U.S. SECURITIES AND EXCHANGE COMMISSION

PRE-EFFECTIVE

Select Comfort Corporation

6105 Trenton Lane North

William R. McLaughlin

Copies to:

    Approximate date of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

    If the only securities being registered on this form are being offered pursuant to dividend or investment reinvestment plans, please check the following box:    o

    If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or reinvestment plans, check the following box:    o

    If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:    o

    If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:    o

    If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box:    o

CALCULATION OF REGISTRATION FEE

(1)	Includes 660,000 shares which the underwriters have the option to purchase to cover over-allotments, if any.
(2)	Estimated solely for the purpose of calculating the registration fee under Rule 457(c) under the Securities Act of 1933, based upon the average of the high and low sale prices of the registrant’s common stock on February 26, 2003, as reported by the Nasdaq National Market.

    The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, dated February 27,April 15, 2003

Shares

Our common stock is quoted on the Nasdaq National Market under the symbol “SCSS.” The last reported sale price on                       , 2003 was $            per share.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE “RISK FACTORS” BEGINNING ON PAGE 6.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is                       , 2003

[Inside front cover of prospectus includes graphics representing

TABLE OF CONTENTS

     As used in this prospectus, the terms “we,” “us,” “our,” the “company” and “Select Comfort” mean Select Comfort Corporation and its subsidiaries and the term “common stock” means our common stock, par value $0.01 per share.

     As used in this prospectus, the term “bedding” includes mattresses, box springs and foundations and does not include bedding accessories, such as sheets, pillows, headboards, frames, mattress pads and related products.

     Select Comfort®,Sleep Number®,Comfort Club®,Sleep Better on Air®,The Sleep Number Bed by Select Comfort (logo)®,Firmness Control System^TM,Precision Comfort^TM,Corner Lock^TM,Intralux^TM,Everybody has a Sleep Number^TM,Knowing your Sleep Number is the Key to a Perfect Night’s Sleep^TM,The Sleep Number Store by Select Comfort (logo)®,You can only find your Sleep Number on a Sleep Number Bed by Select Comfort,^TMSelect Comfort Creator of the Sleep Number Bed^TM,What’s Your Sleep Number?^TM and our stylized logos are trademarks and/or service marks of Select Comfort. This prospectus also contains trademarks, trade names and service marks that are owned by other persons or entities.

     Our fiscal year ends on the Saturday closest to December 31, and, unless the context otherwise requires, all references to years in this prospectus refer to our fiscal years. Our fiscal year is based on a 52- or 53-week year. All years represented in this prospectus are 52 weeks.

     You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The selling shareholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

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PROSPECTUS SUMMARY

     You should read the following summary together with the more detailed information concerning our company, our common stock being sold in this offering and our financial statements appearing in this prospectus and in the documents incorporated by reference in this prospectus. Because this is only a summary of the material information contained in this prospectus, you should read the rest of this prospectus, including the documents incorporated by reference in this prospectus, before you invest in our common stock. Read this entire prospectus carefully, especially the risks and uncertainties described under “Risk Factors.”

Select Comfort Corporation

     We are 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 in comparison to traditional mattress products. Our mission is to improve people’s lives through better sleep and our objective is to become the leading brand in the bedding industry.

     Unlike traditional bedding manufacturers, we are vertically integrated from production through sales and customer service, which allows us to control quality, cost, price and presentation. Most of our innovative products are made-to-order and are sold directly to consumers through our three company-controlled distribution channels: 321 retail stores, direct marketing and e-commerce. Additionally, we sell our products through wholesale relationships with home furnishings and specialty bedding retailers. Our business model allows us to maintain low levels of inventory and to generate an accelerated cash-conversion cycle, which enables us to operate with minimal or no working capital.

     The U.S. wholesale bedding industry is a mature and stable industry that has experienced a compounded annual revenue growth rate of approximately 6% over the past 10 years. U.S. retail bedding sales were approximately $7.6 billion in 2002, of which 85% consisted of traditional innerspring bedding. The top 10 bedding retailers accounted for approximately 25% of total retail sales. In 2001, furniture stores accounted for 41% of U.S. bedding retail sales and specialty sleep stores 40%, compared to 56% and 19% market shares in 1993, respectively. According toFurniture/ Today, we were the largest U.S. bedding retailer, based on 2001 sales.

     Following a change in executive management in 2000, we improved our cost structure and rebranded our products and advertising, which led to significantly enhanced operating results. From 2001 to 2002, our sales grew 28% to $335.8 million and comparable store sales grew 27%. We have improved our profitability from an operating loss of $26.0 million in 2000 to operating income of $21.0 million in 2002 and achieved net income in each of the last six quarters. In 2002, we generated $28.3 million in cash flow from operations, after capital expenditures. For the foreseeable future, we believe we can achieve 15% to 25% annual net sales growth and generatesignificantly improve our operating income growth of approximately twice our net sales growth rate.margins.

