SELECT COMFORT CORP, S-1/A, 1998-10-29

SELECT COMFORT CORP
S-1/A, 1998-10-29
HOUSEHOLD FURNITURE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1998.

REGISTRATION NO. 333-62793

--------------------------

PRE-EFFECTIVE AMENDMENT NO. 1
TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

--------------------------

SELECT COMFORT CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
MINNESOTA 2515 41-1597886
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) No.)
</TABLE>

6105 TRENTON LANE NORTH, SUITE 100
MINNEAPOLIS, MINNESOTA 55442
(612) 551-7000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

DANIEL J. MCATHIE
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, CHIEF OPERATING OFFICER AND
SECRETARY

SELECT COMFORT CORPORATION
6105 TRENTON LANE NORTH, SUITE 100
MINNEAPOLIS, MINNESOTA 55442
(612) 551-7000
(Name and address, including zip code, and telephone number, including
area code, of agent for service)

--------------------------

COPIES TO:

Mark A. Kimball Peter Lillevand
Thomas R. Marek Scott Elliott
Amy E. Culbert Greg Liberman
Oppenheimer Wolff & Donnelly LLP Orrick, Herrington & Sutcliffe LLP
3400 Plaza VII, 45 South Seventh Old Federal Reserve Bank Building
Street 400 Sansome Street
Minneapolis, Minnesota 55402 San Francisco, California 94111
(612) 607-7000 (415) 392-1122

--------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.

--------------------------

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, as amended (the "Securities Act"), check the following box: / /

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

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. / /

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

--------------------------

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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>

SUBJECT TO COMPLETION, DATED OCTOBER 29, 1998

PROSPECTUS

4,000,000 SHARES

SELECT COMFORT CORPORATION

[LOGO]

COMMON STOCK

Of the 4,000,000 shares of Common Stock offered hereby, 2,800,000 shares are
being sold by the Company and 1,200,000 shares are being sold by the Selling
Shareholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders. See "Principal and Selling Shareholders."

Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $15.00 and $17.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. The Company has applied to have the Common Stock approved for quotation
on the Nasdaq National Market under the symbol AIRB.

--------------

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
-------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.

(2) Before deducting offering expenses payable by the Company estimated at
$1,000,000.

(3) The Selling Shareholders have granted to the Underwriters a 30-day option to
purchase up to 600,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Selling Shareholders will
be $ , $ and $ , respectively. See "Underwriting."

--------------

The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.

HAMBRECHT & QUIST

BANCBOSTON ROBERTSON STEPHENS

PIPER JAFFRAY INC.

, 1998
<PAGE>

[INSIDE FRONT COVER PAGE OF PROSPECTUS INCLUDES A PICTURE OF A DIRECT MARKETING
SALES PROFESSIONAL, PICTURES OF MANUFACTURING PERSONNEL, A PICTURE OF A SELECT
COMFORT AIR BED, A PICTURE OF A DISPLAY OF SELECT COMFORT PILLOWS, A PICTURE OF
A TYPICAL SELECT COMFORT RETAIL STORE AND A MAP OF THE UNITED STATES
ILLUSTRATING SELECT COMFORT'S RETAIL STORE LOCATIONS]

--------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."

--------------

SELECT COMFORT-REGISTERED TRADEMARK-, SLEEP NUMBER-REGISTERED TRADEMARK-,
COMFORT CLUB-REGISTERED TRADEMARK-, 90 NIGHT TRIAL, BETTER NIGHT'S SLEEP
GUARANTEE, THE AIR BED COMPANY and the Company's stylized logo are trademarks of
the Company. This Prospectus also includes trademarks of companies other than
the Company.
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."

THE COMPANY

Select Comfort, "The Air Bed Company," is the leading vertically integrated
manufacturer, specialty retailer and direct marketer of premium quality, premium
priced, innovative air beds and sleep-related products. Select Comfort believes
it is revolutionizing the mattress industry by offering a differentiated product
through a variety of service-oriented distribution channels. Select Comfort's
products have been clinically proven to address broad-based consumer sleep
problems through the Company's proprietary air bed technology and the ability to
customize the firmness on each side of the mattress at the touch of a button.
The Company offers its air beds exclusively under the Select Comfort brand
through 244 Select Comfort retail stores and leased departments, direct
marketing operations and road show events. Net sales have grown from $14.0
million in 1993 to $184.4 million in 1997, and comparable stores sales have
increased 26.1%, 36.8% and 26.9% for 1996, 1997 and the nine months ended
October 3, 1998, respectively.

According to the International Sleep Products Association, 35.3 million
mattress and foundation units were sold in the U.S. in 1997, generating
approximately $3.6 billion in wholesale sales, which the Company believes
represented approximately $6.7 billion in retail sales. This market is dominated
by four large manufacturers primarily focused on traditional innerspring
mattresses. The National Sleep Foundation estimates that approximately 50% of
U.S. consumers have suffered from sleep deprivation or poor quality sleep from a
variety of causes. The Company believes there is increasing demand for products
designed to provide a better night's sleep and promote overall wellness and the
traditional innerspring mattress industry has not been responsive to these
consumer preferences.

Select Comfort has commissioned a number of independent clinical studies
which indicate that the Company's air beds provide consumers with substantial
benefits over traditional innerspring mattresses. These studies have confirmed
that Select Comfort's air beds provide greater comfort and support by more
naturally contouring to the body, thereby providing better spinal alignment,
reduced pressure points, greater relief of lower back pain, greater overall
comfort and better quality sleep compared to traditional mattress products. The
Company has been granted or has applications pending for 22 U.S. patents and
maintains an active research and development department.

Unlike traditional mattress manufacturers, Select Comfort sells its products
directly to consumers through three complementary, service-oriented distribution
channels. Each of these channels is operated by knowledgeable Company employees
trained in the latest innovations in sleep technology and the benefits and
features of the Select Comfort product line. The Company's retail operations
included 244 stores in 43 states, including four leased departments (three in
Bed Bath & Beyond stores), at October 3, 1998. The Company plans to open
approximately 12 additional retail stores and 10 additional leased departments
in Bed Bath & Beyond stores in the remainder of 1998 and approximately 50 retail
stores in 1999. In addition, the Company expects to expand its leased department
concept in 1999. The Company's direct marketing operations include approximately
90 sales professionals who service consumer inquiries and make outbound calls.
Road show events are held in selected markets where the Company has high inquiry
levels but does not have a retail presence, as well as at home shows and
consumer product shows, state fairs and similar events. The Company advertises
through targeted print, radio and television media which generate consumer
inquiries that are pursued through each of the Company's three distribution
channels.

The Company's goal is to leverage its leadership position and build the
Select Comfort brand to be synonymous with a better night's sleep. In order to
achieve this goal, the Company's business and growth strategy is to (i) provide
a superior product, (ii) educate consumers and provide superior customer
service, (iii) increase product awareness and brand recognition, (iv) leverage
complementary distribution channels, (v) capitalize on vertically integrated
operations, and (vi) pursue additional growth opportunities by offering new and
enhanced products and services and pursuing additional marketing channels.

The Company was incorporated in Minnesota in February 1987. The Company's
principal executive office is located at 6105 Trenton Lane North, Suite 100,
Minneapolis, MN 55442. The Company's telephone number is (612) 551-7000.

3
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company............. 2,800,000 shares
Common Stock offered by the Selling
Shareholders.................................. 1,200,000 shares
Common Stock to be outstanding after the
offering...................................... 18,045,094 shares(1)
Use of proceeds................................. To repay a portion of long-term
indebtedness; to fund expansion of its
retail store base and the build-out,
start-up and leasing of a third
manufacturing and distribution facility;
and for general corporate purposes,
including working capital and possible
acquisitions
Proposed Nasdaq National Market symbol.......... AIRB
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)

<TABLE>
<CAPTION>
YEAR ENDED(2) NINE MONTHS ENDED
----------------------------------------------------------- ----------------------
DEC. 31, DEC. 30, DEC. 28, JAN. 3, OCT. 3,
1994 1995 1996 1998 1998
DEC. 31, ----------- ----------- --------- --------- SEPT. 27, ---------
1993 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales................................... $ 14,041 $ 30,472 $ 68,629 $ 102,028 $ 184,430 $ 126,470 $ 178,835
Gross margin................................ 8,221 19,420 39,796 63,507 117,801 81,584 116,545
Operating income (loss)..................... (2,753) (3,297) (4,589) (3,764) 2,078 515 7,382
Net loss.................................... $ (2,752) $ (3,371) $ (4,560) $ (3,685) $ (2,846) $ (2,524) $ (413)
Net loss available to common shareholders... $ (2,752) $ (3,371) $ (4,560) $ (4,585) $ (3,746) $ (3,199) $ (1,088)
Net loss per share(3):
Basic..................................... $ (2.16) $ (2.65) $ (3.16) $ (2.61) $ (1.59) $ (1.39) $ (0.40)
Diluted................................... $ (1.90) $ (2.32) $ (2.81) $ (2.37) $ (1.48) $ (1.29) $ (0.37)
Weighted average common shares:
Basic..................................... 1,272 1,274 1,444 1,753 2,353 2,309 2,746
Diluted................................... 1,450 1,453 1,623 1,932 2,532 2,488 2,924
Pro forma net income(4)..................... $ 1,583 $ 162 $ 5,988
Pro forma net income per share,
diluted(4)................................ $ 0.09 $ 0.01 $ 0.31
Pro forma weighted average common shares,
diluted(5)................................ 18,288 18,813 19,632
SELECTED OPERATING DATA:
Stores open at period-end(6)................ 19 35 68 143 200 190 244
Average square footage of stores open during
period(7)................................. 668 642 703 768 866 866 895
Sales per square foot(7).................... $ 401 $ 442 $ 611 $ 622 $ 666 $ 460 $ 543
Average store age (in months at period
end)...................................... 5 12 15 15 22 20 26
Comparable store sales increase(8).......... -- 57.6% 59.8% 26.1% 36.8% 26.7% 26.9%
</TABLE>

<TABLE>
<CAPTION>
OCTOBER 3, 1998
--------------------------
ACTUAL AS ADJUSTED(9)
--------- ---------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 9,579 $ 35,676
Working capital........................................................................ 3,606 29,939
Total assets........................................................................... 63,323 88,414
Long-term debt, less current maturities................................................ 24,244 167
Mandatorily redeemable preferred stock................................................. 27,612 --
Total common shareholders' equity (deficit)............................................ (20,356) 57,093
</TABLE>

4
<PAGE>
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(1) Based on the number of shares outstanding as of October 3, 1998. Excludes
(i) an aggregate of 3,247,478 shares of Common Stock issuable upon exercise
of stock options and warrants outstanding as of October 3, 1998 at a
weighted average exercise price of $7.31 per share, and (ii) an aggregate of
up to 125,000 shares of Common Stock issuable upon exercise of employee
stock options expected to be granted in connection with this offering at an
exercise price per share equal to the initial public offering price. See
"Capitalization," "Management--Stock Option and Incentive Plans" and
"Description of Capital Stock--Options and Warrants."

(2) Except for the year ended January 3, 1998, which included 53 weeks, all
years presented included 52 weeks.

(3) See Note 11 of Notes to Consolidated Financial Statements.

(4) Includes pro forma adjustments for (i) the elimination of non-cash interest
expense associated with a put warrant, the put feature of which will
terminate upon consummation of this offering, (ii) the elimination of
interest expense associated with repayment of $15.0 million of the Company's
outstanding indebtedness from the proceeds of this offering, and (iii)
related tax effects. See "Pro Forma Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

(5) Gives effect to the conversion of all outstanding shares of preferred stock
into Common Stock upon the consummation of this offering, the dilutive
effect of outstanding options and warrants, and shares to be issued upon the
consummation of this offering.

(6) Includes Select Comfort stores operated in leased departments within larger
retail stores (one at December 28, 1996, June 28, 1997 and January 3, 1998
and four at October 3, 1998).

(7) For stores open during the entire period indicated.

(8) Stores enter the comparable store calculation in their 13th full month of
operation. The number of comparable stores used to calculate such data were
13, 32, 65, 138, 107 and 182 for 1994, 1995, 1996, 1997 and the nine-month
periods ended September 27, 1997 and October 3, 1998, respectively.

(9) As adjusted to give effect upon the consummation of this offering to the (i)
reclassification of a put warrant from long-term debt to shareholders'
equity, (ii) conversion of all outstanding shares of preferred stock into
Common Stock, and (iii) application of the estimated net proceeds from the
issuance of 2,800,000 shares of Common Stock at an assumed initial public
offering price of $16.00 per share, including repayment of $15.0 million of
the Company's outstanding indebtedness. See "Use of Proceeds" and
"Capitalization."

------------------------------

THE COMPANY'S 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 THE COMPANY'S FISCAL YEARS. ALL REFERENCES TO THE COMPANY
HEREIN INCLUDE THE COMPANY'S WHOLLY OWNED SUBSIDIARIES, SELECT COMFORT DIRECT
CORPORATION, SELECT COMFORT RETAIL CORPORATION, DIRECT CALL CENTERS, INC. AND
SELECT COMFORT SC CORPORATION. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS (I) GIVES EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF
PREFERRED STOCK INTO COMMON STOCK UPON THE CONSUMMATION OF THIS OFFERING, AND
(II) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.

5
<PAGE>
RISK FACTORS

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH BELOW AND ELSEWHERE IN
THIS PROSPECTUS. SEE "CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS."
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING ANY SHARES OF THE COMMON
STOCK OFFERED HEREBY.

HISTORY OF OPERATING LOSSES; UNCERTAIN PROFITABILITY. The Company has
incurred substantial operating losses since its inception and had an accumulated
deficit of $22.7 million as of October 3, 1998. There can be no assurance that
the Company will achieve or sustain profitability on a quarterly or annual basis
in future periods. The Company's future operating results will depend upon a
number of factors, including (i) the level of consumer acceptance of the
Company's products, (ii) the ability of the Company to create product and brand
name awareness, (iii) the effectiveness and efficiency of the Company's
advertising, (iv) the number and timing of new retail store openings, (v) the
performance of the Company's existing and new retail stores, (vi) the ability of
the Company to manage its planned rapid store expansion, (vii) the ability of
the Company to successfully identify and respond to emerging trends in the
mattress industry, (viii) the level of competition in the mattress industry, and
(ix) general economic conditions and consumer confidence. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

LIMITED HISTORY OF RETAIL OPERATIONS; AGGRESSIVE GROWTH STRATEGY. The
Company's net sales have grown significantly in the past several years primarily
as a result of the opening of new retail stores and increases in comparable
store sales from year to year. Until recently, the Company generated most of its
net sales from its direct marketing operations. The Company opened its first
three retail stores in 1992 and operated 19 stores at the end of 1993, 35 stores
at the end of 1994, 68 stores at the end of 1995, 143 stores at the end of 1996,
200 stores at the end of 1997 and 244 stores, including four leased departments
(three in Bed Bath & Beyond stores) as of October 3, 1998. Virtually all of the
Company's retail stores are in mall locations. The Company plans to open
approximately 12 additional retail stores and 10 additional leased departments
in Bed Bath & Beyond stores in the remainder of 1998 and approximately 50 retail
stores in 1999. In addition, the Company expects to expand its leased department
concept in 1999. Approximately 54% of the Company's new store openings in 1998
will be in existing markets and the remainder will be in new geographical
markets. The opening of additional stores in an existing market could result in
lower net sales from existing Company stores in that market. Because the Company
will be expanding into new geographic markets, it may face competitive
challenges that are different from those encountered to date. The Company's
success in any new geographic market will depend on the Company's ability to
select appropriate new store sites and to create awareness in the new market
through effective marketing and advertising strategies. In addition to adding
further mall locations, the Company's retail expansion plans include alternative
locations such as strip shopping centers. The Company has limited experience
with such alternative locations and its success will depend on the Company's
ability to create awareness of, and to attract consumers to, such alternative
locations.

The success of the Company's planned expansion will be dependent upon many
factors, including the ability of the Company to (i) successfully open
additional retail stores in existing geographic markets, (ii) successfully enter
new geographic markets and store environments in which the Company has no
previous retail experience, (iii) negotiate acceptable lease terms for
additional sites, (iv) effectively hire, train, manage and retain qualified
management and other personnel, (v) effectively manage the interaction among the
Company's multiple distribution channels, (vi) generate additional direct
marketing inquiries, (vii) effectively develop strategic alliances with respect
to product development, marketing and distribution, and (viii) effectively refer
selected direct marketing inquiries to the retail and road show distribution
channels. There can be no assurance that the Company will be able to grow at
historical rates or achieve its planned expansion, that new retail stores will
be effectively integrated into the Company's existing

6
<PAGE>
operations, that such stores will be profitable or that the Company will be able
to establish and maintain profitable strategic alliances. See
"Business--Business and Growth Strategy."

ABILITY TO MANAGE GROWTH. The Company's aggressive growth strategy has
placed, and will continue to place, a significant strain on the Company's
management, production, information systems and other resources. To manage
growth effectively, the Company must maintain a high level of manufacturing
quality and efficiency, continue to enhance its operational, financial and
management systems, including its database management, tracking of inquiries,
inventory control and distribution systems, and expand, train and manage its
employee base. There can be no assurance that the Company will be able to
effectively manage this expansion in any one or more of these areas, and any
failure to do so could have a material adverse effect on the Company's business,
financial condition and operating results.

All orders are filled by shipments made directly to the customer from one of
the Company's two manufacturing and distribution centers located in Minneapolis
and in Columbia, South Carolina. The Company believes that its existing
manufacturing and distribution facilities will be adequate to support its
planned expansion through the next 12 months. Any significant interruption in
the operation of either of such facilities would have a material adverse effect
on the business, financial condition and operating results of the Company. The
Company plans to lease a third manufacturing and distribution center in Salt
Lake City, which is expected to be in operation during the first half of 1999,
at a cost of approximately $4.5 million. There can be no assurance that the new
facility will be completed on time, that the cost to build it will not exceed
the Company's estimates or that manufacturing costs for this new facility will
not be greater than manufacturing costs at the Company's current facilities in
Minnesota and South Carolina. In addition, delays or interruptions in the normal
supply of products could occur as the Company attempts to integrate a third
manufacturing and distribution center. Any such increases in costs or delays
could have a material adverse effect on the Company's business, financial
condition and operating results. The Company does not have experience in
manufacturing its products in the volumes that it projects will be necessary to
support the anticipated increase in sales and may encounter difficulties in
scaling up production, including problems involving quality control and
assurance, component supply and shortages of qualified personnel. Any failure on
the part of the Company in manufacturing its products in volumes sufficient to
meet demand could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Manufacturing and
Distribution."

EFFECTIVENESS AND EFFICIENCY OF ADVERTISING EXPENDITURES. The Company's
advertising expenditures increased from $5.5 million in 1994 to $28.3 million in
1997, and are expected to continue to increase for the foreseeable future. The
Company's future growth and profitability will be dependent in part on the
effectiveness and efficiency of the Company's advertising expenditures,
including the ability of the Company to (i) create greater awareness of the
Company's products and brand name, (ii) determine the appropriate creative
message and media mix for future advertising expenditures, (iii) effectively
manage advertising costs (including creative and media) in order to maintain
acceptable costs per inquiry, costs per order and operating margins, and (iv)
convert inquiries into actual orders. Historically, the Company's advertising
expenditures have generated revenue benefits beyond the actual duration of the
advertisements. There can be no assurance that the Company will experience
similar benefits from advertising expenditures in the future. In addition, no
assurance can be given that the Company's planned increases in advertising
expenditures will result in increased sales, will generate sufficient levels of
product and brand name awareness or that the Company will be able to manage such
advertising expenditures on a cost effective basis. See "Business--Marketing and
Advertising."

FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS. The Company's comparable
store sales results, which are computed by comparing sales during the current
year with prior year periods for those stores open during the same periods of
the current and prior years, have fluctuated significantly in the past and such
fluctuations are likely to continue. Stores enter the comparable store
calculation in their 13th full month of operation. The Company's comparable
store sales increases were 26.1%, 36.8% and 26.9% for 1996, 1997

7
<PAGE>

and the nine months ended October 3, 1998, respectively. The Company's
comparable store sales results have fluctuated significantly from quarter to
quarter with increases ranging from 8.2% to 62.0% on a quarterly basis for 1996
and 1997. There can be no assurance that the Company's comparable store sales
results will not fluctuate significantly in the future. A variety of factors
affect the Company's comparable store sales results, including (i) the level of
consumer awareness of Select Comfort's products and brand name, (ii) the rate of
consumer acceptance of the Company's products, (iii) the higher levels of sales
in the first year of operations as each successive class of new stores is
opened, (iv) the strong comparable store sales performance in recent periods,
(v) the maturation of its store base, (vi) the timing and relative success of
promotional events, advertising expenditures, new product introductions and
product line extensions, and (vii) general economic conditions and consumer
confidence. In addition, the Company's higher per unit prices and lower number
of transactions relative to other mall-based retailers may cause greater
volatility in the Company's comparable store sales results. Additionally, due to
the integrated nature of the Company's distribution channels, the relative level
of the Company's net sales may fluctuate between retail and direct marketing,
which may contribute to fluctuations in comparable store sales results. Changes
in comparable store sales results could cause the price of the Common Stock to
fluctuate substantially.

QUARTERLY FLUCTUATIONS AND SEASONALITY. The Company's quarterly operating
results may fluctuate significantly as a result of a variety of factors,
including increases or decreases in comparable store sales, the timing, amount
and effectiveness of advertising expenditures, any increases in return rates,
the timing of new store openings and related expenses, competitive factors, net
sales contributed by new stores, any disruptions in third party delivery
services and general economic conditions and consumer confidence. The Company's
business is also subject to some seasonal influences, with heavier
concentrations of sales during the fourth quarter holiday season due to higher
mall traffic. During the third quarter of 1997, the United Parcel Service
("UPS") work stoppage resulted in delayed delivery of the Company's products,
requiring the Company to use alternative carriers. Additionally during that
period, the Company converted its manufacturing and financial operations to a
new integrated information system, which further contributed to delays in
fulfilling customer orders. These factors resulted in higher than normal
customer returns, canceled orders and substantially increased freight charges,
which had a material adverse effect on the Company's operating results in the
second half of 1997. See "--Reliance Upon Carriers."

A substantial portion of the Company's operating expenses is related to
sales and marketing expenses, including costs associated with opening new stores
and advertising and marketing expenditures. The level of such spending cannot be
adjusted quickly and is based, in significant part, on the Company's
expectations of future customer inquiries and net sales. Furthermore, the
Company has often realized a substantial portion of its net sales in the last
month of a quarter, with such net sales frequently concentrated in the last
weeks or days of a quarter, due in part to its promotional schedule. If there is
a shortfall in expected net sales or in the conversion rate of customer
inquiries, the Company may be unable to adjust its spending in a timely manner
and the Company's business, financial condition and operating results may be
materially adversely affected. The Company's results of operations of any
quarter are not necessarily indicative of the results that may be achieved for a
full year or any future quarter.

The Company expects to incur certain charges in the period in which this
offering is consummated in connection with an outstanding put warrant and with
the repayment of certain indebtedness with a portion of the net proceeds of this
offering. Based on an assumed initial public offering price of $16.00 per share,
the Company estimates that the interest expense associated with the outstanding
put warrant will not have a material impact on the Company's results of
operations. However, if the initial public offering price is greater than $16.00
per share, the amount of such interest expense will be larger and may have a
material impact on the Company's results of operations. The charge associated
with the repayment of certain indebtedness is estimated to be approximately $1.7
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."

RETURN POLICY AND PRODUCT WARRANTY. Part of the Company's marketing and
advertising strategy focuses on providing a 90 Night Trial in which customers
may return the air bed and obtain a refund of the

8
<PAGE>
purchase price. As the Company expands its sales, there can be no assurance that
its return rates will remain within acceptable levels. An increase in return
rates could have a material adverse effect on the Company's business, financial
condition and operating results. The Company also provides its customers with a
limited 20-year warranty on its air beds. Although the Company has performed
extensive testing to enable it to project warranty claims over the 20-year
warranty period, the Company has only been selling air beds in significant
quantities since 1992. There can be no assurance that the Company's warranty
reserves will be adequate to cover future warranty claims, and such failure
could have a material adverse effect on the Company's business, financial
condition and operating results.

PRODUCT DEVELOPMENT AND ENHANCEMENTS. The Company's growth and future
success will depend upon its ability to enhance its existing products and to
develop and market new products on a timely basis that respond to customer needs
and achieve market acceptance. The Company is pursuing opportunities to enter
into strategic alliances with manufacturers of adjustable frame beds and sofa
sleepers. There can be no assurance that the Company will be successful in
developing or marketing enhanced or new products, or that any such products will
be accepted by the market. There can also be no assurance that the Company will
be able to establish and maintain profitable strategic alliances. Further, there
can be no assurance that the resulting level of sales of any of the Company's
enhanced or new products will justify the costs associated with their
development and marketing. See "Business--Business and Growth Strategy" and
"--Research and Product Development."

MARKET ACCEPTANCE. The U.S. mattress market is dominated by four large
manufacturers of innerspring mattresses. The Company's air bed technology
represents a significant departure from traditional innerspring mattresses. The
market for air beds is continuing to evolve and the success of the Company's
products will be dependent upon both the continued growth of this market and
upon market acceptance of the Company's air beds. The failure of the Company's
air beds to achieve market acceptance for any reason would have a material
adverse effect on the Company's business, financial condition and operating
results.

DEPENDENCE ON CONSUMER SPENDING. The success of the Company's operations
depends to a significant extent upon a number of factors relating to
discretionary consumer spending. These factors include economic conditions such
as employment levels, business conditions, interest rates, availability of
credit, inflation and taxation. Downturns in such economic conditions or in
consumer confidence could have a negative effect on discretionary spending.
Because a high percentage of the Company's net sales are made on credit, any
downturn in general economic conditions or increases in interest rates may
materially adversely affect the Company's business, financial condition and
operating results. The Company is also dependent upon the continued popularity
of malls as shopping destinations and the ability of mall anchor tenants and
other attractions to generate customer traffic for the Company's retail stores.
A decrease in mall traffic could adversely affect the Company's growth, net
sales, comparable store results and profitability.

RELIANCE UPON VENDORS; FOREIGN SOURCES OF SUPPLY. All of the air chambers
for the Company's air beds are purchased from one Eastern European supplier
under a supply contract expiring in August 1999, pursuant to which the Company
is obligated to purchase certain minimum quantities, but not all of its
requirements. Either party can terminate the contract upon 90 days notice if
such party ceases to use the air chambers in its business. The Company believes
that it would be able to procure an adequate supply of air chambers from other
sources on a timely basis if the supply contract is terminated or the Eastern
European supplier is otherwise unable to supply air chambers. The Company has
recently completed the development of an air chamber designed with new materials
that will be manufactured by a U.S. based company at a foreign manufacturing
facility. Full production of this new air chamber is expected to commence in the
third quarter of 1999. The Eastern European supplier is expected to provide a
second source of supply of this new air chamber during the second half of 1999.
The Company does not presently have any contract or commitment from either
supplier to manufacture the newly developed air chamber.

9
<PAGE>
The Company is continuously searching for alternative designs and materials for
all of its components, as well as alternative sources of supply. The inability
of the Company's sources of supply to meet, for any reason, the Company's
requirement for air chambers could have a material adverse effect on the
Company's business, financial condition and operating results. In addition,
since the Company's air chambers and other supplies are manufactured outside the
United States, the Company's operations could be materially adversely affected
by the risks associated with foreign sourcing of materials, including (i)
political instability resulting in disruption of trade, (ii) 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, and (iii) any significant fluctuation in the value of the dollar
against foreign currencies.

With the exception of its air chambers, the Company has no long-term
purchase contracts or other contractual assurances of continued supply, pricing
or access to components. The inability or failure of one or more key vendors to
supply components, the loss of one or more key vendors or a material change in
the Company's purchase terms could have a material adverse effect on the
Company's business, financial condition and operating results. See
"Business--Suppliers" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

RELIANCE UPON CARRIERS. Historically, the Company has relied almost
exclusively on UPS for delivery of the Company's products to customers. For a
significant portion of the third quarter of 1997, UPS was unable to deliver the
Company's products within acceptable time periods, causing delays in deliveries
to customers and requiring the Company to use alternative carriers. This
contributed to substantially greater freight charges and canceled orders, which
had a material adverse effect on the Company's operating results in the second
half of 1997. Due to the extensive national distribution system and cost
effectiveness of UPS, the Company has continued to rely primarily on UPS for
deliveries to customers. No assurance can be given that UPS will not experience
difficulties in meeting the Company's requirements in the future. The Company
continues to evaluate alternative carriers on a national and regional basis, as
well as providers of in-home assembly services. There can be no assurance that
alternative carriers will be able to meet the Company's requirements on a timely
or cost-effective basis. Any significant delay in deliveries to customers or
increase in freight charges may have a material adverse effect on the Company's
business, financial condition and operating results.

COMPETITION. The mattress industry is highly competitive. Participants in
the mattress industry compete primarily on price, quality, brand name
recognition, product availability and product performance, including the
perceived levels of comfort and support provided by a mattress. The Company's
air beds compete with a number of different types of mattress alternatives,
including innerspring mattresses, waterbeds, futons and other air-supported
mattresses that are sold through a variety of channels, including furniture
stores, bedding specialty stores, department stores, mass merchants, wholesale
clubs, telemarketing programs, television infomercials and catalogs. The Company
believes that its success depends in part on increasing consumer awareness and
acceptance of the Company's existing products and continuing to introduce
products that have qualities and benefits which differentiate the Company's
products from those offered by other manufacturers. There can be no assurance
that such products will receive consumer acceptance or that the Company will
continue to be able to successfully introduce such products.

10
<PAGE>
increased their share of the market from 19% to 24%. Many of these competitors,
and in particular the four largest manufacturers named above, have greater
financial, marketing and manufacturing resources and better brand name
recognition than the Company, and sell their products through broader and more
established distribution channels. The Company believes that a number of
companies, including two of the four largest manufacturers, have begun to offer
air beds. There can be no assurance that these or any other mattress
manufacturers will not aggressively pursue the air bed market. Any such
competition by the established manufacturers or new entrants into the market
could have a material adverse effect on the Company's business, financial
condition and operating results. In addition, should any of the Company's
competitors reduce prices on premium mattress products, the Company may be
required to implement price reductions in order to remain competitive, which
could have a material adverse effect on its business, financial condition and
operating results. There are no provisions in the Company's retail store leases
that limit or restrict competing businesses from operating in the malls in which
the Company's stores are located. The lack of such restrictions and the lack of
significant barriers to entry may result in new competition. See
"Business--Competition."

REGULATORY MATTERS. The Company's products and its marketing and
advertising practices are subject to regulation by various federal, state and
local regulatory authorities, including the Federal Trade Commission and the
U.S. Food and Drug Administration. The mattress industry also engages in
advertising self-regulation through certain voluntary forums, including the
National Advertising Division (the "NAD") of the Better Business Bureau. The
Company's advertising campaigns have in the past been the subject of proceedings
before the NAD. As a result of such proceedings, the Company has made minor
modifications to its advertising literature. There can be no assurance that the
Company's marketing and advertising practices will not be the subject of further
proceedings before regulatory authorities or the NAD, or the subject of claims
by other parties. The Company is also subject to various other federal, state
and local regulatory requirements, including federal, state and local
environmental regulation and regulations issued by the U.S. Occupational Safety
and Health Administration. There can be no assurance that the Company will not
experience any material adverse effects on its business, financial condition or
operating results as a result of such regulatory requirements.

YEAR 2000 COMPLIANCE. The Company and third parties with which the Company
does business rely on numerous computer programs in their day to day operations.
There can be no assurance that the Company will be able to effectively address
its Year 2000 issues in a timely and cost-efficient manner and without
interruption to its business. The Company has initiated discussions with its
significant suppliers regarding their plans to remediate Year 2000 issues where
their systems interface with the Company's systems or otherwise impact its
operations. There can be no assurance that Year 2000 difficulties encountered by
its suppliers and other third parties with whom it does business will not have a
material adverse impact on the Company's business, financial condition or
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impact of Year 2000."

DEPENDENCE ON KEY PERSONNEL. The success of the Company's business will
continue to be dependent upon the efforts of its key operating officers and
employees, including H. Robert Hawthorne, President, Chief Executive Officer and
a director, and Daniel J. McAthie, Executive Vice President, Chief Financial
Officer and Chief Operating Officer. The loss of either of these executive
officers, or other key personnel, could have a material adverse effect on the
Company's business, financial condition and operating results. In addition, the
Company's success in the future will be dependent upon its ability to attract,
retain and motivate qualified personnel, including retail store managers.

INTELLECTUAL PROPERTY PROTECTION. The Company currently holds a number of
U.S. and Canadian patents, and has various U.S. and international patent
applications pending, with respect to certain aspects of the design, technology
and function of its products. Notwithstanding these patents and patent
applications, no assurance can be given that such rights will provide
substantial protection or that others will not be able to develop products that
are similar to or competitive with the Company's air beds. The Company

11
<PAGE>
also relies on a combination of copyright, trademark, trade secret, unfair
competition and other intellectual property laws, nondisclosure agreements and
other protective measures to protect its rights. Such protections, however, may
not preclude competitors from developing products similar to the Company's
products or otherwise competing with the Company. In addition, the laws of
certain foreign countries may not protect the Company's intellectual property
rights and confidential information to the same extent as the laws of the United
States. Although the Company is unaware of any basis for an intellectual
property infringement or invalidity claim against it, there can be no assurance
that third parties, including competitors, will not assert such claims against
the Company or that, if asserted, such claims will not be upheld. Intellectual
property litigation, which could result in substantial cost to and diversion of
effort by the Company, may be necessary to enforce patents issued to the
Company, to protect trade secrets or proprietary technology owned by the Company
or to defend the Company against claimed infringement of the rights of others
and to determine the scope and validity of the proprietary rights of others.
There can be no assurance that the Company would prevail in any such litigation
or that, if it is unsuccessful, the Company would be able to obtain any
necessary licenses on reasonable terms or at all. See "Business-- Intellectual
Property."

CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS. The Company's directors,
executive officers and their affiliates will, in the aggregate, beneficially own
approximately 46.2% of the Company's outstanding Common Stock after this
offering. Although the Company does not know of the existence of any agreements
among such shareholders with respect to the voting of their shares, if they were
to act in concert, they would be able to elect all of the Company's directors,
increase the Company's authorized capital stock, dissolve, merge or sell the
assets of the Company, effect other fundamental corporate transactions requiring
shareholder approval, including delaying, deterring or preventing a change in
control of the Company, and generally direct the affairs of the Company. See
"Principal and Selling Shareholders."

LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to
this offering, there has been no public market for the Common Stock, and there
can be no assurance that an active trading market will develop or be sustained.
The initial public offering price for the shares of Common Stock to be sold in
this offering will be determined by agreement among the Company, the Selling
Shareholders and the representatives of the Underwriters and may bear no
relationship to the price at which the Common Stock will trade after completion
of this offering. For a discussion of the factors to be considered in
determining the initial public offering price, see "Underwriting."

The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of the
Common Stock is likely to be highly volatile. Factors such as fluctuations in
the Company's operating results, including sales volume growth and comparable
store sales, a downturn in the retail industry, changes in stock market
analysts' recommendations regarding the Company, other retail companies or the
retail industry in general and general market and economic conditions may have a
significant effect on the market price of the Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE. The sale of substantial amounts of the
Company's Common Stock in the public market following this offering could
adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital in the future through the sale of its equity
securities. Upon completion of the offering, the Company will have 18,045,094
shares of Common Stock outstanding. Of these shares, the 4,000,000 shares of
Common Stock offered hereby will be freely tradable. Of the remaining shares,
12,215,075 shares are subject to lock-up agreements expiring 180 days after the
date of this Prospectus. Upon expiration of these agreements, 12,120,553 shares
of Common Stock will be eligible for immediate resale in the public market
subject to the limitations of Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"). Of such shares, approximately 4,067,374 shares
will be eligible for

12
<PAGE>

resale in the public market pursuant to Rule 144(k) without regard to the volume
and manner of sale limitations in Rule 144. Of the 1,830,019 shares not subject
to lock-up agreements, 1,552,582 shares will be eligible for immediate resale in
the public market pursuant to Rule 144(k) and the remainder will be eligible for
resale in the public market subject to the limitations of Rule 144. The Company
intends to file a registration statement on Form S-8 within 30 days after the
completion of this offering to register the shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options. As of October 3, 1998,
options to purchase approximately 541,045 shares not subject to lock-up
agreements were vested and would be eligible for sale pursuant to such
registration statement. In addition, certain existing shareholders and
warrantholders have the right to register shares of Common Stock for sale in the
public market. See "Shares Eligible for Future Sale" and "Description of Capital
Stock--Registration Rights."

ANTI-TAKEOVER CONSIDERATIONS. The Company's Articles of Incorporation (the
"Articles") provide for a classified Board of Directors (the "Board") serving
staggered terms of three years. The Articles also require the approval of
two-thirds of the outstanding voting power of the Company entitled to vote in
the event of any sale or merger of the Company. Under the Articles, the Board
has the authority, without shareholder approval, to issue up to 5,000,000 shares
of undesignated preferred stock (the "Undesignated Preferred Stock") and to fix
the rights and preferences thereof. This authority, together with the super-
majority shareholder voting requirements and the staggered Board, may have the
effect of making it more difficult for a third party to acquire, or discourage a
third party from attempting to acquire, control of the Company, even if
shareholders purchasing shares in this offering may consider such a change in
control to be in their best interests. In addition, Minnesota law contains
certain provisions that may have the effect of delaying, deterring or preventing
a hostile takeover of the Company. See "Description of Capital Stock--
Provisions with Potential Anti-Takeover Effect."

DILUTION. The initial public offering price per share is substantially
higher than the net tangible book value per share of Common Stock. New investors
purchasing Common Stock in this offering will incur immediate and substantial
dilution of $12.44 in net tangible book value per share of Common Stock
purchased. See "Dilution."

13
<PAGE>
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

The statements contained in this Prospectus that are not purely historical
are forward-looking statements, including statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Statements which use the words "expects," "will," "may," "anticipates,"
"believes," "intends," and "seeks" are forward-looking statements. These
forward-looking statements, including statements regarding the Company's efforts
to increase store level profitability and plans to open new retail stores and
develop new products, are based on information available to the Company on the
date hereof, and the Company assumes no obligation to update any such
forward-looking statement. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
Among the factors that could cause actual results to differ materially are the
factors set forth under the heading "Risk Factors." In particular, the success
of the Company will be dependent upon many factors, including (i) the level of
consumer acceptance of the Company's products, (ii) the ability of the Company
to create product and brand name awareness, (iii) the effectiveness and
efficiency of the Company's advertising, (iv) the number and timing of new
retail store openings, (v) the performance of the Company's existing and new
retail stores, (vi) the ability of the Company to manage its planned rapid store
expansion, (vii) the ability of the Company to successfully identify and respond
to emerging trends in the mattress industry, (viii) the level of competition in
the mattress industry, and (ix) general economic conditions and consumer
confidence. There can be no assurance that the Company will be able to achieve
its planned expansion, that new stores will be effectively integrated into the
Company's existing operations, that new or existing stores will be profitable or
that the Company will be able to establish and maintain profitable strategic
alliances.

14
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,800,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $16.00 per share are estimated to be $40.7 million, after deducting the
underwriting discount and estimated offering expenses payable by the Company.
The Company intends to use such net proceeds as follows: (i) approximately $15.0
million to repay long-term debt; (ii) approximately $6.5 million to fund
expansion of its retail store base; (iii) approximately $4.5 million to fund the
build-out, start-up and leasing of its third manufacturing and distribution
facility scheduled for completion during the first half of 1999; and (iv) the
remainder for general corporate purposes, including working capital and for
possible acquisitions of complementary products, technologies or businesses. The
Company has no current plans to undertake any acquisitions of a material nature.
The Company's $15.0 million of long-term debt intended to be repaid with a
portion of the net proceeds of this offering bears interest at 11% per annum and
is due March 31, 2003. The $15.0 million in long-term debt is owed by the
Company to General Electric Capital Corporation, a beneficial owner of
approximately 7.9% of the Company's Common Stock immediately prior to this
offering. The proceeds of such indebtedness were used to fund expansion of the
Company's retail store base and for general corporate purposes. Pending
application of the net proceeds described above, the Company intends to invest
the net proceeds in short-term, interest-bearing, investment-grade securities.
The Company will not receive any proceeds from the sale of Common Stock by the
Selling Shareholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Principal and Selling Shareholders."

DIVIDEND POLICY

To date, the Company has neither declared nor paid cash dividends on shares
of its Common Stock. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. The payment of
any future dividends will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's future
earnings, capital requirements and financial condition and general business
conditions. The Company's current debt agreement contains various financial
covenants, including covenants relating to net worth, which may have the effect
of restricting the Company's ability to pay dividends. This agreement will
terminate upon repayment of the $15.0 million outstanding thereunder from a
portion of the net proceeds of this offering.

15
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of
October 3, 1998 on an (i) actual basis and (ii) as adjusted basis after giving
effect to the conversion of all outstanding shares of preferred stock into
shares of Common Stock upon the consummation of this offering, the
reclassification of certain warrants from long-term debt to common shareholders'
equity upon the consummation of this offering, and the receipt and the
application of the estimated net proceeds from the sale of the shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $16.00 per share. The table should be read in conjunction with the
Consolidated Financial Statements of the Company and the Pro Forma Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
OCTOBER 3, 1998
--------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt.................................................. $ 1,052 $ 1,052
---------- -------
---------- -------
Long-term debt, less current maturities............................................... $ 24,244 $ 167
Mandatorily redeemable preferred stock................................................ 27,612 --
---------- -------

Common shareholders' equity (deficit):
Undesignated preferred stock, 5,000,000 shares authorized, no shares issued and
outstanding actual, as adjusted................................................... -- --

Common stock, $0.01 par value, 95,000,000 shares authorized, 2,989,885 shares issued
and outstanding, actual; 18,045,094 shares issued and outstanding, as
adjusted(2)....................................................................... 30 180
Additional paid-in capital.......................................................... 3,328 82,346
Accumulated deficit................................................................. (22,720) (24,439)
Notes receivable--investors......................................................... (994) (994)
---------- -------
Total common shareholders' equity (deficit)....................................... (20,356) 57,093
---------- -------
Total capitalization............................................................ $ 31,500 $ 57,260
---------- -------
---------- -------
</TABLE>

- ------------------------

(1) See Pro Forma Consolidated Financial Statements.

(2) Excludes (i) an aggregate of 3,247,478 shares of Common Stock issuable upon
exercise of stock options and warrants outstanding as of October 3, 1998 at
a weighted average exercise price of $7.31 per share and (ii) an aggregate
of up to 125,000 shares of Common Stock issuable upon exercise of employee
stock options expected to be granted in connection with this offering at an
exercise price per share equal to the initial public offering price. See
"Management--Stock Option and Incentive Plans" and "Description of Capital
Stock--Options and Warrants."

16
<PAGE>
DILUTION

As of October 3, 1998, the Company had a net tangible book value of
approximately $32.2 million or $1.82 per share of Common Stock, giving effect to
the conversion of all outstanding shares of preferred stock into Common Stock,
the exercise of stock options and warrants to purchase 2,384,927 shares of
Common Stock, which were exercisable as of October 3, 1998, and the
reclassification of certain warrants from long-term debt to common shareholders'
equity upon the consummation of this offering. Net tangible book value per share
represents the amount of the Company's common shareholders' equity (deficit),
less intangible assets, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of the 2,800,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $16.00 per share and the application of the estimated net proceeds therefrom,
the net tangible book value of the Company as of October 3, 1998 would have been
approximately $72.8 million, or approximately $3.56 per share. This represents
an immediate increase in net tangible book value of $1.74 per share to existing
shareholders and an immediate dilution in net tangible book value of $12.44 per
share to new investors. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 16.00
Net tangible book value per share before the offering...... $ 1.82
Increase per share attributable to new investors........... 1.74
---------
Net tangible book value per share after the offering......... 3.56
---------
Dilution per share to new investors.......................... $ 12.44
---------
---------
</TABLE>

The following table summarizes, as of October 3, 1998, the differences
between the existing shareholders and the new investors with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid (based upon an assumed
initial public offering price of $16.00 per share):

<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(2).... 17,630,021 86.3% $ 48,570,003 52.0% $ 2.75
New investors............... 2,800,000 13.7 44,800,000 48.0 16.00
------------ ----- ------------- ----- ------
Total..................... 20,430,021 100.0% $ 93,370,003 100.0% $ 4.57
------------ ----- ------------- ----- ------
------------ ----- ------------- ----- ------
</TABLE>

- ------------------------

(1) Sales by the Selling Shareholders in this offering will reduce the number of
shares held by the existing shareholders to 16,430,021 or approximately
80.4% (15,830,021 shares or approximately 77.5% if the underwriter's
over-allotment option is exercised in full) and will increase the number of
shares held by new investors to 4,000,000 or approximately 19.6% (4,600,000
or approximately 22.5% if the over-allotment option is exercised in full) of
the total number of shares of Common Stock outstanding after this offering.
See "Principal and Selling Shareholders."

(2) Assumes the exercise of stock options and warrants to purchase 2,384,927
shares of Common Stock at a weighted average exercise price of $7.38 per
share, which were exercisable as of October 3, 1998. Does not include the
exercise of stock options to purchase 862,551 shares at a weighted average
exercise price of $7.12 per share as of October 3, 1998. See
"Management--Stock Option and Incentive Plans" and "Description of Capital
Stock--Options and Warrants."

17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The Consolidated Statements of Operations Data presented below for the years
ended December 30, 1995, December 28, 1996 and January 3, 1998 and the nine
months ended October 3, 1998 and the Consolidated Balance Sheet Data as of
December 28, 1996, January 3, 1998 and October 3, 1998 are derived from the
Company's consolidated financial statements included elsewhere in this
Prospectus, which have been audited by KPMG Peat Marwick LLP, independent
certified public accountants, and should be read in conjunction with those
consolidated financial statements and notes thereto. The Consolidated Statements
of Operations Data presented below for the year ended December 31, 1994 and the
Consolidated Balance Sheet Data as of December 31, 1994 and December 30, 1995
are derived from audited consolidated financial statements of the Company not
included herein. The Consolidated Statement of Operations Data presented below
for the year ended December 31, 1993 and the Consolidated Balance Sheet Data as
of December 31, 1993 are derived from the unaudited consolidated financial
statements of the Company which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information set forth therein. The
Consolidated Statements of Operations Data presented below for the nine months
ended September 27, 1997 and the Pro Forma Consolidated Statements of Operations
Data for all periods shown, are derived from the Company's unaudited
consolidated financial statements included elsewhere in this Prospectus which,
in the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information set forth therein. The consolidated results of operations for the
nine months ended October 3, 1998 are not necessarily indicative of the results
to be expected for the entire year ending January 2, 1999 or for any future
period. The information presented below under the caption "Selected Operating
Data" is unaudited.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED(1) ENDED
----------------------------------------------------------- -----------
DEC. 31, DEC. 31, DEC. 30, DEC. 28, JAN. 3, SEPT. 27,
1993 1994 1995 1996 1998 1997
----------- ----------- ----------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales..................................... $ 14,041 $ 30,472 $ 68,629 $ 102,028 $ 184,430 $ 126,470
Cost of sales................................. 5,820 11,052 28,833 38,521 66,629 44,886
----------- ----------- ----------- --------- --------- -----------
Gross margin................................ 8,221 19,420 39,796 63,507 117,801 81,584
Operating expenses:
Sales and marketing......................... 7,391 16,331 34,164 54,814 99,218 69,476
General and administrative.................. 3,583 6,386 10,221 12,457 16,505 11,593
----------- ----------- ----------- --------- --------- -----------
Total operating expenses.................. 10,974 22,717 44,385 67,271 115,723 81,069
----------- ----------- ----------- --------- --------- -----------
Operating income (loss)....................... (2,753) (3,297) (4,589) (3,764) 2,078 515
Other income (expense), net................... 1 (74) 29 79 (4,783) (3,023)
----------- ----------- ----------- --------- --------- -----------
Income (loss) before income taxes............. (2,752) (3,371) (4,560) (3,685) (2,705) (2,508)
Income tax expense............................ -- -- -- -- 141 16
----------- ----------- ----------- --------- --------- -----------
Net loss...................................... $ (2,752) $ (3,371) $ (4,560) $ (3,685) $ (2,846) $ (2,524)
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Cumulative preferred dividends................ -- -- -- $ (900) $ (900) $ (675)
Net loss available to common shareholders..... $ (2,752) $ (3,371) $ (4,560) $ (4,585) $ (3,746) $ (3,199)
Net loss per share(2):
Basic....................................... $ (2.16) $ (2.65) $ (3.16) $ (2.61) $ (1.59) $ (1.39)
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Diluted..................................... $ (1.90) $ (2.32) $ (2.81) $ (2.37) $ (1.48) $ (1.29)
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Weighted average common shares:
Basic....................................... 1,272 1,274 1,444 1,753 2,353 2,309
Diluted..................................... 1,450 1,453 1,623 1,932 2,532 2,488

Pro forma net income(3)....................... $ 1,583 $ 162
--------- -----------
--------- -----------
Pro forma net income per share, diluted(3).... $ 0.09 $ 0.01
--------- -----------
--------- -----------
Pro forma weighted average common shares,
diluted(4).................................. 18,288 18,813

OCT. 3,
1998
---------

<S> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales..................................... $ 178,835
Cost of sales................................. 62,290
---------
Gross margin................................ 116,545
Operating expenses:
Sales and marketing......................... 95,231
General and administrative.................. 13,932
---------
Total operating expenses.................. 109,163
---------
Operating income (loss)....................... 7,382
Other income (expense), net................... (6,447)
---------
Income (loss) before income taxes............. 935
Income tax expense............................ 1,348
---------
Net loss...................................... $ (413)
---------
---------
Cumulative preferred dividends................ $ (675)
Net loss available to common shareholders..... $ (1,088)
Net loss per share(2):
Basic....................................... $ (0.40)
---------
---------
Diluted..................................... $ (0.37)
---------
---------
Weighted average common shares:
Basic....................................... 2,746
Diluted..................................... 2,924
Pro forma net income(3)....................... $ 5,988
---------
---------
Pro forma net income per share, diluted(3).... $ 0.31
---------
---------
Pro forma weighted average common shares,
diluted(4).................................. 19,632
</TABLE>

18
<PAGE>

OCT. 3,
1998
---------

<S> <C>
SELECTED OPERATING DATA:
Stores open at period-end(5).................. 244
Average square footage of stores open during
period(6)................................... 895
Sales per square foot(6)...................... $ 543
Average store age (in months at period end)... 26
Comparable store sales increase(7)............ 26.9%
</TABLE>

<TABLE>
<CAPTION>
DEC. 31, DEC. 31, DEC. 30, DEC. 28, JAN. 3, OCT. 3,
1993 1994 1995 1996 1998 1998
----------- ----------- --------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 635 $ 3,770 $ 6,862 $ 2,422 $ 12,670 $ 9,579
Working capital............................... 260 2,614 2,734 (7,809) 757 3,606
Total assets.................................. 5,873 14,243 23,838 29,794 57,241 63,323
Long-term debt, less current maturities....... 109 77 40 1,162 19,511 24,244
Mandatorily redeemable preferred stock........ 10,130 18,669 27,625 27,612 27,612 27,612
Total common shareholders' deficit............ (7,333) (10,592) (14,779) (18,216) (21,038) (20,356)
</TABLE>

- ------------------------------

(1) Except for the year ended January 3, 1998, which included 53 weeks, all
years presented included 52 weeks.

(2) See Note 11 of Notes to Consolidated Financial Statements.

(3) Includes pro forma adjustments for (i) the elimination of non-cash interest
expense associated with a put warrant, the put feature of which will
terminate upon the consummation of this offering, (ii) the elimination of
interest expense associated with repayment of $15.0 million of the Company's
outstanding indebtedness from the proceeds of this offering, and (iii)
related tax effects. See Pro Forma Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

(4) Gives effect to the conversion of all outstanding shares of preferred stock
into Common Stock upon the consummation of this offering, the dilutive
effect of outstanding options and warrants, and shares to be issued upon the
consummation of this offering.

(5) Includes Select Comfort stores operated in leased departments within larger
retail stores (one at December 28, 1996, June 28, 1997 and January 3, 1998
and four at October 3, 1998).

(6) For stores open during the entire period indicated.

(7) Stores enter the comparable store calculation in their 13th full month of
operation. The number of comparable stores used to calculate such data were
13, 32, 65, 138, 107 and 182 for 1994, 1995, 1996, 1997 and the nine months
ended September 27, 1997 and October 3, 1998, respectively.

19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS AND THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AND
THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. EXCEPT FOR THE
HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS PROSPECTUS
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHENEVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS," AS
WELL AS THOSE DISCUSSED ELSEWHERE HEREIN. SEE "CAUTIONARY LANGUAGE REGARDING
FORWARD-LOOKING STATEMENTS."

OVERVIEW

Select Comfort was founded in 1987 and has become the leading vertically
integrated manufacturer, specialty retailer and direct marketer of innovative
air beds and sleep-related products. The Company's initial focus was on its
direct marketing operations which have grown in depth and sophistication and now
provide critical support for the Company's retail and road show distribution
channels. Since the Company's first retail stores were opened in 1992, an
increasing percentage of the Company's net sales has occurred at the Company's
retail stores, and retail store sales now account for a majority of the
Company's net sales. In 1994, the Company established its road show distribution
channel, which focuses primarily on markets where the Company does not have
retail stores.

The Company's vertically integrated operations and control over its three
separate but complementary distribution channels enable it to develop and
maintain direct customer relationships as well as leverage its advertising
dollars. The Company's sales generation is driven by targeted print, radio and
television media which generate customer inquiries that historically were
pursued primarily through the Company's direct marketing operations. As the
Company's retail store base has expanded, the Company believes it has been able
to further leverage the direct marketing infrastructure and improve the process
of converting inquiries into sales. The Company has also enhanced its marketing
programs at its retail stores to focus more on increasing customer traffic,
including a number of in-store activities and promotions. The Company believes
that its direct marketing operations will also continue to play a significant
role in building consumer awareness and product sales. The Company believes that
its sales will continue to grow for the foreseeable future as the Company
increases its advertising expenditures and opens additional retail stores, and
as consumer awareness of the Company's products and brand name increases. The
magnitude of future sales growth will depend on the ability of the Company to
create greater awareness of the Company's products and brand name, the
effectiveness and efficiency of the Company's advertising, the ability of the
Company to generate consumer inquiries and drive consumer traffic to its retail
stores, and the ability of the Company to convert customer inquiries into
orders.

The Company's retail operations included 143 stores as of December 28, 1996,
200 stores as of January 3, 1998 and 244 stores, including four leased
departments within larger retail stores (three in Bed Bath & Beyond stores), at
October 3, 1998. The Company plans to open approximately 12 additional retail
stores and 10 additional leased departments in Bed Bath & Beyond stores in the
remainder of 1998 and approximately 50 additional retail stores in 1999. In
addition, the Company expects to expand its leased department concept in 1999.
The Company expects that approximately 46% of the 1998 retail store openings,
including leased departments, will be in new markets. To date, the Company has
closed four stores.

Historically, the Company has experienced strong comparable store sales
growth, reporting increases of 26.1%, 36.8% and 26.9% in 1996, 1997 and the
first nine months of 1998, respectively. The Company believes this performance
is due to increased awareness of the Select Comfort brand and its product

20
<PAGE>

benefits, the relatively young age of the Company's store base and various
initiatives implemented in recent periods related to the Company's increased
emphasis on the retail distribution channel. These initiatives include (i) a
change in focus of advertising toward brand awareness, (ii) the evolution of the
Company's retail store operations, including improvements in store design, and
(iii) the closer integration of the Company's direct marketing and retail
distribution channels. Comparable store sales results in the future will be
influenced by a variety of factors. See "Risk Factors--Fluctuations in
Comparable Store Sales Results."

The Company's advertising expenditures increased from $5.5 million in 1994
to $28.3 million in 1997. The Company expenses advertising costs as incurred as
a component of sales and marketing expenses, although the Company believes that
advertising expenditures provide significant benefits beyond the period in which
they are expensed. The Company also expenses pre-opening costs associated with
new retail stores as incurred. The Company's future advertising expenditures
will depend on the effectiveness and efficiency of the advertising in creating
awareness of the Company's products and brand name, generating consumer
inquiries and driving consumer traffic to the Company's retail stores. Although
advertising expenditures are expected to continue to increase in the foreseeable
future, such increases are expected to be at a lower rate than historical
increases.

The Company believes its historical operating losses have been primarily the
result of an aggressive retail store opening strategy, a relatively immature
store base, significant marketing, advertising and research and development
expenditures, and the development of a substantial corporate infrastructure to
support future growth. Future increases in net sales and the achievement of
long-term profitability will depend upon greater consumer awareness and
acceptance of the Company's products, the opening and successful performance of
new retail stores, and continued improvement in the performance of its current
stores as they mature. There can be no assurance that the Company will be able
to achieve or sustain its historical sales growth or profitability in the
future, on a quarterly or annual basis. See "Risk Factors-- History of Operating
Losses; Uncertain Profitability."

In connection with its March 1997 $15.0 million debt financing, the Company
issued a warrant that contained a put feature. This put feature requires the
Company to record the warrant as long-term debt at its fair value. Furthermore,
any change in the fair value of this warrant is required to be reflected as
interest expense, which resulted in non-cash interest expense of $3.3 million,
$1.9 million and $5.2 million during 1997 and the nine months ended September
27, 1997 and October 3, 1998, respectively. The put feature of this warrant will
be eliminated upon the closing of this offering with the result that the warrant
will be reclassified from long-term debt to common shareholders' equity, and
there will be no further interest expense associated with the warrant. Until
such time, the Company will be required to recognize any increases in the fair
value of this warrant, which will be based on valuations as determined by a
third party, as a non-cash interest expense and the amount of such non-cash
interest expense may be substantial in the periods up to and including the
period in which this offering is consummated. See "Pro Forma Consolidated
Financial Statements."

A portion of the net proceeds from this offering is intended to be used to
repay the Company's March 1997 $15.0 million debt financing. As a result of this
repayment, the Company will be required to write off certain deferred assets
associated with such indebtedness in the period in which such repayment occurs.
This charge is estimated to be approximately $1.7 million at the time of such
repayment and will be recorded as an extraordinary charge.

At October 3, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $1.6 million. Future earnings will
result in the elimination of the Company's net operating loss carryforwards,
increasing the Company's effective tax rate.

21
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the Company's
results of operations expressed as percentages of net sales. Percentage amounts
may not total due to rounding.

<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
----------------------------------- ------------------------
DEC. 30, DEC. 28, JAN. 3, SEPT. 27, OCT. 3,
1995 1996 1998 1997 1998
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales...................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................. 42.0 37.8 36.1 35.5 34.8
----------- ----------- --------- ----------- -----------
Gross margin................................................. 58.0 62.2 63.9 64.5 65.2
Operating expenses:
Sales and marketing.......................................... 49.8 53.7 53.8 54.9 53.3
General and administrative................................... 14.9 12.2 8.9 9.2 7.8
----------- ----------- --------- ----------- -----------
Total operating expenses................................... 64.7 65.9 62.7 64.1 61.0
----------- ----------- --------- ----------- -----------
Operating income (loss)........................................ (6.7) (3.7) 1.1 0.4 4.1
Other income (expense), net.................................... 0.0 0.1 (2.6) (2.4) (3.6)
----------- ----------- --------- ----------- -----------
Income (loss) before income taxes.............................. (6.6) (3.6) (1.5) (2.0) 0.5
Income tax expense............................................. 0.0 0.0 0.1 0.0 0.8
----------- ----------- --------- ----------- -----------
Net loss....................................................... (6.6)% (3.6)% (1.5)% (2.0)% (0.2)%
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
</TABLE>

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998

NET SALES. Net sales increased 41.4% from $126.5 million for the first nine
months of 1997 to $178.8 million for the first nine months of 1998, primarily
due to an increase in unit sales. The components of the increase in net sales
were (i) a $20.5 million increase associated with the opening of 54 new retail
stores from September 27, 1997 through October 3, 1998, (ii) a $17.2 million
increase associated with an increase of 26.9% in comparable store sales over the
comparable period of the prior year, resulting primarily from the continuing
maturation of stores, and (iii) a $13.6 million increase in direct marketing
sales. For a significant portion of the third quarter of 1997, due to a UPS work
stoppage, UPS was unable to deliver the Company's products within acceptable
time periods, causing delays in deliveries to customers and requiring the
Company to use alternative carriers. Also, during this period, the Company
converted its manufacturing and financial operations to a new integrated
information system. These factors resulted in higher than normal customer
returns and canceled orders, lower order volumes and substantially increased
freight charges, which the Company estimates negatively impacted its operating
income by approximately $3.9 million in the second half of 1997.

GROSS MARGIN. Gross margin increased from 64.5% for the first nine months
of 1997 to 65.2% for the first nine months of 1998 primarily due to improved
purchasing through volume discounts and better relationships with key suppliers
and improved leverage of fixed manufacturing costs over higher unit volumes.

SALES AND MARKETING. Sales and marketing expenses increased 37.1% from
$69.5 million in the first nine months of 1997 to $95.2 million in the first
nine months of 1998, and decreased slightly as a percentage of net sales from
54.9% in the first nine months of 1997 to 53.3% in the first nine months of
1998. The increase in the dollar amount of sales and marketing expenses was
primarily due to the opening of 54 new retail stores from September 27, 1997
through October 3, 1998, increased advertising expenditures to support the
Company's growth, and higher commissions, percentage rents and freight expense
related to the higher net sales.

22
<PAGE>

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
20.2% from $11.6 million in the first nine months of 1997 to $13.9 million in
the first nine months of 1998, but decreased as a percentage of net sales from
9.2% in the first nine months of 1997 to 7.8% for the first nine months of 1998.
The increase in the dollar amount of general and administrative expenses was
primarily due to increased spending to provide infrastructure to support overall
net sales growth. The decrease in general and administrative expenses as a
percentage of net sales was primarily due to improved leverage of fixed costs
over the increase in net sales.

OTHER INCOME (EXPENSE), NET. Other expense increased from $3.0 million in
the first nine months of 1997 to $6.4 million in the first nine months of 1998
primarily due to an increase in interest expense associated with the Company's
March 1997 $15.0 million debt issuance, offset in part by the interest income
associated with the proceeds thereof. Other expense in the first nine months of
1998 included $5.2 million of non-cash interest expense relating to the change
in the fair value of an outstanding put warrant compared with $1.9 million in
the first nine months of 1997.

