SELECT COMFORT CORP, DEF 14A, 2000-04-17

SELECT COMFORT CORP
DEF 14A, 2000-04-17
HOUSEHOLD FURNITURE

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<PAGE> 1

SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the registrant [ ]

Filed by a party other than the registrant [ ]

Check the appropriate box:

[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2).

[X] Definitive proxy statement.

[ ] Definitive additional materials.

[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.

SELECT COMFORT CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)

Payment of filing fee (check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.

(1) Title of each class of securities to which transaction applies:

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

(2) Aggregate number of securities to which transaction applies:

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

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):

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

(4) Proposed maximum aggregate value of transaction:

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

(5) Total fee paid:

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

[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.

(1) Amount Previously Paid:

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

(2) Form, Schedule or Registration Statement No.:

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

(3) Filing Party:

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

(4) Date Filed:

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

<PAGE> 2
[SELECT COMFORT LOGO]

10400 VIKING DRIVE, SUITE 400
MINNEAPOLIS, MINNESOTA 55344

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 18, 2000

TO THE SHAREHOLDERS OF SELECT COMFORT CORPORATION:

The Annual Meeting of Shareholders of Select Comfort Corporation, a
Minnesota corporation ("Select Comfort" or the "Company"), will be held on
Thursday, May 18, 2000, at 3:00 p.m., local time, at the Hotel Sofitel, or 5601
W. 78th Street, Bloomington, Minnesota 55439, for the following purposes:

1. To elect three persons to serve as directors for three-year terms;

2. To consider and act upon a proposal to amend the Select Comfort
Corporation 1997 Stock Incentive Plan to impose a per participant
annual limitation of 600,000 shares and to increase the number of
shares of common stock reserved for issuance by 1,000,000 from
2,500,000 shares to 3,500,000 shares;

3. To consider and act upon a proposal to adopt the Select Comfort
Corporation 1999 Employee Stock Purchase Plan;

4. To consider and act upon a proposal to ratify the appointment of
KPMG LLP, certified public accountants, as independent auditors
for the Company for the fiscal year ending December 30, 2000; and

5. To transact such other business as may properly come before the
meeting or any adjournment thereof.

Only shareholders of record at the close of business on March 27, 2000
will be entitled to notice of, and to vote at, the meeting and any adjournments
thereof. It is important that your shares be represented and voted at the
meeting. Please mark, sign, date and mail the enclosed proxy card in the
postage-paid envelope provided.

By Order of
the Board of Directors,

/s/ Mark A. Kimball
-----------------------
Mark A. Kimball
Secretary
April 17, 2000
Minneapolis, Minnesota
<PAGE> 3

TABLE OF CONTENTS

Page
----
<S> <C>
INTRODUCTION ........................................................................................................2
Shareholders Entitled to Vote........................................................................................2
Revocation of Proxies ...............................................................................................2
Quorum Requirements .................................................................................................3
Vote Required........................................................................................................3
Proxy Solicitation Costs ............................................................................................3

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................................4
Security Ownership of Certain Beneficial Owners......................................................................4
Security Ownership of Management.....................................................................................5

ELECTION OF DIRECTORS................................................................................................7
Nomination...........................................................................................................7
Vote Required .......................................................................................................7
Board Recommendation ................................................................................................7
Information About Directors .........................................................................................8
Other Information About Directors ...................................................................................9
Information About the Board and its Committees .....................................................................10
Director Compensation ..............................................................................................11
Compensation Committee Interlocks and Insider Participation ........................................................12

EXECUTIVE COMPENSATION AND OTHER BENEFITS ..........................................................................13
Summary of Cash and Other Compensation .............................................................................13
Option Grants and Exercises ........................................................................................15
Employment and Consulting Agreements ...............................................................................18
Change in Control Arrangements .....................................................................................18

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION ............................................................20
Compensation Philosophy and Objectives .............................................................................20
Executive Compensation Program Components ..........................................................................20
Chief Executive Officer Compensation ...............................................................................22
Section 162(m)......................................................................................................22

COMPARATIVE STOCK PERFORMANCE ......................................................................................23

CERTAIN TRANSACTION ................................................................................................24
Director Relationships .............................................................................................24
Amended and Restated Registration Rights Agreement .................................................................24
Employment and Consulting Agreements ...............................................................................24
Monogram Bank Credit Card Program ..................................................................................24
Investment in SleepTec, Inc. .......................................................................................25

AMENDMENT TO 1997 STOCK INCENTIVE PLAN .............................................................................26
Proposed Amendment .................................................................................................26
Purpose of the Amendment ...........................................................................................26
Summary of the 1997 Plan ...........................................................................................26
Federal Income Tax Consequences ....................................................................................30
Incentive Awards Granted under the 1997 Plan .......................................................................32
Board Recommendation ...............................................................................................32

ADOPTION OF 1999 EMPLOYEE STOCK PURCHASE PLAN ......................................................................34
Summary of Purchase Plan ...........................................................................................34
Federal Income Tax Consequences ....................................................................................37
Board Recommendation ...............................................................................................38

RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS ..................................................................39
Appointment of Auditors ............................................................................................39
Board Recommendation ...............................................................................................39

OTHER MATTERS ......................................................................................................40
Section 16(a) Beneficial Ownership Reporting Compliance ............................................................40
Shareholder Proposals For 2001 Annual Meeting ......................................................................40
Other Business .....................................................................................................41
Copies of 1999 Annual Report .......................................................................................41
</TABLE>

<PAGE> 4

[GRAPHIC OMITTED]

10400 VIKING DRIVE, SUITE 400
MINNEAPOLIS, MINNESOTA 55344

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

PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS

MAY 18, 2000

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

INTRODUCTION

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

This proxy statement is being mailed to our shareholders beginning on or about
April 17, 2000 in connection with the solicitation of proxies by the Board of
Directors for use at the Annual Meeting of Shareholders. The meeting will be
held on Thursday, May 18, 2000, at 3:00 p.m., local time, at the Hotel Sofitel,
5601 W. 78th Street, Bloomington, Minnesota 55439, for the purposes set forth in
the Notice of Meeting.

Your vote is important. A proxy card is enclosed for your use. YOU ARE SOLICITED
ON BEHALF OF THE BOARD OF DIRECTORS, TO MARK, SIGN, DATE AND RETURN THE PROXY
CARD IN THE ACCOMPANYING ENVELOPE. No postage is required if mailed within the
United States Proxies will be voted as specified by you.

Signed proxies that lack any such specification will be voted in favor of the
proposals set forth in the Notice of Meeting and in favor of the election as
directors of the three nominees listed in this proxy statement.

THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE APPROVAL OF THE
PROPOSALS SET FORTH IN THE NOTICE OF MEETING.

SHAREHOLDERS ENTITLED TO VOTE

Shareholders of record at the close of business on March 27, 2000 will be
entitled to vote at the meeting. As of that date, there were 17,788,216
outstanding shares of common stock. Each share is entitled to one vote on each
matter to be voted on at the Annual Meeting. Shareholders are not entitled to
cumulate voting rights.

REVOCATION OF PROXIES

Any shareholder giving a proxy may revoke it at any time prior to its use at the
Annual Meeting by:

- - giving written notice of such revocation to the Secretary of Select Comfort,

- - filing a duly executed proxy bearing a later date with the Secretary of
Select Comfort, or

- - appearing at the Annual Meeting and filing written notice of revocation with
the Secretary of Select Comfort prior to use of the proxy.

2
<PAGE> 5

QUORUM REQUIREMENTS

The presence at the Annual Meeting, in person or by proxy, of the holders of a
majority of the outstanding shares of common stock entitled to vote at the
Annual Meeting (8,894,109 shares) will constitute a quorum for the transaction
of business at the Annual Meeting. In general, shares of common stock
represented by a properly signed and returned proxy card will be counted as
shares present and entitled to vote at the Annual Meeting for purposes of
determining a quorum, without regard to whether the card reflects abstentions
(or is left blank) or reflects a "broker non-vote" on a matter. A "broker
non-vote" is a card returned by a broker on behalf of its beneficial owner
customer that is not voted on a particular matter because voting instructions
have not been received, and the broker has no discretionary authority to vote.

VOTE REQUIRED

Assuming a quorum is represented at the Annual Meeting, either in person or by
proxy, the election of the nominees for director and the approval of the other
proposals described in this proxy statement require the affirmative vote of the
holders of a majority of the shares present and entitled to vote in person or by
proxy at the meeting. Shares represented by a proxy card that includes any
broker non-votes on a matter will be treated as shares not entitled to vote on
that matter, and thus will not be counted in determining whether that matter has
been approved. Shares represented by a proxy card voted as abstaining on any of
the proposals will be treated as shares present and entitled to vote that were
not cast in favor of a particular matter, and thus will be counted as votes
against that matter. Signed proxies that lack any specification will be voted in
favor of the proposals set forth in the Notice of Meeting and in favor of the
election as directors of the three nominees listed in this proxy statement.

PROXY SOLICITATION COSTS

The cost of soliciting proxies, including the preparation, assembly and mailing
of proxies and soliciting material, as well as the cost of forwarding such
material to the beneficial owners of our common stock, will be borne by us. Our
directors, officers and regular employees may, without compensation other than
their regular compensation, solicit proxies by telephone, telegraph or personal
conversation. We may reimburse brokerage firms and others for expenses in
forwarding proxy materials to the beneficial owners of our common stock.

3
<PAGE> 6

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth information, as of December 31, 1999,
with respect to each person who was known by us to be the beneficial owner of
more than 5% of Select Comfort common stock.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED (1)
----------------------------
NAME AMOUNT PERCENT OF CLASS
- ---- -------- ----------------
<S> <C> <C>
St. Paul Venture Capital, Inc. (2).......................................... 5,293,844 29.6%
Consumer Venture Partners II, L.P. (3)...................................... 1,962,801 11.1%
General Electric Capital Corporation (4).................................... 1,076,098 5.7%
</TABLE>

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

(1) Except as otherwise indicated in the footnotes to this table, the
persons named in the table have sole voting and dispositive power with
respect to all shares of common stock. Shares of common stock subject
to options or warrants currently exercisable or exercisable within 60
days 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 or group.

(2) Includes 4,806,022 shares held by St. Paul Fire and Marine Insurance
Company and 321,017 shares held by St. Paul Venture Capital IV, LLC.
Includes 59,769 shares issuable upon exercise of outstanding warrants
held by St. Paul Fire and Marine Insurance Co. and 9,536 shares
issuable upon exercise of outstanding warrants and options held by St.
Paul Venture Capital IV, LLC. Includes 97,500 shares issuable upon
exercise of outstanding options held by St. Paul Venture Capital V,
LLC. St. Paul Companies, Inc. owns all of the issued and outstanding
shares of capital stock of St. Paul Fire and Marine Insurance Co. St.
Paul Fire and Marine Insurance Co. owns 99% of the membership interests
in St. Paul Venture Capital IV, LLC and St. Paul Venture Capital V,
LLC. Patrick A. Hopf, Chairman of the Board of Directors of Select
Comfort, is the Managing General Partner of St. Paul Venture Capital
IV, LLC and St. Paul Venture Capital V, LLC. Does not include shares
held of record by Mr. Hopf or his family members. See "--Security
Ownership of Management." The address of St. Paul Venture Capital, Inc.
is 10400 Viking Drive, Suite 550, Eden Prairie, Minnesota 55344.

(3) Includes 1,962,801 shares held by Consumer Venture Partners II, L.P.
Christopher P. Kirchen, a director of Select Comfort, is 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 "--Security Ownership of
Management." The address of Consumer Venture Partners II, L.P. is Three
Pickwick Plaza, Greenwich, Connecticut 06830.

(4) Includes 1,076,098 shares issuable upon exercise of an outstanding
warrant. The address of General Electric Capital Corporation is 260
Long Ridge Road, Stamford, Connecticut 06927.