Competitive Strengths

     Our objective is to become the leading brand in the bedding industry, both in revenue share and product innovation. To achieve this goal, we intend to capitalize on the following strengths:

	•	Differentiated, Superior Product —Our proprietary Sleep Number bed was designed on the basis of sleep research and is clinically proven to provide better sleep quality and greater relief of back pain in comparison to traditional mattress products. Unlike traditional mattresses made from innersprings, our innovative Sleep Number bed uses proprietary air-chamber technology that allows each side of the mattress to be easily adjusted with a hand-held remote control that digitally displays an individual’s Sleep Number. A Sleep Number is a number from zero to 100 that represents a sleeper’s ideal level of comfort, firmness and support. Our Sleep Number beds are

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		priced competitively with other premium mattress products and have been shown to withstand more than 20 years of simulated use.
	•	Proven Brand Development Strategy — In January 2001, we successfully repositioned our product and advertising messages, creating the Sleep Number brand and a new multi-media advertising campaign to increase awareness of our innovative, proprietary beds. This branding strategy allowed our advertising and consumer

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		communication to focus on our bed’s distinguishing and proprietary feature, personalized comfort, as represented by the digital Sleep Number readout on the bed’s hand-held remote control. Although we have less than 5% unaided brand awareness nationally, average unaided awareness of our Sleep Number brand reached 15% by the end of 2002 in the eight markets where the Sleep Number campaign was launched in early 2001. In these markets, we experienced annual comparable store sales growth in the range of 26% to 38% in 2002. Our Sleep Number campaign is now in a total of 20 markets.
	•	Company-Controlled Distribution —Unlike traditional bedding manufacturers, which primarily sell through third-party retailers, we generate approximately 95% of our net sales through company-controlled distribution channels: retail, direct marketing and e-commerce. This distribution model enables us to control the selling process to ensure that the unique benefits of our product are effectively presented to consumers, to maintain direct contact with our customers and to capture both the manufacturer’s and retailer’s margin.
	•	Flexible and Efficient Operating Model —Unlike traditional bedding manufacturers and retailers that are dependent on a stock of finished-goods inventory to fill orders, we employ a make-to-order manufacturing process. Through our long-term relationships with high-quality suppliers, which have been selected through a rigorous certification and review process, we have implemented a just-in-time materials supply system. As a result of our flexible and modular production process, we estimate that we can double our current production volume in our existing manufacturing facilities with minimal capital investment.

Growth Strategy

     We expect sales growth in the foreseeable future to be derived primarily from comparable store sales increases, opening stores in existing and new markets and adding new distribution channels. We expect to enhance our profit margin primarily by leveraging our existing infrastructure. To accomplish our growth strategy, we intend to focus on the following priorities:

	•	Building Brand Awareness —With less than 5% unaided brand awareness nationally, we have the opportunity for significant growth through increasing awareness of our Sleep Number brand, our innovative products and our store locations. In 2002, we continued to drive strong sales growth in the eight markets where our Sleep Number campaign was launched in early 2001, with comparable store sales increases ranging from 33% to 63% in the fourth quarter of 2002. We plan to increase total media spending by 25% to approximately $50 million in 2003.
	•	Expanding Profitable Distribution —We plan to expand profitable distribution primarily by: increasing comparable store sales, remodeling 100 older stores in 2003, adding 20 to 30 new retail stores in 2003, increasing our store base by 5% to 10% annually beyond 2003, testing our stores in non-mall locations, expanding wholesale distribution selectively through specialty retailers and building our QVC partnership.
	•	Leading the Industry in Product Innovation —Our goal is to continue to lead the industry in product innovation and sleep expertise by developing and marketing products that deliver personalized comfort and better sleep. In 2002, we introduced more new products and product enhancements than in any other year of our history. Sales of the newly re-designed Sleep Number 5000 and 7000 models, our two higher-end product offerings, increased as a percentage of our product mix by eight percentage points in 2002 compared to 2001.

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	•	Leveraging our Infrastructure —As a result of improving our cost structure in 2000 and 2001, we believe we are well-positioned to generate profitable growth. Over this period, we eliminated over $25 million from our cost structure and reduced the number of units we must sell in a year to become profitable by nearly 20%. We intend to maintain marketing and advertising investment at approximately 20% of net sales to build our brand and generate sales growth. We expect 2003 operating income margins to increase to at least 7% and believe we can achieve operating income margins of 10% to 12% within a three-year horizon.
	•	Adding Product Categories, Markets and Geographies —Once we have more thoroughly penetrated the U.S. bedding market, our longer-term goal is to extend our brand through new product introductions, new market segments and international markets. Examples of these growth initiatives include a sofa sleeper featuring our Sleep Number bed, a partnership with Winnebago Industries to install our Sleep Number bed in its higher-end motor homes and an agreement to test our Sleep Number bed in a hotel chain.

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     Our company was incorporated in Minnesota in 1987. Our executive offices are located at 6105 Trenton Lane North, Minneapolis, MN 55442. Our telephone number is (763) 551-7000. Our web site address isselectcomfort.com. The information contained on our web site is not a part of this prospectus.

The Offering

     The number of shares of our common stock that will be outstanding after this offering includes 400,000 shares to be sold in this offering by selling shareholders upon exercise of their warrants and is based on 30,915,48930,875,904 shares outstanding as of February 14,March 28, 2003, which excludes:

	•	9,618,15610,032,080 shares of common stock issuable as of February 14,March 28, 2003 upon the exercise of outstanding options and warrants at a weighted average exercise price of $3.36$3.64 per share (assuming the exercise of the warrants to purchase 400,000 shares which will be exercised in connection with this offering);
	•	2,038,3041,465,286 shares of common stock reserved for future issuance as of February 14,March 28, 2003 under our 1997 Stock Incentive Plan, 1999 Employee Stock Purchase Plan and Profit Sharing and 401(k) Plan; and
	•	727,272 shares issuable as of February 14,March 28, 2003 upon conversion of a $4.0 million principal amount convertible subordinated debenture convertible at $5.50 per share.

     The underwriters have an option to purchase 660,000 additional shares of our common stock from one of the selling shareholders to cover over-allotments, if any. Except as otherwise indicated, the information in this prospectus assumes no exercise of the underwriters’ over-allotment option.