COMPARISON OF YEARS ENDED DECEMBER 28, 1996 AND JANUARY 3, 1998

NET SALES. Net sales increased 80.8% from $102.0 million in 1996 to $184.4
million in 1997 primarily due to an increase in unit sales. The components of
the net sales increase were (i) a $36.6 million increase associated with the
opening of 58 new retail stores in 1997, (ii) a $27.4 million increase in direct
marketing sales, and (iii) a $16.1 million increase associated with an increase
of 36.8% in comparable store sales over the prior year, resulting primarily from
the continuing maturation of stores. For a significant portion of the third
quarter of 1997, due to a UPS work stoppage, UPS was unable to deliver the
Company's products within acceptable time periods, causing delays in deliveries
to customers and requiring the Company to use alternative carriers. Also, during
this period, the Company converted its manufacturing and financial operations to
a new integrated information system. These factors resulted in higher than
normal customer returns and canceled orders, lower order volumes and
substantially increased freight charges, which the Company estimates negatively
impacted its operating income by approximately $3.9 million in the second half
of 1997.

GROSS MARGIN. Gross margin increased from 62.2% in 1996 to 63.9% in 1997
primarily due to improved purchasing through volume discounts and better
relationships with key suppliers and improved leverage of fixed manufacturing
costs over higher unit volumes.

SALES AND MARKETING. Sales and marketing expenses increased 81.0% from
$54.8 million in 1996 to $99.2 million in 1997, and increased slightly as a
percentage of net sales from 53.7% in 1996 to 53.8% in 1997. The increase in the
dollar amount of sales and marketing expenses was primarily due to the opening
of 58 new retail stores in 1997, higher commissions, percentage rents and
freight expenses related to the higher level of net sales, increased advertising
expenditures to support the Company's growth, and an increase in freight charges
due to the UPS strike.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
32.5% from $12.5 million in 1996 to $16.5 million in 1997, but decreased as a
percentage of net sales from 12.2% in 1996 to 8.9% in 1997. The increase in the
dollar amount of general and administrative expenses was primarily due to
increased infrastructure to support overall net sales growth. The decrease in
general and administrative expenses as a percentage of net sales was primarily
due to improved leverage of fixed costs over the increase in net sales.

OTHER INCOME (EXPENSE), NET. Other income (expense) decreased from $0.1
million of other income in 1996 to $4.8 million of other expense in 1997
primarily due to (i) the inclusion of $3.3 million of non-cash interest expense
relating to the change in the fair value of an outstanding put warrant and (ii)
interest expense associated with the Company's March 1997 $15.0 million debt
issuance, offset in part by the interest income associated with the proceeds
thereof.

23
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 30, 1995 AND DECEMBER 28, 1996

NET SALES. Net sales increased 48.7% from $68.6 million in 1995 to $102.0
million in 1996, primarily due to an increase in unit sales. The components of
the net sales increase were (i) a $21.5 million increase associated with the
opening of 77 new retail stores in 1996, (ii) a $6.4 million increase in direct
marketing sales, and (iii) a $4.7 million increase associated with an increase
of 26.1% in comparable store sales over the prior year, resulting primarily from
the continuing maturation of stores.

GROSS MARGIN. Gross margin increased from 58.0% in 1995 to 62.2% in 1996.
The increase in gross margin was primarily due to improved purchasing through
volume discounts and better relationships with key suppliers, the elimination of
supplier problems that adversely affected the second half of 1995 (during which
certain of the Company's former suppliers were unable to supply newly designed
components in a timely manner) and improved leverage of fixed manufacturing
costs over higher unit volumes.

SALES AND MARKETING. Sales and marketing expenses increased 60.4% from
$34.2 million in 1995 to $54.8 million in 1996, and increased as a percentage of
net sales from 49.8% in 1995 to 53.7% in 1996. The increase in the percentage of
net sales was primarily due to the opening of 77 new retail stores in 1996,
higher commissions, percentage rents and freight charges related to the higher
level of net sales and advertising expenditures to support the Company's growth.
The increase as a percentage of net sales was primarily due to advertising
expenditures increasing at a rate greater than the increase in net sales, and
retail store net sales (which have higher sales and marketing costs as a
percentage of net sales) increasing at a rate greater than overall net sales.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
21.9% from $10.2 million in 1995 to $12.5 million in 1996, but decreased as a
percentage of net sales from 14.9% in 1995 to 12.2% in 1996. The increase in the
dollar amount of general and administrative expenses was primarily due to
increased infrastructure to support overall net sales growth. The decrease as a
percentage of net sales was primarily due to improved leverage of fixed costs
over the increase in net sales.

24
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth selected unaudited quarterly results of
operations for the Company's 11 fiscal quarters ended October 3, 1998. The
unaudited quarterly information includes all normal recurring adjustments which
management considers necessary for a fair presentation of the information shown.
The results of operation for any quarter will not necessarily be indicative of
the results that may be achieved for a full year or any future quarter.

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MAR. 30, JUNE 29, SEPT. 28, DEC. 28, MAR. 29, JUNE 28, SEPT. 27,
1996 1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $ 22,263 $ 24,775 $ 24,302 $ 30,688 $ 36,004 $ 46,074 $ 44,392
Cost of sales......................... 8,757 9,516 9,460 10,788 12,839 16,157 15,890
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross margin........................ 13,506 15,259 14,842 19,900 23,165 29,917 28,502
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing................. 12,442 12,592 13,278 16,502 21,370 22,366 25,740
General and administrative.......... 3,094 3,090 2,968 3,305 3,618 4,471 3,504
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.......... 15,536 15,682 16,246 19,807 24,988 26,837 29,244
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)............... (2,030) (423) (1,404) 93 (1,823) 3,080 (742)
Other income (expense), net........... 68 (14) 44 (19) (70) (1,784) (1,169)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes..... (1,962) (437) (1,360) 74 (1,893) 1,296 (1,911)
Income tax expense.................... -- -- -- -- 12 -- 4
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)..................... $ (1,962) $ (437) $ (1,360) $ 74 $ (1,905) $ 1,296 $ (1,915)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative preferred dividends........ $ (225) $ (225) $ (225) $ (225) $ (225) $ (225) $ (225)
Net income (loss) available to common
shareholders........................ $ (2,187) $ (662) $ (1,585) $ (151) $ (2,130) $ 1,071 $ (2,140)
Net income (loss) per share (1):
Basic............................... $ (1.34) $ (0.39) $ (0.87) $ (0.08) $ (1.02) $ 0.44 $ (0.88)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Diluted............................. $ (1.21) $ (0.35) $ (0.79) $ (0.07) $ (0.94) $ 0.07 $ (0.82)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average common shares (1):
Basic............................... 1,634 1,710 1,829 1,841 2,081 2,410 2,437
Diluted............................. 1,813 1,889 2,008 2,020 2,260 14,512 2,616

PERCENTAGE OF NET SALES
-----------------------------------------------------------------------------------------
Net sales............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 39.3 38.4 38.9 35.2 35.7 35.1 35.8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross margin........................ 60.7 61.6 61.1 64.8 64.3 64.9 64.2
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing................. 55.9 50.8 54.6 53.8 59.4 48.5 58.0
General and administrative.......... 13.9 12.5 12.2 10.8 10.0 9.7 7.9
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.......... 69.8 63.3 66.9 64.5 69.4 58.2 65.9
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)............... (9.1) (1.7) (5.8) 0.3 (5.1) 6.7 (1.7)
Other income (expense), net........... 0.3 (0.1) 0.2 (0.1) (0.2) (3.9) (2.6)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes..... (8.8) (1.8) (5.6) 0.2 (5.3) 2.8 (4.3)
Income tax expense.................... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)..................... (8.8)% (1.8 )% (5.6 )% 0.2% (5.3 )% 2.8% (4.3)%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------

JAN. 3, APR. 4, JULY 4, OCT. 3,
1998 1998 1998 1998
----------- ----------- --------- ---------

<S> <C> <C> <C> <C>
Net sales............................. $ 57,960 $ 58,671 $ 60,129 $ 60,035
Cost of sales......................... 21,743 21,080 20,466 20,744
----------- ----------- --------- ---------
Gross margin........................ 36,217 37,591 39,663 39,291
----------- ----------- --------- ---------
Operating expenses:
Sales and marketing................. 29,742 32,260 31,695 31,276
General and administrative.......... 4,912 4,294 4,302 5,336
----------- ----------- --------- ---------
Total operating expenses.......... 34,654 36,554 35,997 36,612
----------- ----------- --------- ---------
Operating income (loss)............... 1,563 1,037 3,666 2,679
Other income (expense), net........... (1,760) (1,305) (1,050) (4,092)
----------- ----------- --------- ---------
Income (loss) before income taxes..... (197) (268) 2,616 (1,413)
Income tax expense.................... 125 150 706 492
----------- ----------- --------- ---------
Net income (loss)..................... $ (322) $ (418) $ 1,910 $ (1,905)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Cumulative preferred dividends........ $ (225) $ (225) $ (225) $ (225)
Net income (loss) available to common
shareholders........................ $ (547) $ (643) $ 1,685 $ (2,130)
Net income (loss) per share (1):
Basic............................... $ (0.22) $ (0.26) $ 0.60 $ (0.72)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Diluted............................. $ (0.21) $ (0.24) $ 0.11 $ (0.68)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Weighted average common shares (1):
Basic............................... 2,475 2,478 2,820 2,938
Diluted............................. 2,654 2,657 15,266 3,117

Net sales............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 37.5 35.9 34.0 34.6
----------- ----------- --------- ---------
Gross margin........................ 62.5 64.1 66.0 65.4
----------- ----------- --------- ---------
Operating expenses:
Sales and marketing................. 51.3 55.0 52.7 52.1
General and administrative.......... 8.5 7.3 7.2 8.9
----------- ----------- --------- ---------
Total operating expenses.......... 59.8 62.3 59.9 61.0
----------- ----------- --------- ---------
Operating income (loss)............... 2.7 1.8 6.1 4.5
Other income (expense), net........... (3.0) (2.2) (1.7) (6.8)
----------- ----------- --------- ---------
Income (loss) before income taxes..... (0.3) (0.5) 4.4 (2.4)
Income tax expense.................... 0.2 0.3 1.2 0.8
----------- ----------- --------- ---------
Net income (loss)..................... (0.6 )% (0.7 )% 3.2% (3.2)%
----------- ----------- --------- ---------
----------- ----------- --------- ---------
</TABLE>

- ----------------------------------

(1) Shares of preferred stock are excluded from the calculation of net income
(loss) per share for all periods for which the Company reported a net loss.
Upon the consummation of this offering, all shares of preferred stock will
be converted to shares of Common Stock and included in weighted average
shares outstanding for purposes of computing net income (loss) per share.

25
<PAGE>
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, including increases or decreases in comparable
store sales, the timing, amount and effectiveness of advertising expenditures,
any changes in return rates, the timing of new store openings and related
expenses, competitive factors, net sales contributed by new stores, any
disruptions in third party delivery services and general economic conditions and
consumer confidence. The Company's business is also subject to some seasonal
influences, with heavier concentrations of sales during the fourth quarter
holiday season due to higher mall traffic. During the third quarter of 1997, the
UPS work stoppage resulted in delayed delivery of the Company's products,
requiring that the Company use alternative carriers. Additionally, during that
period, the Company converted its manufacturing and financial operations to a
new integrated information system, which further contributed to delays in
fulfilling customer orders. These factors resulted in higher than normal
customer returns, canceled orders and substantially increased freight charges,
which had a material adverse effect on the Company's operating results in the
second half of 1997.

A substantial portion of the Company's operating expenses is related to
sales and marketing expenses, including costs associated with opening new stores
and advertising and marketing expenditures. The level of such spending cannot be
adjusted quickly and is based, in significant part, on the Company's
expectations of future customer inquiries and net sales. Furthermore, the
Company has often realized a substantial portion of its net sales in the last
month of a quarter, with such net sales frequently concentrated in the last
weeks or days of a quarter, due in part to its promotional schedule. If there is
a shortfall in expected net sales or in the conversion rate of customer
inquiries, the Company may be unable to adjust its spending in a timely manner
and the Company's business, financial condition and operating results may be
materially adversely affected. The Company's results of operations for any
quarter are not necessarily indicative of the results that may be achieved for a
full year or any future quarter.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of liquidity has been the sale of equity
securities and a $15.0 million senior subordinated debt financing transaction
completed in March 1997. Primary uses of cash have been for the development and
manufacturing of the Company's air bed product line, sales and marketing
expenses, costs associated with the opening of new retail stores and
manufacturing facilities and other required infrastructure and general corporate
purposes, including working capital. The Company had working capital of
approximately $3.6 million at October 3, 1998.

Net cash used in operating activities for 1995 was approximately $404,000
and consisted primarily of a net loss adjusted for non-cash expenses and
increases in inventories and accounts receivable, partially offset by increases
in accounts payable and accruals. Net cash provided by operating activities in
1996 was approximately $3.1 million and consisted primarily of increases in
accounts payable and accruals, partially offset by a net loss adjusted for
non-cash expenses and increases in inventories, accounts receivable and prepaid
expenses. Net cash provided by operating activities in 1997 was approximately
$7.3 million and consisted primarily of increases in accounts payable, accruals
and net loss adjusted for non-cash expenses, partially offset by increases in
accounts receivable, inventories and prepaid expenses. Net cash provided by
operating activities in the first nine months of 1997 was approximately $5.5
million and consisted primarily of increases in accounts payable, accruals and
net loss adjusted for non-cash expenses, partially offset by increases in
inventories and prepaid expenses. Net cash provided by operating activities in
the first nine months of 1998 was approximately $2.6 million and consisted
primarily of net loss adjusted for non-cash expenses partially offset by
increases in accounts receivable and inventories.

Beginning in May 1997, the Company began offering an unsecured revolving
credit arrangement to finance purchases through a third party bank. Amounts owed
to the bank by the Company's customers

26
<PAGE>

aggregated $65.8 million at October 3, 1998. The bank's current commitment
extends to a maximum of $75.0 million of receivables outstanding. The Company
expects to increase the amount of this commitment before the end of 1998. In
connection with all purchases financed under these arrangements, the bank pays
the Company an amount equal to the total amount of purchases net of promotional
related discounts and less amounts retained for returned products and limited
recourse on bad debts. Pursuant to its agreement with the Company, the bank had
retained $1.9 million, $3.9 million and $10.1 million as of September 27, 1997,
January 3, 1998 and October 3, 1998, respectively.

Net cash used in investing activities was approximately $5.6 million, $10.1
million, $10.7 million, $9.0 million and $6.7 million in the years 1995, 1996,
1997 and the first nine months of 1997 and the first nine months of 1998,
respectively. Investing activities consisted of purchases of property and
equipment for new retail stores in all periods as well as for a new
manufacturing and distribution facility and the conversion to a new information
system in 1997.

Net cash provided by financing activities for 1995 was approximately $9.1
million and consisted primarily of proceeds from a preferred stock issuance. Net
cash provided by financing activities for 1996, 1997 and the first nine months
of 1997 was approximately $2.6 million, $13.6 million and $13.8 million,
respectively, and consisted primarily of proceeds from debt issuances, partially
offset by debt repayments. Net cash provided by financing activities for the
first nine months of 1998 was approximately $931,000 and consisted primarily of
proceeds from a Common Stock issuance, partially offset by debt repayments.

At October 3, 1998, the Company had 244 retail stores (including four leased
departments) and plans to open approximately 12 additional retail stores and 10
additional leased departments in Bed Bath & Beyond stores in the remainder of
1998 and approximately 50 retail stores in 1999. In addition, the Company
expects to expand its leased department concept within larger retail stores in
1999. Management expects that new stores will be leased on terms generally
comparable to those of existing store leases. In addition, the Company plans to
open a third manufacturing and distribution facility in Salt Lake City during
the first half of 1999. The Company anticipates that capital expenditures in
1998 and 1999 will be approximately $8.2 million and $15.0 million,
respectively, based on currently planned store openings, the planned new
manufacturing and distribution facility and the central office facilities and
systems necessary to support such additional stores.

The Company believes cash generated from operations will be sufficient to
satisfy its anticipated working capital needs and that capital expenditure
requirements through at least the end of 1999 will be funded primarily by
proceeds from the offering. The Company believes cash generated from operations
and proceeds from the offering remaining at the end of 1999 will be used to meet
long-term liquidity needs, although additional financing may be required.

IMPACT OF YEAR 2000

STATE OF READINESS. Beginning in early 1996, the Company included certain
Year 2000 initiatives and remediation plans in its broader information systems
strategic plan. At that time, the Company also retained an independent
consultant to assess the adequacy of the Company's Year 2000 initiatives and
remediation plans. Since that time, all of the Company's essential information
technology ("IT") systems have been inventoried and remediation plans for any
Year 2000 issues have been implemented. The Company's remediation plans included
the development of Year 2000 compliant applications for the Company's order
entry, customer service and point of sale systems in Fall 1996. In the third
quarter of 1997, the Company purchased and implemented an enterprise information
system used in manufacturing operations, material planning, inventory
management, order processing, financial management and human resources
applications, which system will be upgraded to be Year 2000 compliant in the
first half of 1999. The Company purchased Year 2000 compliant upgrades to the
Company's payroll application in 1997 and the Company's telephone system in
1998. The Company has purchased Year 2000 compliant upgrades for its software
applications for customer inquiries and for processing and tracking warranty
claims and returns. The Company anticipates these upgrades will be completed in
the first half of 1999. With the

27
<PAGE>
implementation of these applications and upgrades, the Company expects that all
of its core applications and IT systems will be Year 2000 compliant by the end
of the second quarter of 1999.

In August 1998, the Company formed a Year 2000 project team ("Year 2000
Project Team") to identify and address Year 2000 compliance matters, including
the Company's significant non-IT systems which are comprised of the embedded
technology used in the Company's buildings, plant, equipment and other
infrastructure. The Year 2000 Project Team is currently in the process of
inventorying all material Year 2000 issues in the Company's non-IT systems.
Based on a general assessment of the Company's significant non-IT systems
performed prior to the formation of the Year 2000 Project Team, the Company
expects that remedial action for all of its non-IT systems will be completed by
the end of the second quarter of 1999.

During the first quarter of 1998, the Company initiated discussions with its
significant suppliers regarding their plans to remediate Year 2000 issues. The
Company sent each of its significant suppliers a questionnaire inquiring as to
the magnitude of their Year 2000 issues and the status of their readiness. The
Company has received assurances from a majority of its suppliers that such third
parties will become Year 2000 compliant in a timely manner. The Company has not
received responses from all of the third parties with whom it does business. In
addition to the questionnaires, the Company has established a supplier
certification program under which the Company's suppliers must meet rigorous
standards relating to quality, service, the ability to deliver materials on a
timely basis and Year 2000 compliance. To date, nine of the Company's key
suppliers were certified and other authorized suppliers are in the process of
seeking certification. Each of these suppliers, including the Company's Eastern
European supplier of air chambers, have notified the Company that they are or
will be Year 2000 compliant during 1999.

In addition to suppliers, the Company also relies upon governmental
agencies, utility companies, telecommunication service companies and other
service providers outside of the Company's control. There can be no assurance
that such governmental agencies or other third parties will not suffer a Year
2000 business disruption that could have a material adverse effect on the
Company's business, financial condition and operating results.

COSTS TO ADDRESS THE YEAR 2000 ISSUE. The Company estimates it has
incurred, through October 3, 1998, approximately $165,000 to address Year 2000
issues. The Company estimates that by mid-1999 it will incur an additional
$100,000 to complete its remediation plans required for its IT systems, which
includes systems software costs and consulting fees. The Company does not have
an estimate on Year 2000 remediation costs that may be required for its non-IT
systems, but the Company believes that such costs will not have a material
adverse effect on the Company's business, financial condition and operating
results.

RISKS PRESENTED BY THE YEAR 2000 ISSUE. As the process of inventorying
non-IT systems proceeds, the Company may identify systems that present a Year
2000 risk. In addition, if any third parties who provide goods or services
essential to the Company's business activities fail to appropriately address
their Year 2000 issues, such failure could have a material adverse effect on the
Company's business, financial condition and operating results. For example, a
Year 2000 related disruption on the part of the financial institutions which
process the Company's credit card sales would have a material adverse effect on
the Company's business, financial condition and operating results.

CONTINGENCY PLANS. The Company's Year 2000 Project Team's initiatives
include the development of contingency plans in the event the Company has not
completed all of its remediation plans in a timely manner. In addition, the Year
2000 Project Team is in the process of developing contingency plans in the event
that any third parties who provide goods or services essential to the Company's
business fail to appropriately address their Year 2000 issues. The Year 2000
Project Team expects to conclude the development of these contingency plans by
the end of the second quarter of 1999.

28
<PAGE>
BUSINESS

OVERVIEW

Select Comfort, "The Air Bed Company," is the leading vertically integrated
manufacturer, specialty retailer and direct marketer of premium quality, premium
priced, innovative air beds and sleep-related products. Select Comfort believes
it is revolutionizing the mattress industry by offering a differentiated product
through a variety of service-oriented distribution channels. Select Comfort's
products have been clinically proven to address broad-based consumer sleep
problems through the Company's proprietary air bed technology and the ability to
customize the firmness on each side of the mattress at the touch of a button.
Extensive testing has confirmed that Select Comfort's proprietary technology
allows its air beds to provide greater comfort and support by more naturally
contouring to the body, thereby providing better spinal alignment, reduced
pressure points, greater relief of lower back pain, greater overall comfort and
better quality sleep in comparison with traditional mattress products. The
Company's air beds are marketed exclusively under the Select Comfort brand. The
Company seeks to build awareness of its air beds and brand as being synonymous
with a better night's sleep.

Unlike traditional mattress manufacturers, the Company sells its products
directly to consumers through three complementary, service-oriented distribution
channels, including Company-operated retail stores and leased departments within
larger retail stores, direct marketing operations and road show events. Each of
these channels is operated by knowledgeable Company employees trained in the
latest innovations in sleep technology and the benefits and features of the
Select Comfort product line. The Company's retail operations included 244 stores
in 43 states, including four leased departments (three in Bed Bath & Beyond
stores), at October 3, 1998. The Company plans to open approximately 12
additional retail stores and 10 additional leased departments in Bed Bath &
Beyond stores in the remainder of 1998 and approximately 50 retail stores in
1999. In addition, the Company expects to expand its leased department concept
in 1999. The Company's direct marketing operations include approximately 90
sales professionals responsible for servicing customer inquiries and making
outbound calls. Road show events are held in selected markets where the Company
has high inquiry levels but does not have a retail presence, as well as at home
shows and consumer product shows, state fairs and similar events. The Company
advertises through targeted print, radio and television media which generate
customer inquiries that are converted into sales through each of the Company's
three distribution channels. The Company's net sales have grown from $14.0
million in 1993 to $184.4 million in 1997, and its comparable store sales have
increased 26.1%, 36.8% and 26.9% for 1996, 1997 and the nine months ended
October 3, 1998, respectively.

INDUSTRY BACKGROUND

The U.S. mattress market is large and dominated by four large manufacturers
primarily focused on traditional innerspring mattresses. According to the
International Sleep Products Association ("ISPA"), 35.3 million mattress and
foundation units were sold in the U.S. in 1997, generating approximately $3.6
billion in wholesale sales, which the Company believes represented approximately
$6.7 billion in retail sales. ISPA estimates that innerspring mattresses
accounted for approximately 90% of total U.S. mattress sales in 1997 and,
according to FURNITURE/TODAY, the four largest manufacturers (Sealy, Serta,
Simmons and Spring Air) accounted for nearly 62% of wholesale dollar sales. The
balance of the mattress market is served by over 700 manufacturers, primarily
operating on a regional basis. The traditional mattress distribution channels
and the estimated market shares in 1997, according to FURNITURE/TODAY, were
furniture stores (42%), specialty bedding stores (24%), department stores (11%),
national chains (8%), wholesale clubs (6%) and others, including telephone and
electronic shopping channels (9%). Between 1993 and 1997, specialty bedding
stores increased their share of the market from 19% to 24%.

The Company believes there is increasing demand for products designed to
provide better quality sleep and promote overall wellness and that the
traditional mattress industry has not been responsive to

29
<PAGE>
these consumer preferences. The National Sleep Foundation estimates that
approximately 50% of U.S. consumers have suffered from sleep deprivation or poor
quality sleep from a variety of causes, including physical causes such as spinal
misalignment, pressure points or lower back pain. In addition, independent
researchers have reported that approximately 80% of all adults will experience
lower back pain at some point in their lives, with most of these cases
associated with spinal misalignment and aging. The Company believes that the
sleep surface is an important factor in sleep quality, and clinical research
verifies that an improved sleep surface can contribute to better quality sleep
and greater relief of lower back pain.

The Company believes that the market for mattresses and related accessories
has been changing as consumers are purchasing larger, higher quality and more
expensive mattresses, as well as more innovative and higher quality accessories.
Factors influencing this trend are the increasing awareness among consumers of
the importance of sleep as a component of health and the aging and increasing
affluence of the baby boom generation. The Company believes that consumers are
increasingly health conscious and motivated to purchase higher quality products
for the home.

THE SELECT COMFORT SOLUTION

Select Comfort believes it is revolutionizing the mattress industry by
offering a clinically proven, differentiated product through a variety of
service-oriented distribution channels. The Company's products address
broad-based consumer sleep problems, resulting in a better night's sleep. The
Company's proprietary technology allows its air beds to more naturally contour
to the body, thereby generally providing better spinal alignment, reduced
pressure points, greater relief of lower back pain, greater overall comfort and
better quality sleep in comparison with traditional mattress products. A
firmness control system allows customers to independently customize the firmness
on each side of the Select Comfort air bed to their optimal level of comfort and
support. Unlike traditional mattress manufacturers, the Company sells its
products directly to consumers through three complementary distribution
channels. These channels allow the Company to interact directly with consumers
to enhance customer satisfaction and build brand loyalty. These channels also
provide consumers with greater accessibility and convenience in purchasing
Select Comfort products.

Select Comfort has commissioned a number of independent clinical studies
which indicate that Select Comfort air beds provide consumers with substantial
benefits over traditional innerspring mattresses. A recent commissioned study
conducted at the Stanford University Sleep Research Center indicated that
participants using Select Comfort air beds fell asleep faster, experienced fewer
brainwave sleep disturbances and spent less time in the lighter sleep stages and
a greater percentage of overall sleep in deeper stages of sleep, including rapid
eye movement (REM) sleep, in comparison to alternative mattress products.
Another commissioned study conducted at the University of Memphis confirmed that
spinal misalignments were generally lower on Select Comfort air beds in
comparison with both a leading innerspring mattress and a leading waterbed. The
Company has also performed extensive testing which confirms that Select Comfort
air beds reduce pressure points in comparison with innerspring mattresses and
waterbeds. Three additional commissioned studies on the relationship between
lower back pain, sleep quality and the sleep surface have found, on average,
that 95% of lower back pain sufferers reported reduced pain, 88% experienced
improved sleep quality and 80% experienced increased physical functioning when
sleeping on a Select Comfort air bed in comparison with an innerspring mattress.
These findings support the Company's market research and customer testimonials
which indicate that sleeping on a Select Comfort air bed results in a
significant reduction in medical visits and fewer days of work lost due to back
pain.

The Company has been granted 16 U.S. patents, has applications pending for
six U.S. patents and maintains an active research and development department.
Select Comfort plans to continue its research of sleep technology, testing of
the consumer benefits from sleeping on its air beds and development of new
products and product improvements designed to provide a better night's sleep.

30
<PAGE>
BUSINESS AND GROWTH STRATEGY

The Company is the leading vertically integrated manufacturer, specialty
retailer and direct marketer of innovative air beds and sleep-related products.
Select Comfort intends to leverage its position by increasing awareness of air
bed technology and further establishing the Select Comfort brand to be
synonymous with a better night's sleep, premium quality products and superior
customer service. Key elements of the Company's business strategy are set forth
below.

PROVIDE A SUPERIOR PRODUCT. Select Comfort's products differ from
traditional mattresses by addressing broad-based consumer sleep problems through
the greater comfort and support of sleeping on air and through the ability to
customize the firmness on each side of the mattress at the touch of a button.
Extensive testing has confirmed that Select Comfort air beds generally provide
better spinal alignment, reduced pressure points, greater relief of lower back
pain, greater overall comfort and better quality sleep in comparison with
traditional mattress products. The Company is committed to the continuing
development of new products to enhance the sleep experience and has recently
introduced the Imperial Series at the top of the product line, quieter firmness
control systems, remote control gauges with digital settings, finer fabrics and
covers, new generations of foams and foundation systems and enhanced border
walls.

EDUCATE CONSUMERS AND PROVIDE SUPERIOR CUSTOMER SERVICE. Traditionally, the
mattress industry has relied heavily on promotional pricing and has not been
characterized by high levels of customer service. Since consumer education and
customer service are critical to convey the features and benefits of Select
Comfort's innovative air beds and to achieve high levels of customer acceptance
and satisfaction, the Company seeks to provide a more friendly and informative
sales environment. In order to ensure superior customer satisfaction, retail,
direct marketing and road show sales professionals receive extensive training in
sleep technology and the Company's proprietary technology and products,
including features and benefits, assembly and service procedures and policies.
The Company also maintains a customer service department of approximately 50
employees who receive similar training. As part of its continuous efforts to
maximize convenience for consumers, the Company offers a 90 Night Trial, and has
recently begun testing in-home assembly services in selected markets.

INCREASE PRODUCT AWARENESS AND BRAND RECOGNITION. The Company believes that
the single most important factor in increasing sales is increasing consumer
awareness of the features and benefits of Select Comfort air beds. The Company's
highest brand awareness and market share is in Minneapolis, where it has its
largest advertising budget and largest number of retail stores. The Company
plans to increase product awareness and brand recognition nationwide through
continued investment in advertising and expansion of its retail store base. The
Company plans to expand its retail store base in both existing and new markets,
and through a combination of mall-based locations, leased departments and, to a
lesser extent, alternative locations such as strip shopping centers.

LEVERAGE COMPLEMENTARY DISTRIBUTION CHANNELS. The Company distributes
directly to customers through Company-operated retail stores, direct marketing
operations and road show events. The Company's control over its three
complementary distribution channels provides significant competitive advantages,
including the ability to (i) leverage the Select Comfort brand name to generate
inquiries and convert inquiries to sales, (ii) interact directly with consumers
to enhance customer satisfaction and build brand loyalty, (iii) train sales
professionals regarding the Company's products and to provide superior customer
service, (iv) utilize data from its direct marketing operations to support
retail and road show site selection, new store openings and road show events,
and (v) leverage advertising and marketing programs across multiple markets and
distribution channels. In addition, the Company's complementary distribution
channels provide customers with greater accessibility and convenience in the
purchase of its products.

CAPITALIZE ON VERTICALLY INTEGRATED OPERATIONS. The Company maintains
control over all phases of its business, including the design, manufacturing,
marketing, distribution and service of its air beds. This allows the Company to
maintain rigorous product quality standards, establish coordinated and
integrated

31
<PAGE>
sales and marketing efforts, carefully manage the presentation and pricing of
its products and focus on customer satisfaction and service. As a result of its
direct relationships with consumers, the Company is better positioned to
understand and respond to consumer needs and market trends.

PURSUE ADDITIONAL GROWTH OPPORTUNITIES. The Company has begun testing the
offering of in-home assembly services in selected markets through regional and
national providers in order to increase overall sales and enhance customer
satisfaction by providing greater convenience to the customer. The Company also
plans to introduce product enhancements and new products such as sofabeds,
adjustable frames, space saver foundations with storage compartments and sound
vibration mattresses providing relaxation and therapeutic effects. The Company
is also exploring opportunities to market the Company's products through health
care providers, including chiropractors and health maintenance organizations.

PRODUCTS

Select Comfort provides a line of high quality air beds, foundations and
sleep accessories. The current line of products represents over 10 years of
research and development by the Company designed to revolutionize the way people
sleep.

AIR BEDS

Select Comfort air beds have been engineered to more naturally contour to
the body, thereby generally providing better spinal alignment, reduced pressure
points, greater relief of lower back pain, greater overall comfort and better
quality sleep in comparison with traditional mattress products. Every Select
Comfort air bed has a patented air chamber as its functioning core and comes
with a firmness control system ("FCS") that allows the customer to easily and
instantly customize the firmness of the mattress at the touch of a button. All
of the Company's air beds, except twin size mattresses, are available with
independent air chambers for each side of the mattress, allowing customized
firmness for each sleep partner. The Company's Imperial and Ultra Series of air
beds feature a wireless remote control with a digital display of the user's
"Sleep Number," which reflects the level of firmness and allows the customer to
more easily adjust and readjust the firmness level to the customer's ideal Sleep
Number based on personal preference.

Select Comfort air beds feature either a traditional cover or a pillowtop
style cover that provides extra cushioning. The covers are constructed with
sanitized and hypoallergenic Damask ticking made from blends of
polyester/polypropylene or cotton/rayon, or from 100% rayon. Select Comfort air
beds are manufactured in a broad array of sizes and styles, including all
standard bed sizes and a waterbed replacement size that fits into a customer's
existing waterbed frame. The Company restaged its product line in the spring of
1998 to include new cover designs as well as the addition of a new zoned foam in
its pillowtop models. This restaging also included a newly redesigned, "whisper
quiet" FCS for the Imperial and Ultra Series and all new marketing materials.

The Company's air beds can be assembled by customers in a simple process
requiring no tools and can be moved more easily than a traditional mattress and
box spring. Furthermore, because air is the primary support material of the
mattress, Select Comfort air beds do not lose their shape or support over time
like a traditional mattress and box spring. Each air bed is accompanied with
instructional product brochures and easy to follow assembly instructions, is
certified by Underwriter's Laboratories and is backed by a 20-year limited
warranty and Select Comfort's 90 Night Trial and Better Night's Sleep Guarantee.
The following paragraphs describe the Select Comfort product line.

CLASSIC SERIES. The Classic Series is the Company's entry level product
that is competitively priced with a broad array of mattress alternatives. The
Classic Series targets consumers seeking better support and comfort at the most
affordable price. The FCS for the Classic Series is equipped with two
individual, wired hand controls to instantly customize firmness. The Classic
Series mattress is 7 1/2 inches thick and features a traditional cover.

32
<PAGE>
ELITE SERIES. In comparison with the Classic Series, the Elite Series
features a quieter and more technologically advanced FCS with two individual,
ergonomically designed, wired hand controls for instant firmness adjustment. The
Elite Series mattress is 9 1/2 inches thick in the pillowtop model and features
more padding for greater comfort and foam sidewalls for greater stability. The
Elite Series is also available with a traditional cover.

ULTRA SERIES. The Ultra Series is the Company's most popular air bed,
featuring a new "whisper quiet" FCS with a single wireless, ergonomically
designed, hand control with a lighted digital display of each user's Sleep
Number for precisely customized firmness. This lighted digital display feature
allows the user to more easily adjust and readjust the firmness level to the
user's ideal Sleep Number based on personal preference. The Ultra Series
mattress is 11 1/2 inches thick in the pillowtop model that features a Belgian
Damask cover. The Ultra Series is also available with a traditional cover.

IMPERIAL SERIES. The Imperial Series is the Company's new premium air bed,
incorporating the Company's most advanced technology. The Imperial Series
mattress is 13 1/2 inches thick and has a unique multi-layer foam system for the
utmost in comfort and support. Available in pillowtop style only, the cover
features an ornate Belgian Damask ticking with a 1930s vintage antique pattern
and is filled with a blend of highly resilient fibrefill and cashmere. Like the
Ultra Series, the Imperial comes with the new "whisper quiet" FCS with a single
wireless, ergonomically designed, hand control with a lighted digital display of
each user's Sleep Number.

The current retail prices for the Company's air beds (excluding foundations)
are as follows:

<TABLE>
<CAPTION>
FULL/
TWIN DOUBLE QUEEN KING
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Classic
Traditional....................................... $ 299 $ 459 $ 549 $ 749
Elite
Pillowtop......................................... $ 599 $ 849 $ 949 $ 1,199
Traditional....................................... $ 449 $ 699 $ 799 $ 1,049
Ultra
Pillowtop......................................... $ 899 $ 1,149 $ 1,249 $ 1,499
Traditional....................................... $ 749 $ 999 $ 1,099 $ 1,349
Imperial
Pillowtop......................................... $ 1,799 N/A $ 2,249 $ 2,599
</TABLE>

FOUNDATIONS

Select Comfort also offers matching foundations that enhance the performance
of its mattresses. A substantial majority of the Company's customers purchase
sets, which include a mattress and foundation. The Company's foundations are
assembled by the customer or by an assembly service provider from rigid plastic
components and provide solid, uniform support beneath the mattress to ensure
that the air bed provides the intended support. Due to their rigid plastic
component structure, Select Comfort foundations, unlike traditional box springs,
do not lose their shape or support over time and are stronger, lighter and more
easily moved. The foundations for the Imperial, Ultra and Elite Series also
feature a padded top for enhanced comfort. Retail prices for foundations
currently range from $199 to $399.

ACCESSORY PRODUCTS

Select Comfort also offers a line of accessory products, including high
quality mattress pads with zoned heating and specialty pillows, all of which are
hypoallergenic and designed to provide comfort and better quality sleep. The
Company's specialty pillows include a neck pillow designed to provide neck
support and comfort, a silent sleeper contoured pillow designed to reduce
snoring, a memory foam pillow

33
<PAGE>
that molds to the shape of the head and neck, a natural down pillow for superior
comfort and a side sleeper pillow. All of these specialty products are
manufactured by third parties and marketed under the Select Comfort brand name.
The Company also sells a line of bed frames manufactured by a third party.

SALES GENERATION

Select Comfort's vertically integrated operations and control over its three
separate but complementary distribution channels enable it to develop and
maintain direct customer relationships, as well as leverage its advertising
dollars. The Company's sales generation is driven by targeted print, radio and
television media which generate customer inquiries that historically were
pursued primarily through the Company's direct marketing operations. As the
Company's retail store base has expanded, the Company believes it has been able
to further leverage its direct marketing infrastructure and improve the process
of converting customer inquiries into sales. The Company is continually
assessing opportunities to further coordinate and leverage its three
distribution channels to direct potential customers to the channel which best
suits their needs and to increase conversion ratios.

RETAIL STORES

Since the Company's first retail stores were opened in 1992, an increasing
percentage of the Company's net sales has occurred at the Company's retail
stores, and retail store sales now account for a majority of the Company's net
sales. At October 3, 1998, the Company had 244 stores in 43 states, including
four leased departments (three in Bed Bath & Beyond stores), and plans to open
approximately 12 additional retail stores and 10 additional leased departments
in Bed Bath & Beyond stores in the remainder of 1998 and approximately 50 retail
stores in 1999. The Company is currently in negotiations with Bed Bath & Beyond
with regard to the 10 additional leased departments. The Company expects to
expand its leased department concept in 1999, with the magnitude of the
expansion depending on the performance of the leased departments opened in 1998.
The expansion of the leased department concept may involve additional Bed Bath &
Beyond locations or locations within other retailers. The Company does not
currently have any commitment from Bed Bath & Beyond or any other retailer
regarding the opening of any leased departments in 1999.

SELECT COMFORT RETAIL STORE LOCATIONS

[MAP OF THE UNITED STATES ILLUSTRATING THE COMPANY'S RETAIL STORE LOCATIONS]

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<PAGE>
STORE ENVIRONMENT. Select Comfort seeks to offer a unique and innovative
store environment that attracts consumers, showcases the Company's products and
encourages trial of its air beds. The Company's retail store design is intended
to convey a sense of innovation, sophistication and quality that reinforces the
Company's brand image and reputation as sleep experts. The Company's current
store design consists of graphically intriguing "dream walls" against a backdrop
of clouds designed to invite consumers to try the Company's innovative products.
The Company's retail stores are principally showrooms, averaging approximately
900 square feet, with several display models from the Company's line of air beds
and a full display of the Company's branded accessories. The retail stores
typically maintain an inventory of accessory products, but little or no
inventory of air beds. The Company's leased departments, at approximately 240
square feet, are significantly smaller than its retail stores.

The Company's sales professionals play an important role in creating an
inviting and informative retail environment. These professionals receive
extensive training regarding the features and benefits of the Company's
proprietary technology and products as well as on the overall importance of
sleep quality. This enables them to more effectively introduce consumers to the
Company's innovative air beds, emphasize the features and benefits that
distinguish Select Comfort air beds from traditional mattresses, determine the
consumers' needs, encourage consumers to experience the comfort and support of
the air beds and answer questions regarding the Company's products.

SITE SELECTION. The Company intends to continue to open retail stores in
both existing markets and new markets. New geographic markets that the Company
expects to enter in 1999 include Providence, Rhode Island, Burlington, Vermont,
Montgomery, Alabama, Savannah, Georgia, Augusta, Georgia and Sarasota, Florida.
In selecting new store sites, Select Comfort generally seeks high-traffic mall
locations of approximately 800 to 1,200 square feet within regional malls in
major metropolitan areas. The Company conducts extensive analyses of potential
store sites and bases its selection on a number of factors, including the
location within the mall, demographics of the trade area, the specifications of
the mall (including size, age, sales per square foot and the location of the
nearest competitive mall), the perceived strength of the mall's anchor stores,
the performance of other specialty retail tenants in the mall and the number of
direct marketing inquiries received from the area surrounding the mall.
Clustering of retail stores within a metropolitan retail market is also a key
consideration in order to leverage the Company's advertising.

The Company is also evaluating alternative locations for its retail stores,
such as strip shopping centers. The Company currently has two retail stores in a
strip shopping center and is evaluating the economics of such locations. If such
locations prove to be viable, future strip shopping center locations will be
selected on the basis of demographics in the market, the perceived quality of
the location within the market, the number of direct marketing inquiries
received from the area and the extent to which such a location would contribute
to the clustering of the Company's retail stores within an advertising market.
The Company expects that the retail stores in which its additional leased
departments will be opened will be in a variety of locations, including malls
and strip shopping centers.

NEW STORE ECONOMICS. The Company's 142 stores that were open for all of
1997 generated average net sales of approximately $576,000 and average net sales
per square foot of approximately $666 during 1997. The Company's newer stores
typically generate lower sales volumes than its more mature stores, although the
average first year sales of each new class of stores by year of opening has
increased each year since 1992. The Company's average cost for leasehold
improvements, furniture and fixtures for stores opened in 1997 was approximately
$101,000 per store. The Company's retail stores have an average payback period
of approximately two years. Pre-opening costs are expensed as incurred and
average under $10,000 per store. Working capital requirements are not
significant since the Company typically maintains relatively little inventory at
the retail stores.

MARKETING AND ADVERTISING. The Company has supported new store openings
with local print and radio advertisements and mailings to direct response
inquiries in the market. The Company also uses local radio personalities and
newspaper advertising in certain of the markets where it has multiple retail
stores.

35
<PAGE>

Local radio personalities have been particularly effective in driving inquiries
with personal endorsements that build product credibility. The Company also uses
local radio and print advertisements and promotional offers during high mall
traffic periods, such as three-day holiday weekends, and in-store events
including live remote broadcasts and promotional contests. The Company also
relies on its unique store design and word-of-mouth referrals to attract
potential customers. To encourage word-of-mouth referrals and build brand
loyalty, new customers are enrolled in the "Comfort Club," which entitles
members to receive $50 for each referral of a customer that puchases an airbed,
as well as special promotional offers.

MANAGEMENT AND EMPLOYEES. The Company's stores are currently organized into
four regional areas and 30 geographic districts, with approximately eight stores
in each district. Each regional sales manager oversees approximately eight
geographic districts. The regional sales managers average over 10 years of
multi-unit retail experience. Each district has a district sales manager who is
responsible for the sales and operations and who reports to a regional sales
manager. The district sales managers frequently visit stores to review
merchandise presentation, sales force product knowledge, financial performance
and compliance with operating standards. The district sales managers average
over six years of experience as an area or district manager in specialty
retailing. The typical staff of a Select Comfort store consists of one store
manager and two full-time sales professionals. In order to maintain high
operating standards, the Company recruits store managers who typically have one
to four years of experience as a store manager in specialty retailing. The sales
professionals devote substantially all of their efforts to sales and customer
service, which includes helping customers and generating and responding to
inquiries. In addition, to promote consumer education, ensure customer
satisfaction and generate referrals, the sales professionals place follow-up
calls to customers who have made recent purchases. Since minimal inventory is
maintained at the retail stores, store managers and sales professionals have
relatively few inventory management, store merchandising and related
administrative duties.

TRAINING AND COMPENSATION. All store personnel receive comprehensive
on-site training on the Company's technology and sleep expertise, the features
and benefits of the Company's air beds, sales and customer service techniques
and operating policies and guidelines. Initial training programs are reinforced
through detailed product and operating manuals and periodic performance
appraisals. All store sales professionals receive base compensation and are
entitled to commissions based on individual and store-wide performance. Regional
and district sales managers are eligible to receive, in addition to their base
compensation, incentive compensation for the achievement of performance
objectives by the stores within their respective regions and districts.

DIRECT MARKETING OPERATIONS

Many consumers' initial exposure to the Select Comfort air bed is through
the Company's direct marketing operations. Typically, an interested consumer
will respond to one of the Company's advertisements by calling the Company's
toll-free number. On this call, one of the direct marketing sales professionals
captures information from the consumer, begins the consumer education process,
takes orders, or, if appropriate, directs the consumer to the Company's other
distribution channels. The telemarketing operations are conducted by
knowledgeable and well-trained sales professionals, including a group of over 50
sales professionals who field incoming direct marketing inquiries, and over 30
sales professionals who make outbound calls to consumers who have previously
contacted the Company. The direct marketing operations also include a database
marketing department that is responsible for mailings of product and promotional
information to direct response inquiries.

INQUIRY GENERATION. In the direct marketing channel, the Company's
advertising message is communicated through targeted print, radio, infomercials
and television advertisements, as well as through product brochures, videos and
other product and promotional materials mailed in response to consumer inquiries
at various intervals. As the Company's advertising budget has expanded over the
last few years, the direct marketing channel has relied more heavily on
nationally syndicated radio personalities, such as

36
<PAGE>
Paul Harvey and Rush Limbaugh, and more recently on television commercials and
infomercials. The Company's direct marketing operations continually monitor the
effectiveness and efficiency of the Company's advertising through tracking the
cost per inquiry ("CPI") and cost per order ("CPO") of its advertising, using
focus groups to evaluate the effectiveness of its advertising messages and using
sophisticated media buying techniques.

INQUIRY CONVERSION AND INTEGRATION WITH OTHER DISTRIBUTION CHANNELS. From
each inquiry, the Company's sales professionals strive to capture a variety of
information, including name, address, telephone number, the current mattress
product used, sleep habits and health issues that may be adversely affected by
poor quality sleep. The Company maintains a database of information on
approximately 3.7 million inquiries, including customers who have purchased an
air bed from the Company, from which the direct marketing channel is able to
take orders, or, if appropriate, direct the consumer to the Company's other
distribution channels. The database also provides valuable marketing
information. The Company's telemarketing sales professionals begin the consumer
education process during the initial call from the consumer. Subsequent to the
initial inquiry, the Company's database marketing department contacts the
consumer on a scheduled format through mailings of printed product and
educational information, a video on the features and benefits of Select Comfort
air beds, outbound telephone calls and periodic promotional offerings.

The direct marketing operations also support the Company's retail and road
show operations through referrals, as well as mailings to direct marketing
inquiries in selected markets in advance of retail store openings and road
shows. As the Company's base of retail stores has expanded, the direct marketing
sales professionals have increasingly been able to refer direct marketing
inquiries to a convenient retail store location, improving the process of
converting inquiries into sales and providing the consumer with a choice of
service venues. The Company intends to continue to pursue opportunities to
leverage its direct marketing infrastructure and expertise to enhance its retail
and road show distribution channels.

TRAINING AND COMPENSATION. The Company's direct marketing sales
professionals receive ongoing training and must pass various tests to move
through the four sales professional levels, each with a separate pay scale.
Direct marketing sales professionals are paid base compensation plus
commissions.

ROAD SHOW EVENTS

The Company's third distribution channel is road show events in selected
markets where the Company typically does not have a retail presence, as well as
at home shows and consumer product shows, state fairs and similar events. Select
Comfort sales professionals, supported by local print and radio advertising and
advance mailings to direct marketing inquiries, travel to various cities to
demonstrate the Company's products in temporary showrooms or in booths at trade
shows and educate consumers about the benefits of Select Comfort's air beds. The
Company uses inquiries generated from the direct marketing channel to determine
road show sites and typically will have approximately 10 road show events,
ranging from three days to two weeks in duration, in process at any given time.
The Company has found this distribution channel to be very effective in
converting direct response customers who want to see the product before
purchasing, but do not live close to a retail store location. The road show
events also provide the Company with valuable information for use in feasibility
analyses for retail store sites. The road show sales professionals receive both
base and incentive compensation.

MARKETING AND ADVERTISING

The primary objective of the Company's marketing and advertising strategy is
to create awareness of the features and benefits of Select Comfort air beds and
to build recognition of the Select Comfort brand as the leader in innovative air
beds, sleep expertise, superior quality and excellent customer service. The
Company's corporate marketing department is responsible for implementing a
coordinated, integrated and consistent marketing and advertising strategy across
the Company's three complementary distribution

37
<PAGE>
channels. The Company continues to spend the majority of its advertising budget
on direct marketing, which also drives traffic to the expanding base of retail
stores. As the base of retail stores continues to grow, the Company plans to
dedicate more of its advertising budget to the retail stores.

In 1997, the Company spent approximately $28.3 million on advertising
expenses. The majority of the Company's advertising budget is devoted to print
and long and short-form television advertising, with the balance primarily
devoted to radio advertising with well-known national personalities, such as
Paul Harvey and Rush Limbaugh, as well as local radio personalities in selected
retail markets. The Company also intends to continue to pursue various
alternative channels, such as catalogs, the Internet and targeted marketing
programs. Management believes that additional demand for the Company's products
will be created by increased consumer awareness of the benefits of Select
Comfort air beds.

CONSUMER EDUCATION AND CUSTOMER SERVICE

Select Comfort is committed to achieving its goal of world class customer
satisfaction and service. The Company intends to achieve this goal through a
variety of means designed to (i) educate consumers on the benefits of Select
Comfort products, (ii) deliver superior quality products, (iii) maximize the
Company's direct relationship with consumers, (iv) maximize convenience for the
consumer, and (v) respond quickly to consumer needs and inquiries. The Company
believes that educating consumers about the features and benefits of Select
Comfort air beds is critical to the success of its marketing and sales efforts,
and devotes considerable time and resources to training programs for its retail,
direct marketing and road show sales professionals. The retail stores also have
displays that provide customers with the latest information on sleep technology
and the features and benefits of Select Comfort air beds.

The Company's controlled distribution channels optimize the Company's direct
contact with its customers and allow the Company to respond quickly to customer
service inquiries and enhance customer satisfaction. The Company's multiple
distribution channels also enhance the convenience for the consumer to purchase
products through a variety of venues. In addition, the Company is currently
testing the offering of in-home assembly services in selected markets through
national and regional providers in order to provide greater convenience and
enhance customer satisfaction.

Select Comfort maintains an in-house customer service department of
approximately 50 customer service representatives who receive extensive training
in sleep technology and all aspects of the Company's products and operations.
The Company has recently implemented an interactive voice response system to
improve customer service. The Company's customer service representatives field
customer calls and also interact with each of the Company's retail stores to
address customer questions and concerns raised with retail sales professionals.
The customer service department makes outbound calls to new customers during the
90 Night Trial phase to answer questions and provide solutions to possible
problems in order to enhance customer education, build customer satisfaction and
reduce returns.

RESEARCH AND PRODUCT DEVELOPMENT

The Company has been granted 16 U.S. patents, has applications pending for
six U.S. patents and maintains an active research and development department.
The Company's research and development department continuously seeks to enhance
the Company's knowledge of sleep dynamics and sleep technology, improve current
product performance and benefits and develop new products. The research and
development department also conducts clinical studies and product tests to
measure the benefits of the Company's air beds, enhance the Company's sleep
technology learning, develop product improvements and establish quality and
performance standards. The Company has performed extensive pressure point
testing in which Select Comfort air beds were tested against nationally
recognized innerspring mattress brands and found to be superior in reducing
pressure points. A commissioned study conducted at the University of Memphis
confirmed that spinal misalignments were generally lower on Select Comfort air

38
<PAGE>

beds in comparison with both a leading innerspring mattress and a leading
waterbed. A recent commissioned study conducted at the Stanford University Sleep
Research Center indicated that participants using Select Comfort air beds
experienced a significant improvement in the quality of their sleep in
comparison to alternative mattress products. Three additional commissioned
studies on the relationship between lower back pain, sleep quality and the sleep
surface have found, on average, that 95% of lower back pain sufferers reported
reduced pain, 88% experienced improved sleep quality and 80% experienced
increased physical functioning when sleeping on a Select Comfort air bed in
comparison with an innerspring mattress. Through customer surveys, Select
Comfort seeks consumer feedback on a regular basis to help enhance existing
products and develop new products. The Company's research and development
expenses for 1995, 1996 and 1997 were $1.4 million, $1.5 million and $1.8
million, respectively.

Since the introduction of the Company's first air bed, the Company has
continued to improve and expand its product line, including quieter firmness
control systems, remote control gauges with digital settings, finer fabrics and
covers, new generations of foams and foundation systems and enhanced border
walls. The Company is currently exploring and expects to develop, either
independently or with a strategic partner, additional product enhancements or
extensions, including adjustable frames, space saver foundations with storage
compartments and sound vibration mattresses providing relaxation and therapeutic
effects.

In August 1998, the Company entered into a license agreement with
Hillenbrand Industries, Inc. ("Hillenbrand"), a leading provider of high-end
beds used primarily in the medical market, and Hillenbrand's wholly owned
subsidiary, Sleep Options, Inc. ("Sleep Options"), pursuant to which the Company
has obtained a limited exclusive license to Sleep Options' technology relating
to various air and foam mattress structures, an articulating bed frame, a hand
control device for mattresses and related product knowledge. The license allows
the Company to leverage Hillenbrand's knowledge of sleep surface technology to
manufacture and sell these products in the North American consumer market. The
license does not permit the Company to sell these products to healthcare
institutions or through healthcare distributors. The Company is also not
permitted to manufacture or sell the articulating bed frame in combination with
an innerspring mattress. For this license, the Company has agreed to pay a
royalty based on a percentage of net sales, with certain minimum royalties. The
license agreement has an initial term of three years.

MANUFACTURING AND DISTRIBUTION

The Company's manufacturing operations are located in Minneapolis and in
Columbia, South Carolina and consist of quilting and sewing of the Company's
fabric covers for its air beds, assembly of firmness control systems and final
assembly and packaging of air beds and foundations from contract manufactured
components. The Company currently conducts its manufacturing operations on two
shifts (three shifts for sewing) and believes it has sufficient capacity to meet
anticipated increases in demand through the next 12 months. The Company plans to
open a third manufacturing and distribution facility in Salt Lake City in the
first half of 1999, primarily to serve West Coast and Southwest destinations.

The Company manufactures air beds to meet orders rather than to stock
inventory, which has enabled the Company to reduce inventory costs. Management
stresses total quality manufacturing techniques, including employee training and
team concepts designed to instill quality awareness and a performance and
customer service orientation. Select Comfort utilizes multiple employee teams to
accomplish its manufacturing objectives, rather than a continuous assembly line
approach, and seeks to enhance employee involvement, enthusiasm and concern for
quality through regular communication and meetings with employees regarding
performance objectives.

Orders are currently shipped from one of the Company's two distribution
centers, primarily via UPS, typically within 48 hours following order receipt,
and are usually received by the customer within five to eight business days
after shipment. The Company is continually evaluating alternative carriers on a

39
<PAGE>
national and regional basis, as well as recent tests in selected markets
involving providers of in-home assembly services. See "Risk Factors--Reliance on
Vendors; Foreign Sources of Supply" and "--Reliance Upon Carriers."

SUPPLIERS

The Company currently obtains all of the materials and components used to
produce its air beds from outside sources. Components for the firmness control
systems are obtained from a variety of primarily domestic sources. Quilting and
ticking materials are obtained from a supplier in Belgium and components for
foundation systems are obtained primarily from two domestic sources. The
Company's proprietary air chambers are produced to Company specifications by one
Eastern European supplier under a supply contract expiring in August 1999,
pursuant to which the Company is obligated to purchase certain minimum
quantities, but not all of its requirements. Either party can terminate the
contract upon 90 days notice if such party ceases to use the air chambers in its
business. The Company believes that it would be able to procure an adequate
supply of air chambers from other sources on a timely basis if the supply
contract is terminated or the Eastern European supplier is otherwise unable to
supply air chambers. The Company has recently completed the development of an
air chamber designed with new materials that will be manufactured by a U.S.
based company at a foreign manufacturing facility. Full production of this new
air chamber is expected to commence in the third quarter of 1999. The Eastern
European supplier is expected to provide a second source of supply of this new
air chamber during the second half of 1999. The Company does not presently have
any contract or commitment from either supplier to manufacture the newly
developed air chamber. The Company is continuously searching for alternative
designs and materials for all of its components and materials, as well as
alternative sources of supply. See "Risk Factors-- Reliance Upon Vendors;
Foreign Sources of Supply."

The Company has a supplier certification program under which suppliers are
required to meet rigorous standards relating to quality, service and ability to
deliver materials on a basis compatible with the Company's demand manufacturing
system and Year 2000 compliance. To date, nine of the Company's key suppliers
have received certification and other authorized suppliers are in the process of
seeking certification. Each of these suppliers, including the Company's Eastern
European supplier of air chambers, have notified the Company that they are or
will be Year 2000 compliant during 1999.

INFORMATION SYSTEMS

Since 1996, the Company has invested approximately $1.7 million in the
design, development and implementation of its integrated enterprise information
system. This system supports manufacturing operations, material planning,
inventory management, order processing, returns and warranty tracking, financial
management, human resources and distribution and tracking systems applications.
In addition, the Company's order capture and database marketing systems allow
each channel to gather inquiries and direct them to a central database, as well
as to share and develop those leads on a coordinated and efficient basis. The
Company also employs a point of sale system used at its retail operations. This
system provides for the reporting of retail orders to the manufacturing
department to speed order processing and allows retail stores to access and
interact with the Company's direct marketing database to obtain information
regarding inquiries and to report inquiries to the Company's central database.

The Company is in the process of internally developing and upgrading core
applications for customer inquiries and for processing and tracking warranty
claims and returns, which is scheduled for implementation in the first half of
1999. With the implementation of these applications, and the upgrade of the
Company's integrated enterprise systems also scheduled for the first half of
1999, all of the Company's core business applications are expected to be Year
2000 compliant. See "Risk Factors--Year 2000 Compliance" and "Management's
Discussion and Analysis of Financial Condition Results of Operations--Impact of
Year 2000."

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<PAGE>
INTELLECTUAL PROPERTY

Certain elements of the design and function of the Select Comfort air beds
are the subject of United States and foreign patents and patent applications
owned by Select Comfort. As of October 3, 1998, the Company had 16 U.S. issued
patents and six U.S. patent applications pending. The Company also held seven
Canadian patents and had six Canadian patent applications pending as of October
3, 1998. Notwithstanding these patents and patent applications, no assurance can
be given that such rights will provide substantial protection or that others
will not be able to develop products that are similar to or competitive with the
Select Comfort air beds. The Company is not aware of any claims that any element
of the Company's air beds infringes or otherwise violates any intellectual
property rights of any third parties.

The name "Select Comfort" and the Company's logo are trademarks of the
Company registered with the United States Patent and Trademark Office. The
trademark "Select Comfort" is also registered, or the subject of pending
applications, in approximately 22 foreign countries. The Company has a number of
other registered marks, including the trademarks "Comfort Club" and "Sleep
Number," the service mark "Comfort Club," and a number of unregistered marks,
including the trademarks "90 Night Trial," "Better Night's Sleep Guarantee" and
"The Air Bed Company." The Company has a number of pending applications for
trademark registrations in the United States and selected foreign countries.
Each federally registered mark is renewable indefinitely if the mark is still in
use at the time of renewal. The Company is not aware of any material claims of
infringement or other challenges to the Company's right to use its marks. See
"Risk Factors--Intellectual Property Protection."

COMPETITION

The mattress industry is highly competitive. Participants in the mattress
industry compete primarily on price, quality, brand name recognition, product
availability and product performance, including the perceived levels of comfort
and support provided by a mattress. The Company's air beds compete with a number
of different types of mattress alternatives, including innerspring mattresses,
waterbeds, futons and other air-supported mattresses that are sold through a
variety of channels, including furniture stores, bedding specialty stores,
department stores, mass merchants, wholesale clubs, telemarketing programs,
television infomercials and catalogs. The Company believes that its success
depends in part on increasing consumer acceptance of existing products and the
continuing introduction of products that have qualities and benefits which
differentiate the Company's products from those offered by other manufacturers.
There can be no assurance that such products will receive consumer acceptance or
that the Company will continue to be able to successfully introduce such
products. See "Risk Factors--Competition."

The traditional mattress industry is characterized by a high degree of
concentration among the four largest manufacturers of innerspring mattresses
with nationally recognized brand names, including Sealy, which also owns the
Stearns & Foster brand name, Serta, Simmons and Spring Air. These manufacturers
were estimated by FURNITURE/TODAY to account for approximately 62% of wholesale
dollar sales in 1997. The balance of the mattress market is served by over 700
manufacturers, primarily operating on a regional basis. Many of these
competitors, and in particular the four largest manufacturers named above, have
greater financial, marketing and manufacturing resources and better brand name
recognition than the Company, and sell their products through broader and more
established distribution channels. The Company believes that a number of
companies, including two of the four largest manufacturers, have begun to offer
air beds. There can be no assurance that these or any other mattress
manufacturer will not aggressively pursue the air bed market. Any such
competition by the established manufacturers or new entrants into the market
could have a material adverse effect on the Company's business, financial
condition and operating results. In addition, should any of the Company's
competitors reduce prices on premium mattress products, the Company may be
required to implement price reductions in order to remain competitive, which
could have a material adverse effect on its business, financial condition and
operating results.

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There are no provisions in the Company's retail store leases that limit or
restrict competing businesses from operating in the malls in which the Company's
stores are located. The lack of such restrictions and the lack of significant
barriers to entry may result in new competition. Such competition could have a
material adverse effect on the Company's business, financial condition and
operating results.

EMPLOYEES

At October 3, 1998, the Company employed 1,466 persons, including 786 retail
store employees, 118 direct marketing employees, 50 customer service employees,
24 road show sales professionals, 343 manufacturing and distribution employees
and 145 management and administrative employees. Approximately 79 of the
Company's employees were employed on a part-time basis at October 3, 1998.
Except for managerial employees and professional support staff, all of the
Company's employees are paid on an hourly basis plus commissions for sales
associates. None of the Company's employees is represented by a labor union or
covered by a collective bargaining agreement. The Company believes that its
relations with its employees are good.

PROPERTIES

The Company currently leases all of its existing retail store locations and
expects that its policy of leasing, rather than owning, will continue as it
expands. The Company's store leases generally provide for an initial lease term
of 10 years with a mutual termination option if the Company does not achieve
certain minimum annual sales thresholds. Generally, the store leases require the
Company to pay minimum rent plus percentage rent based on net sales in excess of
certain thresholds, as well as certain operating expenses.