<PAGE> 7

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth information regarding the beneficial
ownership of Select Comfort common stock as of March 31, 2000 by each director
and nominee for director, by each executive officer named in the Summary
Compensation Table under the heading "Executive Compensation and Other Benefits"
and by all current directors and executive officers of Select Comfort as a
group.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED (1)
---------------------------
NAME AMOUNT PERCENT OF CLASS
- ---- ------ ----------------
<S> <C> <C>
William R. McLaughlin ................... 11,000 *

Ronald E. Mayle (2) ..................... 165,028 *

Gregory T. Kliner (3) ................... 111,786 *

James C. Raabe (4) ...................... 29,340 *

James D. Gaboury (5) ................... 30,698 *

Patrick A. Hopf (6) ..................... 5,558,029 31.0%

Thomas J. Albani (7) .................... 39,456 *

Christopher P. Kirchen (8) .............. 2,003,360 11.3%

David T. Kollat (9) ..................... 39,456 *

William J. Lansing (10) ................. 75,100 *

Ervin R. Shames (11) .................... 250,000 1.4%

Jean-Michel Valette (12) ................ 228,190 1.3%

H. Robert Hawthorne (13) ................ 145,910 *

Daniel J. McAthie (14) .................. 72,203 *

Charles E. Dorsey (15) .................. 86,895 *

All directors and executive officers
as a group (15 persons) (16) ............ 8,647,780 46.5%
</TABLE>

* Less than 1% of the outstanding shares

<PAGE> 8

(2) Includes 161,028 shares issuable upon exercise of outstanding options.

(3) Includes 111,367 shares issuable upon exercise of outstanding options.

(4) Includes 27,513 shares issuable upon exercise of outstanding options.

(5) Includes 21,403 shares issuable upon exercise of outstanding options.

(6) Includes 176,999 shares issuable upon exercise of outstanding options
and warrants. Also includes an aggregate of 8,000 shares held by Mr.
Hopf's spouse and children. Also includes 5,127,039 shares beneficially
owned by St. Paul Fire and Marine Insurance Company, St. Paul Venture
Capital Affiliates Fund I, LLC, St. Paul Venture Capital IV, LLC and
St. Paul Venture Capital V, LLC as of March 31, 2000. St. Paul Venture
Capital, Inc. is the manager of St. Paul Venture Capital Affiliates
Fund I, LLC. Mr. Hopf is the President of St. Paul Venture Capital,
Inc. and the Managing General Partner of St. Paul Venture Capital IV,
LLC and St. Paul Venture Capital V, LLC. Mr. Hopf's address is 10400
Viking Drive, Suite 550, Eden Prairie, Minnesota 55344. See "--Security
Ownership of Certain Beneficial Owners."

(7) Includes 1,861 shares issuable upon exercise of outstanding options.

(8) Includes 1,861 shares issuable upon exercise of outstanding options.
Also includes 1,962,801 shares beneficially owned by Consumer Venture
Partners, L.P., as to which Mr. Kirchen shares voting and dispositive
power. Mr. Kirchen has the same business address as Consumer Venture
Partners. See "--Security Ownership of Certain Beneficial Owners."

(9) Includes 39,361 shares issuable upon exercise of outstanding options.

(10) Includes 6,250 shares issuable upon exercise of outstanding options.

(11) Includes 100,000 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.

(12) Includes 1,861 shares issuable upon exercise of outstanding options.
Also includes 203,605 shares held by H&Q Select Comfort Investors,
L.P., a related party to Hambrecht & Quist LLC. Mr. Valette, by virtue
of his affiliation with the general partner of 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.

(13) Includes 12,000 shares held by Mr. Hawthorne's children.

(14) Includes 29,097 shares held by Mr. McAthie's spouse, as to which Mr.
McAthie shares voting and dispositive power, and 400 shares issuable
upon exercise of outstanding warrants.

(15) Includes 2,000 shares jointly held by Mr. Dorsey and his spouse, as to
which Mr. Dorsey shares voting and dispositive power, and an aggregate
of 3,000 shares held by Mr. Dorsey's children, as to which Mr. Dorsey
has sole voting and dispositive power. Also includes 1,000 shares held
by Mr. Dorsey's daughter and 1,000 shares held by Mr. Dorsey's son, as
to which shares Mr. Dorsey disclaims beneficial ownership.

(16) Includes an aggregate of 834,921 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
Companies, Inc. and its affiliates, H&Q Select Comfort Investors, L.P.
and Consumer Venture Partners. II, L.P.. See "--Security Ownership of
Certain Beneficial Owners."

6
<PAGE> 9

ELECTION OF DIRECTORS

(PROPOSAL 1)

NOMINATION

Article XIV of our Articles of Incorporation provides that the number of
directors must be at least one but not more than 12 and must be divided into
three classes as nearly equal in number as possible. The exact number of
directors is determined from time to time by the Board of Directors, and
currently consists of eight members. The term of each class is three years and
the term of one class expires each year in rotation.

The Board has nominated the following individuals to serve as directors of
Select Comfort for terms of three years, expiring at the 2003 Annual Meeting of
Shareholders, or until their successors are elected and qualified:

- - Patrick A. Hopf
- - William J. Lansing
- - Ervin R. Shames

All of the nominees are current members of the Board.

VOTE REQUIRED

Proxies can only be voted up to the three persons.

Assuming a quorum is represented at the Annual Meeting, either in person or by
proxy, the election of a nominee requires the affirmative vote of a majority of
the shares of common stock represented in person or by proxy at the Annual
Meeting.

BOARD RECOMMENDATION

The Board recommends a vote FOR the election of Messrs. Hopf, Lansing and
Shames. In the absence of other instructions, the proxies will be voted FOR the
election of each of Messrs. Hopf, Lansing and Shames.

If prior to the Annual Meeting the Board should learn that any nominee will be
unable to serve for any reason, the proxies that otherwise would have been voted
for such nominee will be voted for such substitute nominee as selected by the
Board. Alternatively, the proxies, at the Board's discretion, may be voted for
such fewer number of nominees as results from the inability of any such nominee
to serve. The Board has no reason to believe that any of the nominees will be
unable to serve.

7
<PAGE> 10

INFORMATION ABOUT DIRECTORS

The following table sets forth certain information, as of April 3,
2000, which has been furnished to us by each of our directors.

<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
- --------------- --- -------------------- -----
<S> <C> <C> <C>
Nominees for three-year terms expiring in 2003:

Patrick A. Hopf (2) 51 President of St. Paul Venture Capital, Inc. 1991

Ervin R. Shames (2) 59 Independent Management Consultant 1996

William J. Lansing (2) 42 President of NBC Internet Inc. 1999

Directors not standing for election this year whose terms expire in 2001:

Thomas J. Albani (3) 57 Former President and Chief Executive Officer 1994
of Electrolux Corporation

David T. Kollat (3) 61 President and Chairman of 22 Inc. 1994

William R. McLaughlin 43 President and Chief Executive Officer of 2000
Select Comfort Corporation

Directors not standing election this year whose term expires in 2002:

Christopher P. Kirchen (1)(3) 57 Managing General Partner of Brand Equity 1991
Ventures and General Partner of Consumer
Venture Partners

Jean-Michel Valette 39 President and Chief Executive Officer of 1994
Franciscan Estates, Inc.
</TABLE>

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

(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee

8
<PAGE> 11

OTHER INFORMATION ABOUT DIRECTORS

Patrick A. Hopf was elected Chairman of the Board of Directors on April 19, 1999
and has served as a director of Select Comfort since December 1991. Mr. Hopf
also served as the Chairman of the Board of Directors of the Company from August
1993 to April 1996. Mr. Hopf was elected to the Board in connection with the
purchase agreement under which the Series A preferred stock was purchased. See
"Certain Transactions--Director Relationships." Mr. Hopf has been President of
St. Paul Venture Capital, Inc., a venture capital firm, and Managing General
Partner of St. Paul Venture Capital IV, LLC since its formation in January 1997.
From August 1988 to January 1999, Mr. Hopf served as Vice President of St. Paul
Fire and Marine Insurance Company. St. Paul Venture Capital IV, LLC and St. Paul
Venture Capital Affiliates Fund I, LLC, of which St. Paul Venture Capital, Inc.
is the manager for both, and St. Paul Fire and Marine Insurance Company are
investors in the Company. Mr. Hopf also serves as a director of a number of
privately held companies.

Ervin R. Shames has served as a director of Select Comfort since April 1996.
From April 1996 to April 19, 1999, Mr. Shames served as Chairman of the Board of
Directors. Since January 1995, Mr. Shames has served as an independent
management consultant to large and small consumer goods and services companies,
advising on management and sales strategy. Since 1996 he has been a visiting
lecturer at the University of Darden Graduate School of Business. 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. Mr. Shames serves as a director and as a member
of the compensation committee of the board of directors of Online Resources
Communications Corporation.

William J. Lansing has served as a director of Select Comfort since 1999. Mr.
Lansing has been Chief Executive Officer of NBC Internet Inc., an integrated
media company, since March 2000. Mr. Lansing was the Chief Executive Officer of
Fingerhut Companies, Inc., a mail order catalog company, from May 1998 to March
2000. He served as Vice President, Business Development at General Electric
Corporation from October 1996 to May 1998. From January 1996 to October 1996, he
served as Chief Operating Officer of Prodigy, Inc., an Internet service
provider. From September 1986 to December 1995, Mr. Lansing was at McKinsey &
Co., where he was a partner leading the consulting firm's Internet practice. Mr.
Lansing also serves as a director of Digital River Inc., Net Perceptions,
BigStar Entertainment, Inc., Freeshop.com, PCFlowers.com and Mountainzone.com

Thomas J. Albani has served as a director of Select Comfort 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.

David T. Kollat has served as a director of Select Comfort 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., Cooker Restaurant Corporation and Cone Mills.

<PAGE> 12

William R. McLaughlin joined the Company in March 2000 as President and Chief
Executive Officer, and was elected as a director by the Board to fill a vacancy
created by the resignation of Daniel J. McAthie. From December 1988 to March
2000, Mr. McLaughlin served as an executive of Pepsico Foods International in
various capacities, including from September 1996 to March 2000 as President of
Frito Lay Europe, Middle East and Africa, and from June 1993 to June 1996, as
President of Grupo Gamesa, a cookie and flour company based in Mexico.

Christopher P. Kirchen has served as a director of Select Comfort since December
1991. Mr. Kirchen was elected to the Board in connection with the purchase
agreement under which the Series B preferred stock was purchased. See "Certain
Transactions--Director Relationships." 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.

Jean-Michel Valette has served as a director of Select Comfort since 1994. Mr.
Valette was elected to the Board in connection with the purchase agreement
under which the Series D preferred stock was purchased. See "Certain
Transactions--Director Relationships." Mr. Valette has served as President and
Chief Executive Officer of Franciscan Estates, Inc., the Fine Wine Division of
Canandaigua Brands, Inc. since August 1998. Mr. Valette was a Managing Director
of Hambrecht & Quist LLC from October 1994 to August 1998 and served as a Senior
Analyst at Hambrecht & Quist LLC from November 1992 to October 1994. Hambrecht &
Quist LLC was one of the underwriters of the Company's initial public offering.
Mr. Valette also serves as a director of a number of privately held companies.

INFORMATION ABOUT THE BOARD AND ITS COMMITTEES

The Board of Directors met 7 times and took action by written consent on 8
occasions during fiscal 1999. All of the current directors attended 85% or more
of the meetings of the Board and all such committees on which they served during
fiscal 1999. Messrs. Hawthorne and Macke, whose tenure on the Board ended during
1999, each attended 50% of the meetings of the Board held during their tenure in
1999.

The Board has an Executive Committee, an Audit Committee and a Compensation
Committee.

Executive 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 Executive Committee consists of Messrs. Hopf, Kirchen and Shames. The
Executive Committee did not meet during fiscal 1999.

Audit Committee. The Audit Committee provides assistance to the Board in
satisfying its fiduciary responsibilities relating to our accounting, auditing,
operating and reporting practices, and reviews our annual financial statements
our, the selection and work our independent auditors and the adequacy of
internal controls for compliance with corporate policies and directives.

