UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

NATUZZI S.p.A.

(Exact name of Registrant as specified in its charter)

NATUZZI S.p.A.

(Translation of Registrant’s name into English)

(Jurisdiction of incorporation or organization)

(Address of principal executive offices)

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Title of each class		Name of each exchange on which registered
American Depositary Shares, each representing one Ordinary Share		New York Stock Exchange
Ordinary Shares, with a par value of €1.00 each		New York Stock Exchange (for listing purposes only)

(Title of Class)

(Title of Class)

As of December 31, 2008: 54,853,045 Ordinary Shares

Yes o     No þ

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o     No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o     No o     Not Applicable þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP o		IFRS o		Other þ

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17     þ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

 

 

TABLE OF CONTENTS

		Page
PART I
Item 1. Identity of Directors, Senior Management and Advisers			2
Item 2. Offer Statistics and Expected Timetable			2
Item 3. Key Information			2
Selected Financial Data			2
Exchange Rates			5
Risk Factors			6
Forward Looking Information			11
Item 4. Information on the Company			11
Introduction			11
Organizational Structure			13
Strategy			14
Manufacturing			17
Products			22
Markets			24
Incentive Programs and Tax Benefits			27
Management of Exchange Rate Risk			29
Trademarks and Patents			29
Regulation			29
Environmental Regulatory Compliance			30
Insurance			30
Description of Properties			30
Capital Expenditures			31
Item 4A. Unresolved Staff Comments			32
Item 5. Operating and Financial Review and Prospects			32
Critical Accounting Policies			32
Results of Operations			35
Liquidity and Capital Resources			43
Contractual Obligations and Committments			44

TABLE OF CONTENTS

		Page
Related Party Transactions			46
Product and Retail Development			46
New Accounting Standards under Italian and U.S. GAAP			47
Item 6. Directors, Senior Management and Employees			50
Compensation of Directors and Officers			54
Share Ownership			55
Statutory Auditors			56
External Auditors			56
Employees			56
Item 7. Major Shareholders and Related Party Transactions			57
Major Shareholders			57
Related Party Transactions			59
Item 8. Financial Information			59
Consolidated Financial Statements			59
Export Sales			59
Legal and Governmental Proceedings			59
Dividends			61
Item 9. The Offer and Listing			61
Trading Markets and Share Prices			61
Item 10. Additional Information			62
By-laws			62
Certain Contracts			70
Exchange Controls			71
Taxation			72
Documents on Display			77
Item 11. Quantitative and Qualitative Disclosures About Market Risk			77
Item 12. Description of Securities Other than Equity Securities			79

TABLE OF CONTENTS

		Page
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies			79
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			79
Item 15. Controls and Procedures			79
Item 16. [Reserved]			82
Item 16A. Audit Committee Financial Expert			82
Item 16B. Code of Ethics			82
Item 16C. Principal Accountant Fees and Services			82
Item 16D. Exemptions from the Listing Standards for Audit Committees			83
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers			83
Item 16F. Change in Registrant’s Certifying Accountant			83
Item 16G. Corporate Governance			84
PART III
Item 17. Financial Statements			88
Item 18. Financial Statements			88
Item 19. Exhibits			88
Index to Financial Statements
Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 13.1

PRESENTATION OF FINANCIAL INFORMATION

Beginning with the fiscal year ended December 31, 2002, Natuzzi S.p.A. (the “Company” and, together with its consolidated subsidiaries, the “Group”) has published its audited consolidated financial statements (the “Consolidated Financial Statements”) in euro, the single currency established for certain members of the European Union (including Italy) upon the commencement of the third stage of the European Monetary Union (the “EMU”) on January 1, 1999.

In this annual report, references to “€” or “euro” are to the euro and references to “U.S. dollars,” “dollars,” “U.S.$” or “$” are to United States dollars.

Amounts stated in U.S. dollars, unless otherwise indicated, have been translated from the euro amount by converting the euro amounts into U.S. dollars at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) for euros on June 19, 2009 of U.S.$ 1.3998 per euro.

The foreign currency conversions in this annual report should not be taken as representations that the foreign currency amounts actually represent the equivalent U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated.

The Consolidated Financial Statements included in Item 18 of this annual report are prepared in conformity with accounting principles established by the Italian Accounting Profession (“Italian GAAP”). These principles vary in certain significant respects from generally accepted accounting principles in the United States (“U.S. GAAP”). See Note 27 to the Consolidated Financial Statements included in Item 18 of this annual report. All discussions in this annual report are in relation to Italian GAAP, unless otherwise indicated.

In this annual report, the term “seat” is used as a unit of measurement. A sofa consists of three seats; an armchair consists of one seat.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

Selected Financial Data

The following table sets forth selected consolidated financial data for the periods indicated and is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and the notes thereto included in Item 18 of this annual report and the information presented under “Operating and Financial Review and Prospects” included in Item 5 of this annual report. The income statement and balance sheet data presented below have been derived from the Consolidated Financial Statements.

The Consolidated Financial Statements, from which the selected consolidated financial data set forth below has been derived, were prepared in accordance with Italian GAAP, which differ in certain respects from U.S. GAAP. For a discussion of the principal differences between Italian GAAP and U.S. GAAP as they relate to the Group’s consolidated net earnings (loss) and shareholders’ equity, see Note 27 to the Consolidated Financial Statements included in Item 18 of this annual report.

		Year Ended At December 31,
		2008				2008				2007				2006				2005				2004
		(millions of
		dollars, except per
		Ordinary Share)(1)				(millions of euro, except per Ordinary Share)
Income Statement Data:
Amounts in accordance with Italian GAAP:
Net sales:
Leather- and fabric-upholstered furniture		$	864.5			€	587.8			€	563.5			€	660.2			€	594.8			€	665.5
Other(2)			115.0				78.2				70.9				75.2				75.1				87.9
Total net sales			979.5				666.0				634.4				735.4				669.9				753.4
Cost of sales			(704.2	)			(478.8	)			(460.6	)			(490.5	)			(459.4	)			(484.5	)
Gross profit			275.3				187.2				173.8				244.9				210.5				268.9
Selling expenses			(253.4	)			(172.3	)			(173.9	)			(186.2	)			(182.2	)			(188.2	)
General and administrative expenses			(73.4	)			(49.9	)			(49.0	)			(42.2	)			(43.0	)			(40.7	)
Operating income (loss)			(51.5	)			(35.0	)			(49.1	)			16.5				(14.7	)			40.0
Other income (expense), net(3) (4) (5) (6)			(38.0	)			(25.8	)			(2.6	)			2.8				3.0				(3.9	)
Earnings (loss) before taxes and minority interests			(89.5	)			(60.8	)			(51.7	)			19.3				(11.7	)			36.1
Income taxes			(2.2	)			(1.5	)			(11.4	)			(7.1	)			(3.1	)			(17.6	)
Earnings (loss) before minority interests			(91.7	)			(62.3	)			(63.1	)			12.2				(14.8	)			18.5
Minority interest			0.6				0.4				0.5				0.1				0.2				(0.1	)
Net earnings (loss)			(91.1	)			(61.9	)			(62.6	)			12.3				(14.6	)			18.4
Net earnings (loss) per Ordinary Share		$	(1.66	)		€	(1.13	)		€	(1.14	)		€	0.23			€	(0.27	)		€	0.34
Dividends declared per share			—				—				—				—				—			€	0.07
Amounts in accordance with U.S. GAAP:
Net sales			985.6				670.1				635.9				736.8				672.0				759.8
Operating income (loss)			(58.8	)			(40.0	)			(46.4	)			22.7				(4.5	)			34.9
Net earnings (loss)			(81.9	)			(55.7	)			(60.0	)			14.5				(6.9	)			18.8
Net earnings (loss) per Ordinary Share (basic and diluted)		$	(1.50	)		€	(1.02	)		€	(1.09	)		€	0.26			€	(0.13	)		€	0.34
Weighted average number of Ordinary Shares Outstanding			54,850,643				54,850,643				54,817,086				54,733,796				54,681,628				54,681,628
Balance Sheet Data:
Amounts in accordance with Italian GAAP:
Current assets		$	443.2			€	318.5			€	364.1			€	407.3			€	384.5			€	389.4
Total assets			756.8				543.8				617.5				674.7				664.9				673.2
Current liabilities			189.7				136.3				146.0				133.0				136.2				131.5
Long-term debt			4.6				3.3				2.1				2.4				3.6				5.0
Minority interest			1.1				0.8				0.1				0.6				0.7				0.9
Shareholders’ equity (7)			480.4				345.2				411.6				478.9				473.0				487.9
Amounts in accordance with U.S. GAAP:
Shareholders’ equity		$	491.7			€	353.3			€	408.5			€	468.4			€	453.7			€	464.5

Exchange Rates

Fluctuations in the exchange rates between the euro and the U.S. dollar will affect the U.S. dollar amounts received by owners of American Depositary Shares (“ADSs”) on conversion by the Depositary (as defined below) of dividends paid in euro on the Ordinary Shares represented by the ADSs.

In addition, most of the Group’s costs are denominated in euro, while a substantial portion of its revenues is denominated in currencies other than the euro, including the U.S. dollar in particular. Accordingly, in order to protect the euro value of its foreign currency revenues, the Group engages in transactions designed to reduce its exposure to fluctuations in the exchange rate between the euro and such foreign currencies. See “Item 5. Operating and Financial Review and Prospects—Results of Operations—2008 Compared to 2007” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

The following table sets forth the Federal Reserve Bank of New York Noon Buying Rate for the euro expressed in U.S. dollars per euro.

Year:		Average(1)				At Period End
2004			1.2478				1.3538
2005			1.2400				1.1842
2006			1.2661				1.3197
2007			1.3797				1.4603
2008			1.4695				1.3919

Month ending:		High				Low
31-Dec-08			1.4358				1.2634
31-Jan-09			1.3718				1.2804
28-Feb-09			1.3064				1.2547
31-Mar-09			1.3730				1.2549
30-Apr-09			1.3458				1.2978
31-May-09			1.4126				1.3267

The effective Noon Buying Rate on June 19, 2009 was U.S.$ 1.3998 to 1 euro.

Risk Factors

Investing in the Company’s ADSs involves certain risks. You should carefully consider each of the following risks and all of the information included in this annual report.

The Group has a recent history of losses; the Group’s future profitability and financial condition depend on its ability to successfully restructure its operations and implement its new business plan — The Group reported net losses in 2008 (€ 61.9 million), 2007 (€ 62.6 million) and 2005 (€ 14.6 million), and net operating losses of € 34.9 million, € 49.1 million and € 14.7 million for those same years, respectively. In addition, the Group’s net sales have declined from € 753.4 million in 2004 to € 634.4 million in 2007, although net sales increased to € 666.0 million in 2008.

The Group attributes these negative results to an increasingly difficult macroeconomic environment affecting the furniture industry as a whole, and in particular the Group was faced with the following factors in 2008:

•

price competition from low-cost manufacturers;

•

a significant downturn in the global economy;

•

recurring unfavorable currency conditions; and

•

higher raw material prices.

This negative trend continued in the first quarter of 2009, during which the Group recorded net losses of € 10.4 million and its total net sales of €111.3 million represented a 35.6% decrease compared to the same period of the previous year.

The Group’s future operating and financial performance and business prospects will depend in large part on the successful implementation of the strategic business plan for fiscal years 2009-2011 (the “2009-2011 Business Plan”) approved by the Group’s Board of Directors on October 17, 2008. The main goals of the 2009-2011 Business Plan are the achievement of € 1.0 billion of consolidated net sales and a profit margin of 15% at EBIT (earnings before interest and taxes) level by 2011. To achieve these goals, the Group would have to significantly increase the volume of sales across its product lines, which could depend also on customer demand, which is mainly out of our control, and significantly reduce its operating and administrative costs. From time to time, we may evaluate our plans and goals to reflect changing macroeconomic conditions and other factors affecting the Group and the furniture industry generally. See “Item 4. Information on the Company—Strategy” for more details about the 2009-2011 Business Plan.

If the 2009-2011 Business Plan is not successfully implemented, there could be a material adverse effect on the Group’s financial condition, results of operations and business prospects.

The current worldwide economic downturn has impacted the Group’s business and could continue to significantly impact our operations, sales, earnings and liquidity in the foreseeable future — Economic conditions have deteriorated significantly in the United States and worldwide, and may remain depressed for the foreseeable future. These conditions have resulted in a decline in our sales and earnings and could continue to impact our sales and earnings in the future. Sales of residential furniture are impacted by downturns in the general economy primarily due to decreased discretionary spending by consumers. The general level of consumer spending is affected by a number of factors, including, among others, general economic conditions, inflation, and consumer confidence, all of which are generally beyond our control. Consumer purchases of residential furniture decline during periods of economic downturn, when disposable income is lower. The economic downturn also impacts retailers, our primary customers, resulting in the inability of our customers to pay amounts owed to us. In addition, if our retail customers are unable to sell our product or are unable to access credit, they may experience financial difficulties leading to bankruptcies, liquidations, and other unfavorable events. If any of these events occur, or if unfavorable economic conditions continue to challenge the consumer environment, our future sales, earnings, and liquidity would likely be adversely impacted.

A failure to achieve our projected mix of product sales could result in a decrease in our future earnings — Our products are sold at varying price points and levels of profit. An increase in the sales of our lower profit products at the expense of the sales of our higher profit products could result in a decrease in our earnings. For example, during 2007 and 2008, our gross profit was negatively impacted by a change in the mix of our products sold, when volume sales growth was primarily driven by our Italsofa products.