The Company leases 125,000 square feet of space in Minneapolis for one of
the Company's manufacturing and distribution centers, one of the Company's
direct marketing call centers, a customer service center, a research and
development center and corporate offices, which lease expires in 2004. The
Company also leases 105,000 square feet of space in Columbia, South Carolina,
for its other manufacturing and distribution center and a direct marketing call
center, which lease expires in 2003. The Company has agreed to lease
approximately 100,800 square feet in Salt Lake City for a third manufacturing
and distribution center that the Company expects to open in the first half of
1999, which lease expires in 2009.

CONSUMER CREDIT ARRANGEMENTS

In May 1997, the Company entered into an arrangement with Monogram Credit
Card Bank of Georgia (the "Bank"), an affiliate of General Electric Capital
Corporation, a creditor and warrantholder of the Company, pursuant to which the
Bank offers to the Company's qualified customers an unsecured revolving credit
arrangement to finance purchases from the Company. The Bank sets the rate,
annual fees, late fees and all other terms and conditions relating to the
customers' accounts, including collection policies and procedures, and is the
owner of the receivables. The effective interest rate is comparable to rates
generally available under similar consumer revolving credit arrangements. The
Bank's current commitment extends to a maximum of $75 million of receivables
outstanding. The Company expects to increase the amount of this commitment
before the end of 1998.

In connection with all purchases financed under these arrangements, the Bank
pays the Company an amount equal to the total amount of purchases net of
promotional related discounts and less amounts retained for returned products
and limited recourse on bad debts. The Bank had retained $3.9 million and $10.1
million as of January 3, 1998 and October 3, 1998, respectively. The Company's
liability for bad debts is limited to a specified percentage of the receivables
generated.

In the nine months ended October 3, 1998, approximately 51.0% of the
Company's net sales were financed by the Bank through these arrangements. The
average receivable outstanding generated under

42
<PAGE>

these arrangements at September 30, 1998 was approximately $1,140, with an
aggregate amount outstanding at that date of approximately $65.8 million. As
part of its allowance for doubtful accounts, the Company maintains a reserve for
recourse that may result under its arrangement with the Bank. The amount of this
reserve at October 3, 1998 was approximately $2.6 million, representing
approximately 3.9% of the related receivables as of that date. For financial
statement purposes, the financing arrangement with the Bank has been accounted
for as a sale of receivables. See "Risk Factors-- Dependence on Consumer
Spending."

GOVERNMENTAL REGULATION

The Company's products and its marketing and advertising practices are
subject to regulation by various federal, state and local regulatory
authorities, including the Federal Trade Commission and the U.S. Food and Drug
Administration. The mattress industry also engages in advertising
self-regulation through certain voluntary forums, including the National
Advertising Division of the Better Business Bureau. The Company is also subject
to various other federal, state and local regulatory requirements, including
federal, state and local environmental regulation and regulations issued by the
U.S. Occupational Safety and Health Administration. See "Risk
Factors--Regulatory Matters."

LEGAL PROCEEDINGS

The Company is involved in various legal proceedings incident to the
ordinary course of its business. The Company believes that the outcome of all
pending legal proceedings in the aggregate will not have a material adverse
effect on its business, financial condition or operating results.

43
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, and their ages as of
October 3, 1998, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
H. Robert Hawthorne................... 53 President, Chief Executive Officer and Director

Daniel J. McAthie..................... 48 Executive Vice President, Chief Financial Officer, Chief Operating
Officer and Secretary

Charles E. Dorsey..................... 48 Senior Vice President of Direct Marketing and President of Select
Comfort Direct Corporation

Ronald E. Mayle....................... 40 Senior Vice President of Retail and President of Select Comfort
Retail Corporation

Gregory T. Kliner..................... 60 Senior Vice President of Operations

Ervin R. Shames(1)(2)................. 58 Chairman of the Board

Thomas J. Albani(3)................... 56 Director

Patrick A. Hopf(1)(2)................. 49 Director

Christopher P. Kirchen(1)(3).......... 55 Director

David T. Kollat(3).................... 60 Director

Kenneth A. Macke(2)................... 59 Director

Jean-Michel Valette(3)................ 38 Director
</TABLE>

- ------------------------

(1) Member of the Executive Committee

(2) Member of the Compensation Committee

(3) Member of the Audit Committee

H. ROBERT HAWTHORNE has served as the President, Chief Executive Officer and
a Director of the Company since April 1997. From February 1992 to December 1997,
he served as President of The Pillsbury Brands Group, a subsidiary of The
Pillsbury Company, which is a subsidiary of Diageo PLC. From June 1990 to
January 1992, he was President and Chief Executive Officer of Alpo Petfoods,
then a subsidiary of Grand Metropolitan PLC. Prior to joining Alpo Petfoods, Mr.
Hawthorne was President and Chief Executive Officer of Pillsbury Canada, a
subsidiary of Diageo PLC.

DANIEL J. MCATHIE has served as Executive Vice President, Chief Financial
Officer and Secretary since October 1995. Mr. McAthie also served as Chief
Administrative Officer from October 1995 to October 1998, at which time he was
named Chief Operating Officer. From May 1990 to April 1995, Mr. McAthie held the
positions of Senior Vice President, Chief Financial Officer, Vice President and
Treasurer of Fingerhut Companies, Inc., a mail order catalog company.

CHARLES E. DORSEY has served as Senior Vice President of Direct Marketing
since January 1992 and President of Select Comfort Direct Corporation since
March 1996. From March 1988 to December 1991, Mr. Dorsey served as Chief
Operating Officer for DM Shelter, Inc., a custom packaged home company.

RONALD E. MAYLE has served as Senior Vice President of Retail of the Company
and President of Select Comfort Retail Corporation since December 1997. From
October 1996 to December 1997, Mr. Mayle served as Managing Member of Management
& Capital, a retail consulting firm. From May 1995 to

44
<PAGE>

October 1996, Mr. Mayle served as an independent retail marketing consultant.
From April 1992 to May 1995, Mr. Mayle was Vice President of Operations of
Petstuff, Inc., a subsidiary of PetsMart Inc.

GREGORY T. KLINER has served as Senior Vice President of Operations since
August 1995. From October 1986 to August 1995, Mr. Kliner served as Director of
Operations of the Irrigation Division for The Toro Company, a manufacturer of
lawn care and snow removal products and irrigation systems.

ERVIN R. SHAMES has served as a Director of the Company and Chairman of the
Board of Directors since April 1996. From January 1995 to March 1996, Mr. Shames
served as an independent strategic and management consultant. From December 1993
to January 1995, Mr. Shames served as the Chief Executive Officer of Borden,
Inc. and was President and Chief Operating Officer of Borden, Inc. from July
1993 until December 1993. From June 1992 to July 1993, Mr. Shames served as
Chairman and Chief Executive Officer of The Stride Rite Corporation, a footwear
manufacturer, and was President and Chief Executive Officer of The Stride Rite
Corporation from June 1990 to June 1992. Mr. Shames is also a director of the
First Brands Corporation.

THOMAS J. ALBANI has served as a Director of the Company since February
1994. Mr. Albani served as President and Chief Executive Officer of Electrolux
Corporation, a manufacturer of premium floor care machines, from July 1991 to
May 1998. From September 1984 to April 1989, Mr. Albani was employed by
Allegheny International Inc., a home appliance manufacturing company, in a
number of positions, most recently as Executive Vice President and Chief
Operating Officer.

PATRICK A. HOPF has served as a Director of the Company since December 1991.
From August 1993 to April 1996, Mr. Hopf served as the Chairman of the Board of
Directors of the Company. Mr. Hopf was elected to the Board of Directors of the
Company in connection with the purchase agreement under which the Series A
Preferred Stock was purchased. See "Certain Transactions--Director
Relationships" and "-- Voting Agreement and Stock Restriction Agreement." Mr.
Hopf has been President of St. Paul Venture Capital, Inc., a venture capital
firm, and Vice President of St. Paul Fire and Marine Insurance Company since
August 1988, and Managing General Partner of St. Paul Venture Capital IV, LLC
since its formation in January 1997. St. Paul Fire and Marine Insurance Company,
St. Paul Venture Capital IV, LLC and St. Paul Venture Capital Affiliates Fund I,
L.L.C., of which St. Paul Venture Capital, Inc. is the manager, are investors in
the Company. Mr. Hopf also serves as a director of a number of privately held
companies.

CHRISTOPHER P. KIRCHEN has served as a Director of the Company since
December 1991. Mr. Kirchen was elected to the Board of Directors of the Company
in connection with the purchase agreement under which the Series B Preferred
Stock was purchased. See "Certain Transactions--Director Relationships" and
"--Voting Agreement and Stock Restriction Agreement." Mr. Kirchen is currently
Managing General Partner of Brand Equity Ventures, a venture capital partnership
that he co-founded in March 1997. Mr. Kirchen is also a General Partner of
Consumer Venture Partners, an investor in the Company, a position he has held
since 1986. Mr. Kirchen also serves as a director of a number of privately held
companies.

DAVID T. KOLLAT has served as a Director of the Company since February 1994.
Mr. Kollat has served as President and Chairman of 22 Inc., a research and
consulting company for retailers and consumer goods manufacturers, since 1987.
From 1976 until 1987, Mr. Kollat served in various capacities for The Limited,
including Executive Vice President of Marketing and President of Victoria's
Secret Catalogue. Mr. Kollat also serves as a director of numerous companies,
including The Limited, Inc., Wolverine World Wide, Inc., Consolidated Stores,
Inc. and Cooker Restaurant Corporation.

KENNETH A. MACKE has served as a Director as a of the Company since
September 1994. Mr. Macke is General Partner of Macke Limited Partnership, a
venture capital firm and investor in the Company. He previously served as
Chairman and Chief Executive Officer of Dayton Hudson Corporation from 1984 to
1994, prior to which he was employed by Dayton Hudson in a variety of positions
beginning in 1961.

45
<PAGE>
Mr. Macke also serves as a director of Unisys Corporation, General Mills, Inc.
and Fingerhut Companies, Inc.

JEAN-MICHEL VALETTE has served as a Director of the Company since 1994. Mr.
Valette was elected to the Board of Directors of the Company in connection with
the purchase agreement under which the Series D Preferred Stock was purchased.
See "Certain Transactions--Director Relationships" and "--Voting Agreement and
Stock Restriction Agreement." Mr. Valette has served as President and Chief
Executive Officer of Franciscan Estates, Inc., a winery in Northern California,
since August 1998. Mr. Valette was a Managing Director of Hambrecht & Quist LLC
from October 1994 to August 1998 and a Senior Analyst of Hambrecht & Quist LLC
from November 1992 to October 1994. Mr. Valette is also a member of the general
partner of H&Q Select Comfort Investors, L.P., an investor in the Company and a
related party to Hambrecht & Quist LLC. Hambrecht & Quist LLC is one of the
Underwriters of this offering. From 1981 to 1983, Mr. Valette was a consultant
with The Boston Consulting Group. Mr. Valette also serves as a director of a
number of privately held companies.

BOARD OF DIRECTORS

Effective upon completion of this offering, the Board of Directors will
consist of three classes of directors, each class serving for a staggered
three-year term. The Class A directors, whose initial terms will expire at the
1999 annual shareholders meeting, will be Messrs. Kirchen, Macke and Valette.
The Class B directors, whose initial terms will expire at the 2000 annual
shareholders meeting, will be Messrs. Hopf and Shames. The Class C directors,
whose initial terms will expire at the 2001 annual shareholders meeting, will be
Messrs. Hawthorne, Kollat and Albani.

COMMITTEES

The Board of Directors has an Executive Committee, an Audit Committee and a
Compensation Committee. The Executive Committee has the authority to take all
actions that the Board as a whole is able to take, except as limited by
applicable law. The Audit Committee provides assistance to the Board in
satisfying its fiduciary responsibilities relating to accounting, auditing,
operating and reporting practices of the Company, and reviews the annual
financial statements of the Company, the selection and work of the Company's
independent auditors and the adequacy of internal controls for compliance with
corporate policies and directives. The Compensation Committee reviews general
programs of compensation and benefits for all employees of the Company and makes
recommendations to the Board concerning such matters as compensation to be paid
to the Company's officers and directors.

DIRECTOR COMPENSATION

Effective upon completion of this offering, all non-employee directors of
the Company (other than Ervin R. Shames, who is entitled to the compensation
described below) will receive $3,500 for each meeting of the Board of Directors
attended and $500 for each meeting of the Executive Committee, Audit Committee
or Compensation Committee attended. In addition, all non-employee directors
(other than Mr. Shames) will be granted, on an annual basis, an option to
purchase 2,000 shares of Common Stock exercisable at the fair market value of
the Common Stock on the date of grant for a period of up to 10 years, subject to
their continuous service on the Board of Directors. Directors who are officers
or employees of the Company do not receive additional compensation for their
services as directors. All directors are reimbursed for travel expenses for
attending meetings of the Board and any Board committees.

In April 1996, the Company entered into a Consulting Agreement with Ervin R.
Shames, Chairman of the Board, pursuant to which Mr. Shames renders certain
consulting services to the Company. Pursuant to the Consulting Agreement, Mr.
Shames received $120,000 in 1997 for consulting services rendered. See
"--Employment and Consulting Agreements."

46
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. Hopf, Albani and Macke served as members of the Compensation
Committee of the Board of Directors during 1997. Mr. Hopf is the President of
St. Paul Venture Capital, Inc. and Vice President of St. Paul Fire and Marine
Insurance Company, and Mr. Macke is the General Partner of Macke Limited
Partnership, each of which is an investor in the Company. For a description of
certain transactions involving these entities, see "Certain Relationships and
Related Transactions" and "Principal and Selling Shareholders." Mr. Hopf served
as Chairman of the Board of the Company from August 1993 to April 1996. No other
relationships existed during 1997 with respect to Messrs. Hopf, Albani or Macke
that would be required to be disclosed under the rules of the Securities Act.
Messrs. Hopf, Macke and Shames currently serve as members of the Compensation
Committee of the Board of Directors.

EXECUTIVE COMPENSATION

The following table describes the compensation earned in 1997 by (i) the
Chief Executive Officer of the Company; and (ii) each of the four other most
highly compensated executive officers of the Company whose salary and bonus
exceeded $100,000 in 1997 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- ------------------------------------------------- --------- ---------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
H. Robert Hawthorne(1) .......................... 1997 $ 225,000 $ 27,000 400,000 --
President and Chief Executive Officer

Mark L. de Naray(2) ............................. 1997 90,898 -- -- $ 148,515(3)
Former President and Chief Executive Officer

Daniel J. McAthie ............................... 1997 198,655 23,838 55,000 --
Executive Vice President, Chief Financial
Officer, Chief Operating Officer and Secretary

Charles E. Dorsey ............................... 1997 155,540 81,381 35,000 --
Senior Vice President of Retail and President
of Select Comfort Direct Corporation

John D. Watson(4) ............................... 1997 149,423 17,931 35,000 --
Former Senior Vice President of Corporate
Marketing

Gregory T. Kliner ............................... 1997 147,095 17,652 35,000 --
Senior Vice President of Operations
</TABLE>

- ------------------------

(1) Mr. Hawthorne became President and Chief Executive Officer of the Company
effective April 28, 1997.

(2) Mr. de Naray was President and Chief Executive Officer of the Company
through April 27, 1997.

(3) Represents severance payments in an aggregate amount of $147,115 and term
life insurance premiums in the aggregate amount of $1,400 paid by the
Company for the benefit of Mr. de Naray. See "--Separation Agreements."

(4) Mr. Watson resigned from the Company effective September 1, 1998. See
"--Separation Agreements."

47
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR

The following table summarizes stock option grants during 1997 to each of
the Company's Named Executive Officers.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED (#) FISCAL YEAR PER SHARE DATE 5% ($) 10% ($)
- ----------------------------------- ----------- --------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
H. Robert Hawthorne................ 300,000(3) 31.3% $ 5.25 3/27/07 $ 990,509 $ 2,510,144
100,000(4) 10.4 5.25 3/27/07 330,170 836,715

Mark L. de Naray................... -- -- -- -- -- --

Daniel J. McAthie.................. 20,000(3) 2.1 5.25 3/27/07 66,034 167,343
35,000(4) 3.6 5.25 3/27/07 115,559 292,850

Charles E. Dorsey.................. 35,000(4) 3.6 5.25 3/27/07 115,559 292,850

John D. Watson..................... 35,000(4) 3.6 5.25 3/27/07 115,559 292,850

Gregory T. Kliner.................. 35,000(4) 3.6 5.25 3/27/07 115,559 292,850
</TABLE>

- ------------------------

(1) All of the options granted to the Named Executive Officers were granted
under the Company's 1997 Stock Incentive Plan. See "--Stock Option and
Incentive Plans" for a discussion of the material terms of option grants
under such plan.

(2) In accordance with the rules of the Commission, the amounts shown on this
table represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the respective options were granted to their expiration date and do
not reflect the Company's estimates or projections of future Common Stock
prices. The gains shown are net of the option price, but do not include
deductions for taxes or other expenses associated with the exercise. Actual
gains, if any, on stock option exercises will depend upon the future
performance of the Common Stock, the executive's continued employment with
the Company or its subsidiaries and the date on which the options are
exercised. The amounts represented in this table might not necessarily be
achieved.

(3) These options become exercisable in as nearly equal as possible monthly
installments over a 36-month period, so long as the executive remains
employed by the Company or one of its subsidiaries at that date. To the
extent not already exercisable, these options become immediately exercisable
in full upon certain changes in control of the Company and remain
exercisable for the remainder of their term. See "--Stock Option and
Incentive Plans."

(4) These options become exercisable in full upon the earlier of the following
to occur: (a) the date on which the average of the high and low sales prices
of the Company's Common Stock, as reported by the Nasdaq National Market
System, exceeds $22.00 per share for at least 30 consecutive trading days;
or (b) March 28, 2002, so long as the executive remains employed by the
Company or one of its subsidiaries at that date. To the extent not already
exercisable, these options become immediately exercisable in full upon
certain changes in control of the Company that result in consideration
received or to be received by the shareholders of the Company as a result of
such transaction exceeding $22.00 per share of Common Stock on a fully
diluted basis.

48
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

The following table summarizes the number and value of options exercised
during 1997 and the value of options held by the Named Executive Officers at
January 3, 1998.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT JANUARY 3, 1998 AT JANUARY 3, 1998(1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
H. Robert Hawthorne............ -- -- 75,000 325,000 $ 356,250 $ 1,543,750

Mark L. de Naray............... 180,000(2) $ 891,000 -- -- -- --
47,950(2) 237,353
84,340(2) 409,049
600(2) 2,910
173,110(2) 830,928
28,000(2) 119,000
16,000(2) 7,200
8,000(2) 0

Daniel J. McAthie.............. -- -- 80,266 84,734 408,887 413,113

Charles E. Dorsey.............. 2,000 19,400 100,490 40,910 931,592 204,738

John D. Watson................. -- -- 35,552 79,448 168,872 377,378

Gregory T. Kliner.............. -- -- 58,880 56,120 302,423 273,077
</TABLE>

- ------------------------

(1) Value based on the difference between the fair market value of one share of
Common Stock at January 3, 1998 ($10.00), as determined by the Board of
Directors, and the exercise price of the options ranging from $0.30 to $5.25
per share. Options are in-the-money if the market price of the shares
exceeds the option exercise price.

(2) Mr. de Naray exercised these options on February 20, 1997 and paid for the
shares by executing a full recourse promissory note in the amount of
$386,550. See "--Separation Agreements."

EMPLOYMENT AND CONSULTING AGREEMENTS

On April 3, 1997, the Company entered into a Letter Agreement with H. Robert
Hawthorne pursuant to which Mr. Hawthorne serves as President and Chief
Executive Officer as well as a director of the Company. Mr. Hawthorne's base
salary is $350,000 per year, and he is entitled to receive an incentive bonus if
certain performance criteria are met. Under the terms of the Letter Agreement,
Mr. Hawthorne was granted two ten-year options to purchase an aggregate of
400,000 shares of Common Stock at an exercise price of $5.25 per share. Of these
options: (i) an option to purchase 300,000 shares of Common Stock becomes
exercisable in as nearly equal as possible monthly installments over a 36-month
period, so long as Mr. Hawthorne remains employed by the Company or one of its
subsidiaries at such date and (ii) the other option is a "performance-based"
option and becomes exercisable as to 100,000 shares of Common Stock upon the
earlier of the following to occur: (a) the date on which the average of the high
and low sales prices of the Company's Common Stock, as reported by the Nasdaq
National Market System, exceeds $22.00 per share for at least 30 consecutive
trading days; or (b) March 28, 2002, so long as Mr. Hawthorne remains employed
by the Company or one of its subsidiaries at such date. Mr. Hawthorne is
entitled to a minimum severance payment of 24 months base salary in the event he
is terminated without cause.

On October 20, 1995, the Company entered into a Letter Agreement with Daniel
J. McAthie pursuant to which Mr. McAthie serves as Executive Vice President,
Chief Financial Officer and Chief Operating Officer of the Company. Mr. McAthie
receives a base salary and is entitled to receive an incentive bonus if certain
performance criteria are met. Under the terms of the Letter Agreement, Mr.
McAthie was granted a ten-year option to purchase 85,000 shares of Common Stock
at an exercise price of $4.80 per share. This option becomes exercisable in as
nearly equal as possible monthly installments over a 36-month period, so

49
<PAGE>
long as Mr. McAthie remains employed by the Company or one of its subsidiaries
at such date. Mr. McAthie is also entitled to a minimum severance payment equal
to his nine month's then current base salary in the event of termination without
cause.

On July 11, 1995, the Company entered into a Letter Agreement with Gregory
T. Kliner pursuant to which Mr. Kliner serves as Senior Vice President of
Operations of the Company. Mr. Kliner receives a base salary and is entitled to
receive an incentive bonus if certain performance criteria are met. Under the
terms of the Letter Agreement, Mr. Kliner was granted a ten-year option to
purchase 65,000 shares of Common Stock at an exercise price of $4.80 per share.
This option becomes exercisable in as nearly equal as possible monthly
installments over a 36-month period, so long as Mr. Kliner remains employed by
the Company or one of its subsidiaries at such date.

The Company and Mr. Shames entered into a Consulting Agreement and a related
Stock Option Agreement, each dated April 1, 1996, under which Mr. Shames serves
as a consultant to assist the Company in various executive and management
duties. The Consulting Agreement has a term of three years. Under the Consulting
Agreement, Mr. Shames is entitled to a monthly retainer of $10,000 and
reimbursement of certain expenses. In addition to the monthly retainer, Mr.
Shames was granted, effective April 1, 1996, a ten-year, non-qualified option to
purchase 150,000 shares of Common Stock at an exercise price of $5.25 per share,
50,000 shares of which became immediately exercisable and the remaining 100,000
shares of which become exercisable in as nearly equal as possible monthly
installments over the three-year term of the Consulting Agreement, so long as
Mr. Shames remains engaged as a consultant, officer or director of the Company.
Pursuant to the Consulting Agreement, Mr. Shames was also granted a ten-year,
non-qualified option effective April 1, 1997 to purchase 50,000 shares of Common
Stock at an exercise price of $6.50 per share which becomes exercisable in as
nearly equal as possible monthly installments over a 24-month period, and a
ten-year, non-qualified option, effective April 1, 1998 to purchase 25,000
shares of Common Stock at an exercise price of $11.00 per share which becomes
exercisable in as nearly equal as possible monthly installments over a 12-month
period. The Company also agreed to grant Mr. Shames, effective April 1, 1999,
subject to the Board of Directors' discretion, a non-qualified option to
purchase 25,000 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock on such date which option will become
immediately exercisable in full on such date. The Consulting Agreement provides
that Mr. Shames will not compete with the Company for a period of two years
after the termination of the Consulting Agreement.

SEPARATION AGREEMENTS

On February 20, 1997, the Company entered into a Separation Agreement with
Mark L. de Naray, the former President and Chief Executive Officer and a former
director of the Company. Under the Separation Agreement, the Company agreed to
provide Mr. de Naray with certain payments and benefits, including (i) payment
of Mr. de Naray's base salary through July 31, 1998, (ii) payment of a $50,000
cash bonus, (iii) continuation of health, dental and life insurance coverage
until July 31, 1998, (iv) loans from the Company in the amount necessary to
enable Mr. de Naray to exercise any outstanding options held by him and to pay
one-half of the income tax liability resulting therefrom. and (v) reimbursement
of certain other expenses in an amount not to exceed $10,000. The Company loaned
Mr. de Naray approximately $336,550, in addition to the $50,000 Mr. de Naray
previously owed the Company, in order to provide Mr. de Naray funds to exercise
his options. The original principal amount of the full recourse note was
$386,550 and it bears interest at the rate of 9 1/4% per annum. The entire
principal balance and all accrued interest on the note is due in full on the
earlier of (i) six months following the completion of this offering or (ii)
April 30, 1999. The loan is secured by Mr. de Naray's pledge of 150,000 shares
of Common Stock. The outstanding principal balance and accrued interest on the
note was approximately $417,700 as of January 3, 1998 and $446,407 as of October
3, 1998. Pursuant to the Separation Agreement, the Company loaned an additional
$425,000 to Mr. de Naray on April 13, 1998 to enable Mr. de Naray to pay
one-half of the income tax liability resulting from the exercise of his options
in February 1997, which loan is evidenced by a note and a pledge agreement
containing the same terms and conditions as described above, including the
pledge of an additional 150,000 shares of Common Stock. The outstanding
principal balance and

50
<PAGE>

accrued interest on this note was approximately $443,633 as of October 3, 1998.
Under the Separation Agreement, the Company agreed to use its good faith efforts
to enable Mr. de Naray to sell up to 50,000 shares of Common Stock in this
offering. Under the Separation Agreement, Mr. de Naray agreed not to disclose
any confidential information of the Company until July 31, 2003, and until July
31, 1999, not to compete with the Company, interfere with the Company's
relationships with any of its current or potential vendors, suppliers,
distributors or customers and not to solicit any employees of the Company so
long as they remain employees of the Company.

On July 13, 1998, the Company entered into a Separation Agreement with John
D. Watson, the former Senior Vice President of Corporate Marketing of the
Company. Under the Separation Agreement, the Company agreed to provide Mr.
Watson with certain payments and benefits, including (i) payment of Mr. Watson's
base salary through August 1, 1999, (ii) payment of a cash bonus at the end of
1998 equal to 8/12 of Mr. Watson's bonus had he remained an employee during the
remainder of 1998, (iii) continuation of health, dental and life insurance
coverage until July 31, 1999, and (iv) reimbursement of certain other expenses
in an amount not to exceed $5,000. Under the Separation Agreement, Mr. Watson
agreed not to disclose any confidential information of the Company and, until
February 29, 2000, not to compete with the Company, interfere with the Company's
relationships with any of its current or potential vendors, suppliers,
distributors or customers and not to solicit any current employees of the
Company.

STOCK OPTION AND INCENTIVE PLANS

The Company grants options pursuant to its 1990 Omnibus Stock Option Plan
(the "1990 Plan") and its 1997 Stock Incentive Plan (the "1997 Plan"). Each of
the 1990 Plan and the 1997 Plan provides for the grant to eligible participants
of options to purchase shares of Common Stock that qualify as "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended ("Incentive Options"), as well as options that do not qualify as
Incentive Options ("Non-Statutory Options"). In addition, the 1997 Plan provides
for awards to eligible recipients of stock appreciation rights, restricted stock
awards, performance units and stock bonuses. Eligible participants under these
plans include employees, officers, directors, consultants and independent
contractors of the Company and its subsidiaries. Each of these plans is
administered by the Compensation Committee of the Board of Directors, which
determines the persons who are to receive awards, as well as the type, terms and
number of shares subject to each award. The 1990 Plan will terminate on May 29,
2000, and the 1997 Plan will terminate on March 28, 2007, in each case unless
earlier terminated by the Board of Directors.

The Company has reserved an aggregate of 2.8 million shares of Common Stock
for awards under the 1990 Plan. As of October 3, 1998, options to purchase an
aggregate of 720,868 shares of Common Stock were outstanding under the 1990
Plan, of which 562,994 were fully vested, and a total of 413,594 shares of
Common Stock remained available for grant under the 1990 Plan. The Company has
reserved an aggregate of 1.5 million shares of Common Stock for awards under the
1997 Plan. As of October 3, 1998, options to purchase an aggregate of 939,659
shares of Common Stock were outstanding under the 1997 Plan, of which 234,982
were fully vested, and a total of 457,701 shares of Common Stock remained
available for grant under the 1997 Plan. As of October 3, 1998, the outstanding
options under the plans were held by an aggregate of 145 individuals and were
exercisable at prices ranging from $0.45 to $19.00 per share of Common Stock.
Options granted under the plans generally become exercisable in as nearly equal
as possible monthly installments over a 36-month period. Shares subject to
options granted under the plans that lapse or are terminated may again be
subject to grants under the plans.

Prior to the consummation of this offering, the Company plans to grant
options to purchase an aggregate of up to 125,000 shares of Common Stock under
the 1997 Plan at an exercise price equal to the initial public offering price of
the shares of Common Stock offered hereby. These options will be granted to all
full time employees of the Company who have not previously received an option
grant. These grants will range from 50 to 200 shares, depending on years of
service with the Company and will vest in equal annual installments over three
years.

Incentive Options granted under the plans may not have an exercise price
less than the fair market value of the Common Stock on the date of the grant
(or, if granted to a person holding more than 10% of

51
<PAGE>
the Company's voting stock, at less than 110% of fair market value).
Non-Statutory Options granted under the plans may not have an exercise price
less than 85% of fair market value on the date of grant. Aside from the maximum
number of shares of Common Stock reserved under the plans, there is no minimum
or maximum number of shares that may be subject to options. However, the
aggregate fair market value of the stock subject to Incentive Options granted to
any optionee that are exercisable for the first time by an optionee during any
calendar year may not exceed $100,000. Options generally expire when the
optionee's employment or other service is terminated with the Company and its
subsidiaries. Options generally may not be transferred, other than by will or
the laws of descent and distribution, and during the lifetime of an optionee,
may be exercised only by the optionee. The term of each option, which is fixed
by the Board at the time of grant, may not exceed ten years from the date the
option is granted (except that an Incentive Option granted to a person holding
more than 10% of the Company's voting stock may be exercisable only for five
years).

Each of the 1990 Plan and the 1997 Plan contains provisions under which
options would become fully exercisable following certain changes in control of
the Company, such as (i) the sale, lease, exchange or other transfer of all or
substantially all of the assets of the Company to a corporation that is not
controlled by the Company, (ii) the approval by the shareholders of the Company
of any plan or proposal for the liquidation or dissolution of the Company, (iii)
certain merger or business combination transactions, (iv) more than 50% of the
Company's outstanding voting shares are acquired by any person or group of
persons who did not own any shares of Common Stock on the effective date of the
respective plan, or (v) certain changes in the composition of the Board of
Directors of the Company. In addition, under the 1997 Plan, in the event of a
change in control of the Company, all stock appreciation rights will become
fully exercisable, all restricted stock awards will become immediately and fully
vested and all performance units and stock bonuses will vest and/or continue to
vest according to the terms of the agreements evidencing such awards. In
addition, under the 1997 Plan, in the event of such a change in control, the
Compensation Committee, in its sole discretion, may provide that some or all
participants holding outstanding options will receive for each share of Common
Stock subject to such options cash in an amount equal to the excess of the fair
market value of such shares immediately prior to the effective date of a change
in control over the exercise price per share of such options. The acceleration
of the exercisability of options under the Plans may be limited, however, if the
acceleration would be subject to an excise tax imposed upon "excess parachute
payments."

Payment of an option exercise price may be made in cash, or at the
Compensation Committee's discretion, in whole or in part by tender of a broker
exercise notice, a promissory note or previously acquired shares of Common Stock
of the Company having an aggregate fair market value on the date of exercise
equal to the payment required.

PROFIT SHARING AND 401(K) SAVINGS PLAN

On January 1, 1994, the Company adopted a Profit Sharing and 401(k) Plan
(the "401(k) Plan"). Employees who are employed on a full time basis and are 21
years old or over are eligible to participate in the 401(k) Plan on the first
day of the first calendar month following their employment commencement date.
Employees who are employed on a less than full time basis and are 21 years old
or over are eligible to participate in the 401(k) Plan on the first day of the
first calendar month once such employees have completed at least 1,000 hours of
service during the 12 months following their employment commencement date or
have completed 1,000 hours of service during the preceding plan year. Employees
may make salary reduction contributions to the 401(k) Plan up to the maximum
amount permitted by law. The Company may make discretionary matching
contributions equal to a percentage of the amount of the salary reduction the
employee elected. This percentage is determined annually by the Company. During
the first nine months of 1998, the Company contributed $78,000 to the 401(k)
Plan. The Company did not make any contributions during 1995, 1996 and 1997.
Generally, employer matching contributions are vested at the rate of 20% per
year of service commencing after the employee has completed two years of
service. Employee salary reduction contributions under the 401(k) Plan are
always 100% vested.

52
<PAGE>

NONQUALIFIED DEFERRED COMPENSATION PLAN

On October 1, 1998, the Company adopted a Nonqualified Deferred Compensation
Plan (the "DC Plan") for employees of the Company at or above director level
managers. Eligible employees are permitted to elect to defer a portion of their
compensation from the Company up to 50% of the employee's salary and 100% of the
employee's bonus in the initial plan year ending December 31, 1998, and up to
25% of the employee's salary and 100% of the employee's bonus for each calendar
year thereafter. The deferred compensation is credited to one or more accounts
designated by the employee. The Company is permitted, but is not obligated, to
make matching or discretionary contributions to participants' accounts. The
Company has not made any matching or discretionary contributions under the DC
Plan to date. Generally, employer matching or discretionary contributions are
vested at the rate of 20% per year of service commencing after the employee has
completed two years of service. Amounts deferred by election of a participant
are always 100% vested.

53
<PAGE>
CERTAIN TRANSACTIONS

DIRECTOR RELATIONSHIPS

Patrick A. Hopf, a director of the Company, is the President of St. Paul
Venture Capital, Inc. and the Vice President of St. Paul Fire and Marine
Insurance Co., both of which are shareholders of the Company. Mr. Hopf was
elected to the Board of Directors of the Company in connection with the purchase
agreement under which the Series A Preferred Stock was purchased.

Christopher P. Kirchen, a director of the Company, is a general partner of
Consumer Venture Associates, L.P., which is the general partner of Consumer
Venture Partners I, L.P., a shareholder of the Company. Mr. Kirchen is also the
general partner of Consumer Venture Associates II, L.P., which is the general
partner of Consumer Venture Partners II, L.P., a shareholder of the Company. Mr.
Kirchen was elected to the Board of Directors of the Company in connection with
the purchase agreement under which the Series B Preferred Stock was purchased.

Jean-Michel Valette, a director of the Company, was a Managing Director of
Hambrecht & Quist LLC from October 1994 to August 1998 and a Senior Analyst of
Hambrecht & Quist LLC from November 1992 to October 1994. Mr. Valette is also a
member of the general partner of H&Q Select Comfort Investors, L.P., an investor
in the Company and a related party to Hambrecht & Quist LLC. Mr. Valette was
elected to the Board of Directors of the Company in connection with the purchase
agreement under which the Series D Preferred Stock was purchased. Hambrecht &
Quist LLC is one of the Underwriters of this offering.

CERTAIN SALES OF SECURITIES

Since January 1, 1995, the Company has sold shares of Series E Preferred
Stock, promissory notes convertible into shares of Common Stock and warrants to
purchase shares of Common Stock to various investors, including certain
directors, executive officers, greater-than 5% shareholders and entities
affiliated with directors at the time of sale. Such securities were sold to such
affiliated purchasers on the same terms as they were sold to non-affiliated
purchasers.

SERIES E FINANCING

On December 28, 1995, the Company sold an aggregate of 857,143 shares of
Series E Preferred Stock pursuant to the Company's Series E Convertible
Preferred Stock Purchase Agreement dated December 28, 1995 (the "Series E
Purchase Agreement"), at a price of $10.50 per share for an aggregate purchase
price of approximately $9.0 million. The Series E Purchase Agreement was amended
in April 1996 to provide for the issuance to such purchasers of Series E
Preferred Stock warrants to purchase an aggregate of 171,429 shares of Common
Stock exercisable through December 28, 2005 at an exercise price of $5.25 per
share. The following entities and individuals purchased shares of Series E
Preferred Stock and were issued warrants in the following amounts: Apex
Investment Fund, L.P. (19,380 shares of Series E Preferred Stock convertible
into 23,071 shares of Common Stock and a warrant to purchase 3,876 shares);
related parties to Hambrecht & Quist LLC (45,000 shares of Series E Preferred
Stock convertible into 53,570 shares of Common Stock and a warrant to purchase
9,000 shares); Macke Limited Partnership (11,900 shares of Series E Preferred
Stock convertible into 14,166 shares of Common Stock and a warrant to purchase
2,380 shares); Marquette Venture Partners II, L.P. and MVP Affiliates Fund, L.P.
(257,150 shares of Series E Preferred Stock convertible into 306,130 shares of
Common Stock and a warrant to purchase 51,430 shares); Norwest Equity Partners V
(257,150 shares of Series E Preferred Stock convertible into 306,130 shares of
Common Stock and a warrant to purchase 51,430 shares); St. Paul Fire and Marine
Insurance Co. (100,000 shares of Series E Preferred Stock convertible into
119,047 shares of Common Stock and a warrant to purchase 20,000 shares); John
Sculley (15,000 shares of Series E Preferred Stock convertible into 17,857
shares of Common Stock and a warrant to purchase 3,000 shares); Patrick A. Hopf
(950 shares of Series E Preferred Stock convertible into 1,129 shares of Common
Stock and a warrant to

54
<PAGE>

purchase 190 shares); Mark L. de Naray (500 shares of Series E Preferred Stock
convertible into 595 shares of Common Stock and a warrant to purchase 100
shares); and Daniel J. McAthie (20,000 shares of Series E Preferred Stock
convertible into 23,809 shares of Common Stock and a warrant to purchase 4,000
shares).

1996 BRIDGE FINANCING

In November 1996, the Company borrowed an aggregate of approximately
$1,252,000 from certain existing shareholders and issued promissory notes
evidencing such loans. Interest on these notes accrued at an annual rate of 8%.
The Company granted each of these shareholders ten-year warrants to purchase a
number of shares of Common Stock equal to 25% of the principal amount of such
shareholder's note divided by $5.25 (an aggregate of 59,606 shares), at an
exercise price of $5.25 per share. The promissory notes were due on the earlier
of (i) the closing of an equity financing of $10.0 million or more, or (b)
November 1, 1997. The Company paid off the promissory notes in full in March
1997 and granted each of these shareholders additional ten-year warrants to
purchase a number of shares equal to 5% of the principal amount of such
shareholder's note divided by $5.25 (an aggregate of 11,919 shares), exercisable
through October 31, 2006 at an exercise price of $5.25 per share. The following
entities purchased notes and warrants in the following amounts: Apex Investment
Fund, L.P. ($126,450 and warrants to purchase 7,226 shares); Macke Limited
Partnership ($6,000 and warrants to purchase 343 shares); Norwest Equity
Partners V ($122,550 and warrants to purchase 7,003 shares); and St. Paul Fire
and Marine Insurance Co. ($835,150 and warrants to purchase 47,723 shares).

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

All holders of Common Stock issuable upon conversion of the preferred stock
or upon exercise of certain warrants have certain demand and incidental
registration rights covering such shares of Common Stock pursuant to the Amended
and Restated Registration Rights Agreement dated December 28, 1995, as amended,
among the Company and the other parties thereto. See "Description of
Securities-- Registration Rights--Amended and Restated Registration Rights
Agreement."

VOTING AGREEMENT AND STOCK RESTRICTION AGREEMENT

The Company and the purchasers of the preferred stock entered into a Voting
Agreement in connection with the purchase agreements under which the preferred
stock was purchased, pursuant to which Saint Paul Fire and Marine Insurance Co.,
Cherry Tree Ventures IV, Consumer Venture Partners, Apex Investment Fund, L.P.
and KCB BV, L.P. each were granted the right to designate one director to the
Board of Directors so long as each held at least 20% of the number of shares
originally purchased by such investor pursuant to the Series A Purchase
Agreement (in the case of Saint Paul Fire and Marine Insurance Co., Cherry Tree
Ventures IV and Consumer Venture Partners), Series B Purchase Agreement (in the
case of Apex Investment Fund, L.P.) or Series C Purchase Agreement (in the case
of KCB BV, L.P.). In connection with the Series D Purchase Agreement and the
Series E Purchase Agreement, related parties to Hambrecht & Quist LLC and
Marquette Venture Partners II, L.P., respectively, were granted a one-time right
to designate one director to the Board of Directors. All of the holders of the
preferred stock agreed to vote their shares of preferred stock and any other
shares of capital stock of the Company owned by such holder in favor of the
election of the persons designated by the respective shareholders. In addition,
in connection with the Series A Financing, the Company, the holders of the
Series A Preferred Stock and Robert A. Walker and JoAnn Walker (collectively,
the "Promoters") entered into a Stock Restriction Agreement. The Stock
Restriction Agreement was amended to include all subsequent purchasers of
preferred stock. Under this agreement, the Company, the holders of the preferred
stock and J.P. Poole had certain rights of first refusal to purchase and to
participate in any sales of shares of the Company's capital stock by the
Promoters. In addition, until the holders of the preferred stock recovered (by
sale or other disposition) their aggregate investment amount paid for all shares
of preferred stock purchased from the Company, the Promoters were prohibited
from selling more than 20% of their

55
<PAGE>
collective holdings of capital stock of the Company. The Stock Restriction
Agreement terminated on December 31, 1997, and the Voting Agreement will
terminate upon the consummation of this offering.

SEPARATION AGREEMENTS

On February 20, 1997, the Company entered into a Separation Agreement with
Mark L. de Naray, the former President and Chief Executive Officer and a former
director of the Company, pursuant to which the Company, among other things,
loaned Mr. de Naray an aggregate of $761,550 in addition to the $50,000 Mr. de
Naray previously owed the Company to provide Mr. de Naray funds to exercise his
options. On July 13, 1998, the Company entered into a Separation Agreement with
John D. Watson, the former Senior Vice President of Corporate Marketing of the
Company. For a discussion of these agreements, see "Management--Separation
Agreements."

CONSULTING AGREEMENTS

In April 1996, the Company entered into a Consulting Agreement with Ervin R.
Shames, Chairman of the Board, pursuant to which Mr. Shames renders certain
consulting services to the Company. See "Management--Director Compensation" and
"--Employment and Consulting Agreements."

In July 1997, the Company entered into a Letter Agreement with Richard
Clayton, a former director of the Company, pursuant to which Mr. Clayton
rendered certain consulting services to the Company through the end of March
1998 in connection with the establishment by the Company of several leased
departments within larger retail stores. Under the Letter Agreement, Mr. Clayton
received a consulting fee equal to $197,000 paid in eight monthly installments
and was granted an option to purchase 14,000 shares of Common Stock at an
exercise price of $7.50 per share.

For a discussion of the employment agreements entered into by the Company
and certain Named Executive Officers, see "Management--Employment and Consulting
Agreements."

GE FINANCING AND RESTRUCTURING OF GE WARRANTS

On March 27, 1997, the Company entered into a Purchase Agreement (the "GE
Purchase Agreement") with General Electric Capital Corporation ("GECC"),
pursuant to which the Company issued to GECC a senior subordinated promissory
note in the principal amount of $15.0 million (the "GE Note"). Interest on the
GE Note accrues at a rate equal to 11% per year and is payable quarterly in
arrears. The outstanding principal on the GE Note is due on or before March 31,
2003. Under the terms of the GE Purchase Agreement, the Company is required to
comply with certain affirmative and financial covenants so long as the GE Note
remains outstanding, including without limitation, the delivery of certain
financial and business information and maintaining a minimum ratio of EBITDA to
fixed charges, a minimum ratio of total indebtedness to EBITDA and a minimum
consolidated net worth. In addition, the Company is required to comply with
certain negative covenants so long as the GE Note remains outstanding, including
without limitation, refraining from consummating certain acquisitions,
investments, and sales of Company assets, issuing additional shares of preferred
stock, incurring additional indebtedness and permitting liens on any of its
assets. The Company intends to repay the GE Note in full with a portion of the
net proceeds of this offering. See "Use of Proceeds."

In addition to the GE Note, the Company issued to GECC a Series A Warrant
(the "Series A Warrant") to purchase 1,100,000 shares of Common Stock
exercisable through March 31, 2005 at an exercise price of $10.50 and a Series B
Warrant (the "Series B Warrant") providing contingent rights to purchase up to
1,000,000 shares of Common Stock at an exercise price of $.01 after May 1, 1999,
subject to adjustment and cancellation upon the occurrence of certain events.
Pursuant to an amendment to the GE Purchase Agreement effective as of March 31,
1998, the Company and GECC restructured these warrants by combining them into
one Series A Warrant to purchase 1,309,583 shares of Common Stock at an exercise
price of $8.82. GECC has certain demand and incidental registration rights
covering the shares of

56
<PAGE>
Common Stock issuable upon exercise of the new Series A Warrant. See
"Description of Securities-- Registration Rights--General Electric Warrant."

GECC, through its affiliation with Monogram Credit Card Bank of Georgia (the
"Bank"), has an indirect interest in the Company's consumer credit arrangements
with the Bank. Under these arrangements, the Bank offers to the Company's
qualified customers an unsecured revolving credit arrangement to finance
purchases from the Company. For all purchases financed under these arrangements,
the Bank pays the Company an amount equal to the total amount of purchases net
of promotional related discounts and less amounts retained for returned products
and limited recourse on bad debts. The Bank had retained $3.9 million and $10.1
million as of January 3, 1998 and October 3, 1998, respectively. See "Business--
Consumer Credit Arrangements."

------------------------

All future transactions, including any loans from the Company to its
officers, directors, principal shareholders or affiliates, will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.

57
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth information known to the Company with respect
to beneficial ownership of the Common Stock as of October 3, 1998 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, for
(i) each person who is known by the Company to own beneficially more than 5% of
the Common Stock, (ii) each of the Named Executive Officers, (iii) each of the
Company's directors, (iv) all directors and executive officers as a group, and
(v) each Selling Shareholder.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(1)
------------------------- NUMBER OF SHARES -------------------------
NAME NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------------------------------------ ------------ ----------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
St. Paul Venture Capital, Inc.(2)............... 5,223,022 34.1% -- 5,223,022 28.8%
Consumer Venture Partners(3).................... 2,237,113 14.7 -- 2,237,113 12.4
Apex Investment Fund, L.P. and The Productivity
Fund II, L.P.(4).............................. 1,329,344 8.7 229,769 1,099,575 6.1
General Electric Capital Corporation(5)......... 1,309,583 7.9 102,598 1,206,985 6.2
Norwest Venture Capital(6)...................... 1,061,616 6.9 111,334 950,282 5.2
Cherry Tree Ventures IV Limited
Partnership(7)................................ 828,690 5.4 116,468 712,222 3.9
H. Robert Hawthorne(8).......................... 179,777 1.2 -- 179,777 *
Mark L. de Naray(9)............................. 552,000 3.6 140,545 411,455 2.3
Daniel J. McAthie(10)........................... 146,545 * -- 146,545 *
Charles E. Dorsey(11)........................... 110,420 * 7,160 103,260 *
John D. Watson(12).............................. 51,522 * -- 51,522 *
Gregory T. Kliner(13)........................... 79,038 * 8,138 70,900 *
Ervin R. Shames(14)............................. 197,228 1.3 -- 197,228 1.1
Thomas J. Albani................................ 37,595 * -- 37,595 *
Patrick A. Hopf(15)............................. 5,232,341 34.2 -- 5,232,341 28.9
Christopher P. Kirchen(16)...................... 2,237,113 14.7 -- 2,237,113 12.4
David T. Kollat(17)............................. 37,595 * -- 37,595 *
Kenneth A. Macke(18)............................ 89,334 * -- 89,334 *
Jean-Michel Valette(19)......................... 206,989 1.4 -- 206,989 1.1
All directors and executive officers as a group
(12 persons)(20).............................. 8,622,586 54.5% 15,298 8,607,288 46.2%

Other Selling Shareholders:

Alex. Brown & Sons Employees
Venture Fund LP(21)........................... 27,809 * 5,281 22,528 *
Theodore H. Ashford(22)......................... 68,506 * 12,359 56,147 *
Robert D. Auritt................................ 37,500 * 3,952 33,548 *
Bayview Investors, Ltd.(23)..................... 27,809 * 3,513 24,296 *
Richard M. Downs(24)............................ 20,666 * 2,037 18,629 *
James D. Gaboury(25)............................ 19,760 * 705 19,055 *
Doug Hickman(26)................................ 3,267 * 544 2,723 *
Brent T. Hutton(27)............................. 86,311 * 2,078 84,233 *
Karen Jones(28)................................. 25,627 * 3,512 22,115 *
Terral Jordan(29)............................... 3,267 * 412 2,855 *
KCB BV, L.P..................................... 750,843 4.9 158,291 592,552 3.3
Douglas Keefer.................................. 15,000 * 125 14,875 *
Erwin A. Kelen(30).............................. 13,209 * 1,000 12,209 *
Richard Knase................................... 9,500 * 1,052 8,448 *
</TABLE>

58
<PAGE>

- ------------------------

* Less than one percent.

(1) Except as otherwise indicated, the persons named in the table, based on
information provided by such persons, have sole voting and sole investment
power with respect to all shares of Common Stock shown as beneficially owned
by them. Shares of Common Stock subject to options or warrants currently
exercisable or exercisable within 60 days of October 3, 1998 are deemed
outstanding for computing the percentage of the person or group holding such
options or warrants but are not deemed outstanding for computing the
percentage of any other person.

(2) Includes 4,837,007 shares held by St. Paul Fire and Marine Insurance
Company, 318,017 shares held by St. Paul Venture Capital IV, L.L.C. and 275
shares held by St. Paul Venture Capital Affiliates Fund I, L.L.C. Includes
59,769 shares issuable upon exercise of outstanding warrants held by St.
Paul Fire and Marine Insurance Company and 7,954 shares issuable upon
exercise of outstanding warrants held by St. Paul Venture Capital IV, L.L.C.
St. Paul Venture Capital, Inc. is an affiliate of St. Paul Fire and Marine
Insurance Company and the manager of St. Paul Venture Capital IV, L.L.C. and
St. Paul Venture Capital Affiliates Fund I, L.L.C. Patrick A. Hopf, a
director of the Company, is the Vice President of St. Paul Fire and Marine
Insurance Company, the President of St. Paul Venture Capital, Inc. and the
Managing General Partner of St. Paul Venture Capital IV, L.L.C. Does not
include shares held of record by Mr. Hopf. See note (15) below. The address
of St. Paul Venture Capital, Inc. is 8500 Normandale Lake Boulevard, Suite
1940, Bloomington, Minnesota 55437.

(3) Includes 274,312 shares held by Consumer Venture Partners I, L.P. and
1,962,801 shares held by Consumer Venture Partners II, L.P. Christopher P.
Kirchen, a director of the Company, is the general partner of Consumer
Venture Associates L.P., which is the general partner of Consumer Venture
Partners I, L.P. Mr. Kirchen is also the general partner of Consumer Venture
Associates II, L.P., which is the general partner of Consumer Venture
Partners II, L.P. Does not include any shares held of record by Mr. Kirchen.
See note (15) below. The address of Consumer Venture Partners is Three
Pickwick Plaza, Greenwich, Connecticut 06830.

(4) Includes 918,609 shares held of record by Apex Investment Fund, L.P.
("Apex") and 394,698 shares held of record by The Productivity Fund II, L.P.
("TPF"). Also includes 11,102 and 4,935 shares issuable upon exercise of
outstanding warrants held by Apex and TPF, respectively. Apex intends to
sell 160,734 shares in the offering and will beneficially own 768,977 shares
after the offering. TPF intends to sell 69,035 shares in the offering and
will beneficially own 330,598 shares after the offering. First Analysis
Corporation is a general partner of each of the general partners of Apex and
TPF and may be deemed to be the beneficial owner of shares held by Apex and
TPF. First Analysis Corporation disclaims beneficial ownership of such
shares, except to the extent of its pecuniary interest therein. James A.
Johnson, George M. Middlemas and Paul J. Renze, by virtue of their
affiliation with Apex, may be deemed to be the beneficial owner of shares
held by Apex; however, they disclaim beneficial ownership of such shares,
except to the extent of their individual pecuniary interest therein. Bret R.

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<PAGE>
Maxwell, by virtue of his affiliation with TPF, may be deemed to be the
beneficial owner of shares held
by TPF; however, he disclaims beneficial ownership of such shares, except to
the extent of his pecuniary interest therein. The address of Apex and TPF is
233 South Wacker Drive, Suite 9500, Chicago, Illinois 60606.

(5) Includes 1,309,583 shares issuable upon exercise of outstanding warrants.
The address of General Electric Capital Corporation is 260 Long Ridge Road,
Stamford, Connecticut 06927.

(6) Includes 697,053 shares held by Norwest Equity Partners IV and 306,130
shares held by Norwest Equity Partners V. Also includes 58,433 shares
issuable upon exercise of outstanding warrants held by Norwest Equity
Partners V. Norwest Equity Partners IV intends to sell 70,272 shares in the
offering and will beneficially own 626,781 shares after the offering.
Norwest Equity Partners V intends to sell 41,062 shares in the offering and
will beneficially own 323,501 shares after the offering. Itasca Partners is
the general partner of Norwest Equity Partners IV and may be deemed to be
the beneficial owner of shares held by Norwest Equity Partners IV. Itasca
Partners V is the general partner of Norwest Equity Partners V and may be
deemed to be the beneficial owner of shares held by Norwest Equity Partners
V. John E. Lindahl and George J. Still, Jr. are each managing general
partners of, and John P. Whaley is the managing administrative partner of,
Itasca Partners and Itasca Partners V, respectively. By virtue of their
affiliation with Norwest Equity Partners IV and Norwest Equity Partners V
resulting from their positions with Itasca Partners and Itasca Partners V,
each may be deemed to be the beneficial owner of shares held by Norwest
Equity Partners IV and Norwest Equity Partners V; however they disclaim
beneficial ownership of such shares, except to the extent of their pecuniary
interest therein. The address of Norwest Venture Capital and the other named
individuals is 2800 Piper Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402.

(7) The address of Cherry Tree Ventures IV Limited Partnership is 1400 Northland
Plaza, 3800 West 80th Street, Minneapolis, Minnesota 55431.

(8) Includes 67,777 shares issuable upon exercise of outstanding options. Also
includes 12,000 shares held by Mr. Hawthorne's children, as to which Mr.
Hawthorne disclaims any beneficial interest.

(9) Includes 37,000 shares held by Mr. de Naray's spouse and children, as to
which Mr. de Naray disclaims any beneficial ownership. Mr. de Naray is a
former director and executive officer of the Company.

(10) Includes 60,542 shares issuable upon exercise of outstanding options and
4,000 shares issuable upon exercise of outstanding warrants. Also includes
29,097 shares held by Mr. McAthie's spouse, as to which Mr. McAthie shares
voting and investment power.

(11) Includes 4,664 shares issuable upon exercise of outstanding options. Also
includes 99,156 shares jointly held by Mr. Dorsey and his spouse, and an
aggregate of 5,000 held by Mr. Dorsey's children, as to which Mr. Dorsey
shares voting and investment power. Mr. Dorsey is currently an executive
officer of the Company.

(12) Includes 2,222 shares held by Mr. Watson's wife, as to which Mr. Watson
shares voting and investment power.

(13) Includes 79,038 shares issuable upon exercise of outstanding options. Mr.
Kliner is currently an executive officer of the Company.

(14) Includes 78,228 shares issuable upon exercise of outstanding options held
by Mr. Shames and 100,000 shares issuable upon exercise of outstanding
options held by Louise G. Shames, Trustee of the Ervin R. Shames Estate
Reduction Family Trust U/A dated October 30, 1997.

(15) Includes 190 shares issuable upon exercise of outstanding warrants. Also
includes an aggregate of 1,129 shares held by Mr. Hopf's spouse and
children. Also include shares beneficially owned by St. Paul Fire and Marine
Insurance Company, St. Paul Venture Capital Affiliates Fund I, LLC and

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St. Paul Venture Capital IV, L.L.C. Mr. Hopf has the same business address
as St. Paul Venture Capital. See note (2) above.

(16) Includes shares beneficially owned by Consumer Venture Partners I, L.P. and
Consumer Venture Partners II, L.P., as to which Mr. Kirchen shares voting
and investment power. Mr. Kirchen has the same business address as Consumer
Venture Partners. See note (3) above.

(17) Includes 37,500 shares issuable upon exercise of outstanding options.

(18) Includes 12,500 shares issuable upon exercise of outstanding options. Also
includes 74,111 shares held by Macke Limited Partnership and 2,723 shares
issuable upon exercise of outstanding warrants held by Macke Limited
Partnership, of which Mr. Macke is the general partner.

(19) Includes 200,396 shares held by H&Q Select Comfort Investors, L.P., a
related party to Hambrecht & Quist LLC. Also includes 5,940 shares issuable
upon exercise of outstanding warrants held by H&Q Select Comfort Investors,
L.P. Mr. Valette by virtue of his affiliation with H&Q Select Comfort
Investors, L.P. may be deemed to be the beneficial owner of such shares;
however, he disclaims beneficial ownership of such shares, except to the
extent of his pecuniary interest therein.

(20) Includes an aggregate of 589,436 shares issuable upon exercise of
outstanding options and warrants held by officers, directors and their
affiliates. Also includes all shares beneficially owned by St. Paul Venture
Capital, Inc. and Consumer Venture Partners. See notes (2) and (3) above.

(21) Includes 4,000 shares issuable upon the exercise of outstanding warrants.

(22) Includes 470 shares issuable upon the exercise of outstanding warrants.

(23) Includes 4,000 shares issuable upon the exercise of outstanding warrants.

(24) Includes 20,666 shares issuable upon the exercise of outstanding options.
Mr. Downs is currently an employee of the Company.

(25) Includes 10,693 shares issuable upon the exercise of outstanding options.
Mr. Gaboury is currently an employee of the Company.

(26) Includes 470 shares issuable upon the exercise of outstanding warrants.

(27) Mr. Hutton is a former executive officer of the Company.

(28) Includes 4,179 shares issuable upon the exercise of outstanding options.
Ms. Jones is currently an employee of the Company.

(29) Includes 470 shares issuable upon the exercise of outstanding warrants.

(30) Includes 1,900 shares issuable upon the exercise of outstanding warrants.

(31) Includes 297,627 shares held of record by Marquette Venture Partners II,
L.P. ("MVP") and 8,503 shares held of record by MVP II Affiliates Fund, L.P.
("MVP Affiliates"). Also includes 50,306 and 1,437 shares issuable upon
exercise of outstanding warrants held by MVP and MVP Affiliates,
respectively. MVP intends to sell 59,731 shares in the offering and will
beneficially own 288,202 shares after the offering. MVP Affiliates intends
to sell 1,686 shares in the offering and will beneficially own 8,254 shares
after the offering.

(32) Includes 8,954 shares issuable upon the exercise of outstanding options.
Ms. Puerzer is currently an employee of the Company.

(33) Includes 12,500 shares issuable upon the exercise of outstanding options.
Also includes 10,000 shares held by Sculley Brothers LLC and 2,000 shares
held by Sculley Investment Ltd. Partnership. Mr. Sculley is a former
director of the Company.

(34) Includes 470 shares issuable upon the exercise of outstanding warrants.

(35) Includes 218,750 shares held by Mr. Walker's spouse.

(36) Includes 41,814 shares held by Mr. Walker's IRA.

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DESCRIPTION OF CAPITAL STOCK

Assuming the conversion of all outstanding shares of preferred stock into
Common Stock and the filing of the Articles upon completion of this offering,
the authorized capital stock of the Company will consist of 95,000,000 shares of
Common Stock and 5,000,000 shares of Undesignated Preferred Stock. The following
summary of the terms and provisions of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
Company's Articles and applicable law.

COMMON STOCK

As of October 3, 1998, there were 15,245,094 shares of Common Stock issued
and outstanding, held of record by 180 shareholders. The holders of Common Stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of shareholders, and are not entitled to cumulate votes. Subject to
preferences that may be applicable to any outstanding shares of Undesignated
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Upon liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets that are
legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of the outstanding
shares of Undesignated Preferred Stock. The holders of Common Stock have no
preemptive, subscription, redemption, sinking fund or conversion rights. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and nonassessable.

UNDESIGNATED PREFERRED STOCK

As of the date of this Prospectus, no shares of Undesignated Preferred Stock
were issued and outstanding. Under Minnesota law, no action by the Company's
shareholders is necessary, and only action by the Board of Directors is
required, to authorize the issuance of any of the shares of Undesignated
Preferred Stock. Subject to certain limitations, the Board of Directors is
empowered to establish, and to designate the name of each class or series of the
shares of Undesignated Preferred Stock and to set the terms of such shares
(including terms with respect to redemption, sinking fund, dividend,
liquidation, preemptive conversion and voting rights and preferences). The Board
of Directors can issue shares of such class or series to, among other
individuals, the holders of another class or series of Undesignated Preferred
Stock or to the holders of the Common Stock. Accordingly, the Board of
Directors, without shareholder approval, could issue Undesignated Preferred
Stock with dividend, voting and conversion rights which could adversely affect
the rights of the holders of Common Stock. The Undesignated Preferred Stock may
have the effect of discouraging an attempt, through acquisition of a substantial
number of shares of the Common Stock, to acquire control of the Company with a
view to effecting a merger, sale or exchange of assets or a similar transaction.
The Company has no present plans to issue Undesignated Preferred Stock.

OPTIONS AND WARRANTS

As of October 3, 1998, the Company had outstanding options to purchase an
aggregate of 1,660,527 shares of Common Stock at a weighted average exercise
price of $6.38 per share and warrants to purchase an aggregate of 1,586,951
shares of Common Stock at a weighted average exercise price of $8.28 per share.
All outstanding options and warrants provide for antidilution adjustments in the
event of certain mergers, consolidations, reorganizations, recapitalizations,
stock dividends, stock splits or other changes in the
corporate structure of the Company. Certain of the outstanding warrants provide
for antidilution adjustments if the Company sells any shares of capital stock or
securities exercisable for or convertible into shares of capital stock for less
than $5.25 per share. Holders of the outstanding warrants have certain demand
and incidental registration rights with respect to the shares issuable upon
exercise of the warrants. See "--Registration Rights."