The Audit Committee consists of Messrs. Albani, Kirchen and Kollat. The Audit
Committee met twice during fiscal 1999.

Compensation Committee. The Compensation Committee:

- - reviews general programs of compensation and benefits for all of our
employees;

10
<PAGE> 13

- - makes recommendations to the Board concerning such matters as compensation
to be paid to our officers and directors; and

- - administers our stock option and incentive plans, pursuant to which stock
options and other incentive awards may be granted to eligible employees,
officers, directors and consultants of the Company.

The Compensation Committee consists of Messrs. Hopf, Lansing and Shames. The
Compensation Committee met or took action by written consent on three occasions
in fiscal 1999.

DIRECTOR COMPENSATION

Meeting Fees. All of our non-employee directors 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.

Stock Options. Each newly elected non-employee director is eligible for an
initial grant of options to purchase 20,000 shares of common stock at an
exercise price equal to the fair market value of the common stock on the date of
grant. These initial options become exercisable in equal monthly increments over
a 24-month period, so long as the director remains a director of Select Comfort.
After the vesting of this initial grant, each non-employee director is eligible
for an annual grant, subject to action by the Board and coincident with the
annual meeting of shareholders, of options to purchase 10,000 shares of common
stock at an exercise price equal to the fair market value of the common stock on
the date of the annual meeting of shareholders. These annual options become
exercisable in equal monthly increments over a 36-month period, so long as the
director remains a director of Select Comfort. All of the options granted to
directors remain exercisable for a period of up to 10 years after the date of
grant, subject to continuous service on the Board.

Option Grants for Service as Chairman of the Board. For service as Chairman of
the Board, in May 1999 the Board of Directors granted to St. Paul Venture
Capital V, LLC, an affiliate of Mr. Hopf's employer, St. Paul Venture Capital,
Inc., options to purchase a total of 250,000 shares exercisable at $15.38 per
share, of which 50,000 vest in equal monthly increments over 36 months, 50,000
vest at such time that the trading price of Select Comfort common stock has
exceeded $50.00 per share for at least 30 consecutive trading days, and 150,000
vest at such time that the trading price of Select Comfort common stock has
exceed $100.00 per share for at least 30 consecutive trading days.

Option Grants for Service as Interim President and CEO. Mr. Hopf received no
cash compensation for his service as Interim President and CEO during 1999. In
consideration of such service, we granted to Mr. Hopf's employer, St. Paul
Venture Capital, Inc., 10,000 options per month for the months of July through
December 1999.

Reimbursement of Expenses. All directors are reimbursed for travel expenses for
attending meetings of the Board and any Board committees.

No Director Compensation for Employee Directors. Directors who are employees of
the Company do not receive additional compensation for their services as
directors.

Consulting Agreement with Ervin R. Shames. In April 1996, we entered into a
consulting agreement with Ervin R. Shames, a director and former Chairman of the
Board of Directors of the Company, pursuant to which Mr. Shames rendered certain
consulting services to the Company through the end of March 1999. Pursuant to
the consulting agreement, Mr. Shames received $30,000 in fiscal 1999.

Consulting Agreement with Lawrence P. Murphy. In May of 1999, we entered into a
Consulting Agreement with Lawrence P. Murphy, a director of Select Comfort from
June 1999 to January 2000, pursuant to which Mr.

<PAGE> 14

Murphy rendered certain consulting services. In 1999, Mr. Murphy received
$100,000 in consulting fees under this Consulting Agreement. Mr. Murphy resigned
from the Board in January 2000 and the Consulting Agreement was terminated.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. Hopf, Lansing and Shames served as members of the Compensation Committee
of the Board of Directors during fiscal 1999. In the last half of 1999, Mr. Hopf
served as Interim President and CEO pending the search for the successor to Mr.
McAthie, who resigned in July 1999. Mr. Shames rendered certain consulting
services to the Company through March 31, 1999. See "Election of Directors --
Director Compensation."

Mr. Hopf is the President of St. Paul Venture Capital, Inc. and Managing General
Partner of St. Paul Venture Capital IV, LLC., which are investors in the
Company. Mr. Hopf was elected Chairman of the Board of Directors on April 19,
1999 and previously served as Chairman of the Board of Directors of the Company
from August 1993 to April 1996.

For a description of certain transactions involving these entities, see "Certain
Transactions."

No other relationships existed during fiscal 1999 with respect to Messrs. Hopf,
Lansing or Shames that would be required to be disclosed under the rules of the
Securities Act of 1933.

12
<PAGE> 15

EXECUTIVE COMPENSATION AND OTHER BENEFITS

SUMMARY OF CASH AND OTHER COMPENSATION

The following table provides summary information concerning cash and
non-cash compensation paid to or earned by (i) each of the persons serving in
the capacity of Chief Executive Officer in 1999, (ii) the four most highly
compensated executive officers other than the CEO serving as executive officers
at the end of 1999, and (iii) Mr. Dorsey, who was an executive officer of the
Company until November 24, 1999 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------- ------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
- --------------------------- ---- --------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Patrick A. Hopf (2) 1999 $ -- $ -- 50,000 $ --
Former Interim President and Chief
Executive Officer

Daniel J. McAthie (3) 1999 181,310 -- 280,000 --
Former President and Chief Executive 1998 214,856 71,182 55,000 3,580
Officer, 1997 198,655 23,838 55,000 --

H. Robert Hawthorne (4) 1999 192,226 -- -- --
Former President and Chief Executive 1998 341,914 107,805 5,000 5,000
Officer 1997 225,000 27,000 400,000 --

Ronald E. Mayle (5) 1999 202,615 -- 80,000 13,077
Senior Vice President, Retail 1998 161,231 50,352 25,000 --
1997 12,307 3,500 135,000 --

Charles E. Dorsey (6) 1999 179,139 -- 5,000 2,400
Former Senior Vice President, Direct 1998 167,231 54,233 25,000 3,709
Marketing 1997 155,540 81,381 35,000 --

Gregory T. Kliner 1999 183,197 -- 15,000 2,139
Senior Vice President, Operations 1998 157,574 52,204 15,000 2,628
1997 147,095 17,652 35,000 --

James C. Raabe (7) 1999 141,520 -- 37,500 2,139
Vice President and Chief Financial
Officer

James D. Gaboury (8) 1999 134,003 12,500 30,500 2,139
Vice President, Direct Sales

</TABLE>

<PAGE> 16

(1) The amounts disclosed for each individual represent Select Comfort's
contributions to the accounts of the named individuals in Select Comfort's
401(k) defined contribution plan and payments made for moving expenses.

(2) Mr. Hopf was Interim President and Chief Executive Officer from July 14,
1999 to March 20, 2000. Includes 50,000 shares issuable upon exercise of
outstanding options issued to St. Paul Venture Capital V, LLC.

(3) Mr. McAthie was elected President and Chief Executive Officer on April 19,
1999. Prior to April 19, 1999, Mr. McAthie served as Executive Vice
President, Chief Operating Officer, Chief Financial Officer and Secretary.
Mr. McAthie resigned as President and Chief Executive Officer on July 9,
1999.

(4) Mr. Hawthorne was President and Chief Executive Officer from April 28, 1997
to April 19, 1999.

(5) Mr. Mayle became Senior Vice President, Retail and President of Select
Comfort Retail Corporation on December 1, 1997.

(6) Mr. Dorsey resigned as an executive officer of Select Comfort on November
24, 1999.

(7) Mr. Raabe was elected Vice President and Chief Financial Officer on April
19, 1999.

(8) Mr. Gaboury was elected Vice President, Direct Sales on December 13, 1999.

<PAGE> 17
OPTION GRANTS AND EXERCISES

The following tables summarize option grants and exercises during the
fiscal year ended January 1, 2000 to or by the Named Executive Officers and the
potential realizable value of the options held by such persons at January 1,
2000.

OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>

INDIVIDUAL GRANTS (1)
-------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
TOTAL AT ASSUMED ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM (2)
OPTIONS IN FISCAL PRICE EXPIRATION --------------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% 10%
---- ----------- ---- ------ ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Patrick A. Hopf 10,000 (3) 0.5% $6.91 8/28/09 $ 43,396 $ 110,032
10,000 (3) 0.5% 7.04 9/28/09 44,132 111,974
10,000 (3) 0.5% 5.77 10/28/09 36,216 91,845
10,000 (3) 0.5% 5.69 11/28/09 35,743 90,619
10,000 (3) 0.5% 4.08 12/28/09 25,628 64,975

Daniel J. McAthie 50,000 (4) 2.7% 23.50 02/23/09 738,951 1,872,647
30,000 (4) 1.6% 15.38 05/04/09 289,928 734,964
150,000 (5) 8.0% 15.38 05/04/00 114,563 229,875
50,000 (6) 2.7% 15.38 05/04/00 38,187 76,625

H. Robert Hawthorne --- --- --- --- --- ---

Ronald E. Mayle 30,000 (4) 1.6% 15.38 05/04/09 289,928 734,964
50,000 (4) 2.7% 7.47 07/28/09 234,794 595,107

Gregory T. Kliner 10,000 (4) 0.5% 15.38 05/04/09 96,643 244,987
5,000 (4) 0.3% 7.47 07/28/09 23,479 59,511

Charles E. Dorsey 5,000 (4) 0.3% 15.38 05/04/09 48,321 122,494

James C. Raabe 10,000 (4) 0.5% 5.60 11/01/09 35,117 89,098
7,500 (4) 0.4% 7.47 07/28/09 35,219 89,266
20,000 (4) 1.8% 15.38 05/04/09 193,285 489,976

James D. Gaboury 25,000 (4) 1.4% 5.43 12/03/09 85,043 215,825
2,500 (4) 0.1% 7.47 07/28/09 11,740 29,755
3,000 (4) 0.2% 15.38 05/04/09 28,993 73,496

</TABLE>

- ---------------
(1) All of the options granted to the Named Executive Officers were granted
under our 1990 Omnibus Stock Option Plan or under our 1997 Stock
Incentive Plan.

(2) In accordance with the rules of the Securities and Exchange 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 our 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

<PAGE> 18

exercises will depend upon the future performance of the common stock,
the executive's continued employment with Select Comfort or its
subsidiaries and the date on which the options are exercised. The
amounts represented in this table might not necessarily be achieved.

(3) Represents options granted to St. Paul Venture Capital V, LLC, an
affiliate of St. Paul Venture Capital, Inc., Mr. Hopf's employer. All
such options became immediately exercisable at the date of grant.

(4) 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 Select Comfort 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 Select Comfort
and remain exercisable for the remainder of their term.

(5) These options become exercisable when the average of the high and low
sales prices of Select Comfort's common stock, as reported by the
Nasdaq National Market System, exceeds $50.00 per share for at least 30
consecutive trading days.

(6) These options become exercisable when the average of the high and low
sales prices of Select Comfort's common stock, as reported by the
Nasdaq National Market System, exceeds $100.00 per share for at least
30 consecutive trading days.

<PAGE> 19

AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT JANUARY 1, 2000 AT JANUARY 1, 2000 (2)
ACQUIRED ON VALUE -------------------------- ----------------------
NAME EXERCISE (#) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Patrick A. Hopf (3) -- $ -- 50,000 -- -- --

Daniel J. McAthie 101,818 160,943 -- -- -- --

H. Robert Hawthorne 226,797 2,745,572 -- -- -- --

Ronald E. Mayle -- -- 150,694 69,306 -- --

Gregory T. Kliner -- -- 108,700 14,445 -- --

Charles E. Dorsey 22,739 528,360 19,977 -- -- --

James C. Raabe 1,500 22,969 20,737 38,263 -- --

James D. Gaboury 393 5,120 16,669 31,831 -- --
</TABLE>

- ---------------
(1) Value based on the difference between the fair market value of one
share of our common stock on the date of exercise and the exercise
price of the option.

