e-commerce sales and (ii) a $6.8 million increase in wholesale sales, partially offset by, (iii) a $9.7 million decrease in direct marketing sales and (iv) a $5.1 million decrease in sales from our retail stores, comprised of a $47.6 million decrease from comparable-stores and a $42.5 million increase from new stores, net of stores closed.

Gross profit

The gross profit rate increased to 61.6% of net sales for the first nine months of fiscal 2007 compared with 60.8% for the same period one year ago. The gross profit rate benefited from improvements in sourcing, manufacturing productivity and our ongoing implementation of a hub-and-spoke logistics network which reduced our cost of sales. The gross profit rate also benefited from the absence of a warranty accrual correction (to include freight costs) which occurred in the first nine months of the prior fiscal year and ongoing reductions in warranty costs per unit. A shift in our promotional strategy to a greater use of financing offers (which increased sales and marketing expenses) also contributed to the gross profit rate increase.

These items were partially offset by increased costs to comply with the new open flame fire retardancy standards which became effective for all products manufactured after July 1, 2007 and increased production costs associated with our new line of beds. In addition, the gross profit rate was negatively impacted by an increase in the percentage of net sales from lower gross margin distribution channels which reduced the gross profit rate by approximately 0.3 ppt and a sales mix shift to lower margin products which reduced the gross profit rate by approximately 0.4 ppt.

Sales and marketing expenses

Sales and marketing expenses for the nine months ended September 29, 2007 increased to $280.6 million, or 46.1% of net sales, compared with $258.1 million, or 42.5% of net sales, for the same period one year ago. The $22.5 million expense increase was primarily due to operating costs associated with 46 net new stores opened in the past 12 months, an increased use of promotional financing offers and increased media spending. The 3.6 ppt sales and marketing expense rate increase was primarily due to the deleveraging impact of a 10% comparable-store sales decline and the $22.5 million expense increase compared with the same period one year ago. Total media spending increased 3% compared with the same period one year ago and was 0.4 ppt higher on a rate basis.

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General and administrative expenses

General and administrative expenses decreased $1.3 million to $49.1 million for the nine months ended September 29, 2007, compared with $50.4 million for the same period one year ago and decreased 0.2 ppt on a rate basis. G&A expenses were favorably impacted by a $5.4 million reduction in incentive-based compensation costs compared to the same period one year ago, partially offset by increased compensation and benefit costs as additional headcount were added to support business growth initiatives.

Research and development expenses

Research and development expenses increased to $4.2 million for the first nine months of fiscal 2007 compared with $2.9 million for the same period one year ago, and increased as a percentage of net sales to 0.7% from 0.5%. The dollar and percentage of net sales increases in R&D expenses were the result of continued investment in new product innovation.

Asset impairment charges

Asset impairment charges decreased to $0.2 million for the nine months ended September 29, 2007, compared with $1.8 million for the same period one year ago. The fiscal 2007 asset impairment charges related to assets at two underperforming stores. The fiscal 2006 asset impairment charges included $1.2 million for abandoned software and $0.5 million related to assets at underperforming stores.

Interest income, net

Net interest income decreased to $0.2 million for the nine months ended September 29, 2007 compared with $2.2 million for the same period one year ago. The $2.1 million decrease in net interest income was driven by lower average cash and investment balances compared with the same period one year ago, increased interest expense from borrowings under our revolving line of credit to fund fiscal 2007 common stock repurchases and $0.3 million of net realized losses on the sales of marketable debt securities.

Income tax expense

Income tax expense decreased to $15.4 million for the nine months ended September 29, 2007 compared with $22.5 million for the same period one year ago. The effective tax rate was 37.7% and 38.2% in 2007 and 2006, respectively. The lower effective tax rate for the first nine months of fiscal 2007 was primarily due to $0.2 million of discrete tax adjustments recognized in the third quarter of fiscal 2007 related to the resolution of certain federal and state income tax matters.

Liquidity and Capital Resources

The following table summarizes our cash, cash equivalents and marketable debt securities as of September 29, 2007 and December 30, 2006 ($ in millions):

	September 29, 2007		December 30, 2006
Cash and cash equivalents	$	8.5	$	8.8
Marketable debt securities – current		—		37.7
Marketable debt securities – non-current		—		43.6
Total cash, cash equivalents and marketable debt securities	$	8.5	$	90.2

As of September 29, 2007, we had cash, cash equivalents and marketable debt securities of $8.5 million compared to $90.2 million as of December 30, 2006. The $81.7 million decrease in cash, cash equivalents and marketable debt securities was primarily due to $134.5 million of common stock repurchases (based on settlement dates) and $30.4 million of capital expenditures, partially offset by $56.2 million of cash provided by operating activities and a $21.6 million net increase in short-term borrowings.