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REGISTRATION RIGHTS

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

The holders of 12,255,209 shares of Common Stock and warrants to purchase an
aggregate of 1,552,536 shares of Common Stock (the "Registrable Securities") or
their transferees are entitled to certain rights with respect to the
registration of such shares under the Securities Act pursuant to the terms of
the Amended and Restated Registration Rights Agreement, dated as of December 28,
1995, as amended (the "Registration Rights Agreement"), among the Company and
the holders of Registrable Securities. If at any time the holders of specified
amounts of Registrable Securities request that the Company file a registration
statement covering the Registrable Securities, the Company will use its best
efforts to cause such securities to be registered. The Company is not required
to file more than two registration statements, other than on Form S-2 or Form
S-3, pursuant to such demand rights, or more than one registration statement,
other than on Form S-2 or Form S-3, in any twelve-month period. The holders of
specified amounts of Registrable Securities also have the right to require the
Company to file a registration statement on Form S-2 or Form S-3 an unlimited
number of times, provided that the Company is not required to register any
Registrable Securities which are freely transferable under the provisions of
Rule 144(k) under the Securities Act. In addition, the holders of Registrable
Securities are entitled to have Registrable Securities included in a
registration statement filed on behalf of the Company provided that the Company
is not required to include any Registrable Securities which are freely
transferable under the provisions of Rule 144(k) under the Securities Act. In
any underwritten public offering, the foregoing registration rights are limited
to the extent that the managing underwriter has the right (i) to limit the
number of Registrable Securities to be included in the registration statement,
(ii) to prohibit the sale of any securities of the Company other than those
registered and included in the underwritten offering for a period of 180 days,
and (iii) to require holders of Registrable Securities not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any securities of the Company (other than the securities included in the
registration) without the prior written consent of such underwriters for a
period up to 180 days from the effective date of such registration. The Company
will bear the expenses of registration of any of the Registrable Securities,
except for any underwritten discounts and commissions which will be borne by the
participating shareholders in proportion to the number of shares sold and except
for any expenses incurred in connection with a registration statement on Form
S-2 or Form S-3 filed at the request of holders of Registrable Securities the
minimum offering of which is less than $1.0 million. The registration rights
granted under the Registration Rights Agreement terminate as to any Registrable
Securities when such Registrable Securities have been effectively registered and
sold by the holder thereof or when such Registrable Securities have been sold
pursuant to Rule 144 under the Securities Act. The foregoing registration rights
have been waived with respect to this offering.

GENERAL ELECTRIC WARRANT

General Electric Capital Corporation ("GECC") possesses certain rights to
register of up to 1,309,583 shares of Common Stock (the "GE Registrable
Securities") issuable upon exercise of a warrant granted in connection with the
Company's March 1997 debt financing. Commencing six months following the
consummation of this offering (assuming this offering constitutes a Qualified
IPO, as defined below), holders of an aggregate of 30% or more of the GE
Registrable Securities or holders of GE Registrable Securities having a minimum
anticipated aggregate offering price of at least $5.0 million, may request that
the Company register the GE Registrable Securities under the Securities Act,
subject to the limitations below. A "Qualified IPO" means a sale of the
Company's Common Stock pursuant to an initial public offering registered under
the Securities Act which yields net proceeds to the Company (after underwriting
discounts and commissions) of at least $20.0 million and which results in a
post-offering valuation of the Company's total equity of at least $200.0 million
based on the per share offering price and the number of issued and outstanding
shares of the Company's Common Stock. The Company is not required to file more
than two registration statements pursuant to such demand rights unless the
Company is eligible to file a

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registration statement on Form S-3 in which event such holders are entitled to
an unlimited number of such registrations. In addition, the holders of GE
Registrable Securities are entitled to have GE Registrable Securities included
in a registration statement filed on behalf of the Company (other than a
registration statement on Form S-4 and Form S-8); provided, that the Company is
not required to include any GE Registrable Securities which are transferable
without registration under the Securities Act. The Company is not required to
register GE Registrable Securities pursuant to a holder's demand right, if the
Company has had a registration statement under which such holder had a right to
have its GE Registrable Securities included pursuant to its demand and
incidental rights declared effective within one year prior to the date of the
request pursuant to its demand rights; provided, however, that if any holder
elected to have GE Registrable Securities included under such registration
statement but some or all of such securities were excluded pursuant to
underwriter's advice, then such one-year period is reduced to six months. The
Company will bear the expenses of registration of any of the GE Registrable
Securities, except for any fees, discounts or commissions to any underwriter or
any fees or disbursements of counsel for any underwriter and all expenses
incurred in connection with any amendment or supplement to the registration
statement or prospectus filed more than 180 days after the effective date of
such registration statement because any holder of GE Registrable Securities has
not sold such GE Registrable Securities requested to be registered. Such
registration rights terminate when such GE Registrable Securities have been
effectively registered under the Securities Act and sold or when the Company has
received an opinion of counsel that such shares may be transferred without
registration under the Securities Act.

PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECT

The Company is subject to the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act. These anti-takeover provisions may
eventually operate to deny shareholders the receipt of a premium on their Common
Stock and may also have a depressive effect on the market price of the Company's
Common Stock. In general, Section 302A.671 provides that the shares of a
corporation acquired in a "control share acquisition" have no voting rights
unless voting rights are approved by the shareholders in a prescribed manner. A
"control share acquisition" is defined as an acquisition of beneficial ownership
of shares that would, when added to all other shares beneficially owned by the
acquiring person, entitle the acquiring person to have voting power of 20% or
more in the election of directors. Section 302A.673 prohibits a public
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions. An "interested
shareholder" is a person who is the beneficial owner, of 10% or more of the
corporation's voting stock. Reference is made to the detailed terms of Sections
302A.671 and 302A.673 of the Minnesota Business Corporation Act.

The Company's Articles provide for a classified Board of Directors serving
staggered terms of three years. In addition, shareholders are not entitled to
cumulative voting in the election of directors and may not remove a director
without cause. The Articles also require the approval of two-thirds of the
outstanding voting power of the Company entitled to vote in the event of any
sale or merger of the Company. The authorization of Undesignated Preferred Stock
makes it possible for the Board of Directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of the Company. The foregoing provisions of the
Company's Articles and the Minnesota Business Corporation Act may have the
effect of deterring hostile takeovers or delaying changes in control of
management of the Company.

LIMITATION ON LIABILITY OF DIRECTORS AND INDEMNIFICATION

The Company's Articles limit the liability of its directors to the fullest
extent permitted by the Minnesota Business Corporation Act. Specifically,
directors of the Company will not be personally liable

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for monetary damages for breach of fiduciary duty as directors, except liability
for (i) any breach of the duty of loyalty to the Company or its shareholders,
(ii) acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) dividends or other distributions of
corporate assets that are in contravention of certain statutory or contractual
restrictions, (iv) violations of certain Minnesota securities laws, or (v) any
transaction from which the director derives an improper personal benefit.
Liability under federal securities law is not limited by the Restated Articles.

The Company also maintains a directors and officers insurance policy
pursuant to which directors and officers of the Company are insured against
liability for certain actions in their capacity as directors and officers.

The Minnesota Business Corporation Act requires that the Company indemnify
any director, officer or employee made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity of the person,
against judgments, penalties, fines, settlements and reasonable expenses
incurred in connection with the proceeding if certain statutory standards are
met. "Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including a derivative
action in the name of the Company. Reference is made to the detailed terms of
the Minnesota indemnification statute, Section 302A.521 of the Minnesota
Business Corporation Act, for a complete statement of such indemnification
rights. The Company's Articles also require the Company to provide
indemnification to the fullest extent of the Minnesota indemnification statute.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company is aware that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Norwest Bank
Minnesota, N.A.

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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon the consummation of this offering, the Company will have 18,045,094
shares of Common Stock outstanding, assuming no exercise of options or warrants
after October 3, 1998. Of these shares, the 4,000,000 shares sold in this
offering will be freely tradable without restriction under the Securities Act,
unless purchased by an "affiliate" of the Company, as that term is defined in
Rule 144 under the Securities Act. The remaining 14,045,094 shares of Common
Stock held by existing shareholders are "restricted securities" as defined in
Rule 144 and may be sold in the public market only if registered, or pursuant to
an exemption from registration such as Rule 144, 144(k) or 701 under the
Securities Act. Holders of an aggregate of 12,215,075 shares of Common Stock,
have entered into lock-up agreements under which they have agreed that they will
not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of, any shares of Common Stock, options or warrants to acquire
shares of Common Stock or securities exchangeable for or convertible into shares
of Common Stock owned by them during the 180-day period following the date of
this Prospectus. Hambrecht & Quist LLC may, in its sole discretion at any time
without notice, release any portion of the shares subject to the lock-up
agreements during the 180-day period. Upon expiration of these agreements,
12,120,553 shares of Common Stock will be eligible for immediate resale in the
public market subject to the limitations of Rule 144. Of such shares,
approximately 4,067,374 will be eligible for resale in the public market
pursuant to Rule 144(k) without regard to the volume and manner of sale
limitations in Rule 144. Of the 1,830,019 shares not subject to lock-up
agreements, 1,552,582 shares will be eligible for immediate resale in the public
market pursuant to Rule 144(k) and the remainder will be eligible for resale in
the public market subject to the limitations of Rule 144.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least one year, within any three-month period commencing 90 days
after the date of this Prospectus, may sell a number of shares that does not
exceed the greater of (i) one percent of the number of shares of Common Stock
then outstanding (approximately 180,450 shares immediately after this offering)
or (ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701 under the Securities
Act, persons who purchase shares upon exercise of options granted prior to the
effective date of this offering are entitled to sell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144.

As of October 3, 1998, options to purchase 1,660,527 shares of Common Stock
were outstanding under the Company's option plans. The Company expects to grant
options to purchase an aggregate of up to 125,000 shares of Common Stock in
connection with this offering. Options covering an aggregate of 475,500 shares
are subject to the lock-up agreements described above. Approximately 30 days
after the completion of this offering, the Company intends to file Registration
Statements on Form S-8 covering shares issuable under the Company's 1990 Omnibus
Stock Option Plan and 1997 Stock Incentive Plan (including shares subject to
then outstanding options), thus permitting the resale of such shares in the
public market without restrictions under the Securities Act after expiration of
the applicable lock-up agreements. In addition, as of October 3, 1998, warrants
to purchase 1,586,951 shares of Common Stock were outstanding.

A total of 11,577,652 of the shares outstanding immediately following the
completion of this offering and the holders of warrants to purchase 1,408,876
shares of Common Stock will be entitled to registration

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rights with respect to such shares. The number of shares sold in the public
market could increase if such rights are exercisable.

Because there has been no public market for shares of the Company's Common
Stock, the Company is unable to predict the effect that sales made under Rule
144, pursuant to future registration statements, or otherwise, may have on any
then prevailing market price for shares of the Common Stock. Nevertheless, sales
of a substantial amount of Common Stock in the public market, or the perception
that such sales could occur, could adversely affect market prices.

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UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
BancBoston Robertson Stephens Inc. and Piper Jaffray Inc. have severally agreed
to purchase from the Company and the Selling Shareholders the following
respective number of shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Hambrecht & Quist LLC.............................................................
BancBoston Robertson Stephens Inc.................................................
Piper Jaffray Inc.................................................................

-----------
Total.........................................................................
-----------
-----------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and independent
auditors. The nature of the Underwriters' obligation is such that they are
committed to purchase all shares of Common Stock offered hereby if any of such
shares are purchased.

The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives of the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend to
confirm discretionary sales in excess of 5% of the Common Stock offered hereby.

The Selling Shareholders have granted to the Underwriters an option,
exercisable no later than 30 days after the date of this Prospectus, to purchase
up to 600,000 additional shares of Common Stock at the initial public offering
price, less the underwriting discount, set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise this option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased by
it shown in the above table bears to the total number of shares of Common Stock
offered hereby. The Selling Shareholders will be obligated, pursuant to the
option, to sell shares to the Underwriters to the extent the option is
exercised. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of shares of Common Stock
offered hereby.

The offering of the shares are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions.

The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.

The Selling Shareholders and certain other shareholders of the Company,
including the executive officers and directors, who will own in the aggregate
12,215,075 shares of Common Stock after the offering, have agreed that they will
not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of

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Common Stock or securities exchangeable for or convertible into shares of Common
Stock owned by them during the 180-day period following the date of this
Prospectus. The Company has agreed that it will not, without the prior written
consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares
of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock during
the 180-day period following the date of this Prospectus, except that the
Company may issue shares upon the exercise of options and warrants granted prior
to the date hereof, and may grant additional options under its stock option
plans, subject to the 180-day period described above.

Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation among the Company, the Selling Shareholders and the Representatives.
Among the factors to be considered in determining the initial public offering
price are prevailing market and economic conditions, revenues and earnings of
the Company, market valuations of other companies engaged in activities similar
to the Company's business operations, the Company's management and other factors
deemed relevant. The estimated initial public offering price range set forth on
the cover of this preliminary prospectus is subject to change as a result of
market conditions and other factors.

Certain persons participating in the offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discounted at any time.

H&Q Select Comfort Investors, L.P. and H&Q London Ventures, related parties
to Hambrecht & Quist LLC, one of the Representatives, own in the aggregate
400,792 shares of the Company's Common Stock and warrants to purchase an
aggregate of 11,880 shares of the Company's Company's Common Stock.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Oppenheimer Wolff & Donnelly LLP, Minneapolis, Minnesota. Mark A.
Kimball, a partner in the law firm of Oppenheimer Wolff & Donnelly LLP,
beneficially owns 1,000 shares of Common Stock. Orrick, Herrington & Sutcliffe
LLP, San Francisco, California will pass upon certain legal matters for the
Underwriters.

EXPERTS

The consolidated financial statements of Select Comfort Corporation as of
December 28, 1996, January 3, 1998 and October 3, 1998, and for each of the
years in the three-year period ended January 3, 1998, and for the nine-month
period ended October 3, 1998 have been included herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.

Certain information concerning the fair market value of a put warrant held
by GECC has been prepared and included in the consolidated financial statements
of the Company set forth herein in reliance upon the reports of Houlihan
Valuation Advisors and upon the authority of said firm as experts in valuation
matters.

69
<PAGE>
ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement and the
exhibits and schedules thereto may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington D.C. 20549, and at the Commission's regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements, and other information that has been
or will be filed by the Company.

The Company intends to furnish holders of the Common Stock with annual
reports containing audited financial statements certified by independent
auditors, and quarterly reports for each of the first three quarters of each
year containing unaudited financial information.

70
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Pro Forma Consolidated Financial Statements................................................................ F-2

Pro Forma Consolidated Statement of Operations for the year ended January 3, 1998 (unaudited)............ F-2

Pro Forma Consolidated Statements of Operations for the nine months ended September 27, 1997 and October
3, 1998 (unaudited).................................................................................... F-3

Pro Forma Consolidated Balance Sheet as of October 3, 1998 (unaudited)................................... F-4

Consolidated Financial Statements.......................................................................... F-5

Report of Independent Auditors........................................................................... F-5

Consolidated Balance Sheets as of December 28, 1996 and January 3, 1998 and October 3, 1998.............. F-6

Consolidated Statements of Operations for the years ended December 30, 1995, December 28, 1996 and
January 3, 1998 and the nine months ended September 27, 1997 (unaudited) and October 3, 1998........... F-7

Consolidated Statements of Shareholders' Deficit for the years ended December 30, 1995, December 28, 1996
and January 3, 1998 and the nine months ended October 3, 1998.......................................... F-8

Consolidated Statements of Cash Flows for the years ended December 30, 1995, December 28, 1996 and
January 3, 1998 and the nine months ended September 27, 1997 (unaudited) and October 3, 1998........... F-9

Notes to Consolidated Financial Statements............................................................... F-10
</TABLE>

F-1
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The pro forma consolidated statements of operations data set forth below for
the year ended January 3, 1998 and for the nine months ended September 27, 1997
and October 3, 1998 give effect to the offering as if it had occurred on
December 29, 1996. The pro forma adjustments are based upon currently available
information and certain assumptions that management of the Company believes are
reasonable under the circumstances.

SELECT COMFORT CORPORATION AND SUBSIDIARIES

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED JANUARY 3, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
JANUARY 3, 1998
-----------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
Net sales.................................................................. $ 184,430 $ -- $ 184,430
Cost of sales.............................................................. 66,629 -- 66,629
---------- ----------- ----------
Gross margin........................................................... 117,801 -- 117,801
---------- ----------- ----------
Operating expenses:
Sales and marketing...................................................... 99,218 -- 99,218
General and administrative............................................... 16,505 -- 16,505
---------- ----------- ----------
Total operating expenses............................................... 115,723 -- 115,723
---------- ----------- ----------
Operating income........................................................... 2,078 -- 2,078
---------- ----------- ----------
Other income (expense):
Interest income.......................................................... 682 -- 682
Interest expense......................................................... (5,234) 3,250(1) (346)
1,638(2)
Other, net............................................................... (231) -- (231)
---------- ----------- ----------
Other income (expense), net............................................ (4,783) 4,888 105
---------- ----------- ----------
Income (loss) before income taxes.......................................... (2,705) 4,888 2,183
Income tax expense......................................................... 141 459(2) 600
---------- ----------- ----------
Net income (loss).......................................................... $ (2,846) $ 4,429 $ 1,583
---------- ----------- ----------
Cumulative preferred dividends............................................. (900) 900(3) --
---------- ----------- ----------
Net income (loss) available to common shareholders......................... $ (3,746) $ 5,329 $ 1,583
---------- ----------- ----------
---------- ----------- ----------
Net income (loss) per common share, diluted................................ $ (1.48) $ 0.09
---------- ----------
---------- ----------
Weighted average common shares, diluted.................................... 2,532 15,754(4) 18,288
</TABLE>

- ------------------------

(1) Includes a pro forma adjustment for the elimination of non-cash interest
expense associated with a put warrant, the put feature of which will be
terminated upon the consummation of this offering.

(2) Includes a pro forma adjustment for the elimination of interest expense
associated with the repayment of $15.0 million of the Company's outstanding
indebtedness from the proceeds of this offering and related tax effects.

(3) Gives effect to the elimination of cumulative preferred dividends as a
result of the conversion of outstanding shares of preferred stock into
Common Stock upon the consummation of this offering.

F-2
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SEPTEMBER 27, 1997 OCTOBER 3, 1998
----------------------------------- -----------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................. $ 126,470 $ -- $ 126,470 $ 178,835 $ -- $ 178,835
Cost of sales......................... 44,886 -- 44,886 62,290 -- 62,290
---------- ---------- ---------- ----------- ----------
Gross margin........................ 81,584 -- 81,584 116,545 -- 116,545
---------- ---------- ---------- ----------- ----------

Operating expenses:
Sales and marketing................. 69,476 -- 69,476 95,231 -- 95,231
General and administrative.......... 11,593 -- 11,593 13,932 -- 13,932
---------- ---------- ---------- ----------- ----------
Total operating expenses.......... 81,069 -- 81,069 109,163 -- 109,163
---------- ---------- ---------- ----------- ----------
Operating income...................... 515 -- 515 7,382 -- 7,382
---------- ---------- ---------- ----------- ----------
Other income (expense):
Interest income..................... 484 -- 484 548 548
Interest expense.................... (3,251) 1,900(1) (259) (6,995) 5,222(1) (135)
1,092(2) 1,638(2)
Other, net.......................... (256) -- (256) -- -- --
---------- ---------- ---------- ----------- ----------
Other income (expense), net....... (3,023) 2,992 (31) (6,447) 6,860 413
---------- ---------- ---------- ----------- ----------
Income (loss) before income taxes..... (2,508) 2,992 484 935 6,860 7,795
Income tax expense.................... 16 306(2) 322 1,348 459(2) 1,807
---------- ---------- ---------- ----------- ----------
Net income (loss)..................... $ (2,524) $ 2,686 $ 162 $ (413) $ 6,401 $ 5,988
Cumulative preferred dividends........ (675) 675(3) -- (675) 675(3) --
---------- ----------- ---------- ---------- ----------- ----------
Net income (loss) available to common
shareholders........................ $ (3,199) $ 3,361 $ 162 $ (1,088) $ 7,076 $ 5,988
---------- ----------- ---------- ---------- ----------- ----------
---------- ----------- ---------- ---------- ----------- ----------
Net income (loss) per common share,
diluted............................. $ (1.29) $ 0.01 $ (0.37) $ 0.31
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares,
diluted............................. 2,488 16,325(4) 18,813 2,924 16,707(4) 19,632
---------- ----------- ---------- ---------- ----------- ----------
</TABLE>

- ------------------------

(1) Includes a pro forma adjustment for the elimination of non-cash interest
expense associated with a put warrant, the put feature of which will be
terminated upon the consummation of this offering.

(3) Gives effect to the elimination of cumulative preferred dividends as a
result of the conversion of outstanding shares of preferred stock into
Common Stock upon the consummation of this offering.

F-3
<PAGE>

The pro forma consolidated balance sheet data set forth below at October 3,
1998 gives effect to the offering as if it had occurred on October 3, 1998. The
pro forma adjustments are based upon currently available information and certain
assumptions that management of the Company believes are reasonable under current
circumstances.

SELECT COMFORT CORPORATION AND SUBSIDIARIES

PRO FORMA CONSOLIDATED BALANCE SHEET

OCTOBER 3, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 9,579 $ 41,097(3) $ 35,676
(15,000)(4)
Accounts receivable, net................................................... 8,977 -- 8,977
Inventories................................................................ 10,315 -- 10,315
Prepaid expenses........................................................... 4,479 (433)(3) 4,046
Deferred tax assets........................................................ 388 -- 388
----------- ----------- -----------
Total current assets................................................... 33,738 25,664 59,402
----------- ----------- -----------
Property and equipment, net.................................................. 28,255 -- 28,255
Other assets................................................................. 1,330 (573)(4) 757
----------- ----------- -----------
Total assets........................................................... $ 63,323 $ 25,091 $ 88,414
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt....................................... $ 1,052 $ -- $ 1,052
Accounts payable........................................................... 12,247 -- 12,247
Accruals:
Sales returns............................................................ 5,620 -- 5,620
Warranty costs........................................................... 3,862 -- 3,862
Compensation, taxes and benefits......................................... 3,049 -- 3,049
Other.................................................................... 4,302 (669)(4) 3,633
----------- ----------- -----------
Total current liabilities.............................................. 30,132 (669) 29,463
Long-term debt, less current maturities...................................... 24,244 (10,892)(1) 167
(13,185)(1)
Other liabilities............................................................ 1,691 -- 1,691
----------- ----------- -----------
Total liabilities...................................................... 56,067 (24,746) 31,321
----------- ----------- -----------
Series A-E mandatorily redeemable preferred stock, $1.00--$1.25 par value;
12,091,962 and no shares issued and outstanding, respectively.............. 12,692 (12,692)(2) --
Additional paid-in capital................................................... 14,920 (14,920)(2) --
----------- ----------- -----------
27,612 (27,612) --
----------- ----------- -----------
Common shareholders' equity (deficit):
Undesignated preferred stock; no shares issued and outstanding............. -- -- --
Common stock, $.01 par value; 2,989,885 and 18,045,094 shares issued and
outstanding, respectively................................................ 30 122(2) 180
28(3)
Additional paid-in capital................................................. 3,328 27,490(2) 82,346
40,636(3)
10,892(1)
Accumulated deficit........................................................ (22,720) (1,719)(4) (24,439)
Notes receivable--investors................................................ (994) -- (994)
----------- ----------- -----------
Total common shareholders' equity (deficit)............................ (20,356) 77,449 57,093
----------- ----------- -----------
Total liabilities and shareholders' equity............................. $ 63,323 $ 25,091 $ 88,414
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

- ------------------------------
(1) As adjusted to give effect to the reclassification of a put warrant from
debt to common shareholders' equity upon the consummation of the offering.

(2) Reflects automatic conversion of preferred stock to common stock upon the
consummation of the offering.

(3) Reflects the net proceeds from the issuance of 2,800,000 shares at an
assumed initial public offering price of $16.00 per share.

(4) Reflects repayment of the Company's March 1997 $15.0 million indebtedness,
the expensing of certain deferred costs associated therewith, and related
tax effects.

F-4
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders

Select Comfort Corporation:

We have audited the accompanying consolidated balance sheets of Select
Comfort Corporation and subsidiaries (the Company) as of December 28, 1996,
January 3, 1998 and October 3, 1998, and the related consolidated statements of
operations, shareholders' deficit, and cash flows for each of the years in the
three-year period ended January 3, 1998 and for the nine months ended October 3,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Select
Comfort Corporation and subsidiaries as of December 28, 1996, January 3, 1998
and October 3, 1998, and the results of their operations and their cash flows
for each of the years in the three-year period ended January 3, 1998 and for the
nine months ended October 3, 1998 in conformity with generally accepted
accounting principles.

Minneapolis, Minnesota
October 23, 1998

F-5
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 28, 1996, JANUARY 3, 1998 AND OCTOBER 3, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
OCTOBER 3,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 2,422 $ 12,670 $ 9,579
Accounts receivable, net of allowance for doubtful accounts of $200, $1,901,
and $2,817, respectively (note 2)......................................... 1,202 6,001 8,977
Inventories (note 3)........................................................ 5,582 7,749 10,315
Prepaid expenses............................................................ 1,689 4,256 4,479
Deferred tax assets......................................................... -- -- 388
---------- ---------- -----------
Total current assets.................................................... 10,895 30,676 33,738
Property and equipment, net (note 4).......................................... 18,316 25,183 28,255
Other assets.................................................................. 583 1,382 1,330
---------- ---------- -----------
Total assets............................................................ $ 29,794 $ 57,241 $ 63,323
---------- ---------- -----------
---------- ---------- -----------

LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable to investors (note 6)......................................... $ 1,252 $ -- $ --
Current maturities of long-term debt (note 7)............................... 563 999 1,052
Accounts payable............................................................ 9,173 12,199 12,247
Accruals:
Sales returns............................................................. 2,795 5,324 5,620
Warranty costs............................................................ 2,036 3,257 3,862
Compensation, taxes and benefits.......................................... 1,723 3,149 3,049
Other..................................................................... 1,162 4,991 4,302
---------- ---------- -----------
Total current liabilities............................................... 18,704 29,919 30,132
Long-term debt, less current maturities (note 7).............................. 1,162 19,511 24,244
Other liabilities............................................................. 532 1,237 1,691
---------- ---------- -----------
Total liabilities....................................................... 20,398 50,667 56,067
---------- ---------- -----------
Series A-E mandatorily redeemable preferred stock, $1.00-$1.25 par value;
12,123,390 shares authorized, 12,091,962 shares issued and outstanding (note
8).......................................................................... 12,692 12,692 12,692
Additional paid-in capital.................................................... 14,920 14,920 14,920
---------- ---------- -----------
27,612 27,612 27,612
---------- ---------- -----------
Common shareholders' deficit (note 9):
Undesignated preferred stock; 5,000,000 shares authorized, no shares issued
and outstanding........................................................... -- -- --
Common stock, $.01 par value; 25,000,000 shares authorized, 1,847,146 and
2,477,660 and 2,989,885 shares issued and outstanding, respectively....... 19 25 30
Additional paid-in capital.................................................. 1,226 1,662 3,328
Accumulated deficit......................................................... (19,461) (22,307) (22,720)
Notes receivable--investors (note 14)....................................... -- (418) (994)
---------- ---------- -----------
Total common shareholders' deficit...................................... (18,216) (21,038) (20,356)
---------- ---------- -----------
Commitments (notes 5, 7 and 15)
Total liabilities and shareholders' deficit............................. $ 29,794 $ 57,241 $ 63,323
---------- ---------- -----------
---------- ---------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996
AND JANUARY 3, 1998 AND NINE MONTHS
ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
SEPTEMBER 27, OCTOBER 3,
1995 1996 1997 1997 1998
--------- ---------- ---------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $ 68,629 $ 102,028 $ 184,430 $ 126,470 $ 178,835
Cost of sales...................................... 28,833 38,521 66,629 44,886 62,290
--------- ---------- ---------- ------------- ----------
Gross margin..................................... 39,796 63,507 117,801 81,584 116,545
--------- ---------- ---------- ------------- ----------
Operating expenses:
Sales and marketing.............................. 34,164 54,814 99,218 69,476 95,231
General and administrative....................... 10,221 12,457 16,505 11,593 13,932
--------- ---------- ---------- ------------- ----------
Total operating expenses..................... 44,385 67,271 115,723 81,069 109,163
--------- ---------- ---------- ------------- ----------
Operating income (loss)............................ (4,589) (3,764) 2,078 515 7,382
--------- ---------- ---------- ------------- ----------
Other income (expense):
Interest income.................................. 136 244 682 484 548
Interest expense (note 7)........................ (34) (88) (5,234) (3,251) (6,995)
Other, net....................................... (73) (77) (231) (256) --
--------- ---------- ---------- ------------- ----------
Other income (expense), net.................. 29 79 (4,783) (3,023) (6,447)
--------- ---------- ---------- ------------- ----------
Income (loss) before income taxes.................. (4,560) (3,685) (2,705) (2,508) 935
Income tax expense (note 10)....................... -- -- 141 16 1,348
--------- ---------- ---------- ------------- ----------
Net loss........................................... $ (4,560) $ (3,685) $ (2,846) $ (2,524) $ (413)
--------- ---------- ---------- ------------- ----------
--------- ---------- ---------- ------------- ----------
Cumulative preferred dividends..................... -- $ (900) $ (900) $ (675) $ (675)
--------- ---------- ---------- ------------- ----------
Net loss available to common shareholders.......... $ (4,560) $ (4,585) $ (3,746) $ (3,199) $ (1,088)
--------- ---------- ---------- ------------- ----------
--------- ---------- ---------- ------------- ----------
Net loss per common share (note 11)
Basic............................................ $ (3.16) $ (2.61) $ (1.59) $ (1.39) $ (0.40)
--------- ---------- ---------- ------------- ----------
--------- ---------- ---------- ------------- ----------
Diluted.......................................... $ (2.81) $ (2.37) $ (1.48) $ (1.29) $ (0.37)
--------- ---------- ---------- ------------- ----------
--------- ---------- ---------- ------------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996,
AND JANUARY 3, 1998
AND NINE MONTHS ENDED OCTOBER 3, 1998
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NOTES
---------------------- PAID-IN ACCUMULATED RECEIVABLE -
SHARES AMOUNT CAPITAL DEFICIT INVESTORS TOTAL
--------- ----------- ----------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994................ 1,348,579 $ 13 $ 611 $ (11,216) $ -- $ (10,592)
Exercise of common stock options.......... 186,153 2 121 -- -- 123
Conversion of subordinated debenture...... 52,076 1 249 -- -- 250
Net loss.................................. -- -- -- (4,560) -- (4,560)
--------- ----------- ----------- ------------ ----- ---------
Balance at December 30, 1995................ 1,586,808 16 981 (15,776) -- (14,779)
Exercise of common stock options.......... 260,338 3 245 -- -- 248
Net loss.................................. -- -- -- (3,685) -- (3,685)
--------- ----------- ----------- ------------ ----- ---------
Balance at December 28, 1996................ 1,847,146 19 1,226 (19,461) -- (18,216)
Exercise of common stock options.......... 630,514 6 436 -- -- 442
Issuance of investor notes................ -- -- -- -- (418) (418)
Net loss.................................. -- -- -- (2,846) -- (2,846)
--------- ----------- ----------- ------------ ----- ---------
Balance at January 3, 1998.................. 2,477,660 25 1,662 (22,307) (418) (21,038)
Exercise of common stock options and
warrants................................ 512,225 5 1,666 -- -- 1,671
Issuance of investor notes ............... -- -- -- -- (576) (576)
Net loss.................................. -- -- -- (413) -- (413)
--------- ----------- ----------- ------------ ----- ---------
Balance at October 3, 1998 ................. 2,989,885 $ 30 $ 3,328 $ (22,720) $ (994) $ (20,356)
--------- ----------- ----------- ------------ ----- ---------
--------- ----------- ----------- ------------ ----- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

F-8
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996,
AND JANUARY 3, 1998
AND NINE MONTHS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
1995 1996 1997 ---------------
--------- --------- --------- SEPTEMBER 27,
1997
---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $ (4,560) $ (3,685) $ (2,846) $ (2,524)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 1,090 2,094 4,030 2,744
Loss on disposal of property and equipment............................. 11 66 264 264
Deferred tax assets.................................................... -- -- -- --
Interest expense from put warrant valuation............................ -- -- 3,250 1,901
Change in operating assets and liabilities:
Accounts receivable, net............................................. (488) (421) (4,799) 60
Inventories.......................................................... (1,177) (500) (2,167) (2,760)
Prepaid expenses..................................................... (171) (781) (2,567) (1,413)
Accounts payable..................................................... 1,961 4,039 3,026 2,493
Accrued sales returns................................................ 1,102 888 2,529 1,766
Accrued warranty costs............................................... 782 646 1,221 1,178
Accrued compensation, taxes and benefits............................. 813 393 1,426 560
Other accrued liabilities............................................ 332 158 3,829 1,087
Other assets......................................................... (154) (91) (565) (507)
Other liabilities.................................................... 55 270 705 642
--------- --------- --------- -------
Net cash provided by (used in) operating activities................ (404) 3,076 7,336 5,491
--------- --------- --------- -------
Cash flows from investing activities:
Purchases of property and equipment.................................... (5,614) (10,122) (10,727) (9,031)
--------- --------- --------- -------
Net cash used in investing activities.............................. (5,614) (10,122) (10,727) (9,031)
--------- --------- --------- -------
Cash flows from financing activities:
Proceeds from issuance of debt........................................... 31 2,850 16,184 16,184
Principal payments on debt............................................... -- (523) (2,203) (1,968)
Debt issuance costs...................................................... -- -- (781) (781)
Proceeds from issuance of common stock................................... 123 292 439 399
Proceeds from issuance of redeemable preferred stock 8,956 (13) -- --
--------- --------- --------- -------
Net cash provided by financing activities.......................... 9,110 2,606 13,639 13,834
--------- --------- --------- -------
Increase (decrease) in cash and cash equivalents................... 3,092 (4,440) 10,248 10,294
Cash and cash equivalents, at beginning of period.......................... 3,770 6,862 2,422 2,422
--------- --------- --------- -------
Cash and cash equivalents, at end of period................................ $ 6,862 $ 2,422 $ 12,670 $ 12,716
--------- --------- --------- -------
--------- --------- --------- -------

-----------

<S> <C>
Cash flows from operating activities:
Net loss................................................................. $ (413)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 3,985
Loss on disposal of property and equipment............................. --
Deferred tax assets.................................................... (388)
Interest expense from put warrant valuation............................ 5,222
Change in operating assets and liabilities:
Accounts receivable, net............................................. (2,976)
Inventories.......................................................... (2,566)
Prepaid expenses..................................................... (223)
Accounts payable..................................................... 48
Accrued sales returns................................................ 296
Accrued warranty costs............................................... 605
Accrued compensation, taxes and benefits............................. (100)
Other accrued liabilities............................................ (689)
Other assets......................................................... (618)
Other liabilities.................................................... 454
-----------
Net cash provided by (used in) operating activities................ 2,637
-----------
Cash flows from investing activities:
Purchases of property and equipment.................................... (6,659)
-----------
Net cash used in investing activities.............................. (6,659)
-----------
Cash flows from financing activities:
Proceeds from issuance of debt........................................... --
Principal payments on debt............................................... (740)
Debt issuance costs...................................................... --
Proceeds from issuance of common stock................................... 1,671
Proceeds from issuance of redeemable preferred stock --
-----------
Net cash provided by financing activities.......................... 931
-----------
Increase (decrease) in cash and cash equivalents................... (3,091)
Cash and cash equivalents, at beginning of period.......................... 12,670
-----------
Cash and cash equivalents, at end of period................................ $ 9,579
-----------
-----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-9
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

Select Comfort Corporation and its wholly owned subsidiaries (the Company)
develop, manufacture, and market air beds and sleep-related products. The
Company's fiscal year ends on the Saturday closest to December 31. Fiscal years
1995 and 1996 each had 52 weeks. Fiscal 1997 had 53 weeks. Certain prior year
amounts have been reclassified to conform to the current year presentation.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.

INTERIM FINANCIAL INFORMATION

The financial information presented for the nine months ended September 27,
1997 is unaudited. In the opinion of management, this unaudited financial
information contains all adjustments (which consist only of normal, recurring
adjustments) necessary for a fair presentation. Operating results for the nine
months ended October 3, 1998 are not necessarily indicative of results that may
be expected for the full year.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include highly liquid investments with initial
maturities of three months or less.

INVENTORIES

Inventories includes material, labor, and overhead and is stated at the
lower of cost or market. Cost is determined by the first-in, first-out method.

PROPERTY AND EQUIPMENT

Property and equipment, carried at cost, are depreciated using the
straight-line method over the estimated useful lives of the assets, which range
from three to seven years. Leasehold improvements are amortized over the shorter
of the life of the lease or ten years.

OTHER ASSETS

Other assets include security deposits, patents, trademarks, and debt
issuance costs. Patents and trademarks are amortized using the straight-line
method over a 17-year period and 15-year period, respectively. Debt issuance
costs are amortized using the straight-line method over the term of the debt.

ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the

F-10
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

ACCRUED WARRANTY COSTS

The Company has a 20-year warranty on air beds, the last 15 years of which
are on a prorated basis. Estimated warranty costs are provided at the time of
sale of the warranted products. Estimates are based upon historical warranty
claims incurred by the Company. Given the limited history available, actual
results could differ from these estimates.

ACCRUED SALES RETURNS

Estimated sales returns are provided at the time of sale based upon
historical sales returns. Returns are allowed by the Company for 90 nights
following the sale.

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents and accounts receivable
approximate fair value because of the short-term maturity of those instruments.
The fair value of long-term debt approximates carrying value based on the
Company's estimate of rates that would be available to it for debt of the same
remaining maturities. Warrants are recorded at fair value based on a third party
valuation. The Company believes it is not practical to estimate a fair market
value different from the redeemable preferred stock's carrying value, as this
security has numerous unique features (See Note 8).

REVENUE RECOGNITION

Revenue is recognized when products are shipped to customers net of
estimated returns.

STOCK COMPENSATION

The Company records compensation expense for option grants under its stock
option plan if the current market value of the underlying stock at the grant
date exceeds the stock option exercise price. Pro forma disclosure of the net
income impact of applying an alternative method of recognizing stock
compensation expense over the vesting period based on the fair value of all
stock-based awards on the date of grant is presented in Note 9.

F-11
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS

Costs incurred in connection with research and development are charged to
expense as incurred. Research and development expense was $1,412,000, $1,464,000
and $1,819,000 in 1995, 1996 and 1997, respectively, and $1,310,000 and
$1,085,000 for the nine months ended September 27, 1997 and October 3, 1998,
respectively.

PRE-OPENING COSTS

Costs associated with the opening of new stores are expensed as incurred.

DIRECT RESPONSE ADVERTISING COSTS

The Company incurs direct response advertising costs associated with print
and broadcast advertisements. Such costs are charged to expense as incurred.
Advertising expense was $10,545,000, $16,224,000 and $28,281,000 in 1995, 1996
and 1997, respectively, and $20,851,000 and $24,120,000 for the nine months
ended September 27, 1997 and October 3, 1998, respectively.

INCOME TAXES

The Company recognizes deferred tax assets and liabilities for the future
tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

EARNINGS PER SHARE

Basic earnings per share excludes dilution and is computed by dividing the
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share includes common
stock equivalents consisting of stock options and warrants determined by the
treasury stock method, and dilutive convertible securities.

(2) ACCOUNTS RECEIVABLE

In June 1997, the Company began utilizing a third party bank to offer its
qualified customers an unsecured revolving credit arrangement to finance
purchases from the Company. The bank sets the 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, the bank pays the Company an amount equal to
the total amount of such purchases, net of promotional related discounts and
less amounts retained for recourse related to returned products and limited
recourse related to bad debts. The bank's recourse for bad debts is limited to a
specified percent of receivables generated. The bank had retained $3,882,000 and
$10,080,000 as of January 3, 1998 and October 3, 1998, respectively, under terms
of the agreement. The Company has included such amounts in its accounts
receivable net of estimated allowance for doubtful accounts.

F-12
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(3) INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3, OCTOBER 3,
1996 1998 1998
------------- ----------- -----------
<S> <C> <C> <C>
Raw materials.......................................... $ 3,829 $ 5,891 $ 6,920
Work in progress....................................... 760 39 76
Finished goods......................................... 993 1,819 3,319
------ ----------- -----------
$ 5,582 $ 7,749 $ 10,315
------ ----------- -----------
------ ----------- -----------
</TABLE>

(4) PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3, OCTOBER 3,
1996 1998 1998
------------ ----------- -----------
<S> <C> <C> <C>
Leasehold improvements...................................... $ 12,151 $ 18,164 $ 22,804
Office furniture and equipment.............................. 2,233 2,698 2,916
Production machinery and computer equipment................. 5,050 7,062 8,701
Other....................................................... 826 1,256 1,424
Property and equipment under capital lease.................. 1,870 2,971 2,966
Less accumulated depreciation and amortization.............. (3,814) (6,968) (10,556)
------------ ----------- -----------
$ 18,316 $ 25,183 $ 28,255
------------ ----------- -----------
------------ ----------- -----------
</TABLE>

(5) LEASES

The Company rents office and manufacturing space under two operating leases
which, in addition to the minimum lease payments, require payment of a
proportionate share of the real estate taxes and building operating expenses.
The Company also rents retail space under operating leases which, in addition to
the minimum lease payments, require payment of percentage rents based upon sales
levels. Rent expense aggregated $2,550,000, $5,112,000 and $9,357,000 for 1995,
1996 and 1997, respectively, and $6,539,000 and $9,215,000 for the nine months
ended September 27, 1997 and October 3, 1998, respectively, including percentage
rents of $152,000, $237,000 and $892,000 for 1995, 1996 and 1997, respectively,
and $545,000 and $1,171,000 for the nine months ended September 27, 1997 and
October 3, 1998, respectively.

The Company also leases equipment under noncancelable operating leases.
Costs incurred under these operating leases aggregated $384,000, $402,000 and
$683,000 for 1995, 1996 and 1997, respectively, and $478,000 and $632,000 for
the nine months ended September 27, 1997 and October 3, 1998, respectively.

F-13
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(5) LEASES (CONTINUED)

The aggregate minimum rental commitments under operating leases for the
reminder of 1998 is $2,757,000 and for subsequent years are as follows (in
thousands):

<TABLE>
<CAPTION>
<S> <C>
1999............................................................................... $ 11,162
2000............................................................................... 11,318
2001............................................................................... 11,352
2002............................................................................... 11,098
2003............................................................................... 10,375
Thereafter......................................................................... 29,370
---------
$ 84,675
---------
---------
</TABLE>

(6) NOTES PAYABLE TO INVESTORS

In November 1996, the Company borrowed $1,252,000 and issued short-term
notes payable to several related parties at 8% interest per annum. In connection
with these notes, the Company granted warrants to purchase 59,606 shares of the
Company's common stock at a purchase price of $5.25 per share. In accordance
with the note agreements, an additional 11,919 common stock warrants were issued
during 1997 at an exercise price of $5.25 per share. The notes were repaid in
full in March 1997.

(7) NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

In March 1997, the Company completed a financing under which it issued a
senior subordinated promissory note in the principal amount of $15,000,000, a
warrant to purchase 1,100,000 shares of the Company's common stock at $10.50 per
share and a warrant to purchase 1,000,000 shares of common stock at $0.01 per
share. These warrants were subsequently adjusted and combined, resulting in a
single warrant to purchase 1,309,583 shares of common stock at $8.82 per share,
exercisable at any time prior to March 31, 2005. (see Note 9). At October 3,
1998, the Company was in compliance with all financial covenants.

The warrant holder may require repurchase of the warrant if an IPO has not
been completed prior to March 27, 2002. The repurchase amount would be equal to
the excess of the estimated fair market value of the Company's common stock, as
determined by the warrant agreement, over the exercise price of the warrant. The
Company also has an option to repurchase the warrant if the warrant has not been
exercised prior to March 27, 2004. As required by Emerging Issues Task Force
Issue 96-13 (EITF 96-13), the warrant is recorded at fair value and recorded as
long-term debt. At January 3, 1998 and October 3, 1998, the fair value of the
warrant was $5,670,000 and $10,892,000, respectively.

In addition, EITF 96-13 requires that any change in fair value of the
warrant be reflected as interest expense. Accordingly, the financial statements
reflect interest expense of $3,250,000 for 1997 and $1,900,000 and $5,222,000
for the nine months ended September 27, 1997 and October 3, 1998, respectively.
In addition, in connection with the March 1997 $15.0 million debt issuance, the
Company recorded original issue discount equal to $2,420,000, which is being
amortized over the term of the note.

F-14
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(7) NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Long-term obligations under notes and capital leases are as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3, OCTOBER 3,
1996 1998 1998
------------- ----------- -----------
<S> <C> <C> <C>
Senior subordinated note payable to financing company
due March 2003 with interest payable quarterly at 11%
per annum. Face amount of $15,000,000 net of
$2,118,000 and $1,815,000, respectively, of debt
discount with an effective interest rate of 13.7%.... $ -- $ 12,882 $ 13,185

Warrant subject to put provision....................... -- 5,670 10,892

Notes payable under capital lease agreements, payable
in monthly installments through March 2000, with
interest at 9.75%--12.5% per annum. Financing
available under these agreements aggregates
$3,000,000, of which $2,966,000 had been utilized at
October 3, 1998. In connection with these notes, the
Company granted the vendor warrants to acquire 31,428
shares of the Company's Series E convertible
preferred stock (note 8)............................. 1,725 1,958 1,219
------ ----------- -----------

1,725 20,510 25,296

Less current maturities................................ 563 999 1,052
------ ----------- -----------

$ 1,162 $ 19,511 $ 24,244
------ ----------- -----------
------ ----------- -----------
</TABLE>

Aggregate annual maturities of long-term debt for the five years subsequent
to October 3, 1998 are as follows (in thousands):

F-15
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(8) MANDATORILY REDEEMABLE PREFERRED STOCK

The holders of the Series A, B, C, D, and E mandatorily redeemable preferred
stock are entitled to receive dividends out of funds legally available for
dividends if and when declared by the board of directors. No dividends can be
paid to common shareholders unless the dividend is allocated among the holders
of Series A, B, C, D, and E shares and the holders of common shares based on the
amount of the investment in the Company represented by each such class. In
addition, the holders of Series E preferred stock are entitled to a cumulative
dividend of $1.05 per share before dividends may be paid on any other class of
capital stock. At October 3, 1998, cumulative dividends in arrears equaled
$2,475,000. In the event of voluntary or involuntary liquidation, dissolution,
or winding up of the Company or in the event of a sale of the Company's assets
or a merger with another corporation, the holders of the Company's shares of
preferred stock are entitled to receive the following amounts in the following
order of priority: (1) Series E, $21.00 per share through December 31, 1997 and
$10.50 per share plus cumulative dividends thereafter, (2) Series D, $2.88 per
share, Series C, $2.27 per share, Series B, $1.25 per share, and Series A, $1.00
per share, respectively, before any distribution is made with respect to the
common stock. The Series A, B, C, D, and E shareholders have special voting
rights as defined by the Articles of Incorporation. However, in the event of an
underwritten public offering of the Company's common stock meeting certain
requirements, the special voting rights will terminate.

The Series A, B, C, D, and E are convertible into an aggregate of 12,255,209
shares of common stock at any time or can be automatically converted into common
stock upon the issuance of common stock in an underwritten public offering where
the gross proceeds received by the Company equal or exceed $20,000,000 and the
public offering price equals or exceeds $14.25 per share and, solely with
respect to Series E, $19.95 per share after 1997. The conversion price was
initially based on a one for one conversion of preferred to common shares.
Effective March 31, 1998, the Series E conversion price was adjusted from $10.50
per share to $8.82 per share as a result of its anti-dilution clause. The Series
A, B, C, D, and E must be redeemed by the Company, 1/3 each on or before
December 31, 1998, 1999, and 2000 at $1.00, $1.25, $2.27, $2.88, and $10.50 per
share, respectively. The holders of the Series A, B, C, D, and E have the option
to defer this redemption offer for successive one-year periods. The deferral
does not affect the Company's obligation to redeem in successive years. If the
holders of the Series A, B, C, D, and E elect to defer the redemption, the
Company has the right, but not the obligation, to redeem the Series A, B, C, D,
and E on December 31, 2000.

F-16
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(8) MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)

Mandatorily redeemable preferred stock consisted of the following as of
December 28, 1996, January 3, 1998 and October 3, 1998 (in thousands):

<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN
PAR VALUE CAPITAL
--------- -----------
<S> <C> <C>
Series A, $1.00 par value; 4,458,852 shares authorized, issued, and
outstanding.......................................................... $ 4,459 $ --
Series B, $1.25 par value; 2,400,000 shares authorized, issued, and
outstanding.......................................................... 3,000 --
Series C, $1.00 par value; 2,292,635 shares authorized, issued, and
outstanding.......................................................... 2,293 2,972
Series D, $1.00 par value; 2,083,332 shares authorized, issued, and
outstanding.......................................................... 2,083 3,862
Series E, $1.00 par value; 888,571 shares authorized and 857,143 shares
issued and outstanding............................................... 857 8,086
--------- -----------
Total mandatorily redeemable preferred stock......................... $ 12,692 $ 14,920
--------- -----------
--------- -----------
</TABLE>

Changes in mandatorily redeemable preferred stock are as follows (dollars in
thousands):

<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN
SHARES AMOUNT CAPITAL TOTAL
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ..................................... 11,234,819 $ 11,835 $ 6,834 $ 18,669
Issuance of Series E preferred stock ........................... 857,143 857 8,099 8,956
------------ --------- ----------- ---------
Balance at December 30, 1995 ..................................... 12,091,962 12,692 14,933 27,625
Issuance of Series E preferred stock ........................... -- -- (13) (13)
------------ --------- ----------- ---------
Balance at December 28, 1996, January 3, 1998 and October 3, 1998
................................................................ 12,091,962 $ 12,692 $ 14,920 $ 27,612
------------ --------- ----------- ---------
------------ --------- ----------- ---------
</TABLE>

F-17
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(9) SHAREHOLDERS' DEFICIT

STOCK OPTIONS

The Board of Directors has reserved 4,300,000 shares of common stock for
options that may be granted to key employees, directors, or others under the
Company's stock option plans.

A summary of the status of the Company's stock option plans for the periods
ended October 3, 1998 is as follows:

<TABLE>
<CAPTION>
AVERAGE
EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
Outstanding at December 31, 1994........................................................... 1,355,775 $ 0.54
Granted.................................................................................. 545,500 3.79
Exercised................................................................................ 186,153 0.65
Canceled................................................................................. 79,939 0.66
---------- -----
Outstanding at December 30, 1995 (including 947,193 shares exercisable).................... 1,635,183 1.59
Granted.................................................................................. 443,850 5.25
Exercised................................................................................ 260,338 1.09
Canceled................................................................................. 139,522 2.29
---------- -----
Outstanding at December 28, 1996 (including 1,105,468 shares exercisable).................. 1,679,173 2.58
Granted.................................................................................. 1,073,750 6.20
Exercised................................................................................ 630,514 0.70
Canceled................................................................................. 26,800 4.29
---------- -----
Outstanding at January 3, 1998 (including 931,319 shares exercisable)...................... 2,095,609 4.98
Granted.................................................................................. 201,450 12.03
Exercised................................................................................ 509,225 3.17
Canceled................................................................................. 127,307 5.01
---------- -----
Outstanding at October 3, 1998 (including 797,971 shares exercisable)...................... 1,660,527 $ 6.38
---------- -----
---------- -----
</TABLE>

The following table summarizes information about options outstanding at
October 3, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
AVERAGE -----------------------
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE (YEARS) PRICE SHARES PRICE
- ---------------- ---------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.45 - 0.45 6,148 4.69 $ 0.45 6,148 $ 0.45
0.75 - 1.00 75,530 5.96 0.94 72,688 0.93
4.80 - 6.50 1,181,022 7.98 5.25 590,429 5.19
7.50 - 11.00 360,702 9.27 10.25 121,446 9.91
14.00 - 19.00 37,125 9.74 16.70 7,260 16.45
---------- --- ----------- ---------- -----------
$ 0.45 - 19.00 1,660,527 8.20 $ 6.38 797,971 $ 5.59
---------- --- ----------- ---------- -----------
---------- --- ----------- ---------- -----------
</TABLE>

No compensation cost has been recognized in the financial statements for
stock options grants. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options

F-18
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(9) SHAREHOLDERS' DEFICIT (CONTINUED)

under an alternative accounting method, the Company's net loss would have been
adjusted as indicated below (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS
ENDED OCTOBER
1995 1996 1997 3, 1998
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Net loss: As reported....................... $ (4,560) $ (3,685) $ (2,846) $ (413)
Pro forma........................... $ (4,892) $ (4,253) $ (3,563) $ (1,187)
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option-pricing model with the following assumptions: expected
dividend yield--0%; expected stock price volatility--40%; risk-free interest
rate--6.4% for 1995, 1996 and 1997, and 4.6% for the nine months ended October
3, 1998; expected life of options--4.5 years, 3.0 years, 4.2 years and 3.0 years
for 1995, 1996, 1997, and the nine months ended October 3, 1998, respectively.
The per share weighted-average fair value of stock options granted during 1995,
1996, 1997 and the nine months ended October 3, 1998 was $1.80, $2.03, $1.92,
and $3.85, respectively.

WARRANTS

In connection with the financing completed in March 1997 (see Note 7), the
Company issued a warrant to purchase 1,100,000 shares of Common Stock at $10.50
per share (Series A Warrant) and a warrant to purchase 1,000,000 shares of
Common Stock at $0.01 per share (Series B Warrant). The Series B Warrant
provided that the number of shares exercisable could be reduced based on future
earnings levels or in the event the Company completed an initial public
offering. Effective March 31, 1998, the warrants were adjusted and combined,
resulting in a single warrant to purchase 1,309,583 shares of Common Stock at
$8.82 per share, exercisable at any time prior to March 31, 2005.

In April 1996, the Company amended the Series E Stock Purchase Agreement
dated December 28, 1995 to provide for the issuance of warrants to the holders
of Series E Preferred Stock to purchase an aggregate of 171,429 shares of Common
Stock at an exercise price of $5.25 per share. During September 1998, warrants
for 3,000 common shares were exercised. Warrants for 168,429 shares remained
outstanding at October 3, 1998.

In connection with a capital lease transaction with a vendor in 1997, the
Company granted the vendor warrants to acquire 31,428 shares of the Company's
Series E convertible preferred stock at a purchase price of $10.50 per share.
The warrants are exercisable for the shorter of (1) ten years from the grant
date, or (2) five years from the effective date of an initial public offering.

In connection with short-term debt issued to related parties in 1996, the
Company granted warrants to purchase 71,425 shares of the Company's common stock
at a purchase price of $5.25 per share. The warrants are exercisable for ten
years from the grant date.

F-19
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(10) INCOME TAXES

The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS
ENDED OCTOBER
1995 1996 1997 3, 1998
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Current:
Federal........................................................... $ -- $ -- $ 125 $ 1,192
State............................................................. -- -- 16 544
--------- --------- --------- ------
-- -- 141 1,736
--------- --------- --------- ------
Deferred:
Federal........................................................... -- -- -- (321)
State............................................................. -- -- -- (67)
--------- --------- --------- ------
-- -- -- (388)
--------- --------- --------- ------
Income tax expense.................................................. $ -- $ -- $ 141 $ 1,348
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>

Effective tax rates differ from statutory federal income tax rates as follows:

<TABLE>
<CAPTION>
NINE MONTHS
ENDED OCTOBER
1995 1996 1997 3, 1998
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate.............. (34.0)% (34.0)% (34.0)% 35.0%
Nondeductible interest expense, put warrants... -- -- 40.8 195.4
Change in valuation allowance.................. 36.0 33.0 (2.7) (211.0)
Effect of change in tax rate on deferred tax
asset........................................ 0.0 8.6 0.0 0.0
State income taxes, net of federal benefit..... (2.0) (4.0) 0.4 37.8
General business credits....................... 0.0 (2.6) 0.0 0.0
To adjust to annualized effective rate......... 0.0 0.0 0.0 83.5
Other.......................................... 0.0 (1.0) 0.7 3.5
--------- --------- --------- ------
0.0% 0.0% 5.2% 144.2%
--------- --------- --------- ------
--------- --------- --------- ------
</TABLE>

The tax effects of temporary differences that give rise to deferred tax
assets at December 28, 1996, January 3, 1998 and October 3, 1998 are as follows
(in thousands):

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Current:
Inventory, warranty, and returns reserves................. $ 1,916 $ 3,361 $ 4,002
Allowance for doubtful accounts........................... 76 722 93
Advertising costs......................................... 300 -- --
Other..................................................... 113 214 734
Long term:
Net operating loss carryforwards.......................... 4,967 2,842 602
Other..................................................... 183 344 465
--------- --------- ---------
Total gross deferred tax assets......................... 7,555 7,483 5,896
Valuation allowance........................................... (7,555) (7,483) (5,508)
--------- --------- ---------
Total net deferred tax assets........................... $ -- $ -- $ 388
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-20
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(10) INCOME TAXES (CONTINUED)

At October 3, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $1,600,000. The Company expects
that approximately $1,400,000 of these carryforwards will expire unutilized due
to an Internal Revenue Code (IRC) Section 382 limitation resulting from a prior
ownership change. The remaining $200,000 may be available to offset future
taxable income and will expire between the years 2003 and 2006. The utilization
of the carryforwards may be further restricted in the event of future ownership
changes.

(11) NET LOSS PER COMMON SHARE

The following computations reconcile net loss with net loss per common
share--basic and net loss per common share--diluted (dollars in thousands,
except per share amounts).

<TABLE>
<CAPTION>
1995
----------------------------------
NET PER SHARE
LOSS SHARES AMOUNT
--------- ---------- -----------
<S> <C> <C> <C>
Net loss....................................................................... $ (4,560)
Less cumulative preferred dividends............................................ --
---------
BASIC EPS
Net loss available to common shareholders...................................... (4,560) 1,443,741 $ (3.16)
-----------
-----------
EFFECT OF DILUTIVE SECURITIES
Dilutive effect retroactively applied to share issuances....................... -- 178,835
--------- ----------
DILUTED EPS
Net loss available to common shareholders...................................... $ (4,560) 1,622,576 $ (2.81)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>

<TABLE>
<CAPTION>
1996
----------------------------------
NET PER SHARE
LOSS SHARES AMOUNT
--------- ---------- -----------
<S> <C> <C> <C>
Net loss....................................................................... $ (3,685)
Less cumulative preferred dividends............................................ (900)
---------
BASIC EPS
Net loss available to common shareholders...................................... (4,585) 1,753,484 $ (2.61)
-----------
-----------
EFFECT OF DILUTIVE SECURITIES
Dilutive effect retroactively applied to share issuances....................... -- 178,835
--------- ----------
DILUTED EPS
Net loss available to common shareholders...................................... $ (4,585) 1,932,319 $ (2.37)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>

<TABLE>
<CAPTION>
1997
----------------------------------
NET PER SHARE
LOSS SHARES AMOUNT
--------- ---------- -----------
<S> <C> <C> <C>
Net loss....................................................................... $ (2,846)
Less cumulative preferred dividends............................................ (900)
---------
BASIC EPS
Net loss available to common shareholders...................................... (3,746) 2,352,947 $ (1.59)
-----------
-----------
EFFECT OF DILUTIVE SECURITIES
Dilutive effect retroactively applied to share issuances....................... -- 178,835
--------- ----------
DILUTED EPS
Net loss available to common shareholders...................................... $ (3,746) 2,531,782 $ (1.48)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>

F-21
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(11) NET LOSS PER COMMON SHARE (CONTINUED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 3, 1998
----------------------------------
NET PER SHARE
LOSS SHARES AMOUNT
--------- ---------- -----------
<S> <C> <C> <C>
Net loss....................................................................... $ (413)
Less cumulative preferred dividends............................................ (675)
---------

BASIC EPS
Net loss available to common shareholders...................................... (1,088) 2,745,602 $ (0.40)
-----------
-----------

EFFECT OF DILUTIVE SECURITIES
Dilutive effect retroactively applied to share issuances....................... -- 178,835
--------- ----------

DILUTED EPS
Net loss available to common shareholders...................................... $ (1,088) 2,924,437 $ (0.37)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>

The following is a summary of those securities outstanding during the
respective periods which have been excluded from the calculations because the
effect on net income (loss) per common share would not have been dilutive:

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
OCTOBER 3,
1995 1996 1997 1998
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Options............................ 1,635,183 1,679,173 2,095,609 1,660,527
Common stock warrants.............. -- 154,023 2,342,954 1,549,537
Preferred stock warrants........... -- 31,428 31,428 31,428
Convertible preferred stock........ 12,091,962 12,091,962 12,091,962 12,091,962
</TABLE>

Convertible preferred stock and preferred stock warrants were convertible
into 12,292,623; common shares during 1995, 1996, 1997 and the nine months ended
October 3, 1998.

(12) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Total cash paid for interest during 1995, 1996 and 1997 was $34,000, $44,000
and $1,512,000, respectively, and $710,000 and $1,372,000, respectively, for the
nine months ended September 27, 1997 and October 3, 1998. There were no cash
payments for income taxes during 1995 or 1996. Income tax payments during 1997
totaled $16,000 and during the nine month periods ended September 27, 1997 and
October 3, 1998 totaled $16,000 and $1,708,000, respectively.

During 1995, $250,000 of notes payable were converted to common stock.

(13) EMPLOYEE BENEFIT PLANS

Effective January 1, 1994, the Company adopted a profit sharing and 401(k)
plan for eligible employees. The plan allows employees to defer up to 15% of
their compensation on a pretax basis. Each year, the Company may make a
discretionary contribution equal to a percentage of the employee's

F-22
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 27, 1997 IS
UNAUDITED)

(13) EMPLOYEE BENEFIT PLANS (CONTINUED)

contribution. The Company did not make a contribution for 1995 and 1996. During
1997 and the nine months ended October 3, 1998, the Company expensed $78,000 and
$50,000, respectively, relating to its contribution to the 401(k) plan.

(14) RELATED PARTY TRANSACTIONS

At December 28, 1996, the Company had a $50,000 note receivable due from a
former director and executive officer of the Company. The note plus interest at
6% per annum was due on August 31, 1997. On February 20, 1997, the former
director and executive officer signed a promissory note for $387,000, which
replaced the $50,000 note receivable. The note, with interest at 9.25% per
annum, is due and payable to the Company on the earlier of (1) six months
following the completion of an initial public offering of the Company's
securities, or (2) April 30, 1999. The full recourse note is secured by a pledge
of 150,000 shares of the Company's common stock. In April 1998, the former
director and executive officer borrowed an additional $425,000 from the Company
under the same terms as the February 1997 note. At October 3, 1998 the note
receivable, including interest, totaled $890,000.

At December 28, 1996 the Company had a $20,000 note receivable due from an
employee of the Company. This non-interest-bearing note was repaid in 1997.

(15) COMMITMENTS AND CONTINGENCIES

The Company is a party to various claims, legal actions, sales tax disputes,
and other complaints arising in the ordinary course of business. In the opinion
of management, any losses that may occur are adequately covered by insurance or
are provided for in the financial statements and the ultimate outcome of these
matters will not have a material effect on the financial position or results of
operations of the Company.