(2) Value based on the difference between the fair market value of one
share of our common stock at January 1, 2000 ($4.0625) and the exercise
price of the options ranging from $4.08 to $17.00 per share. Options
are in-the-money if the market price of the shares exceeds the option
exercise price.

(3) Includes 50,000 shares issuable upon exercise of outstanding options
granted to St. Paul Venture Capital V, LLC.

<PAGE> 20

EMPLOYMENT AND CONSULTING AGREEMENTS

H. Robert Hawthorne. In April 1999, we entered into an employment and consulting
agreement with H. Robert Hawthorne, our former President and Chief Executive
Officer. Under the agreement, Mr. Hawthorne agreed to remain an employee through
July 31, 1999 and to serve as an independent contractor on a special project
basis through April 30, 2001.

In consideration of this agreement, we agreed to provide Mr. Hawthorne with
certain payments and benefits, including (i) payment of a base salary equal to
$10,000 per month for the period from May 1, 1999 through July 31, 1999, (ii)
payment of a consulting fee equal to $8,250 per month for the period from August
1, 1999 through April 30, 2001, and (iii) continuation of health, dental and
life insurance coverage until April 30, 2001. Under the agreement, Mr. Hawthorne
agreed not to disclose any of our confidential information, and until April 30,
2001, not to compete with us, interfere with our relationships with any of our
current or potential vendors, suppliers, distributors or customers and not to
solicit any of our employees so long as they remain employees of Select Comfort.

Ronald E. Mayle. We have entered into a letter agreement with Ronald E. Mayle
pursuant to which he serves as our Senior Vice President, Retail. Mr. Mayle
receives a base salary and is entitled to receive an incentive bonus if certain
performance criteria are met.

Gregory T. Kliner. We have entered into a letter agreement with Gregory T.
Kliner pursuant to which he serves as our Senior Vice President, Operations. Mr.
Kliner receives a base salary and is entitled to receive an incentive bonus if
certain performance criteria are met.

CHANGE IN CONTROL ARRANGEMENTS

Under our 1990 Omnibus Stock Option Plan (the "1990 Plan") and our 1997 Stock
Incentive Plan (the "1997 Plan"), if a "change in control" of our company
occurs, then, unless the Compensation Committee decides otherwise either at the
time of grant of an incentive award or at any time thereafter, all outstanding
options will become immediately exercisable in full and will remain exercisable
for the remainder of their terms, regardless of whether the participant to whom
such options have been granted remains in the employ or service of our company
or any subsidiary.

In addition, under the 1997 Plan, if a "change in control" of our company
occurs, then, unless the Compensation Committee decides otherwise either at the
time of grant of an incentive award or at any time thereafter:

- - all outstanding stock appreciation rights will become immediately
exercisable in full and will remain exercisable for the remainder of
their terms, regardless of whether the participant to whom such stock
appreciation rights have been granted remains in the employ or service
of our company or any subsidiary;

- - all outstanding restricted stock awards will become immediately fully
vested and non-forfeitable; and

- - all outstanding performance units and stock bonuses will vest and/or
continue to vest in the manner determined by the Compensation Committee
and set forth in the agreement evidencing such performance units or
stock bonuses.

In addition, the Compensation Committee may pay cash for all or a portion of the
outstanding options. The amount of cash the participants would receive will
equal (a) the fair market value of such shares immediately prior to the change
in control minus (b) the exercise price per share and any required tax
withholding. The acceleration of the exercisability of options under the 1990
and 1997 Plans may be limited, however, if the acceleration would be subject to
an excise tax imposed upon "excess parachute payments."

Under the 1990 and 1997 Plans, a "change in control" will include any of the
following:

<PAGE> 21

- - the sale, lease exchange or other transfer of all or substantially all
of our company's assets to a corporation not controlled by our company;

- - the approval by our shareholders of a plan or proposal for the
liquidation or dissolution of our company;

- - any change in control that is required by the Securities and Exchange
Commission to be reported;

- - any person who was not a shareholder of our company on the effective
date of the plan becomes the beneficial owner of 50% or more of the
voting power of our outstanding stock; or

- - the "continuity" directors (directors as of the effective date of the
Plan and their future nominees) ceasing to constitute a majority of the
Board of Directors.

Notwithstanding anything in the foregoing to the contrary, solely for purposes
of options granted under such plans prior to July 27, 1999, no change in control
will be deemed to have occurred for purposes of the 1990 and 1997 Plans by
virtue of any transaction described above which was approved by the affirmative
vote of at least a majority of the "continuity" directors, as defined above. For
options granted on or after July 27, 1999 each of the transactions constituting
a change in control as defined above will constitute a change in control for
purposes of the plans regardless of whether the transaction was approved by the
continuity directors.

19
<PAGE> 22

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee is comprised solely of non-employee directors and
consisted of, Patrick A. Hopf, William J. Lansing and Ervin R. Shames during
fiscal 1999. The Compensation Committee makes recommendations to the Board of
Directors concerning the compensation and benefits of our directors, executive
officers and key managers, and acts on such other matters relating to their
compensation as it deems appropriate. In addition, the Compensation Committee
administers our stock option and incentive plans, pursuant to which incentive
stock options, non-statutory stock options, restricted stock awards, stock
appreciation rights, performance units and stock bonuses may be granted to
eligible employees, officers, directors and consultants.

COMPENSATION PHILOSOPHY AND OBJECTIVES

The philosophy underlying the decisions and recommendations of the Compensation
Committee is to recognize and reward results and achievement at our company and
individual level by linking compensation to such achievement. Consistent with
this philosophy, the Compensation Committee has set the following objectives for
our executive compensation program:

- - Motivate officers to achieve desired company performance goals by
rewarding such achievements.

- - Provide a program of compensation that is competitive with comparable
companies to enable us to attract and retain key executive talent.

- - Align the interests of our executives with the interests of our
shareholders by linking compensation to our performance and by
providing our executives with long-term opportunities for stock
ownership.

In determining its recommendations as to the compensation of our executives, the
Compensation Committee considers factors, such as company performance, both in
isolation and in comparison to growth companies of comparable size, development
and complexity; the individual performance of each executive officer; historical
compensation levels at our company; the overall competitive environment for
executives and the level of compensation necessary to attract and retain the
level of key executive talent we desire. The Compensation Committee places
primary emphasis on company performance rather than individual performance as
measured against goals approved by the Compensation Committee. In analyzing
these factors, the Compensation Committee may from time to time review
competitive compensation data gathered in comparative surveys or collected by
independent consultants.

EXECUTIVE COMPENSATION PROGRAM COMPONENTS

The three components of Select Comfort's executive compensation program are base
salary, annual cash incentive bonuses, and long-term incentive opportunities
under our stock option and incentive plans. Each element of the compensation
program is discussed in greater detail below.

Base Salary. The Compensation Committee's recommendations regarding the base
salary of each of our executive officers, including the compensation of the
President and Chief Executive Officer, are based on a number of factors,
including the executive officer's experience and qualifications, the potential
impact of the individual on our performance, the level of skill and
responsibility required by the individual's position and the other factors
described above. Base salaries are reviewed annually, and the Compensation
Committee seeks to set executive officer base salaries at moderately to
aggressively competitive levels in

20
<PAGE> 23

relation to the companies with which we compete for executives.

Annual Management Incentive Bonus. Our annual management incentive bonus program
is designed to provide a direct financial incentive to our executive officers,
including the President and Chief Executive Officer, for the achievement of
specific company performance goals. Generally, at the beginning of each year,
the Compensation Committee establishes a maximum annual bonus, as a percentage
of base salary, that the President and Chief Executive Officer and the other
executive officers are eligible to receive and the goals against which
performance will be measured in determining annual bonuses after the conclusion
of the year. In past years, these goals have consisted of financial and
non-financial goals, established to motivate the executive officers to achieve
milestones that would impact our long-term value.

Long-Term Incentive Compensation. The Compensation Committee makes long-term
incentive compensation available to our executive officers, as well as
substantially all other employees of Select Comfort, through the grant of stock
options approved by the Board of Directors. The purpose of stock option grants
is to advance the interests of our company and its shareholders by enabling us
to attract and retain persons of ability to perform services for us, including
persons performing services for us as executive officers. By granting stock
options to executive officers and other employees, the Compensation Committee
seeks to align the long-term interests of these individuals with those of our
shareholders by creating a strong and direct nexus between compensation and
shareholder return and to enable executive officers and key managers to develop
and maintain a significant ownership position in our company. The Compensation
Committee determines the number of options and the terms and conditions of such
options based on certain factors, including the past performance of the
executive officer, the executive officer's potential impact on the achievement
of our objectives, past grants or awards of stock-based compensation and on
comparative compensation data regarding option grants by companies within the
specialty retail industry as well as within a broader group of companies of
comparable size and complexity. Additionally, options may be granted to an
executive officer as an incentive at the time the executive officer joins our
company.

All options have an exercise price equal to 100% of the fair market value of the
common stock on the date of grant. In general, options become exercisable in as
nearly equal as possible monthly increments over a 36-month period and remain
exercisable for a period of 10 years from the date of grant, provided the
individual continues to be employed by us. Alternatively, some options are
"performance-based" and become exercisable upon the achievement of certain
performance goals, including the price of our common stock.

In 1999, the Compensation Committee recommended and the Board of Directors
approved the grant of options to all of our executive officers and to our key
managers. The primary purposes of the 1999 stock option grants was to provide an
incentive to newly hired executive officers and managers, to retain previously
employed executive officers and managers, and to align the interests of all such
executive officers and key managers with the interests of our shareholders.

<PAGE> 24

CHIEF EXECUTIVE OFFICER COMPENSATION

During fiscal 1999, three different people served in the CEO capacity for
different parts of the year. Mr. Hawthorne served as President and CEO from the
beginning of the year through April 19, 1999 and during that period received his
base salary at the annual rate of $350,000 that was established in 1998. Mr.
McAthie served as President and CEO from April 19, 1999 through July 9, 1999. At
the time of his promotion to President and CEO, Mr. McAthie's annual base salary
was increased from $250,000 to $315,000 based on the increased level of
responsibility and historical compensation levels at our company. Mr. McAthie
was also granted options to purchase (i) up to 30,000 shares vesting over 36
months, (ii) 50,000 shares vesting at such time that the trading price of Select
Comfort common stock exceeded $50.00 per share for 30 consecutive trading days
and (iii) 150,000 shares vesting at such time that the trading price of Select
Comfort common stock exceeded $100.00 per share for 30 consecutive trading days.
These options were granted in recognition of the increased level of
responsibility assumed by Mr. McAthie and in order to align the interests of Mr.
McAthie with the interests of our shareholders. Mr. McAthie resigned as of July
9, 1999 and these option grants lapsed unexercised. Mr. Hopf served as interim
President and CEO from and after July 14, 1999 pending the search for Mr.
McAthie's successor. Mr. Hopf did not serve as, and was not compensated as, an
employee of our company. The Compensation Committee agreed to grant to St. Paul
Venture Capital V, LLC, an affiliate of Mr. Hopf's employer, St. Paul Venture
Capital, Inc., 10,000 options per month in consideration for the performance by
Mr. Hopf of the function of interim President and CEO. None of the foregoing
persons performing the duties of CEO during 1999 became eligible for or received
any incentive bonus compensation for service as our Chief Executive Officer.

SECTION 162(M)

Section 162(m) of the Internal Revenue Code limits the deductibility of certain
compensation paid to the chief executive officer and each of the four other most
highly compensated executives of a publicly held corporation to $1,000,000. In
1999, we did not pay "compensation" within the meaning of Section 162(m) to such
executive officers in excess of $1,000,000. The $1,000,000 limit on
deductibility does not apply to compensation that meets certain requirements for
qualified performanced-based compensation as further described in the Internal
Revenue Code. The amendment to our 1997 Stock Incentive Plan submitted for
approval by shareholders at the Annual Meeting is designed to permit stock
options granted under the plan to qualify as deductible performance-based
compensation under the Internal Revenue Code (assuming all other applicable
requirements are satisfied). The Compensation Committee expects to review
periodically other compensation programs for executives subject to Section
162(m) limitations, and consider Section 162(m) modifications to such programs
in light of the materiality of potential deductibility benefits and the
potential impact of such modifications on other compensation objectives. Because
the Compensation Committee seeks to maintain flexibility in accomplishing our
compensation goals, however, it has not adopted a policy that all compensation
must be fully deductible.