Manufacturing realignments and cost savings programs could result in a decrease in our short-term earnings and liquidity — We continually review our domestic manufacturing operations and offshore sourcing capabilities. Effects of periodic manufacturing realignments and cost savings programs would likely result in a decrease in our short-term earnings and liquidity until the expected cost reductions are achieved. Such programs can include the consolidation and integration of facilities, functions, systems, and procedures. Certain products may also be shifted from domestic manufacturing to offshore sourcing. These realignments have resulted, and in the future likely would result, in substantial costs, including severance, impairment, exit, and disposal costs, among others. Such actions may not be accomplished as quickly as anticipated and the expected cost reductions may not be achieved in full, which has resulted in, and in the future could continue to result in, a decrease in our short-term earnings and liquidity.

Our growth strategy includes, in part, the development of new stores each year. If we and our dealers are not able to open new stores or effectively manage the growth of these stores, our ability to grow and our profitability could be adversely affected — Our ability and the ability of our dealers to identify and open new stores in desirable locations and operate such stores profitably is an important factor in our ability to grow successfully. We have in the past and will likely continue to purchase or otherwise assume operation of company-brand stores from independent dealers. Increased demands on our operational, managerial, and administrative resources could cause us to operate our business, including our existing and new stores, less effectively, which in turn could cause deterioration in our profitability.

Demand for furniture is cyclical and may fall in the future — Historically, the furniture industry has been cyclical, fluctuating with economic cycles, and sensitive to general economic conditions, housing starts, interest rate levels, credit availability and other factors that affect consumer spending habits. Due to the discretionary nature of most furniture purchases and the fact that they often represent a significant expenditure to the average consumer, such purchases may be deferred during times of economic uncertainty such as those being experienced in some of our markets in Europe and the United States.

In 2008, the Group derived 35.5% of its leather- and fabric-upholstered furniture net sales from the Americas, 55.1% from Europe and 9.4% from the rest of the world. A prolonged economic slowdown in the United States and Europe may have a material adverse effect on the Group’s results of operations.

The Group operates principally in a niche area of the furniture market — The Group is a leader in the production of leather-upholstered furniture, with 91.1% of net sales of upholstered furniture in 2008 derived from the sale of leather-upholstered furniture. Consumers have the choice of purchasing upholstered furniture in a wide variety of styles and materials, and consumer preferences may change. There can be no assurance that the current market for leather-upholstered furniture will not decrease.

The furniture market is highly competitive — The Group operates in a highly competitive industry that includes a large number of manufacturers. No single company has a dominant position in the industry. Competition is generally based on product quality, brand name recognition, price and service.

The Group principally competes in the upholstered furniture sub-segment of the furniture market. In Europe, the upholstered furniture market is highly fragmented. In the United States, the upholstered furniture market includes a number of relatively large companies, some of which are larger and have greater financial resources than the Group. Some of the Group’s competitors offer extensively advertised, well-recognized branded products.

Competition has increased significantly in recent years as foreign producers from countries with lower manufacturing costs have begun to play an important role in the upholstered furniture market. Such manufacturers are often able to offer their products at lower prices, which increases price competition in the industry. In particular, manufacturers in China, Eastern Europe and South America have increased competition in the lower-priced segment of the market.

As a result of the actions and strength of the Group’s competitors and the inherent fragmentation in some markets in which it competes, the Group is continually subject to the risk of losing market share, which may lower its sales and profits. Market competition may also force the Group to reduce prices and margins, thereby reducing its cash flows.

The highly competitive nature of the industry means that we are constantly at risk of losing market share, which would likely result in a loss of future sales and earnings. In addition, due to high levels of competition, it may not be possible for us to raise the prices of our products in response to inflationary pressures or increasing costs, which could result in a decrease in our profit margins.

Fluctuations in currency exchange rates have adversely affected and may adversely affect the Group’s results — The Group conducts a substantial part of its business outside of the euro zone. An increase in the value of the euro relative to other currencies used in the countries in which the Group operates will reduce the relative value of the revenues from its operations in those countries, and therefore may adversely affect its operating results or financial position, which are reported in euro. In addition to this risk, the Group is subject to currency exchange rate risk to the extent that its costs are denominated in currencies other than those in which it earns revenues. In 2008, a significant portion of the Group’s net sales, but only approximately 38% of its costs, were denominated in currencies other than the euro. The Group is therefore exposed to the risk that fluctuations in currency exchange rates may adversely affect its results, as has been the case in recent years. For more information, see Item 11, “Quantitative and Qualitative Disclosures about Market Risk.”

The Group faces risks associated with its international operations — The Group is exposed to risks that arise from its international operations, including changes in governmental regulations, tariffs or taxes and other trade barriers, price, wage and exchange controls, political, social, and economic instability in the countries where the Group operates, inflation and interest rate fluctuations. Any of these factors could have a material adverse effect on the Group’s results.

The price of the Group’s principal raw material is difficult to predict — Leather is used in approximately 85% of the Group’s upholstered furniture production, and the acquisition of cattle hides represents approximately 35% of total cost of goods sold. The dynamics of the raw hides market are dependent on the consumption of beef, the levels of worldwide slaughtering, worldwide weather conditions and the level of demand in a number of different sectors, including footwear, automotive, furniture and clothing.

Introduction of a new integrated management system — The Group has undertaken the adoption for its operations worldwide of a new Enterprise Resource Planning system entitled “SAP,” with the aim of enabling Management to achieve better control over the Company through:

•

improved quality, reliability and timeliness of information;

•

improved integration and visibility of information stemming from different management functions and countries; and

•

optimization and global management of corporate processes.

The overall estimated investment for the project is about € 10.6 million. The adoption of the new SAP system, which will replace the existing accounting and management systems, poses several challenges relating to, among other things, training of personnel, communication of new rules and procedures, changes in corporate culture, migration of data, and the potential instability of the new system. In order to mitigate the impact of such critical issues, the Company decided to implement the new SAP system on a step-by-step basis, both geographically and in terms of processes. In relation to each step of the project, the Company has set up a contingency plan in order to ensure business continuity. However, there can be no assurance that the new SAP system will be successfully implemented and failure to do so could have a material adverse effect on the Group’s operations.

In 2008, the implementation of the project proceeded according to the original plan. The first SAP implementation for Finance and Purchase processes took place in Italy, Spain, the U.S. and Romania and the implementation of the Sales & Distribution and Production Planning processes took place worldwide. The implementation of the SAP system has involved a change in the management culture of the Company. This new culture is being implemented to create a more productive working environment and to better prepare for the transition to the new technological platform. We continue to proceed with the rollout of the SAP system with the appropriate contingency plans in place in order to avoid future problems.

The Group’s past results and operations have significantly benefited from government incentive programs, which may not be available in the future — Historically, the Group derived significant benefits from the Italian Government’s investment incentive programs for under-industrialized regions in Southern Italy, including tax benefits, subsidized loans and capital grants. See “Item 4. Information on the Company—Incentive Programs and Tax Benefits.” In recent years, the Italian Parliament replaced these incentive programs with an investment incentive program for all under-industrialized regions in Italy, which is currently being implemented by the Group through grants and research and development benefits. There are no indications at this time that the Italian Government will implement new initiatives to support companies located in under-industrialized regions in Italy. Therefore, there can be no assurance that the Group will continue to be eligible for such grants, benefits or tax credits for its current or future investments in Italy.

In recent years, the Group has opened manufacturing operations in China, Brazil and Romania and has been granted tax benefits and export incentives by the relevant governmental authorities in those countries. There can be no assurance that these tax benefits and export incentives will continue to be available to the Group in the future.

The Group is dependent on qualified personnel — The Group’s ability to maintain its competitive position will depend to some degree upon its ability to continue to attract and maintain highly qualified managerial, manufacturing and sales and marketing personnel. There can be no assurance that the Group will be able to continue to recruit and retain such personnel. In particular, the Group has been dependent on certain key management personnel in the past, and there can be no assurance that the loss of key personnel would not have a material adverse effect on the Group’s results of operations.

Investors may face difficulties in protecting their rights as shareholders or holders of ADSs — The Company is incorporated under the laws of the Republic of Italy. As a result, the rights and obligations of its shareholders and certain rights and obligations of holders of its ADSs are governed by Italian law and the Company’s Statuto (or By-laws). These rights and obligations are different from those that apply to U.S. corporations. Furthermore, under Italian law, holders of ADSs have no right to vote the shares underlying their ADSs; however, pursuant to the Deposit Agreement, ADS holders do have the right to give instructions to The Bank of New York Mellon, the ADS depositary, as to how they wish such shares to be voted. For these reasons, the Company’s ADS holders may find it more difficult to protect their interests against actions of the Company’s management, Board of Directors or shareholders than they would if they were shareholders of a company incorporated in the United States.

One shareholder has a controlling stake of the company — Mr. Pasquale Natuzzi, who founded the Company and is currently Chief Executive Officer and Chairman of the Board of Directors, beneficially owns 29,358,089 Ordinary Shares, representing 53.5% of the Ordinary Shares outstanding (58.7% of the Ordinary Shares outstanding if the Ordinary Shares owned by members of Mr. Natuzzi’s immediate family (the “Natuzzi Family”) are aggregated). As a result, Mr. Natuzzi controls the Company, including its management and the selection of its Board of Directors. Since December 16, 2003, Mr. Natuzzi has held his entire beneficial ownership of Natuzzi S.p.A. shares (other than 196 ADSs) through INVEST 2003 S.r.l., an Italian holding company wholly-owned by Mr. Natuzzi and with its registered office located at Via Gobetti 8, Taranto, Italy.

In addition, under the Deposit Agreement dated as of May 15, 1993, as amended and restated as of December 23, 1996 and as of December 31, 2001 (the “Deposit Agreement”), among the Company, The Bank of New York Mellon, as Depositary (the “Depositary”), and owners and beneficial owners of American Depositary Receipts (“ADRs”), the Natuzzi Family has a right of first refusal to purchase all the rights, warrants or other instruments which The Bank of New York Mellon, as Depositary under the Deposit Agreement, determines may not lawfully or feasibly be made available to owners of ADSs in connection with each rights offering, if any, made to holders of Ordinary Shares.

Because a change of control of the Company would be difficult to achieve without the cooperation of Mr. Natuzzi and the Natuzzi Family, the holders of the Ordinary Shares and the ADSs may be less likely to receive a premium for their shares upon a change of control of the Company.

Forward Looking Information

The Company makes forward-looking statements in this annual report. Statements that are not historical facts, including statements about the Group’s beliefs and expectations, are forward-looking statements. Words such as “believe,” “expect,” “intend,” “plan” and “anticipate” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements. These statements are based on current plans, estimates and projections (including, but not limited to, plans, estimates and projections associated with our 2009-2011 Business Plan), and therefore readers should not place undue reliance on them. Forward-looking statements speak only as of the dates they were made, and the Company undertakes no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

Projections and targets related to our 2009-2011 Business Plan included in this annual report are included to describe our current targets and goals, and not as a prediction of future performance or results. The attainment of such projections and targets is subject to a number of risks and uncertainties described in the paragraph below and elsewhere in this annual report. See “Item 3. Key Information—Risk Factors.”

Forward-looking statements involve inherent risks and uncertainties. The Company cautions readers that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to: effects on the Group from competition with other furniture producers, material changes in consumer demand or preferences, significant economic developments in the Group’s primary markets, significant changes in labor, material and other costs affecting the construction of new plants, significant changes in the costs of principal raw materials, significant exchange rate movements or changes in the Group’s legal and regulatory environment, including developments related to the Italian Government’s investment incentive or similar programs. The Company cautions readers that the foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and events.

Item 4. Information on the Company

Introduction

The Group is primarily engaged in the design, manufacture and marketing of contemporary and traditional leather and fabric-upholstered furniture, principally sofas, loveseats, armchairs, sectional furniture, motion furniture and sofa beds, and living room accessories.

The Group is one of the world’s leading companies for the production of leather-upholstered furniture and believes that it has a leading share of the market for leather-upholstered furniture in the United States and Europe based on research conducted by CSIL, a well known, unaffiliated and reputable Italian market research firm, with reference to market information for the years 2007 and 2008 for the market for leather-upholstered furniture in the United States and Europe, respectively (Sources: CSIL, “The European market for upholstered furniture,” July 2008; CSIL, “The US market for upholstered furniture,” October 2007). The Group is currently focusing its attention on the development of foreign markets, like Eastern Europe, Middle East, China and India, where it has been achieving significant results both in terms of sales and order flow in recent months.

In 2000, the Company launched “Italsofa,” a new promotional brand aimed at the lower-priced segment of the upholstery market, while in January 2002, the Company introduced the new logo for the “Natuzzi” brand, which is aimed at identifying the Company’s medium- to high-end of the market products. The Group currently designs 100% of its products and it manufactures, directly or through third parties, approximately 51% of its products in Italy. Production outside of Italy is mainly for the Italsofa brand.

Within Italy, the Group sells its furniture principally through franchised Divani & Divani by Natuzzi furniture stores. As of April 30, 2009, 104 Divani & Divani by Natuzzi stores, 4 outlet stores, and 1 Natuzzi store were located in Italy. Outside of Italy, the Group sells its furniture principally on a wholesale basis to major retailers and through 195 Natuzzi stores and Divani & Divani by Natuzzi stores and 17 concessions in the United Kingdom and 1 concession in the Republic of Ireland. These concessions are store-in-store concept managed directly by a subsidiary of the Company located in the United Kingdom. As of April 30, 2009, there were 426 Natuzzi galleries worldwide (store-in-store concept managed by independent partners).