(16) INITIAL PUBLIC OFFERING

The Company is in the process of completing an initial public offering. Upon
consummation of the offering, mandatorily redeemable preferred shares will be
converted into common shares which will require an increase in authorized
shares. The Company anticipates amending its Articles of Incorporation to
increase authorized common shares from 25,000,000 to 95,000,000.

F-23
<PAGE>

[Inside back cover includes a picture of a cross-section of a Select Comfort air
bed, several pictures of people on Select Comfort air beds, a picture of a
Select Comfort air bed and a picture of a remote control unit for a Select
Comfort air bed]

<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.

--------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 29
Management................................................................ 44
Certain Transactions...................................................... 54
Principal and Selling Shareholders........................................ 58
Description of Capital Stock.............................................. 62
Shares Eligible for Future Sale........................................... 66
Underwriting.............................................................. 68
Legal Matters............................................................. 69
Experts................................................................... 69
Additional Information.................................................... 70
Index to Consolidated Financial Statements................................ F-1
</TABLE>

--------------

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

4,000,000 SHARES

SELECT COMFORT CORPORATION

COMMON STOCK

-------------

PROSPECTUS
-------------

HAMBRECHT & QUIST

BANCBOSTON ROBERTSON STEPHENS

PIPER JAFFRAY INC.

, 1998

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All of the amounts shown are
estimates, except the SEC registration fee, the NASD filing fees and the Nasdaq
listing fee.

<TABLE>
<S> <C>
SEC registration fee............................................ $ 32,450
NASD filing fee................................................. 11,500
Nasdaq listing fee.............................................. 95,000
Fees and expenses of counsel for the Company.................... 375,000
Fees and expenses of accountants for the Company................ 225,000
Blue sky fees and expenses...................................... 5,000
Printing expenses............................................... 100,000
Transfer agent fees............................................. 4,000
Miscellaneous................................................... 152,050
---------
Total....................................................... $1,000,000
---------
---------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Minnesota Statutes, Section 302A.521 provides that a Minnesota business
corporation shall indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity (as defined) of the person, against
judgments, penalties, fines, settlements and reasonable expenses incurred by the
person in connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights. The Company's Articles of
Incorporation also require the Company to provide indemnification to the fullest
extent of the Minnesota indemnification statute.

Reference is also made to Section 7(a) of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Company against certain liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since August 1, 1995, the Company has issued and sold the following
securities without registration under the Securities Act:

1. On December 28, 1995, the Company sold an aggregate of 857,143
shares of Series E Preferred Stock at a price of $10.50 per share and issued
warrants to purchase an aggregate of 171,429 shares of Common Stock
exercisable through December 28, 2005 at an exercise price of $5.25 pursuant
to the Company's Series E Convertible Preferred Stock Purchase Agreement
dated December 28, 1995, as amended, for an aggregate purchase price of
approximately $9.0 million to 25 accredited investors and three
non-accredited investors, including shares and warrants sold to the
following entities and individuals in the following amounts: Apex Investment
Fund, L.P. (19,380 shares

II-1
<PAGE>

of Series E Preferred Stock convertible into 23,071 shares of Common Stock
and a warrant to purchase 3,876 shares); Macke Limited Partnership (11,900
shares of Series E Preferred Stock convertible into 14,166 shares of Common
Stock and a warrant to purchase 2,380 shares); Norwest Equity Partners V
(257,150 shares of Series E Preferred Stock convertible into 306,130 shares
of Common Stock and a warrant to purchase 77,145 shares) St. Paul Fire and
Marine Insurance Company (100,000 shares of Series E Preferred Stock
convertible into 119,047 shares of Common Stock and a warrant to purchase
20,000 shares); John Sculley (15,000 shares of Series E Preferred Stock
convertible into 17,857 shares of Common Stock and a warrant to purchase
3,000 shares); Patrick A. Hopf (950 shares of Series E Preferred Stock
convertible into 1,129 shares of Common Stock and a warrant to purchase 190
shares); Mark L. de Naray (500 shares of Series E Preferred Stock
convertible into 595 shares of Common Stock and a warrant to purchase 100
shares); and Daniel J. McAthie (20,000 shares of Series E Preferred Stock
convertible into 23,809 shares of Common Stock and a warrant to purchase
4,000 shares).

2. From August 1, 1995 through December 31, 1995, the Company issued an
aggregate of 119,782 shares of Common Stock to employees and directors of
the Company pursuant to the exercise of stock options by such individuals.
Of the 119,782 shares issued, 60,000 were issued at $1.00 per share; 4,782
were issued at $.45 per share; 25,000 were issued at $.40 per share; and
30,000 were issued at $.30 per share.

3. On August 27, 1996, the Company issued a warrant to Comdisco, Inc.
to purchase 7,619 shares of the Company's Series E Preferred Stock
exercisable for five years from the effective date of this offering at an
exercise price of $10.50 per share in connection with a Master Lease
Agreement dated as of August 27, 1996 and an Equipment Schedule No. VL-1
dated as of August 27, 1996. Upon consummation of this offering, the warrant
will automatically be amended to provide for the purchase of 9,070 shares of
Common Stock at an exercise price of $8.82 per share.

4. In November 1996, the Company borrowed an aggregate of $1,251,700
from certain existing shareholders and issued promissory notes evidencing
such loans. Interest on these notes accrued at an annual rate of 8%. In
connection with such loans, the Company granted each of these shareholders
warrants to purchase a number of shares of Common Stock equal to 25% of the
principal amount of such shareholder's note divided by $5.25 (an aggregate
of 59,606 shares of Common Stock), exercisable until October 31, 2006 at
$5.25 per share. The promissory notes were due on the earlier of the
following: (i) the closing date of an equity financing of $10.0 million or
more, or (b) November 1, 1997. The Company paid off the promissory notes in
full in March 1997 and at such time granted each of these shareholders
additional warrants to purchase a number of shares equal to 5% of the
principal amount of such shareholder's note divided by $5.25 (an aggregate
of 11,919 shares of Common Stock), exercisable through October 31, 2006 at
$5.25 per share. All of the purchasers of the notes and warrants were
accredited investors, including the following entities: Apex Investment
Fund, L.P. ($126,450 and warrants to purchase 7,226 shares); Macke Limited
Partnership ($6,000 and warrants to purchase 343 shares); Norwest Equity
Partners V ($122,550 and warrants to purchase 7,003 shares); and St. Paul
Fire and Marine Insurance Co. ($835,150 and warrants to purchase 47,723
shares).

5. On November 11, 1996, Company issued a warrant to Comdisco, Inc. to
purchase 23,809 shares of the Company's Series E Preferred Stock exercisable
for five years from the effective date of this offering at an exercise price
of $10.50 per share in connection with a Master Lease Agreement dated as of
August 27, 1996 and Equipment Schedule Nos. VL-2 and VL-3 dated as of
November 11, 1996. Upon consummation of this offering, the warrant will
automatically be amended to provide for the purchase of 28,344 shares of
Common Stock at an exercise price of $8.82 per share.

6. From January 1, 1996 through December 31, 1996, the Company issued
an aggregate of 261,598 shares of Common Stock to employees and directors of
the Company pursuant to the exercise of stock options by such individuals.
Of the 261,598 shares issued, 19,567 were issued at $5.25 per

II-2
<PAGE>

share; 9,713 were issued at $4.80; 61,814 were issued at $2.60 per share;
69,995 were issued at $1.00; 11,033 were issued at $.85 per share; 6,090
were issued at $.75 per share; 4,786 were issued at $.45 per share; 7,000
were issued at $.40 per share and 71,600 were issued at $.30 per share.

7. On March 27, 1997, the Company entered into a Purchase Agreement
dated March 27, 1997 (the "GE Purchase Agreement") with General Electric
Capital Corporation ("GECC"), pursuant to which the Company issued to GE a
senior subordinated promissory note in the principal amount of $15.0 million
(the "GE Note"). Interest on the GE Note accrues at a rate equal to 11% per
year and is payable quarterly in arrears. The outstanding principal on the
GE Note is due on or before March 31, 2003. In connection with the GE
Purchase Agreement, the Company issued to GE a Series A Warrant (the "Series
A Warrant") to purchase an aggregate of 1,100,000 shares of Common Stock
exercisable through March 31, 2005 at an exercise price of $10.50 and a
Series B Warrant (the "Series B Warrant") containing certain contingent
rights to purchase an aggregate of up to 1,000,000 shares of Common Stock at
an exercise price of $.01. Pursuant to an amendment to the GE Purchase
Agreement effective as of March 31, 1998, the Company and GECC restructured
these warrants by combining them into one Series A Warrant to purchase
1,309,583 shares of Common Stock at an exercise price of $8.82.

8. From January 1, 1997 through December 31, 1997, the Company issued
an aggregate of 630,094 shares of Common Stock to employees and directors of
the Company pursuant to the exercise of stock options by such individuals.
Of the 630,094 shares issued, 9,302 were issued at $5.25 per share; 26,042
were issued at $4.80 per share; 38,820 were issued at $1.00 per share; 8,588
were issued at $.85 per share; 50,160 were issued at $.75 per share; 178,792
were issued at $.45 per share; 88,440 were issued at $.40 per share; and
229,950 were issued at $.30 per share.

9. From January 1, 1998 through October 3, 1998, the Company issued an
aggregate of 511,385 shares of Common Stock to employees and directors of
the Company pursuant to the exercise of stock options by such individuals.
Of the 511,385 shares issued, 75 were issued at $16.50 per share; 631 were
issued at $11.00 per share; 100 were issued at $10.00 per share; 166 were
issued at $7.50 per share; 201,626 were issued at $5.25 per share; 88,683
were issued at $4.80 per share; 33,288 were issued at $1.00 per share;
60,234 were issued at $.85 per share; 35,182 were issued at $.45 per share;
25,000 were issued at $.40 per share; and 66,400 were issued at $.30 per
share.

No underwriting commissions or discounts were paid with respect to the sales
of the unregistered securities described above. In addition, all of the above
sales were made in reliance on Rule 701, Regulation D and Section 4(2) under the
Securities Act. With regard to the reliance by the Company upon the exemptions
set forth in the previous sentence, certain inquiries were made by the Company
to establish that such sales qualified for such exemptions from the registration
requirements. In particular, the Company confirmed that (i) all offers of sales
and sales were made by personal contact from officers or directors of the
Company or other persons closely associated with the Company; (ii) each investor
made representations that he or she was sophisticated in relation to this
investment (and the Company has no reason to believe such representations were
incorrect); (iii) each purchaser gave assurance of investment intent and the
certificates for the shares bear a legend accordingly; and (iv) offers and sales
within any offering were made to a limited number of persons.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
1.1 Underwriting Agreement

3.1 Restated Articles of Incorporation of the Company (to be effective upon
effectiveness of Registration Statement)
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.2 Restated Bylaws of the Company (to be effective upon effectiveness of
Registration Statement)

4.2* Form of Warrant issued in connection with the sale of Convertible
Preferred Stock, Series E

4.3* Form of Warrant issued in connection with the November 1996 Bridge
Financing

4.4* Amended and Restated Registration Rights Agreement dated December 28, 1995

4.5* First Amendment to Series E Stock Purchase Agreement and Amended and
Restated Registration Rights Agreement dated April 25, 1996

4.6* Second Amendment to Amended and Restated Registration Rights Agreement
dated as of November 1, 1996

4.7* Second (sic) Amendment to Amended and Restated Registration Rights
Agreement dated March 24, 1997

4.8* Series A Warrant effective as of March 31, 1998 issued to General Electric
Capital Corporation

5.1 Opinion of Oppenheimer Wolff & Donnelly LLP

10.1* Net Lease Agreement dated December 3, 1993 between the Company and Opus
Corporation

10.2* Amendment of Lease dated August 10, 1994 between the Company and Opus
Corporation

10.3* Second Amendment to Lease dated May 10, 1995 between the Company and
Rushmore Plaza Partners Limited Partnership (successor to Opus
Corporation)

10.4* Letter Agreement dated as of October 5, 1995 between the Company and
Rushmore Plaza Partners Limited Partnership

10.5* Third Amendment of Lease, Assignment and Assumption of Lease and Consent
dated as of January 1, 1996 among the Company, Rushmore Plaza Partners
Limited Partnership and Select Comfort Direct Corporation

10.6* Sublease dated as of March 27, 1997 between Select Comfort SC Corporation
and Bellsouth Telecommunications, Inc.

10.7* Master Lease Agreement dated August 27, 1996 between Comdisco, Inc. and
the Company and Equipment Schedules VL-1 dated August 27, 1996 and VL-2
and VL-3 dated November 11, 1996

10.8* Supply Agreement dated August 23, 1994 between the Company and Supplier(1)

10.9* Equipment Purchase and Software License Agreement dated February 6, 1996
between the Company and Supplier(1)

10.10* Purchase Agreement dated as of March 27, 1997 between the Company and
General Electric Capital Corporation

10.11* Senior Subordinated Note dated as of March 27, 1997 in the principal
amount of $15,000,000 by the Company in favor of General Electric
Capital Corporation

10.12* Consumer Credit Card Program Agreement dated as of May 22, 1997 among the
Company, Select Comfort Retail Corporation, Select Comfort Direct
Corporation, Select Comfort SC Corporation and Monogram Credit Card Bank
of Georgia(1)
</TABLE>

II-4

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.13* Major Merchant Agreement dated December 19, 1997 among First National Bank
of Omaha and the Company, Select Comfort So. Carolina Corporation,
Select Comfort Retail Corporation and Select Comfort Direct Corporation

10.14* 1990 Omnibus Stock Option Plan, as amended

10.15* 1997 Stock Incentive Plan

10.16* Form of Incentive Stock Option Agreement under the 1997 Stock Incentive
Plan

10.17* Form of Performance Based Stock Option Agreement under the 1997 Stock
Incentive Plan

10.18* Employment Letter Agreement dated April 3, 1997 between the Company and H.
Robert Hawthorne

10.19* Employment Letter Agreement dated October 20, 1995 between the Company and
Daniel J. McAthie

10.20* Employment Letter Agreement dated July 11, 1995 between the Company and
Gregory T. Kliner

10.21* Consulting Agreement and Stock Option Agreement dated April 1, 1996
between the Company and Ervin R. Shames

10.22* Separation Agreement dated February 20, 1997 between the Company and Mark
L. de Naray

10.23* Promissory Note dated February 20, 1997 in favor of the Company from Mark
L. de Naray

10.24* Pledge Agreement dated February 20, 1997 between the Company and Mark L.
de Naray

10.25* Promissory Note dated April 13, 1998 in favor of the Company from Mark L.
de Naray

10.26* Pledge Agreement dated April 13, 1998 between the Company and Mark L. de
Naray

10.27* Separation Agreement dated as of July 13, 1998 between the Company and
John D. Watson

10.28 Lease Agreement dated September 30, 1998 between the Company and ProLogis
Development Services Incorporated

10.29 Select Comfort Corporation Nonqualified Deferred Compensation Plan

21.1* Subsidiaries of the Company

23.1 Independent Auditors' Consent and Report on Financial Statement Schedule
of KPMG Peat Marwick LLP

23.2 Consent of Oppenheimer Wolff & Donnelly LLP (included in Exhibit 5.1)

23.3 Consent of Houlihan Valuation Advisors

24.1* Power of Attorney (included on pages II-9 hereto)

27.1 Financial Data Schedule
</TABLE>

- ------------------------

* Previously filed.

(1) Confidential treatment has been requested with respect to designated
portions contained within this exhibit. Such portions have been omitted and
filed separately with the Commission pursuant to Rule 406 under the
Securities Act.

II-5
<PAGE>
(b) Financial Statement Schedules.

SELECT COMFORT CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO DEDUCTIONS BALANCE AT
BALANCE AT COSTS AND FROM END OF
DESCRIPTION BEGINNING EXPENSES RESERVES PERIOD
- ----------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
--1998 (nine months)....................... $ 1,901 $ 2,293 $ 1,377 $ 2,817
Allowance for doubtful accounts--1997.................................. $ 200 $ 2,101 $ 400 $ 1,901
--1996..................................... $ 261 $ 63 $ 124 $ 200
--1995..................................... $ 35 $ 237 $ 11 $ 261
Accrued warranty costs
--1998 (nine months)....................... $ 3,257 $ 3,456 $ 2,851 $ 3,862
--1997..................................... $ 2,036 $ 3,274 $ 2,053 $ 3,257
--1996..................................... $ 1,390 $ 1,936 $ 1,290 $ 2,036
--1995..................................... $ 608 $ 1,492 $ 710 $ 1,390
</TABLE>

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Minnesota Business Corporation Act, the Restated
Articles of Incorporation or Bylaws of the Registrant, the Underwriting
Agreement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) It will provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.

(2) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-6
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to the Registration Statement
on Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in Minneapolis, Minnesota on this 29th day of October, 1998.

<TABLE>
<S> <C> <C>
SELECT COMFORT CORPORATION

By: /s/ H. ROBERT HAWTHORNE
-----------------------------------------
H. Robert Hawthorne
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)

By: /s/ DANIEL J. MCATHIE
-----------------------------------------
Daniel J. McAthie
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER, CHIEF OPERATING OFFICER AND
SECRETARY (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities indicated, on October 29, 1998.

<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE
- ------------------------------ --------------------------

<C> <S>
/s/ H. ROBERT HAWTHORNE
- ------------------------------ President, Chief Executive
H. Robert Hawthorne Officer and Director

*
- ------------------------------ Chairman of the Board
Ervin R. Shames

*
- ------------------------------ Director
Thomas J. Albani

*
- ------------------------------ Director
Patrick A. Hopf

*
- ------------------------------ Director
Christopher P. Kirchen
</TABLE>

II-7
<PAGE>

<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE
- ------------------------------ --------------------------

<C> <S>
*
- ------------------------------ Director
David T. Kollat

*
- ------------------------------ Director
Kenneth A. Macke

*
- ------------------------------ Director
Jean-Michel Valette

/s/ H. ROBERT HAWTHORNE
- ------------------------------ Attorney-in-fact
H. Robert Hawthorne
</TABLE>

II-8
<PAGE>
SELECT COMFORT CORPORATION
EXHIBIT INDEX TO REGISTRATION STATEMENT ON FORM S-1

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
- ----------- ------------------------------------------------------------------------------------ -----------------
<C> <S> <C>
1.1 Underwriting Agreement

3.1 Restated Articles of Incorporation of the Company (to be effective upon
effectiveness of Registration Statement)

3.2 Restated Bylaws of the Company (to be effective upon effectiveness of Registration
Statement)

4.2* Form of Warrant issued in connection with the sale of Convertible Preferred Stock,
Series E

4.3* Form of Warrant issued in connection with the November 1996 Bridge Financing

4.4* Amended and Restated Registration Rights Agreement dated December 28, 1995

4.5* First Amendment to Series E Stock Purchase Agreement and Amended and Restated
Registration Rights Agreement dated April 25, 1996

4.6* Second Amendment to Amended and Restated Registration Rights Agreement dated as of
November 1, 1996

4.7* Second (sic) Amendment to Amended and Restated Registration Rights Agreement dated
March 24, 1997

4.8* Series A Warrant effective as of March 31, 1998 issued to General Electric Capital
Corporation

5.1 Opinion of Oppenheimer Wolff & Donnelly LLP

10.1* Net Lease Agreement dated December 3, 1993 between the Company and Opus Corporation

10.2* Amendment of Lease dated August 10, 1994 between the Company and Opus Corporation

10.3* Second Amendment to Lease dated May 10, 1995 between the Company and Rushmore Plaza
Partners Limited Partnership (successor to Opus Corporation)

10.4* Letter Agreement dated as of October 5, 1995 between the Company and Rushmore Plaza
Partners Limited Partnership

10.5* Third Amendment of Lease, Assignment and Assumption of Lease and Consent dated as of
January 1, 1996 among the Company, Rushmore Plaza Partners Limited Partnership and
Select Comfort Direct Corporation

10.6* Sublease dated as of March 27, 1997 between Select Comfort SC Corporation and
Bellsouth Telecommunications, Inc.

10.7* Master Lease Agreement dated August 27, 1996 between Comdisco, Inc. and the Company
and Equipment Schedules VL-1 dated August 27, 1996 and VL-2 and VL-3 dated
November 11, 1996

10.8* Supply Agreement dated August 23, 1994 between the Company and Supplier(1)

10.9* Equipment Purchase and Software License Agreement dated February 6, 1996 between the
Company and Supplier(1)
</TABLE>

<PAGE>

10.11* Senior Subordinated Note dated as of March 27, 1997 in the principal amount of
$15,000,000 by the Company in favor of General Electric Capital Corporation

10.12* Consumer Credit Card Program Agreement dated as of May 22, 1997 among the Company,
Select Comfort Retail Corporation, Select Comfort Direct Corporation, Select
Comfort SC Corporation and Monogram Credit Card Bank of Georgia; as amended in
First Amendment to Consumer Credit Card Program Agreement dated November 18,
1987(1)

10.13* Major Merchant Agreement dated December 19, 1997 among First National Bank of Omaha
and the Company, Select Comfort So. Carolina Corporation, Select Comfort Retail
Corporation and Select Comfort Direct Corporation

10.14* 1990 Omnibus Stock Option Plan, as amended

10.15* 1997 Stock Incentive Plan

10.16* Form of Incentive Stock Option Agreement under the 1997 Stock Incentive Plan

10.17* Form of Performance Based Stock Option Agreement under the 1997 Stock Incentive Plan

10.18* Employment Letter Agreement dated April 3, 1997 between the Company and H. Robert
Hawthorne

10.19* Employment Letter Agreement dated October 20, 1995 between the Company and Daniel J.
McAthie

10.20* Employment Letter Agreement dated July 11, 1995 between the Company and Gregory T.
Kliner

10.21* Consulting Agreement and Stock Option Agreement dated April 1, 1996 between the
Company and Ervin R. Shames

10.22* Separation Agreement dated February 20, 1997 between the Company and Mark L. de
Naray

10.23* Promissory Note dated February 20, 1997 in favor of the Company from Mark L. de
Naray

10.24* Pledge Agreement dated February 20, 1997 between the Company and Mark L. de Naray

10.25* Promissory Note dated April 13, 1998 in favor of the Company from Mark L. de Naray

10.26* Pledge Agreement dated April 13, 1998 between the Company and Mark L. de Naray

10.27* Separation Agreement dated as of July 13, 1998 between the Company and John D.
Watson

10.28 Lease Agreement dated September 30, 1998 between the Company and ProLogis
Development Services Incorporated

21.1* Subsidiaries of the Company

23.1 Independent Auditors' Consent and Report on Financial Statement Schedule of KPMG
Peat Marwick LLP

23.2 Consent of Oppenheimer Wolff & Donnelly LLP (included in Exhibit 5.1)
</TABLE>

<PAGE>

24.1* Power of Attorney (included on pages II-9 hereto)

27.1 Financial Data Schedule
</TABLE>

- ------------------------

* Previously filed.

(1) Confidential treatment has been requested with respect to designated
portions contained within this exhibit. Such portions have been omitted and
filed with the Commission pursuant to Rule 406 under the Securities Act.

<PAGE>

EXHIBIT 1.1
OH&S DRAFT - OCTOBER 28, 1998

SELECT COMFORT CORPORATION

4,000,000 SHARES (1)

COMMON STOCK

UNDERWRITING AGREEMENT

November __, 1998

HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS INC.
PIPER JAFFRAY, INC.
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104

Ladies and Gentlemen:

Select Comfort Corporation, a Minnesota corporation (herein called the
Company), proposes to issue and sell 2,800,000 shares of its authorized but
unissued Common Stock, par value $0.01 per share (herein called the Common
Stock), and the shareholders of the Company named in Schedule II hereto (herein
collectively called the Selling Securityholders) propose to sell an aggregate of
1,200,000 shares of Common Stock of the Company (said 4,000,000 shares of Common
Stock being herein called the Underwritten Stock). The Selling
Securityholders propose to grant to the Underwriters (as hereinafter defined)
an option to purchase up to 600,000 additional shares of Common Stock (herein
called the Option Stock and with the Underwritten Stock herein collectively
called the Stock). The Common Stock is more fully described in the
Registration Statement and the Prospectus hereinafter mentioned.

The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.

- -------------------
(1) Plus an option to purchase from the Selling Securityholders up to
600,000 additional shares to cover over-allotments.

<PAGE>

1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-62793), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act) of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.

The term Registration Statement as used in this Agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement) and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.

The Registration Statement has been declared effective under the Securities Act,
and no post-effective amendment to the Registration Statement has been filed as
of the date of this Agreement. The Company has caused to be delivered to you
copies of each Preliminary Prospectus and has consented to the use of such
copies for the purposes permitted by the Securities Act.

2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDERS.

(a) The Company hereby represents and warrants as follows:

(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own or lease its properties and conduct its business
as described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property owned
or leased or the nature of the business transacted by it makes
qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole).

<PAGE>

(ii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition
or results of operations of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of
business, neither the Company nor any of its subsidiaries has entered into
any material transaction not referred to in the Registration Statement and
the Prospectus.

(iii) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not, contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that none of the representations and warranties in this
subparagraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.

(iv) The Stock is duly and validly authorized, is (or, in the case
of shares of the Stock to be sold by the Company, will be, when issued and
sold to the Underwriters as provided herein) duly and validly issued, fully
paid and nonassessable and conforms to the description thereof in the
Prospectus. No further approval or authority of the shareholders or the
Board of Directors of the Company will be required for the transfer and
sale of the Stock to be sold by the Selling Securityholders or the issuance
and sale of the Stock as contemplated herein.

(v) Prior to the Closing Date, the Stock will be authorized for
listing by the Nasdaq National Market upon official notice of issuance.

(vi) There are no persons with registration or other similar rights to
have any equity or debt securities registered for sale under the
Registration Statement or included in the offering contemplated by this
Agreement, other than the Selling Securityholders with respect to the Stock
included in the Registration Statement, except for such rights as have been
duly waived.

(vii) KPMG Peat Marwick LLP, who have expressed their opinion with
respect to the financial statements (which term as used in this Agreement
includes the related notes thereto) filed with the Commission as a part of
the Registration Statement and

<PAGE>

included in the Prospectus, are independent public or certified public
accountants as required by the Securities Act.

(viii) The consolidated financial statements filed with the
Commission as a part of the Registration Statement and included in the
Prospectus present fairly the consolidated financial position of the
Company and its subsidiaries as of and at the dates indicated and the
results of their operations and cash flows for the periods specified
subject, in the case of unaudited financial statements, to normal year-end
adjustments. Such financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting
schedules are required to be included in the Registration Statement. The
financial data set forth in the Prospectus under the captions "Prospectus
Summary," "Summary Consolidated Financial Information," "Selected
Consolidated Financial Data" and "Capitalization" fairly present the
information set forth therein on a basis consistent with that of the
audited financial statements contained in the Registration Statement.

(ix) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption
"Capitalization" (other than for subsequent issuances, if any, pursuant to
employee benefit plans described in the Prospectus or upon exercise of
outstanding options or warrants described in the Prospectus). All of the
issued and outstanding shares of Common Stock have been duly authorized and
validly issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
shares of Common Stock were issued in violation of any preemptive rights,
rights of first refusal or other similar rights to subscribe for or
purchase securities of the Company. There are no authorized or outstanding
options, warrants, preemptive rights, rights of first refusal or other
rights to purchase, or equity or debt securities convertible into or
exchangeable or exercisable for, any capital stock of the Company or any of
its subsidiaries other than those described in the Prospectus. The
description of the Company's stock option, stock bonus and other stock
plans or arrangements, and the options or other rights granted thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.

(x) The Company's execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby and by
the Prospectus (i) have been duly authorized by all necessary corporate
action and will not result in any violation of the provisions of the
Articles of Incorporation or Bylaws of the Company or any subsidiary, (ii)
will not conflict with or result in the breach of any of the terms or
provisions of any material agreement, franchise, license, indenture,
mortgage, deed of trust, or other material instrument to which the Company
or its subsidiaries is a party or by which the Company or its subsidiaries
or its or their property may be bound or affected, except where such
conflict or breach would not have a material adverse effect on the
business, properties, financial condition or results of operations of the
Company and its subsidiaries taken as a whole, or (iii) violate or conflict
with any order, rule or regulation applicable to the Company or its
subsidiaries of any court or regulatory body,

<PAGE>

administrative agency or other governmental body having jurisdiction over
the Company or its subsidiaries, or any order of any court or governmental
agency or authority entered in any proceeding to which the Company or its
subsidiaries was or is now a party or by which it or they are bound.

(xi) There are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened (i) against
or affecting the Company or any of its subsidiaries, (ii) which has as the
subject thereof any officer or director of the Company in their capacity as
such, or property owned or leased by the Company or any of its subsidiaries
or (iii) relating to environmental or discrimination matters, where in any
such case (A) there is a reasonable possibility that such action, suit or
proceeding might be determined adversely to the Company or such subsidiary
and (B) any such action, suit or proceeding, if so determined adversely,
would reasonably be expected to result in a material adverse change in the
business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole, or adversely affect the
consummation of the transactions contemplated by this Agreement. No
material labor dispute with the employees of the Company or any of its
subsidiaries, or, to the best of the Company's knowledge, with the
employees of any principal supplier of the Company, exists or, to the best
of the Company's knowledge, is threatened or imminent.

(xii) The Company and its subsidiaries own or possess sufficient
trademarks, trade names, patents, copyrights, licenses, approvals, trade
secrets and other similar rights (collectively, "Intellectual Property
Rights") reasonably necessary to conduct their respective businesses as now
conducted; and the expected expiration of any of such Intellectual Property
Rights would not result in a material adverse change in the business,
properties, financial condition or results of operations of the Company and
its subsidiaries, taken as a whole. Neither the Company nor any of its
subsidiaries has received any notice of infringement or conflict with
asserted Intellectual Property Rights of others, which infringement or
conflict, if the subject of an unfavorable decision, would result in a
material adverse change in the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a
whole.

(xiii) The conduct of the business of the Company and each of its
subsidiaries is in compliance in all respects with applicable federal,
state, local and foreign laws and regulations, except where the failure to
be in compliance would not have a material adverse effect upon the
business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole.

(xiv) The Company and each of its subsidiaries has good and
marketable title to all the properties and assets reflected as owned in the
financial statements referred to above, in each case free and clear of any
security interests, mortgages, liens, encumbrances, equities, claims and
other defects, except such as do not materially and adversely affect the
value of such property and do not materially interfere with the use made or
proposed to be made of such property by the Company or such subsidiary.
The real property, improvements, equipment and personal property held under
lease by the Company or any subsidiary are held under valid and enforceable
leases, with such

<PAGE>

exceptions as are not material and do not materially interfere with the use
made or proposed to be made of such real property, improvements, equipment
or personal property by the Company or such subsidiary.

(xv) The Company and its consolidated subsidiaries have filed all
necessary federal, state and foreign income and franchise tax returns or
have properly requested extensions thereof and have paid all taxes required
to have been paid by any of them and, if due and payable, any related or
similar assessment, fine or penalty levied against any of them The Company
has made adequate charges, accruals and reserves in the applicable
financial statements referred to above in respect of all federal, state and
foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its consolidated subsidiaries has not
been finally determined.

(xvi) Neither the Company nor any subsidiary is, and after receipt
of payment for the Stock will be, an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.

(xvii) The Company, for itself and each of its subsidiaries,
maintains insurance of the types and in the amounts generally deemed
adequate for their respective businesses and consistent with insurance
maintained by similar companies in similar businesses, including without
limitation, general liability insurance and insurance covering all real and
personal property owned or leased by the Company and each of its
subsidiaries against theft, damage, destruction, acts of vandalism and all
other risks customarily insured against, all of which insurance is in full
force and effect.

(xviii) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Stock.

(xix) There are no business relationships or related-party
transactions involving the Company or any other person required to be
described in the Prospectus which have not been described as required.

(xx) Neither the Company nor any of its subsidiaries, nor, to the
best of the Company's knowledge, any employee or agent of the Company or
any subsidiary, has made any contribution or other payment to any official
of, or candidate for, any federal, state or foreign office in violation of
any law or of the character required to be disclosed in the Prospectus.

(xxi) Each of the Company and its subsidiaries maintains a system
of accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization; and
(iv) the recorded

<PAGE>

accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.

(xxii) Each of the Company and its subsidiaries (i) is in
compliance with any and all applicable United States, state and local
environmental laws, rules, regulations, treaties, statutes and codes
promulgated by any and all governmental authorities relating to the
protection of human health and safety, the environment or toxic substances
or wastes, pollutants or contaminants ("Environmental Laws"), (ii) has
received all permits, licenses or other approvals required of it under
applicable Environmental Laws to conduct its business as currently
conducted, and (iii) is in compliance with all terms and conditions of any
such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals or noncompliance with terms or conditions of any permit, license
or approval would not, individually or in the aggregate, have a material
adverse effect on the business, properties, financial condition or results
of operations of the Company and its subsidiaries, taken as a whole. No
action, proceeding, revocation proceeding, writ, injunction or claim is
pending or, to the best of the Company's knowledge, threatened relating to
the Environmental Laws or to the Company's or its subsidiaries' activities
involving Hazardous Materials. "Hazardous Materials" means any material or
substance (i) that is prohibited or regulated by any environmental law,
rule, regulation, order, treaty, statute or code promulgated by any
governmental authority, or any amendment or modification thereto, or
(ii) that has been designated or regulated by any governmental authority as
radioactive, toxic, hazardous or otherwise a danger to health, reproduction
or the environment.

(xxiii) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.

(xxiv) There is no material document of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement which is not described or filed as
required.

(b) Each of the Selling Securityholders, severally and not jointly, hereby
represents and warrants as follows:

<PAGE>

(i) Such Selling Securityholder has good and marketable title to all
the shares of Stock to be sold by such Selling Securityholder hereunder,
free and clear of all liens, encumbrances, equities, security interests and
claims whatsoever, with full right and authority to deliver the same
hereunder, subject, in the case of each Selling Securityholder, to the
rights of Norwest Bank Minnesota, N.A., as Custodian (herein called the
Custodian), and that upon the delivery of and payment for such shares of
the Stock hereunder, the several Underwriters will receive good and
marketable title thereto, free and clear of all liens, encumbrances,
equities, security interests and claims whatsoever.

(ii) Certificates in negotiable form for the shares of the Stock to be
sold by such Selling Securityholder have been placed in custody under a
Custody Agreement for delivery under this Agreement with the Custodian;
such Selling Securityholder specifically agrees that the shares of the
Stock represented by the certificates so held in custody for such Selling
Securityholder are subject to the interests of the several Underwriters and
the Company, that the arrangements made by such Selling Securityholder for
such custody, including the Power of Attorney provided for in such Custody
Agreement, are to that extent irrevocable, and that the obligations of such
Selling Securityholder shall not be terminated by any act of such Selling
Securityholder or by operation of law, whether by the death or incapacity
of such Selling Securityholder (or, in the case of a Selling Securityholder
that is not an individual, the dissolution or liquidation of such Selling
Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur
before the delivery of such shares of the Stock hereunder, certificates for
such shares of the Stock shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death,
incapacity, dissolution, liquidation or other event had not occurred,
regardless of whether the Custodian shall have received notice of such
death, incapacity, dissolution, liquidation or other event.

(iii) The performance of this Agreement and the Custody Agreement
and the consummation of the transactions contemplated hereby and thereby will
not (i) result in a breach or violation by such Selling Securityholder of any of
the terms or provisions of, or constitute a default by such Selling
Securityholder under, any material agreement, franchise, license, indenture,
mortgage, deed of trust, or other material instrument to which such Selling
Securityholder is a party or by which such Selling Securityholder or any of its
property may be bound or affected, except where such conflict or breach would
not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries taken as
a whole, or (ii) violate or conflict with any order, rule or regulation
applicable to such Selling Securityholder of any court or regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or its subsidiaries, or any order of any court or governmental agency or
authority entered in any proceeding to which such Selling Securityholder was or
is now a party or by which it is bound.

(iv) Such Selling Securityholder has not taken and will not take,
directly or indirectly, any action designed to stabilize or manipulate, or which
has constituted or which might reasonably be expected to cause or result in
stabilization or manipulation, of the price of

<PAGE>

any security of the Company to facilitate the sale or resale of the Stock to
be sold by such Selling Securityholder.

(v) The Registration Statement and the Prospectus, insofar as it has
related to such Selling Securityholder, has conformed in all material respects
to the requirements of the Securities Act and the rules and regulations of the
Commission thereunder and has not included any untrue statement of a material
fact or omitted to state a material fact necessary to make the statements
therein not misleading in light of the circumstances under which they were made.

3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.

(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
2,800,000 shares of the Underwritten Stock to the several Underwriters, each
Selling Securityholder agrees to sell to the several Underwriters the number of
shares of the Underwritten Stock set forth in Schedule II opposite the name of
such Selling Securityholder, and each of the Underwriters agrees to purchase
from the Company and the Selling Securityholders the respective aggregate number
of shares of Underwritten Stock set forth opposite its name in Schedule I. The
price at which such shares of Underwritten Stock shall be sold by the Company
and the Selling Securityholders and purchased by the several Underwriters shall
be $___ per share. The obligation of each Underwriter to the Company and each
of the Selling Securityholders shall be to purchase from the Company and the
Selling Securityholders that number of shares of the Underwritten Stock which
represents the same proportion of the total number of shares of the Underwritten
Stock to be sold by each of the Company and the Selling Securityholders pursuant
to this Agreement as the number of shares of the Underwritten Stock set forth
opposite the name of such Underwriter in Schedule I hereto represents of the
total number of shares of the Underwritten Stock to be purchased by all
Underwriters pursuant to this Agreement, as adjusted by you in such manner as
you deem advisable to avoid fractional shares. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is
to purchase only the respective number of shares of the Underwritten Stock
specified in Schedule I.

(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company or the Selling Securityholders shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such notice
to purchase, or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon between you and such purchasing Underwriter
or Underwriters and upon the terms herein set forth, all or any part of the
shares of the Stock which such defaulting Underwriter or Underwriters agreed
to purchase. If the non-defaulting Underwriters fail so to make such
arrangements with respect to all such shares and portion, the number of
shares of the Stock which each non-defaulting Underwriter is otherwise
obligated to purchase under this Agreement shall be automatically increased
on a pro rata basis to absorb the remaining shares and portion which the
defaulting Underwriter or Underwriters agreed to purchase; PROVIDED, HOWEVER,
that the non-defaulting Underwriters shall

<PAGE>

not be obligated to purchase the shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase if the aggregate number of
such shares of the Stock exceeds 10% of the total number of shares of the
Stock which all Underwriters agreed to purchase hereunder. If the total
number of shares of the Stock which the defaulting Underwriter or
Underwriters agreed to purchase shall not be purchased or absorbed in
accordance with the two preceding sentences, the Company and the Selling
Securityholders shall have the right, within 24 hours next succeeding the
24-hour period above referred to, to make arrangements with other
underwriters or purchasers satisfactory to you for purchase of such shares
and portion on the terms herein set forth. In any such case, either you or
the Company and the Selling Securityholders shall have the right to postpone
the Closing Date determined as provided in Section 5 hereof for not more than
seven business days after the date originally fixed as the Closing Date
pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company and
the Selling Securityholders shall make arrangements within the 24-hour
periods stated above for the purchase of all the shares of the Stock which
the defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company or the Selling Securityholders to any
non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company or the Selling Securityholders.
Nothing in this paragraph (b), and no action taken hereunder, shall relieve
any defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.

(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth,
the Selling Securityholders grant an option to the several Underwriters to
purchase, severally and not jointly, up to 600,000 shares in the aggregate of
the Option Stock from the Selling Securityholders at the same
price per share as the Underwriters shall pay for the Underwritten Stock. The
maximum number of shares of Option Stock to be sold by such Selling
Securityholders is set forth opposite their respective names in Schedule II.
Said option may be exercised only to cover over-allotments in the sale
of the Underwritten Stock by the Underwriters and may be exercised in whole or
in part at any time (but not more than once) on or before the thirtieth day
after the date of this Agreement upon written or telegraphic notice by you to
the Company setting forth the aggregate number of shares of the Option Stock as
to which the several Underwriters are exercising the option. Delivery of
certificates for the shares of Option Stock, and payment therefor, shall be made
as provided in Section 5 hereof. If the option granted hereby is exercised in
part, the respective number of Option Shares to be sold by the Selling
Securityholders listed on Schedule II shall be determined on a pro rata basis
according to the number of shares of Option Stock to be sold by each such
Selling Securityholder and the total aggregate number of shares of Option
Stock to be sold hereunder, as adjusted by you in such manner as you deem
advisable to avoid fractional shares. The number of shares of the Option
Stock to be purchased by each Underwriter shall be the same percentage of the
total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional
shares.

<PAGE>

4. OFFERING BY UNDERWRITERS.

(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.

(b) The information set forth in the last paragraph on the front cover
page and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and you
on behalf of the respective Underwriters represent and warrant to the Company
that the statements made therein are correct.

5. DELIVERY OF AND PAYMENT FOR THE STOCK.

(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have been
exercised not later than 7:00 a.m., San Francisco time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of Oppenheimer Wolff & Donnelly LLP, 3400 Plaza VII, 45 South Seventh
Street, Minneapolis, Minnesota, at 7:00 a.m., San Francisco time, on the fourth
business day after the date of this Agreement, or at such time on such other
day, not later than seven full business days after such fourth business day, as
shall be agreed upon in writing by the Company, the Selling Securityholders and
you. The date and hour of such delivery and payment (which may be postponed as
provided in Section 3(b) hereof) are herein called the Closing Date.

(b) If the option granted by Section 3(c) hereof shall be exercised after
7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Oppenheimer Wolff & Donnelly
LLP, 3400 Plaza VII, 45 South Seventh Street, Minneapolis, Minnesota, at
7:00 a.m., San Francisco time, on the third business day after the exercise of
such option.

(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order, and payment for the Stock purchased from the Selling
Securityholders shall be made to the Custodian, for the account of the Selling
Securityholders, in each case by one or more certified or official bank check or
checks or a wire transfer or transfers in same day funds. Such payment shall
be made upon delivery of certificates for the Stock to you for the respective
accounts of the several Underwriters against receipt therefor signed by you.
Certificates for the Stock to be delivered to you shall be registered in such
name or names and shall be in such denominations as you may request at least one
business day before the Closing Date, in the case of Underwritten Stock, and at
least one business day prior to the purchase thereof, in the case of the Option
Stock. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of Lewco Securities
Corporation, 2 Broadway, New York, New York 10004 on the business day prior to
the Closing

<PAGE>

Date or, in the case of the Option Stock, by 3:00 p.m., New York time, on the
business day preceding the date of purchase.

It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter.
Any such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.

6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
Each of the Company and the Selling Securityholders respectively covenants
and agrees as follows:

(a) The Company will (i) prepare and timely file with the Commission under
Rule 424(b) a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A and (ii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.

(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company and
the Selling Securityholders will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be issued,
to obtain the withdrawal thereof at the earliest possible moment.

(c) The Company will (i) on or before the Closing Date, deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together
with, in each case, all exhibits thereto unless previously furnished to you)
and will also deliver to you, for distribution to the Underwriters, a
sufficient number of additional conformed copies of each of the foregoing
(but without exhibits) so that one copy of each may be distributed to each
Underwriter, (ii) as promptly as possible deliver to you and send to the
several Underwriters, at such office or offices as you may designate, as many
copies of the Prospectus as you may reasonably request, and (iii) thereafter
from time to time during the period in which a prospectus is required by law
to be delivered by an Underwriter or dealer, likewise send to the
Underwriters as many additional copies of the Prospectus and as many copies
of any supplement to the Prospectus and of any amended prospectus, filed by
the Company with the Commission, as you may reasonably request for the
purposes contemplated by the Securities Act.

<PAGE>

(d) If at any time during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.

(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.

(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; PROVIDED, HOWEVER, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Stock.

(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to shareholders of
the Company and of all information, documents and reports filed with the
Commission.

(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.

<PAGE>

(i) The Company agrees to pay all costs and expenses incident to the
performance of its and the Selling Securityholders' obligations (other than the
Selling Securityholders' obligations relating to the underwriting discount
applicable to sales by the Selling Securityholders, personal taxes and any fees
and expenses of counsel engaged by the Selling Securityholders, which discount,
transfer taxes, personal taxes and fees and expenses of such counsel shall be
paid by such Selling Securityholder) under this Agreement, including all costs
and expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. ("NASD") of
the Registration Statement, any Preliminary Prospectus and the Prospectus,
(ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus
and of the several documents required by paragraph (c) of this Section 6 to be
so furnished, (iii) the printing of this Agreement and related documents
delivered to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi) the
printing and issuance of stock certificates, including the transfer agent's
fees. The Selling Securityholders will pay any transfer taxes incident to the
transfer to the Underwriters of the shares the Stock being sold by the Selling
Securityholders.

(j) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters) paid
by or for the account of the Underwriters or their counsel in qualifying the
Stock under state securities or blue sky laws and in the review of the offering
by the NASD.

(k) The provisions of paragraphs (i) and (j) of this Section are intended
to relieve the Underwriters from the payment of the expenses and costs which the
Company and the Selling Securityholders hereby agree to pay and shall not affect
any agreement which the Company and the Selling Securityholders may make, or may
have made, for the sharing of any such expenses and costs.

(l) The Company and each of the Selling Securityholders hereby agrees
that, without the prior written consent of Hambrecht & Quist LLC on behalf of
the Underwriters, the Company or such Selling Securityholder, as the case may
be, will not, for a period of 180 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (i) sell,
offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this
Agreement, (B) shares of Common Stock issued by the Company upon the exercise of
options outstanding as of the date hereof granted under the stock option plans
of the Company (the "Option Plans") or upon the exercise of warrants outstanding
as of the date hereof, all as described in footnote (1) to the table under the
caption "Capitalization" in the

<PAGE>

Preliminary Prospectus, and (C) options to purchase Common Stock granted
under the Option Plans.

(m) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.

7. INDEMNIFICATION AND CONTRIBUTION.

(a) Subject to the provisions of paragraph (f) of this Section 7, the
Company and the Selling Securityholders jointly and severally agree to indemnify
and hold harmless each Underwriter and each person (including each partner or
officer thereof) who controls any Underwriter within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Securities Exchange Act of
1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and the Company and the Selling Securityholders jointly and severally
agree to reimburse each such Underwriter and controlling person for any legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that (1) the indemnity agreements of the Company
and the Selling Securityholders contained in this paragraph (a) shall not apply
to any such losses, claims, damages, liabilities or expenses if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of any Underwriter for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, (2) the indemnity agreement contained in this paragraph (a)
with respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person

<PAGE>

controlling such Underwriter) if at or prior to the written confirmation of
the sale of such Stock a copy of the Prospectus (or the Prospectus as amended
or supplemented) was not sent or delivered to such person and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented) unless the failure is the result of noncompliance by the
Company with paragraph (c) of Section 6 hereof. The indemnity agreements of
the Company and the Selling Securityholders contained in this paragraph (a)
and the representations and warranties of the Company and the Selling
Securityholders contained in Section 2 hereof shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Stock.

(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of
Section 15 of the Securities Act, and the Selling Securityholders from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Exchange Act, or the common law or otherwise and to
reimburse each of them for any legal or other expenses (including, except as
otherwise hereinafter provided, reasonable fees and disbursements of counsel)
incurred by the respective indemnified parties in connection with defending
against any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement) or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment thereof or supplement thereto) or
the omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of such
indemnifying Underwriter for use in the Registration Statement or the Prospectus
or any such amendment thereof or supplement thereto. The indemnity agreement of
each Underwriter contained in this paragraph (b) shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Stock.

(c) Each party indemnified under the provisions of paragraphs (a) or (b)
of this Section 7 agrees that, upon the service of a summons or other initial
legal process upon it in any action or suit instituted against it or upon its
receipt of written notification of the commencement of any investigation or
inquiry of, or proceeding against, it in respect of which indemnity may be
sought on account of any indemnity agreement contained in such paragraphs, it
will promptly give written notice (herein called the Notice) of such service or
notification to the party or parties

<PAGE>

from whom indemnification may be sought hereunder. No indemnification
provided for in such paragraphs shall be available to any party who shall
fail so to give the Notice if the party to whom such Notice was not given was
unaware of the action, suit, investigation, inquiry or proceeding to which
the Notice would have related and was prejudiced by the failure to give the
Notice, but the omission so to notify such indemnifying party or parties of
any such service or notification shall not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of such indemnity agreement.
Any indemnifying party shall be entitled at its own expense to participate in
the defense of any action, suit or proceeding against, or investigation or
inquiry of, an indemnified party. Any indemnifying party shall be entitled,
if it so elects within a reasonable time after receipt of the Notice by
giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to
the indemnified party or parties; PROVIDED, HOWEVER, that (i) if the
indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action,
suit, investigation, inquiry or proceeding or that there may be legal
defenses available to such indemnified party or parties different from or in
addition to those available to the indemnifying party or parties, then
counsel for the indemnified party or parties shall be entitled to conduct the
defense to the extent reasonably determined by such counsel to be necessary
to protect the interests of the indemnified party or parties and (ii) in any
event, the indemnified party or parties shall be entitled to have counsel
chosen by such indemnified party or parties participate in, but not conduct,
the defense. If, within a reasonable time after receipt of the Notice, an
indemnifying party gives a Notice of Defense and the counsel chosen by the
indemnifying party or parties is reasonably satisfactory to the indemnified
party or parties, the indemnifying party or parties will not be liable under
paragraphs (a) through (c) of this Section 7 for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding, except
that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred
to in clause (i) of the proviso to the preceding sentence and (B) the
indemnifying party or parties shall bear such other expenses as it or they
have authorized to be incurred by the indemnified party or parties. If,
within a reasonable time after receipt of the Notice, no Notice of Defense
has been given, the indemnifying party or parties shall be responsible for
any legal or other expenses incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding.

(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims,
damages or liabilities referred to in paragraph (a) or (b) of this Section 7
(i) in such proportion as is appropriate to reflect the relative benefits
received by each indemnifying party from the offering of the Stock or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of each
indemnifying party in connection with the

<PAGE>

statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and
the Selling Securityholders on the one hand and the Underwriters on the other
shall be deemed to be in the same respective proportions as the total net
proceeds from the offering of the Stock received by the Company and the
Selling Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.

The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.

Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will promptly
give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or
parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise (except as specifically provided in paragraph (c) of this Section
7).

(e) Neither the Company nor the Selling Securityholders will, without the
prior written consent of each Underwriter, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.

(f) The liability of each Selling Securityholder under this Agreement,
including the indemnity, contribution and reimbursement agreements contained in
the provisions of this

<PAGE>

Section 7 and Section 11 hereof shall be limited to an amount equal to the
gross proceeds from the Sale of the stock sold by such Selling Securityholder
to the Underwriters, less the amount of the underwriting discount applicable
to such Stock. The Company and the Selling Securityholders may agree, as
among themselves and without limiting the rights of the Underwriters under
this Agreement, as to the respective amounts of such liability for which they
each shall be responsible.

8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in major hostilities or an escalation of major hostilities by the
United States or the declaration of war or a national emergency by the United
States on or after the date hereof, (ii) any outbreak of major hostilities or
other national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, calamity, crisis or change
in economic or political conditions in the financial markets of the United
States would, in the Underwriters' reasonable judgment, make the offering or
delivery of the Stock impracticable, (iii) suspension of trading in securities
generally or a material adverse decline in value of securities generally on the
New York Stock Exchange, the American Stock Exchange, or The Nasdaq Stock
Market, or limitations on prices (other than limitations on hours or numbers of
days of trading) for securities on either such exchange or system, (iv) the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of, or commencement of any proceeding or
investigation by, any court, legislative body, agency or other governmental
authority which in the Underwriters' reasonable opinion materially and adversely
affects or will materially or adversely affect the business or operations of the
Company, (v) declaration of a banking moratorium by either federal or New York
State authorities or (vi) the taking of any action by any federal, state or
local government or agency in respect of its monetary or fiscal affairs which in
the Underwriters' reasonable opinion has a material adverse effect on the
securities markets in the United States. If this Agreement shall be terminated
pursuant to this Section 8, there shall be no liability of the Company or the
Selling Securityholders to the Underwriters and no liability of the Underwriters
to the Company or the Selling Securityholders; PROVIDED, HOWEVER, that in the
event of any such termination the Company and the Selling Securityholders agree
to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.

9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:

(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.

<PAGE>

(b) The legality and sufficiency of the sale of the Stock hereunder and
the validity and form of the certificates representing the Stock, all corporate
proceedings and other legal matters incident to the foregoing, and the form of
the Registration Statement and of the Prospectus (except as to the financial
statements contained therein), shall have been approved at or prior to the
Closing Date by Orrick, Herrington & Sutcliffe LLP, counsel for the
Underwriters.

(c) You shall have received from Oppenheimer Wolff & Donnelly LLP,
counsel for the Company and the Selling Securityholders, and from ________,
patent counsel for the Company, opinions, addressed to the Underwriters and
dated the Closing Date, covering the matters set forth in Annex A and Annex B
hereto, respectively, and if Option Stock is purchased at any date after the
Closing Date, additional opinions from each such counsel, addressed to the
Underwriters and dated such later date, confirming that the statements
expressed as of the Closing Date in such opinions remain valid as of such
later date.

(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, and in light of the circumstances
under which they were made in the case of the Prospectus, not misleading,
(ii) since the Effective Date, no event has occurred which should have been set
forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment, (iii) since the respective dates as of
which information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein,
(iv) neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus,
(vi) there are not any franchises, contracts, leases or other documents which
are required to be filed as exhibits to the Registration Statement which have
not been filed as required, (vii) the representations and warranties of the
Company herein are true and correct in all material respects as of the Closing
Date or any later date on which Option Stock is to be purchased, as the case may
be, and (viii) there has not been any outbreak of major hostilities or other
national or international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, calamity, crisis or change in
economic or political conditions in the financial markets of the United States
would, in the Underwriters' reasonable judgment, make the offering or delivery
of the Stock impracticable or the suspension of trading in securities generally
or a material adverse decline in value of securities generally on the New York
Stock Exchange, the American Stock Exchange, or The Nasdaq Stock Market, or
limitations on prices (other than limitations on hours or numbers of days of
trading) for securities on either such exchange or system.

<PAGE>

(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company, stating that the respective signers
of said certificate have carefully examined the Registration Statement in the
form in which it originally became effective and the Prospectus contained
therein and any supplements or amendments thereto, and that the statements
included in clauses (i) through (vii) of paragraph (d) of this Section 9 are
true and correct.

(f) You shall have received from KPMG Peat Marwick LLP a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
certified public accountants with respect to the Company within the meaning of
the Securities Act and the applicable published rules and regulations thereunder
and based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the Original
Letter), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such later
date, as the case may be, and (ii) setting forth any revisions and additions to
the statements and conclusions set forth in the Original Letter which are
necessary to reflect any changes in the facts described in the Original Letter
since the date of the Original Letter or to reflect the availability of more
recent financial statements, data or information. The letters shall not
disclose any change, or any development involving a prospective change, in or
affecting the business or properties of the Company or any of its subsidiaries
which, in your sole judgment, makes it impractical or inadvisable to proceed
with the public offering of the Stock or the purchase of the Option Stock as
contemplated by the Prospectus.

(g) You shall have received from KPMG Peat Marwick LLP a letter stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their examination
of the Company's consolidated financial statements as of and at September 30,
1998 and for the nine-month period then ended, did not disclose any weakness in
internal controls that they considered to be material weaknesses.

(h) You shall have been furnished evidence in usual written or telegraphic
form from the appropriate authorities of the several jurisdictions, or other
evidence satisfactory to you, of the qualification referred to in paragraph (f)
of Section 6 hereof.

(i) Prior to the Closing Date, the Stock shall have been duly authorized
for listing by the Nasdaq National Market upon official notice of issuance.

(j) On or prior to the Closing Date, you shall have received from all
directors, officers, and beneficial holders of more than 1% of the outstanding
Common Stock agreements, in a form reasonably satisfactory to Hambrecht & Quist
LLC, stating that without the prior written consent of Hambrecht & Quist LLC on
behalf of the Underwriters, such person or entity will not, for a period of 180
days following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make
any short sale, pledge, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of

<PAGE>

Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock or (ii)
enter into any swap or other agreement that transfers, in whole or in part,
any of the economic consequences or ownership of Common Stock, whether any
such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.

All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Orrick, Herrington & Sutcliffe LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.

In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; PROVIDED, HOWEVER, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is
terminated by you because of any refusal, inability or failure on the part of
the Company or the Selling Securityholders to perform any agreement herein, to
fulfill any of the conditions herein, or to comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the transactions contemplated hereby.

10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.

In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; PROVIDED, HOWEVER, that in the event of any such termination,
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.

11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Securityholder, to the provisions of paragraph (f) of Section 7), the
Company and the Selling Securityholders hereby jointly and severally agree to
reimburse, on a quarterly basis, the Underwriters for all reasonable

<PAGE>

legal and other expenses incurred in connection with investigating or
defending any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged
statement or omission, described in paragraph (a) of Section 7 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 11 and the
possibility that such payments might later be held to be improper; PROVIDED,
HOWEVER, that (i) to the extent any such payment is ultimately held to be
improper, the persons receiving such payments shall promptly refund them and
(ii) such persons shall provide to the Company, upon request, reasonable
assurances of their ability to effect any refund, when and if due.

12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company, the Selling Securityholders and the
several Underwriters and, with respect to the provisions of Section 7 hereof,
the several parties (in addition to the Company, the Selling Securityholders
and the several Underwriters) indemnified under the provisions of said
Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give
to any other person, firm or corporation any legal or equitable remedy or
claim under or in respect of this Agreement or any provision herein
contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Stock from any of the
several Underwriters.

13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 6105 Trenton Lane North, Suite
100, Attention: ; and if to the Selling Securityholders,
shall be mailed, telegraphed or delivered to the Selling Securityholders in care
of at
. All notices given by telegraph shall be promptly confirmed by letter.

14. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and
effect regardless of (a) any termination of this Agreement, (b) any
investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of the Company or the Selling Securityholders or
their respective directors or officers, and (c) delivery and payment for the
Stock under this Agreement; PROVIDED, HOWEVER, that if this Agreement is
terminated prior to the Closing Date, the provisions of paragraphs (l) and
(m) of Section 6 hereof shall be of no further force or effect.

This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.

This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.

<PAGE>

Please sign and return to the Company and to the Selling Securityholders in
care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.

Very truly yours,

SELECT COMFORT CORPORATION

By
-----------------------------
[Name]
[Title]

SELLING SECURITYHOLDERS:

Apex Investment Fund, L.P. and
The Productivity Fund II, L.P.
General Electric Capital Corporation
Norwest Venture Capital
Cherry Tree Ventures IV Limited Partnership
Mark L. de Naray
Charles E. Dorsey
Alex. Brown & Sons Employees
Venture Fund LP
Theodore H. Ashford
Robert D. Auritt
Bayview Investors, Ltd.
Anne Dorsey
Richard M. Downs
James D. Gaboury
Doug Hickman
Brent T. Hutton
Karen Jones
Terral Jordon
KCB BV, L.P.
Douglas Keefer
Erwin A. Kelen
Gregory T. Kliner
Richard Knase
Marquette Venture Partners II, L.P.
MVP II Affiliates Fund, L.P.
Doug Poole
J.P. Poole

<PAGE>

SELLING SECURITYHOLDERS (CONT.):

Suzanne Puerzer
John A. Rollwagen
John Sculley
Dewey K. Shay
Robert A. Walker
Jo Ann O. Walker
Kenneth H. Walker
Kenneth H. Walker, IRA

By
------------------------------
[Attorney-in-Fact]

The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.

HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS INC.
PIPER JAFFRAY, INC.
By Hambrecht & Quist LLC

By
------------------------------
Managing Director

Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.

<PAGE>

SCHEDULE I

UNDERWRITERS

SHARES
NUMBER OF TO BE
UNDERWRITERS PURCHASED
------------ ---------
<S> <C>
Hambrecht & Quist LLC . . . . . . . . . . . . . . . . . . .
BancBoston Robertson Stephens Inc. . . . . . . . . . . . .
Piper Jaffray, Inc. . . . . . . . . . . . . . . . . . . . .