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Summary Consolidated Financial Data

     The following table summarizes the consolidated statements of operations and selected operating data of our business.

     The following table summarizes our consolidated balance sheet data as of December 28, 2002. The consolidated balance sheet data are presented on an actual basis and as adjusted to give effect to the exercise of warrants to purchase 400,000 shares of common stock and the payment of our estimated offering expenses.

(1)	Includes charges for store closings and asset impairments of $0.2 million, $1.4 million, $2.0 million, $1.5 million and $0.0 million for 2002, 2001, 2000, 1999 and 1998, respectively. See Note 4 to our Consolidated Financial Statements.
(2)	Pro forma net income (loss) per share reflects the effects on net income from specific non-recurring items and from the recognition of an income tax benefit (provision) for years where a regular tax provision, at a rate of 38%, was not recorded. Generally accepted accounting principles (GAAP) did not allow us to reduce net income for income tax expense in 2002 or to provide an income tax benefit in 2001 or 2000. Because we expect to record income tax in future periods, we believe pro forma net

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	income (loss) per share provides a more meaningful comparison than GAAP net income (loss) per share for the periods presented and future periods.

	In addition, we excluded the effect of the extraordinary after-tax, non-cash charges associated with early repayment of our $5.0 million of 12% senior secured debt in December 2002.2002 because we have no remaining debt

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	which could result in a similar charge in the future. A reconciliation of diluted net income (loss) per share (as determined in accordance with GAAP) to pro forma net income (loss) per share is as follows:

(3)	Includes stores operated in leased departments within other retail stores (13, 22, 25, 45 and 14 at the end of 2002, 2001, 2000, 1999 and 1998, respectively).
(4)	For stores open during the entire period indicated.
(5)	Stores enter the comparable store calculation in the 13th full month of operation. The number of comparable stores used to calculate such data was 307, 317, 314, 262 and 199 for 2002, 2001, 2000, 1999 and 1998, respectively. Our 1998 comparable store sales increase reflects adjustments for an additional week of sales in 1997. Without adjusting for the additional week, comparable store sales would have been 17.9% in 1998.
(6)	Earnings before interest, income taxes, depreciation amortization and other non-cash charges, including non-cash compensationamortization (EBITDA) is a key financial measure but should not be construed as an alternative to operating income or cash flows from operating activities (as determined in accordance with GAAP). We believe that EBITDA is a useful supplement to net income and other income statement data in understanding cash flows generated from operations that are available for taxes, debt service and capital expenditures. A reconciliation of operating income (loss) before income taxes and extraordinary loss to EBITDA for each of the fiscal years indicated is as follows:

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RISK FACTORS

     This offering involves a high degree of risk. You should carefully consider the risks and uncertainties described below, which we believe are the material risks and uncertainties of our business and this offering, as well as the other information contained in this prospectus and in the documents to which we refer you under the heading “Incorporation of Information We File with the SEC” before deciding whether to invest in shares of our common stock. If any of the following risks actually occurs, our business, financial condition or operating results could be significantly harmed. In that case, the market price of our common stock could decline, and you may lose part or all of your investment. These risks and uncertainties described below are not the only risks or uncertainties that we face. Additional risks or uncertainties not currently known to us or that we currently deem immaterial may also impair our business operations and adversely affect the market price of our common stock.

Risks Related to Select Comfort Corporation

     Our net sales grew in 2002 after two consecutive years of declining net sales. Our six most recent quarters have been profitable after eight consecutive quarters of losses. We may not be able to sustain growth or profitability on a quarterly or annual basis in future periods. Our future growth and profitability will depend upon a number of factors, including without limitation:

	•	Our ability to continue to successfully execute our strategic initiatives and growth strategy;
	•	The efficiency and effectiveness of our Sleep Number advertising campaign and other marketing programs in building product and brand awareness, driving traffic to our points of sale and increasing sales;
	•	The level of consumer acceptance of our products;
	•	Our ability to continue to realize the benefits of our cost savings initiatives;
	•	Our ability to realize increased sales and greater levels of profitability through our retail stores;
	•	Our ability to cost-effectively close under-performing or unprofitable store locations;
	•	Our ability to hire, train, manage and retain qualified retail store management and sales professionals;
	•	Our ability to cost-effectively sell our products through wholesale or other distribution channels in volumes sufficient to drive growth and leverage our cost structure and advertising spending;
	•	Our ability to continuously improve our products to offer new and enhanced consumer benefits, better quality and reduced costs;
	•	Our ability to maintain cost-effective sales, production and delivery of our products;
	•	Our ability to successfully expand our home delivery, assembly and mattress removal capability on a cost-effective basis;
��	•	The ability of various third-party providers of delivery, assembly and mattress removal services to provide quality services on a cost-effective basis;
	•	Our ability to cost-effectively offer consumer credit options through third-party credit providers;
	•	Our ability to successfully identify and respond to emerging trends in the bedding industry;
	•	The level of competition in the bedding industry; and
	•	General economic conditions and consumer confidence.

     We cannot assure you that we willmay not be successful in executing our growth strategy or that achievingand even if we achieve our strategic plan, will enable uswe may not be able to sustain profitability. Failure to successfully execute any material part of

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Our comparable store sales and other operating results may fluctuate significantly and an unanticipated decline in comparable store sales or other operating results may disappoint investors and result in a decline in our stock price.

