The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes included in this Form 10-Q. Unless otherwise noted, all of the financial information in this report is condensed consolidated information for Tempur-Pedic International Inc. or its predecessor. The forward-looking statements in this discussion regarding the mattress and pillow industries, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion include numerous risks and uncertainties, as described under "Special Note Regarding Forward-Looking Statements" and "Risk Factors" elsewhere in this quarterly report on Form 10-Q and in our annual report on Form 10-K for the year ended December 31, 2008. Our actual results may differ materially from those contained in any forward-looking statements. Except as may be required by law, we undertake no obligation to publicly update or revise any of the forward-looking statements contained herein.

Executive Overview

General-We are the leading manufacturer, marketer and distributor of premium mattresses and pillows which we sell in approximately 80 countries under the TEMPUR® and Tempur-Pedic® brands. We believe our premium mattresses and pillows are more comfortable than standard bedding products because our proprietary pressure-relieving TEMPUR® material is temperature sensitive, has a high density and therapeutically conforms to the body.

Business Segment Information-We have two reportable business segments:
Domestic and International. These reportable segments are strategic business units that are managed separately based on the fundamental differences in their operations. The Domestic operating segment consists of our U.S. manufacturing facilities, whose customers include our U.S. distribution subsidiary and certain third party distributors in the Americas. The International segment consists of our manufacturing facility in Denmark, whose customers include all of our distribution subsidiaries and third party distributors outside the Domestic operating segment. We evaluate segment performance based on Net sales and Operating income.

Strategy and Outlook

We believe we are the industry leader in terms of profitability. Our long-term goal is also to become the world's largest bedding company in terms of revenue. To achieve our long-term goals while also addressing the current economic environment, we expect to continue to pursue certain key strategies:

• Maintain our focus on premium mattresses and pillows and to regularly introduce new products.

• Invest in increasing our global brand awareness through advertising campaigns that further associate our brand name with better overall sleep and premium quality products.

• Extend our presence and improve our account productivity in both the Domestic and International Retail segments.

• Invest in our operating infrastructure to meet the requirements of our business, including investments in our research and development capabilities.

• Take actions to further improve our financial flexibility and strengthen the business.

Results of Operations

A summary of our results for the three months ended March 31, 2009 includes the following:

• Earnings per common share (EPS) remained flat at $0.18 per diluted common share compared to the first quarter of 2008.

• We reduced total debt by $19.3 million to $400.0 million as of March 31, 2009 from $419.3 million at December 31, 2008.

• We generated $26.0 million of cash from operating activities, compared to $24.6 million for the first quarter of 2008.

                                                                 Three Months Ended
(In thousands, except earnings per common share)                      March 31,
                                                           2009                      2008
Net sales                                          $ 177,104       100.0 %   $ 247,222       100.0 %
Cost of sales                                         95,243        53.8       139,141        56.3

Gross profit                                          81,861        46.2       108,081        43.7
Selling and marketing expenses                        33,872        19.1        53,163        21.5
General, administrative and other expenses            22,108        12.5        25,585        10.3

Operating income                                      25,881        14.6        29,333        11.9

Interest expense, net                                 (4,571 )      (2.6 )      (7,691 )      (3.1 )
Other income (expense), net                              348         0.2        (1,019 )      (0.4 )

Income before income taxes                            21,658        12.2        20,623         8.4
Income tax provision                                   8,320         4.7         7,109         2.9
Net income                                         $  13,338         7.5 %   $  13,514         5.5 %

Earnings per common share:
Basic                                              $    0.18                 $    0.18
Diluted                                            $    0.18                 $    0.18

Cash dividend per common share                     $       -                 $    0.08

Weighted average common shares outstanding:
Basic                                                 74,874                    74,591
Diluted                                               74,959                    75,188

Three Months Ended March 31, 2009 Compared with Three Months Ended March 31, 2008