---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800,000
---------
---------

</TABLE>

<PAGE>

SCHEDULE II

SELLING SECURITYHOLDERS

NUMBER OF SHARES NUMBER OF SHARES
NAME OF OF UNDERWRITTEN OF OPTION STOCK
SELLING SECURITYHOLDERS STOCK TO BE SOLD TO BE SOLD
----------------------- ---------------- ----------
<S> <C> <C>
Apex Investment Fund, L.P. and
The Productivity Fund II, L.P. .....
General Electric Capital Corporation..
Norwest Venture Capital...............
Cherry Tree Ventures IV Limited.......
Partnership.........................
Mark L. de Naray......................
Charles E. Dorsey.....................
Alex. Brown & Sons Employees..........
Venture Fund LP.....................
Theodore H. Ashford...................
Robert D. Auritt......................
Bayview Investors, Ltd. ..............
Anne Dorsey...........................
Richard M. Downs......................
James D. Gaboury......................
Doug Hickman..........................
Brent T. Hutton.......................
Karen Jones...........................
Terral Jordon.........................
KCB BV, L.P. .........................
Douglas Keefer........................
Erwin A. Kelen........................
Gregory T. Kliner.....................
Richard Knase.........................
Marquette Venture Partners II, L.P. ..
MVP II Affiliates Fund, L.P. .........
Doug Poole............................
J.P. Poole............................
Suzanne Puerzer.......................
John A. Rollwagen.....................
John Sculley..........................
Dewey K. Shay.........................
Robert A. Walker......................
Jo Ann O. Walker......................
Kenneth H. Walker.....................
Kenneth H. Walker, IRA................
------------- ------------
Total 1,200,000 600,000
------------- ------------
------------- ------------

</TABLE>

<PAGE>

ANNEX A

MATTERS TO BE COVERED IN THE OPINION OF OPPENHEIMER WOLFF DONNELLY LLP
COUNSEL FOR THE COMPANY
AND THE SELLING SECURITYHOLDERS

(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, is duly qualified
as a foreign corporation and in good standing in each state of the United
States of America in which its ownership or leasing of property requires
such qualification (except where the failure to be so qualified would not
have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole), and has full corporate power and authority to own or
lease its properties and conduct its business as described in the
Registration Statement; all the issued and outstanding capital stock of
each of the subsidiaries of the Company has been duly authorized and
validly issued and is fully paid and nonassessable, and is owned by the
Company free and clear of all liens, encumbrances and security interests,
and to the best of such counsel's knowledge, no options, warrants or other
rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or ownership
interests in such subsidiaries are outstanding;

(ii) the authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the heading
"Capitalization" (except for issuances subsequent to the date thereof, if
any, pursuant to the exercise of options and warrants referred to in the
Prospectus and except that the conversion of all the Company's outstanding
shares of Series A, B, C, D and E Preferred Stock, assumed in the
Prospectus to have previously occurred, will not occur until the Closing
Date); proper corporate proceedings have been taken validly to authorize
such authorized capital stock; all of the outstanding shares of such
capital stock (including the Underwritten Stock and the shares of Option
Stock issued, if any) have been duly and validly issued and are fully paid
and nonassessable; any Option Stock purchased after the Closing Date, when
issued and delivered to and paid for by the Underwriters as provided in the
Underwriting Agreement, will have been duly and validly issued and be fully
paid and nonassessable; and no preemptive rights of, or rights of refusal
in favor of, shareholders exist with respect to the Stock, or the issue and
sale thereof, pursuant to the Articles of Incorporation or Bylaws of the
Company and, to the knowledge of such counsel, there are no contractual
preemptive rights that have not been waived, rights of first refusal or
rights of co-sale which exist with respect to the Stock being sold by the
Selling Securityholders or the issue and sale of the Stock;

(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for
that purpose have been instituted or are pending or contemplated by the
Commission;

<PAGE>

(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial and statistical data
contained therein, as to which such counsel need express no opinion) comply
as to form in all material respects with the requirements of the Securities
Act and with the rules and regulations of the Commission thereunder;

(v) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel)
and 11(c) of Form S-1 is to the best of such counsel's knowledge accurately
and adequately set forth therein in all material respects or no response is
required with respect to such Items, and the description of the Company's
stock option plans and the options granted and which may be granted
thereunder and the options granted otherwise than under such plans set
forth in the Prospectus accurately and fairly presents in all material
respects, the information required to be shown with respect to said plans
and options to the extent required by the Securities Act and the rules and
regulations of the Commission thereunder;

(vi) such counsel do not know of any material franchises, contracts,
leases, documents or legal proceedings, pending or threatened, which in the
opinion of such counsel are of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not described and filed as required;

(vii) the Underwriting Agreement has been duly authorized,
executed and delivered by the Company;

(viii) the Underwriting Agreement has been duly executed and
delivered by or on behalf of the Selling Securityholders and the Custody
Agreement between the Selling Securityholders and Norwest Bank Minnesota,
N.A., as Custodian, and the Power of Attorney referred to in such Custody
Agreement have been duly executed and delivered by the several Selling
Securityholders;

(ix) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of, the Articles of Incorporation or Bylaws of
the Company or any of its subsidiaries or result in the breach of any
agreement or instrument filed as an exhibit to the Registration Statement
and to which the Company or any of its subsidiaries is a party or any
applicable law or regulation, or so far as is known to such counsel, any
order, writ, injunction or decree, of any jurisdiction, court or
governmental instrumentality;

(x) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company, have waived such
rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement;

(xi) good and marketable title to the shares of Stock sold by the
Selling Securityholders under the Underwriting Agreement, free and clear of
all liens,

<PAGE>

encumbrances, equities, security interests and claims, has been
transferred to the Underwriters who have severally purchased such shares of
Stock under the Underwriting Agreement, assuming for the purpose of this
opinion that the Underwriters purchased the same in good faith without
notice of any adverse claims and assuming that each Underwriter is
otherwise a bona fide purchaser for purposes of the Uniform Commercial
Code; and

(xii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated in the Underwriting Agreement, except such as
have been obtained under the Securities Act and such as may be required
under state securities or blue sky laws in connection with the purchase and
distribution of the Stock by the Underwriters.

____________________________________

Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or of the State of Minnesota,
upon opinions of local counsel satisfactory in form and scope to counsel for
the Underwriters. Copies of any opinions so relied upon shall be delivered
to the Representatives and to counsel for the Underwriters and the foregoing
opinion shall also state that counsel knows of no reason the Underwriters are
not entitled to rely upon the opinions of such local counsel.

In addition to the matters set forth above, counsel rendering the foregoing
opinion shall also include a statement to the effect that nothing has come to
the attention of such counsel that leads it to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial and statistical data, and except with respect to the discussions of
intellectual property matters, contained or incorporated by reference therein,
as to which such counsel need not express any opinion or belief) at the
Effective Date contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, that the Prospectus (except as to the
financial statements and schedules and other financial and statistical data and
except with respect to the discussions of intellectual property matters,
contained or incorporated by reference therein, as to which such counsel need
not express any opinion or belief) as of its date or at the Closing Date (or any
later date on which Option Stock is purchased), contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.

<PAGE>

ANNEX B

MATTERS TO BE COVERED IN THE OPINION OF
PATENT COUNSEL FOR THE COMPANY

Such counsel are familiar with the technology used by the Company in its
business and the manner of its use thereof and have read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to patents, trade secrets,
trademarks, service marks or other proprietary information or materials and:

(i) such counsel have no reason to believe that the Registration
Statement or the Prospectus (A) contains any untrue statement of a material
fact with respect to patents, trade secrets, trademarks, service marks or
other proprietary information or materials owned or used by the Company, or
the manner of its use thereof, or any allegation on the part of any person
that the Company is infringing any patent rights, trade secrets,
trademarks, service marks or other proprietary information or materials of
any such person or (B) omits to state any material fact relating to
patents, trade secrets, trademarks, service marks or other proprietary
information or materials owned or used by the Company, or the manner of its
use thereof, or any allegation of which such counsel have knowledge, that
is required to be stated in the Registration Statement or the Prospectus or
is necessary to make the statements therein not misleading;

(ii) to the best of such counsel's knowledge there are no legal or
governmental proceedings pending relating to patent rights, trade secrets,
trademarks, service marks or other proprietary information or materials of
the Company, and to the best of such counsel's knowledge no such
proceedings are threatened or contemplated by governmental authorities or
others;

(iii) such counsel do not know of any contracts or other
documents, relating to governmental regulation affecting the Company or the
Company's patents, trade secrets, trademarks, service marks or other
proprietary information or materials of a character required to be filed as
an exhibit to the Registration Statement or required to be described in the
Registration Statement or the Prospectus that are not filed or described as
required;

(iv) to the best of such counsel's knowledge, the Company is not
infringing or otherwise violating any patents, trade secrets, trademarks,
service marks or other proprietary information or materials of others, and
to the best of such counsel's knowledge there are no infringements by
others of any of the Company's patents, trade secrets, trademarks, service
marks or other proprietary information or materials which in the judgment
of such counsel could affect materially the use thereof by the Company; and

(v) to the best of such counsel's knowledge, the Company owns or
possesses sufficient licenses or other rights to use all patents, trade
secrets, trademarks, service marks or other proprietary information or
materials necessary to conduct the business now being or proposed to be
conducted by the Company as described in the Prospectus.

<PAGE>

THIRD RESTATED
ARTICLES OF INCORPORATION
OF
SELECT COMFORT CORPORATION

These Third Restated Articles of Incorporation supersede the Second Restated
Articles of Incorporation dated August 31, 1998 and all amendments thereto.

ARTICLE I

The name of the Corporation is Select Comfort Corporation.

ARTICLE II

The registered office of the Corporation in Minnesota is 6105 Trenton Lane
North, Suite 100, Minneapolis, MN 55442-3240.

ARTICLE III

The Corporation, through its Board of Directors, is authorized to issue up to
one-hundred million (100,000,000) shares of capital stock, ninety-five million
(95,000,000) of which are designated as Common Stock, five million (5,000,000)
of which are designated as the "Undesignated Preferred Stock," and all of which
shall have a par value of $0.01 per share.

The Undesignated Preferred Stock may be issued from time to time in one or more
series. For each series, the Board of Directors must fix, prior to the issuance
of any shares thereof, pursuant to the authority hereby expressly vested in it,
a distinctive designation or title, the number of shares in each series, the
voting powers (full, limited or no voting powers), the preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof.

ARTICLE IV

The purposes of the Corporation are general business purposes and the
Corporation shall possess all powers necessary to conduct any business in which
it is authorized to engage, including, but not limited to, all those powers
expressly conferred upon business corporations by Chapter 302A of the Minnesota
Statutes, as amended, together with those powers implied therefrom.

ARTICLE V

The Corporation shall have perpetual duration.

ARTICLE VI

The affirmative vote of the holders of a majority of the voting power of the
shares of capital stock represented and entitled to vote at a duly held meeting
is required for an action of the shareholders, including any amendment to these
Articles of Incorporation, except where Chapter

<PAGE>

302A of the Minnesota Statutes, as amended, or these Articles of Incorporation,
as amended, requires an affirmative vote of a larger majority.

ARTICLE VII

Shares of capital stock of the Corporation acquired by the Corporation shall
become authorized but unissued shares and may be reissued, from time to time, at
the discretion of the Corporation.

ARTICLE VIII

Except as otherwise provided in these Articles of Incorporation, as amended,

(A) The Board of Directors may from time to time, by vote of a majority of its
members present at a duly held meeting, adopt, amend or repeal all or any of the
Bylaws of the Corporation as permitted by Chapter 302A of the Minnesota
Statutes, as amended, subject to the power of the shareholders to adopt, amend
or repeal such Bylaws.

(B) The Board of Directors is authorized to accept and reject subscriptions for
and to dispose of shares of authorized stock of the Corporation, including the
granting of stock options, warrants and other rights to purchase stock, without
action by the shareholders and upon such terms and conditions as may be deemed
advisable by the Board of Directors in the exercise of its discretion, except as
otherwise limited by Chapter 302A of the Minnesota Statutes, as amended.

(C) The Board of Directors is authorized to issue, sell or otherwise dispose of
bonds, debentures, certificates of indebtedness and other securities, including
those convertible into stock, without action by the shareholders and for such
consideration and upon such terms and conditions as may be deemed advisable by
the Board of Directors in the exercise of its discretion, except as otherwise
limited by Chapter 302A of the Minnesota Statutes, as amended.

ARTICLE IX

Any action required or permitted to be taken at a meeting of the Board of
Directors may be taken by written consent signed by all the directors; provided
that, if the action is one which does not require shareholder approval, such
action may be taken by written consent signed by the number of directors that
would be required to take the same action at a meeting at which all directors
were present.

ARTICLE X

The shareholders of the Corporation have no right to cumulate their votes in the
election of directors.

ARTICLE XI

The shareholders of the Corporation have no preemptive rights in any future
issuance of stock by the Corporation.

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<PAGE>

ARTICLE XII

Each director, officer, employee or agent, past and present, of the Corporation,
and each person who serves or may have served at the request of the Corporation
as a director, officer, employee or agent of another corporation or employee
benefit plan, and their respective heirs, administrators and executors, shall be
indemnified by the Corporation in accordance with, and to the fullest extent
permissible under, the provisions of Chapter 302A of the Minnesota Statutes, as
amended.

ARTICLE XIII

A director of the Corporation, including a person deemed to be a director under
applicable law, shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except to the extent provided by applicable law for (i) liability based on a
breach of the duty of loyalty to the Corporation or the shareholders; (ii)
liability for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) liability based on the payment
of an improper dividend or an improper acquisition of the Corporation's shares
under Section 559 of the Minnesota Business Corporation Act (Minnesota Statutes,
Chap. 302A) or on violations of state securities laws under Section 80A.23 of
Minnesota Statutes; or (iv) liability for any transaction from which the
director derived an improper personal benefit. If Chapter 302A, the Minnesota
Business Corporation Act, hereafter is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the Corporation, in addition to the limitation on personal liability
provided herein, shall be eliminated or limited to the fullest extent permitted
by any such amendment. Any repeal or modification of this Article XIII by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.

ARTICLE XIV

The number of directors which shall constitute the entire Board of Directors
shall not be less than one (1) nor more than nine (9), which number shall be
determined from time to time by the Board of Directors. The Directors shall be
divided into three (3) classes, as nearly equal in number as possible. The term
of office of the first class shall expire at the 1999 annual meeting of the
shareholders of the Corporation; the term of office of the second class shall
expire at the 2000 annual meeting of the shareholders of the Corporation; and
the term of office of the third class shall expire at the 2001 annual meeting of
the shareholders of the Corporation. At each annual meeting of the shareholders
after such classification, the number of directors equal to the number of the
class whose term expires on the day of such meeting shall be elected for a term
of three (3) years. Directors shall hold office until expiration of the terms
for which they were elected and qualified; provided, however, that a director
may be removed from office as a director at any time by the shareholders, but
only for cause, and only by the affirmative vote of a majority of the
outstanding voting power entitled to elect such director. If the office of any
director becomes vacant by reason of death, resignation, retirement,
disqualification, removal from office, increase in the number of directors or
otherwise, a majority of the remaining directors, although less than a quorum,
at a meeting called for that purpose, may choose a successor, who, unless
removed for cause as set forth above, shall hold office until the expiration

3
<PAGE>

of the term of the class for which appointed or until a successor shall be
elected and qualified. This Article XIV may not be altered, amended or
repealed, in whole or in part, unless authorized by the affirmative vote of the
holders of not less than two-thirds of the outstanding voting power entitled to
vote.

ARTICLE XV

The affirmative vote of the holders of not less than two-thirds of the
outstanding voting power of the corporation entitled to vote for approval shall
be required if (a) this Corporation merges or consolidates with any other
corporation, or if (b) this Corporation sells or exchanges all or a substantial
part of its assets to or with any other corporation, or if (c) this Corporation
issues or delivers any stock or other securities of its issue in exchange or
payment for any properties or assets of any other corporation, or securities
issued by any other corporation, or in a merger of any subsidiary of this
Corporation (80% or more of the common stock of which is held by this
Corporation) with or into any other corporation; provided, however, that the
foregoing shall not apply to any plan of merger or consolidation, or sale or
exchange of assets, or issuance or delivery of stock or other securities which
was approved (or adopted) and recommended without condition by the affirmative
vote of not less than two-thirds of the directors, nor shall it apply to any
such transaction solely between this Corporation and another corporation 50% or
more of the voting stock of which is owned, directly or indirectly, by this
Corporation. The Board of Directors shall be permitted to condition its
approval (or adoption) of any plan of merger or exchange of assets, or issuance
or delivery of stock or securities upon the approval of holders of two-thirds of
the outstanding stock of this Corporation entitled to vote on such plan of
merger or consolidation, or sale or exchange of assets, or issuance or delivery
of stock or securities. This Article XV may not be altered, amended or
repealed, in whole or in part, unless authorized by the affirmative vote of the
holders of not less than two-thirds of the outstanding voting power entitled to
vote.

IN WITNESS WHEREOF, the undersigned hereunto sets his hand this ___ day of
________________, 1998.

SELECT COMFORT CORPORATION

By:
--------------------------------
Its:
-------------------------------

<PAGE>

SECOND
RESTATED BYLAWS
OF
SELECT COMFORT CORPORATION

ARTICLE I
Offices

SECTION 1. REGISTERED OFFICE. The registered office of the Corporation
required by Chapter 302A of the Minnesota Statutes to be maintained in the State
of Minnesota is as designated in the Articles of Incorporation. The Board of
Directors of the Corporation may, from time to time, change the location of the
registered office. On or before the day that such change is to become
effective, a certificate of such change and of the new address of the new
registered office shall be filed with the Secretary of State of the State of
Minnesota.

SECTION 2. OTHER OFFICES. The Corporation may establish and maintain such
other offices, within or without the State of Minnesota, as are from time to
time authorized by the Board of Directors.

ARTICLE II
Meetings of Shareholders

SECTION 1. PLACE OF MEETING. All meetings of the shareholders shall be held
at the registered office of the Corporation in the State of Minnesota or at such
place within or without the state as may be fixed from time to time by the Board
of Directors, provided that a meeting called by or at the demand of a
shareholder shall be held in the county where the principal executive office of
the Corporation is located.

SECTION 2. DATE OF MEETING. A regular meeting of shareholders may be held
for the purpose of electing directors or for the transaction of any other
business as may come before the meeting. It shall be the duty of the President
or Treasurer, upon demand of any shareholder holding three percent (3%) or more
of the voting power of all shares entitled to vote to call such meeting if a
regular meeting of shareholders has not been held during the immediately
preceding fifteen (15) months. If said officers fail to call and hold such
meeting within ninety (90) days after receipt of the demand, the shareholder
making the demand shall have the right and power to call such meeting.

SECTION 3. NOTICE OF REGULAR MEETINGS. Written notice of the time and place
of each regular shareholder meeting shall be mailed, postage prepaid, at least
ten (10) business days but not more than sixty (60) days before such meeting, to
each shareholder entitled to vote thereat at his address as the same appears
upon the books of the Corporation.

<PAGE>

SECTION 4. SPECIAL MEETINGS. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the Articles
of Incorporation, may be called by the President or Treasurer and shall be
called by the President or Treasurer at the request in writing of two or more
members of the Board of Directors, or at the request in writing of shareholders
owning ten percent (10%) or more of the voting power of all shares entitled to
vote. Such request, which shall be by registered mail or delivered in person to
the President or Treasurer, shall state the purpose or purposes of the proposed
meeting.

SECTION 5. NOTICE OF SPECIAL MEETINGS. Written notice of the time, place
and purpose or purposes of a special meeting shall be mailed, postage prepaid,
at least five (5) business but not more than sixty (60) days before such
meeting, to each shareholder entitled to vote at such meeting at his address as
the same appears upon the books of the Corporation.

SECTION 6. BUSINESS TO BE TRANSACTED. (A) The proposal of business, except
nominations of persons for election to the Board of Directors of the
Corporation, to be considered by the shareholders at a regular or annual meeting
of shareholders may be made by any shareholder of the Corporation who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Section 6(A) and who was a shareholder of record at the time such
notice is delivered to the Secretary of the Corporation. For business, except
nominations of persons for election to the Board of Directors of the
Corporation, to be properly brought before a regular or annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice shall be
delivered to the Secretary at the principal executive office of the Corporation
not less than one hundred twenty (120) days prior to the first anniversary of
the date that the Corporation first released or mailed its proxy statement to
shareholders in connection with the preceding year's regular or annual meeting;
provided, however, that in the event that the date of the regular or annual
meeting is advanced by more than thirty (30) days or delayed by more than sixty
(60) days from the anniversary of the preceding year's regular or annual meeting
date, notice by the shareholder to be timely must be so delivered not later than
the close of business on the later of the one hundred twentieth (120th) day
prior to such regular or annual meeting or the tenth (10th) day following the
day on which public announcement of the date of such meeting is first made. Such
shareholder's notice shall set forth (a) as to any business, except for
nominations of persons for election to the Board of Directors of the
Corporation, that the shareholder proposes to bring before the meeting, a brief
description of the business desires to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such shareholder and the beneficial owner, if any, on whose
behalf the proposal is made and (b) as to the shareholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such shareholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the class and number
of shares of the Corporation which are owned beneficially and of record by such
shareholder and such beneficial owner.

2
<PAGE>

(B) Only such business shall be conducted as a special meeting of shareholders
as shall have been brought before the meeting pursuant to the Corporation's
notice of meeting pursuant to Section 5 of these Bylaws.

(C) Only such business shall be conducted at a meeting of shareholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 6. Except as otherwise provided by law, the Articles of
Incorporation or these Bylaws, the chairman of the meeting shall have the power
and duty to determine whether any business proposed to be brought before the
meeting was made in accordance with the procedures set forth in this Section 6,
and, if any proposed business is not in compliance with this Section 6, to
declare that such defective proposal shall be disregarded.

SECTION 7. WAIVER OF NOTICE. A shareholder may waive notice of a meeting of
shareholders. A waiver of notice by a shareholder entitled to notice is
effective whether given before, at, or after the meeting, and whether given in
writing, orally, or by attendance. Attendance by a shareholder at a meeting is
a waiver of notice of that meeting, except where the shareholder objects at the
beginning of the meeting to the transaction of business because the meeting is
not lawfully called or convened, or objects before a vote on an item of business
because the item may not lawfully be considered at that meeting and does not
participate in the consideration of the item at that meeting.

SECTION 8. QUORUM AND ADJOURNMENT. The holders of a majority of the voting
power of the shares entitled to vote at a meeting shall constitute a quorum at
all meetings of the shareholders for the transaction of business, except as
otherwise provided by statute or by the Articles of Incorporation. If, however,
such quorum shall not be present or represented at any meeting of the
shareholders, the holders of a majority of the voting power of the shares
entitled to vote thereat, and present in person or represented by proxy, shall
have the power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the meeting as originally noticed. The shareholders present at a duly called or
held meeting at which a quorum is present may continue to transact business
until adjournment, even though the withdrawal of a number of shareholders
originally present leaves less than the proportion or number otherwise required
for a quorum.

SECTION 9. VOTING RIGHTS. A shareholder may cast his vote in person or by
proxy. When a quorum is present at the time a meeting is convened, the vote of
the holders of a majority of the shares entitled to vote on any question present
in person or by proxy shall decide such question unless the question is one upon
which, by express provision of the applicable statute or the Articles of
Incorporation, a different vote is required, in which case such express
provision shall govern and control the decision of such question.

3
<PAGE>

SECTION 10. MANNER OF VOTING. Each shareholder shall at every meeting of the
shareholders be entitled to one vote in person or by proxy for each share of the
capital stock having voting power held by such shareholder; provided, however,
that (i) no proxy shall be valid after eleven (11) months from its date unless
the proxy expressly provides for a longer period, and (ii) except where the
transfer books of the Corporation have been closed or a date has been fixed as a
record date for the determination of its shareholders entitled to vote, no share
of stock that has been transferred on the books of the Corporation within twenty
(20) days next preceding any election of directors shall be voted at such
election for directors.

SECTION 11. RECORD DATE. The Board of Directors may fix a date, not
exceeding sixty (60) days preceding the date of any meeting of shareholders, as
a record date for the determination of the shareholders entitled to notice of
and to vote at such meeting, and in such case only shareholders of record on the
date so fixed, or their legal representatives, shall be entitled to notice of
and to vote at such meeting, notwithstanding any transfer of any shares on the
books of the Corporation after any record date so fixed. The Board of Directors
may close the books of the Corporation against transfers of shares during the
whole or any part of such period.

SECTION 12. ORGANIZATION OF MEETINGS. The President shall preside at all
meetings of the shareholders, and in his or her absence the Treasurer shall act
as Chairman. The Secretary shall act as secretary of all meetings of the
shareholders, or in his or her absence any person appointed by the Chairman
shall act as secretary.

SECTION 13. ACTION WITHOUT A MEETING. Any action required or permitted to be
taken at a shareholders' meeting may be taken without a meeting if authorized by
a writing or writings signed by all of the holders of shares who would be
entitled to vote on that action. Such action shall be effective at the time the
last signature is placed on such writing or writings, unless a different
effective time is provided in the written action. If any action so taken
requires a certificate to be filed in the office of the Secretary of State, the
officer signing such certificate shall state therein that the action was
effected in the manner aforesaid.

SECTION 14. SHAREHOLDER NOMINATIONS OF DIRECTORS. Any shareholder that
intends to make a nomination of one or more persons for election to the Board of
Directors of the Corporation shall have given timely notice thereof in writing
to the Secretary of the Corporation. To be timely, a shareholder's notice shall
be delivered to the Secretary at the principal executive office of the
Corporation not less than one hundred twenty (120) days prior to the first
anniversary of the date that the Corporation first released or mailed its proxy
statement to shareholders in connection with the preceding year's regular or
annual meeting; provided, however, that in the event that the date of the
regular or annual meeting is advanced by more than thirty (30) days or delayed
by more than sixty (60) days from the anniversary of the preceding year's
regular or annual meeting date, notice by the shareholder to be timely must be
so delivered not later than the close of business on the later of the one
hundred twentieth (120th) day prior to such regular or annual

4
<PAGE>

meeting or the tenth (10th) day following the day on which public announcement
of the date of such meeting is first made. Such shareholder's notice shall set
forth (a) as to each nominee whom the shareholder proposes to nominate for
election or reelection as a director, (i) the name, age, business address and
residence address of the nominee, (ii) the principal occupation or employment of
the nominee, (iii) the class and number of shares of capital stock of the
Corporation which are beneficially owned by the nominee, and (iv) any other
information concerning the nominee that would be required under the rules of the
Securities and Exchange Commission in a proxy statement soliciting proxies of
the election of such nominee; and (b) as to the shareholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination is made, (i)
the name and address of such shareholder, as they appear on the Corporation's
books, and of such beneficial owner and (ii) the class and number of shares of
the Corporation which are owned beneficially and of record by such shareholder
and such beneficial owner. Such notice shall include a signed consent to serve
as a director of the Corporation, if elected, of each such nominee. The
Corporation may require any proposed nominee to furnish such other information
as may reasonably be required by the Corporation to determine the eligibility of
such proposed nominee to serve as a director of the Corporation.

ARTICLE III
Board of Directors

SECTION 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by or under its Board of Directors which may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
statute or by the Articles of Incorporation or by these Bylaws required to be
exercised or done by the shareholders.

SECTION 2. NUMBER AND TERM OF OFFICE. The number of directors which shall
constitute the entire Board of Directors shall not be less than one (1) nor more
than nine (9), which number shall be determined from time to time by the Board
of Directors. The Directors shall be divided into three (3) classes, as nearly
equal in number as possible. The term of office of the first class shall expire
at the 1999 annual meeting of the shareholders of the Corporation; the term of
office of the second class shall expire at the 2000 annual meeting of the
shareholders of the Corporation; and the term of office of the third class shall
expire at the 2001 annual meeting of the shareholders of the Corporation. At
each annual meeting of the shareholders after such classification, the number of
directors equal to the number of the class whose term expires on the day of such
meeting shall be elected for a term of three (3) years. Directors shall hold
office until expiration of the terms for which they were elected and qualified.

SECTION 3. RESIGNATION AND REMOVAL. Any director may resign at any time by
giving written notice to the Corporation. Such resignation shall take effect on
the date of the receipt of such notice, or at any later time specified therein,
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective. Any director may be removed from
office as a director at any time by the

5
<PAGE>

shareholders, but only for cause, and only by the affirmative vote of a majority
of the outstanding voting power entitled to elect such director.

SECTION 4. VACANCIES. If the office of any director becomes vacant by
reason of death, resignation, retirement, disqualification, removal from office,
increase in the number of directors or otherwise, a majority of the remaining
directors, although less than a quorum, at a meeting called for that purpose,
may choose a successor, who, unless removed for cause as set forth in Section 3
above, shall hold office until the expiration of the term of the class for which
appointed or until a successor shall be elected and qualified.

SECTION 5. MEETINGS OF DIRECTORS. The Board of Directors of the Corporation
may hold meetings, from time to time, either within or without the State of
Minnesota, at such place as a majority of the members of the Board of Directors
may from time to time appoint. If the Board of Directors fails to select a
place for the meeting, the meeting shall be held at the principal executive
office of the Corporation.

SECTION 6. CALLING MEETINGS. Meetings of the Board of Directors may be
called by (i) the President on five (5) business days' notice or (ii) any
director on ten (10) business days' notice, to each director, either personally,
by telephone or by mail or telegram. Every such notice shall state the date,
time and place of the meeting. Notice of a meeting called by a person other
than the President shall state the purpose of the meeting.

SECTION 7. PARTICIPATION BY CONFERENCE TELEPHONE. Directors of the
Corporation may participate in a meeting of the Board of Directors by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting by that means shall constitute presence in person at the meeting.

SECTION 8. WAIVER OF NOTICE. A director may waive notice of a meeting of
the Board of Directors. A waiver of notice by a director entitled to notice is
effective whether given before, at, or after the meeting, and whether given in
writing, orally, or by attendance. Attendance by a director at a meeting is a
waiver of notice of that meeting, except where the director objects at the
beginning of the meeting to the transaction of business because the meeting was
not lawfully called or convened and does not participate thereafter in the
meeting.

SECTION 9. ABSENT DIRECTORS. A director may give advance written consent or
opposition to a proposal to be acted on at a meeting of the Board of Directors
by actual delivery prior to the meeting of such advance written consent or
opposition to the President or Treasurer or a director who is present at the
meeting. If the director is not present at the meeting, advance written consent
or opposition to a proposal shall not constitute presence for purposes of
determining the existence of a quorum, but consent or opposition shall be
counted as a vote in favor of or against the proposal and shall be entered in
the minutes or other record of action at the meeting, if the proposal acted on
at the meeting is substantially the same or has substantially the same effect as
the proposal to which the director has consented or objected.

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<PAGE>

SECTION 10. QUORUM. At all meetings of the Board of Directors a majority of
the directors shall constitute a quorum for the transaction of business, and the
act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors, except as may be otherwise
specifically provided by applicable statute or by the Articles of Incorporation.
If a quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present. If a
quorum is present at the call of a meeting, the directors may continue to
transact business until adjournment notwithstanding the withdrawal of enough
directors to leave less than a quorum.

SECTION 11. ORGANIZATION OF MEETINGS. The President shall preside at all
meetings of the Board of Directors, and in his or her absence the Treasurer
shall act as Chairman. The Secretary shall act as secretary of all meetings of
the Board of Directors, and in his or her absence any person appointed by the
Chairman shall act as secretary.

SECTION 12. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Articles of Incorporation or these Bylaws, any action required or permitted to
be taken at any meeting of the Board of Directors may be taken without a
meeting, if a written consent thereto is signed by all members of the Board of
Directors and such written consent is filed with the minutes of proceedings of
the Board of Directors. If the proposed action need not be approved by the
shareholders and the Articles of Incorporation so provide, action may be taken
by written consent signed by the number of directors that would be required to
take the same action at a meeting of the Board of Directors at which all
directors were present. Such action shall be effective on the date on which the
last signature is placed on such writing or writings, or such other effective
date as is set forth therein.

SECTION 13. COMPENSATION OF DIRECTORS. By resolution of the Board of
Directors, each director may be paid his or her expenses, if any, of attendance
at each meeting of the Board of Directors, and may be paid a stated amount as a
director or a fixed sum for attendance at each meeting of the Board of
Directors, or both. No such payment shall preclude a director from serving the
Corporation in any other capacity and receiving compensation therefor.

ARTICLE IV
Officers

SECTION 1. NUMBER. The officers of the Corporation shall be chosen by the
Board of Directors and shall include a President, a Secretary, and a Treasurer.
The Board of Directors may also choose one or more Vice Presidents, and one or
more Assistant Secretaries and Assistant Treasurers. Any number of offices or
functions of those offices may be held or exercised by the same person.

7
<PAGE>

SECTION 2. ELECTION. The Board of Directors at its first meeting after each
regular meeting of shareholders shall choose a President, a Secretary and a
Treasurer.

SECTION 3. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint
such other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors.

SECTION 4. SALARIES. The salaries of all officers of the Corporation shall
be fixed by the Board of Directors.

SECTION 5. TERM OF OFFICE. The officers of the Corporation shall hold
office until their successors are chosen and qualify. Any officer elected or
appointed by the Board of Directors may be removed with or without cause at any
time by the affirmative vote of a majority of the Board of Directors. Any
officer may resign at any time by giving written notice to the President or the
Secretary of the Corporation. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.

SECTION 6. THE PRESIDENT. POWERS AND DUTIES. The President shall be the
chief executive officer of the Corporation, shall preside at all meetings of the
Board of Directors and the shareholders, shall have general active management of
the business of the Corporation, shall see that all orders and resolutions of
the Board of Directors are carried into effect, and shall perform such other
duties prescribed by the Board of Directors. He or she shall execute bonds,
mortgages, and other contracts of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation, and shall maintain
records of and, whenever necessary, certify all proceedings of the Board of
Directors and the shareholders. Except as otherwise prescribed by these Bylaws
or the Board of Directors, he or she shall prescribe duties of other officers.

SECTION 7. THE VICE PRESIDENT. POWERS AND DUTIES. The Vice President, if
any, or if there shall be more than one, the Vice Presidents in the order
determined by the Board of Directors, shall, in the absence or disability of the
President, perform the duties and exercise the powers of the President and shall
perform such other duties and have such other powers as the Board of Directors
or the President may from time to time prescribe.

SECTION 8. THE SECRETARY. POWERS AND DUTIES. The Secretary shall attend
all meetings of the Board of Directors and all meetings of the shareholders and
record all the proceedings of the meetings of the Corporation and of the Board
of Directors in a book to be kept for that purpose. He or she shall give, or
cause to be given, notice of all meetings of the shareholders and special
meetings of the Board of Directors, and shall perform such other duties as may
be prescribed by the Board of Directors or President, under whose supervision he
or she shall be.

8
<PAGE>

SECTION 9. ASSISTANT SECRETARY. The Assistant Secretary or, if there be
more than one, the Assistant Secretaries, in the order determined by the Board
of Directors, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors or the President may
from time to time prescribe.

SECTION 10. THE TREASURER. POWERS AND DUTIES. The Treasurer shall be the
chief financial officer, shall have custody of the Corporation's funds and
securities, shall keep full and accurate accounts of receipts and disbursements
in books belonging to the Corporation, shall deposit all monies and other
valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors, and shall perform
such other duties prescribed by the Board of Directors or by the President.

SECTION 11. TREASURER'S ACCOUNTING. He or she shall disburse such funds of
the Corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the President and the Board
of Directors, at its regular meetings, or when the Board of Directors so
requires, an account of all his or her transactions as Treasurer and of the
financial condition of the Corporation.

SECTION 12. TREASURER'S BOND. If required by the Board of Directors, he or
she shall give the Corporation a bond (which shall be renewed every six (6)
years) in such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties of his or her
office and for the restoration to the Corporation, in case of his or her death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his or her possession or under his
or her control belonging to the Corporation.

SECTION 13. ASSISTANT TREASURER. The Assistant Treasurer or, if there shall
be more than one, the Assistant Treasurers, in the order determined by the Board
of Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers as the Board of Directors or the President may
from time to time prescribe.

ARTICLE V
Certificates of Stock

SECTION 1. CERTIFICATES OF STOCK. Every holder of stock in the Corporation
shall be entitled to have a certificate, signed by the President and the
Secretary or an Assistant Secretary of the Corporation, if there be one,
certifying the number of shares owned by him or her in the Corporation. The
certificates of stock of each class shall be numbered in the order of their
issue.

SECTION 2. FACSIMILE SIGNATURES. Where a certificate is signed (1) by a
transfer agent or an assistant transfer agent, or (2) by a transfer clerk acting
on behalf of the Corporation and a registrar, the signature of any such
President, Secretary or Assistant Secretary may

9
<PAGE>

be facsimile. In case any officer or officers who have signed, or whose
facsimile signature or signatures have been used on any such certificate or
certificates shall cease to be such officer or officers of the Corporation
before such certificate or certificates have been delivered by the Corporation,
such certificate or certificates may nevertheless be adopted by the Corporation
and be issued and delivered as though the person or persons who signed such
certificate or certificates or whose facsimile signature or signatures have been
used thereon had not ceased to be such officer or officers of the Corporation.

SECTION 3. LOST OR DESTROYED CERTIFICATES. The Board of Directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost or destroyed certificate or
certificates, or his or her legal representative, to advertise the same in such
manner as it shall require and/or to give the Corporation a bond in such sum as
it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost or
destroyed.

SECTION 4. TRANSFERS OF STOCK. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.

SECTION 5. REGISTERED SHAREHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall be entitled
to hold liable for calls and assessments a person so registered on its books as
the owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by applicable statute.

ARTICLE VI
General Provisions

SECTION 1. DIVIDENDS. Subject to the provisions of the applicable statute
and the Articles of Incorporation, dividends upon the capital stock of the
Corporation may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property, or in shares of the capital
stock.

SECTION 2. RESERVES. Before payment of any dividend, there may be set aside
out of any funds of the Corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to

10
<PAGE>

meet contingencies, or for equalizing dividends, or for repairing or maintaining
any property of the Corporation, or for such other purposes as the directors
shall think conducive to the interest of the Corporation, and the directors may
modify or abolish any such reserve in the manner in which it was created.

SECTION 3. CHECKS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.

SECTION 4. FISCAL YEAR. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.

SECTION 5. SEAL. The Corporation shall not have a corporate seal.

ARTICLE VII
Amendments

SECTION 1. AMENDMENTS. The power to make, alter, amend or rescind these
Bylaws is vested in the Board of Directors, subject to the power of the
shareholders to adopt, amend or repeal these Bylaws, as permitted by applicable
statute.

ARTICLE VIII
Indemnification

SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party
or is threatened to be made a party to or is involved in or called as a witness
in any Proceeding because he or she is an Indemnified Person, shall be
indemnified and held harmless by the corporation to the fullest extent permitted
under the Minnesota Statutes (the "Statutes"), as the same now exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the corporation to provide broader indemnification
rights than the Statutes permitted the corporation to provide prior to such
amendment). Such indemnification shall cover all expenses incurred by an
Indemnified Person (including, but not limited to, attorneys' fees and other
expenses of litigation) and all liabilities and losses (including, but not
limited to, judgments, fines, ERISA or other excise taxes or penalties and
amounts paid or to be paid in settlement) incurred by such person in connection
therewith.

Notwithstanding the foregoing, except with respect to indemnification specified
in section 3 of this Article, the corporation shall indemnify an Indemnified
Person in connection with a Proceeding (or part thereof) initiated by such
person only if such Proceeding (or part thereof) was authorized by the board of
directors of the corporation.

For purposes of this Article:

(a) a "Proceeding" is an action, suit or proceeding, whether civil, criminal,
administrative or investigative, and any appeal therefrom;

11
<PAGE>

(b) an "Indemnified Person" is a person who is, was or had agreed to become a
director or an officer or a Delegate, as defined herein, of the corporation or
the legal representative of any of the foregoing; and

(c) a "Delegate" is a person serving at the request of the corporation or a
subsidiary of the corporation as a director, trustee, fiduciary, or officer of
such subsidiary or of another corporation, partnership, joint venture, trust or
other enterprise.

SECTION 2. EXPENSES. Expenses, including attorneys' fees, incurred by a
person indemnified pursuant to section 1 of this Article in defending or
otherwise being involved in a Proceeding shall be paid by the corporation in
advance of the final disposition of such Proceeding, including any appeal
therefrom, upon receipt of an undertaking (the "Undertaking") by or on behalf of
such person to repay such amount if it shall ultimately be determined that he or
she is not entitled to be indemnified by the corporation; provided, that in
connection with a Proceeding (or part thereof) initiated by such person, except
a Proceeding authorized by section 3 of this Article, the corporation shall pay
said expenses in advance of final disposition only if such Proceeding (or part
thereof) was authorized by the board of directors. A person to whom expenses
are advanced pursuant hereto shall not be obligated to repay pursuant to the
Undertaking until the final determination of any pending Proceeding in a court
of competent jurisdiction concerning the right of such person to be indemnified
or the obligation of such person to repay pursuant to the Undertaking.

SECTION 3. PROTECTION OF RIGHTS. If a claim under section 1 of this Article
is not promptly paid in full by the corporation after a written claim has been
received by the corporation or if expenses pursuant to section 2 of this Article
have not been promptly advanced after a written request for such advancement
accompanied by the Undertaking has been received by the corporation, the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim or the advancement of expenses. If
successful, in whole or in part, in such suit, such claimant shall also be
entitled to be paid the reasonable expense thereof. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any Proceeding in advance of its final disposition where
the required Undertaking has been tendered to the corporation) that
indemnification of the claimant is prohibited by law, but the burden of proving
such defense shall be on the corporation. Neither the failure of the
corporation (including its board of directors, independent legal counsel, or its
stockholders) to have made a determination, if required, prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances, nor an actual determination by the corporation (including its
board of directors, independent legal counsel, or its stockholders) that
indemnification of the claimant is prohibited, shall be a defense to the action
or create a presumption that indemnification of the claimant is prohibited.

<PAGE>

EXHIBIT 5.1

[On Oppenheimer Wolff & Donnelly LLP Letterhead]

October 28, 1998

Select Comfort Corporation
6105 Trenton Lane North
Minneapolis, Minnesota 55442

Re: Registration Statement on Form S-1

Ladies and Gentlemen:

We have acted as counsel to Select Comfort Corporation, a Minnesota corporation
(the "Company"), in connection with the registration by the Company of
4,600,000 shares (including 600,000 shares subject to the Underwriters'
over-allotment option) of the Company's Common Stock, $.01 par value (the
"Shares"), pursuant to the Company's Registration Statement on Form S-1, filed
with the Securities and Exchange Commission on September 3, 1998, as amended
(the "Registration Statement").

In acting as counsel for the Company and arriving at the opinions expressed
below, we have examined and relied upon originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company,
agreements and other instruments, certificates or statements of officers of the
Company, certificates of public officials and other documents we have deemed
necessary or appropriate as a basis for the opinions expressed herein. As to
the various questions of fact material to such opinions, we have, when relevant
facts were not independently established, relied upon officers of the Company.
In connection with our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents tendered to us as originals, the
legal capacity of natural persons and the conformity to original documents of
all documents submitted to us as certified or photostatic copies.

Based on the foregoing, and subject to the qualifications and limitations stated
herein, it is our opinion that:

1. The Company has been duly incorporated and is an existing corporation in
good standing under the laws of the State of Minnesota, with corporate
power and authority to own its properties and conduct its business as
described in the Prospectus and to issue the Shares in the manner and under
the terms set forth in the Registration Statement.

<PAGE>

Select Comfort Corporation
October 28, 1998
Page 2

2. The certificates for the Shares to be delivered as described in the
Registration Statement are in due and proper form, and when duly
countersigned by the Company's transfer agent and delivered to the
Underwriters or upon the Underwriters' order against payment of the agreed
consideration therefor, the Shares represented thereby will be duly
authorized and validly issued, fully paid and nonassessable.

We express no opinion with respect to laws other than those of the State of
Minnesota and the federal laws of the United States of America, and we assume no
responsibility as to the applicability thereto, or the effect thereon, of the
laws of any other jurisdiction.

We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement, to its use as part of the Registration Statement, and to
the use of our name under the caption "LEGAL MATTERS" in the Prospectus forming
a part of the Registration Statement.

Very truly yours,

OPPENHEIMER WOLFF & DONNELLY LLP

/s/ Oppenheimer Wolff & Donnelly LLP

<PAGE>

EXHIBIT 10.28

[Net Lease]

LEASE AGREEMENT

THIS LEASE AGREEMENT is made this 30th day of September, 1998, between
ProLogis Development Services Incorporated ("Landlord"), and the Tenant named
below.

<TABLE>
<S> <C>
TENANT: Select Comfort Corporation

TENANT'S REPRESENTATIVE, Gregory T. Kliner
ADDRESS, AND PHONE NO.: 6105 Trenton Lane N.
Minneapolis, MN 55442-3240
(612) 551-7821, Fax: (612) 551-
7826

PREMISES: That portion of the Building,
containing approximately
100,800 rentable square feet,
as determined by Landlord, plus
parking area, driveways and
common area rights, as shown on
Exhibit A.

PROJECT: Salt Lake International Center
#7

BUILDING: Select Comfort Distribution
Center #1

TENANT'S PROPORTIONATE SHARE
OF PROJECT: 100%

TENANT'S PROPORTIONATE SHARE
OF BUILDING: 100%

LEASE TERM: Beginning on the Commencement
Date and ending on the last day
of the 120th full calendar
month thereafter.

COMMENCEMENT DATE: As described in Addendum 2 and
Addendum 3

INITIAL MONTHLY BASE RENT: $33,969.00

INITIAL ESTIMATED MONTHLY 1. Utilities: $N/A
OPERATING EXPENSE PAYMENTS: 2. Common Area
(estimates only and subject to Charges: $1,068.48
adjustment to actual costs and 3. Taxes: $4,788.00
expenses according to the 4. Insurance: $252.00
provisions of this Lease) 5. Others: $844.00
</TABLE>

<PAGE>

<TABLE>
<S> <C>
INITIAL ESTIMATED MONTHLY
OPERATING $6,952.48
EXPENSE PAYMENTS:

INITIAL MONTHLY BASE RENT AND
OPERATING EXPENSE PAYMENTS: $40,921.48

SECURITY DEPOSIT: $37,000, in addition to the
terms as set forth in Addendum
7.

BROKER: N/A

ADDENDA: Addendum 1 (Base Rent Adj.),
Addendum 2 (Building Shell
Construction), Addendum 3
(Improvements Construction),
Addendum 4 (Renewal Option),
Addendum 5 (Purchase Option),
Addendum 6 (Right of First
Offer), Addendum 7 (Credit
Enhancements), Exhibit A (Site
Plan), Exhibit B (Replatting of
Land Parcel)
</TABLE>

1. GRANTING CLAUSE. In consideration of the obligation of Tenant to pay
rent as herein provided and in consideration of the other terms, covenants, and
conditions hereof, Landlord leases to Tenant, and Tenant takes from Landlord,
the Premises, to have and to hold for the Lease Term, subject to the terms,
covenants and conditions of this Lease.

2. ACCEPTANCE OF PREMISES. Tenant shall accept the Premises in its
condition as of the Commencement Date, subject to all applicable laws,
ordinances, regulations, covenants and restrictions. Landlord has made no
representation or warranty as to the suitability of the Premises for the conduct
of Tenant's business, and Tenant waives any implied warranty that the Premises
are suitable for Tenant's intended purposes. Except for latent defects for
which Tenant provides Landlord notice within 60 days after taking possession of
the Premises and as provided in Paragraph 10, in no event shall Landlord have
any obligation for any defects in the Premises or any limitation on its use.
The taking of possession of the Premises shall be conclusive evidence that
Tenant accepts the Premises and that the Premises were in good condition at the
time possession was taken except for items that are Landlord's responsibility
under Paragraph 10, and any punchlist items or latent defects or as otherwise
agreed to in writing by Landlord and Tenant.

3. USE. The Premises shall be used only for the purpose of receiving,
storing, shipping and selling (but limited to wholesale sales, employee discount
sales, sales made by direct shipment to Tenant's consumers, and limited showroom
sales) products, materials and merchandise made and/or distributed by Tenant,
light manufacturing, and for such other lawful purposes as may be incidental
thereto. Tenant shall not conduct or give notice of any auction, liquidation,
or going out of business sale on the Premises. Tenant will use the Premises in
a careful, safe and proper manner and will not commit waste, overload the floor
or structure of the Premises or subject the Premises to use that would damage
the Premises. Tenant shall not permit

<PAGE>

any objectionable or unpleasant odors, smoke, dust, gas, noise, or vibrations
to emanate from the Premises, or take any other action that would constitute
a nuisance or would disturb, unreasonably interfere with, or endanger
Landlord or any tenants of the Project. Outside storage, including without
limitation, storage of non-operable trucks and other non-operable vehicles,
is prohibited without Landlord's prior written consent, which shall not be
unreasonably withheld; provided, however Landlord hereby consents to the
outside storage of Tenant's trucks and tractor-trailers used in Tenant's
normal business operations, not to exceed 5 days and so long as such trucks
and tractor-trailers do not interfere with the ingress and egress of the
Project. Tenant, at its sole expense, shall use and occupy the Premises in
compliance with all laws, including, without limitation, the Americans With
Disabilities Act, orders, judgments, ordinances, regulations, codes,
directives, permits, licenses, covenants and restrictions now or hereafter
applicable to the Premises (collectively, "Legal Requirements"). The
Premises shall not be used as a place of public accommodation under the
Americans With Disabilities Act or similar state statutes or local ordinances
or any regulations promulgated thereunder, all as may be amended from time to
time. Tenant shall, at its expense, make any non-structural alterations or
modifications, within or without the Premises, that are required by Legal
Requirements because of Tenant's particular use or occupation of the
Premises. Tenant will not use or permit the Premises to be used for any
purpose or in any manner that would void Tenant's or Landlord's insurance,
increase the insurance risk, or cause the disallowance of any sprinkler
credits. If any increase in the cost of any insurance on the Premises or the
Project is caused by Tenant's use or occupation of the Premises, or because
Tenant vacates the Premises, then Tenant shall pay the amount of such
increase to Landlord. Any occupation of the Premises by Tenant prior to the
Commencement Date shall be subject to all obligations of Tenant under this
Lease.

Notwithstanding anything contained herein to the contrary, Tenant's
obligations hereunder shall relate only to the interior of the Premises and any
changes to the Project that relate solely to the specific manner of use of the
Premises by Tenant; and Landlord shall make all other additions to or
modifications of the Project required from time to time by Legal Requirements.
The cost of such additions or modifications made by Landlord shall be included
in Operating Expenses pursuant to Paragraph 6 of this Lease, except for those
additions or modifications which are Landlord's sole responsibility pursuant to
Paragraph 10 of this Lease.

Notwithstanding anything contained herein to the contrary, Tenant may
store its pallets in certain designated storage areas as mutually agreed to by
Landlord and Tenant.

4. BASE RENT. Tenant shall pay Base Rent in the amount set forth above.
The first month's Base Rent, the Security Deposit, and the first monthly
installment of estimated Operating Expenses (as hereafter defined) shall be due
and payable on the date hereof, and Tenant promises to pay to Landlord in
advance, without demand, deduction or set-off (except as expressly provided for
in this Lease), monthly installments of Base Rent on or before the first day of
each calendar month succeeding the Commencement Date. Payments of Base Rent for
any fractional calendar month shall be prorated. All payments required to be
made by Tenant to Landlord hereunder shall be payable at such address as
Landlord may specify from time to time by written notice delivered in accordance
herewith. The obligation of Tenant to pay Base Rent and other sums to Landlord
and the obligations of Landlord under this Lease are independent obligations.
Tenant shall have no right at any time to abate, reduce, or set-off any rent due

<PAGE>

hereunder except as may be expressly provided in this Lease. If Tenant is
delinquent in any monthly installment of Base Rent or of Operating Expenses
beyond 5 business days after the due date thereof, and after receipt of notice
as provided below, Tenant shall pay to Landlord on demand a late charge equal to
5 percent of such delinquent sum. Tenant shall not be obligated to pay the late
charge until Landlord has given Tenant 5 business days written notice of the
delinquent payment (which may be given at any time during the delinquency) and
Tenant has failed to remit said payment within such 5-day period; provided,
however, that such notice shall not be required more than twice in any 12-month
period. The provision for such late charge shall be in addition to all of
Landlord's other rights and remedies hereunder or at law and shall not be
construed as a penalty or as limiting Landlord's remedies in any manner.

5. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord as
security for the performance of Tenant's obligations under this Lease. The
Security Deposit is not an advance rental deposit or a measure of Landlord's
damages in case of Tenant's default. Upon each occurrence of an Event of
Default (hereinafter defined), Landlord may use all or part of the Security
Deposit to pay delinquent payments due under this Lease, and the cost of any
damage, injury, expense or liability caused by such Event of Default, without
prejudice to any other remedy provided herein or provided by law. Tenant shall
pay Landlord on demand the amount that will restore the Security Deposit to its
original amount. Landlord's obligation respecting the Security Deposit is that
of a debtor, not a trustee; no interest shall accrue thereon. The Security
Deposit shall be the property of Landlord, but shall be paid to Tenant when
Tenant's obligations under this Lease have been completely fulfilled. Landlord
shall be released from any obligation with respect to the Security Deposit upon
transfer of this Lease and the Premises to a person or entity assuming
Landlord's obligations under this Paragraph 5. See Addendum 7.

6. OPERATING EXPENSE PAYMENTS. During each month of the Lease Term, on
the same date that Base Rent is due, Tenant shall pay Landlord an amount equal
to 1/12 of the annual cost, as estimated by Landlord from time to time, of
Tenant's Proportionate Share (hereinafter defined) of Operating Expenses for the
Project. Payments thereof for any fractional calendar month shall be prorated.
The term "Operating Expenses" means all costs and expenses incurred by Landlord
with respect to the ownership, maintenance, and operation of the Project
including, but not limited to costs of: Taxes (hereinafter defined) and fees
payable to tax consultants and attorneys for consultation and contesting taxes;
insurance; utilities; maintenance, repair and replacement of all portions of the
Project, including without limitation, paving and parking areas, roads, roofs,
alleys, and driveways, mowing, landscaping, exterior painting, utility lines,
heating, ventilation and air conditioning systems, lighting, electrical systems
and other mechanical and building systems; amounts paid to contractors and
subcontractors for work or services performed in connection with any of the
foregoing; charges or assessments of any association to which the Project is
subject; property management fees payable to a property manager, including any
affiliate of Landlord, in the amount of $844.00 for the first year of the Lease
Term, increased 4% annually throughout the remainder of the Lease Term; security
services, if any; trash collection, sweeping and removal; and additions or
alterations made by Landlord to the Project or the Building in order to comply
with Legal Requirements (other than those expressly required herein to be made
by Tenant) or that are appropriate to the continued operation of the Project or
the Building as a bulk warehouse facility in the market area, provided that the
cost of additions or alterations that are required to be capitalized for federal
income tax

<PAGE>

purposes shall be amortized on a straight line basis over a period equal to
the lesser of the useful life thereof for federal income tax purposes or 10
years. Operating Expenses do not include costs, expenses, depreciation or
amortization for capital repairs and capital replacements required to be made
by Landlord under Paragraph 10 of this Lease, debt service under mortgages or
ground rent under ground leases, costs of restoration to the extent of net
insurance proceeds received by Landlor with respect thereto, leasing
commissions (if applicable), interest, principal, or other payments on
account of any indebtedness that is secured by any encumbrance on any part of
the Project, or rental or other payments under any ground lease, or any
payments in the nature of returns on or of equity of any kind, costs of
selling, syndicating, financing, mortgaging or hypothecating any part of or
interest in the Project, costs for which Landlord is reimbursed from any
other source, costs of removing Hazardous Materials or of correcting any
other conditions in order to comply with any environmental law or ordinance
(but this exclusion shall not constitute a release by Landlord of Tenant for
any such costs for which Tenant is liable pursuant to Paragraph 30 of this
Lease), depreciation, reserves of any kind, including replacement reserves
and reserves for bad debt or lost rent, or any other charge not involving the
payment of money to third parties, costs incurred in connection with the
construction or remodeling of the Project or any other improvements now or
hereafter located thereon, correction of defects in design or construction,
Landlord's overhead costs, including salaries, equipment, supplies,
accounting and legal fees, rent and other occupancy costs or any other costs
associated with the operation or internal organization and function of
Landlord as a business entity (but this provision does not prevent the
payment of a management fee to Landlord as provided in this Paragraph 6),
costs incurred as a result of Landlord's violation of any lease, contract,
law or ordinance, including fines and penalties, late charges, interest or
penalties of any kind for late or other improper payment of any public or
private obligation, including ad valorem taxes, or the costs of renovating
space for tenants (if applicable).

If Tenant's total payments of Operating Expenses for any year are less
than Tenant's Proportionate Share of actual Operating Expenses for such year,
then Tenant shall pay the difference to Landlord within 30 days after demand,
and if more, then Landlord shall retain such excess and credit it against
Tenant's next payments, except that Landlord shall refund such excess to Tenant
within 30 days following the last calendar year of the Lease Term. For purposes
of calculating Tenant's Proportionate Share of Operating Expenses, a year shall
mean a calendar year except the first year, which shall begin on the
Commencement Date, and the last year, which shall end on the expiration of this
Lease. With respect to Operating Expenses which Landlord allocates to the
entire Project, Tenant's "Proportionate Share" shall be the percentage set forth
on the first page of this Lease as Tenant's Proportionate Share of the Project
as reasonably adjusted by Landlord in the future for changes in the physical
size of the Premises or the Project; and, with respect to Operating Expenses
which Landlord allocates only to the Building, Tenant's "Proportionate Share"
shall be the percentage set forth on the first page of this Lease as Tenant's
Proportionate Share of the Building as reasonably adjusted by Landlord in the
future for changes in the physical size of the Premises or the Building.
Landlord may equitably increase Tenant's Proportionate Share for any item of
expense or cost reimbursable by Tenant that relates to a repair, replacement, or
service that benefits only the Premises or only a portion of the Project or
Building that includes the Premises or that varies with occupancy or use. The
estimated Operating Expenses for the Premises set forth on the first page of
this Lease are only estimates, and Landlord makes no guaranty or warranty that
such estimates will be accurate.

<PAGE>

7. UTILITIES. Tenant shall pay for all water, gas, electricity, heat,
light, power, telephone, sewer, sprinkler services, refuse and trash collection,
and other utilities and services used on the Premises, all maintenance charges
for utilities, and any storm sewer charges or other similar charges for
utilities imposed by any governmental entity or utility provider, together with
any taxes, penalties, surcharges or the like pertaining to Tenant's use of the
Premises. Landlord shall cause at Landlord's expense all utilities, except for
water and sewer, to be separately metered or charged directly to Tenant by the
provider. Tenant shall pay its share of all charges for jointly metered
utilities based upon consumption, as reasonably determined by Landlord. No
interruption or failure of utilities shall result in the termination of this
Lease or the abatement of rent. Tenant agrees to limit use of water and sewer
for normal restroom use, in the event the Building becomes a multi-tenant
facility.

Notwithstanding anything to the contrary contained in Paragraph 7 of
this Lease, if an interruption or cessation of utilities results from a cause
within the Landlord's reasonable control and the Premises are not usable by
Tenant for the conduct of Tenant's business as a result thereof, Base Rent and
applicable Operating Expenses not actually incurred by Tenant shall be abated
for the period which commences three (3) business days after the date Tenant
gives to Landlord notice of such interruption until such utilities are restored.

8. TAXES. Landlord shall pay all taxes, assessments and governmental
charges (collectively referred to as "Taxes") that accrue against the Project
during the Lease Term, which shall be included as part of the Operating Expenses
charged to Tenant. Landlord may contest by appropriate legal proceedings the
amount, validity, or application of any Taxes or liens thereof. If Landlord
fails to contest the real estate taxes, Tenant shall have the right to request
Landlord to contest such taxes, and Landlord shall so contest, at Tenant's sole
cost and expense (including, without limitation, Landlord's reasonable
attorneys' fees and reasonable fees payable to tax consultants and attorneys for
consultation and contesting taxes) , if, in Landlord's reasonable judgment,
such contest is warranted; provided, however, Tenant's request of such
contesting of Taxes shall be limited to one request in a calendar year.
Landlord shall cooperate in the institution and prosecution of any such
proceedings of contesting taxes and will execute any documents reasonably
required therefor. All capital levies or other taxes assessed or imposed on
Landlord upon the rents payable to Landlord under this Lease and any franchise
tax, any excise, transaction, sales or privilege tax, assessment, levy or charge
measured by or based, in whole or in part, upon such rents from the Premises
and/or the Project or any portion thereof shall be paid by Tenant to Landlord
monthly in estimated installments or upon demand, at the option of Landlord, as
additional rent; provided, however, in no event shall Tenant be liable for taxes
and/or assessments which are attributable to land or buildings not otherwise
included within the Premises nor shall Tenant be liable for any net income taxes
imposed on Landlord unless such net income taxes are in substitution for any
Taxes payable hereunder. If any such tax or excise is levied or assessed
directly against Tenant, then Tenant shall be responsible for and shall pay the
same at such times and in such manner as the taxing authority shall require.
Tenant shall be liable for all taxes levied or assessed against any personal
property or fixtures placed in the Premises, whether levied or assessed against
Landlord or Tenant.

Notwithstanding anything contained herein to the contrary, in the
event that

<PAGE>

Landlord should receive a tax refund or credit from any taxing authority for
any period in respect of which Tenant paid its Proportionate Share of Taxes
(including the tax which is the subject of such refund), Landlord shall
promptly notify Tenant thereof and refund to Tenant Tenant's Proportionate
Share of the net amount of such refund or credit, after deducting Landlord's
reasonable costs incurred in securing such refund or credit. The provisions
of this paragraph shall survive the termination of this Lease.

9. INSURANCE. Landlord shall maintain all risk property insurance
covering the full replacement cost of the Building. Landlord may, but is not
obligated to, maintain such other insurance and additional coverages as it may
deem reasonably necessary, including, but not limited to, commercial liability
insurance and rent loss insurance. All such insurance shall be included as part
of the Operating Expenses charged to Tenant. The Project or Building may be
included in a blanket policy (in which case the cost of such insurance allocable
to the Project or Building will be determined by Landlord based upon the
insurer's cost calculations). Tenant shall also reimburse Landlord for any
increased premiums or additional insurance as a result of Tenant's particular
use of the Premises.

Tenant, at its expense, shall maintain during the Lease Term: all
risk property insurance covering the full replacement cost of all property and
improvements installed or placed in the Premises by Tenant at Tenant's expense;
worker's compensation insurance with no less than the minimum limits required by
law; employer's liability insurance with such limits as required by law; and
commercial liability insurance, with a minimum limit of $1,000,000 per
occurrence and a minimum umbrella limit of $1,000,000, for a total minimum
combined general liability and umbrella limit of $2,000,000 (together with such
additional umbrella coverage as Landlord may reasonably require) for property
damage, personal injuries, or deaths of persons occurring in or about the
Premises. Landlord may from time to time require reasonable increases in any
such limits. The commercial liability policies shall name Landlord as an
additional insured, insure on an occurrence and not a claims-made basis, be
issued by insurance companies which are reasonably acceptable to Landlord, not
be cancelable unless 30 days prior written notice shall have been given to
Landlord, contain a hostile fire endorsement and a contractual liability
endorsement and provide primary coverage to Landlord (any policy issued to
Landlord providing duplicate or similar coverage shall be deemed excess over
Tenant's policies). Such policies or certificates thereof shall be delivered to
Landlord by Tenant upon commencement of the Lease Term and upon each renewal of
said insurance. Landlord hereby agrees that Tenant's insurance coverages
hereunder may be in the form of a blanket policy.

The all risk property insurance obtained by Landlord and Tenant shall
include a waiver of subrogation by the insurers and all rights based upon an
assignment from its insured, against Landlord or Tenant, their officers,
directors, employees, managers, agents, invitees and contractors, in connection
with any loss or damage thereby insured against. Neither party nor its
officers, directors, employees, managers, agents, invitees or contractors shall
be liable to the other for loss or damage caused by any risk coverable by all
risk property insurance, and each party waives any claims against the other
party, and its officers, directors, employees, managers, agents, invitees and
contractors for such loss or damage. The failure of a party to insure its
property shall not void this waiver. Landlord and its agents, employees and
contractors shall not be liable for, and Tenant hereby waives all claims against
such parties for, business interruption

<PAGE>

and losses occasioned thereby sustained by Tenant or any person claiming
through Tenant resulting from any accident or occurrence in or upon the
Premises or the Project from any cause whatsoever, including without
limitation, damage caused in whole or in part, directly or indirectly, by the
negligence of Landlord or its agents, employees or contractors.

10. LANDLORD'S REPAIRS. Landlord shall maintain, at its expense, the
structural soundness of the roof, foundation, and exterior walls of the Building
in good repair, reasonable wear and tear and uninsured losses and damages caused
by Tenant, its agents and contractors excluded. The term "walls" as used in
this Paragraph 10 shall not include windows, glass or plate glass, doors or
overhead doors, special store fronts, dock bumpers, dock plates or levelers, or
office entries. Tenant shall promptly give Landlord written notice of any
repair required by Landlord pursuant to this Paragraph 10, after which Landlord
shall have a reasonable opportunity to repair.