     Our comparable store sales results and other operating results have fluctuated significantly in the past. These fluctuations may continue and thus may not be a meaningful indicator of future performance. For example, our comparable store sales results have fluctuated significantly from quarter to quarter with (decreases)/increases ranging from (7.7)% to 38.3% from 1998 through 2002. Stores enter the comparable store calculation in the 13th full month of operation. Our annual comparable store sales (decreases)/increases were 26.8% for 2002, (3.8)% for 2001 and 0.2% for 2000. We cannot assure you that ourOur comparable store sales and other operating results will notmay fluctuate significantly in the future. A variety of factors affect our comparable store sales results and other operating results, including:

	•	Levels of consumer awareness of our products, brand name and store locations;
	•	Levels of consumer acceptance of our existing and new products;
	•	Higher levels of sales in the first year of operations as each successive class of new stores is opened;
	•	Comparable store sales performance in prior periods;
	•	The maturation of our store base;
	•	The amount, timing and relative success of promotional events, advertising expenditures, new product introductions and product line extensions;
	•	The quality and tenure of store-level managers and sales professionals;
	•	The amount of competitive activity;
	•	The timing of new store openings and related expenses;
	•	Changes in the sales mix among our distribution channels;
	•	Our ability to offer effective consumer credit promotional offerings;
	•	The wholesale distribution of our products through home furnishings and specialty bedding retailers into markets with existing company-operated retail stores;
	•	Any increases in return rates or warranty claims;
	•	Any disruptions in third-party delivery services; and
	•	General economic conditions and consumer confidence.

     Because of these fluctuations, our comparable store sales and other quarterly operating results may not be a meaningful indicator of future performance. Future decreases in our comparable store sales and other operating results could significantly harm our business, financial condition and operating results. In addition, an unanticipated decline in comparable store sales and other operating results may disappoint securities analysts or investors and result in a decline in our stock price.

Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our advertising expenditures and our ability to select the right markets in which to advertise.

     Our advertising expenditures were $39.5 million, $29.5 million and $31.3 million in 2002, 2001 and 2000, respectively. Our overall marketing budget is being managed with greater emphasis toward

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	•	Create greater awareness of our products and brand name;
	•	Identify the most effective and efficient level of spending in each market;
	•	Determine the appropriate creative message and media mix for advertising expenditures;

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	•	Effectively manage advertising costs (including creative and media) in order to maintain acceptable costs per inquiry, costs per order and operating margins;
	•	Select the right markets in which to advertise; and
	•	Convert consumer inquiries into actual orders.

     We cannot assure you that ourOur planned advertising expenditures willmay not result in increased sales willor generate sufficient levels of product and brand name awareness or that we willawareness. We may not be able to manage our advertising expenditures on a cost-effective basis.

The bedding industry is highly competitive. If any of our competitors or a new entrant into the market with significant resources aggressively pursues the air bed market, our business could be significantly harmed.

     Our Sleep Number beds compete with a number of different types of bedding alternatives, including innerspring bedding, foam bedding, waterbeds, futons and other air-supported bedding that are sold through a variety of channels, including home furnishings stores, specialty bedding stores, department stores, mass merchants, wholesale clubs, telemarketing programs, television infomercials and catalogs. The bedding industry is characterized by a high degree of concentration among the four largest manufacturers with nationally recognized brand names, including Sealy, which also owns the Stearns & Foster brand, Serta, Simmons and Spring Air. Numerous other manufacturers, primarily operating on a regional or niche basis, serve the balance of the bedding market. A number of bedding manufacturers, including Simmons, have offered air beds and some of these manufacturers have recently increased their presence in the air bed market. Many of our competitors, including in particular the four largest bedding manufacturers, have greater financial, marketing and manufacturing resources and better brand name recognition than we do and sell products through broader and more established distribution channels. We cannot assure you that theseThese competitors or new entrants into the market will notmay aggressively pursue the air bed market orand be successful in obtaining a significant presence in the air bed market. Any such competition could significantly harm our business. In addition, should any of our competitors reduce its prices on premium bedding products, we may be required to implement similar price reductions in order to remain competitive, which could significantly harm our financial condition and operating results.

Our plan to pursue additional or maintain existing wholesale relationships with home furnishings retailers, specialty bedding retailers and the QVC shopping channel may not yield the benefits we expect and may involve other risks that may harm our business.

     An important element of our growth strategy is to expand profitable distribution by increasing sales through our existing channels and by increasing opportunities for consumers to become aware of, and to purchase, our products through additional points of distribution, such as wholesale distribution. We have only recently established a limited number of wholesale relationships with home furnishings retailers, specialty bedding retailers and the QVC shopping channel and therefore have limited wholesale experience. We cannot assure you that ourOur wholesale relationships willmay not result in the intended benefits. We also expect the gross margin from wholesale sales to be less than the gross margin we generate in our company-controlled channels. The success of our wholesale strategy will depend upon numerous factors, including the following:

	•	The ability of our personnel to adequately analyze and identify suitable wholesale distribution partners and markets in which our retail presence is underrepresented;

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	•	Our ability to negotiate favorable distribution terms with our wholesale distribution partners;
	•	Our ability and the ability of our wholesale distribution partners to train, motivate, incentivize and retain sales professionals who are selling our products;
	•	Our ability to adapt our distribution and other operational and management systems to an expanded network of points of sale; and
	•	Our ability and the ability of our wholesale distribution partners to attract customers and generate sales sufficient to justify the expense of establishing the wholesale distribution relationship.

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We rely upon several key suppliers that are, in some instances, our sole source of supply. The failure of one or more of these suppliers or our other key suppliers to supply components for our products on a timely basis, or a material change in the purchase terms for our components, could significantly harmlead to inadequate inventory and delays in shipping our business, financial conditionbeds to customers which could lead to increased returns and operating results.cause us to lose future sales.