We sell our premium mattresses and pillows through four distribution channels:
Retail, Direct, Healthcare, and Third party. The Retail channel sells to furniture and bedding, specialty and department stores. The Direct channel sells directly to consumers. The Healthcare channel sells to hospitals, nursing homes, healthcare professionals and medical retailers. The Third party channel sells to distributors in countries where we do not operate our own wholly-owned subsidiaries. The following table sets forth Net sales information, by channel:

                        CONSOLIDATED                  DOMESTIC                 INTERNATIONAL
                     Three Months Ended          Three Months Ended          Three Months Ended
                          March 31,                   March 31,                  March 31,
   (in thousands)    2009          2008          2009          2008          2009          2008
   Retail           $ 150,522     $ 207,903     $  93,411     $ 129,120      $ 57,111     $ 78,783
   Direct               9,729        12,744         8,478        10,675         1,251        2,069
   Healthcare           8,902        12,257         2,694         3,822         6,208        8,435
   Third Party          7,951        14,318         1,851         4,301         6,100       10,017
                    $ 177,104     $ 247,222     $ 106,434     $ 147,918      $ 70,670     $ 99,304

                        CONSOLIDATED                  DOMESTIC                 INTERNATIONAL
                     Three Months Ended          Three Months Ended          Three Months Ended
                          March 31,                   March 31,                  March 31,
   (in thousands)    2009          2008          2009          2008          2009          2008
   Net sales:
     Mattresses     $ 119,128     $ 168,050     $  75,711     $ 106,872      $ 43,417     $ 61,178
     Pillows           23,061        31,616         9,845        13,121        13,216       18,495
     Other             34,915        47,556        20,878        27,925        14,037       19,631
                    $ 177,104     $ 247,222     $ 106,434     $ 147,918      $ 70,670     $ 99,304

Net sales. Net sales for the three months ended March 31, 2009 decreased to $177.1 million from $247.2 million for the same period in 2008, a decrease of $70.1 million, or 28.4%, primarily driven by a decrease in volume for the comparable periods. Our industry continues to be affected by the macroeconomic environment, resulting in lower consumer traffic and decreased consumer demand. Consolidated Mattress sales decreased $48.9 million, or 29.1% compared to the first quarter of 2008. For the three months ended March 31, 2009, our Retail channel Net sales decreased to $150.5 million from $207.9 million for the same period in 2008, a decrease of $57.4 million, or 27.6%. Consolidated pillow sales decreased approximately $8.6 million, or 27.1%, from the first quarter of 2008. Consolidated Other, which includes adjustable bed bases, foundations and other related products, decreased $12.6 million, or 26.6%.

Domestic. Domestic Net sales for the three months ended March 31, 2009 decreased to $106.4 million from $147.9 million for the same period in 2008, a decrease of $41.5 million, or 28.0%. Our Domestic Retail channel contributed $93.4 million in Net sales for the three months ended March 31, 2009 for a decrease of $35.7 million, or 27.7%, for the same period in 2008. We believe that the macroeconomic environment and slower consumer traffic impacted our Domestic Retail channel during the first quarter. As a result, Domestic mattress sales in the first quarter of 2009 decreased $31.2 million, or 29.2%, over the same period in 2008. Pillow sales decreased $3.3 million, or 25.0%. Net sales in the Direct channel decreased by $2.2 million, or 20.6%. We believe that the macroeconomic environment also negatively impacted Net sales in the Direct channel. Our Healthcare channel Net sales decreased by $1.1 million, or 29.5%, which we believe is primarily related to the decreased availability of spending in the healthcare industry. Net sales in the Third Party channel decreased $2.5 million, or 57.0%, principally related to a deteriorating consumer environment in Canada.