Compensation Committee

Patrick A. Hopf
William J. Lansing
Ervin R. Shames

<PAGE> 25

COMPARATIVE STOCK PERFORMANCE

The graph below compares, for the period from December 3, 1998, the
date of our initial public offering, to January 1, 2000, the total cumulative
shareholder return on Select Comfort common stock to the total cumulative return
on The Nasdaq Stock Market (U.S.) Index and the Standard & Poor's 400 Retail
(Specialty) Index. The graph assumes a $100 investment in Select Comfort common
stock, The Nasdaq Stock Market (U.S.) Index and the Standard & Poor's 400 Retail
(Specialty) Index on December 3, 1998 and the reinvestment of all dividends.

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG SELECT COMFORT CORPORATION, THE STANDARD & POOR'S 400
RETAIL (SPECIALTY) INDEX
AND THE NASDAQ STOCK MARKET (U.S.) INDEX
DECEMBER 3, 1998 TO JANUARY 1, 2000

COMPARISON OF 13 MONTH CUMULATIVE TOTAL RETURN
AMONG SELECT COMFORT CORPORATION,
THE NASDAQ STOCK MARKET (U.S.) INDEX AND A PEER GROUP

<TABLE>
<CAPTION>
Standard and Poor's The Nasdaq Stock
Select Comfort 400 Retail Market (U.S.)
Corporation (Specialty) Index Index
-------------- ------------------- ----------------
<S> <C> <C> <C>
December 3, 1998 100 100 100
January 2, 1999 156 124 109
January 1, 2000 24 139 198
</TABLE>

* $100 INVESTED ON 12/3/98 IN STOCK OR INDEX.
INCLUDING REINVESTMENT OF DIVIDENDS.

<PAGE> 26

CERTAIN TRANSACTIONS

DIRECTOR RELATIONSHIPS

Patrick A. Hopf, Chairman of the Board of Directors of Select Comfort, is the
President of St. Paul Venture Capital, Inc. and the Managing General Partner of
St. Paul Venture Capital IV, LLC and St. Paul Venture Capital V, LLC. St. Paul
Venture Capital IV, LLC, St. Paul Venture Capital V, LLC and St. Paul Venture
Capital Affiliates Fund I, LLC, for each of which funds, St. Paul Venture
Capital, Inc. is the manager, and St. Paul Fire and Marine Insurance Co. are
shareholders of our company. Mr. Hopf was elected to the Board in connection
with the purchase agreement under which our Series A preferred stock was
originally issued in 1991.

Christopher P. Kirchen, a director of Select Comfort, is a general partner of
Consumer Venture Associates II, L.P., which is the general partner of Consumer
Venture Partners II, L.P., a shareholder of our company. Mr. Kirchen was elected
to the Board in connection with the purchase agreement under which our Series B
preferred stock was originally issued in 1991.

Jean-Michel Valette, a director of Select Comfort, 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 our company and a related party to Hambrecht & Quist LLC. Mr. Valette was
elected to the Board in connection with the purchase agreement under which our
Series D preferred stock was originally issued in 1994. Hambrecht & Quist LLC
was one of the underwriters of our initial public offering completed in December
1998.

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

Several holders of our common stock and warrants to purchase shares of our
common stock, including certain directors and more than 5% shareholders, have
demand and incidental registration rights covering such shares pursuant to a
certain Amended and Restated Registration Rights Agreement dated December 28,
1995, as amended, among Select Comfort and the other parties thereto.

EMPLOYMENT AND CONSULTING AGREEMENTS

In April 1996, we entered into a consulting agreement with Ervin R. Shames, a
director and former Chairman of the Board of Directors of Select Comfort,
pursuant to which Mr. Shames rendered consulting services for us through the end
of March 1999. In May 1999, we entered into a consulting agreement with Lawrence
P. Murphy, a former director of Select Comfort, pursuant to which Mr. Murphy
rendered consulting services for us through January 2000. See "Election of
Directors--Director Compensation."

For a discussion of the employment agreements entered into by us and the Named
Executive Officers, see "Executive Compensation and Other Benefits--Employment
and Consulting Agreements."

MONOGRAM BANK CREDIT CARD PROGRAM

General Electric Capital Corporation, one of our principal shareholders, which
controls Monogram Credit Card Bank of Georgia (the "Bank"), had an indirect
interest in our consumer credit arrangements with the Bank in 1999. Under these
arrangements, the Bank offered to our qualified customers an unsecured revolving
credit arrangement to finance purchases from us. For all purchases financed
under these arrangements, the Bank paid us an amount equal to the total amount
of purchases net of promotional related discounts and less amounts retained for
limited recourse on bad debts.

<PAGE> 27

Upon commencement of our consumer credit arrangements with the Bank, the Bank
paid us a $500,000 incentive bonus, and we paid the Bank $500,000 as an amount
to be retained by the Bank for returned products.

Effective in July 1999, we terminated this consumer credit arrangement with the
Bank. A successor to the Bank purchased substantially all of the outstanding
receivables from the Bank in July 1999. As a result of this transaction, we
received $9.8 million that had been retained by the Bank as security and
included in our accounts receivable.

INVESTMENT IN SLEEPTEC, INC.

In May 1999, we entered into a Series C Preferred Stock Purchase Agreement
pursuant to which we invested $2,000,000 in SleepTec, Inc., a developer and
manufacturer of sofa sleepers with air supported mattresses, in exchange for 57%
of the Series C Convertible Preferred Stock of SleepTec, which represented
approximately 10.3% of the fully diluted equity of SleepTec at that time. In
December 1999, the Series C Convertible Preferred Stock of SleepTec was split on
a 1.45714 for 1 basis. As a result of this stock split, our investment in the
Series C Convertible Preferred Stock of SleepTec currently represents
approximately 13.55% of the fully diluted equity of SleepTec. SleepTec is the
developer and manufacturer of the sofa sleepers with air supported mattresses
that we intend to offer through our distribution channels beginning later this
year. In fiscal 1999, we purchased products in the amount of $93,474 from
SleepTec.

Affiliates of St. Paul Venture Capital, Inc. own a majority of the outstanding
capital stock of SleepTec. Patrick A. Hopf, the Chairman of the Board of
Directors of Select Comfort, is the President of St. Paul Venture Capital, Inc.
and a member of the Board of Directors of SleepTec, Inc. All of the terms of our
relationship with SleepTec are determined through arm's-length negotiations and
management believes that all such terms are no less favorable than terms
available from any unrelated party.

25
<PAGE> 28

AMENDMENT TO 1997 STOCK INCENTIVE PLAN

(PROPOSAL 2)

PROPOSED AMENDMENT

On March 28, 1997, our Board of Directors adopted the Select Comfort Corporation
1997 Stock Incentive Plan (the "1997 Plan"), which our shareholders approved on
March 27, 1998. On March 2, 2000, the Board amended the 1997 Plan, subject to
shareholder approval, to (i) to impose a limit on the number of options that may
be granted to any participant during any fiscal year in the amount of 600,000
shares and (ii) increase the number of shares of common stock reserved for
issuance under the 1997 Plan by 1,000,000, from 2,500,000 shares to 3,500,000
shares. You are being asked to approve this amendment at the Annual Meeting.

PURPOSE OF THE AMENDMENT

Providing stock option grants and other incentive awards under the 1997 Plan is
an important element in the overall success of Select Comfort. In general, the
Board believes that equity-based incentives align the interests of our
management and employees with those of our shareholders. In addition, providing
stock option grants and other incentive awards under the 1997 Plan is an
important strategy for attracting and retaining the type of high-quality
executives, employees and advisors the Board believes necessary for Select
Comfort to achieve its goals. Given the intense competition for such personnel,
the Board believes that its ability to offer competitive compensation packages,
including those with equity-based incentive components, is particularly
important in attracting and retaining qualified candidates.

The addition of a limit on the number of options that may be granted to any
participant during any fiscal year is designed to permit options granted under
the Plan to qualify for an exemption from the provisions of Section 162(m) of
the Internal Revenue Code (the "Code"). Section 162(m) of the Code limits the
deductibility of certain compensation paid to the CEO and each of the four other
most highly compensated executives. However, certain types of "performance-based
compensation" are excepted from this limit, and the amendment to the Plan
proposed hereby is designed to allow options granted under the Plan to qualify
for an exception from the Section 162(m) limitation for performance-based
compensation.

A general description of the basic features of the 1997 Plan is outlined below.
Unless otherwise indicated, the following summary of the principal provisions of
the 1997 Plan assumes the approval of the proposed amendment to the 1997 Plan.
This summary is qualified in its entirety by reference to the actual text of the
1997 Plan, a copy of which you may obtain from us at the address set forth at
the beginning of this proxy statement.

SUMMARY OF THE 1997 PLAN

INTRODUCTION. The 1997 Plan permits us to grant options, stock appreciation
rights, restricted stock awards, performance units and stock bonuses.

PURPOSE OF THE 1997 PLAN. The 1997 Plan's purpose is to advance our interests
and the interests of our shareholders by enabling us to attract and retain
talented persons by:

- - providing an incentive to such individuals through equity participation
in our company; and

- - rewarding such individuals who contribute to the achievement of our
economic objectives.

<PAGE> 29

ELIGIBLE PARTICIPANTS. All employees (including officers and directors who are
also employees) of Select Comfort or any subsidiary and any non-employee
directors, consultants and independent contractors of Select Comfort or any
subsidiary who, in the judgment of the Compensation Committee, have contributed,
are contributing or are expected to contribute to the achievement of our
economic objectives are eligible to participate in the 1997 Plan. On April 1,
2000, there were approximately 1,954 employees eligible to be granted incentive
awards under the 1997 Plan.

Participants may be granted one or more incentive awards, alone or in
combination with other awards. The incentive awards will always be subject to
whatever terms and conditions the Compensation Committee determines, provided
such terms and conditions are consistent with the 1997 Plan.

ADMINISTRATION. The Compensation Committee of the Board of Directors administers
the 1997 Plan. The Compensation Committee has the authority to determine all
provisions of incentive awards as long as they are consistent with the terms of
the 1997 Plan. The Compensation Committee also has the authority to amend or
modify the terms of any outstanding incentive award in any manner. Any such
amendment or modification, however, must be permitted by the 1997 Plan and may
not adversely affect any participant's rights without his or her consent. Each
determination, interpretation or other action of the Committee will be
conclusive and binding for all purposes on all persons.

STOCK SUBJECT TO THE 1997 PLAN. Prior to the proposed amendment of the 1997 Plan
described in this proxy statement, there were 2,500,000 shares of common stock
authorized for issuance under the 1997 Plan. The amendment to the 1997 Plan
proposed hereby would increase the number of shares authorized under the 1997
Plan from 2,500,000 to 3,500,000 shares. As of March 1, 2000, we had granted
options to purchase an aggregate of 2,995,875 shares of common stock under the
1997 Plan, 403,367 of which had been exercised, 759,557 of which had been
cancelled, and 1,832,951 of which remain outstanding. As of March 1, 2000,
263,682 shares of common stock were available for future grants under the 1997
Plan. We have also agreed to grant options to purchase up to 600,000 shares to
William R. McLaughlin under the 1997 Plan, subject to shareholder approval of
the increase in the number of shares available under the 1997 Plan. If this
proposal is approved by the shareholders at the Annual Meeting, after taking
into account the 600,000 options committed to Mr. McLaughlin, 663,682 shares of
common stock will be available for future grants.

The following points describe how the number of shares of common stock available
for issuance under the 1997 Plan is determined at any point in time.