     The major components and raw materials that we purchase for our products are air chambers, foundations, remote controls, pumps, valves, foam and fabric. We currently obtain the air chambers and foundations for our beds from single supply sources. We have a supply agreement with the supplier of our air chambers that expires in October 2006, subject to automatic annual renewal thereafter unless either party gives 365 days’ notice of non-renewal. We have a supply agreement with the supplier of our blow molded foundations that expires in October 2003, subject to automatic annual renewal thereafter unless either party gives 180 days’ notice of non-renewal. If our relationship with the supplier of our air chambers or foundations is terminated, we could have difficulty in replacing these sources since there are few other suppliers capable of manufacturing these components.

     We generally purchase many of our other components and raw materials centrally to obtain volume discounts and achieve economies of scale. We therefore obtain a large percentage of our components and raw materials from a small number of suppliers. We do not have any long-term purchase agreements with, or other contractual assurances of continued supply, pricing or access from, any of our suppliers, except as noted above. Other than our air chambers and foundations, we purchase most of our components and raw materials through purchase orders. If prices increase and we are unable to pass on the increase in our costs to our customers, then our financial condition or operating results may be significantly harmed. The loss of one or more of our key suppliers, the failure of one or more of our key suppliers to supply components to our products on a timely basis, or a material change in the purchase terms for our components could significantly harmlead to inadequate inventory and delays in shipping our business, financial conditionbeds to customers, which could lead to increased returns and operating results.cause us to lose future sales.

     We generally assemble our products after we receive orders from customers. Lead times for ordered components may vary significantly and depend upon factors, such as the location of the supplier, the complexity in manufacturing the component and general demand for the component. Some of our components, including our air chambers, have longer lead times. We generally do not maintain large volumes of component inventory, except for our air chambers, in which case we generally carry approximately four weeks of inventory. As a result, an unexpected and significant increase in the demand for our beds could lead to inadequate inventory and delays in shipping our beds to customers.

The foreign manufacturing of our air chambers and some of our other components involves risks that could substantially harmincrease our business.costs and lead to inadequate inventory and delays in shipping our beds to customers, which could lead to increased returns and cause us to lose future sales.

     Since our air chambers and some of our other components are manufactured outside the United States, our operations could be significantly harmed by the risks associated with foreign sourcing of materials, including without limitation:

	•	Political instability resulting in disruption of trade;
	•	Existing or potential duties, tariffs or quotas that may limit the quantity of certain types of goods that may be imported into the United States or increase the cost of such goods;

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	•	Any significant fluctuation in the value of the U.S. dollar against foreign currencies; and
	•	Economic uncertainties, including inflation.

     IfThese factors could increase our costs of doing business with these foreign suppliers and lead to inadequate inventory and delays in shipping our beds to customers, which could lead to increased returns and cause us to lose future sales. In addition, if any of these or other factors were to render the conduct of any of our suppliers’ businesses in particular countries undesirable or impractical, our financial condition and operating results could be materially adversely affected because we would have difficulty sourcing the main components of our products.

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Our air beds represent a significant departure from traditional innerspring bedding and the failure of our beds to achieve market acceptance would significantly harm our business, financial conditionsales growth and operating results.profitability.

     Innerspring mattress sales represent approximately 85% of all mattress sales. Four large manufacturers of innerspring bedding dominate the U.S. bedding market. Our air chamber technology represents a significant departure from traditional innerspring bedding. Because no established air bed market existed prior to the introduction of our air bed in 1988, we faced the challenge of establishing the viability of this market, as well as gaining widespread acceptance of our air bed. The market for air beds is now evolving and the future success of our products will depend upon both the continued growth of this market and market acceptance of our air beds. The failure of our beds to achieve market acceptance for any reason would significantly harm our business, financial conditionsales growth and operating results.profitability.

Approximately one-third of our net sales are financed by a third party. The termination of our agreement with this third party, any material change to the terms of our agreement with this third party or in the availability or terms of credit offered to our customers by this third party, or any delay in securing replacement credit sources, could harm our business, financial condition and operating results.negatively impact sales by affecting the number of customers who can finance purchases.

     Our qualified customers are offered a revolving credit arrangement to finance purchases from us through a private label consumer credit facility provided by Mill Creek Bank, a subsidiary of Conseco Finance Corp. Mill Creek Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts. In connection with all purchases financed under these arrangements, Mill Creek Bank pays us an amount equal to the total amount of such purchases, net of promotional related discounts. Mill Creek Bank’s right to set the minimum customer credit ratings could, if exercised, impact sales by affecting the number of customers who can finance purchases. The term of this facility expires in May 2004, subject to automatic one-year renewals, unless terminated by either party upon 150 days’ notice prior to the end of the then-current term. We are liable to Mill Creek Bank for chargebacks arising out of (i) breach of our warranties relating to the underlying sale transaction, (ii) defective products or (iii) our failure to comply with applicable operating procedures under the facility. We have provided a standby letter of credit to Mill Creek Bank in the amount of $1.0 million to protect Mill Creek Bank against potential losses from unpaid chargebacks. We are not liable to Mill Creek Bank for losses arising out of our customers’ credit defaults. If we replace Mill Creek Bank with an alternative third-party provider of consumer financing, Mill Creek Bank could request that we purchase its portfolio of our customer accounts based on a pre-determined formula, which reflects a discount to the face amount of these accounts. If we were to engage a replacement provider, we would likely require this new provider to purchase the portfolio from Mill Creek Bank, relieving us of our obligations under this facility.