International. International Net sales for the three months ended March 31, 2009 decreased to $70.7 million from $99.3 million for the same period in 2008, a decrease of $28.6 million, or 28.8%. On a constant currency basis, our International Net sales declined approximately 17.6%. Our International segment was primarily impacted by macroeconomic factors, as the global economic slowdown continues to impact our International segment. The International Retail channel decreased $21.7 million, or 27.5%, for the three months ended March 31, 2009. Our Direct and Third Party channels decreased 39.5% and 39.1%, respectively, also a reflection of the global economic slowdown. Healthcare channel Net sales decreased $2.2 million or 26.4%. International mattress sales in the first quarter of 2009 decreased $17.8 million, or 29.0%, over the first quarter of 2008. Pillow sales for the first quarter of 2009 decreased $5.3 million, or 28.5%, as compared to the first quarter of 2008.

Gross profit. Gross profit for the three months ended March 31, 2009 decreased to $81.9 million from $108.1 million for the same period in 2008, a decrease of $26.2 million, or 24.3%. The Gross profit margin for the three months ended March 31, 2009 was 46.2% as compared to 43.7% for the same period in 2008. The factors that impacted Gross profit margin during the quarter are identified and discussed below in the respective segment discussions. We currently have plans underway across our operations to expand margins for the remainder of 2009, including projects to improve utilization rates, a redesign of our transportation network and a range of sourcing opportunities to further improve the Gross profit margin.

International. International Gross profit for the three months ended March 31, 2009 decreased to $39.1 million from $54.5 million for the same period in 2008, a decrease of $15.4 million, or 28.2%. The Gross profit margin in our International segment was 55.3% and 54.8% for the three months ended March 31, 2009 and March 31, 2008, respectively. Improvements in our International Gross profit margin were primarily driven by lower commodity pricing including raw material costs, our focus on driving manufacturing efficiencies and pricing actions taken early in 2009. These factors were partially offset by fixed cost de-leverage as production volumes were down substantially during the three months ended March 31, 2009 as compared to the same period in 2008. Our International Cost of sales for the three months ended March 31, 2009 decreased to $31.6 million from $44.9 million for the same period in 2008, a decrease of $13.3 million, or 29.6%.

Selling and marketing expenses. Selling and marketing expenses include advertising and media production associated with our Direct channel, other marketing materials such as catalogs, brochures, videos, product samples, direct customer mailings and point of purchase materials and sales force compensation. We also include in Selling and marketing expenses certain new product development costs, including market research and testing for new products. In the first quarter of 2009, Selling and marketing expenses decreased to $33.9 million for the three months ended March 31, 2009 as compared to $53.1 million for the three months ended March 31, 2008. Selling and marketing expenses as a percentage of Net sales were 19.1% and 21.5% for the three months ended March 31, 2009 and March 31, 2008, respectively. Our objective is to align advertising costs to reflect our sales expectations. However, in the first quarter of 2008, much of our cost structure was in place, which limited our ability to take actions to reduce costs to reflect our reduced sales levels. During the last three quarters of 2008 and the first quarter of 2009, we have taken actions to better align our advertising spend with our sales expectations. In addition, we have implemented initiatives to reduce costs in other selling activities.

General, administrative and other expenses. General, administrative and other expenses include management salaries, information technology, professional fees, depreciation of furniture and fixtures, leasehold improvements and computer equipment, expenses for administrative functions and research and development costs. General, administrative and other expenses decreased to $22.1 million for the three months ended March 31, 2009 as compared to $25.7 million for the three months ended March 31, 2008, a decrease of $3.5 million, or 13.6%. General, administrative and other expenses as a percentage of Net sales was 12.5% and 10.3% for the three months ended March 31, 2009 and March 31, 2008, respectively. The increase in general, administrative and other expenses as a percentage of Net sales in the first quarter of 2009 as compared to the first quarter of 2008 is primarily related to increased bad debt expense and fixed costs associated with depreciation and stock-based compensation.

Interest expense, net. Interest expense, net, includes the interest costs associated with our borrowings and the amortization of deferred financing costs related to those borrowings. Interest expense, net, decreased to $4.6 million for the three months ended March 31, 2009, as compared to $7.7 million for the three months ended March 31, 2008, a decrease of $3.1 million, or 40.6%. The decrease in interest expense is primarily attributable to the decrease in our total Long-term debt levels partially offset by an increase in our interest rates.