On June 7, 2002, the Company changed its name from Industrie Natuzzi S.p.A. to Natuzzi S.p.A. The Statuto, or By-laws, of the Company provide that the duration of the Company is until December 31, 2050. The Company, which operates under the trademark “Natuzzi,” is a società per azioni (stock company) organized under the laws of the Republic of Italy and was established in 1959 by Mr. Pasquale Natuzzi, who is currently the Chairman of the Board of Directors, Chief Executive Officer, and controlling shareholder of the Company. Most of the Company’s operations are carried out through various subsidiaries that individually conduct a specialized activity, such as leather processing, foam production and shaping, furniture manufacturing, marketing or administration.

The Company’s principal executive offices are located at Via Iazzitiello 47, 70029 Santeramo, Italy, which is approximately 25 miles from Bari, in Southern Italy. The Company’s telephone number is: +39 080 882-0111. The Company’s distribution subsidiary in the United States is Natuzzi Americas, Inc. (“Natuzzi Americas”), located at 130 West Commerce Avenue, High Point, North Carolina 27260. Natuzzi Americas telephone number is: +1 336 888-0351.

Organizational Structure

As of April 30, 2009, the Company’s principal operating subsidiaries were:

		Percentage of
Name		ownership				Registered office		Activity
Italsofa Bahia Ltd			97.99			Bahia, Brazil		(1)
Minuano Nordeste S.A.			100.00			Pojuca, Brazil		(1)
Italsofa Shanghai Ltd			96.50			Shanghai, China		(1)
Softaly Shanghai Ltd			100.00			Shanghai, China		(1)
Natuzzi China Ltd			100.00			Shanghai, China		(1)
Italsofa Romania			100.00			Baia Mare, Romania		(1)
Natco S.p.A.			99.99			Bari, Italy		(2)
I.M.P.E. S.p.A.			90.83			Qualiano, Italy		(3)
Nacon S.p.A.			100.00			Bari, Italy		(4)
Lagene S.r.l.			100.00			Bari, Italy		(4)
Natuzzi Americas Inc.			100.00			High Point, NC, USA		(4)
Natuzzi Iberica S.A.			100.00			Madrid, Spain		(4)
Natuzzi Switzerland AG			100.00			Kaltbrunn, Switzerland		(4)
Natuzzi Nordic			100.00			Copenaghen, Denmark		(4)
Natuzzi Benelux S.A.			100.00			Geel, Belgium		(4)
Natuzzi Germany Gmbh			100.00			Dusseldorf, Germany		(4)
Natuzzi Sweden AB			100.00			Stockholm, Sweden		(4)
Natuzzi Japan KK			100.00			Tokyo, Japan		(4)
Natuzzi Services Limited			100.00			London, UK		(4)
Natuzzi Trading Shanghai Ltd			100.00			Shanghai, China		(4)
Italholding S.r.l.			100.00			Bari, Italy		(5)
Natuzzi Netherlands Holding			100.00			Amsterdam, Holland		(5)
Natuzzi Trade Service S.r.l.			100.00			Bari, Italy		(6)
La Galleria Limited			100.00			London, UK		(7)
Natuzzi United Kingdom Limited			100.00			London, UK		(7)
Kingdom of Leather Limited			100.00			London, UK		(7)

See Note 1 to the Consolidated Financial Statements included in Item 18 of this annual report for further information on the Company’s subsidiaries.

Strategy

The negative performance of the Group in 2008 and in recent years has largely been the result of several challenges specific to the furniture industry and prevalent in the economy at large. For instance, the discretionary spending of consumers on furnished goods has been negatively impacted by the global economic downturn, largely as a result of lower home values, rising levels of unemployment and personal debt, and reduced access to consumer credit. In addition, the Group has faced increasingly stiff competition from other furniture companies and its sales revenues have also been negatively impacted as a result of the euro’s recent appreciation against the U.S. dollar and British pound.

In an effort to address these challenges and to restore the positive performance of the Group, the Board of Directors in October 2008 adopted the 2009-2011 Business Plan, which sets as its primary goals the achievement of € 1.0 billion of consolidated net sales and a margin of 15% at EBIT (earnings before interest and taxes) level by 2011. See “Item 3. Key Information—Risk Factors” for discussions of the risks and uncertainties that may impact the Group’s results and plans.

In order to accomplish its primary objectives, the 2009-2011 Business Plan will employ a growth strategy aimed at:

•

repositioning the Group brands—including Natuzzi and Italsofa worldwide, Divani & Divani mainly in Italy and Natuzzi Editions in America—by increasing awareness and penetration in current and new markets;

•

expanding in new markets, such as Brazil, India, Russia and various markets in Latin America;

•

improving and further developing the Group’s retail organization;

•

diversifying product assortment and launching new models based on pricing strategies in line with market inputs and expectations;

•

streamlining operations on a regional basis, so that factories located in certain regions will primarily serve such regions;

•

creating more efficiency in the manufacturing and procurement process by revising product cost structures and focusing more on the R&D and engineering process; and

•

eliminating waste and redundancies in Group processes, with a focus on increasing integration within the Group by completing the SAP rollout.

Specifically, the intended effects of this growth strategy are:

•

the growth of the annual net sales of the Natuzzi, Italsofa, Divani & Divani and Natuzzi Editions brands;

•

a reduction of our cost of goods sold to approximately 61% of net sales; and

•

other reductions in logistical costs (materials, transportation and transformation) and selling expenses and general administrative expenses (SG&A).

The Group’s primary objective is to expand and strengthen its presence in the global upholstered furniture market in terms of sales and production, while at the same time increasing the Group’s profit and efficiency. To achieve these objectives, the Group’s principal strategic objectives include:

Repositioning the Brand Portfolio Strategy of the Group — The Group is focusing in all price segments of the leather and non-leather upholstered furniture market. The Group has divided its extensive product range into two different brands—Natuzzi and Italsofa—in an effort to address specific market segments and increase its sales and profitability.

i) The Natuzzi brand offers high-end, high-quality products, with detailed designs and customized materials and finishes. The Group aims to position this brand as one that helps consumers rediscover the home as a welcoming place, a place of happiness and well-being. The Group also wants to establish an “aspirational” image for this brand through the style and quality of its products, and the concepts and presentation in its stores. Finally, the Group seeks to broaden this brand’s market by bringing consumers in various countries around the world product collections filled with beautiful, Italian-style living room design. Products under this brand are distributed through the Group’s stores, galleries, and qualified free market (multi brand) retailers that carry high-end products.

From the identification of consumer preferences and market trends to the delivery of the living room in the consumer’s home, Natuzzi directly controls the production and distribution value chain, with the aim of ensuring ultimate quality at competitive prices. All models are designed in the Group’s Style Center in Italy and are primarily manufactured at the Group’s Italian factories.

In the last quarter of 2005 and the beginning of 2006, the Group moved some of the production for its most popular Natuzzi Edition-brand models in the United States to its manufacturing facilities outside of Italy in order to avoid the relative rise in production costs at its Italian plants due to the weak U.S. dollar and thus increase profitability. This move includes limited models and covers in leathers and microfibers, but no “Total Look” furnishings.

ii) The Italsofa brand targets the medium-to-medium low segment of the market. The Group aims to position this brand offering Italian style products at the best value. The brand includes a wide range of sofas and armchairs in leather, fabric and microfiber, which are available in different versions, coverings and colors. Products are designed and engineered in Italy and manufactured at the Group’s factories in China, Brazil and Romania, to provide the best possible value in the market. Products under this brand are mainly distributed through the wholesale channel.

In 2007, the Group refreshed and updated the image of its Italsofa brand, and opened a total of five Italsofa stores in China, with the objective of positioning Italsofa within a higher market segment as compared to very low-cost Chinese competitors. By December 31, 2008, 14 Italsofa stores were opened in China. In 2009, the Group intends to launch the Italsofa retail channel in Europe and the Middle East. In addition, the Group has decided to allocate marketing investments both for communication and for the Italsofa display system to support this new channel.

Competition has increased significantly in recent years within the medium-to-medium low segment as foreign producers from countries with lower manufacturing costs have begun to play an important role in the upholstered furniture market. Such manufacturers are often able to offer their products at lower prices, which increases price competition in the industry. In particular, manufacturers in China, Eastern Europe and South America have increased competition in the lower-priced segment of the market.

In response to this increase and the inherent fragmentation in some markets in which the Group competes, the Group will continue to focus its efforts on improving product quality, design, reliable customer service and marketing support.

Expansion into New Markets — The Group first targeted the United States market in 1983 and subsequently began diversifying its geographic markets, particularly in the highly fragmented European markets (outside of Italy). Although the Group is currently a leader in the leather-upholstered furniture segment in the United States and in Europe, it is now focusing its attention on the development of new foreign markets, like Eastern Europe, the Middle East, China and India, where it has been achieving significant results both in terms of sales and order flow in recent months (Sources: CSIL, “The European market for upholstered furniture,” July 2008; CSIL, “The US market for upholstered furniture,” October 2007). The Group intends to continue to consolidate its growth in these markets and to further expand into new markets, such as Russia, Brazil and other parts of Latin America.

Improvement of the Group’s Retail Program and Brand Development — The Group has made significant investments to improve its existing distribution network and strengthen its brand, primarily through the establishment of new distribution subsidiaries and an increase in the number of Natuzzi stores and Natuzzi galleries worldwide. See “Item 4. Information on the Company—Markets.” As of April 30, 2009, there were 304 stores worldwide, including Natuzzi stores and Divani & Divani by Natuzzi stores, and 14 Italsofa stores in China. By using the same creative concepts and internal decorations in Natuzzi stores and Natuzzi galleries, the Group has created a coherent identity for the Natuzzi brand.

In May 2007, the Group organized a Retail Congress in Italy, inviting all its partners worldwide to visit the Group’s headquarters for product selection and collection renewal, and to participate in strategy sessions to develop marketing and advertising plans for the upcoming year. More than 230 stores and 500 persons participated in the Retail Congress. Due to the success of this event, the Group organized a similar event in 2008 and in May 2009.

Product Diversification — The Group believes that it is the Italian manufacturing company in the designer furniture and home decoration industry most capable of offering consumers carefully developed, coordinated living rooms at competitive prices through its “Total Look” offer. The Total Look offer is conceived in accordance with the latest trends in design, materials and colors, and includes high quality sofas, furnishings and accessories, all of which are developed in-house and presented in harmonic and personalized solutions. The Group has taken a number of steps to broaden its product lines, including the development of new models, such as modular and motion frames, and the introduction of new materials and colors, including exclusive fabrics and microfibers. See “Item 4. Information on the Company—Products.” In order to add to its already vast offerings in upholstered furniture, the Group has begun to invest in its furnishings and accessories offerings. Beginning in 2006, the Group has further widened its collection of accessories by introducing wall units, thus completing its living room environment offering. The Group believes that expanding its Total Look offerings will strengthen its relationships with the world’s leading distribution chains, which are interested in offering branded packages. The Group has invested in Natuzzi Style Center in Santeramo, Italy, to serve as a creative hub for the Group’s design activities. The Style Center is improving its interaction with the market under the coordination of dedicated office Range managers (who provide a link between R&D and market needs). The first effects of this market oriented policy were visible during the last retail congress (Santeramo, Paris and Cologne), which resulted in positive feedback with respect to our products and pricing.

Improving Efficiency and Reducing Operating Costs — In order to increase its profitability, the Group is taking steps to reduce operating costs and to improve the efficiency of its operations. In particular, the Group is streamlining operations on a regional basis, so that factories located in certain regions will be primarily responsible for serving those regions. In addition, the Group is seeking to increase efficiency in the manufacturing and procurement process by revising product cost structures and focusing additional attention on R&D and engineering aspects of production. Furthermore, the Group is attempting to eliminate waste and redundancies in its operations by completing the SAP rollout and focusing on integration within the Group.

Manufacturing

As of April 30, 2009, the Group operated six production facilities in Italy and three warehouses (two for leather and one for finished goods). Four of the facilities are engaged in upholstery cutting and sewing and assembly of finished and semi-finished products, and employed (net of those workers temporarily laid-off), as of the same date, 3,085 workers, 42% of whom are not directly involved in production. Seven of these nine facilities are located either in, or within a 25-mile radius of, Santeramo, where the Group’s headquarters are located. Assembly operations at the Group’s production facilities also include leather cutting and sewing and attaching foam and covering to frames.

These operations retain many characteristics of production by hand and are coordinated at the production facilities through the use of a management information system that identifies by number (by means of a bar-code system) each component of every piece of furniture and facilitates its automatic transit through the different production phases up to the storehouse.

In July 2006, the Company initiated an industrial restructuring program to improve the flow of production logistics and simplify job assignments in order to increase productivity while improving product quality.

Operations at all of the Group’s facilities are normally conducted Monday through Friday with two maximum eight-hour shifts per day.