     Conseco Finance Corp., the parent corporation of Mill Creek Bank, has recently experienced financial and liquidity issues and has filed for protection under federal bankruptcy laws. Through its pending bankruptcy proceedings, Conseco Finance Corp. has proposedentered into an asset purchase agreement to sell various of its business and operating assets, including various assets of Mill Creek Bank. The sale process, including selectionUnder the terms of the ultimate possible purchaser of these assets, is pending. Any new ownerthis agreement, our agreement with Mill Creek Bank would be sold to General Electric Capital Corporation, a competitor of Mill Creek BankBank. This sale, which is subject to various closing conditions, is expected to close in May 2003. Upon closing, General Electric Capital Corporation could attempt to exercise discretion as currently available to Mill Creek Bank under our facility that maycould adversely impact our reliance on it. TheseIn the event this sale does not close as anticipated, the financial and liquidity issues being encountered by Conseco Finance Corp. could jeopardize the ability of Mill Creek Bank to continue to provide consumer credit financing for our customers. In that event, we would seek to secure consumer credit financing from other

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Our future growth and success depend upon key personnel whom we may not be able to retain or hire. Our inability to retain or hire key personnel could significantly affect our ability to execute our business strategy.

     We are currently dependent upon the continued services, ability and experience of our executive management team, particularly William R. McLaughlin, our President and Chief Executive Officer. The loss of the services of

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Our future growth and success will depend, in part, upon our abilityinability to enhance our existing products and to develop and market new products on a timely basis, that respondcould harm our ability to customer needs and achieve market acceptance.sustain our growth or profitability.

     One of our growth strategies is to continue to lead our industry in product innovation and sleep expertise by enhancing existing products and by developing and marketing new products that deliver personalized comfort and better sleep. We cannot assure you that we willmay not be successful in developing or marketing enhanced or new products or thatand, even if we successfully develop and market such products, the market willmay not accept any such products. Further, the resulting level of sales from any of our enhanced or new products may not justify the costs associated with the development and marketing. Our inability to enhance our existing products and develop and market new products could harm our ability to sustain our growth or profitability.

If we are unable to protect our intellectual property, we may be unable to prevent other companies from using our technology in competitive products.products, which could adversely affect our sales and require us to decrease our prices.

     Certain elements of the design and function of our beds are the subject of U.S. and foreign patents and patent applications owned by us. We also own several registered and unregistered trademarks and trademark applications, including in particular our Sleep Number trademark, which we believe have significant value and are important to the marketing of our products to customers. In addition to patents and trademarks, we rely upon copyrights, trade secrets and other intellectual property rights, and we have implemented several measures to protect our intellectual property and confidential information contained in our products, such as entering into assignment of invention and nondisclosure agreements. Our ability to compete effectively with other companies depends, to a significant extent, upon our ability to maintain the proprietary nature of our owned intellectual property and confidential information. We cannot assure you, however, thatHowever, our intellectual property rights willmay not provide us substantial protection or cannot and will notmay be circumvented by our competitors. We also cannot assure you that ourOur protective measures willmay not protect our intellectual property rights or confidential information or may not prevent our competitors from developing and marketing products that are similar to or competitive with our beds or other products. In addition, the laws of some foreign countries may not protect our intellectual property rights and confidential information to the same extent as the laws of the United States. If we are unable to protect our intellectual property, we may be unable to prevent other companies from using our technology in competitive products, which could adversely affect our sales and require us to decrease our prices.

     Intellectual property litigation, which could result in substantial costs to us and the diversion of significant time and effort by our executive management, may be necessary to enforce our patents and trademarks and to protect our trade secrets and proprietary technology. We cannot assure you that we willmay not have the financial resources necessary to enforce or defend our intellectual property rights. Although we are unaware of any intellectual property infringement or invalidity claims asserted against us, we cannot assure you that third parties, including competitors, will notmay assert such claims against us or that,and, if asserted, such claims will notcould be upheld. We also cannot assure you that we wouldmay not prevail in any such litigation or that,and, if we are unsuccessful, we wouldmay not be able to obtain any necessary licenses on reasonable terms or at all.

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We depend upon UPS and other carriers to deliver our products to customers on a timely and cost-effective basis and anybasis. Any significant delay in deliveries to our customers orcould lead to increased returns and cause us to lose future sales. Any increase in freight charges could significantlyincrease our costs of doing business and harm our business, financial condition and operating results.profitability.

     Historically, we have relied almost exclusively on UPS for delivery of our products to customers. For a significant portion of the third quarter of 1997, UPS was unable to deliver our products within acceptable time periods due to a labor strike, causing delays in deliveries to customers and requiring us to use alternative carriers. No assurance can be given that UPS willmay not be able to avert labor difficulties in the future or that UPS will notmay otherwise experience difficulties in meeting our requirements in the future. In 2000, we began to shift a portion of our product delivery business to FedEx. In addition, we either provide directly, or contract with a third party to provide, in-home delivery, assembly and mattress removal services, and are in the process of increasing the availability of this service. Despite these alternative carriers, we cannot assure you that if UPS were to experience difficulties in meeting our requirements, we wouldmay not be able to deliver our products to our customers through any one

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Significant and unexpected return rates under our 30-night trial period and warranty claims under our limited 20-year warranty on our beds, in excess of our returns and warranty reserves, could significantly harm our business, financial condition and operating results.