11. TENANT'S REPAIRS. Landlord, at Tenant's expense as provided in
Paragraph 6, shall maintain in good repair and condition the parking areas and
other common areas of the Building, including, but not limited to driveways,
alleys, landscape and grounds surrounding the Premises. Subject to Landlord's
obligation in Paragraph 10 and subject to Paragraphs 9 and 15, Tenant, at its
expense, shall repair, replace and maintain in good condition all portions of
the Premises and all areas, improvements and systems exclusively serving the
Premises including, without limitation, dock and loading areas, truck doors,
plumbing, water and sewer lines up to points of common connection, fire
sprinklers and fire protection systems, entries, doors, ceilings and roof
membrane, windows, interior walls, and the interior side of demising walls, and
heating, ventilation and air conditioning systems. Such repair and replacements
include capital expenditures and repairs whose benefit may extend beyond the
Term. Heating, ventilation and air conditioning systems and other mechanical
and building systems serving the Premises shall be maintained at Tenant's
expense pursuant to maintenance service contracts entered into by Tenant. The
scope of services and contractors under such maintenance contracts shall be
reasonably approved by Landlord. If Tenant fails to perform any repair or
replacement for which it is responsible within the time period provided for in
this Lease, Landlord may perform such work and be reimbursed by Tenant within 30
days after demand therefor. Subject to Paragraphs 9 and 15, Tenant shall bear
the full cost of any repair or replacement to any part of the Building or
Project that results from damage caused by Tenant, its agents, contractors, or
invitees and any repair that benefits only the Premises.

12. TENANT-MADE ALTERATIONS AND TRADE FIXTURES. Any alterations,
additions, or improvements made by or on behalf of Tenant to the Premises
("Tenant-Made Alterations") in excess of $50,000 per occurrence shall be subject
to Landlord's prior written consent, which shall not be unreasonably withheld
provided that such alteration does not materially affect the slab, structure or
the roof of the Building, or modify the utility systems of the Project. Tenant
shall cause, at its expense, all Tenant-Made Alterations to comply with
insurance requirements and with Legal Requirements and shall construct at its
expense any alteration or modification required by Legal Requirements as a
result of any Tenant-Made Alterations. All Tenant-Made Alterations shall be
constructed in a good and workmanlike manner by contractors reasonably
acceptable to Landlord and only good grades of materials shall be used. All
plans and specifications for any Tenant-Made Alterations shall be submitted to
Landlord for its approval.

<PAGE>

Landlord may monitor construction of the Tenant-Made Alterations. Tenant
shall reimburse Landlord for its reasonable out-of-pocket costs in reviewing
plans and specifications. Landlord's right to review plans and
specifications and to monitor construction shall be solely for its own
benefit, and Landlord shall have no duty to see that such plans and
specifications or construction comply with applicable laws, codes, rules and
regulations. Tenant shall provide Landlord with the identities and mailing
addresses of all persons performing work or supplying materials, prior to
beginning such construction, and Landlord may post on and about the Premises
notices of non-responsibility pursuant to applicable law. Tenant shall
furnish security or make other arrangements satisfactory to Landlord to
assure payment for the completion of all work free and clear of liens and
shall provide certificates of insurance for worker's compensation and other
coverage in amounts and from an insurance company satisfactory to Landlord
protecting Landlord against liability for personal injury or property damage
during construction. Upon completion of any Tenant-Made Alterations, Tenant
shall deliver to Landlord sworn statements setting forth the names of all
contractors and subcontractors who did work on the Tenant-Made Alterations
and final lien waivers from all such contractors and subcontractors. Upon
surrender of the Premises, all Tenant-Made Alterations and any leasehold
improvements constructed by Landlord or Tenant shall remain on the Premises
as Landlord's property, except to the extent Landlord requires removal at
Tenant's expense of any such items or Landlord and Tenant have otherwise
mutually agreed to in writing of which Tenant-Made Alterations shall remain
the property of Tenant and shall be removed by Tenant upon surrender of the
Premises. At Tenant's request, Landlord shall provide Tenant, at the time of
Tenant's request for approval of Tenant-Made Alterations, written
notification of which Tenant-Made Alterations Landlord will require Tenant to
remove upon surrender of the Premises. Tenant shall repair any damage caused
by such removal.

Tenant, at its own cost and expense and without Landlord's prior
approval, may erect such shelves, bins, machinery and trade fixtures
(collectively "Trade Fixtures") in the ordinary course of its business provided
that such items do not alter the basic character of the Premises, do not
overload or damage the Premises, and may be removed without injury to the
Premises, and the construction, erection, and installation thereof complies with
all Legal Requirements and with Landlord's requirements set forth above. Tenant
shall remove its Trade Fixtures and shall repair any damage caused by such
removal.

13. SIGNS. Tenant shall not make any changes to the exterior of the
Premises, install any exterior lights, decorations, balloons, flags, pennants,
banners, or painting, or erect or install any signs, windows or door lettering,
placards, decorations, or advertising media of any type which can be viewed from
the exterior of the Premises, without Landlord's prior written consent, except
that Tenant may erect temporary signage on the exterior of the Premises for a 14
day period once in a calendar year, provided that such temporary signage (i)
shall be in good taste and for a good business purpose, (ii) is related solely
to Tenant's business operations, and (iii) does not involve the roof or
structure of the Building. Upon surrender or vacation of the Premises, Tenant
shall have removed all signs and repair, paint, and/or replace the building
facia surface to which its signs are attached. Tenant shall obtain all
applicable governmental permits and approvals for sign and exterior treatments.
All signs, decorations, advertising media, blinds, draperies and other window
treatment or bars or other security installations visible from outside the
Premises shall be subject to Landlord's approval and conform in all respects to
Landlord's

<PAGE>

requirements.

Notwithstanding anything contained herein to the contrary, Tenant
shall be allowed to place temporary, promotional or special event signage

14. PARKING. Tenant shall be entitled to park in those areas designated
on Exhibit A. Subject to Paragraph 20, Landlord shall not be responsible for
enforcing Tenant's parking rights against any third parties.

15. RESTORATION. If at any time during the Lease Term the Premises are
damaged by a fire or other casualty, Landlord shall notify Tenant within 60 days
after such damage as to the amount of time Landlord reasonably estimates it will
take to restore the Premises. If the restoration time is estimated to exceed 6
months, either Landlord or Tenant may elect to terminate this Lease upon notice
to the other party given no later than 30 days after Landlord's notice. If
neither party elects to terminate this Lease or if Landlord estimates that
restoration will take 6 months or less, then, subject to receipt of sufficient
insurance proceeds, Landlord shall promptly restore the Premises excluding the
improvements installed by Tenant or by Landlord and paid by Tenant, subject to
delays arising from the collection of insurance proceeds or from Force Majeure
events. Tenant at Tenant's expense shall promptly perform, subject to delays
arising from the collection of insurance proceeds, or from Force Majeure events,
all repairs or restoration not required to be done by Landlord and shall
promptly re-enter the Premises and commence doing business within 30 days after
restoration in accordance with this Lease. Notwithstanding the foregoing,
either party may terminate this Lease if the Premises are damaged during the
last year of the Lease Term and Landlord reasonably estimates that it will take
more than one month to repair such damage. Tenant shall pay to Landlord with
respect to any damage to the Premises the amount of the commercially reasonable
deductible under Landlord's insurance policy (not to exceed $10,000) within 10
days after presentment of Landlord's invoice. If the damage involves the
premises of other tenants, Tenant shall pay the portion of the deductible that
the cost of the restoration of the Premises bears to the total cost of
restoration, as determined by Landlord. Base Rent and Operating Expenses shall
be abated for the period of repair and restoration in the proportion which the
area of the Premises, if any, which is not usable by Tenant bears to the total
area of the Premises. Such abatement shall be the sole remedy of Tenant, and
except as provided herein, Tenant waives any right to terminate the Lease by
reason of damage or casualty loss.

16. CONDEMNATION. If any part of the Premises or the Project should be
taken for any public or quasi-public use under governmental law, ordinance, or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof (a "Taking" or "Taken"), and the Taking would prevent or materially
interfere with Tenant's use of the Premises or in Landlord's judgment would
materially interfere with or impair its ownership or operation of the Project,
then upon written notice by Landlord or Tenant this Lease shall terminate and
Base Rent shall be apportioned as of said date. If part of the Premises shall
be Taken, and this Lease is not terminated as provided above, the Base Rent
payable hereunder during the unexpired Lease Term shall be reduced to such
extent as may be fair and reasonable under the circumstances. In the event of
any such Taking, Landlord shall be entitled to receive the entire price or award
from any such Taking without any payment to Tenant, and Tenant hereby assigns to
Landlord Tenant's

<PAGE>

interest, if any, in such award. Tenant shall have the right, to the extent
that same shall not diminish Landlord's award, to make a separate claim
against the condemning authority (but not Landlord) for such compensation as
may be separately awarded or recoverable by Tenant for moving expenses and
damage to Tenant's Trade Fixtures and other matters, if a separate award for
such items is made to Tenant. Notwithstanding anything contained herein to
the contrary, Landlord shall use a reasonable portion of any condemnation
proceeds it receives to repair any damage to the Premises caused by such
condemnation.

17. ASSIGNMENT AND SUBLETTING. Without Landlord's prior written consent,
Tenant shall not assign this Lease or sublease the Premises or any part thereof
or mortgage, pledge, or hypothecate its leasehold interest or grant any
concession or license within the Premises and any attempt to do any of the
foregoing shall be void and of no effect. For purposes of this paragraph, a
single transfer of 50% or more of the total ownership interests of Tenant shall
be deemed an assignment of this Lease unless such ownership interests are or
become publicly traded. Notwithstanding the above, Tenant may assign or sublet
the Premises, or any part thereof, to any entity controlling Tenant, controlled
by Tenant or under common control with Tenant (a "Tenant Affiliate"), without
the prior written consent of Landlord. Tenant shall reimburse Landlord for all
of Landlord's reasonable out-of-pocket expenses in connection with any
assignment or sublease. Upon Landlord's receipt of Tenant's written notice of a
desire to assign or sublet the Premises, or any part thereof (other than to a
Tenant Affiliate) or as provided in the paragraph immediately below, Landlord
may, by giving written notice to Tenant within 30 days after receipt of Tenant's
notice, terminate this Lease with respect to the space described in Tenant's
notice, as of the date specified in Tenant's notice for the commencement of the
proposed assignment or sublease.

Provided no default has occurred and is continuing under this Lease,
upon 10 days prior written notice to Landlord, Tenant may, without Landlord's
prior written consent, assign this Lease to an entity into which Tenant is
merged or consolidated or to an entity to which substantially all of Tenant's
assets are transferred, provided (x) such merger, consolidation, or transfer of
assets is for a good business purpose and not principally for the purpose of
transferring Tenant's leasehold estate, and (y) the assignee or successor entity
has a net worth at least equal to $22 million dollars immediately prior to such
merger, consolidation, or transfer.

Notwithstanding any assignment or subletting, Tenant and any guarantor
or surety of Tenant's obligations under this Lease shall at all times remain
fully responsible and liable for the payment of the rent and for compliance with
all of Tenant's other obligations under this Lease (regardless of whether
Landlord's approval has been obtained for any such assignments or sublettings),
unless Landlord, at its sole discretion, releases Tenant from such obligations
upon assumption of such obligations by the assignee or sublessee. In the event
that the rent due and payable by a sublessee or assignee (or a combination of
the rental payable under such sublease or assignment plus any bonus or other
consideration therefor or incident thereto) exceeds the rental payable under
this Lease, then Tenant shall be bound and obligated to pay Landlord as
additional rent hereunder all such excess rental and other excess consideration
within 20 days following receipt thereof by Tenant.

If this Lease be assigned or if the Premises be subleased (whether in
whole or in

<PAGE>

part) or in the event of the mortgage, pledge, or hypothecation of Tenant's
leasehold interest or grant of any concession or license within the Premises
or if the Premises be occupied in whole or in part by anyone other than
Tenant, then upon a default by Tenant hereunder Landlord may collect rent
from the assignee, sublessee, mortgagee, pledgee, party to whom the leasehold
interest was hypothecated, concessionee or licensee or other occupant and,
except to the extent set forth in the preceding paragraph, apply the amount
collected to the next rent payable hereunder; and all such rentals collected
by Tenant shall be held in trust for Landlord and immediately forwarded to
Landlord. No such transaction or collection of rent or application thereof
by Landlord, however, shall be deemed a waiver of these provisions or a
release of Tenant from the further performance by Tenant of its covenants,
duties, or obligations hereunder.

18. INDEMNIFICATION. Except for the negligence of Landlord, its agents,
employees or contractors, and to the extent permitted by law, Tenant agrees to
indemnify, defend and hold harmless Landlord, and Landlord's agents, employees
and contractors, from and against any and all losses, liabilities, damages,
costs and expenses (including attorneys' fees) resulting from claims by third
parties for injuries to any person and damage to or theft or misappropriation or
loss of property occurring in or about the Project and arising from the use and
occupancy of the Premises or from any activity, work, or thing done, permitted
or suffered by Tenant in or about the Premises or due to any other act or
omission of Tenant, its subtenants, assignees, invitees, employees, contractors
and agents. The furnishing of insurance required hereunder shall not be deemed
to limit Tenant's obligations under this Paragraph 18.

19. INSPECTION AND ACCESS. Landlord and its agents, representatives, and
contractors may enter the Premises at any reasonable time to inspect the
Premises and to make such repairs as may be required or permitted pursuant to
this Lease and for any other business purpose; Landlord and Landlord's
representatives may enter the Premises during business hours for the purpose of
showing the Premises to prospective purchasers and, during the last year of the
Lease Term, to prospective tenants; Landlord may erect a suitable sign on the
Premises stating the Premises are available to let or that the Project is
available for sale; Landlord may grant easements, make public dedications,
designate common areas and create restrictions on or about the Premises,
provided that none of the foregoing materially interferes with Tenant's use or
occupancy of the Premises. At Landlord's request, Tenant shall execute such
instruments as may be reasonably necessary for such easements, dedications or
restrictions.

20. QUIET ENJOYMENT. If Tenant shall perform all of the covenants and
agreements herein required to be performed by Tenant, Tenant shall, subject to
the terms of this Lease, at all times during the Lease Term, have peaceful and
quiet enjoyment of the Premises against any person claiming by, through or under
Landlord.

21. SURRENDER. Upon termination of the Lease Term or earlier termination
of Tenant's right of possession, Tenant shall surrender the Premises to Landlord
in the same condition as received, broom clean, ordinary wear and tear and
casualty loss and condemnation covered by Paragraphs 15 and 16 excepted. Any
Trade Fixtures, Tenant-Made Alterations and property not so removed by Tenant as
permitted or required herein shall be deemed abandoned and may be stored,
removed, and disposed of by Landlord at Tenant's expense, and Tenant

<PAGE>

waives all claims against Landlord for any damages resulting from Landlord's
retention and disposition of such property. All obligations of Tenant
hereunder not fully performed as of the termination of the Lease Term shall
survive the termination of the Lease Term, including without limitation,
indemnity obligations, payment obligations with respect to Operating Expenses
and obligations concerning the condition and repair of the Premises.

22. HOLDING OVER. If Tenant retains possession of the Premises after the
termination of the Lease Term, unless otherwise agreed in writing, such
possession shall be subject to immediate termination by Landlord at any time,
and all of the other terms and provisions of this Lease (excluding any expansion
or renewal option or other similar right or option) shall be applicable during
such holdover period, except that Tenant shall pay Landlord from time to time,
upon demand, as Base Rent for the holdover period, an amount equal to 150% of
the Base Rent in effect on the termination date, computed on a monthly basis for
each month or part thereof during such holding over. All other payments shall
continue under the terms of this Lease. In addition, Tenant shall be liable for
all damages incurred by Landlord as a result of such holding over. No holding
over by Tenant, whether with or without consent of Landlord, shall operate to
extend this Lease except as otherwise expressly provided or agreed to by
Landlord in writing, and this Paragraph 22 shall not be construed as consent for
Tenant to retain possession of the Premises.

23. EVENTS OF DEFAULT. Each of the following events shall be an event of
default ("Event of Default") by Tenant under this Lease:

(i) Tenant shall fail to pay any installment of Base Rent or any
other payment required herein when due, and such failure shall continue for
a period of 5 business days after receipt of notice from Landlord to Tenant
that such payment was due; provided, however, that Landlord shall not be
obligated to provide written notice of such failure more than 2 times in
any consecutive 12-month period, and the failure of Tenant to pay any third
or subsequent installment of Base Rent or any other payment required herein
when due in any consecutive 12-month period shall constitute an Event of
Default by Tenant under this Lease without the requirement of notice or
opportunity to cure.

(ii) Tenant or any guarantor or surety of Tenant's obligations
hereunder shall (A) make a general assignment for the benefit of creditors;
(B) commence any case, proceeding or other action seeking to have an order
for relief entered on its behalf as a debtor or to adjudicate it a bankrupt
or insolvent, or seeking reorganization, arrangement, adjustment,
liquidation, dissolution or composition of it or its debts or seeking
appointment of a receiver, trustee, custodian or other similar official for
it or for all or of any substantial part of its property (collectively a
"proceeding for relief"); (C) become the subject of any proceeding for
relief which is not dismissed within 60 days of its filing or entry; or (D)
die or suffer a legal disability (if Tenant, guarantor, or surety is an
individual) or be dissolved or otherwise fail to maintain its legal
existence (if Tenant, guarantor or surety is a corporation, partnership or
other entity).

(iii) Any insurance required to be maintained by Tenant pursuant
to this Lease shall be canceled or terminated or shall expire or shall be
reduced or materially changed,

<PAGE>

except, in each case, as permitted in this Lease.

(iv) Tenant shall not occupy or shall vacate the Premises or
shall fail to continuously operate its business at the Premises for the
permitted use set forth herein, whether or not Tenant is in monetary or
other default under this Lease. Tenant's vacating of the Premises shall
not constitute an Event of Default if, prior to vacating the Premises,
Tenant has made arrangements reasonably acceptable to Landlord to (a)
insure that Tenant's insurance for the Premises will not be voided or
canceled with respect to the Premises as a result of such vacancy, (b)
insure that the Premises are secured and not subject to vandalism, and (c)
insure that the Premises will be properly maintained after such vacation.
Tenant shall inspect the Premises at least every 2 months and report every
2 months in writing to Landlord on the condition of the Premises.

(v) Tenant shall attempt or there shall occur any assignment,
subleasing or other transfer of Tenant's interest in or with respect to
this Lease except as otherwise permitted in this Lease.

(vi) Subject to the terms of Paragraph 28 of this Lease, Tenant
shall fail to discharge any lien placed upon the Premises in violation of
this Lease within 30 days after any such lien or encumbrance is filed
against the Premises.

(vii) Tenant shall fail to comply with any provision of this Lease
other than those specifically referred to in this Paragraph 23, and except
as otherwise expressly provided herein, such default shall continue for
more than 30 days after Landlord shall have given Tenant written notice of
such default.

24. LANDLORD'S REMEDIES. Upon each occurrence of an Event of Default and
so long as such Event of Default shall be continuing, Landlord may at any time
thereafter at its election: terminate this Lease or Tenant's right of
possession, (but Tenant shall remain liable as hereinafter provided) and/or
pursue any other remedies at law or in equity. Upon the termination of this
Lease or termination of Tenant's right of possession, it shall be lawful for
Landlord, without formal demand or notice of any kind, to re-enter the Premises
by summary dispossession proceedings or any other action or proceeding
authorized by law and to remove Tenant and all persons and property therefrom.
If Landlord re-enters the Premises, Landlord shall have the right to keep in
place and use, or remove and store, all of the furniture, fixtures and equipment
at the Premises.

If Landlord terminates this Lease, Landlord may recover from Tenant
the sum of: all Base Rent and all other amounts accrued hereunder to the date of
such termination; the cost of reletting the whole or any part of the Premises,
including without limitation brokerage fees and/or leasing commissions incurred
by Landlord, and costs of removing and storing Tenant's or any other occupant's
property, repairing, altering, remodeling, or otherwise putting the Premises
into condition reasonably acceptable to a new tenant or tenants, and all
reasonable expenses incurred by Landlord in pursuing its remedies, including
reasonable attorneys' fees and court costs; and the excess of the then present
value of the Base Rent and other amounts payable by Tenant under this Lease as
would otherwise have been required to be paid by Tenant to Landlord

<PAGE>

during the period following the termination of this Lease measured from the
date of such termination to the expiration date stated in this Lease, over
the present value of any net amounts which Tenant establishes Landlord can
reasonably expect to recover by reletting the Premises for such period,
taking into consideration the availability of acceptable tenants and other
market conditions affecting leasing. Such present values shall be calculated
at a discount rate equal to the 90-day U.S. Treasury bill rate at the date of
such termination.

If Landlord terminates Tenant's right to possession without
terminating the Lease after an Event of Default, Landlord shall use commercially
reasonable efforts to relet the Premises; provided, however, (a) Landlord shall
not be obligated to accept any tenant proposed by Tenant, (b) Landlord shall
have the right to lease any other space controlled by Landlord first, and (c)
any proposed tenant shall meet all of Landlord's reasonable leasing criteria.
For the purpose of such reletting Landlord is authorized to make any repairs,
changes, alterations, or additions in or to the Premises as Landlord deems
reasonably necessary or desirable. If the Premises are not relet, then Tenant
shall pay to Landlord as damages a sum equal to the amount of the rental
reserved in this Lease for such period or periods, plus the cost of recovering
possession of the Premises (including attorneys' fees and costs of suit), the
unpaid Base Rent and other amounts accrued hereunder at the time of
repossession, and the reasonable costs incurred in any attempt by Landlord to
relet the Premises. If the Premises are relet and a sufficient sum shall not be
realized from such reletting [after first deducting therefrom, for retention by
Landlord, the unpaid Base Rent and other amounts accrued hereunder at the time
of reletting, the reasonable cost of recovering possession (including attorneys'
fees and costs of suit), all of the costs and expense of repairs, changes,
alterations, and additions, the reasonable expense of such reletting (including
without limitation brokerage fees and leasing commissions) and the reasonable
cost of collection of the rent accruing therefrom] to satisfy the rent provided
for in this Lease to be paid, then Tenant shall immediately satisfy and pay any
such deficiency. Any such payments due Landlord shall be made upon demand
therefor from time to time and Tenant agrees that Landlord may file suit to
recover any sums falling due from time to time. Notwithstanding any such
reletting without termination, Landlord may at any time thereafter elect in
writing to terminate this Lease for such previous breach.

Exercise by Landlord of any one or more remedies hereunder granted or
otherwise available shall not be deemed to be an acceptance of surrender of the
Premises and/or a termination of this Lease by Landlord, whether by agreement or
by operation of law, it being understood that such surrender and/or termination
can be effected only by the written agreement of Landlord and Tenant. Any law,
usage, or custom to the contrary notwithstanding, Landlord shall have the right
at all times to enforce the provisions of this Lease in strict accordance with
the terms hereof; and the failure of Landlord at any time to enforce its rights
under this Lease strictly in accordance with same shall not be construed as
having created a custom in any way or manner contrary to the specific terms,
provisions, and covenants of this Lease or as having modified the same. Tenant
and Landlord further agree that forbearance or waiver by Landlord to enforce its
rights pursuant to this Lease or at law or in equity, shall not be a waiver of
Landlord's right to enforce one or more of its rights in connection with any
subsequent default. A receipt by Landlord of rent or other payment with
knowledge of the breach of any covenant hereof shall not be deemed a waiver of
such breach, and no waiver by Landlord of any provision of this Lease shall be
deemed to have been made unless expressed in writing and signed by Landlord. To
the

<PAGE>

greatest extent permitted by law, Tenant waives the service of notice of
Landlord's intention to re-enter as provided for in any statute, or to
institute legal proceedings to that end, and also waives all right of
redemption in case Tenant shall be dispossessed by a judgment or by warrant
of any court or judge. The terms "enter," "re-enter," "entry" or "re-entry,"
as used in this Lease, are not restricted to their technical legal meanings.
Any reletting of the Premises shall be on such terms and conditions as
Landlord in its sole discretion may determine (including without limitation a
term different than the remaining Lease Term, rental concessions, alterations
and repair of the Premises, lease of less than the entire Premises to any
tenant and leasing any or all other portions of the Project before reletting
the Premises). Landlord shall not be liable, nor shall Tenant's obligations
hereunder be diminished because of, Landlord's failure to relet the Premises
or collect rent due in respect of such reletting.

25. TENANT'S REMEDIES/LIMITATION OF LIABILITY. Landlord shall not be in
default hereunder unless Landlord fails to perform any of its obligations
hereunder within 30 days after written notice from Tenant specifying such
failure (unless such performance will, due to the nature of the obligation,
require a period of time in excess of 30 days, then after such period of time as
is reasonably necessary). All obligations of Landlord hereunder shall be
construed as covenants, not conditions; and, except as may be otherwise
expressly provided in this Lease, Tenant may not terminate this Lease for breach
of Landlord's obligations hereunder. All obligations of Landlord under this
Lease will be binding upon Landlord only during the period of its ownership of
the Premises and not thereafter. The term "Landlord" in this Lease shall mean
only the owner, for the time being of the Premises, and in the event of the
transfer by such owner of its interest in the Premises, such owner shall
thereupon be released and discharged from all obligations of Landlord thereafter
accruing, but such obligations shall be binding during the Lease Term upon each
new owner for the duration of such owner's ownership. Any liability of Landlord
under this Lease shall be limited solely to its interest in the Project, and in
no event shall any personal liability be asserted against Landlord in connection
with this Lease nor shall any recourse be had to any other property or assets of
Landlord.

26. WAIVER OF JURY TRIAL. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL BY
JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS
LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.

27. SUBORDINATION. This Lease and Tenant's interest and rights hereunder
are and shall be subject and subordinate at all times to the lien of any first
mortgage, now existing or hereafter created on or against the Project or the
Premises, and all amendments, restatements, renewals, modifications,
consolidations, refinancing, assignments and extensions thereof, without the
necessity of any further instrument or act on the part of Tenant. Tenant
agrees, at the election of the holder of any such mortgage, to attorn to any
such holder. Tenant agrees upon demand to execute, acknowledge and deliver such
instruments, confirming such subordination and such instruments of attornment as
shall be requested by any such holder. Tenant hereby appoints Landlord attorney
in fact for Tenant irrevocably (such power of attorney being coupled with an
interest) to execute, acknowledge and deliver any such instrument and
instruments for

<PAGE>

and in the name of the Tenant and to cause any such instrument to be
recorded. Notwithstanding the foregoing, any such holder may at any time
subordinate its mortgage to this Lease, without Tenant's consent, by notice
in writing to Tenant, and thereupon this Lease shall be deemed prior to such
mortgage without regard to their respective dates of execution, delivery or
recording and in that event such holder shall have the same rights with
respect to this Lease as though this Lease had been executed prior to the
execution, delivery and recording of such mortgage and had been assigned to
such holder. The term "mortgage" whenever used in this Lease shall be deemed
to include deeds of trust, security assignments and any other encumbrances,
and any reference to the "holder" of a mortgage shall be deemed to include
the beneficiary under a deed of trust.

Tenant shall not be obligated to subordinate the Lease or its interest
therein to any future mortgage, deed of trust or ground lease on the Project
unless concurrently with such subordination the holder of such mortgage or deed
of trust or the ground lessor under such ground lease agrees not to disturb
Tenant's possession of the Premises under the terms of the Lease in the event
such holder or ground lessor acquires title to the Premises through foreclosure,
deed in lieu of foreclosure or otherwise. Tenant shall be solely responsible
for any fees or expenses charged by the holder of such mortgage or deed of trust
in connection with the granting of such non-disturbance agreement.

28. MECHANIC'S LIENS. Tenant has no express or implied authority to
create or place any lien or encumbrance of any kind upon, or in any manner to
bind the interest of Landlord or Tenant in, the Premises or to charge the
rentals payable hereunder for any claim in favor of any person dealing with
Tenant, including those who may furnish materials or perform labor for any
construction or repairs. Tenant covenants and agrees that it will pay or
cause to be paid all sums legally due and payable by it on account of any
labor performed or materials furnished in connection with any work performed
on the Premises and that it will save and hold Landlord harmless from all
loss, cost or expense based on or arising out of asserted claims or liens
against the leasehold estate or against the interest of Landlord in the
Premises or under this Lease. Tenant shall give Landlord immediate written
notice of the placing of any lien or encumbrance against the Premises and
cause such lien or encumbrance to be discharged within 30 days of the filing
or recording thereof; provided, however, Tenant may contest such liens or
encumbrances as long as such contest prevents foreclosure of the lien or
encumbrance and Tenant causes such lien or encumbrance to be bonded or
insured over in a manner satisfactory to Landlord within such 30 day period.

29. ESTOPPEL CERTIFICATES. Tenant agrees, from time to time, within 15
days after request of Landlord, to execute and deliver to Landlord, or
Landlord's designee, any estoppel certificate requested by Landlord, stating
that this Lease is in full force and effect, the date to which rent has been
paid, that Landlord is not in default hereunder (or specifying in detail the
nature of Landlord's default), the termination date of this Lease and such other
matters pertaining to this Lease as may be requested by Landlord. Tenant's
obligation to furnish each estoppel certificate in a timely fashion is a
material inducement for Landlord's execution of this Lease. No cure or grace
period provided in this Lease shall apply to Tenant's obligations to timely
deliver an estoppel certificate. Tenant hereby irrevocably appoints Landlord as
its attorney in fact to execute on its behalf and in its name any such estoppel
certificate if Tenant fails to execute and deliver the estoppel certificate
within 15 days after Landlord's written request

<PAGE>

thereof.

30. ENVIRONMENTAL REQUIREMENTS. Except for Hazardous Material contained
in products used by Tenant in de minimis quantities for ordinary cleaning and
office purposes, Tenant shall not permit or cause any party to bring any
Hazardous Material upon the Premises or transport, store, use, generate,
manufacture or release any Hazardous Material in or about the Premises without
Landlord's prior written consent. Tenant, at its sole cost and expense, shall
operate its business in the Premises in strict compliance with all Environmental
Requirements and shall remediate in a manner reasonably satisfactory to Landlord
any Hazardous Materials released on or from the Project by Tenant, its agents,
employees, contractors, subtenants or invitees. Tenant shall complete and
certify to disclosure statements as requested by Landlord from time to time
relating to Tenant's transportation, storage, use, generation, manufacture or
release of Hazardous Materials on the Premises. The term "Environmental
Requirements" means all applicable present and future statutes, regulations,
ordinances, rules, codes, judgments, orders or other similar enactments of any
governmental authority or agency regulating or relating to health, safety, or
environmental conditions on, under, or about the Premises or the environment,
including without limitation, the following: the Comprehensive Environmental
Response, Compensation and Liability Act; the Resource Conservation and Recovery
Act; and all state and local counterparts thereto, and any regulations or
policies promulgated or issued thereunder. The term "Hazardous Materials" means
and includes any substance, material, waste, pollutant, or contaminant listed or
defined as hazardous or toxic, under any Environmental Requirements, asbestos
and petroleum, including crude oil or any fraction thereof, natural gas liquids,
liquified natural gas, or synthetic gas usable for fuel (or mixtures of natural
gas and such synthetic gas). As defined in Environmental Requirements, Tenant
is and shall be deemed to be the "operator" of Tenant's "facility" and the
"owner" of all Hazardous Materials brought on the Premises by Tenant, its
agents, employees, contractors or invitees, and the wastes, by-products, or
residues generated, resulting, or produced therefrom.

Tenant shall indemnify, defend, and hold Landlord harmless from and
against any and all losses (including, without limitation, diminution in value
of the Premises or the Project and loss of rental income from the Project),
claims, demands, actions, suits, damages (including, without limitation,
punitive damages), expenses (including, without limitation, remediation,
removal, repair, corrective action, or cleanup expenses), and costs (including,
without limitation, actual attorneys' fees, consultant fees or expert fees and
including, without limitation, removal or management of any asbestos brought
into the property or disturbed in breach of the requirements of this Paragraph
30, regardless of whether such removal or management is required by law) which
are brought or recoverable against, or suffered or incurred by Landlord as a
result of any release of Hazardous Materials for which Tenant is obligated to
remediate as provided above or any other breach of the requirements under this
Paragraph 30 by Tenant, its agents, employees, contractors, subtenants,
assignees or invitees, regardless of whether Tenant had knowledge of such
noncompliance. The obligations of Tenant under this Paragraph 30 shall survive
any termination of this Lease.

Landlord shall have access to, and a right to perform inspections and
tests of, the Premises to determine Tenant's compliance with Environmental
Requirements, its obligations under this Paragraph 30, or the environmental
condition of the Premises. Access shall be granted

<PAGE>

to Landlord upon Landlord's prior notice to Tenant and at such times so as to
minimize, so far as may be reasonable under the circumstances, any
disturbance to Tenant's operations. Such inspections and tests shall be
conducted at Landlord's expense, unless such inspections or tests reveal that
Tenant has not complied with any Environmental Requirement, in which case
Tenant shall reimburse Landlord for the reasonable cost of such inspection
and tests. Landlord's receipt of or satisfaction with any environmental
assessment in no way waives any rights that Landlord holds against Tenant.

31. RULES AND REGULATIONS. Tenant shall, at all times during the Lease
Term and any extension thereof, comply with all reasonable rules and regulations
at any time or from time to time established by Landlord covering use of the
Premises and the Project. The current rules and regulations are attached
hereto. In the event of any conflict between said rules and regulations and
other provisions of this Lease, the other terms and provisions of this Lease
shall control. Landlord shall not have any liability or obligation for the
breach of any rules or regulations by other tenants in the Project.

32. SECURITY SERVICE. Tenant acknowledges and agrees that, while Landlord
may patrol the Project, Landlord is not providing any security services with
respect to the Premises and that Landlord shall not be liable to Tenant for, and
Tenant waives any claim against Landlord with respect to, any loss by theft or
any other damage suffered or incurred by Tenant in connection with any
unauthorized entry into the Premises or any other breach of security with
respect to the Premises.

33. FORCE MAJEURE. Landlord shall not be held responsible for delays in
the performance of its obligations hereunder when caused by strikes, lockouts,
labor disputes, acts of God, inability to obtain labor or materials or
reasonable substitutes therefor, governmental restrictions, governmental
regulations, governmental controls, delay in issuance of permits, enemy or
hostile governmental action, civil commotion, fire or other casualty, and other
causes beyond the reasonable control of Landlord ("Force Majeure").

34. ENTIRE AGREEMENT. This Lease constitutes the complete agreement of
Landlord and Tenant with respect to the subject matter hereof. No
representations, inducements, promises or agreements, oral or written, have been
made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant,
which are not contained herein, and any prior agreements, promises,
negotiations, or representations are superseded by this Lease. This Lease may
not be amended except by an instrument in writing signed by both parties hereto.

35. SEVERABILITY. If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or future laws, then and in that event,
it is the intention of the parties hereto that the remainder of this Lease shall
not be affected thereby. It is also the intention of the parties to this Lease
that in lieu of each clause or provision of this Lease that is illegal, invalid
or unenforceable, there be added, as a part of this Lease, a clause or provision
as similar in terms to such illegal, invalid or unenforceable clause or
provision as may be possible and be legal, valid and enforceable.

36. BROKERS. Tenant represents and warrants that it has dealt with no
broker, agent

<PAGE>

or other person in connection with this transaction and that no broker, agent
or other person brought about this transaction, other than the broker, if
any, set forth on the first page of this Lease, and Tenant agrees to
indemnify and hold Landlord harmless from and against any claims by any other
broker, agent or other person claiming a commission or other form of
compensation by virtue of having dealt with Tenant with regard to this
leasing transaction.

37. MISCELLANEOUS. (a) Any payments or charges due from Tenant to
Landlord hereunder shall be considered rent for all purposes of this Lease.

(b) If and when included within the term "Tenant," as used in this
instrument, there is more than one person, firm or corporation, each shall be
jointly and severally liable for the obligations of Tenant.

(c) All notices required or permitted to be given under this Lease shall
be in writing and shall be sent by registered or certified mail, return receipt
requested, or by a reputable national overnight courier service, postage
prepaid, or by hand delivery addressed to the parties at their addresses below,
and with a copy sent to Landlord at 14100 EAST 35TH PLACE, AURORA, COLORADO
80011. Either party may by notice given aforesaid change its address for all
subsequent notices. Except where otherwise expressly provided to the contrary,
notice shall be deemed given upon delivery.

(d) Except as otherwise expressly provided in this Lease or as otherwise
required by law, Landlord's consent or approval shall not be unreasonably
withheld.

(e) At Landlord's request from time to time Tenant shall furnish Landlord
with true and complete copies of its most recent annual and quarterly financial
statements prepared by Tenant or Tenant's accountants and any other financial
information or summaries that Tenant typically provides to its lenders or
shareholders.

(f) Neither this Lease nor a memorandum of lease shall be filed by or on
behalf of Tenant or Landlord in any public record. Landlord may prepare and
file, and upon request by Landlord Tenant will execute, a memorandum of lease.

(g) The normal rule of construction to the effect that any ambiguities are
to be resolved against the drafting party shall not be employed in the
interpretation of this Lease or any exhibits or amendments hereto.

(h) The submission by Landlord to Tenant of this Lease shall have no
binding force or effect, shall not constitute an option for the leasing of the
Premises, nor confer any right or impose any obligations upon either party until
execution of this Lease by both parties.

(i) Words of any gender used in this Lease shall be held and construed to
include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires. The captions
inserted in this Lease are for convenience only and in no way define, limit or
otherwise describe the scope or intent of this Lease, or any provision hereof,
or in any way affect the interpretation of this Lease.

<PAGE>

(j) Any amount not paid by Tenant within 5 business days after receipt of
notice from Landlord to Tenant that such payment was due; provided, however,
that Landlord shall not be obligated to provide written notice of such failure
more than 2 times in any consecutive 12-month period, shall bear interest from
such due date until paid in full at the lesser of the highest rate permitted by
applicable law or 12 percent per year. It is expressly the intent of Landlord
and Tenant at all times to comply with applicable law governing the maximum rate
or amount of any interest payable on or in connection with this Lease. If
applicable law is ever judicially interpreted so as to render usurious any
interest called for under this Lease, or contracted for, charged, taken ,
reserved, or received with respect to this Lease, then it is Landlord's and
Tenant's express intent that all excess amounts theretofore collected by
Landlord be credited on the applicable obligation (or, if the obligation has
been or would thereby be paid in full, refunded to Tenant), and the provisions
of this Lease immediately shall be deemed reformed and the amounts thereafter
collectible hereunder reduced, without the necessity of the execution of any new
document, so as to comply with the applicable law, but so as to permit the
recovery of the fullest amount otherwise called for hereunder.

(k) Construction and interpretation of this Lease shall be governed by the
laws of the state in which the Project is located, excluding any principles of
conflicts of laws.

(l) Time is of the essence as to the performance of Tenant's obligations
under this Lease.

(m) All exhibits and addenda attached hereto are hereby incorporated into
this Lease and made a part hereof. In the event of any conflict between such
exhibits or addenda and the terms of this Lease, such exhibits or addenda shall
control.

38. LANDLORD'S LIEN/SECURITY INTEREST. Intentionally deleted.

39. LIMITATION OF LIABILITY OF TRUSTEES, SHAREHOLDERS, AND OFFICERS OF
PROLOGIS TRUST. Any obligation or liability whatsoever of ProLogis Trust, a
Maryland real estate investment trust, which may arise at any time under this
Lease or any obligation or liability which may be incurred by it pursuant to any
other instrument, transaction, or undertaking contemplated hereby shall not be
personally binding upon, nor shall resort for the enforcement thereof be had to
the property of, its trustees, directors, shareholders, officers, employees or
agents, regardless of whether such obligation or liability is in the nature of
contract, tort, or otherwise.

40. PURCHASE OF LAND. Landlord and Tenant hereby acknowledge and agree
that the effectiveness of this Lease is contingent upon Landlord acquiring the
real property required to develop the Premises by October 16, 1998, and Landlord
shall use commercially reasonable efforts to effectuate the acquisition of the
real property required to develop the Premises by October 16, 1998. In the
event the Landlord does not acquire the real property required to develop the
Premises by October 16, 1998, then this Lease shall be deemed null and void, and
no longer in full force and effect.

<PAGE>

IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the
day and year first above written.

TENANT LANDLORD:

SELECT COMFORT CORPORATION PROLOGIS DEVELOPMENT SERVICES
INCORPORATED

By: /s/ D. J. McAthie By: /s/ Bud Lyons
---------------------------------- ---------------------------------
Title: Daniel J. McAthie, EVP-CAO-CFR Title: Irving F. (Bud) Lyons III,
& Secretary Co-Chairman

Address: Address:
6105 Trenton Lane N. 14100 E. 35th Place

Minneapolis, MN 55442-3240 Aurora, CO 80011

<PAGE>

RULES AND REGULATIONS

1 The sidewalk, entries, and driveways of the Project shall not be obstructed
by Tenant, or its agents, or used by them for any purpose other than
ingress and egress to and from the Premises.

2. Tenant shall not place any objects, including antennas, outdoor furniture,
etc., in the parking areas, landscaped areas or other areas outside of its
Premises, or on the roof of the Project, except for miscellaneous furniture
associated with an employee lunch area.

3. Except for seeing-eye dogs, no animals shall be allowed in the offices,
halls, or corridors in the Project.

4. Tenant shall not disturb the occupants of the Project or adjoining
buildings by the use of any radio or musical instrument or by the making of
loud or improper noises.

5. If Tenant desires telegraphic, telephonic or other electric connections in
the Premises, Landlord or its agent will direct the electrician as to where
and how the wires may be introduced; and, without such direction, no boring
or cutting of wires will be permitted. Any such installation or connection
shall be made at Tenant's expense.

6. Tenant shall not install or operate any steam or gas engine or boiler, or
other mechanical apparatus in the Premises, except as specifically approved
in the Lease or by Landlord pursuant to the Lease. The use of oil, gas or
inflammable liquids for heating, lighting or any other purpose is expressly
prohibited. Explosives or other articles deemed extra hazardous shall not
be brought into the Project.

7. Parking any type of recreational vehicles is specifically prohibited on or
about the Project. Except for the overnight parking of operative vehicles,
no vehicle of any type shall be stored in the parking areas at any time.
In the event that a vehicle is disabled, it shall be removed within 48
hours. There shall be no "For Sale" or other advertising signs on or about
any parked vehicle. All vehicles shall be parked in the designated parking
areas in conformity with all signs and other markings. All parking will be
open parking, and no reserved parking, numbering or lettering of individual
spaces will be permitted except as specified by Landlord.

8. Tenant shall maintain the Premises free from rodents, insects and other
pests.

9. Landlord reserves the right to exclude or expel from the Project any person
who, in the judgment of Landlord, is intoxicated or under the influence of
liquor or drugs or who shall in any manner do any act in violation of the
Rules and Regulations of the Project.

10. Tenant shall not cause any unnecessary labor by reason of Tenant's
carelessness or indifference in the preservation of good order and
cleanliness. Landlord shall not be responsible to Tenant for any loss of
property on the Premises, however occurring, or for

<PAGE>

any damage done to the effects of Tenant by the janitors or any other
employee or person.

11. Tenant shall give Landlord prompt notice of any defects in the water, lawn
sprinkler, sewage, gas pipes, electrical lights and fixtures, heating
apparatus, or any other service equipment affecting the Premises.

12. Except as otherwise provided for in the Lease, Tenant shall not permit
storage outside the Premises, including without limitation, outside storage
of trucks and other vehicles, or dumping of waste or refuse or permit any
harmful materials to be placed in any drainage system or sanitary system in
or about the Premises.

13. All moveable trash receptacles provided by the trash disposal firm for the
Premises must be kept in the trash enclosure areas, if any, provided for
that purpose.

14. No auction, public or private, will be permitted on the Premises or the
Project.

15. No awnings shall be placed over the windows in the Premises except with the
prior written consent of Landlord.

16. The Premises shall not be used for lodging, sleeping or cooking or for any
immoral or illegal purposes or for any purpose other than that specified in
the Lease. No gaming devices shall be operated in the Premises.

17. Tenant shall ascertain from Landlord the maximum amount of electrical
current which can safely be used in the Premises, taking into account the
capacity of the electrical wiring in the Project and the Premises and the
needs of other tenants, and shall not use more than such safe capacity.
Landlord's consent to the installation of electric equipment shall not
relieve Tenant from the obligation not to use more electricity than such
safe capacity.

18. Tenant assumes full responsibility for protecting the Premises from theft,
robbery and pilferage.

19. Tenant shall not install or operate on the Premises any machinery or
mechanical devices of a nature not directly related to Tenant's ordinary
use of the Premises and shall keep all such machinery free of vibration,
noise and air waves which may be transmitted beyond the Premises.

24
<PAGE>

ADDENDUM 1

BASE RENT ADJUSTMENTS

ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED SEPTEMBER 30, 1998, BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
SELECT COMFORT CORPORATION

Subject to the provisions of Addendum 7 to this Lease, Base Rent shall
equal the following amounts for the respective periods set forth below:

<TABLE>
<CAPTION>
Period Monthly Base Rent
------ -----------------
<S> <C>
Month 1 - 60 $33,969.00

Month 61-120 $39,070.00
</TABLE>

<PAGE>

ADDENDUM 2

CONSTRUCTION-BUILDING SHELL

ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED SEPTEMBER 30, 1998, BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
SELECT COMFORT CORPORATION

1. DEFINITIONS . As used in this Addendum 2, the following terms
shall have the following respective meanings:

(a) "BUILDING SHELL IMPROVEMENTS" shall mean all items of
construction and all improvements specified and listed on Attachment 1 to this
Addendum 2 to the Lease, to be more particularly described in the Building Shell
Plans provided for in Paragraph 2(b) below.

(b) "LANDLORD'S PROJECT REPRESENTATIVE" shall mean John Hanson,
or any replacement designated by Landlord in writing to Tenant pursuant to the
notice provisions of the Lease.

(c) "TENANT DELAYS" shall mean and refer to delays in the
completion of construction of the Building Shell Improvements caused or
contributed to by (i) failure of Tenant to respond to the proposed Building
Shell Plans within the time periods provided in Paragraph 2(c) below, and any
delays resulting from the implementation of the hereinbelow provided dispute
resolution process to resolve any disputes between Landlord and Tenant with
respect to such Building Shell Plans, (ii) any request by Tenant for design or
specification changes in the Building Shell Improvements during completion of
construction thereof that will require extensive or substantial re-design of any
structural component or system of the Building Shell Improvements, or (iii)
Tenant's material interference with construction (taking into consideration the
construction deadlines imposed on Landlord hereunder), including (without
limitation) material interference resulting from Tenant's early entry of the
Premises pursuant to Paragraph 5 of this Addendum One. In order to make a claim
for a Tenant Delay under clauses (ii) or (iii) above, Landlord's Project
Representative must give Tenant's Project Representative written notice of such
claim of Tenant Delay within twelve (12) hours following the first occurrence of
the event(s) giving rise to such claim of delay.

(d) "TENANT'S PROJECT REPRESENTATIVE" shall mean Greg Kliner or
any replacement designated by Tenant in writing to Landlord pursuant to the
notice provisions of the Lease.

The other defined terms used in the various Paragraphs of this
Addendum 2 shall have the respective means therein set forth for such terms.
Defined terms used in this

<PAGE>

Addendum 2 for which no definition is herein provided shall have the
respective meanings provided for such defined terms in the Lease.

2. SCOPE OF THE WORK.

(a) Landlord agrees to furnish or perform, at Landlord's sole cost
and expense, the Building Shell Improvements specified and listed on Attachment
1 to this Addendum 2, to be more particularly described in the Building Shell
Plans provided for in Paragraph 2(b) below.

(b) Landlord shall prepare or cause to be prepared and submitted to
Tenant's Project Representative, Greg Kliner, at Tenant's offices at 6105
Trenton Lane N., Minneapolis, MN 55442-3240, for Tenant's review, by October 1,
1998, subject to Tenant Delays and events of Force Majeure, complete and final
architectural and engineering drawings and specifications (hereinafter
collectively referred to as the "Building Shell Plans"), consistent with the
description of the Building Shell Improvements set forth on Attachment 1 to this
Addendum 2. Tenant agrees that it shall not unreasonably withhold, delay or
condition its approval of the proposed Building Shell Plans. The approval
process for the Building Shell Plans shall be substantially as set forth below.
In no event shall Landlord be obligated to construct any portion of the Building
Shell Improvements unless and until Tenant has approved (or is deemed to have
approved) Building Shell Plans at 100% completion.

(c) Tenant shall have 10 business days after Tenant's receipt of the
proposed Building Shell Plans to review the same and notify Landlord in writing
of any comments or requested changes, or to otherwise give its approval or
disapproval of such proposed Building Shell Plans. Tenant's right to disapprove
the Building Shell Plans shall be limited to material inconsistencies with the
specifications set forth on Attachment 1 hereto and items which do not comply
with applicable Legal Requirements. If Tenant fails to give written comments to
or disapprove the Building Shell Plans within such 10 day period, then Tenant
shall be deemed to have approved the Building Shell Plans as submitted. Subject
to Landlord's rights under the provisions of Paragraph 2(d) below, Landlord
shall have 10 business days following its receipt of Tenant's comments and
requested changes to redraw the proposed Building Shell Plans in compliance with
Tenant's request and to resubmit the same for Tenant's final review and approval
or comment within 5 days of Tenant's receipt of such revised plans. Such
process shall be repeated as necessary until final approval or deemed approval
by Tenant of the proposed Building Shell Plans at 100% completion has been
obtained.

(d) In the event that Landlord disagrees with any of the changes to
the proposed Building Shell Plans requested by Tenant, then the Project
Representatives of Landlord and Tenant shall consult with respect thereto and
each party shall use all reasonable efforts to promptly resolve any disputed
elements of such proposed Building Shell Plans. Landlord and Tenant agree that
if after consultation with each other and their respective architects they are
unable to resolve any disputed items within 10 days of Tenant's written request
for changes, then such dispute between Landlord and Tenant with respect to the
Building Shell Plans or Tenant's request for changes to the proposed Building
Shell Plans shall be resolved pursuant to the provisions of Paragraph 6 below.

<PAGE>

(e) In the event that Tenant proposes any changes to the Building
Shell Plans (or any portion thereof) after the same have been approved or deemed
approved by Landlord, Landlord shall not unreasonably withhold its consent to
any such changes, provided the changes do not, in Landlord's reasonable opinion,
adversely affect the Building structure, systems, or equipment, or the external
appearance of the Building, or the long-term viability of the Building as an
office/warehouse project. Any proposed changes to the approved Building Shell
Plans shall be reviewed and approved pursuant to the procedures of Subparagraphs
(c) and (d) of this Paragraph 2.

(g) As soon as the Building Shell Plans are mutually agreed upon,
Landlord shall use diligent efforts to obtain all required permits,
authorizations, and licenses from appropriate governmental authorities for
construction of the Building Shell Improvements. Tenant shall be solely
responsible for obtaining any business or other license or permit required for
the conduct of its business at the Premises.

(h) Landlord's construction of the Building Shell Improvements shall
be performed in substantial compliance with this Addendum and the Building Shell
Plans approved in writing by Tenant (and any changes thereto approved by
Landlord as herein provided), and in a good and workmanlike manner, utilizing
only new materials. All such work shall be performed by Landlord in compliance
with all applicable building codes, regulations and all other Legal
Requirements.

3. CONSTRUCTION MILESTONES: DELAY DAMAGES. Landlord shall cause the
following construction milestones to be achieved, subject in each case to Tenant
Delays and events of Force Majeure:

(a) By March 1, 1999, subject to Tenant Delays and events of Force
Majeure (including weather delays but only if such delays exceed 5 days, on a
cumulative basis), Landlord shall cause the Building Shell to be "dried-in" so
as to enable Tenant to begin installing its racking and manufacturing equipment
(as used herein, the term "dried-in" shall mean the exterior walls are erected,
the exterior doors are installed, the roof structure and roofing work, including
flashing, are complete, overhead electrical and mechanical work in the warehouse
is complete, electrical service to the warehouse has been energized, heat to the
Premises has been turned on, the high-bay lighting fixtures for the warehouse
have been installed and are functional, and the warehouse floor has been cleaned
and sealed); otherwise, the scheduled Commencement Date of the Lease shall be
extended for such days of delay beyond March 1, 1999 until the date on which the
Building Shell is dried-in. Additionally, Landlord shall cause the Building
Shell Improvements (but not the Initial Improvements to be constructed by
Landlord as provided for in Addendum 3 to this Lease) to be substantially
completed, with all mechanical systems of the Building in good working order,
except for minor punch list items which do not prevent or restrict in any
material way Tenant's use of the entirety of the facility for its manufacturing
and distribution use (after Landlord's construction of its Initial Improvements
as provided for in Addendum 3 to this Lease) by May 1, 1999, subject to Tenant
Delays and events of Force Majeure, as hereinabove provided; otherwise, the
scheduled Commencement Date of the Lease shall be extended for each day of delay
beyond May 1, 1999 until the date on which the Building Shell Improvements are
substantially completed as hereinabove described. As used herein, the term
"substantially completed" does not mean or require that minor punch list items
for the

<PAGE>

Building Shell Improvements have been completed or that seasonal items (such
as landscaping) have been completed. The actual date of substantial
completion of the Building Shell Improvements shall be the Commencement Date
of this Lease, but Landlord shall be obligated to continue to use
commercially reasonable efforts, at Landlord's sole cost and expense (which
shall not be Operating Expenses) after commencement of the Lease Term to
complete such minor punch list and seasonal items.

Notwithstanding anything contained herein to the contrary, subject to
Tenant Delays and events of Force Majeure, in the event Landlord fails to cause
the Building Shell to be dried-in by March 1, 1999, Landlord shall pay to Tenant
as a penalty for such delay Base Rent on a per diem basis for every day that the
dried-in construction is delayed, not to exceed 60 days.

(b) As each such construction milestone is achieved, Tenant shall,
within five business (5) days after notice from Landlord of its achievement,
execute and deliver to Landlord a certificate or statement indicating the date
on which such construction milestone has been met, if the same has been met (or
assert in writing within such 5-day period that such milestone has not been
met). This provision shall have no effect on Landlord's next subsequent
construction milestones.

4. PUNCH LIST. Within thirty (30) days following Landlord's notice of
substantial completion of the Building Shell Improvements to Tenant, Landlord's
Project Representative and Tenant's Project Representative shall perform a joint
inspection of the Premises in order to prepare a "punch list" of items to be
completed by Landlord in order to achieve final completion of the Building Shell
Improvements. In the event of any dispute between Landlord and Tenant with
respect to items to be included on the punch list, such disputes shall be
subject to resolution pursuant to the provisions of Paragraph 6 of this Addendum
2. Landlord shall complete such "punch list" items within thirty (30) days
after agreement on such punch list, subject, however, to seasonal requirements
for any landscaping and exterior work, and to any delay in availability of
necessary parts or materials (provided Landlord has exercised due diligence in
ordering such parts or materials) required for completion of the punch list
items.

5. TENANT'S EARLY ENTRY. Subject to applicable ordinances and building
codes governing Tenant's right to occupy or perform in the Building Shell
Improvements and subject to the provisions of Paragraph 12 of the Lease, Tenant
shall be allowed to install its conveyor and racking systems, machinery,
equipment, fixtures, or other property in the Building Shell Improvements
(collectively, Tenant's "FIXTURING") immediately following Landlord's delivering
the Premises in a dried-in condition per Paragraph 3(a) of this Addendum 2,
provided that Tenant does not thereby unreasonably interfere with the completion
of construction or occasion any labor dispute as a result of such fixturing, and
provided further that Tenant does hereby agree to assume all risk of loss or
damage to such improvements, machinery, equipment, fixtures and other property
installed by Tenant, its employees, agents or contractors. In addition, Tenant
agrees to indemnify, defend, and hold Landlord harmless from any and all
liability, loss, or damage arising from any injury to the property of Landlord,
its Contractor, its subcontractors, or materialmen, and any death or personal
injury to any person or persons arising out of such fixturing, to the extent
caused by the negligence or willful misconduct of Tenant, its agents, employees
or contractors.

<PAGE>

6. DISPUTE RESOLUTION. The parties (through their Project
Representatives) shall make good faith efforts to resolve any dispute which may
arise under this Addendum 2 in an expedient manner. In the event, however, that
any dispute arises, either party may notify the other party of its intent to
invoke the dispute resolution procedure herein set forth by delivering written
notice to the other party. In such event, if the parties' respective Project
Representatives are unable to reach agreement on the subject dispute within five
(5) business days after delivery of such notice, then each party shall, within
five (5) business days thereafter, designate a representative of its management
to meet at a mutually agreed location to resolve the dispute.

7. CONSTRUCTION WARRANTIES. Tenant acknowledges that Landlord has made
no representation or warranty as to the suitability of the design of the
Building Shell Improvements for the conduct of Tenant's business, and Tenant
waives any implied warranty that the Building Shell Improvements are suitable
for Tenant's intended purposes. However, and in lieu of any implied warranties,
Landlord expressly warrants to Tenant, which warranty shall run for the one (1)
year period from and after the actual date of substantial completion of the
Building Shell Improvements, that the Building Shell Improvements will be
constructed in a good and workmanlike manner and substantially in accordance
with the specifications set forth in Attachment 1 to this Addendum 2 and the
Building Shell Plans therefor, will be of good quality and new, and will be free
of material defects.

The above warranty (i) includes labor and materials but (ii) excludes
remedy for damage or defect caused by abuse, modifications not executed by
Landlord or its contractors, Tenant's failure to reasonably maintain the
Building Shell Improvements in accordance with the provisions of the Lease or
Tenant's failure to reasonably operate or use the Building Shell Improvements
for their intended purposes, and normal wear and tear under normal usage. If
within one (1) year after the date of Substantial Completion of the Building
Shell Improvements any of the Building Shell Improvements are found to be not in
accordance with the specifications set forth on Attachment 1 to this Addendum 2
and the Building Shell Plans therefor, or are found to be otherwise defective,
then Landlord shall correct such defects, and any other damaged materials or
finishes that are part of the Building Shell Improvements (but not any of
Tenant's fixtures, furniture, furnishings, equipment, machinery, supplies,
stock, inventory or other personal property), promptly after receipt of written
notice from Tenant. Tenant shall give written notice promptly after discovery
of the condition. Landlord's warranties as set forth above are expressly
intended to survive substantial completion and completion of the construction of
the Building Shell Improvements, acceptance and/or occupancy of the Building
Shell Improvements by Tenant, and the payment of Base Rent or other amounts
payable under this Lease by Tenant, for the full one (1) year period herein set
forth.

Landlord shall assign to Tenant (or have Tenant named as a
co-obligee on) all warranties that are assignable (or on which Tenant may be
named as a co-obligee) and applicable to those portions of the Building Shell
Improvements (including, without limitation, equipment, systems, and the
roof) that Tenant is obligated to maintain or repair under this Lease; and,
to the extent such warranties are not assignable (or Tenant cannot be named
as a co-obligee), Landlord shall use reasonable efforts to enforce such
warranties on behalf of and for the benefit of Tenant, if and as applicable.
With respect to any warranties applicable to those portions of the Building
Shell Improvements that Landlord is obligated to maintain or repair under
this Lease,

<PAGE>

Landlord also shall use reasonable efforts to have Tenant named as an
additional party entitled to enforce such warranties in the event Landlord
fails or refuses to do so.

<PAGE>

ADDENDUM 3

CONSTRUCTION-IMPROVEMENTS

ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED SEPTEMBER 30, 1998, BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
SELECT COMFORT CORPORATION

(a) Landlord agrees to furnish or perform at Landlord's sole cost and
expense those items of construction and those improvements (the "INITIAL
IMPROVEMENTS") specified below and as more fully described on Attachment 1 to
this Addendum 3:

- Warehouse Electrical & Mechanical: 1200 Amp 480/277 volt three
phase electrical service with 6 subpanels as per outline
specifications, 20 foot candles of warehouse lighting 72" above
finished floor prior to installation of racking, (400 watt metal
halide fixtures).
- Warehouse Ventilation: Landlord will provide two air changes per
hour.
- Dock Equipment: Twenty-six (26) dock doors with bumpers, of
which twenty-three (23) dock doors to have hydraulic levelers,
seals and swing-arm type dock lights.
- Warehouse Breakroom: 10'x20' employee breakroom located in the
northwest corner of the Premises.

Further, Landlord agrees to furnish or perform those items of
construction and those improvements (the "INITIAL ALLOWANCE IMPROVEMENTS")
specified below and as more fully described on Attachment 1 to this Addendum 3:

- 6,000 square feet of office area: Allowance calculated at $36.00
p.s.f.
- Main Warehouse Restroom: Allowance in a lump sum amount of
$45,000
- Monument/Building Signage: Allowance in a lump sum amount of
$13,000

Landlord shall pay for the Initial Allowance Improvements up to a maximum amount
of $216,000 for the office area; $45,000 for the main warehouse restroom, and
$13,000 for the building monument signage, and Tenant shall pay for the cost of
the Initial Allowance Improvements in excess of such amount. If the cost of the
Initial Allowance Improvements is estimated to exceed such amount, such
estimated overage shall be paid by Tenant before Landlord begins construction
and a final adjusting payment based upon the actual costs of the Initial
Allowance Improvements shall be made when the Initial Allowance Improvements are
complete.

Additionally, Landlord shall pay for additional miscellaneous tenant
improvements ("Miscellaneous Improvements") up to a maximum amount of $100,000
("Miscellaneous Allowance"), subject to the provisions of Addendum 6 of this
Lease, and in no event shall

<PAGE>

Landlord have any obligation to pay for any costs of any additional
miscellaneous tenant improvements in excess of the Miscellaneous Allowance.
The Miscellaneous Allowance shall be repaid to Landlord, together with
interest at 10.5% per annum, in equal monthly installments over the Lease
term; provided, however, in no event shall Landlord be obligated to amortize
any portion of such overage in excess of $100,000 and any estimated overage
in excess of such amount shall be paid by Tenant to Landlord before Landlord
begins constructing any additional miscellaneous tenant improvements. Upon
completion the parties shall make an adjusting payment between them.

(b) If Tenant shall desire any changes, Tenant shall so advise
Landlord in writing and Landlord shall determine whether such changes can be
made in a reasonable and feasible manner. Any and all costs of reviewing any
requested changes, and any and all costs of making any changes to the Initial
Improvements, the Initial Allowance Improvements, or the Miscellaneous
Improvements which Tenant may request and which Landlord may agree to shall be
at Tenant's sole cost and expense and shall be paid to Landlord upon demand and
before execution of the change order.