Two of the Group’s production facilities are involved in the processing of leather hides to be used as upholstery. One of the facilities is a leather dyeing and finishing plant located near Udine. The Udine facility receives both raw and tanned cattle hides, sends raw cattle hides to subcontractors for tanning, and then dyes and finishes the hides. The other facility, located near Vicenza, is a warehouse that receives semi-finished hides and sends them to various subcontractors for processing, drying and finishing, and then arranges for the finished leather to be shipped to the Group’s assembly facilities. Hides are tanned, dyed and finished on the basis of orders given by the Group’s central office in accordance with the Group’s “on demand” planning system, as well as on the basis of estimates of future requirements. The movement of hides through the various stages of processing is monitored through the management information system. See “Item 4. Information on the Company—Manufacturing—“Supply-Chain Management”.”

The Group produces, directly and by subcontracting, nine grades of leather in approximately 15 finishes and 118 colors. The hides, after being tanned, are split and shaved to obtain uniform thickness and separated into “top grain” and “split” (top grain leather is primarily used in the manufacture of most Natuzzi-branded leather products, while split leather is used, in addition to top grain leather, in the manufacture of some Natuzzi-branded products and most Italsofa products). The hides are then colored with dyes and treated with fat liquors to soften and smooth the leather, after which they are dried. Finally, the semi-processed hides are treated to improve the appearance and strength of the leather and to provide the desired finish. The Group also purchases finished hides from third parties.

One of the Group’s production facilities, which is located near Naples and employed 61 workers as of April 30, 2009, is engaged in the production of flexible polyurethane foam and, because the facility’s production capacity is in excess of the Group’s needs, also sells foam to third parties. The foam from the Naples facility, which is produced through a patented process that results in a high-quality material without using any auxiliary blowing agent, is sold under the “Eco-FlexTM” trademark. A material specially designed for mattresses is also produced and sold under the “GreenflexTM” trademark.

As a result of intensive R&D activity, the Company has developed a new family of highly resilient materials. The new polymer matrix is safer than others available in the market because of its improved flame resistance, and it is more environmentally-friendly because it can be disposed of without releasing harmful by-products and because the raw materials used to make it cause less harmful environmental impacts during handling and storage.

The Group currently manufactures the Italsofa Collection outside Italy at plants located in China, Romania, and Brazil, although the strong appreciation of Brazilian currency against the U.S. dollar and the low productivity of the Brazilian plants have negatively affected the competitiveness of the Group’s manufacturing operations in Brazil. If orders exceed production capacity at these plants, Italsofa products are also manufactured in the Company subcontractor’s Italian plants.

The Group owns the land and buildings for its principal assembly facilities located in Santeramo, Matera, its leather dyeing and finishing facility located near Udine, its foam-production facility located near Naples, and its facilities located in Ginosa, Laterza, Brazil, Romania and one of the two plants in China. The land and buildings of the remaining production facilities are leased from lessors with whom the Group enjoys long-term relationships. Although the lease terms vary in length, under Italian law the leases for the Group’s Italian plants must have a minimum term of six years. The lease agreements provide for rents that generally increase each year in line with inflation. Management believes that the prospects are good for renewing the leases on acceptable terms when they expire. The Group owns substantially all the equipment used in its facilities.

Historically, the Group has entrusted some of its production work relating to the assembly of finished products from raw materials and finished parts to subcontractors located within a 20-mile radius of Santeramo (about 20% of Natuzzi’s production during fiscal year 2008). The Group’s contracts with these subcontractors provide that the Group will supply to each subcontractor product designs, finished leather, pre-cut cushions, wooden frames and other assembly materials. The subcontractors are required to assemble these materials into finished products.

The furniture is assembled at a fixed cost per unit that is set to increase annually in line with inflation. These contracts have an indefinite term, subject to termination by either party with prior notice (generally one month).

Raw Materials — The principal raw materials used in the manufacture of the Group’s products are cattle hides, polyurethane foam, polyester fiber, wood and wood products.

The Group purchases hides from slaughterhouses and tanneries located mainly in Italy, Brazil, Germany, Colombia, Ireland, Scandinavian countries, and Eastern Europe. The hides purchased by the Group are divided into several categories, with hides in the lowest categories being purchased mainly in Brazil, and Colombia. The hides in the middle categories are purchased mainly in Italy and certain other parts of Europe and hides in the highest categories are purchased in Germany and Scandinavian countries. A significant number of hides in the lowest categories are purchased at the “wet blue” stage — i.e., after tanning — while some hides purchased in the middle and highest categories are unprocessed. The Group has implemented a leather purchasing policy according to which a percentage of leather is purchased at a finished or semi-finished stage. Therefore, the Group has had a smaller inventory of “split leather” to sell to third parties. Approximately 80% of the Group’s hides are purchased from 13 suppliers, with whom the Group enjoys long-term and stable relationships. Hides are generally purchased from the suppliers pursuant to orders given every one to two months specifying the number of hides, the purchase price and the delivery date.

Hides purchased from Europe are delivered directly by the suppliers to the Group’s leather facilities near Udine and Vicenza, while those purchased outside of Italy are inspected overseas by technicians of the Group, delivered to an Italian port and then sent by the Group to the Udine facility and subcontractors. Management believes that the Group is able to purchase leather hides from its suppliers at reasonable prices as a result of the volume of its orders, and that alternative sources of supply of hides in any category could be found quickly at an acceptable cost if the supply of hides in such category from one or several of the Group’s current suppliers ceased to be available or was no longer available on acceptable terms. The supply of raw cattle hides is principally dependent upon the consumption of beef, rather than on the demand for leather.

During the last quarter of 2008, the prices for hides tended to decrease. During the first quarter of 2009, the prices for hides stabilized. Due to the volatile nature of the hides market, there can be no assurances that any current trend of stabilized prices will continue. See “Item 3. Key Information—Risk Factors—The price of the Group’s principal raw material is difficult to predict.”

The Group also purchases fibers and microfibers for use in coverings. Both kinds of coverings are divided into several price categories: most fabrics are in the highest price categories, while the most inexpensive of the microfibers are in the lowest price categories. Fabrics are purchased exclusively in Italy from 13 suppliers which provide the product at the finished stage. Microfibers are purchased in Italy, South Korea, Taiwan, through four suppliers who provide them at the finished stage. Microfibers purchased from the Group’s Italian supplier are in some cases imported by the supplier at the greige or semi-finished stage and then finished (dyed and bonded) in Italy. Fabrics and microfibers are generally purchased from the suppliers pursuant to orders given every week specifying the quantity (in linear meters) and the delivery date. The price is determined before the fiber or microfiber is introduced into the collection.

Fabrics and microfibers purchased from the Italian suppliers are delivered directly by the suppliers to the Group’s facility in Laterza, while those purchased outside of Italy are delivered to an Italian port and then sent to the Laterza facility. Microfibers and fabrics included into Italsofa and Natuzzi Editions are delivered directly by the suppliers to Chinese and Brazilian ports and then sent to the Group’s Shanghai and Salvador de Bahia facilities. The Group is able to purchase such products at reasonable prices as a result of the volume of its orders. The Group continuously searches for alternative supply sources in order to obtain the best product at the best price.

Price performance of fabrics is quite different from that of microfibers. Because fabrics are purchased exclusively in Italy and are composed of natural fibers, their prices are influenced by the cost of labor and the quality of the product. During 2008 and the beginning of 2009, fabric prices were stable due to long-term relationships with suppliers and the large volumes purchased by the Group. During the same period microfiber prices decreased due to the introduction of new suppliers and the renegotiation of prices with current suppliers. The price of microfibers is mainly influenced by the international availability of high-quality products and raw materials at low costs, especially from Asian markets.

The Group obtains the chemicals required for the production of polyurethane foam from major chemical companies located in Europe (including Germany, Italy and the United Kingdom) and the polyester fiber filling for its polyester fiber-filled cushions from several suppliers located mainly in Korea, China and Taiwan. The chemical components of polyurethane foam are petroleum-based commodities, and the prices for such components are therefore subject to, among other things, fluctuations in the price of crude oil, which has decreased over the last months. The Group obtains wood and wood products for its wooden frames from suppliers in Italy and Eastern Europe. Through its plant located in Romania, the Group has begun engaging directly in the cutting and transportation of wood from Romanian forests.

With regard to the Group’s collection of home furnishing accessories (tables, lamps, carpets, home accessories in different materials), most of the suppliers are located in Italy and other European countries, while some hand-made products (such as carpets) are made in India.

“Supply-Chain Management”

Procurement Policies and Operations Integration — In order to improve customer service and reduce industrial costs, the Group in 2008 established a definitive policy for handling suppliers and supply logistics. All of the sub-departments working in the Logistics Department have been reorganized to maximize efficiency throughout the supply-chain. The Logistics Department now coordinates periodic meetings among all of its working groups in order to identify areas of concern that arise in the supply-chain, and to identify solutions that will be acceptable to all groups. The Logistics Department is responsible for monitoring the proposed solutions in order to ensure their effectiveness. Additionally, in order to improve access to supply-chain information throughout the Group, the Logistics Department (with the support of the Information Systems department) has created a new portal that allows the Logistics Department and other departments (such as Customer Service and Sales) to monitor the movement of goods through the supply-chain.

Production Planning (Order Management, Production, Procurement) — The Group’s commitment to reorganizing procurement logistics has led to:

1) the development of a logistic-production model to customize the level of service to customers;

2) a 47% reduction in the size of the Group’s inventory of raw materials and/or components, particularly those pertaining to coverings. This positive impact was made possible by both the development of software that allows more detailed production programming and broader access by suppliers themselves, and a more general reorganization of supplier relationships. Suppliers are now able to provide assembly lines at Italian plants with requested components within four hours;

3) the planning and partial completion of the industrial reorganization of the local production center; and

4) since January 2009, the SAP system has been implemented through the organization.

The Group also plans procurements of raw materials and components:

i) “On demand” for those materials and components (which the Group identifies by code numbers) that require a shorter lead time for order completion than the standard production planning cycle for customers’ orders. This system allows the Group to handle a higher number of product combinations (in terms of models, versions and coverings) for customers all over the world, while maintaining a high level of service and minimizing inventory size. Procuring raw materials and components “on demand” eliminates the risk that these materials and components would become obsolete during the production process; or

ii) “Upon forecast” for those materials and components requiring a long lead time for order completion. The Group utilizes a new forecast methodology, developed in cooperation with a consulting firm. This methodology balances the Group’s desire to maintain low inventory levels against the Sales Department’s needs for flexibility in filling orders, all the while maintaining high customer satisfaction levels. This new methodology is currently being developed together with the Group’s Information Systems Department, in order to create a new intranet portal, called Worldwide Demand Planning tool. This tool is working for sales coming from the North American market, under the supervision of a forecast manager. Once completed, it will further support corporate logistics and operations managers to better forecast the future demand for the Group’s products so as to improve the lead time from material supply to sales delivery.

Special production programs—those requiring lead times shorter than three weeks—are only available to a restricted group of customers, for a limited group of collections and product combinations.

Lead times can be longer than those mentioned above when a high number of unexpected orders is received.

Delivery times vary depending on the place of discharge (transport lead times vary widely depending on the distance between the final destination and the production plant).

All planning activities (finished goods load optimization, customer order acknowledgement, production and suppliers’ planning) are synchronized in order to guarantee that during the production process, the correct materials are located in the right place at the right time, thereby achieving a maximum level of service while minimizing handling and transportation costs.

Load Optimization — With the aim of decreasing costs and safeguarding product quality, the Group attains optimum load levels for shipping by using a software developed through a research partnership with the University of Bari and the University of Copenhagen, completed in June 2006.

This software manages customers’ orders to be shipped by sea with the goal of maximizing the number of orders shipped in full containers. If a customer’s order does not make optimal use of container space, revisions to the order quantities are suggested. This activity, which was previously a prerogative of the Group’s headquarters, has been almost completely transferred to Natuzzi Americas in High Point, North Carolina. Now, this software is also undergoing testing by customers.

As far as the load composition by truck is concerned, the Group has commissioned planning a software development project to minimize total transport costs by taking into account volume and route optimization for customers’ orders in defined areas. A prototype of this software was delivered to the Group in November 2007. The Group concluded testing of this prototype in September 2008 and it is currently operational. This software was developed by the Group jointly with Polytechnic of Bari and the University of Lecce.

Transportation — The Group delivers goods to customers by common carriers. Those goods destined for the Americas and other markets outside Europe are transported by sea in 40’ high cube containers, while those produced for the European market are generally delivered by truck and, in some cases, by railway. In 2008, the Group shipped 11,000 containers (40’hc) to overseas countries and approximately 6,700 full load mega-trailer trucks to European destinations. To improve service levels, a method of Supplier Vendor Rating is under development to measure performance of carriers and distributors providing direct service. This rating system has first been extended to transport by land, and, later, also to the transport by sea.

The Group relies principally on several shipping and trucking companies operating under “time-volume” service contracts to deliver its products to customers and to transport raw materials to the Group’s plants and processed materials from one plant to another. In general, the Group prices its products to cover its door-to-door shipping costs, including all customs duties and insurance premiums. Some of the Group’s overseas suppliers are responsible for delivering raw materials to the port of departure, therefore transportation costs for these materials are generally under the Group’s control. At the same time, a transportation tender has been organized during 2008. This tender involves worldwide transportation companies; the concept is to have a better service for our customers at a cheaper price reducing the number of transport companies involved in the inbound & outbound flow.

Products

The Group is committed to the conception, prototyping, production (sofas only) and commercialization of a wide range of upholstered furniture, both in leather and in fabric, and furnishings & accessories. The Company is the largest Italian company in the sector and a world leader in the segment of upholstered furniture.