Income tax provision. Income tax provision includes income taxes associated with taxes currently payable and deferred taxes, and it includes the impact of net operating losses for certain of our domestic and foreign operations.

Our effective tax rate for the three months ended March 31, 2009 was 38.4%. For the same period in 2008, the effective tax rate was 34.5%. Our effective income tax rates for the three months ended March 31, 2009 and for the three months ended March 31, 2008 differed from the federal statutory rate principally because of certain foreign tax rate differentials, state and local income taxes, the tax charge on a previously recognized foreign tax benefit, foreign income currently taxable in the U.S., the production activities deduction and certain other permanent differences.

Liquidity and Capital Resources

Liquidity

Our principal sources of funds are cash flows from operations and borrowings. Our principal uses of funds consist of payments of principal and interest on our debt facilities, capital expenditures, payments of dividends and share repurchases from time to time pursuant to a share repurchase program. At March 31, 2009, we had working capital of $84.8 million including Cash and cash equivalents of $21.1 million. This was relatively flat compared to working capital of $82.4 million including $15.4 million in Cash and cash equivalents as of December 31, 2008. The increase in Cash and cash equivalents was primarily related to the timing of certain payments made at the end of the first quarter of 2009. During 2008 and the first quarter of 2009, there were no repurchases of our common stock.

Our cash flow from operations increased to $26.0 million for the three months ended March 31, 2009 as compared to $24.6 million for the three months ended March 31, 2008. During 2009, we plan to maintain our focus on driving working capital improvements to maximize operating cash flow and increase our financial flexibility. The increase in operating cash flow for the first quarter of 2009 compared to the first quarter of 2008 was primarily the result of cash flows generated by changes in operating assets and liabilities, the effects of which were offset by changes in deferred income taxes. During the first quarter of 2009, we continued to increase our working capital levels by reducing accounts receivables and inventory levels and managing vendor payment terms.

Net cash used in investing activities decreased to $1.6 million for the three months ended March 31, 2009 as compared to $4.4 million for the three months ended March 31, 2008, a decrease of $2.8 million. The decrease is primarily related to reduction for capital expenditures in 2009. During the quarter ended March 31, 2008 we acquired our former third party distributor in New Zealand, whereas no acquisitions occurred in 2009.

Cash flow used by financing activities was $18.2 million for the three months ended March 31, 2009 as compared to $10.2 million for the three months ended March 31, 2008, representing an increase in cash flow used of $8.0 million. The increase is primarily related to our continued focus to reduce our level of outstanding debt. In the first quarter of 2009, we completed our repatriation of foreign earnings which was initiated during the fourth quarter of 2008 and used a portion of the proceeds to reduce our level of outstanding debt. Additionally, in the fourth quarter of 2008, we suspended our quarterly dividend payment in order to redirect the use of these funds to pay down outstanding debt.

Capital Expenditures

Capital expenditures totaled $1.4 million for the three months ended March 31, 2009 and $2.8 million for the three months ended March 31, 2008. We currently expect our 2009 capital expenditures to be in line with 2008, ranging from $10 to $12 million.

Debt Service

Our long-term debt decreased to $400.0 million as of March 31, 2009 from $419.3 million as of December 31, 2008. After giving effect to $400.0 million in borrowings under the 2005 Senior Credit Facility and letters of credit outstanding, total availability under the Revolvers was $234.4 million as of March 31, 2009. In the first quarter of 2009, we completed our repatriation of foreign earnings which was initiated during the fourth quarter of 2008. This repatriation program has enabled us to reduce our overall level of outstanding debt.