     Part of our marketing and advertising strategy focuses on providing a 30-night trial in which customers may return their beds and obtain a refund of the purchase price if they are not 100% comfortable with our product. As we expand our sales, we cannot assure you that our return rates willmay not remain within acceptable levels. A significant and unexpected increase in return rates could significantly harm our business, financial condition and operating results. Our marketing and advertising strategy also includes providing our customers with a limited 20-year warranty on our beds. However, since we have only been selling beds in significant quantities since 1992, we cannot assure you that we will notmay receive significant and unexpected claims under this warranty or thatand our warranty reserves willmay not be adequate to cover future warranty claims. Significant warranty claims in excess of our warranty reserves could also significantly harm our business, financial condition and operating results.

We may be unable to effectively manage our growth, which could significantly harm our business, financial condition and operating results.

     Our growth strategy has placed, and will continue to place, a significant strain on our management, production, information systems and other resources. To manage growth effectively, we must maintain a high level of manufacturing quality and efficiency, continue to enhance our operational, financial and management systems, including our database management, tracking of inquiries, inventory control and distribution systems, and expand, train and manage our employee base. We cannot assure you that we willmay not be able to effectively manage this expansion in any one or more of these areas, and any failure to do so could significantly harm our business, financial condition and operating results.

Our management information systems may prove inadequate and we are in the process of migrating our current systems to an upgraded version, which could cause interruptions in our business if this conversion does not occur smoothly.

     We depend upon our management information systems for many aspects of our business. Some of our key software has been developed by our own programmers and this software may not be easily integrated with other software and systems. Our business will be materially and adversely affected if our management information systems are disrupted or if we are unable to improve, upgrade, integrate or expand upon our systems as we execute our growth strategy. We are in the process of migrating our management information systems to an upgraded version, which could cause interruptions in our business if this conversion does not occur smoothly.

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Damage to either of our manufacturing facilities could significantly harmincrease our costs of doing business financial condition and operating results.lead to delays in shipping our beds, which could result in increased returns and adversely affect future sales.

     We have two manufacturing plants which are located in Columbia, South Carolina and in Salt Lake City, Utah. SinceUnlike other mattress manufacturers, we manufacture beds to fulfill orders rather than stocking inventory, our business, financial condition and operating results may be significantly harmed ifinventory. Therefore, the destruction or shutting down of either of our manufacturing plants was destroyed or shut downfacilities for a significant period of time.time as a result of fire, explosion, act of war or terrorism, flood, hurricane, tornado, typhoon, earthquake, lightning or other natural disaster could increase our costs of doing business and lead to delays in shipping our beds to customers. Such delays could result in increased returns and adversely affect future sales. These adverse consequences to our business may be greater for our company than with other mattress manufacturers.

Significant and long-term failure of our web site could harmadversely affect our business, financial condition and operating results.net sales.

     We depend on our web site for a certain percentage of our net sales and for advertising of our products. If our web site becomes unavailable for a significant period of time due to information technology or Internet failure, our net sales could be adversely affected.

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Our business is subject to seasonal influences and a substantial portion of our net sales is often realized in the last month or last few weeks of a quarter, due in part to our promotional schedule and commission structure. Because the level of our sales and marketing expense is based on our expectations of future customer inquiries and net sales and cannot be adjusted quickly, a shortfall in these expectations may harm our profitability.

     Our business is subject to some seasonal influences, with lower sales in the second quarter and higher sales during the fourth quarter holiday season due to greater mall traffic. Furthermore, a substantial portion of our sales is often realized in the last month or last few weeks of a quarter, due in part to our promotional schedule and commission structure. The level of sales and marketing expenses and new store opening costs is based, in significant part, on our expectations of future customer inquiries and net sales and cannot be adjusted quickly. If there is a shortfall in expected net sales or in the conversion rate of customer inquiries, we may be unable to adjust our spending in a timely manner and our business, financial condition and operating resultsprofitability may be significantly harmed.

We are subject to government regulations relating to the bedding industry and cannot assure you that we will notmay be required to incur expense and modify our operations in order to ensure compliance with these regulations.

     Our operations are subject to state and local consumer protection and other regulations relating to the bedding industry. These regulations vary among the states in which we do business. The regulations generally impose requirements as to the proper labeling of bedding merchandise, restrictions regarding the identification of merchandise as “new” or otherwise, controls as to hygiene and other aspects of product handling and sale and penalties for violations. Although we believe that we are in substantial compliance with these regulations and have implemented a variety of measures to promote continuing compliance, we cannot assure you that we will notmay be required in the future to incur expense and/or modify our operations in order to ensure compliance with these regulations, which could harm our operating results.

     Our direct marketing operations are or may become subject to various adopted or proposed federal and state “do not call” list requirements. The Federal Trade Commission has amended its rules to provide for a national “do not call” registry. Under these new federal regulations, consumers may begin to have their phone numbers added to the national “do not call” registry beginning in July 2003. In September 2003, telemarketers will have access to the registry and will be required to scrub their call lists against the national “do not call” registry at least once every 90 days. A telemarketer may call a consumer with whom it has an established business relationship for up to 18 months after the consumer’s last purchase, delivery or payment even if the consumer’s name is on the national “do not call” registry. A company may also call a consumer for up to three months after the consumer makes an inquiry or submits an application to the company. In addition, if a consumer asks a company not to call, the company may not call even if there is an established business relationship. We believe that we are in substantial compliance with theseexisting requirements, and plan to comply with the new federal requirements described above when they become effective, but these requirements may be further modified over time and may adversely affect our direct marketing sales or costs.