The wide range of offerings enables the Company to reach specific market segments, constantly monitor consumers needs and offer products in line with market trends and final customers’ preferences.

New models are the result of a constant information flow that stems from the market (whose preferences are analyzed, filtered and translated by the product managers into a brief, including specific styles, functions and price points), and is communicated to the group of designers who, through constant work with the team from the prototypes department, sketches the creation of new products in accordance with the guidelines received.

The product development process is also based on specific needs of particular clients (mass dealers) who are capable of generating a critical mass of sales that enable the product to achieve the right market penetration.

The diversity of final customers’ tastes and preferences and the natural inclination of Natuzzi to offer new solutions promote the development of products that are increasingly personalized. For instance, in 2008, the Company developed 117 new models that have generated more than 2201 different versions.

The Group’s product range falls within five broad categories of furniture: stationary furniture (sofas, loveseats and armchairs); sectional furniture; motion furniture; sofa beds; and occasional chairs (including recliners and body massage chairs). As of April 30, 2009, the Group offered its products in 403 different models.

Regarding the supply of furnishing & accessories, 28 new products were introduced in 2008 as a result of a significant push on development.

The Group’s wide range of products includes a comprehensive collection of sofas and armchairs with particular styles, coverings and functions, with more than two million combinations. The Group’s offering is divided into two separate collections: the Natuzzi Collection, which has two separate lines of products, one targeting the Americas (Natuzzi Editions) and one targeting the Group’s markets in the rest of the world, and the Italsofa Collection, which is also divided into two lines of products, those targeting the Americas and the Asia Pacific region, and those targeting Europe, the Middle East and Africa.

The Natuzzi Collection, positioned in the medium-high market, focuses on making Italian quality and style accessible through coordinated and innovative living rooms. This collection stands out for high quality in the choice of materials and finishes, as well as the creativity and details of its designs. As of April 30, 2009, this line of products offered 164 models, 26 articles in fabrics in 86 colors, 16 leather articles in 119 colors, and four articles in dreamfiber in 51 colors. The best-selling models in 2008 were Klaus, Plaza, Malcolm and Nicolaus (generating respectively € 14.7 million, € 12.5 million, € 10.9 million and € 10.8 million in sales). The collection also includes a selection of additional furniture (wall units, tables, lamps, carpets), accessories (pots and candles), furniture for the dining room (tables, chairs, lamps) to offer complete furniture with the aim enabling the Group to become a real “Lifestyle Company.”

As of April 30, 2009, the Natuzzi Collection’s line oriented to the Americas named “Natuzzi Editions” was represented by 105 models, 21 leather articles in 108 colors, and nine articles in dreamfiber & fabrics in 44 colors. The Ginevra model is the best-selling model with sales of about € 6.1 million during 2008.

The Italsofa Collection, which is characterized by a young and vibrant style, offers for the medium-to-medium low market, 134 models, 10 leather articles in 76 colors, two articles in dreamfiber and 14 fabric articles in 30 colors. The most successful model is the Otranto, with € 7.3 million in sales during 2008.

The Group’s overall sales are also partly the result of unbranded production, developed on the basis of specific provision agreements for important mass-dealer clients like IKEA and Macy’s.

Markets

The Group markets its products internationally as well as in Italy. Outside Italy, the Group sells its leather furniture principally on a wholesale basis to major retailers and furniture stores. In 1990, the Group began selling its leather-upholstered products in Italy and abroad through franchised Divani & Divani by Natuzzi and Natuzzi furniture stores. Since 2001, the Group has also sold its furniture through directly owned Natuzzi stores and Divani & Divani by Natuzzi stores. Starting from the second half of 2007, the Group has sold its promotional line in China through Italsofa stores, of which there were 16 as of the end of 2008.

In 2008, the Group derived 35.5% of its leather and fabric-upholstered furniture net sales from the United States and the Americas, 55.1% from Europe and 9.4% from the rest of the world.

The following tables show the leather and fabric-upholstered furniture net sales and number of seats sold of the Group broken down by geographic market for each of the years indicated:

Leather and Fabric Upholstered Furniture Net Sales (in millions of euro)

		2008								2007								2006
Americas (1)			208.6				35.5	%			198.6				35.2	%			245.4				37.2	%
Natuzzi			110.4				18.8	%			114.4				20.3	%			146.6				22.2	%
Italsofa			98.2				16.7	%			84.2				14.9	%			98.8				15.0	%
Europe			323.7				55.1	%			319.4				56.7	%			366.6				55.5	%
Natuzzi			189.3				32.2	%			191.8				34.0	%			235.3				35.6	%
Italsofa			134.4				22.9	%			127.6				22.7	%			131.3				19.9	%
Rest of the world			55.5				9.4	%			45.5				8.1	%			48.3				7.3	%
Natuzzi			32.8				5.5	%			29.9				5.3	%			34.3				5.2	%
Italsofa			22.7				3.9	%			15.6				2.8	%			14.0				2.1	%
Total			587.8				100.0	%			563.5				100.0	%			660.3				100.0	%

Leather and Fabric Upholstered Furniture Net Sales (in seats) ⁽²⁾

		2008								2007								2006
Americas			1,272,559				46.8	%			1,176,585				45.4	%			1,364,873				45.2	%
Natuzzi			554,492				20.4	%			560,647				21.6	%			684,009				22.7	%
Italsofa			718,067				26.4	%			615,938				23.8	%			680,864				22.5	%
Europe			1,211,939				44.5	%			1,225,882				47.3	%			1,449,696				48.1	%
Natuzzi			487,821				17.9	%			523,054				20.2	%			716,846				23.8	%
Italsofa			724,118				26.6	%			702,828				27.1	%			732,850				24.3	%
Rest of the world			237,809				8.7	%			189,926				7.3	%			202,133				6.7	%
Natuzzi			90,430				3.3	%			87,950				3.4	%			106,127				3.5	%
Italsofa			147,379				5.4	%			101,976				3.9	%			96,006				3.2	%
Total			2,722,307				100.0	%			2,592,393				100.0	%			3,016,702				100.0	%

1. United States and the Americas.

In 2008, net sales of leather and fabric-upholstered furniture in the United States and the Americas increased 5.04% to € 208.6 million, compared to € 198.6 million in 2007, and the number of seats sold increased 8.16% to 1,272,559 compared to 1,176,585 in 2007.

The Group’s sales in the United States and the Americas are handled by Natuzzi Americas, which maintains offices in High Point, North Carolina, the heart of the most important furniture manufacturing and distributing region in the United States. The staff at High Point provides customer service, marketing and logistics, handles finance and collections, and generally acts as the customers’ contact for the Group. As of April 30, 2009, the High Point operation had 68 employees.

Natuzzi Americas has 38 independent sales representatives and sub-representatives in the United States and Canada. They are regionally supervised by sales managers.

The Group’s principal customers are major retailers. The Group advertises its products to retailers and, recently, to consumers in the United States and Canada directly and through the use of various marketing tools. The Group also relies on its network of sales representatives and on the furniture fairs held at High Point each Spring and Fall to promote its products.

2. Europe.

During 2008, the Group continued to consolidate its position in Europe by investing in stores and galleries. Net sales of leather and fabric-upholstered furniture in Europe increased by 1.3% from € 319.4 million in 2007 to € 323.7 million in 2008, with the number of seats sold slightly decreased from 1,225,882 in 2007 to 1,211,939 seats sold in 2008.

Italy. Since 1990, the Group has sold its upholstered products within Italy principally through franchised Divani & Divani furniture stores (now Divani & Divani by Natuzzi). As of April 30, 2009, there were 108 Divani & Divani by Natuzzi stores and one Natuzzi store located in Italy. Eighteen of these stores are directly owned by the Group.

Outside Italy. The Group uses franchised or directly owned stores to penetrate markets and implement brand strategies. As of April 30, 2009, 91 franchised single-brand stores were operating in Europe (outside Italy): 21 under the Divani & Divani by Natuzzi name (eight in Greece and 13 in Portugal) and the remainder under the Natuzzi name (25 in France, nine in Holland, five in Russia, three in the Czech Republic, two in Germany, two in Malta, two in Cyprus, two in Croatia, two in Poland, two in Latvia, two in Slovenia, two in Turkey, two in Romania, and one each in Iceland, Lithuania, Finland, Estonia, Bosnia-Herzegovina, Hungary, Belgium, Serbia-Montenegro, the United Kingdom and Ukraine). As of April 30, 2009, there were 38 directly owned stores in Europe (outside Italy): 25 in Spain (of which one is an outlet), five in Switzerland, four in the United Kingdom, three in Denmark and one in Sweden, all under the Natuzzi name. Apart from the four Natuzzi stores located in the United Kingdom, the Group operates 17 concessions in the United Kingdom and one in the Republic of Ireland.

3. Rest of the World.

Middle East. The Group has seen a significant increase in demand, especially in Israel where net sales increased from € 1.4 million in 2007 to € 2.6 million in 2008. As of April 30, 2009, the Group had a total of nine Natuzzi stores in the Middle East: three in Israel, two in the United Arab Emirates, two in Saudi Arabia and one each in Kuwait and Qatar. The Group also had a total of six galleries: two in Saudi Arabia and one each in Bahrain, Kuwait, the United Arab Emirates and Jordan.

Asia-Oceania-Africa. In 2008, the overall net sales in this region equaled € 37.3 million. Until the end of the year, the business was managed through the regional management integrated in Italsofa Shanghai Ltd. and supported by the subsidiary in Japan and three agencies located in Australia, South Korea and New Zealand. Since the beginning of 2009, a new legal entity has been set up—Natuzzi Trading (Shanghai) Co., Ltd.—which acts as a regional office and manages the commercial part of the business throughout the region. Furthermore, the Group is also currently preparing a representative office in Sydney, in order to be closer to the Australian and New Zealand markets. This office will report to the regional office in Shanghai. The general strategy for the Natuzzi brand is to further expand the store network throughout the region, but with a strong emphasis on China.

As of April 30, 2009, 50 franchised single-brand Natuzzi stores were operating in the Asia Pacific market: 20 in China, 19 in Australia, five in Taiwan, two in New Zealand, and one each in the Philippines, Singapore, Thailand and Indonesia. The Group also maintains 13 galleries in the Asia-Oceania-Africa region with locations in South Africa, Morocco, Egypt, Thailand, Indonesia, Korea, New Zealand. The Group also has a gallery presence in Australia, specifically at 28 David Jones department stores.

In 2007, the Group launched an initiative to redefine the image of its Italsofa brand, and opened a total of five single brand Italsofa stores in China with the objective of positioning Italsofa within a higher market segment as compared to very-low-cost Chinese competitors. As of April 30, 2009, the Italsofa single-branded store network in China has increased to 14 stores in different areas of China. The Group is currently planning to further expand its presence in China, specifically with stores in medium-sized and small cities all over the country.

Customer Credit Management — The Group maintains an active credit management program. The Group evaluates the creditworthiness of its customers on a case-by-case basis according to each customer’s credit history and information available to the Group. Throughout the world, the Group utilizes “open terms” in 86% of its sales and obtains credit insurance for almost 78% of this amount; 12% of the Group’s sales are commonly made to customers on a “cash against documents” and “cash on delivery” basis; and lastly, 2% of the Group’s sales are supported by a “letter of credit” or “payment in advance.”

Advertising — The Group uses the Natuzzi brand for its medium-to higher-priced product line. The Group’s Communication System was developed to regulate all methods used in each market to advertise the brand name, and operates simultaneously on different levels: the “brand-building level” establishes the brand’s philosophy, while the “traffic-building level” aims to attract consumers to points of sale using various kinds of initiatives, such as presentations of new collections, new store openings and promotional activities.

Advertising in the galleries is carried out with the help of the “Retail Advertising Kit,” a collection of templates that enable advertising of the Natuzzi brand in conjunction with the retailer’s brand.

Incentive Programs and Tax Benefits

Historically, the Group derived benefits from the Italian Government’s investment incentive program for under-industrialized regions in Southern Italy, which includes the area that serves as the center of the Group’s operations. The investment incentive program provided tax benefits, capital grants and subsidized loans. In particular, a substantial portion of the Group’s earnings before taxes and minority interests from 1994 to 2003 was derived from Group companies to some extent from such tax exemptions. These tax exemptions expired between 1996 and 2003. The last tax exemption was related to the subsidiary “Style & Comfort S.r.l.” and expired on December 27, 2003.

In December 1996, the Company and the “Contract Planning Service” of the Italian Ministry of Industrial Activities signed a “Program Agreement” with respect to the “Natuzzi 2000 project.” In connection with this project, the Group prepared a multi-faceted program of industrial investments for the increase of the production capacity of leather and fabric upholstered furniture in the area close to its headquarters in Italy. According to this “Program Agreement”, the Company should have made investments for € 295.2 million and at the same time the Italian government should have contributed in the form of capital grants for € 145.5 million. During 2003 the Company revised its growth and production strategy due to the strong competition from competitors in countries like China and Brazil. Therefore, as a consequence of this change in the economic environment in 2003, the Company requested to the Italian Ministry of Industrial Activities the revision of the original “Program Agreement” as follows: reduction of the investment to be made from € 295.2 million to € 69.8 million, and reduction of the related capital grants from € 145.5 million to € 35.0 million. In April 2005, the Company received from the Italian Government the final approval of the “Program Agreement” confirming these revisions. The Company received under the aforementioned project capital grants for € 24.2 million. A committee has been appointed by the Ministry of Industrial Activities to prepare the final technical report for the disbursement of the remaining capital grants of approximately € 10.8 million.