The interest rate and certain fees that we pay in connection with the 2005 Senior Credit Facility are subject to periodic adjustment based on changes in our consolidated leverage ratio. In May 2008, we entered into an interest rate swap agreement to manage interest costs and the risk associated with changing interest rates. Under this swap, we pay at a fixed rate and receive payments at a variable rate. The swap effectively fixes the floating LIBOR-based interest rate to 3.755% on $300.0 million of the outstanding balance as of March 31, 2009 under the 2005 Senior Credit Facility, with the outstanding balance subject to the swap declining over time. The amount of the outstanding balance subject to the swap declines as follows: to $300.0 million on November 28, 2008 (through November, 2009); to $200.0 million on November 28, 2009 (through November, 2010) and to $100.0 million on November 28, 2010 (through November 28, 2011).

Share Repurchase Program-On October 16, 2007, our Board of Directors authorized a share repurchase authorization of up to $300.0 million of our common stock. Under the existing share repurchase authorization, we have $280.1 million available for repurchase as of March 31, 2009. No shares were repurchased during the year ended December 31, 2008 and first quarter of 2009. Share repurchases under this authorization may be made through open market transactions, negotiated purchase or otherwise, at times and in such amounts as we deem appropriate. This share repurchase authorization may be suspended, limited or terminated at any time without notice.

Dividend Program-Our Board of Directors declared dividends in the first three quarter of 2008 of $0.08 per common share. On October 16, 2008, we announced that we would suspend the payment of the quarterly cash dividend and redirect the use of those funds to reduce debt. The decision to pay a dividend is reviewed quarterly and requires declaration by our Board of Directors.

Factors That May Affect Future Performance

General Business and Economic Conditions-Our business has been affected by general business and economic conditions, and these conditions could have an impact on future demand for our products. The U.S. macroeconomic environment continues to be challenging and was the primary factor in a slowdown in the mattress industry. In addition, our International segment experienced further weakening as a result of certain consumer trends in several European and Asian markets. We expect the economic environment in the U.S., Europe and Asia to continue to be challenging.

Maintaining financial flexibility is our primary short-term focus. In light of the macroeconomic environment, we took steps to further align our cost structure with our anticipated level of Net sales. During the first quarter of 2009 we have continued to increase our financial flexibility by reducing our inventory, improving collections, lowering expenses and paying down debt. During the remainder of 2009, we expect to continue to pursue certain key strategies including: maintaining focus on premium mattresses and pillows and regularly introducing new products; investing in increasing our global brand awareness; extending our presence and improving our Retail account productivity; investing in our operating infrastructure to meet the requirements of our business; and taking actions to further improve our financial flexibility and strengthen our business.

Managing Growth-We have grown rapidly, with our Net sales increasing from $221.5 million in 2001 to $1,106.7 million in 2007 and our Net sales were $927.8 million for the year ended December 31, 2008. For the quarter ended March 31, 2009, our net sales were $177.1 million. In the past, our growth has placed, and may continue to place, a strain on our management, production, product distribution network, information systems and other resources. In response to these challenges, management has continued to enhance operating and financial infrastructure. These expenditures, as well as expenditures for advertising and other marketing-related activities are made as the continued growth in the business allows us the ability to invest. However, these expenditures may be limited by lower than planned sales or an inflationary cost environment.

Gross Margins-Our gross margin is primarily impacted by the cost of raw materials, operational efficiency, product and channel mix and volume incentives offered to certain retail accounts. Future increases in raw material prices could have a negative impact on our gross margin if we do not raise prices to cover increased cost. Our gross margin can also be impacted by our operational efficiencies, including the particular levels of utilization at our three manufacturing facilities. Our margins are also impacted by the growth in our Retail channel as sales in our Retail channel are at wholesale prices whereas sales in our Direct channel are at retail prices. Additionally, our overall product mix has shifted to mattresses and other products over the last several years, which has impacted our gross margins because mattresses generally carry lower margins than pillows and are sold with lower margin products such as foundations and bed frames.

Competition-Participants in the mattress and pillow industries compete primarily on price, quality, brand name recognition, product availability and product performance. We compete with a number of different types of mattress . . .