(c) Landlord shall proceed with and complete the construction of the
Initial Improvements, the Initial Allowance Improvements and the Miscellaneous
Improvements, subject to Tenant's compliance with the terms and conditions of
Addendum #7 of this Lease. As soon as such improvements have been Substantially
Completed, Landlord shall notify Tenant in writing of the date that such
improvements were Substantially Completed. Such date, in conjunction with the
substantial completion of the Building Shell as defined in Addendum 2 of this
Lease, shall be the "COMMENCEMENT DATE," unless the completion of such
improvements was delayed due to any act or omission of, or delay caused by,
Tenant including, without limitation, Tenant's failure to approve plans,
complete submittals or obtain permits within the time periods agreed to by the
parties or as reasonably required by Landlord, in which case the Commencement
Date shall be the date such improvements would have been completed but for the
delays caused by Tenant. Such improvements shall be deemed substantially
completed ("SUBSTANTIALLY COMPLETED") when, in the mutual and professional
opinion of Landlord's representative and Tenant's representative ("CONSTRUCTION
MANAGER"), the Premises are substantially completed except for punch list items
which do not prevent in any material way the use of the Premises for the
purposes for which they were intended. In the event Tenant, its employees,
agents, or contractors cause construction of such improvements to be delayed,
the date of Substantial Completion shall be deemed to be the date that, in the
professional and reasonable opinion of the Construction Manager, Substantial
Completion would have occurred if such delays had not taken place. Without
limiting the foregoing, Tenant shall be solely responsible for delays caused by
Tenant's request for any changes in the plans, Tenant's request for long lead
items or Tenant's interference with the construction of the Initial
Improvements, the Initial Allowance Improvements or the Miscellaneous
Improvements, and such delays shall not cause a deferral of the Commencement
Date beyond what it otherwise would have been. After the Commencement Date
Tenant shall, upon demand, execute and deliver to Landlord a letter of
acceptance of delivery of the Premises.

(d) The failure of Tenant to take possession of or to occupy the
Premises shall not serve to relieve Tenant of obligations arising on the
Commencement Date or delay the payment of rent by Tenant. Subject to applicable
ordinances and building codes governing

<PAGE>

Tenant's right to occupy or perform in the Premises, Tenant shall be allowed
to install its tenant improvements, machinery, equipment, fixtures, or other
property on the Premises during the final stages of completion of
construction provided that Tenant does not thereby substantially interfere
with the completion of construction or cause any labor dispute as a result of
such installations, and provided further that Tenant does hereby agree to
indemnify, defend, and hold Landlord harmless from any loss or damage to such
property, and all liability, loss, or damage arising from any injury to the
Project or the property of Landlord, its contractors, subcontractors, or
materialmen, and any death or personal injury to any person or persons
arising out of such installations, whether or not any such loss, damage,
liability, death, or personal injury was caused by Landlord's negligence.
Any such occupancy or performance in the Premises shall be in accordance with
the provisions governing Tenant-Made Alterations and Trade Fixtures in the
Lease, and shall be subject to Tenant providing to Landlord satisfactory
evidence of insurance for personal injury and property damage related to such
installations and satisfactory payment arrangements with respect to
installations permitted hereunder. Delay in putting Tenant in possession of
the Premises shall not serve to extend the term of this Lease or to make
Landlord liable for any damages arising therefrom, except as otherwise
provided for in Paragraph 3(a) of Addendum 2.

(e) Except for incomplete punch list items, Tenant upon the
Commencement Date shall have and hold the Premises as the same shall then be
without any liability or obligation on the part of Landlord for making any
further alterations or improvements of any kind in or about the Premises, except
as expressly provided in this Lease.

<PAGE>

ADDENDUM 4

ONE RENEWAL OPTION AT MARKET

ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED SEPTEMBER 30, 1998, BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
SELECT COMFORT CORPORATION

(a) Provided that as of the time of the giving of the Extension Notice and
the Commencement Date of the Extension Term, (x) Tenant (or Tenant Affiliate) is
the Tenant originally named herein, (y) Tenant (or Tenant Affiliate) actually
occupies all of the Premises initially demised under this Lease and any space
added to the Premises, and (z) no Event of Default exists or would exist but for
the passage of time or the giving of notice, or both; then Tenant shall have the
right to extend the Lease Term for an additional term of 5 years (such
additional term is hereinafter called the "EXTENSION TERM") commencing on the
day following the expiration of the Lease Term (hereinafter referred to as the
"COMMENCEMENT DATE OF THE EXTENSION TERM"). Tenant shall give Landlord notice
(hereinafter called the "EXTENSION NOTICE") of its election to extend the term
of the Lease Term at least 6 months, but not more than 12 months, prior to the
scheduled expiration date of the Lease Term.

(b) The Base Rent payable by Tenant to Landlord during the Extension Term
shall be the greater of (i) the Base Rent applicable to the last year of the
initial Lease term and (ii) the then prevailing market rate for comparable space
in the Project and comparable buildings in the vicinity of the Project, taking
into account the size of the Lease, the length of the renewal term, market
escalations and the credit of Tenant. The Base Rent shall not be reduced by
reason of any costs or expenses saved by Landlord by reason of Landlord's not
having to find a new tenant for such premises (including, without limitation,
brokerage commissions, costs of improvements, rent concessions or lost rental
income during any vacancy period). In the event Landlord and Tenant fail to
reach an agreement on such rental rate and execute the Amendment (defined below)
at least 6 months prior to the expiration of the Lease, then Tenant's exercise
of the renewal option shall be deemed withdrawn and the Lease shall terminate on
its original expiration date.

(c) The determination of Base Rent does not reduce the Tenant's obligation
to pay or reimburse Landlord for Operating Expenses and other reimbursable items
as set forth in the Lease, and Tenant shall reimburse and pay Landlord as set
forth in the Lease with respect to such Operating Expenses and other items with
respect to the Premises during the Extension Term without regard to any cap on
such expenses set forth in the Lease.

(d) Except for the Base Rent as determined above, Tenant's occupancy of
the Premises during the Extension Term shall be on the same terms and conditions
as are in effect immediately prior to the expiration of the initial Lease Term;
provided, however, Tenant shall have no further right to any allowances, credits
or abatements or any options to expand, contract, renew or extend the Lease.

<PAGE>

(e) If Tenant does not give the Extension Notice within the period set
forth in paragraph (a) above, Tenant's right to extend the Lease Term shall
automatically terminate. Time is of the essence as to the giving of the
Extension Notice.

(f) Landlord shall have no obligation to refurbish or otherwise improve
the Premises for the Extension Term. The Premises shall be tendered on the
Commencement Date of the Extension Term in "as-is" condition.

(g) If the Lease is extended for the Extension Term, then Landlord shall
prepare and Tenant shall execute an amendment to the Lease confirming the
extension of the Lease Term and the other provisions applicable thereto (the
"Amendment").

(h) If Tenant exercises its right to extend the term of the Lease for the
Extension Term pursuant to this Addendum, the term "Lease Term" as used in the
Lease, shall be construed to include, when practicable, the Extension Term
except as provided in (d) above.

<PAGE>

ADDENDUM 5

PURCHASE OPTION

ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED SEPTEMBER 30, 1998, BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
SELECT COMFORT CORPORATION

Subject to Landlord receiving approval from appropriate governmental
authorities on replatting the land parcel as described on the attached Exhibit
B, and in accordance with the terms of this Addendum 5, Tenant shall have the
right and option (the "Purchase Option") to purchase the Premises. Tenant shall
exercise the Purchase Option by delivering written notice ("Purchase Option
Notice") to Landlord no later than 60 days after the Commencement Date of this
Lease.

1. PURCHASE PRICE. The Purchase Price shall be Four Million Six
Hundred Ninety Thousand Nine Hundred Sixty-Four Dollars ($4,690,964) plus any
sales commission payable by Landlord, plus the sum of all Change Orders and
tenant improvement allowance amounts as defined in Addendum 3 of this Lease,
payable in immediately available funds at closing. The intent of the parties is
that the Purchase Price shall be absolutely net to Landlord, with the sole
exception being that Landlord shall pay its attorneys' fees.

2. CLOSING. The Closing shall be conducted through an escrow
established at a title company acceptable to both Landlord and Tenant. All
deliveries shall be deposited in escrow and all closing deliveries and
disbursements shall be made through the escrow. The Closing shall occur no
later than 60 days following the exercise of the Purchase Option.

3. INSPECTION. For a period of 30 days after the date of Tenant's
Purchase Option Notice to Landlord, Tenant shall be entitled to inspect the
Premises. Tenant shall indemnify and defend Landlord for any claim, damage or
liability arising out of Tenant's and its agent's and contractor's inspection.
Tenant may revoke its election to exercise the Purchase Option by notice to
Landlord within the 30-day period if Tenant is not satisfied with any aspect of
the Premises, in which case this Lease shall continue in full force and effect.

4. TITLE. Landlord shall convey to Tenant fee simple title to the
Premises by special warranty deed (warranting title by, through, or under
Landlord, but not otherwise) subject only to all matters of record and those
matters which a correct survey would show but free and clear of any liens or any
other exceptions created by, under, or through Landlord. Tenant shall have the
absolute right to approve title to the Property, and if title is not
satisfactory, Tenant may revoke its election to exercise the Purchase Option by
giving notice to Landlord (x) within the inspection period in subparagraph (a)
above and, (y) with respect to any title exceptions of which Purchaser is
notified after such inspection period but before the Closing, at any time before
the Closing. Landlord shall assign to Tenant all its right, title and interest
in and to all contracts,

<PAGE>

warranties, permits, approvals, and other intangible property related to the
Premises except for any tradename or other similar rights related to the
Premises, which Landlord shall retain.

5. PRORATIONS. There shall be no proration of taxes or other
expenses.

6. LEASE TERMINATION. The Lease shall be terminated as of the
Closing. All rent and other payments due by Tenant to Landlord under the Lease
shall be prorated to the date of Closing and shall be deposited into the escrow
and disbursed to Landlord at Closing.

7. NO WARRANTY. Landlord makes no, and at closing Tenant shall
waive in writing satisfactory to Landlord any, warranty or representation with
respect to the Premises (other than title to the Premises as provided above) and
shall release Landlord from any right or claims, known or unknown, with respect
to the physical or environmental condition of the Premises or the compliance of
the Premises with applicable law. Tenant is relying on its own inspection and
review of the Premises.

8. RISK OF LOSS. Risk of loss shall remain with Landlord, subject
to Tenant's obligations under the Lease, until the Closing. If any condemnation
is instituted or threatened against the Premises or the Premises are damaged,
either party may terminate the purchase transaction, and the Lease shall remain
in full force and effect.

9. TAX-FREE EXCHANGE. Landlord may conduct the sale as a tax-free
exchange pursuant to Section 1031 of the Internal Revenue Code. Such exchange
shall be conducted through a qualified intermediary, at no cost to Tenant, and
without affecting Landlord's obligations to Tenant. Tenant shall not be
required to take title to any other property in connection with a Section 1031
exchange.

10. EXERCISE IS IRREVOCABLE. Tenant's exercise of the Purchase
Option is irrevocable except as provided herein. Time is of the essence.

11. EXERCISE BY TENANT OR TENANT AFFILIATE ONLY. Only the Tenant
originally named herein or a Tenant Affiliate may exercise this Purchase
Option. The Purchase Option is not assignable except to a Tenant Affiliate to
which the Lease is assigned and shall terminate automatically upon any
termination of the Lease other than as a result of default by Landlord.
Further, no such right is exercisable if as of the date of exercised of the
right or the Closing, the Lease has terminated or an Event of Default or
event ("Potential Default") which but for the passage of time or the giving
of notice, or both, would constitute an Event of Default has occurred and is
continuing.

12. LANDLORD'S RIGHT OF FIRST OFFER. If at any time Tenant desires
to sell the Building, then Tenant, before offering the Building to anyone, shall
offer to Landlord the right to purchase the Building on the same terms and
conditions upon which Tenant intends to offer the Building for sale.

Such offer shall be made by Tenant to Landlord in a written
notice (hereinafter called the "First Offer Notice") which offer shall designate
the terms which Tenant intends to offer the Building for sale. Landlord may
accept the offer set forth in the First Offer

<PAGE>

Notice by delivering to Tenant an acceptance (hereinafter called "Landlord's
Notice") of such offer within 7 business days after delivery by Tenant of the
First Offer Notice to Landlord. Time shall be of the essence with respect to
the giving of Landlord's Notice. If Landlord does not accept (or fails to
timely accept) an offer made by Tenant pursuant to the provisions of this
Addendum with respect to the purchase of the Building, Tenant shall be free
to sell the Building to anyone for no less than 95% of the purchase price and
on any other terms offered to Landlord.

Notwithstanding the foregoing, if Tenant desires to sell the
Building to anyone on terms which are less than 95% of the purchase price
offered to Landlord, then Tenant must re-offer to Landlord the right to purchase
the Building on such terms (the "Second Offer Notice"). Tenant shall deliver to
Landlord the Second Offer Notice in the same manner as the First Offer Notice.
If Landlord does not accept (or fails to timely accept) the re-offer made by
Tenant pursuant to the provisions of this Addendum with respect to the purchase
of the Building, Landlord shall be deemed to have irrevocably waived all further
rights under this Addendum and Tenant shall be under no further obligation to
Landlord with respect to the sale of the Building by reason of this Addendum.

<PAGE>

ADDENDUM 6

RIGHT OF FIRST OFFER

ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED SEPTEMBER 30, 1998, BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
SELECT COMFORT CORPORATION

(a) "OFFERED SPACE" shall mean the Building as described on the first page
of this Lease subject to Landlord receiving approval from appropriate
governmental authorities on replatting the land parcel as described in Addendum
5, and more commonly known as Select Comfort Distribution Center #1.

(b) Provided that as of the date of the giving of Landlord's Notice, (x)
Tenant (or Tenant Affiliate) is the Tenant originally named herein, (y) Tenant
(or Tenant Affiliate) actually occupies all of the Premises originally demised
under this Lease and any premises added to the Premises, and (z) no Event of
Default or event which but for the passage of time in the giving of notice, or
both, would constitute an Event of Default has occurred and is continuing, if
Tenant has not exercised the Purchase Option under the terms and conditions as
described in Addendum 5 of this Lease and Landlord desires to sell the Offered
Space, then Landlord, before selling such Offered Space to anyone, shall first
offer to Tenant the right to purchase the Building on the same terms and
conditions upon which Landlord intends to sell the Offered Space to other
parties.

(c) Such offer shall be made by Landlord to Tenant in a written notice
(hereinafter called the "FIRST OFFER NOTICE") which offer shall designate the
space being offered and shall specify the terms which Landlord intends to offer
with respect to any such Offered Space. Tenant may accept the offer set forth
in the First Offer Notice by delivering to Landlord an unconditional acceptance
(hereinafter called "TENANT'S NOTICE") of such offer within 5 business days
after delivery by Landlord of the First Offer Notice to Tenant. Time shall be
of the essence with respect to the giving of Tenant's Notice. If Tenant does
not accept (or fails to timely accept) an offer made by Landlord pursuant to the
provisions of this Addendum with respect to the Offered Space designated in the
First Offer Notice, Landlord shall be free to sell the Building to anyone for no
less than 95% of the purchase price and on any other terms offered to Tenant.

(d) If Tenant at any time declines any Offered Space offered by Landlord,
Tenant shall be deemed to have irrevocably waived all further rights under this
Addendum.

<PAGE>

ADDENDUM 7

CREDIT ENHANCEMENT OPTIONS

ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED SEPTEMBER 30, 1998, BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
SELECT COMFORT CORPORATION

In the event Tenant's net worth is less than $22,000,000 (including the
ability to treat the preferred stock positions from an accounting perspective as
an equity item versus a liability) as of March 1, 1999, Tenant shall be granted
the following options: (1) Tenant shall provide to Landlord, in addition to the
Security Deposit set forth in the Lease, an unconditional, irrevocable Letter of
Credit in an amount equal to $513,000, which amount shall be increased by the
amount equal to the Miscellaneous Allowance (not to exceed $100,000) pursuant to
Addendum 3 of this Lease, and shall be issued from a bank reasonably acceptable
to Landlord; provided, however, the Letter of Credit shall not expire until the
expiration of the Lease Term and any extensions thereof or Tenant's net worth
exceeds $22,000,000 ("Option #1"); or (2) Tenant shall pay to Landlord, in one
lump sum payment, the amount equal to the amount of the Letter of Credit, and
the Base Rent shall be adjusted as described below ("Option #2).

If Tenant desires to exercise Option #1 as described herein, the Letter of
Credit shall be in substantially similar form as attached hereto, shall provide
that it may be drawn down upon by Landlord in the event of a default under the
Lease at any time Landlord delivers its sight draft to the bank, and shall only
be in the amount of Landlord's actual damages sustained in such default.
Notwithstanding anything contained herein to the contrary, in the event Landlord
terminates the Lease pursuant to Paragraph 24 of the Lease, Landlord shall
follow any and all appropriate legal proceedings relating to its remedies,
including, without limitation, acceleration of rent, prior to drawing down upon
the Letter of Credit. If Landlord sells or conveys the Premises, Tenant shall,
at Landlord's request, cooperate in having the Letter of Credit transferred to
the purchaser. If the Letter of Credit is ever drawn upon by Landlord in the
event of a default pursuant to the terms of the Lease and this Addendum, the
default under the Lease shall be deemed cured, and Tenant shall within ten (10)
days thereafter cause the Letter of Credit to be restored to its original
amount. Further, if Tenant desires to exercise Option #1, the monthly Base Rent
shall be reduced by $.0075/sf/mo/NNN during the period of time that the Letter
of Credit is in force, but in no event to exceed 12 months.

<PAGE>

If Tenant desires to exercise Option #2 as described herein, the monthly
Base Rent as set forth in Addendum 1 of this Lease shall be adjusted as follows:

<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Months 1-60 $29,232.00 (calculated at $.290/sf/mo/NNN)
Months 61-120 $33,667.20 (calculated at $.334/sf/mo/NNN)
</TABLE>

<PAGE>

FORM OF LETTER OF CREDIT
[LETTERHEAD OF LETTER OF CREDIT BANK]
[DATE]

ProLogis Development Services Incorporated
_________________________________
_________________________________
Attention: _______________

Re: Irrevocable Transferrable Letter of Credit
No. ___________________________

Beneficiary:

By order of our client, ______________________________________ (the
"APPLICANT"), we hereby establish this Irrevocable Transferrable Letter of
Credit No. _______________ in your favor for an amount up to but not exceeding
the aggregate sum of ___________________ and No/100 Dollars ($_________) (as
reduced from time to time in accordance with the terms hereof, the "LETTER OF
CREDIT AMOUNT"), effective immediately, and expiring on the close of business at
our office at the address set forth above one year from the date hereof unless
renewed as hereinafter provided.

Funds under this Letter of Credit are available to you on or prior to the
expiry date against presentation by you of your (i) sight drafts drawn on us in
the form of Annex 1 hereto, indicating this Letter of Credit number and (ii)
request in the form of Annex 2 hereto (such sight draft and request, together
referred to as a "DRAWING REQUEST"), sight draft(s), completed and signed by one
of your officers. Presentation of your Drawing Requests may be made by you to
us at the address set forth above or may be made by overnight courier, to the
same address. You may present to us one or more Drawing Requests from time to
time prior to the expiry date in an aggregate amount not to exceed the Letter of
Credit Amount then in effect (it being understood that the honoring by us of
each Drawing Request shall reduce the Letter of Credit Amount then in effect by
the amount of the Drawing Request so honored).

This Letter of Credit will be automatically renewed for a one-year period
upon the expiration date set forth above and upon each anniversary of such date,
unless at least sixty (60) days prior to such expiration date, or sixty (60)
days prior to any anniversary of such date, we notify both you and the Applicant
in writing by certified mail that we elect not to so renew the Letter of Credit.

This Letter of Credit sets forth in full the terms of our undertaking and
such undertaking shall not in any way be modified, amended or amplified by
reference to any document or instrument referred to herein or in which this
Letter of Credit is referred to or to which this Letter of Credit relates, and
no such reference shall be deemed to incorporate herein by reference any
document or instrument.

All bank charges and commissions incurred in this transaction are for the
Applicant's account, except you shall be responsible for all bank charges
related to any assignment of this Letter of Credit to your successors and
assigns.

<PAGE>

This Letter of Credit is assignable by you to your successors and assigns
any number of times in its entirety and not in part, but only by delivery to us
of a Notice of Assignment in the form of Annex 3 hereto.

We hereby agree with the drawers, endorsers, and bona fide holders of
drafts drawn under and in compliance with the terms of this Letter of Credit
that such drafts will be duly honored upon presentation to the drawee from our
own funds and not the funds of the Applicant and shall be available to such
drawers as the case may be, on or before noon, Minnesota time, on the Business
Day (defined below) next following the date on which such drafts are received by
us. "Business Day" shall mean any day which is not a Saturday, Sunday or day on
which we are required or authorized by law to be closed in Minneapolis,
Minnesota.

To the extent not inconsistent with the express terms hereof, this Letter
of Credit shall be governed by, and construed in accordance with, the terms of
the Uniform Customs and Practice for Commercial Documentary Credits (1993
Revision), I.C.C. Publication No. 500 (the "UCP 500") and as to matters not
governed by the UCP 500, this Letter of Credit shall be governed by and
construed in accordance with the laws of the State of Minnesota.

Very truly yours,

[NAME OF LETTER OF CREDIT BANK]

By:
----------------------------------

Name:
-----------------------------

Title:
-----------------------------

<PAGE>

ANNEX 1

SIGHT DRAFT

___________, 199__

For value received, at sight pay to the order of PROLOGIS DEVELOPMENT
SERVICES INCORPORATED, the sum of [Amount in words] [Amount in Figures] United
States Dollars drawn under [Name of Letter of Credit Bank] Irrevocable
Transferrable Letter of Credit No. ________ dated
_________________, 199_____.

PROLOGIS DEVELOPMENT SERVICES INCORPORATED

By:
---------------------------------------

Name:
-------------------------------------

Title:
------------------------------------

<PAGE>

ANNEX 2

DRAWING REQUEST

_________________, 199__

[NAME AND ADDRESS OF LETTER
OF CREDIT BANK]

Re: Irrevocable Letter of Credit No. (the "LETTER OF CREDIT")

The undersigned (the "BENEFICIARY"), hereby certifies to [Name of Letter of
Credit Bank] (the "ISSUER") that:

(a) The Beneficiary is making a request for payment in lawful currency
of the United States of America under Irrevocable Letter of Credit No._________
(the "Letter of Credit") in the amount of $________.

(b) The Letter of Credit Amount (as defined in the Letter of Credit) as of
the date hereof and prior to payment of the amount demanded in this Drawing
Request is $________. The amount requested by this Drawing Request does not
exceed the Letter of Credit Amount.

(c) Demand is made for payment under the Letter of Credit in the amount of
Landlord's actual damages as a result of the occurrence and continuation of an
Event of Default (as defined in the Lease Agreement).

Please wire transfer the proceeds of the drawing to the following account
of the Beneficiary at the financial institution indicated below:

-----------------------------

Unless otherwise defined, all capitalized terms used herein have the
meanings provided in, or by reference in, the Letter of Credit.

<PAGE>

IN WITNESS WHEREOF, the undersigned has duly executed and delivered this
Drawing Request as of the ___ day of _______________, 199__.

PROLOGIS DEVELOPMENT SERVICES INCORPORATED

By:
--------------------------------------

Name:
------------------------------------

Title:
-----------------------------------

<PAGE>
ANNEX 3

NOTICE OF ASSIGNMENT

____________, 199_

[NAME AND ADDRESS OF
LETTER OF CREDIT BANK]

Re: Irrevocable Letter of Credit No. _____

The undersigned (the "BENEFICIARY"), hereby notifies
[Name of Letter of Credit Bank] (the "ISSUER") that it has irrevocably
assigned the above-referenced Letter of Credit to __________ (the "ASSIGNEE")
with an address at ________________ effective as of the date the Issuer
receives this Notice of Assignment. The Assignee acknowledges and agrees
that the Letter of Credit Amount may have been reduced pursuant to the terms
thereof, and that the Assignee is bound by any such reduction.

IN WITNESS WHEREOF, the undersigned has duly executed and delivered this
Notice of Assignment as of this _____ day of _______, 199_.

PROLOGIS DEVELOPMENT SERVICES INCORPORATED

By:
----------------------------------------

Name:
--------------------------------------

Title:
-------------------------------------

Agreed:

[Assignee]

- --------------------------------------

<PAGE>

EXHIBIT A - SITE PLAN

To be provided.

<PAGE>

EXHIBIT B - REPLATTING OF LAND PARCEL

To be provided.

<PAGE>

SELECT COMFORT CORPORATION NONQUALIFIED DEFERRED
COMPENSATION PLAN

<PAGE>

SELECT COMFORT CORPORATION NONQUALIFIED DEFERRED
COMPENSATION PLAN

TABLE OF CONTENTS

Page
ARTICLE I - DEFINITIONS
<S> <C> <C>
1.1 Account . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Administrator . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Board . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4 Bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.5 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.6 Compensation . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.8 Deferral Election . . . . . . . . . . . . . . . . . . . . . 2
1.9 Disability . . . . . . . . . . . . . . . . . . . . . . . . 2
1.10 Effective Date . . . . . . . . . . . . . . . . . . . . . . 2
1.11 Eligible Employee . . . . . . . . . . . . . . . . . . . . . 2
1.12 Employee . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.13 Employer Contribution . . . . . . . . . . . . . . . . . . . 3
1.14 Investment Fund . . . . . . . . . . . . . . . . . . . . . . 3
1.15 Matching Contribution . . . . . . . . . . . . . . . . . . . 3
1.16 Participant . . . . . . . . . . . . . . . . . . . . . . . . 3
1.17 Plan Year . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.18 Retirement . . . . . . . . . . . . . . . . . . . . . . . . 3
1.19 Salary . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.20 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.21 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.22 Years of Service . . . . . . . . . . . . . . . . . . . . . 3

ARTICLE II - PARTICIPATION

2.1 Commencement of Participation . . . . . . . . . . . . . . . 4
2.2 Loss of Eligible Employee Status . . . . . . . . . . . . . 4

ARTICLE III - CONTRIBUTIONS

3.1 Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Matching Contributions . . . . . . . . . . . . . . . . . . 6
3.3 Employer Contributions . . . . . . . . . . . . . . . . . . 6
3.4 Time of Contributions . . . . . . . . . . . . . . . . . . . 6
3.5 Form of Contributions . . . . . . . . . . . . . . . . . . . 7

<PAGE>

ARTICLE IV - VESTING

4.1 Vesting of Deferrals . . . . . . . . . . . . . . . . . . . 8
4.2 Vesting of Matching Contributions . . . . . . . . . . . . . 8
4.3 Vesting of Employer Contributions . . . . . . . . . . . . . 8
4.4 Vesting in Event of Retirement, Disability and Death . . . 9
4.5 Amounts Not Vested . . . . . . . . . . . . . . . . . . . . 9

ARTICLE V - ACCOUNTS

5.1 Accounts . . . . . . . . . . . . . . . . . . . . . . . . .10
5.2 Investments, Gains and Losses . . . . . . . . . . . . . . I I
5.3 Forfeitures . . . . . . . . . . . . . . . . . . . . . . . I I

ARTICLE VI - DISTRIBUTIONS

6.1 Distribution Election . . . . . . . . . . . . . . . . . . .12
6.2 Payment Options . . . . . . . . . . . . . . . . . . . . . 12
6.3 Commencement of Payment upon Death, Disability or
Termination . . . . . . . . . . . . . . . . . . . . . . . .13
6.4 Minimum Distribution . . . . . . . . . . . . . . . . . . .13
6.5 Financial Hardship . . . . . . . . . . . . . . . . . . . .13

ARTICLE VII - BENEFICIARIES

7.1 Beneficiaries . . . . . . . . . . . . . . . . . . . . . . .14
7.2 Lost Beneficiary . . . . . . . . . . . . . . . . . . . . .14

ARTICLE VIII - FUNDING

8.1 Prohibition Against Funding . . . . . . . . . . . . . . . .14
8.2 Deposits in Trust . . . . . . . . . . . . . . . . . . . . .14
8.4 Withholding of Employee Contributions . . . . . . . . . . .14

ARTICLE IX - CLAIMS ADMINISTRATION

9.1 General . . . . . . . . . . . . . . . . . . . . . . . . . .15
9.2 Claim Review . . . . . . . . . . . . . . . . . . . . . . .15
9.3 Right of Appeal . . . . . . . . . . . . . . . . . . . . . .15
9.4 Review of Appeal . . . . . . . . . . . . . . . . . . . . .15
9.5 Designation . . . . . . . . . . . . . . . . . . . . . . . .15

<PAGE>

ARTICLE X - GENERAL PROVISIONS

10.1 Administrator . . . . . . . . . . . . . . . . . . . . . . .17
10.2 No Assignment . . . . . . . . . . . . . . . . . . . . . . .17
10.3 No Employment Rights . . . . . . . . . . . . . . . . . . .18
10.4 Incompetence . . . . . . . . . . . . . . . . . . . . . . .18
10.5 Identity . . . . . . . . . . . . . . . . . . . . . . . . .18
10.6 Other Benefits . . . . . . . . . . . . . . . . . . . . . .19
10.7 No Liability . . . . . . . . . . . . . . . . . . . . . . .19
10.8 Expenses . . . . . . . . . . . . . . . . . . . . . . . . .20
10.9 Insolvency . . . . . . . . . . . . . . . . . . . . . . . .20
10.10 Amendment and Termination . . . . . . . . . . . . . . . . .20
10.11 Employer Determinations . . . . . . . . . . . . . . . . . .20
10.12 Construction . . . . . . . . . . . . . . . . . . . . . . .20
10.13 Governing Law . . . . . . . . . . . . . . . . . . . . . . .20
10.14 Severability . . . . . . . . . . . . . . . . . . . . . . .20
10.15 Headings . . . . . . . . . . . . . . . . . . . . . . . . .21
10.16 Terms . . . . . . . . . . . . . . . . . . . . . . . . . . .21
10.17 Approval of IRS . . . . . . . . . . . . . . . . . . . . . .21

</TABLE>

<PAGE>

SELECT COMFORT CORPORATION NONQUALIFIED DEFERRED
COMPENSATION PLAN

Select Comfort Corporation, a Minnesota corporation (the "Employee"),
hereby adopts this Select Comfort Corporation Nonqualified Deferred Compensation
Plan (the "Plan") for the benefit of a select group of management or highly
compensated employees. This plan is an unfunded arrangement and is intended to
be exempt from the participation, vesting, funding, and fiduciary requirements
set forth in Title I of the Employee Retirement Income Security Act of 1974, as
amended. This Plan is effective October 1, 1998.

ARTICLE I - DEFINITIONS

1.1 ACCOUNT. The bookkeeping account established for each Participant as
provided in section 5.1 hereof.

1.2 ADMINISTRATOR. The Employer shall serve as Plan Administrator.

1.3 BOARD. The Board of Directors of the Employer.

1.4 BONUS. Compensation which is designated as such by the Employer and
which relates to services performed during an incentive period by an Eligible
Employee in addition to his or her Salary, including any pretax elective
deferrals from said Bonus to any Employer sponsored plan that includes amounts
deferred under a Deferral Election or a qualified cash or deferred arrangement
under Code Section 401(k) or cafeteria plan under Code Section 125.

1.5 CODE. The Internal Revenue Code of 1986, as amended.

1.6 COMPENSATION.
The Participant's earned income, including Salary, Bonus and other
remuneration from the Employer, but excluding the following: (i) welfare
benefits, fringe benefits and

1
<PAGE>

any other noncash remuneration; (ii) amounts realized from the sale, exchange or
other disposition of stock acquired under a stock option, a stock grant or any
other similar arrangement; and (iii) moving expenses.

1.7 DEFERRALS. The portion of Compensation that a Participant elects to
defer in accordance with section 3.1 hereof.

1.8 DEFERRAL ELECTION. The separate written agreement, submitted to the
Administrator, by which an Eligible Employee agrees to participate in the Plan
and make Deferrals thereto.

1.9 DISABILITY. Any medically determinable physical or mental disorder that
renders a Participant incapable of continuing in the employment of the Employer
in his or her regular duties of employment and is expected to continue for the
remainder of a Participant's life, as determined by the Administrator in its
sole discretion.

1.10 EFFECTIVE DATE. October 1, 1998.

1.11 ELIGIBLE EMPLOYEE. An Employee shall be considered an Eligible
Employee if such Employee is employed in a level of director or above of the
Employer.

1.12 EMPLOYEE. Any person who performs services for the Employer as an
employee classified by the Employer at the time the services are performed
(without regard to any subsequent, prospective or retroactive classification).

1.13 EMPLOYER CONTRIBUTION. A discretionary contribution made by the
Employer to the Trust and that is credited to one or more Participant's
Accounts in accordance with the terms of section 3.3 hereof.

1.14 INVESTMENT FUND OR FUNDS. Each investment(s) that serves as a means to
measure value increases or decreases with respect to a Participant's Accounts.

1.15 MATCHING CONTRIBUTION. A contribution made by the Employer to the
Trust and that is credited to one or more Participant's Accounts in
accordance with the terms of section 3.2 hereof.

2
<PAGE>

1.16 PARTICIPANT. An Eligible Employee who is a Participant as provided
in ARTICLE II.

1.17 PLAN YEAR. The initial plan year shall be from October 1, 1998
through December 31, 1998. Each subsequent plan year shall commence on
January 1 and end on the following December 31.

1.18 RETIREMENT. Retirement means a Participant has retired from the employ
of the Employer when or after he or she has reached age 55.

1.19 SALARY. An Eligible Employee's base salary rate or rates in effect at
any time during a Plan year, including any pretax elective deferrals from said
Salary to any Employer sponsored plan that includes amounts deferred under a
Deferral Election or a qualified cash or deferred arrangement under Code Section
401 (k) or cafeteria plan under Code Section 125.

1.20 TRUST. The agreement between the Employer and the Trustee under which
the assets of the Plan are held, administered and managed, which shall conform
to the terms of Rev. Proc. 92-64.

1.21 TRUSTEE. Investors Bank and Trust, or such other successor that shall
become trustee pursuant to the terms of the Select Comfort Corporation
Nonqualified Deferred Compensation Plan.

1.22 YEARS OF SERVICE. A Participant's "Years of Service" shall be measured
by employment during twelve (12) month periods commencing with the
Participant's date of hire and anniversaries thereof.

3
<PAGE>

ARTICLE II - PARTICIPATION

2.1 COMMENCEMENT OF PARTICIPATION. Each Eligible Employee shall become a
Participant at the earlier of the date on which his or her Deferral Election
first becomes effective or the date on which an Employer Contribution is first
credited to his or her Account.

2.2 LOSS OF ELIGIBLE EMPLOYEE STATUS.

(a) A participant who is no longer an Eligible Employee shall not be
permitted to submit a Deferral Election and all Deferrals for such
Participant shall cease as of the end of the Plan Year in which such
Participant is determined to no longer be an Eligible Employee.

(b) Amounts credited to the Account of a Participant described in
subsection (a) shall continue to be held, pursuant to the terms of the Plan
and shall be distributed as provided in ARTICLE VI.

4
<PAGE>

ARTICLE III - CONTRIBUTIONS

3.1 DEFERRALS.

(a) The Employer shall credit to the Account of a Participant an
amount equal to the amount designated in the Participant's Deferral Election
for that Plan Year. Such amounts shall not be made available to such
Participant, except as provided in ARTICLE VI, and shall reduce such
Participant's Compensation from the Employer in accordance with the
provisions of the applicable Deferral Election; provided, however, that all
such amounts shall be subject to the rights of the general creditors of the
Employer as provided in ARTICLE VIII.

(b) Each Eligible Employee shall deliver a Deferral Election to the
Employer before any Deferrals can become effective. Such Deferral Election
shall be void with respect to any Deferral unless submitted before the
beginning of the calendar year during which the amount to be deferred will be
earned; provided, however, that in the year in which the Plan is first
adopted or an Employee is first eligible to participate, such Deferral
Election shall be filed within thirty (30) days of the date on which the Plan
is adopted or the date on which an Employee is first eligible to participate,
respectively, with respect to Compensation earned during the remainder of the
calendar year.

(c) The Deferral Election shall, subject to the limitation set forth
in section 3.1 hereof, designate the amount of Compensation deferred by each
Participant, the subaccount, if any, as set forth in subsection (e), below,
the beneficiary or beneficiaries of the Participant and such other items as
the Administrator may prescribe. Such designations shall remain effective
unless amended as provided in subsection (d), below.

(d) A Participant may amend his or her Deferral Election from time
to time; provided, however, that any amendment to the amount of a
Participant's Deferrals shall comply with the provisions of subsection (b),
above.

(e) A Participant may direct his or her Deferral to be credited to
one or more subaccount as may be established, as provided in ARTICLE V, by
the Participant at the time of the Deferral Election.

5
<PAGE>

(f) The minimum amount that may be deferred each Plan Year is the
greater of three hundred dollars ($300) or two percent (2%) of the
Participant's Compensation. If total deferrals for a Plan Year fail to meet
the minimum, such deferrals will be returned to Participant as if no deferral
election had been made for that Plan Year.

(g) The maximum amount that may be deferred for the initial Plan
Year is fifty percent (50%) of the Participant's Salary and one hundred
percent (100%) of the Participant's Bonus, net of applicable taxes. Each Plan
Year thereafter, the maximum is twenty-five percent (25%) of the
Participant's Salary and one hundred percent (100%) of the Participant's
Bonus, net of applicable taxes.

3.2 MATCHING CONTRIBUTIONS. The Employer reserves the right to credit to
the Account of each Participant who makes Deferrals a Matching Contribution in
such amount and in such manner as may be determined by the Employer.

3.3 EMPLOYER CONTRIBUTIONS. The Employer reserves the right to make
discretionary contributions to Participants' Accounts in such amount and in such
manner as may be determined by the Employer.

3.4 TIME OF CONTRIBUTIONS.

(a) Deferrals and Matching Contributions shall be transferred to the
Trust as soon as administratively feasible following each payroll period. The
Employer shall also transmit at that time any necessary instructions
regarding the allocation of such amounts among the Accounts of Participants.

(b) Employer Contributions shall be transferred to the Trust at such
time as the Employer shall determine. The Employer shall also transmit at
that time any necessary instructions regarding the allocation of such amounts
among the Accounts of Participants.

3.5 FORM OF CONTRIBUTIONS. All Deferrals, Matching Contributions and
Employer Contributions to the Trust shall be made in the form of cash or cash
equivalents of US currency.

6
<PAGE>

ARTICLE IV - VESTING

4.1 VESTING OF DEFERRALS. A Participant shall have a vested right to the
portion of his or her Account attributable to Deferrals and any earnings on
the investment of such Deferrals.

4.2 VESTING OF MATCHING CONTRIBUTIONS. Except as otherwise provided
herein, a Participant shall have a vested right to the portion of his or her
Account attributable to Matching Contributions in accordance with the
following schedule:

<TABLE>

Completed
Years of Service Vested Percentage
---------------- -----------------
<S> <C>
0 but fewer than 2 0%
2 but fewer than 3 20%
3 but fewer than 4 40%
4 but fewer than 5 60%
5 but fewer than 6 80%
6 years or more 100%

</TABLE>

4.3 VESTING OF EMPLOYER CONTRIBUTIONS. Except as otherwise provided
herein, a Participant shall have a vested right to the portion of his or her
Account attributable to Employer Contributions in accordance with the
following schedule:

<TABLE>

Completed
Years of Service Vested Percentage
------------------ -----------------
<S> <C>
0 but fewer than 2 0%
2 but fewer than 3 20%
3 but fewer than 4 40%
4 but fewer than 5 60%
5 but fewer than 6 80%
6 years or more 100%

</TABLE>

4.4 VESTING IN EVENT OF RETIREMENT, DISABILITY, OR DEATH.

(a) Provided the Participant has a minimum of five (5) Years of
Service with the Employer, a Participant who retires from the employ of the
Employer after attaining age 59 1/2 shall be fully vested in the amounts
credited to his or her account.

(b) A Participant who has a termination of employment due to
Disability shall be fully vested in the amounts credited to his or her
Account.

7
<PAGE>

(c) A Participant who has a termination of employment due to death
shall be fully vested in the amounts credited to his or her Account.

4.5 AMOUNTS NOT VESTED. Any amounts credited to a Participant's Account
that are not vested at the time of his or her termination of employment with the
Employer shall be forfeited.

8
<PAGE>

ARTICLE V - ACCOUNTS

5.1 ACCOUNTS. The Administrator shall establish and maintain a
bookkeeping account in the name of each Participant. The Administrator shall
also establish subaccounts, as provided in subsection (a), (b), and/or (c),
below, as elected by the Participant pursuant to ARTICLE III.

(a) A Retirement Account shall be established for each Participant.
His or her Retirement Account shall be credited with Deferrals (as specified
in the Participant's Deferral Election), any Matching Contributions allocable
thereto, any Employer Contributions, and the Participant's allocable share of
any earnings or losses on the foregoing. Each Participant's Account shall be
reduced by any distributions made plus any federal and state tax withholding
and any social security withholding tax as may be required by law.

(b) A Participant may elect to establish one or more Education
Accounts in the name of a "Student" at the time of his or her Deferral. For
purposes of this ARTICLE, Student shall mean a child, grandchild, niece or
nephew of the Participant that has not yet attained the age of fourteen (14)
at the time the account is initially established. A Participant may have a
maximum of five (5) subaccount at any time. Each Participant's Education
Account shall be credited with Deferrals (as specified in the Participant's
Deferral Election), any Matching Contributions allocable thereto, any
Employer Contributions and the Participant's allocable share of any earnings
or losses on the foregoing. Each Participant's Account shall be reduced by
any distributions made plus any federal and state tax withholding and any
social security withholding tax as may be required by law.

(c) A Participant may elect to establish one or more Fixed Period
Accounts by designating a year of payout at the time the account is initially
established. The minimum initial deferral period for each subaccount shall be
five (5) years. A Participant may have a maximum of five (5) subaccounts at
any time. Each Participant's Fixed Period Account shall be credited with
Deferrals (as specified in the Participant's Deferral Election), any Matching
Contributions allocable thereto, any Employer Contributions and the
Participant's allocable share of any earnings or losses on the foregoing.
Each Participant's Account shall be reduced by any distributions made plus
any federal and state tax withholding and any social security withholding tax
as may be required by law.

9
<PAGE>

5.2 INVESTMENTS, GAINS AND LOSSES.

(a) Trust assets shall be invested in the discretion of the Trustee.
The Trustee may consider any investment suggestions received by the Employer
or by a Participant with respect to his or her own Account.

(b) The Administrator shall adjust the amounts credited to each
Participant's Account to reflect Deferrals, Matching Contributions, Employer
Contributions, investment experience, distributions and any other appropriate
adjustments. Such adjustments shall be made as frequently as is
administratively feasible.

(c) A Participant may direct that his or her Retirement Account,
Education Account and or Fixed Period Account established pursuant to section
5.1 may be valued as if they were invested in one or more Investment Funds up
to a maximum of ten (10) funds in multiples of one percent (1%) of the
balance in an Account. A Participant may change his or her selection of
Investment Funds no more than six (6) times each Plan Year. An election shall
be effective as soon as administratively feasible following the date of the
change as indicated in writing by the Participant.

5.3 FORFEITURES. Any forfeitures from a Participant's Account shall
continue to be held in the Trust, shall be separately invested and shall be used
to reduce succeeding Matching Contributions, Employer Contributions and/or
Employee Contributions until such forfeitures have been entirely so applied. If
no further Matching Contributions, Employer Contributions or Employee
Contributions will be made, then such forfeitures shall be returned to the
Employer.

10
<PAGE>

ARTICLE VI - DISTRIBUTIONS

6.1 DISTRIBUTION ELECTION. Each Participant shall designate on his or her
initial Deferral Election the form and timing of his or her distribution by
indicating the type of account as described under section 5.1, and by
designating the manner in which payments shall be made from the choices
available under section 6.2 hereof. Such designation shall be irrevocable and
shall apply to all amounts distributed from such Participant's Account.

6.2 PAYMENT OPTIONS.

(a) Retirement Account payout shall be payable in one of the
following forms: (i) in a lump-sum payment; or (ii) in annual installments
over a period of up to ten (10) years (as elected by Participant on his or
her Deferral Election). Retirement Account payments shall commence as soon as
administratively feasible immediately after the Participant's Retirement.

(b) Education Account payout shall be paid in four annual
installments on January 1 (or as soon as administratively feasible) of the
calendar year in which the Student reaches age eighteen (18) and the three
anniversaries thereof in the following amounts:

<TABLE>

<S> <C>
Year 1 25% of the vested account balance
Year 2 33% of the vested account balance
Year 3 50% of the vested account balance
Year 4 100% of the vested account balance
</TABLE>

(c) Fixed Period Account payouts shall be paid in one lump sum
payment on January 1 (or as soon as administratively feasible) of the
calendar year selected by the participant on his or her Deferral Election.

(d) If a Participant has either an Education Account(s) or Fixed
Period Account(s) at the time of his or her Retirement, said Accounts shall
be transferred to his or her Retirement Account and paid out according to
subsection (a) above.

11
<PAGE>

6.3 COMMENCEMENT OF PAYMENT UPON DEATH, DISABILITY OR TERMINATION.

(a) Upon the death of a Participant, all amounts credited to his or
her Account(s) shall be paid, as soon as administratively feasible, to his or
her beneficiary or beneficiaries, as determined under ARTICLE VII hereof, in
a lump sum.

(b) Upon the Disability of a Participant, all amounts credited to
his or her Account(s) shall be paid to the Participant, (i) in a lump-sum
payment; or (ii) in annual installments over a period of up to ten (10) years
(as elected by Participant on his or her initial Deferral Election form) as
soon as administratively feasible after the Participant is determined to have
experienced a disability.

(c) Upon a Participant's termination of employment with the Company
and all of its affiliates, all amounts credited to his or her Account(s)
shall be paid to the Participant in a lump-sum payment, as soon as
administratively feasible after his or her termination of employment.

6.4 MINIMUM DISTRIBUTION. Notwithstanding any provision to the contrary, if
the balance of a Participant's Account at the time of a termination due to
Retirement or Disability is less than $10,000, then the Participant shall be
paid his or her benefits as a single lump sum as soon as administratively
feasible following said termination.

6.5 FINANCIAL HARDSHIP. The Administrator may permit an early distribution
of part or all of any deferred amounts; provided, however, that such
distribution shall be made only if the Administrator, in its sole discretion,
determines that the Participant has experienced an unforeseen emergency that is
caused by an event beyond the control of the Participant and that would result
in severe financial hardship to the Participant if early distribution were not
permitted. Any distribution pursuant to this subsection is limited to the amount
necessary to meet the hardship.

12
<PAGE>
ARTICLE VII - BENEFICIARIES

7.1 BENEFICIARIES. Each Participant may from time to time designate one
or more persons (who may be any one or more members of such person's family
or other persons, administrators, trusts, foundations or other entities) as
his or her beneficiary under the Plan. Such designation shall be made on a
form prescribed by the Administrator. Each Participant may at any time and
from time to time, change any previous beneficiary designation, without
notice to or consent of any previously designated beneficiary, by amending
his or her previous designation on a form prescribed by the Administrator. If
the beneficiary does not survive the Participant (or is otherwise unavailable
to receive payment) or if no beneficiary is validly designated, then the
amounts payable under this Plan shall be paid to the Participant's surviving
spouse, if any, and, if none, to his or her surviving issue per stirpes, if
any, and, if none, to his or her estate and such person shall be deemed to be
a beneficiary hereunder. (For purposes of this ARTICLE, a per stirpes
distribution to surviving issue means a distribution to such issue as
representatives of the branches of the descendants of such Participant; equal
shares are allotted for each living child and for the descendants as a group
of each deceased child of the deceased Participant). If more than one person
is the beneficiary of a deceased Participant, each such person shall receive
a pro rata share of any death benefit payable unless otherwise designated on
the applicable form. If a beneficiary who is receiving benefits dies, all
benefits that were payable to such beneficiary shall then be payable to the
estate of that beneficiary.

7.2 LOST BENEFICIARY.

(a) All Participants and beneficiaries shall have the obligation to
keep the Administrator informed of their current address until such time as
all benefits due have been paid.

(b) If a Participant or beneficiary cannot be located by the
Administrator exercising due diligence, then, in its sole discretion, the
Administrator may presume that the Participant or beneficiary is deceased for
purposes of the Plan and all unpaid amounts (net of due diligence expenses)
owed to the Participant or beneficiary shall be paid accordingly or, if a
beneficiary cannot be so located, then such amounts may be forfeited. Any
such presumption of death shall be final, conclusive and binding on all
parties.

13
<PAGE>

ARTICLE VII - FUNDING

8.1 PROHIBITION AGAINST FUNDING. Should any investment be acquired in
connection with the liabilities assumed under this Plan, it is expressly
understood and agreed that the Participants and beneficiaries shall not have
any right with respect to, or claim against, such assets nor shall any such
purchase be construed to create a trust of any kind or a fiduciary
relationship between the Employer and the Participants, their beneficiaries
or any other person. Any such assets shall be and remain a part of the
general, unpledged, unrestricted assets of the Employer, subject to the
claims of its general creditors. It is the express intention of the parties
hereto that this arrangement shall be unfunded for tax purposes and for
purposes of Title I of the Employee Retirement Income Security Act of 1974,
as amended. Each Participant and beneficiary shall be required to look to the
provisions of this Plan and to the Employer itself for enforcement of any and
all benefits due under this Plan, and to the extent any such person acquires
a right to receive payment under this Plan, such right shall be no greater
than the right of any unsecured general creditor of the Employer. The
Employer or the Trust shall be designated the owner and beneficiary of any
investment acquired in connection with its obligation under this Plan.

8.2 DEPOSITS IN TRUST. Notwithstanding paragraph 8.1, or any other
provision of this Plan to the contrary, the Employer may deposit into the
Trust any amounts it deems appropriate to pay the benefits under this Plan.
The amounts so deposited may include all contributions made pursuant to a
Deferral Election by a Participant any Employer Contributions and any
Matching Contributions.

8.3 WITHHOLDING OF EMPLOYEE CONTRIBUTIONS. The Administrator is
authorized to make any and all necessary arrangements with the Employer in
order to withhold the Participant's Deferrals under section 3.1 hereof from
his or her Compensation. The Administrator shall determine the amount and
timing of such withholding.

14
<PAGE>

ARTICLE IX - CLAIMS ADMINISTRATION

9.1 GENERAL. In the event that a Participant or his or her beneficiary
does not receive any Plan benefit that is claimed, such Participant or
beneficiary shall be entitled to consideration and review as provided in this
ARTICLE. Such consideration and review shall be conducted in a manner designed
to comply with section 503 of the Employee Retirement Income Security Act of
1974, as amended.

9.2 CLAIM REVIEW. Upon receipt of any written claim for benefits, the
Administrator shall be notified and shall give due consideration to the claim
presented. If the claim is denied to any extent by the Administrator, the
Administrator shall furnish the claimant with a written notice setting forth (in
a manner calculated to be understood by the claimant):

(a) the specific reason or reasons for denial of the claim;

(b) a specific reference to the Plan provisions on which the denial
is based;

(c) a description of any additional material or information necessary
for the claimant to perfect the claim and an explanation of why such material or
information is necessary; and

(d) an explanation of the provisions of this ARTICLE.

9.3 RIGHT OF APPEAL. A claimant who has a claim denied under section 9.2
may appeal to the Administrator for reconsideration of that claim. A request for
reconsideration under this section must be filed by written notice within sixty
(60) days after receipt by the claimant of the notice of denial under section
9.2.

9.4 REVIEW OF APPEAL. Upon receipt of an appeal the Administrator shall
promptly take action to give due consideration to the appeal. Such consideration
may include a hearing of the parties involved, if the Administrator feels such a
hearing is necessary. In preparing for this appeal the claimant shall be given
the right to review pertinent documents and the right to submit in writing a
statement of issues and comments. After consideration of the merits of the
appeal the Administrator shall issue a written decision which shall be binding
on all parties. The decision shall be written in a

15
<PAGE>

manner calculated to be understood by the claimant and shall specifically
state its reasons and pertinent Plan provisions on which it relies. The
Administrator's decision shall be issued within sixty (60) days after the
appeal is filed, except that if a hearing is held the decision may be issued
within one hundred twenty (120) days after the appeal is filed.

9.5 DESIGNATION. The Administrator may designate one or more of its
members or any other person of its choosing to make any determination otherwise
required under this ARTICLE.

16
<PAGE>

ARTICLE X - GENERAL PROVISIONS

10.1 ADMINISTRATOR.

(a) The Administrator has the discretionary power and authority to
limit the amount of compensation that may be deferred; to deposit amounts
into trust in accordance with section 8.2 hereof; to interpret and apply the
Plan, and to determine all questions arising in the administration,
interpretation and application of the Plan; to employ actuaries, accountants,
counsel, and other persons it deems necessary in connection with the
administration of the Plan; to request any information from the Employer it
deems necessary to determine whether the Employer would be considered
insolvent or subject to a proceeding in bankruptcy; and to take all other
necessary and proper actions to fulfill its duties as Administrator.

(b) The Administrator shall not be liable for any actions by it
hereunder, unless due to its own negligence, willful misconduct or lack of
good faith.

(c) The Administrator shall be indemnified and saved harmless by the
Employer from and against all personal liability to which it may be subject
by reason of any act done or omitted to be done in its official capacity as
Administrator in good faith in the administration of the Plan and Trust,
including all expenses reasonably incurred in its defense in the event the
Employer fails to provide such defense upon the request of the Administrator.
The Administrator is relieved of all responsibility in connection with its
duties hereunder to the fullest extent permitted by law, short of breach of
duty to the beneficiaries.

10.2 NO ASSIGNMENT. Benefits or payments under this Plan shall not
be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, attachment, or garnishment by creditors of
the Participant or the Participant's beneficiary, whether voluntary or
involuntary, and any attempt to so anticipate, alienate, sell, transfer,
assign, pledge, encumber, attach or garnish the same shall not be valid, nor
shall any such benefit or payment be in any way liable for or subject to the
debts, contracts, liabilities, engagement or torts of any Participant or
beneficiary, or any other person entitled to such benefit or payment pursuant
to the terms of this Plan, except to such extent as may be required by law.
If any Participant or beneficiary or any other person entitled to a benefit
or payment pursuant to the terms of

17
<PAGE>

this Plan becomes bankrupt or attempts to anticipate, alienate, sell,
transfer, assign, pledge, encumber, attach or garnish any benefit or payment
under this Plan, in whole or in part, or if any attempt is made to subject
any such benefit or payment, in whole or in part, to the debts, contracts,
liabilities, engagements or torts of the Participant or beneficiary or any
other person entitled to any such benefit or payment pursuant to the terms of
this Plan, then such benefit or payment, in the discretion of the
Administrator shall cease and terminate with respect to such Participant or
beneficiary, or any other such person.

10.3 NO EMPLOYMENT RIGHTS. Participation in this Plan shall not be
construed to confer upon any Participant the legal right to be retained in
the employ of the Employer, or give a Participant or beneficiary, or any
other person, any right to any payment whatsoever, except to the extent of
the benefits provided for hereunder. Each Participant shall remain subject to
discharge to the same extent as if this Plan had never been adopted.

10.4 INCOMPETENCE. If the Administrator determines that any person
to whom a benefit is payable under this Plan is incompetent by reason of
physical or mental disability, the Administrator shall have the power to
cause the payments becoming due to such person to be made to another for his
or her benefit without responsibility of the Administrator or the Employer to
see to the application of such payments. Any payment made pursuant to such
power shall, as to such payment, operate as a complete discharge of the
Employer, the Administrator and the Trustee.

10.5 IDENTITY. If, at any time, any doubt exists as to the identity
of any person entitled to any payment hereunder or the amount or time of such
payment, the Administrator shall be entitled to hold such sum until such
identity or amount or time is determined or until an order of a court of
competent jurisdiction is obtained. The Administrator shall also be entitled
to pay such sum into court in accordance with the appropriate rules of law.
Any expenses incurred by the Employer, Administrator, and Trust incident to
such proceeding or litigation shall be charged against the Account of the
affected Participant.

18
<PAGE>

10.6 OTHER BENEFITS. The benefits of each Participant or beneficiary
hereunder shall be in addition to any benefits paid or payable to or on
account of the Participant or beneficiary under any other pension,
disability, annuity or retirement plan or policy whatsoever.

10.7 NO LIABILITY. No liability shall attach to or be incurred by
any manager of the Employer, Trustee or any Administrator under or by reason
of the terms, conditions and provisions contained in this Plan, or for the
acts or decisions taken or made thereunder or in connection therewith; and as
a condition precedent to the establishment of this Plan or the receipt of
benefits thereunder, or both, such liability, if any, is expressly waived and
released by each Participant and by any and all persons claiming under or
through any Participant or any other person. Such waiver and release shall be
conclusively evidenced by any act or participation in or the acceptance of
benefits or the making of any election under this Plan.

10.8 EXPENSES. All expenses incurred in the administration of the
Plan, whether incurred by the Employer or the Plan, shall be paid by the
Employer.

10.9 INSOLVENCY. Should the Employer be considered insolvent (as
defined by the Trust), the Employer, through its Board and chief executive
officer, shall give immediate written notice of such to the Administrator of
the Plan and the Trustee. Upon receipt of such notice, the Administrator or
Trustee shall cease to make any payments to Participants who were Employees
of the Employer or their beneficiaries and shall hold any and all assets
attributable to the Employer for the benefit of the general creditors of the
Employer.

10.10 AMENDMENT AND TERMINATION.

(a) Except as otherwise provided in this section, the Employer
shall have the sole authority to modify, amend or terminate this Plan;
provided, however, that any modification or termination of this Plan shall
not reduce, without the consent of a Participant, a Participant's right to
any amounts already credited to his or her Account, or lengthen the time
period for a payout from an established Account, on the day before the
effective date of such modification or termination. Following such
termination, payment of such credited amounts may be made in a single sum
payment if the Employer so designates. Any such decision to pay in a single
sum shall apply to all Participants.

19
<PAGE>

(b) A Participant shall have a vested right to his or her Account in
the event of the termination of the Plan pursuant to section (a), above.

(c) Any funds remaining in the Trust after termination of the Plan
and satisfaction of all liabilities to Participants and others shall be
returned to the Employer.

10.11 EMPLOYER DETERMINATIONS. Any determinations, actions or
decisions of the Employer (including but not limited to, Plan amendments and
Plan termination) shall be made by the Board in accordance with its
established procedures or by such other individuals, groups or organizations
that have been properly delegated by the Board to make such determination or
decision.

10.12 CONSTRUCTION. All questions of interpretation, construction or
application arising under or concerning the terms of this Plan shall be
decided by the Administrator, in its sole and final discretion, whose
decision shall be final, binding and conclusive upon all persons.

10.13 GOVERNING LAW. This Plan shall be governed by, construed and
administered in accordance with the applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, and any other applicable
federal law, provided, however, that to the extent not preempted by federal
law this Plan shall be governed by, construed and administered under the laws
of the State of Minnesota, other than its laws respecting choice of law.

10.14 SEVERABILITY. If any provision of this Plan is held invalid or
unenforceable, its invalidity or unenforceability shall not affect any other
provision of this Plan and this Plan shall be construed and enforced as if
such provision had not been included therein. If the inclusion of any
Employee (or Employees) as a Participant under this Plan would cause the Plan
to fail to comply with the requirements of sections 201(2), 301(a)(3) and
401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended,
then the Plan shall be severed with respect to such Employee or Employees,
who shall be considered to be participating in a separate arrangement.

20
<PAGE>

10.15 HEADINGS. The ARTICLE headings contained herein are inserted
only as a matter of convenience and for reference and in no way define,
limit, enlarge or describe the scope or intent of this Plan nor in any way
shall they affect this Plan or the construction of any provision thereof.

10.16 TERMS. Capitalized terms shall have meanings as defined
herein. Singular nouns shall be read as plural, masculine pronouns shall be
read as feminine, and vice versa, as appropriate.

IN WITNESS WHEREOF, Select Comfort Corporation has caused this
instrument to be executed by its duly authorized officer, effective as of
this 15th day of October, 1998.

Select Comfort Corporation

By: Thomas F. Masloski Jr.
-------------------------------------------
Title: Director of Compensation and Benefits
---------------------------------------

ATTEST:
By:_________________________

Title:______________________

21
<PAGE>

SCHEDULE A

<PAGE>
EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT AND REPORT ON FINANCIAL STATEMENT SCHEDULE

The Board of Directors
Select Comfort Corporation:

The audits referred to in our report dated October 23, 1998, included the
related consolidated financial statement schedule as of December 28, 1996,
January 3, 1998, and October 3, 1998, and for each of the years in the
three-year period ended January 3, 1998, and the nine-month period ended
October 3, 1998, included in the registration statement. This consolidated
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this consolidated
financial statement schedule based on our audits. In our opinion, such
consolidated financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.

/s/ KPMG Peat Marwick LLP

Minneapolis, Minnesota
October 28, 1998

<PAGE>

EXHIBIT 23.3

CONSENT OF HOULIHAN VALUATION ADVISORS

We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-1; Commission File No. 333-62793) and related
Prospectus of Select Comfort Corporation dated October 29, 1998, and in any
amended Prospectus or Registration Statement filed under the Securities Act of
1933.

HOULIHAN VALUATION ADVISORS

/s/ Houlihan Valuation Advisors

Minneapolis, Minnesota
October 28, 1998

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR YEAR 9-MOS
9-MOS
<FISCAL-YEAR-END> DEC-30-1995 DEC-28-1996 JAN-03-1998 JAN-03-1998
JAN-02-1999
<PERIOD-START> JAN-11-1995 DEC-31-1995 DEC-29-1996 DEC-29-1996
JAN-04-1998
<PERIOD-END> DEC-30-1995 DEC-28-1996 JAN-03-1998 SEP-27-1997
OCT-03-1998
<CASH> 0 2,422 12,670 0
9,579
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 0 1,402 7,902 0
11,794
<ALLOWANCES> 0 200 1,901 0
2,817
<INVENTORY> 0 5,582 7,749 0
10,315
<CURRENT-ASSETS> 0 10,895 30,676 0
33,738
<PP&E> 0 22,130 32,151 0
38,811
<DEPRECIATION> 0 3,814 6,968 0
10,556
<TOTAL-ASSETS> 0 29,794 57,241 0
63,323
<CURRENT-LIABILITIES> 0 18,704 29,919 0
30,132
<BONDS> 0 1,162 19,511 0
24,244
0 27,612 27,612 0
27,612
0 0 0 0
0
<COMMON> 0 19 25 0
30
<OTHER-SE> 0 (18,235) (21,063) 0
(20,356)
<TOTAL-LIABILITY-AND-EQUITY> 0 29,794 57,241 0
63,323
<SALES> 68,629 102,028 184,430 126,470
178,835
<TOTAL-REVENUES> 68,629 102,028 184,430 126,470
178,835
<CGS> 28,833 38,521 66,629 44,886
62,290
<TOTAL-COSTS> 28,833 38,521 66,629 44,886
62,290
<OTHER-EXPENSES> 73 77 231 256
0
<LOSS-PROVISION> 237 63 2,101 835
2,293
<INTEREST-EXPENSE> 34 88 5,234 3,251
6,995
<INCOME-PRETAX> (4,560) (3,685) (2,705) (2,508)
935
<INCOME-TAX> 0 0 141 16
1,348
<INCOME-CONTINUING> (4,560) (3,685) (2,846) (2,524)
(413)
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> (4,560) (3,685) (2,846) (2,524)
(413)
<EPS-PRIMARY> (3.16) (2.61) (1.59) (1.39)
(0.40)
<EPS-DILUTED> (2.81) (2.37) (1.48) (1.29)
(0.37)

</TABLE>