On April 27, 2004, the Technical-Scientific Committee of the Italian Education, University and Research Ministry approved a four-year research project presented by the Company in February 2002 related to improvement and development in leather manufacturing and processing. The Committee has approved a maximum capital grant of € 2.4 million and a 10-year subsidized loan for a maximum amount of € 3.3 million at a subsidized interest rate of 0.5% to be used in connection with industrial research expenses and prototype developments (as published on August 20, 2004, in the Italian Official Gazette (Gazzetta Ufficiale della Repubblica Italiana) n° 195). Industrial research and prototype developments, planned as part of the project, are already underway thanks to the collaborative efforts of specialized in-house personnel and university researchers from the University of Lecce and the Polytechnic University of Bari. In February 2007, the Company provided the aforementioned Committee with the complete list of expenses to be acknowledged under such project and that have been incurred between August 19, 2002 through December 31, 2003 (such expenses amounted to € 1.0 million). Also in 2007, the Company sent the list of all the costs incurred in 2004 and 2005, amounting to € 1.1 million and € 1.7 million respectively, to be acknowledged under the same project. In June 2008, the Italian Government provided a € 2.0 million subsidized loan and a € 1.5 million operating subsidy to the Company. In July 2008, the Company sent the final list of all the costs incurred in 2006 and 2007.

In 2006, the Company entered into an agreement with the Italian Ministry of Industrial Activities for the incentive program denominated “Integrated Package of Benefits—Innovation of the working national program ‘Developing Local Entrepreneurs’” for the creation of a centralized information system in Santeramo in Colle that will be utilized by all Natuzzi points-of-sale around the world. This agreement acknowledges costs of € 7.2 million and € 1.9 million for the development and industrialization program, respectively. On March 20, 2006, the Italian Industrial Ministry issued a concession decree providing for a provisional grant to the Company of € 2.8 million and a loan of € 4.3 million, to be repaid at a rate of 0.74% over 10 years. In December 2006, the Company provided the aforementioned Committee with the list of expenses to be acknowledged under such project and that have been incurred between July 2005 through December 31, 2006 (such expenses amounted to € 4.1 million). Additionally, in February 2008 and September 2008, the Company sent the list of all the remaining expenses incurred up to November 2007 (date of completion of the program) amounting to € 6.7 million. In April 2009, the Italian Government provided a € 3.9 million subsidized loan and a € 1.9 million operating subsidy to the Company.

During 2008, the Italian Ministry of Industrial Activities approved a new incentive program, entitled “Made in Italy — Industry 2015.” The objective of this program is to facilitate the realization and development of new production technologies and services with high innovation value in order to stimulate awareness for products that are made in Italy. In December 2008, the Company submitted to the Italian Ministry of Industrial Activities its proposal, entitled “i-sofas”, which is pending approval. The i-sofas program envisions a total investment of € 3.9 million, up to € 1.7 million of which may be contributed as a grant by the Italian Ministry of Industrial Activities. However, there can be no assurance that the Company will receive any such grants.

In November 2008, the Puglia regional authorities launched an incentive program in order to support companies located in the Puglia regional district that intend to invest in new production process changes, production diversification and industrial research. In January 2009, the Company submitted its proposal, entitled “UthinkLean,” which is pending to approval. The “UThinkLean” program envisions a total investment of € 11.3 million, up to € 3.7 million of which may be contributed as a grant by the Puglia regional authorities. However, there can be no assurance that the Company will receive any such grants.

Certain of the Group’s foreign subsidiaries, including Italsofa (Shanghai) Co. Ltd, Italsofa Bahia Ltda, Minuano Nordeste S.A. and SC Italsofa Romania S.r.l. enjoy significant tax benefits, such as corporate income tax exemptions or reductions of the applicable corporate income tax rates.

Management of Exchange Rate Risk

The Group is subject to currency exchange rate risk in the ordinary course of its business to the extent that its costs are denominated in currencies other than those in which it earns revenues. Exchange rate fluctuations also affect the Group’s operating results because it recognizes revenues and costs in currencies other than euro but publishes its financial statements in euro. The Group’s sales and results may be materially affected by exchange rate fluctuations. For more information, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

Trademarks and Patents

The Group’s products are sold under the “Natuzzi” and “Italsofa” trademarks. These trademarks and certain other trademarks, such as “Divani & Divani by Natuzzi,” have been registered as such in Italy, the European Union, the United States and elsewhere. In order to protect its investments in new product development, the Group has also undertaken a practice of registering certain new designs in most of the countries in which such designs are sold. The Group currently has more than 1,500 design patents and patents pending. Applications are made with respect to new product introductions that the Group believes will enjoy commercial success and have a high likelihood of being copied.

Regulation

The Company is incorporated under the laws of the Republic of Italy. The principal laws and regulations that apply to the operations of the Company—those of Italy and the European Union—are different from those of the United States. Such non-U.S. laws and regulations may be subject to varying interpretations or may be changed, and new laws and regulations may be adopted, from time to time. While management believes that the Group is currently in compliance in all material respects with such laws and regulations (including Italian Legislative Decree No. 6 of 2003 and rules with respect to environmental matters), there can be no assurance that any subsequent official interpretation of such laws or regulations by the relevant governmental authorities that differs from that of the Company, or any such change or adoption, would not have an adverse effect on the results of operations of the Group or the rights of holders of the Ordinary Shares or the owners of the Company’s ADSs. See “Item 4. Information on the Company—Environmental Regulatory Compliance,” “Item 10. Additional Information—Exchange Controls” and “Item 10. Additional Information—Taxation.”

Environmental Regulatory Compliance

The Group operates a leather dyeing and finishing factory located in Pozzuolo del Friuli, in the province of Udine and a factory for polyurethane foam production in Qualiano, in the province of Naples. The activities of these facilities are subject to both Italian and European laws and regulations. The Group operates these and its other facilities in compliance with all applicable laws and regulations.

Insurance

The Group maintains insurance against a number of risks. The Group insures against loss or damage to its facilities, loss or damage to its products while in transit to customers, failure to recover receivables, certain potential environmental liabilities and product liability claims. While the Group’s insurance does not cover 100% of these risks, management believes that the Group’s present level of insurance is adequate in light of past experience.

Description of Properties

The location, approximate size and function of the principal physical properties used by the Group as of April 30, 2009 are set forth below:

Size

(approximate

Production

square

Capacity

Unit of

Location

meters)

Function

per day

Measure

Santeramo in Colle

29,000

Headquarters, prototyping, manufacturing of wooden frames, showroom (Owned)

704

Frames

(BA) — Italy

Santeramo in Colle,

27,500

Sewing and product assembly (Owned)

1.400

Seats

Iesce (BA) — Italy

Matera La Martella

38,000

General warehouse of sofas and accessory furnishing (Owned)

N.A.

N.A.

— Italy

Ginosa (TA) — Italy

14,500

Sewing and product assembly (Owned)

900

Seats

Laterza (TA) — Italy

10,000

Leather cutting (Owned)

7,500

Square Meters

Laterza (TA) — Italy

13,000

Fabric and lining cutting, leather warehouse (Owned)

6,000

Linear Meters

Laterza (TA) — Italy

20,000

Accessory Furnishing Packaging and Warehouse (Owned)

N.A.

N.A.

Qualiano (NA) —

12,000

Polyurethane foam production (Owned)

87

Tons

Italy

Pozzuolo del Friuli

21,000

Leather dyeing and finishing (Owned)

14,000

Square Meters

(UD) — Italy

Montebello (VI) -

5,500

Leather warehouse (Leased)

N.A.

N.A.

Italy

Size

(approximate

Production

square

Capacity

Unit of

Location

meters)

Function

per day

Measure

High Point — North

10,000

Office and showroom for Natuzzi Americas (Owned)

N.A.

N.A.

Carolina — U.S.A.

Baia Mare — Romania

75,600

Leather cutting, sewing and product

2,900

Seats

assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill production and wood and wooden product manufacturing (Owned)

Shanghai — China

44,000

Leather cutting, sewing and product

4,000

Seats

assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill production (Owned)

Shanghai (Fengpu) —

14,500

Leather cutting, leather and fabric warehouse (Leased)

10,800

Square Meters

China

Fabric cutting

420

Linear Meters

Salvador de Bahia

28,700

Leather cutting, sewing and product

700

Seats

(Bahia) — Brazil

assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill production (Owned)

The Group believes that its production facilities are suitable for its production needs and are well maintained. The Group’s production facilities are operated utilizing close to 100% of their production capacity. Operations at all of the Group’s production facilities are normally conducted Monday through Friday with two eight-hour shifts per day. In 2008, the Group continued to utilize subcontractors to meet demand.

As of April 30, 2009, the Group also owned 68 stores (18 of which are located in Italy) and three outlet stores (two of which are located in Italy and one in Spain).

Capital Expenditures

The following table sets forth the Group’s capital expenditures for each year for the three-year period ended December 31, 2008:

		Year ending December 31,
		(millions of Euro)
		2008				2007				2006
Land and plants			1.1				3.3				2.4
Equipment			5.1				10.1				7.0
Other assets			9.8				13.1				9.7
Total			16.0				26.5				19.1

Capital expenditures during the last three years were primarily made in the areas of construction, as well as improvements to property, plant and equipment and expansion of the Company’s retail network. In 2008, capital expenditures were primarily made to open new Natuzzi stores and Natuzzi galleries, as well as to make improvements at the Group’s existing facilities (those located in Baia Mare, Romania, and other facilities located in and around Santeramo in Colle, Italy) in order to increase productivity. The Group expects that capital expenditures in 2009 will be approximately € 22 million, to be financed with cash flow from operations. The Group plans to direct such capital expenditures mainly to open new stores and galleries, towards the continued implementation of SAP and, to a lesser extent, to achieve productivity improvements in existing plants. The Group expects approximately 61% of the new store and gallery openings to be in Europe and approximately 39% in emerging markets where it has recently achieved positive results—these emerging markets include Eastern Europe, the Middle East, China and India.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

The following discussion of the Group’s results of operations, liquidity and capital resources is based on information derived from the audited Consolidated Financial Statements and the notes thereto included in Item 18 of this annual report. These financial statements have been prepared in accordance with Italian GAAP, which differ in certain respects from U.S. GAAP. For a discussion of the principal differences between Italian GAAP and U.S. GAAP as they relate to the Group’s consolidated net earnings (loss) and shareholders’ equity, see Note 27 to the Consolidated Financial Statements included in Item 18 of this annual report.

Critical Accounting Policies

Use of Estimates — The significant accounting policies used by the Group to prepare its financial statements are described in Note 3 to the Consolidated Financial Statements included in Item 18 of this annual report. The application of these policies requires management to make estimates, judgments and assumptions that are subjective and complex, and which affect the reported amounts of assets and liabilities as of any reporting date and the reported amounts of revenues and expenses during any reporting period. The Group’s financial presentation could be materially different if different estimates, judgments or assumptions were used. The following discussion addresses the estimates, judgments and assumptions that the Group considers most material based on the degree of uncertainty and the likelihood of a material impact if a different estimate, judgment or assumption were used.

Recoverability of Long-lived Assets Including Goodwill and Other Intangible Assets — The Group periodically reviews the carrying values of the long-lived assets held for use and the carrying values of assets to be disposed of, including goodwill and other intangible assets, when events and circumstances warrant such a review. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its estimated recovery value, in relation to its use or realization, as determined by reference to the most recent corporate plans. Management believes that the estimates of these recovery values are reasonable; however, changes in estimates of such recovery values could affect the relevant valuations. The analysis of each long-lived asset is unique and requires that management use estimates and assumptions that are deemed prudent and reasonable for a particular set of circumstances.

In particular in 2008, our market capitalization fell significantly below our company’s book value. Many factors could have contributed to this decline, including, without limitation, general economic and financial conditions, our financial results, the general decline in stock market prices and, from time to time, an illiquid trading market for our ADSs. As a result of such decline in market capitalization and other triggering events discussed in detail in Notes 9, 24, 27(g) and 27(k) of the Consolidated Financial Statements included in Item 18 of this annual report, the Company had to analyze its overall valuation and had performed an impairment analysis of its long-lived assets, including intangible assets, and goodwill in accordance with Italian GAAP and US GAAP (whenever the events or changes in circumstances indicate that the carrying amount of an asset may be not recoverable).

Based on this impairment analysis, the Company recorded in its consolidated statements of operation for the year ended December 31, 2008: (a) under Italian GAAP, impairment losses of € 2.9 million (related to a manufacturing facility located in the State of Bahia in Brazil) and € 1.8 million (related to two industrial buildings located near the Group’s headquarters in Italy) (see Notes 9, 24 and 27(k) of the Consolidated Financial Statements included in item 18 of this annual report); and (b) under US GAAP, impairment losses of € 1.5 million (related to the goodwill of its reporting unit named “Italian retail owned stores”) and € 3.6 million (related to the intangible asset “export incentive benefit agreement”) (see Note 27(g) of the Consolidated Financial Statements included in item 18 of this annual report). For a discussion of the differences between Italian GAAP and US GAAP with respect to the above impairment charges and the effect on net loss and shareholders’ equity as of December 31, 2008, please see Notes 27(g) and 27(k) of the Consolidated Financial Statements included in item 18 of this annual report.