17

The following table summarizes our cash flows for the nine months ended September 29, 2007 and September 30, 2006 ($ in millions):

	Nine Months Ended
	September 29, 2007			December 30, 2006
Total cash provided by (used in):
Operating activities	$	56.2		$	57.4
Investing activities		50.7			(28.4	)
Financing activities		(107.2	)		(46.5	)
Decrease in cash and cash equivalents	$	(0.3	)	$	(17.5	)

Cash provided by operating activities for the nine months ended September 29, 2007 and September 30, 2006 was $56.2 million and $57.4 million, respectively. The $1.2 million year-over-year decrease in cash from operations was comprised of an $11.0 million decline in net income, partially offset by a $9.6 million increase in adjustments to reconcile net income to cash provided by operating activities and a $0.2 million increase in cash from changes in operating assets and liabilities. 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 with the same period one year ago, and the reduced impact of deferred income taxes and excess tax benefits from stock-based compensation. The increase in cash from changes in operating assets and liabilities was due to a lower increase in accounts receivable (prior year had a greater impact from increased wholesale sales) and an increase in customer prepayments (timing of cash received on customer orders in advance of fulfillment), partially offset by a greater increase in inventories (seasonal increase in accessory products), a lower increase in warranty liabilities (reduced warranty costs per unit compared with the prior year) and a greater reduction in accrued compensation and benefits (lower incentive-based compensation expense in the current year).

Net cash provided by investing activities was $50.7 million for the nine months ended September 29, 2007 compared with net cash used in investing activities of $28.4 million for the same period one year ago. The $79.1 million increase in net cash provided by investing activities was principally due to $81.1 million of proceeds from the sales and maturity of marketable debt securities in the first nine months of fiscal 2007, compared to $20.9 million for the same period one year ago. During the first nine months of fiscal 2007, we invested $30.4 million in property and equipment, compared to $21.0 million for 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. The year-over-year increase in capital expenditures was primarily due to additional costs related to our implementation of a new technology platform (SAP). For the first nine months of 2007 we opened 37 new retail stores, while in the first nine months of 2006 we opened 33 new retail stores.

Net cash used in financing activities increased to $107.2 million for the nine months ended September 29, 2007, compared to $46.5 million for the same period one year ago. The $60.7 million increase in cash used in financing activities resulted from a $84.9 million year-over-year increase in common stock repurchases, a $5.1 million reduction in tax benefits from stock-based compensation, and a $2.9 million reduction in proceeds from the issuance of common stock related to stock options and employee purchases, partially offset by a net increase in short-term borrowings during the current-year to fund stock repurchases compared to a net reduction in short-term borrowings for the same period one year ago.

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. For the first nine months of fiscal 2007 we repurchased 7.6 million shares of common stock at a total cost of $134.5 million (based on settlement dates). In the third quarter, we curtailed our share repurchases following the tightening of credit markets and the continued deterioration in the general economic environment. We decided that the most prudent course of action at this time is to minimize debt on our balance sheet. We will continue to reassess our repurchase strategy and expect to reinitiate our repurchase activity as circumstances improve. As of October 26, 2007, the remaining authorization under our stock repurchase program was $207 million. We may terminate or limit the stock repurchase program at any time.

Cash generated from operations and existing credit facilities 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 greater of the prime rate or the federal funds rate plus 0.5%) or as Eurocurrency rate loans tied to LIBOR, plus a margin up to 0.8% depending on our leverage ratio, as defined in our credit agreement. 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. As of September 29, 2007, we had $21.9 million in borrowings outstanding under the revolving line of credit.

18

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 September 29, 2007, we are not involved in any unconsolidated special purpose entity transactions.

There has been no material change in our contractual obligations since the end of fiscal 2006 other than the $21.9 million of borrowings outstanding against our credit facility as of September 29, 2007 as described in Note 4, Credit Agreement, of the Notes to our Condensed Consolidated Financial Statements. 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 Condensed Consolidated Financial Statements, herein.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 29, 2007, our short-term debt was comprised primarily of borrowings under our revolving line of credit. We do not currently manage interest rate risk on our debt through the use of derivative instruments.

Borrowings under our revolving credit facility are currently not subject to material interest rate risk. The credit facility’s interest rate may be reset due to fluctuations in a market-based index, such as the prime rate, federal funds rate or LIBOR. A hypothetical 100 basis point change in the interest rate of outstanding borrowings under our credit facility as of September 29, 2007 would change our annual consolidated pre-tax income by $0.2 million.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act 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 our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosure. We have established a Disclosure Committee, consisting of certain members of management, to assist in this evaluation. The Disclosure Committee meets on a regular quarterly basis, and as needed.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), at September 29, 2007. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at September 29, 2007, our disclosure controls and procedures were effective.

19

Changes in Internal Controls

There was no change in internal control over financial reporting during the fiscal quarter ended September 29, 2007, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

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. The risk factors discussed in the Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q do not identify all risks that we face because our business operations could also be affected by additional risk factors that are not presently known to us or that we currently consider to be immaterial to our operations. There has been no material change in those risk factors since the date of our Annual Report on Form 10-K.

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
July 2007	1,494	$16.75	1,494
August 2007	765	$16.45	765
September 2007	—	—	—
Total	2,259	$16.65	2,259	$206,762

(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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

None.

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ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

Exhibit Number	Description	Method of Filing
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

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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: November 7, 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)

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EXHIBIT INDEX

Exhibit Number	Description	Method of Filing
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

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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: November 7, 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: November 7, 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 September 29, 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: November 7, 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 September 29, 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: November 7, 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.