- - Outstanding incentive awards -- reduces the maximum number of shares
available for issuance.

- - Shares issued upon exercise of outstanding options -- reduces the
maximum number of shares available for issuance.

- - Incentive award lapses or expires unexercised or unvested-- shares
become available again for issuance.

- - Option is forfeited or terminated unexercised or unvested -- shares
become available again for issuance.

- - Restricted stock award is forfeited -- shares do not become available
for further issuance under the 1997 Plan.

- - We pay for the incentive award, in cash, not common stock -- shares
become available again for issuance.

OPTIONS. An option provides the optionee with the opportunity to purchase shares
of common stock in a specified amount, at a predetermined price for a specific
period of time. Incentive options must be granted with an exercise price equal
to at least the fair market value of the common stock on the date of grant,
which is defined in the 1997 Plan to equal the average of the high and low
trading prices of the common stock on the Nasdaq National Market on the date

27
<PAGE> 30

of grant. On March 1, 2000, the average of the high and the low trading prices
as reported on the Nasdaq National Market was $5.61 per share. Options will
become exercisable at such times and in such installments as may be determined
by the Compensation Committee, provided that options may not be exercisable
after 10 years from their date of grant.

The exercise price of options must be paid in cash, except that the Compensation
Committee may allow payment to be made (in whole or in part) by delivery of a
"broker exercise notice" (pursuant to which the broker or dealer is instructed
to sell enough shares or loan the optionee enough money to pay the exercise
price and to remit such sums to us), a promissory note or by transfer of shares
of common stock (either previously owned by the participant or to be acquired
upon option exercise). The aggregate fair market value of shares of common stock
with respect to which incentive stock options within the meaning of Section 422
of the Internal Revenue Code become exercisable for the first time by a
participant in any calendar year may not exceed $100,000. Any incentive options
in excess of this amount will be treated as non-statutory options.

STOCK APPRECIATION RIGHTS. A stock appreciation right is a right to receive a
payment from us in the form of common stock, cash or a combination of both,
equal to the difference between the fair market value of one or more shares of
common stock and the exercise price of such shares. The exercise price of a
stock appreciation right will be determined by the Compensation Committee, but
may not be less than the fair market value of the common stock on the date of
grant. Stock appreciation rights become exercisable at such times and in such
installments as may be determined by the Compensation Committee, except that
stock appreciation rights may not become exercisable prior to six months from
their date of grant and may not be exercisable after 10 years from their date of
grant. A holder of a stock appreciation right has no rights as a shareholder
with respect to any shares subject to a stock appreciation right unless and
until he or she exercises the right and the Compensation Committee decides to
pay the holder in the form of common stock.

RESTRICTED STOCK AWARDS. A restricted stock award is an award of shares of
common stock that cannot be transferred to any person for some predetermined
period of time, and may have to be returned to us upon the occurrence of certain
conditions. The Compensation Committee may impose such restrictions or
conditions to the vesting of restricted stock awards as it deems appropriate,
including that the participant remain in the continuous employ or service with
our company for a certain period or that the participant or our company satisfy
certain performance goals or criteria. No restricted stock award may vest prior
to six months from its date of grant. Unless the Compensation Committee
determines otherwise, any dividends or distributions paid with respect to shares
of common stock subject to the unvested portion of a restricted stock award will
be subject to the same restrictions as the shares to which such dividends or
distributions relate.

<PAGE> 31

PERFORMANCE UNITS. A performance unit is a right to receive cash, common stock,
or a combination of both, upon the achievement of established performance goals.
A performance unit will vest at such times and in such installments as may be
determined by the Compensation Committee. The Compensation Committee may impose
such restrictions or conditions to the vesting of performance units as it deems
appropriate, including that the participant remain in the continuous employ or
service with our company for a certain period or that the participant or our
company satisfy certain performance goals or criteria.

STOCK BONUSES. A stock bonus is an award of common stock upon the achievement of
established performance goals.

EFFECT OF BREACH OF CONFIDENTIALITY OR NON-COMPETE AGREEMENT. Without notice,
the Compensation Committee may immediately terminate all of a participant's
rights under the 1997 Plan and his or her incentive awards if such participant
materially breaches the terms of any confidentiality or non-compete agreement
entered into with Select Comfort or any subsidiary, whether such breach occurs
before or after the participant voluntarily terminates his or her service with
our company.

EFFECT OF CHANGE IN CONTROL. See "Executive Compensation and Other Benefits --
Change in Control Arrangements" for discussion regarding the effects of a
"change in control" on incentive awards granted under the 1997 Plan.

EFFECT OF TERMINATION OF EMPLOYMENT OR SERVICE. In the event a participant's
employment or other service with us is terminated by reason of death, disability
or retirement,

- - all outstanding option and stock appreciation rights will remain
exercisable to the extent then exercisable for a period of one year
after such termination (three months in the case of retirement), but in
no event after their original expiration date,

- - all restricted stock awards then held by the participant will become
fully vested and nonforfeitable, and

- - all performance units and stock bonuses then held by the participant
will vest or continue to vest according to their original terms.

In the event a participant's employment or other service with our company is
terminated for any other reason, other than for cause, all outstanding option
and stock appreciation rights will remain exercisable to the extent then
exercisable for a period of three months after such termination.

In the event a participant's employment or other service with our company is
terminated for cause,

- - all outstanding option and stock appreciation rights will immediately
terminate without notice,

- - all restricted stock awards that have not vested as of such termination
will be terminated and forfeited, and

- - all performance units and stock bonuses then held by the participant
will vest or continue to vest according to their original terms.

Select Comfort may, in its discretion, modify these post-termination provisions,
provided that no option or stock appreciation right may remain exercisable
beyond its expiration date.

AMENDMENT OF 1997 PLAN. The Board of Directors has the following powers with
respect to the 1997 Plan:

- - The Board may suspend or terminate all or a portion of the 1997 Plan at
any time.

- - The Board may amend the 1997 Plan to conform to any change in
applicable laws or regulations.

- - The Board may amend the 1997 Plan in whatever manner it deems to be in
our best interests.

<PAGE> 32

The Board may not, however, make an amendment to the 1997 Plan without
shareholder approval if shareholder approval is required under Rule 16(b)(3)
under the Securities Exchange Act of 1934, Section 422 of the Internal Revenue
Code or the rules of the Nasdaq Stock Market. Furthermore, the Board cannot make
any modification to the 1997 Plan that would adversely affect outstanding
incentive awards without the consent of the affected participants.

TERMINATION. The 1997 Plan will terminate on March 28, 2007, unless terminated
earlier by the Board. No incentive award may be granted after such termination.
Incentive awards outstanding upon termination of the 1997 Plan may continue to
be exercised, or become free of restrictions, in accordance with their terms.

FEDERAL INCOME TAX CONSEQUENCES

The following description of federal income tax consequences is based on current
statutes, regulations and interpretations. The description does not include
foreign, state or local income tax consequences. In addition, the description is
not intended to address specific tax consequences applicable to directors,
executive officers or greater than 10% shareholders of our company or to any
individual participant who receives an incentive award under the 1997 Plan.

INCENTIVE STOCK OPTIONS. There will not be any federal income tax consequences
to either the participant or us as a result of the grant to an employee of an
incentive stock option under the 1997 Plan. The exercise by a participant of an
incentive stock option also will not result in any federal income tax
consequences to us or the participant, except that (i) an amount equal to the
excess of the fair market value of the shares acquired upon exercise of the
incentive stock option, determined at the time of exercise, over the amount paid
for the shares by the participant will be includable in the participant's
alternative minimum taxable income for purposes of the alternative minimum tax,
and (ii) the participant may be subject to an additional excise tax if any
amounts are treated as excess parachute payments (see explanation below).
Special rules will apply if previously acquired shares of common stock are
permitted to be tendered in payment of an option exercise price.

If the participant disposes of the incentive stock option shares acquired upon
exercise of the incentive stock option, the federal income tax consequences will
depend upon how long the participant has held the shares. If the participant
does not dispose of the shares within two years after the incentive stock option
was granted, nor within one year after the participant exercised the incentive
stock option, then the participant will recognize a long-term capital gain or
loss. The amount of the long-term capital gain or loss will be equal to the
difference between (i) the amount the participant realized on disposition of the
shares, and (ii) the option price at which the participant acquired the shares.
We are not entitled to any compensation expense deduction under these
circumstances.

If the participant does not satisfy both of the above holding period
requirements, then the participant will be required to report as ordinary
income, in the year the participant disposes of the shares, the amount by which
the lesser of (i) the fair market value of the shares at the time of exercise of
the incentive stock option, or (ii) the amount realized on the disposition of
the shares, exceeds the option price for the shares. We will be entitled to a
compensation expense deduction in an amount equal to the ordinary income
includable in the taxable income of the participant. This compensation income
may be subject to withholding. The remainder of the gain recognized on the
disposition, if any, or any loss recognized on the disposition, will be treated
as long-term or short-term capital gain or loss, depending on the holding
period.

NON-STATUTORY STOCK OPTIONS. Neither we nor the participant incurs any federal
income tax consequences as a result of the grant of a non-statutory stock
option. Upon exercise of a non-statutory stock option, a participant will
recognize ordinary income, subject to withholding, on the date of exercise in an
amount equal to the difference between (i) the

<PAGE> 33

fair market value of the shares purchased, determined on the date of exercise,
and (ii) the consideration paid for the shares. The participant may be subject
to an additional excise tax if any amounts are treated as excess parachute
payments (see explanation below). Special rules will apply if previously
acquired shares of common stock are permitted to be tendered in payment of an
option exercise price.

At the time of a subsequent sale or disposition of any shares of common stock
obtained upon exercise of a non-statutory stock option, any gain or loss will be
treated as long-term or short-term capital gain or loss, depending on the
holding period from the date of exercise.

In general, we will be entitled to a compensation expense deduction in
connection with the exercise of a non-statutory stock option for any amounts
includable in the taxable income of the participant as ordinary income, provided
that we comply with any applicable withholding requirements.

STOCK APPRECIATION RIGHTS. A participant who receives a stock appreciation right
will not recognize any taxable income at the time of the grant. Upon the
exercise of a stock appreciation right, the participant will realize ordinary
income in an amount equal to the cash and the fair market value of any shares of
common stock received by the participant. Provided that proper withholding is
made, we will be entitled to a compensation expense deduction for any amounts
includable by the participant as ordinary income.

RESTRICTED STOCK AWARDS. With respect to shares issued pursuant to a restricted
stock award that are not subject to a substantial risk of forfeiture, a
participant will include as ordinary income in the year of receipt an amount
equal to the fair market value of the shares received on the date of receipt.
With respect to shares that are subject to a substantial risk of forfeiture, a
participant may file an election under Section 83(b) of the Internal Revenue
Code within 30 days after the shares are received to include as ordinary income
in the year of receipt an amount equal to the fair market value of the shares
received on the date of receipt (determined as if the shares were not subject to
any risk of forfeiture, we will receive a corresponding tax deduction, provided
that proper withholding is made. If a Section 83(b) election is made, the
participant will not recognize any additional income when the restrictions on
the shares issued in connection with the stock award lapse. At the time any such
shares are sold or disposed of, any gain or loss will be treated as long-term or
short-term capital gain or loss, depending on the holding period from the date
of receipt of the restricted stock award.

A participant who does not make a Section 83(b) election within 30 days of the
receipt of a restricted stock award that is subject to a substantial risk of
forfeiture will recognize ordinary income at the time of the lapse of the
restrictions in an amount equal to the then fair market value of the shares. We
will receive a corresponding tax deduction, provided that proper withholding is
made. At the time of a subsequent sale or disposition of any shares of common
stock issued in connection with a restricted stock award as to which the
restrictions have lapsed, any gain or loss will be treated as long-term or
short-term capital gain or loss, depending on the holding period from the date
the restrictions lapse.