Furthermore, the Company would like to underline that the net book value of goodwill (net of above impairment charge) as of December 31, 2008 under Italian GAAP and US GAAP is 0.6% and 1.1% of total assets, respectively (see notes 10 and 27(g) of the Consolidated Financial Statements included in item 18 of this annual report).

Recoverability of Deferred Tax Assets — Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for losses available for carry forward in the various tax jurisdictions. Deferred tax assets are reduced by a valuation allowance to an amount that is more likely than not to be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and the tax loss carry forwards are utilized.

Given the cumulative loss position of Natuzzi and of most of its Italian and foreign subsidiaries as of December 31, 2008 and 2007 (see note 14 of the Consolidated Financial Statements included in item 18 of this annual report), management considered the scheduled reversal of deferred tax liabilities and tax planning strategies, in making this assessment. However, management after a reasonable effort as of December 31, 2008 and 2007 has not identified any relevant tax planning strategies prudent and feasible available to reduce the need for a valuation allowance. Therefore, at December 31, 2008 and 2007 the realization of the deferred tax assets is primarily based on the scheduled reversal of deferred tax liabilities (see note 14 of the Consolidated Financial Statements included in item 18 of this annual report).

Based upon this analysis, management believes it is more likely than not that the Group will realize the benefits of the deductible differences and net operating loss carryforwards (see note 14 of the Consolidated Financial Statements included in item 18 of this annual report), net of the existing valuation allowance at December 31, 2008 and 2007.

In particular, changes in the assumptions and estimates related to future taxable income, tax planning strategies and scheduled reversal of deferred tax liabilities could affect the recoverability of the deferred tax assets. If actual results differ from such estimates and assumptions the Group financial position and results of operation may be affected.

Allowances for Returns and Discounts — The Group records revenues net of returns and discounts. The Group estimates sales returns and discounts and creates an allowance for them in the year of the related sales. The Group makes estimates in connection with such allowances based on its experience and historical trends in its large volumes of homogeneous transactions. However, actual costs for returns and discounts may differ significantly from these estimates if factors such as economic conditions, customer preferences or changes in product quality differ from the ones used by the Group in making these estimates.

Allowance for Doubtful Accounts — The Group makes estimates and judgments in relation to the collectibility of its accounts receivable and maintains an allowance for doubtful accounts based on losses it may experience as a result of failure by its customers to pay amounts owed. The Group estimates these losses using consistent methods that take into consideration, in particular, insurance coverage in place, the creditworthiness of its customers and general economic conditions. Changes to assumptions relating to these estimates could affect actual results. Actual results may differ significantly from the Group’s estimates if factors such as general economic conditions and the creditworthiness of its customers are different from the Group’s assumptions.

Revenue Recognition — Under Italian GAAP, the Group recognizes sales revenue, and accrues associated costs, at the time products are shipped from its manufacturing facilities located in Italy and abroad. A significant part of the products are shipped from factories directly to customers under sales terms such that ownership, and thus risk, is transferred to the customer when the customer takes possession of the goods. These sales terms are referred to as “delivered duty paid,” “delivered duty unpaid,” “delivered ex quay” and “delivered at customer factory.” Delivery to the customer generally occurs within one to six weeks from the time of shipment. The Group’s revenue recognition under Italian GAAP is at variance with U.S. GAAP. For a discussion of revenue recognition under U.S. GAAP, see Note 27(c) to the Consolidated Financial Statements included in Item 18 of this annual report.

Results of Operations

Summary — Despite a series of challenges, including increasingly stiff industry competition and reduced consumer discretionary spending as a result of the global economic downturn, the Group’s performance in 2008 improved as compared with its performance in 2007. In 2008, the Group had net losses of € 61.9 million, as compared to net losses of € 62.6 million in 2007, and reported a 5.0% increase in net sales, from € 634.4 million in 2007 to € 666.0 million in 2008. In 2008, the Group sold 2,722,307 seats, up 5.0% as compared to 2007. In 2008, net sales of the Natuzzi branded products, which targets the high-end of the market, decreased by 1.0 % to € 332.6 million from € 336.1 million in 2007, with the number of Natuzzi-branded seats sold decreasing by 3.3% over 2007. Net sales of the medium/low-priced Italsofa furniture increased by 12.2% in 2008, to € 255.2 million from € 227.4 million in 2007, with the number of Italsofa seats sold increasing by 11.9%.

The Group’s negative performance in 2008 was principally due to the negative impact on sales revenues of the euro’s appreciation against the U.S. dollar and British pound, a slight decrease in the sales volume of Natuzzi-branded products and increases in other expenses. In particular, we believe that the underperformance in sales was primarily caused by a number of ongoing factors in the global economy that have negatively impacted the discretionary spending of consumers. These economic factors include lower home values, rising levels of unemployment and personal debt, and reduced access to consumer credit. These developments, coupled with the ongoing malaise of the global financial system and capital markets, have caused a decline in consumer confidence and curtailed consumer spending.

Due to only a marginal increase in the sales volume of our products, higher raw material prices, the poor performance of the Group’s retail network, and the low efficiency of the manufacturing plants operating in Brazil, the Group reported disappointing operating losses in 2008 (despite realizing a significant improvement in operating margin levels as from 2007) and yet still maintained a sound net financial position. The increase in other expenses, which was also a contributing factor to our negative performance in 2008, was largely the result of: (1) exchange differences arising from ordinary operations (€ 11.0 million in 2008 compared to € 7.1 million in 2007); (2) an impairment charge of € 2.9 million relating to our manufacturing facility located in Brazil and an impairment charge of € 1.8 million relating to two industrial buildings located close to the Group’s headquarters in Italy; and (3) a € 4.6 million expense for one-time termination benefits.

Despite these challenges, the Group continued to invest in the repositioning of the Natuzzi brand and the reorganization of its sales activities in 2008, as well as in the ongoing restructuring of its operations, with the aim of regaining its competitiveness and ensuring its long-term profitability.

The following table sets forth certain income statement data expressed as a percentage of net sales for the years indicated:

		Year Ended December 31,
		2008				2007				2006
Net sales			100.0	%			100.0	%			100.0	%
Cost of sales			71.9				72.6				66.7
Gross profit			28.1				27.4				33.3
Selling expenses			25.9				27.4				25.3
General and administrative expenses			7.4				7.7				5.7
Operating income (loss)			(5.2	)			(7.7	)			2.3
Other income (expense), net			(3.9	)			(0.4	)			0.4
Income taxes			0.2				1.8				1.0
Net earnings (loss)			(9.3	)			(9.9	)			1.7

See “Item 4. Information on the Company—Markets” for tables setting forth the Group’s net leather- and fabric-upholstered furniture sales and seats sold, which are broken down by geographic market, for the years ended December 31, 2006, 2007 and 2008.

2008 Compared to 2007

Net Sales for 2008, including sales of leather- and fabric-upholstered furniture and other sales (principally sales of polyurethane foam and leather sold to third parties as well as of accessories), increased 5.0% to € 666.0 million, as compared to € 634.4 million in 2007.

Net sales for 2008 of leather- and fabric-upholstered furniture increased 4.3% to € 587.8 million, as compared to € 563.5 million in 2007. The 4.3% increase was due to a combination of factors, principally (i) a 5.0% increase in the number of seats sold, (ii) a 3.9% decrease in sales as reported in euro stemming from the appreciation of the euro against the U.S. dollar, and (iii) a 3.2% increase due to targeted pricing strategies and advertising with respect to certain product models. Net sales of Natuzzi-branded furniture accounted for 56.6% of our total net sales in 2008 (as compared to 59.6% in 2007), and net sales of Italsofa-branded products accounted for 43.4% of our total net sales for 2008 (as compared to 40.4% in 2007).

Net sales for 2008 of leather upholstered furniture increased 6.4% to € 535.2 million, as compared to € 502.9 million in 2007, and net sales for 2008 of fabric upholstered furniture decreased 13.2% to € 52.6 million, as compared to € 60.6 million in 2007.

In the Americas, net sales for 2008 of upholstered furniture increased by 5.0% to € 208.6 million, as compared to € 198.6 million in 2007, and seats sold increased by 8.2% to 1,272,559, as compared to 1,176,585 in 2007. Net sales of the lower-priced Italsofa-branded furniture increased 16.5% compared to 2007, while net sales of the higher-priced Natuzzi-branded furniture decreased 3.5%. In Europe, net sales for 2008 of upholstered furniture increased 1.3% to € 323.4 million, as compared to € 319.4 million in 2007, due to the combined effect of a 1.3% decrease in net sales of Natuzzi-branded furniture and to a 5.3% increase in net sales of Italsofa-branded furniture. In the Rest of the World, net sales for 2008 of upholstered furniture increased 22.0% to € 55.5 million, as compared to € 45.5 million in 2007, due to a 9.9% increase in net sales of Natuzzi-branded furniture and to a 45.5% increase in net sales of Italsofa-branded furniture.

Net sales for 2008 of the Natuzzi-branded furniture decreased 1.0% to € 332.6 million, as compared to € 336.1 million in 2007, with the number of Natuzzi-branded seats sold decreasing by 3.3%. During 2008, net sales of the medium/low-priced Italsofa furniture increased 12.2% to € 255.2 million, as compared to € 227.4 million in 2007, with the number of Italsofa seats sold increasing by 11.9%.

Total net sales of Divani & Divani by Natuzzi and Natuzzi Stores increased 21.5% in 2008 to € 139.9 million, as compared to € 115.1 million in 2007.

In 2008, total seats sold increased 5.0% to 2,722,307 from 2,592,393 sold in 2007. Negative performance was recorded in the Europe region (down 1.1% to 1,211,939 seats), while positive results were achieved in the Americas (up 8.2% to 1,272,559 seats) and the Rest of the World (up 25.2% to 237,809 seats).

The following provides a more detailed country by country examination of the changes in volumes by brand in our principal markets:

• Natuzzi Brand. In terms of seats sold under the Natuzzi brand, the Group recorded negative results in the United States (-2.6%), Italy (-13.7%), Spain (-28.0%), Ireland (-30.8%), Portugal (-7.4%), Denmark (-14.9%) and Belgium (-1.0%). Positive results were reported in Canada (+3.7%), Korea (+4.0%), Holland (+18.5%) and China (+20.9%).

• Italsofa Brand. In terms of seats sold under the Italsofa brand, the Group recorded decreases in many countries, including Holland (-11.4%), Germany (-9.7%), Portugal (-33.0%), the United Kingdom (-2.0%), Ireland (-46.3%), Chile (-68.0%), Sweden (-30.1%) and Norway (-46.7%). Positive results were reported in Spain (+13.4%), France (+31.2%), Belgium (+14.7%), Australia (+ 32.4) and China (+599.1%).

Other Net Sales (principally sales of polyurethane foam and leather sold to third parties, as well as of accessories) increased 10.3% to € 78.2 million, as compared to € 70.9 million in 2007.

Cost of Sales in 2008 increased in absolute terms by 3.9% to € 478.8 million (representing 71.9% of net sales), as compared to € 460.6 million (or 72.6% of net sales) in 2007. The improvement in cost of sales, as a percentage of net sales, was due to the decrease in the cost of leather and of other principal raw materials, as well as to the lower impact of fixed costs resulting from the increase in net sales.

Gross Profit. The Group’s gross profit increased 7.7% in 2008 to € 187.2 million, as compared to € 173.8 million in 2007 as a result of the factors described above.

Selling Expenses decreased 0.9% in 2008 to € 172.3 million, as compared to € 173.9 million in 2007, and, as a percentage of net sales, decreased from 27.4% in 2007 to 25.9% in 2008. This decrease was mainly due to lower advertising and exhibition costs.

General and Administrative Expenses. In 2008, the Group’s general and administrative expenses increased 1.8% to € 49.9 million, as compared to € 49.0 million in 2007, and, as a percentage of net sales, decreased from 7.7% in 2007 to 7.4% in 2008.

Operating Loss. The Group had an operating loss for 2008 of € 35.0 million, as compared to an operating loss of € 49.1 million in 2007, as a result of the factors described above.

Other Income (expenses), net. The Group registered other expenses, net, of € 25.8 million in 2008 as compared to other expenses, net of € 2.6 million in 2007. Net interest expenses, included in other income (expense), net, in 2008 was € 0.2 million, as compared to net income of € 1.7 million in 2007. See Note 24 to the Consolidated Financial Statement included in Item 18 of this annual report.

The Group registered a € 11.0 million foreign-exchange net loss in 2008 (included in other income (expense), net), as compared to a net loss of € 7.1 million in 2007. The foreign exchange loss in 2008 primarily reflected the following factors:

•

a net realized loss of € 1.3 million in 2008 (compared to a gain of € 5.9 million in 2007) on domestic currency swaps due to the difference between the forward rates of the domestic currency swaps and the spot rates at which the domestic currency swaps were closed (the Group uses the forward rate to hedge its price risks against unfavourable exchange rate variations);

•

a net realized loss of € 6.3 million in 2008 (compared to a loss of € 3.9 million in 2007), from the difference between invoice exchange rates and collection/payment exchange rates;

•

a net unrealized gain of € 1.0 million in 2008 (compared to an unrealized loss of € 10.1 million in 2007) on accounts receivable and payable; and

•

a net unrealized loss of € 4.4 million in 2008 (compared to an unrealized gain of € 0.9 million in 2007), from the mark-to-market of domestic currency swaps.