     The federal Consumer Product Safety Commission and various state regulatory agencies are considering new rules relating to fire retardancy standards for the bedding industry. The State of California plans to adopt, effective in the year 2004, new fire retardancy standards that have not yet been finally defined. If adopted, such new rules may adversely affect our costs, manufacturing processes and materials. We are developing product solutions that are intended to enable us to meet the new standards. Because the new standards have not been finally determined, however, no assurance can be given that our solutions willmay not enable us to meet the new standards. We expect that any required product modifications will add cost to our product.

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     A portion of our net sales consists of refurbished products that are assembled in part from components returned to us from customers. These refurbished products must be properly labeled and marketed as refurbished products under applicable state laws. Our sales of refurbished products are limited to approximately 24 states, as the remaining states do not allow the sale of refurbished bedding products.

Failure to comply with health and safety requirements could expose us to a material liability.

     We are subject to federal, state and local laws and regulations relating to occupational health and safety. There can be no assurance that we areWe may not at all times be in compliance with all such requirements. We have made and will continue to make capital and other expenditures to comply with health and safety requirements.

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We may face exposure to product liability.

     We face an inherent business risk of exposure to product liability claims in the event that the use of any of our products results in personal injury or property damage. In the event that any of our products proves to be defective, we may be required to recall or redesign such products. We maintain insurance against product liability claims, but there can be no assurance that such coverage willmay not continue to be available on terms acceptable to us or that such coverage willmay not be adequate for liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage, or any claim or product recall that results in significant adverse publicity against us, may have a material adverse effect on our business.

We depend upon endorsements by national radio personalities to promote our products.products, the loss of which or the reduction in effectiveness of which could adversely affect our sales.

     Our integrated marketing program depends in part on national radio personalities, including Paul Harvey and Rush Limbaugh. The loss of either Paul Harvey or Rush Limbaugh or a reduction in the effectiveness of their endorsement could result in significant harm toadversely affect our business, financial condition and operating results.sales.

Additional terrorist attacks in the United States or against U.S. targets or actual or threats of war or the escalation of current hostilities involving the United States or its allies could significantly impact this offering, our business, financial condition, operating results or stock price in unpredictable ways.

     Additional terrorist attacks in the United States or against U.S. targets, actual or threats of war or the escalation of current hostilities involving the United States or its allies, or military or trade disruptions impacting our domestic or foreign suppliers of components to our products, may impact this offering and our operations, including, among other things, causing delays or losses in the delivery of merchandise to us and decreased sales of our products. These events could cause an increase in oil or other commodity prices which could adversely affect our materials or transportation costs, including delivery of our products to customers. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide financial markets. These events also could cause an economic recession in the United States or abroad. Any of these occurrences could have a significant impact on this offering, our business, financial condition and operating results and may result in volatility of our stock price.

     As a result of the terrorist attacks in the United States and the threat of war involving the United States, we believe many consumers have traveled less and purchased more products for their home. We believe these trends have contributed to an increase in our net sales. We cannot assure you that theseThese trends willmay not continue that they willor may not continue to positively affect our net sales or that we willmay not be able to sustain our current net sales levels.

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Risks Related to this Offering

Our stock price may be volatile and your investment in our common stock could suffer a decline in value.

     The sales price of our common stock has fluctuated between $0.45 and $35.25 since our initial public offering in December 1998. The market price of our common stock may fluctuate in the future as a result of a variety of factors, many of which are outside of our control, including the following factors:

	•	Variations in our quarterly operating results;
	•	Changes in recommendations and earnings estimates regarding us or comparable companies by securities analysts;
	•	Additions or departures of key personnel;
	•	Changes in market valuations of comparable companies; and
	•	Announcements of other significant events.

     Such fluctuations may also be the result of changes in the trading characteristics that prevail in the market for our common stock, including low trading volumes, trading volume fluctuations and other similar factors that are particularly common among highly volatile securities of companies such as ours. In addition, the U.S. equity markets have from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for

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We may incur significant costs from additional class action litigation if our stock price is volatile.

     Following periods of large price declines in the public market price of a company’s stock, holders of that stock may institute securities class action litigation against the company that issued the stock. We became subject to such a suit in 1999. We agreed to a settlement of this suit in 2002, and final approval of the terms of the settlement are currently pending before the court.was obtained in February 2003. If any of our shareholders were to bring another similar type of lawsuit against us, even if the lawsuit is without merit, we could incur substantial costs defending the lawsuit. The lawsuit also could divert the time and attention of our management, which would hurt our business. Any adverse determination in litigation that requires us to pay an amount in excess of our insurance coverage could significantly harm our financial condition and operating results.

Future sales of our common stock in the public market could adversely affect our stock price and our ability to raise funds in new equity offerings.

     We cannot predict the effect, if any, that futureFuture sales of shares of our common stock or the availability for future sale of shares of our common stock or securities convertible into or exercisable for our common stock willmay have a negative effect on the market price of our common stock prevailing from time to time. Sale, or the availability for sale, of substantial amounts of common stock by our existing shareholders pursuant to an effective registration statement or under Rule 144, through the issuance of shares of common stock upon the exercise of stock options or the perception that such sales or issuances could occur, could decrease prevailing market prices for our common stock and could materially impair our future ability to raise capital through an offering of equity securities.

We have a significant number of options, warrants and convertible debentures to acquire shares of our common stock that will adversely affect any diluted earnings per share calculation and that when exercised will dilute existing shareholders and could decrease the market price of our common stock.

     As of February 14,March 28, 2003, we had outstanding options, warrants and convertible debentures to acquire 10,745,42811,159,352 shares of our common stock at various prices ranging from $0.45 to $28.63, with a weighted average exercise price of $3.41.$3.67. We will also continue to issue equity securities under our equity compensation plans which will continue to adversely affect any diluted earnings per share calculation. In

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