PERFORMANCE UNITS. A participant who receives a performance unit will not
recognize any taxable income at the time of the grant. Upon settlement of the
performance unit, the participant will realize ordinary income in an amount
equal to the cash and the fair market value of any shares of common stock
received by the participant. Provided that proper withholding is made, we would
be entitled to a compensation expense deduction for any amounts includable by
the participant as ordinary income.

STOCK BONUSES. With respect to shares issued pursuant to a stock bonus, a
participant will include as ordinary income in the year of receipt an amount
equal to the fair market value of the shares received as of the date of receipt.
We

<PAGE> 34

will receive a corresponding tax deduction, provided that proper withholding
is made. At the time of a subsequent sale or disposition of any shares of common
stock issued in connection with a stock bonus, any gain or loss will be treated
as long-term or short-term capital gain or loss, depending on the holding period
from the date the shares were received.

EXCISE TAX ON PARACHUTE PAYMENTS. The Internal Revenue Code also imposes a 20%
excise tax on the recipient of "excess parachute payments," as defined in the
Internal Revenue Code and denies tax deductibility to us on excess parachute
payments. Generally, parachute payments are payments in the nature of
compensation to employees of a company who are officers, shareholders or highly
compensated individuals, which payments are contingent upon a change in
ownership or effective control of the company, or in the ownership of a
substantial portion of the assets of the company. For example, acceleration of
the exercisability of options, or the vesting of restricted stock awards, upon a
change in control of our company may constitute parachute payments, and in
certain cases, "excess parachute payments."

SECTION 162(M). Under Section 162(m) of the Internal Revenue Code, the
deductibility of certain compensation paid to the chief executive officer and
each of the four other most highly compensated executives of a publicly held
corporation is limited to $1,000,000. Compensation for this purpose generally
includes any items of compensation expense described above in connection with
incentive awards under the 1997 Plan. However, certain types of compensation are
excepted from this limit, including compensation that qualifies as
"performance-based compensation." As a result of the amendment of the 1997 Plan
as contemplated hereby to impose an annual limit on the number of options
granted to any individual, assuming all other applicable requirements are
satisfied, any compensation expense resulting from the exercise of options
subsequently granted under the 1997 Plan with exercise prices equal to (or
greater than) the fair market value of the common stock on the date of grant
should qualify as "performance-based compensation" excepted from the limit of
Section 162(m). However, compensation expense in connection with any other
incentive awards under the 1997 Plan will be subject to this limit.

INCENTIVE AWARDS GRANTED UNDER THE 1997 PLAN

Information about options granted in fiscal 1999 under the 1997 Plan to the
Chief Executive Officer of Select Comfort and the four other most highly
compensated executive officers of Select Comfort during fiscal 1999 can be found
in the table under the heading "Option Grants in Last Fiscal Year" on page 17 of
this proxy statement. In fiscal 1999, options to purchase an aggregate of
493,000 shares were granted to all current executive officers as a group,
options to purchase 60,000 shares were granted to current directors who are not
executive officers as a group, and options to purchase an aggregate of 1,857,100
shares were granted to all employees (excluding current executive officers) as a
group under the 1997 Plan.

No information can be provided with respect to options or awards that may be
granted in the future under the 1997 Plan. Such awards are within the discretion
of the Board of Directors and the Compensation Committee. Neither the Board of
Directors nor the Compensation Committee has determined future awards or who
might receive them.

BOARD RECOMMENDATION

The Board of Directors recommends that the shareholders vote FOR approval of the
amendment to the 1997 Plan to (i) to impose a limit on the number of options
that may be granted to any participant during any fiscal year in the amount of
600,000 shares and (ii) increase the number of shares of common stock reserved
for issuance by 1,000,000, from 2,500,000 shares to 3,500,000 shares. The
affirmative vote of the holders of a majority of the shares of common stock
present and entitled to vote in

<PAGE> 35

person or by proxy on this matter at the Annual Meeting, and at least a majority
of the minimum number of votes necessary for a quorum, is necessary for
approval. Unless a contrary choice is specified, proxies solicited by the Board
will be voted FOR approval of the amendment to the 1997 Plan.

<PAGE> 36

ADOPTION OF
1999 EMPLOYEE STOCK PURCHASE PLAN

(PROPOSAL 3)

On June 10, 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan"), subject to approval by the shareholders of
the Company. The Purchase Plan allows eligible employees of Select Comfort and
its subsidiaries to purchase shares of common stock on favorable terms through
payroll deductions.

Under the Purchase Plan, Select Comfort conducts a series of offerings of its
common stock, each continuing for a period of three months (the "Offering
Period") and each beginning on January 1, April 1, July 1 and October 1 of each
year, as the case may be (the "Offering Commencement Date"), and ending on the
following March 31, June 30, September 30 and December 31, as the case may be
(the "Offering Termination Date"). On each Offering Commencement Date, each
eligible participating employee (the "Participant") in the Purchase Plan will be
granted, by operation of the Purchase Plan, an option (a "Purchase Plan Option")
to purchase as many full shares of common stock as can be purchased with payroll
deductions authorized by the Participant and credited to the Participant's
account during that Offering Period.

The purpose of the Purchase Plan is to advance the interests of Select Comfort
and its shareholders by allowing employees of Select Comfort and its
subsidiaries the opportunity to acquire an ownership interest in Select Comfort
through these purchases.

The major features of the Purchase Plan are summarized below, which summary is
qualified in its entirety by reference to the actual text of the Purchase Plan,
a copy of which may be obtained from Select Comfort.

SUMMARY OF THE PURCHASE PLAN

GENERAL. Any employee (including any executive officer) of Select Comfort or any
participating subsidiary, other than an employee whose customary employment is
five months or less per calendar year, who has been continuously employed by
Select Comfort or a subsidiary prior to the Offering Commencement Date for an
Offering Period will be eligible to participate in that Offering Period.

The maximum number of shares of common stock available for issuance under the
Purchase Plan is 500,000 shares. Any shares of common stock that are subject to
a Purchase Plan Option that terminates unexercised will automatically become
available again for issuance under the Purchase Plan. The number and type of
securities subject to outstanding Purchase Plan Options and the exercise price
of outstanding Purchase Plan Options will be appropriately adjusted in the event
of any common stock dividend, split-up, recapitalization, merger, consolidation,
combination or exchange or other change in the corporate structure or shares of
Select Comfort. If the total number of shares that would otherwise be issuable
on any Offering Termination Date exceeds the number of shares then available
under the Purchase Plan (after deduction of all shares for which Purchase Plan
Options have been exercised or are then outstanding), Select Comfort will make a
pro rata allocation of the shares remaining available for Purchase Plan Option
grants in as uniform and equitable a manner as it deems appropriate.

Following shareholder approval of the Purchase Plan, the Purchase Plan will be
administered by the Compensation Committee (the "Committee") of the Board.
Members of the Committee are appointed from time to time by the Board, serve at
the pleasure of the Board, and may resign at any time upon written notice to the
Board. The

<PAGE> 37

Committee has the authority to make, administer and interpret such rules and
regulations as it deems necessary to administer the Purchase Plan.

PARTICIPATION. An eligible employee may become a Participant in the Purchase
Plan by completing an enrollment form authorizing payroll deductions on the form
provided by Select Comfort and filing it with the Human Resources Department not
later than the 15th day of the month immediately preceding the Offering
Commencement Date of the first Offering Period in which the Participant wishes
to participate. Payroll deductions for a Participant will begin with the first
payroll following the applicable Offering Commencement Date and will continue
until the termination of the Purchase Plan, subject to withdrawal by the
Participant at any time as described below. An otherwise eligible employee will
not be granted a Purchase Plan Option under the Purchase Plan if, immediately
after the grant, the Participant would own shares of common stock and/or hold
outstanding options to purchase shares of common stock possessing 5% or more of
the total combined voting power or value of all classes of stock of Select
Comfort or of any subsidiary. As of March 1, 2000, approximately 1,900 persons
were eligible to participate in the Purchase Plan.

PAYROLL DEDUCTIONS. By completing and filing a participation form, a Participant
elects to have payroll deductions made from the Participant's total compensation
on each payday during the Offering Period at a rate equal to a whole percentage
from 1% to 15% of the total compensation that he or she would have received on
the payday (or such other minimum or maximum percentages as the Committee may
from time to time establish). No increases or decreases in the amount of payroll
deductions for a Participant may be made during an Offering Period. A
Participant may increase or decrease the rate of the Participant's payroll
deductions under the Purchase Plan for subsequent Offering Periods by completing
an amended enrollment form and filing it no later than the 15th day of the month
immediately preceding the Offering Commencement Date of the Offering Period for
which the increase or decrease is to become effective. A Participant may
discontinue participation in the Purchase Plan at any time as described below.

The funds accumulated through a Participant's payroll deductions under the
Purchase Plan are credited to an account established under the Purchase Plan for
the Participant. These funds are held by Select Comfort as part of its general
assets, usable for any corporate purpose, and Select Comfort is not obligated to
keep these funds separate from its other corporate funds. Participants will not
receive any interest from Select Comfort for the funds accumulated from their
payroll deductions under the Purchase Plan and may not make any separate cash
payment or contribution to such account.

PURCHASE OF SHARES. On each Offering Commencement Date, each Participant is
granted, by operation of the Purchase Plan, a Purchase Plan Option to purchase
as many full shares of common stock as he or she will be able to purchase with
the payroll deductions credited to the Participant's account during the Offering
Period plus the balance (if any) carried forward from the preceding Offering
Period. Unless a Participant withdraws from the Purchase Plan as described
below, the Participant's Purchase Plan Option will be exercised automatically on
the Offering Termination Date for the purchase of the number of full shares of
common stock that the accumulated payroll deductions in the Participant's
account on the Offering Termination Date will purchase at the applicable price,
determined in the manner described below. The number of shares of common stock
that may be purchased under the Purchase Plan, however, will be limited as
follows: (i) no Participant may purchase more than 2,000 shares of common stock
under the Purchase Plan in any given Offering Period; and (ii) no Participant
may be granted a Purchase Plan Option that permits such Participant's rights to
purchase common stock under the Purchase Plan and any other "employee stock
purchase plans" of Select Comfort and its subsidiaries to become exercisable at
a rate that exceeds $25,000 of fair market value of such shares of common stock
(determined at the time such Purchase Plan

<PAGE> 38

Option is granted) for each calendar year in which such Purchase Plan Option is
outstanding at any time.

The per share purchase price of the shares offered in a given Offering Period
will be 85% of the fair market value of one share of common stock on the
Offering Termination Date. For this purpose, the fair market value of the common
stock will be the average of the reported high and low sale prices of the common
stock as reported by the Nasdaq National Market on the applicable date or, if no
shares were traded on such day, as of the next preceding day on which there was
such a trade. On March 1, 2000, the average of the reported high and low sale
prices of the common stock on the Nasdaq National Market was $5.61.

Shares purchased in an Offering Period will be issued as soon as practicable
after each Offering Termination Date. The Committee may determine, in its sole
discretion, the manner of delivery of shares of common stock purchased under the
Purchase Plan. No Participant will have any interest in any shares of common
stock subject to a Purchase Plan Option under the Purchase Plan until the
Purchase Plan Option has been exercised.

NON-TRANSFERABILITY OF PURCHASE PLAN OPTIONS. Neither payroll deductions
credited to a Participant's account nor any rights with regard to the exercise
of a Purchase Plan Option or to receive shares of common stock under the
Purchase Plan may be assigned, transferred, pledged or otherwise disposed of in
any way (other than by will, the laws of descent and distribution, or by
designation of a beneficiary as provided in the Purchase Plan). Any such attempt
at assignment, transfer, pledge or other disposition will have no effect, except
that Select Comfort may treat such act as an election to withdraw from the
Purchase Plan, in which case the provisions described below will apply.

WITHDRAWAL AND TERMINATION OF EMPLOYMENT. A Participant may terminate
participation in the Purchase Plan and withdraw all, but not less than all, of
the payroll deductions credited to the Participant's account under the Purchase
Plan prior to the Offering Termination Date of an Offering Period by giving
written notice to Select Comfort no later than the 15th day of the last month of
the Offering Period. The notice must state the Participant's desire to terminate
involvement in the Purchase Plan, specify a termination date and request the
withdrawal of all of the Participant's payroll deductions held under the
Purchase Plan. All of the Participant's payroll deductions credited to the
Participant's account will be paid to such Participant as soon as practicable
after the termination date specified in the notice (or, if no date is specified,
as soon as practicable after receipt of the notice of termination and
withdrawal), the Purchase Plan Option for the Offering Period will automatically
be canceled, and no further payroll deductions for the purchase of shares of
common stock will be made during the Offering Period or for any subsequent
Offering Period unless a new enrollment form is filed. A Participant's
withdrawal from an Offering Period will not have any effect upon the
Participant's eligibility to participate in a succeeding Offering Period or in
any similar plan that Select Comfort may adopt.

Upon termination of a Participant's employment for any reason, including
retirement, death or disability, the payroll deductions credited to such
Participant's account will be returned as soon as practicable after the
effective date of termination (or, in the case of the Participant's death, to
the person or persons entitled to such funds according to the provisions
described above under the section "Non-Transferability of Purchase Plan
Options") and the Participant's Purchase Plan Option will automatically be
canceled. A transfer of employment between Select Comfort and a subsidiary or
between subsidiaries and absences or leaves approved by Select Comfort are not
considered termination of employment under the Purchase Plan.

36
<PAGE> 39

FEDERAL INCOME TAX CONSEQUENCES

The following general description of federal income tax consequences is based
upon current statutes, regulations and interpretations. This description is not
intended to address specific tax consequences applicable to an individual
participant who receives a Purchase Plan Option and does not address special
rules that may be applicable to directors, officers and greater-than 10%
stockholders of Select Comfort.

The Purchase Plan is intended to qualify as an "employee stock purchase plan"
under Section 423 of the Code. If the Purchase Plan so qualifies, the amount
withheld from a Participant's compensation under the Purchase Plan will
constitute ordinary income for federal income tax purposes in the year in which
such amounts would otherwise have been paid to the Participant. However, a
Participant will generally not recognize any income for federal income tax
purposes either on the grant of a Purchase Plan Option or upon the issuance of
any shares of common stock under the Purchase Plan.

The federal income tax consequences of disposing of shares of common stock
acquired under the Purchase Plan depend upon how long a Participant holds the
shares. If a Participant disposes of shares acquired under the Purchase Plan
(other than a transfer by reason of death) within a period of two years from the
Offering Commencement Date of the Offering Period in which the shares were
acquired, an amount equal to the difference between the purchase price and the
fair market value of the shares on the last day of the Offering Period will be
treated as ordinary income for federal income tax purposes in the taxable year
in which the disposition takes place. Such amount may be subject to wage
withholding. The difference between the amount realized upon such disposition of
the shares and their fair market value on the last day of the Offering Period
will constitute capital gain or loss. Whether the gain (or loss) constitutes
long-term or short-term capital gain (or loss) will depend upon the length of
time the Participant held the stock prior to its disposition. Participants
should consult their tax advisors to determine whether any specific gain (or
loss) constitutes long-term or short-term capital gain (or loss).

If a Participant disposes of any shares acquired under the Purchase Plan more
than two years after the Offering Commencement Date of the Offering Period in
which such shares were acquired (or if no disposition has occurred by the time
of Participant's death) an amount equal to the lesser of (a) the excess of the
fair market value of the shares at the time of disposition (or death) over the
purchase price, or (b) the excess of the fair market value of the shares on the
Offering Commencement Date of the Offering Period in which the shares were
acquired over the purchase price will be recognized as ordinary income and may
be subject to wage withholding. With respect to a disposition of such shares,
any remaining gain on such disposition will be taxed as long-term capital gain.
With respect to a transfer of such shares upon death, any remaining gain or loss
will not be recognized. However, a subsequent sale or exchange of such shares by
a Participant's estate or the person receiving such shares by reason of the
Participant's death may result in capital gain or loss.

No income tax deduction ordinarily is allowed to Select Comfort with respect to
the grant of any Purchase Plan Option, the issuance of any shares of common
stock under the Purchase Plan or the disposition of any shares acquired under
the Purchase Plan and held for two years. However, if a Participant disposes of
shares purchased under the Purchase Plan within two years after the Offering
Commencement Date of the Offering Period in which the shares were acquired,
Select Comfort will receive an income tax deduction in the year of such
disposition in an amount equal to the amount constituting ordinary income to the
Participant, provided that Select Comfort complies with the applicable wage
withholding requirements.

37
<PAGE> 40

BOARD RECOMMENDATION

The Board of Directors recommends that the shareholders vote FOR approval of the
1999 Employee Stock Purchase Plan. The affirmative vote of the holders of a
majority of the shares of common stock present and entitled to vote in person or
by proxy on this matter at the Annual Meeting, and at least a majority of the
minimum number of votes necessary for a quorum, is necessary for approval.
Unless a contrary choice is specified, proxies solicited by the Board of
Directors will be voted FOR approval of the 1999 Employee Stock Purchase Plan.

<PAGE> 41

RATIFICATION OF SELECTION OF
INDEPENDENT AUDITORS

(PROPOSAL 4)

APPOINTMENT OF AUDITORS

The Board of Directors has appointed KPMG LLP, independent certified public
accountants, as our auditors for the year ending December 30, 2000. KPMG LLP has
acted as our independent auditors since 1993.

Although it is not required to do so, the Board wishes to submit the selection
of KPMG LLP to the shareholders for ratification. If you do not ratify the
appointment of KPMG LLP, another firm of independent auditors will be considered
by the Board.

Representatives of KPMG LLP will be present at the Annual Meeting, will have an
opportunity to make a statement if they so desire and will be available to
respond to appropriate questions.

BOARD RECOMMENDATION

The Board recommends a vote FOR ratification of the appointment of KPMG LLP as
our auditors for the year ending December 30, 2000.

The affirmative vote of the holders of a majority of shares of common stock of
the Company present in person or by proxy at the Annual Meeting, and at least a
majority of the minimum number of votes necessary for a quorum, is necessary for
approval. Unless a contrary choice is specified, proxies solicited by the Board
will be voted FOR the ratification of KPMG LLP.

39
<PAGE> 42
OTHER MATTERS

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and all persons who beneficially own more than 10% of the
outstanding shares of our common stock to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
our common stock.

Executive officers, directors and greater than 10% beneficial owners are also
required to furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based upon a review of the copies of such reports furnished to
us during the fiscal year ended January 1, 2000 and written representations by
such persons, one initial report on Form 3 was not timely filed for each of
Tracey Breazeale, Renee Christensen and James Gaboury upon their respective
appointment or promotion to executive officer positions at Select Comfort during
1999. All transactions were reported on a timely basis.

SHAREHOLDER PROPOSALS FOR 2001 ANNUAL MEETING

Any shareholder proposal to be included in the proxy materials for the 2001
Annual Meeting of Shareholders must be received by the Company on or before
December 17, 2000.

Our Bylaws require advance written notice to the Company of shareholder-proposed
business or of a shareholder's intention to make a nomination for director at an
annual meeting of shareholders. They also limit the business which may be
conducted at any special meeting of shareholders to business brought by the
Board.

Specifically, the Bylaws provide that business may be brought before an annual
meeting by a shareholder only if the shareholder provides written notice to the
Secretary of the Company not less than 120 days prior to the first anniversary
of the date that the Company first released or mailed its proxy statement to
shareholders in connection with the preceding year's annual meeting. In the
event, however, that the date of the annual meeting is advanced by more than 30
days or delayed by more than 60 days from the anniversary of the preceding
year's 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 120th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made.

A shareholder's notice must set forth:

- - a description of the proposed business and the reasons for it,

- - the name and address of the shareholder making the proposal,

- - the class and number of shares of common stock owned by the
shareholder, and

- - a description of any material interest of the shareholder in the
proposed business.

Our Bylaws also provide that a shareholder may nominate a director at an annual
meeting only after providing advance written notice to the Secretary of the
Company within the time limits described above. The shareholder's notice must
set forth all information about each nominee that would be required under SEC
rules in a proxy statement soliciting proxies for the election of such nominee,
as well as the nominee's business and residence address. The notice must also
set forth the name and record address of the shareholder making the nomination
and the class and number of shares of common stock owned by that shareholder.

<PAGE> 43

OTHER BUSINESS

The management of the Company does not intend to present other items of business
and knows of no items of business that are likely to be brought before the
Annual Meeting except those described in this proxy statement. However, if any
other matters should properly come before the Annual Meeting, the persons named
in the enclosed proxy will have discretionary authority to vote such proxy in
accordance with their best judgment on such matters.

COPIES OF 1999 ANNUAL REPORT

We will furnish without charge a copy of our Annual Report on Form 10-K (without
exhibits) for the fiscal year ended January 1, 2000 upon receipt from any such
person of a written request for such an Annual Report.

Such request should be sent to:

Select Comfort Corporation
10400 Viking Drive, Suite 400
Minneapolis, Minnesota 55344
Attn: Shareholder Information

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

Your vote is important. Whether or not you plan to attend the Annual Meeting,
please vote your shares of common stock by marking, signing, dating and promptly
returning the enclosed proxy card in the envelope provided. No postage is
required for mailing in the United States.

By Order Of The Board Of Directors

/s/ Mark A. Kimball
----------------------------------
Mark A. Kimball
Secretary
April 17, 2000
Minneapolis, Minnesota

41
<PAGE> 44
[SELECT COMFORT LOGO]

ANNUAL MEETING OF SHAREHOLDERS

THURSDAY, MAY 18, 2000
3:00 P.M.

HOTEL SOFITEL
5601 W. 78TH STREET
BLOOMINGTON, MINNESOTA 55439

[SELECT COMFORT LOGO] 10400 VIKING DRIVE, SUITE 400
MINNEAPOLIS, MINNESOTA 55344 PROXY
- --------------------------------------------------------------------------------

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF SELECT COMFORT
CORPORATION FOR THE ANNUAL MEETING OF SHAREHOLDERS ON MAY 18, 2000.

The undersigned appoints William R. McLaughlin and Mark A. Kimball, and either
of them, the proxies of the undersigned, with full power of substitution in
each, to vote at the Annual Meeting of Shareholders to be held on May 18, 2000
and at any adjournment or postponement thereof all of the undersigned's shares
of Select Comfort Corporation common stock held of record on March 27, 2000 in
the manner indicated on the reverse side hereof, and with the discretionary
authority to vote as to any other matters that may properly come before such
meeting.

YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES ON
THE REVERSE SIDE.

This proxy, when properly signed, will be voted in the manner directed. IF NO
DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR ITEMS 1, 2, 3 AND 4.

See reverse for voting instructions.

<PAGE> 45
\/ Please detach here \/
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2, 3 AND 4.
<S><C>
1. Election of directors: 01 Patrick A. Hopf 02 Ervin R. Shames [ ] Vote FOR [ ] Vote WITHHELD
03 William J. Lansing all nominees from all nominees
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE, -------------------------------------------
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.)
-------------------------------------------
2. To amend the Select Comfort Corporation 1997 Stock Incentive Plan. [ ] For [ ] Against [ ] Abstain

3. To adopt the Select Comfort Corporation 1999 Employee Stock Purchase Plan. [ ] For [ ] Against [ ] Abstain

4. To ratify the appointment of KPMG LLP, certified public accountants, as
independent auditors for Select Comfort for the fiscal year ending
December 30, 2000. [ ] For [ ] Against [ ] Abstain

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED
FOR EACH PROPOSAL.
Address Change? Mark Box [ ] Indicate changes below: Dated: , 2000
----------------------------

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

Signature(s) in Box
Please sign exactly as your name(s) appear on Proxy,
If held in joint tenancy, all persons must sign.
Trustees, administrators, etc, should include title
and authority. Corporations should provide full
name of corporation and title of authorized officer
signing the proxy.

</TABLE>