The Group also recorded other expenses, included in other income (expense), net, in 2008 of € 14.5 million, compared to other income of € 2.8 million reported in 2007. This income reflected the following factors:

•

a € 4.7 million expense due to the impairment of long-lived assets in 2008, while no such expenses were registered in 2007;

•

a € 4.6 million expense for the one-time termination benefits incurred in 2008, while no such expenses were registered in 2007;

•

a € 3.2 million contingent-liabilities provision for estimated losses related to some claims (including tax claims) and legal actions in 2008, while in 2007, the provisions for contingent liabilities amounted to € 3.0 million;

•

other expenses of € 1.2 million deriving from the write-off of fixed assets in 2008, while in 2007, the other expenses deriving from the write off of fixed assets amounted to € 2.3 million;

•

the Group did not register any refunds from tax authorities in 2008, while in 2007 it registered a refund of € 3.0 million obtained from the Italian tax authorities for income and other taxes not due related to prior years (in addition in 2007, the Italian tax authorities confirmed that a portion of the income tax of € 0.7 accrued in year 2006, was no longer due);

•

the Group did not register any provisions or reversals for legal actions in 2008, while in 2007 it registered an income of € 1.5 million due to the write off of a provision for legal actions accrued in 2006, which resulted from a settlement of the claim; and

•

€ 0.8 million as other expense, net in 2008, compared to other income, net of € 2.9 million in 2007.

Since 2003, the Group has not followed hedge accounting and records all fair value changes of its domestic currency swaps in its income statement.

Income Taxes. In 2008, the Group suffered a negative effective tax rate of 2.6% on the loss before taxes and minority interest, compared to a Group’s effective negative tax rate of 22.2% reported in 2007.

For the Group’s Italian companies the negative effective tax rate (or the obligation to accrue taxes despite reporting a loss before taxes) was due to the regional tax denominated “Irap” (see Note 14 to the Consolidated Financial Statements in Item 18 of this annual report). This regional tax is applicable to the gross profit determined as the difference between gross revenue (excluding interest and dividend income) and direct production costs (excluding labor costs, interest expenses and other financial costs). As a consequence, even if an Italian company reports a pre-tax loss, it could be subject to this regional tax. In 2008, most Italian companies within the Group reported losses but had to pay “Irap” tax.

In 2007, the Group’s effective income tax rate was negatively affected by the considerable increase in the deferred tax assets valuation allowance. In fact, in 2007 most of the Italian and foreign subsidiaries realized significant pre-tax losses and were in a cumulative loss position, so management did not consider it more likely than not that the deferred tax asset of those companies would be realized in the scheduled reversal periods (see Note 14 to the Consolidated Financial Statements in Item 18 of this annual report).

Some of the Group’s foreign subsidiaries (Italsofa Shanghai Ltd, Softaly Shanghai Ltd, Natuzzi China Ltd, Italsofa Bahia Ltd, Minuano Nordeste S.A. and Italsofa Romania) are entitled to significant tax benefits, such as corporate income tax exemptions or reductions in statutory corporate income tax rates, the most significant of which will expire in 2012. As a consequence, some of those foreign subsidiaries reported a lower effective tax rate than the Group’s Italian subsidiaries. See “Item 4. Information on the Company—Incentive Programs and Tax Benefits.”

Net Loss. The Group reported a net loss of € 61.9 million in 2008, as compared to a net loss of € 62.6 million in 2007. On a per-Ordinary Share, or per-ADS basis, the Group had net losses of € 1.13 in 2008, as compared to net losses of € 1.14 in 2007.

As disclosed in Note 27 to the Consolidated Financial Statements included in Item 18 of this annual report, established accounting principles in Italy vary in certain significant respects from generally accepted accounting principles in the United States. Under U.S. GAAP, the Group would have had net losses of € 55.7 million and € 60.0 million in 2008 and 2007, respectively, and net earnings of € 14.5 million in 2006, compared to net losses of € 61.9 million and € 62.6 million in 2008 and 2007, respectively, and net earnings of € 12.3 million in 2006 under Italian GAAP.

2007 Compared to 2006

Net Sales for 2007, including sales of leather- and fabric-upholstered furniture and other sales (principally sales of polyurethane foam and leather sold to third parties as well as of accessories), decreased 13.7% to € 634.4 million, as compared to € 735.4 million in 2006.

Net sales for 2007 of leather- and fabric-upholstered furniture decreased 14.6% to € 563.5 million, as compared to € 660.2 million in 2006. The 14.6% decrease was due to a 14.0% decrease in the number of seats sold, a 2.9% decrease stemming from the appreciation of the euro against the U.S. dollar, partially offset by a 2.3% increase deriving from the change in the mix of products sold and product prices. Net sales of Natuzzi-branded furniture accounted for 59.6% of our total net sales in 2007, and net sales of Italsofa products accounted for 40.4% of our total net sales for 2007. Net sales for 2007 of Natuzzi-branded furniture decreased 19.2% in 2007, while net sales of Italsofa-branded furniture decreased 6.8%, in each case as compared to 2006.

Net sales for 2007 of leather upholstered furniture decreased 12.2% to € 502.9 million, as compared to € 573.1 million in 2006, and net sales for 2007 of fabric upholstered furniture decreased 30.5% to € 60.6 million, as compared to € 87.2 million in 2006.

In the Americas, net sales for 2007 of upholstered furniture decreased by 19.1% to €198.6 million, as compared to € 245.4 million in 2006, and seats sold decreased by 13.8% to 1,176,584, as compared to 1,364,873 in 2006. Net sales of the lower-priced Italsofa-branded furniture decreased 14.7% compared to 2006, while net sales of the higher-priced Natuzzi-branded furniture decreased 22.0%. In Europe, net sales for 2007 of upholstered furniture decreased 12.9% to € 319.4 million, as compared to € 366.6 million in 2006, due to a 18.5% decrease in net sales of Natuzzi-branded furniture and to a 2.7% decrease in net sales of Italsofa-branded furniture. In the Rest of the World, net sales for 2007 of upholstered furniture decreased 5.8% to € 45.5 million, as compared to € 48.2 million in 2006, due to a 12.7% decrease in net sales of Natuzzi-branded furniture, which was partially offset by an 11.1% increase in net sales of Italsofa-branded furniture.

Net sales for 2007 of the Natuzzi-branded furniture decreased 19.2% to € 336.1 million, as compared to € 416.2 million in 2006, with the number of Natuzzi-branded seats sold decreasing by 22.3%. During 2007, net sales of the medium/low-priced Italsofa furniture decreased 6.8% to € 227.4 million, as compared to € 244.0 million in 2006, with the number of Italsofa seats sold decreasing by 5.9%.

Total net sales of Divani & Divani by Natuzzi and Natuzzi Stores decreased 17.0% in 2007 to € 115.1 million, as compared to € 138.7 million in 2006.

In 2007, total seats sold decreased 14.1% to 2,592,393 from 3,016,702 sold in 2006. Negative performance was recorded in the Americas (down 13.8% to 1,176,584 seats), in Europe (down 15.4% to 1,225,882 seats) and the Rest of the World (down 6.0% to 189,926 seats).

The following provides a more detailed country by country examination of the changes in volumes by brand in our principal markets:

• Natuzzi Brand. In terms of seats sold under the Natuzzi brand, the Group recorded negative results in the United States (-23.1%), Italy (-21.8%), Spain (-30.2%), France (-18.5%), Belgium (-24.9%), the United Kingdom (-37.9%), Germany (-25.3%) and Holland (-36.9%). Positive performances were reported in Canada (+5.5%), Korea (+35.8%) and Ireland (+24.5%).

• Italsofa Brand. In terms of seats sold under the Italsofa brand, the Group recorded significant decrease in many countries, including the United States (-9.5%), Germany (-10.7%), France (-8.2%), the United Kingdom (-9.9%), Belgium (-7.9%), Canada (-12.5%), Sweden (-15.9%), Norway (-32.2%). Positive performances were reported in Spain (+16.7%), Holland (+6.5%), Italy (+6.3%) and Japan (+37.4%).

Other Net Sales (principally sales of polyurethane foam and leather sold to third parties, as well as of accessories) decreased 5.7% to € 70.9 million, as compared to € 75.2 million in 2006.

Cost of Sales in 2007 decreased in absolute terms by 6.1% to € 460.6 million (representing 72.6% of net sales), from € 490.5 million (or 66.7% of net sales) in 2006. The increase in cost of sales, as a percentage of net sales, was due to the appreciation of the euro against the U.S. dollar, and to the increase, expressed in constant exchange rates, in the cost of leather and of other principal raw materials, such as polyurethane foam, polyester fibers and chemical.

Gross Profit. The Group’s gross profit decreased 29.0% in 2007 to € 173.8 million, as compared to € 244.9 million in 2006 as a result of the factors described above.

Selling Expenses decreased 6.6% in 2007 to € 173.9 million, as compared to € 186.2 million in 2006, and, as a percentage of net sales, increased from 25.3% in 2006 to 27.4% in 2007. This increase was mainly due to higher advertising and exhibition costs.

General and Administrative Expenses. In 2007, the Group’s general and administrative expenses increased 16.1% to € 49.0 million, as compared to € 42.2 million in 2006, and, as a percentage of net sales, increased from 5.7% in 2006 to 7.7% in 2007. The increase was primarily attributable to higher administrative salaries and depreciation costs.

Operating Loss. The Group had an operating loss for 2007 of € 49.1 million, as compared to an operating income of € 16.5 million in 2006, as a result of the factors described above.

Other Income (expenses), net. The Group registered other expenses, net, of € 2.6 million in 2007 as compared to other income of € 2.8 million in 2006. Net interest income, included in other income (expense), net, in 2007 was € 1.7 million, as compared to € 1.5 million in 2006. See Note 24 to the Consolidated Financial Statement included in Item 18 of this annual report.

The Group registered a € 7.1 million foreign-exchange net loss in 2007 (included in other income (expense), net), as compared to a net gain of € 0.8 million in 2006. The foreign exchange loss in 2007 reflected primarily the following factors:

•

a net realized gain of € 5.9 million in 2007 (compared to a gain of € 0.7 million in 2006) on domestic currency swaps due to the difference between the forward rates of the domestic currency swaps and the spot rates at which the domestic currency swaps were closed (the Group uses the forward rate to hedge its price risks against unfavourable exchange rate variations);

•

a net realized loss of € 3.8 million in 2007 (compared to a loss of € 8.2 million in 2006), from the difference between invoice exchange rates and collection/payment exchange rates;

•

a net unrealized loss of € 10.1 million in 2007 (compared to an unrealized gain of € 2.8 million in 2006) on accounts receivable and payable; and

•

a net unrealized gain of € 0.9 million in 2007 (compared to an unrealized gain of € 5.5 million in 2006), from the mark-to-market of domestic currency swaps.

The Group also recorded other income, included in other income (expense), net, in 2007 of € 2.8 million, compared to other income of € 0.5 million reported in 2006. This income reflected the following factors:

•

a € 3.0 million contingent-liabilities provision for estimated losses related to some claims (including tax claims) and legal actions. In 2006, the provisions for contingent liabilities amounted to € 5.8 million;

•

other expenses of € 2.3 million deriving from the write-off of fixed assets. No such expenses were registered in 2006;

•

in 2007 the Group did not register any revenue from export incentive benefits, while in 2006 it registered revenue of € 3.4 million. This incentive is measured on the basis of the export sales realized by the subsidiaries Italsofa Bahia Ltd and Minuano Nordeste S.A.;

•

a refund of € 3.0 million obtained from the Italian tax authorities for income and other taxes not due related to prior years; in addition, the Italian tax authorities confirmed that a portion of the income tax of € 0.7 accrued in year 2006, was no longer due. In 2006 the Company did not record revenues for tax refund;

•

an income of € 1.5 million due to the write off of a provision for legal action accrued in 2006, which resulted from a settlement of the claim; and

•

€ 2.9 million as other income, net, that is the same amount it had registered in 2006.

Income Taxes. In 2007, the Group realized an effective negative tax rate of 22.0% on the loss before taxes and minority interest, compared to the Group’s effective income tax rate of 36.7% reported in 2006.

The 2007 Group’s effective income tax rate was negatively affected by the considerable increase in deferred tax assets valuation allowance. In fact, in 2007 most of the Italian and foreign subsidiaries realized significant pre-tax losses and were in a cumulative loss position, so management did not consider it more likely than not that the deferred tax asset of those companies would be realized in the scheduled reversal periods (see Note 14 to the Consolidated Financial Statements in Item 18 of this annual report). In addition, for the Group’s Italian companies the effective negative tax rate was due to the regional tax denominated “Irap” (see Note 14 to the Consolidated Financial Statements in Item 18 of this annual report). This regional tax is applicable to the gross profit determined as the difference between gross revenue (excluding interest and dividend income) and direct production costs (excluding labor costs, interest expenses and other financial costs). As a consequence, even if an Italian company reports a pre-tax loss, it could be subject to this regional tax. In 2007, most Italian companies within the Group reported losses but had to pay “Irap” tax.

Some of the Group’s foreign subsidiaries (Italsofa Shanghai Ltd, Softaly Shanghai Ltd, Italsofa Bahia Ltd, Minuano Nordeste S.A. and Italsofa Romania) are entitled to significant tax benefits, such as corporate income tax exemptions or reductions in statutory corporate income tax rates, the most significant of which will expire in 2012. As a consequence, some of those foreign subsidiaries reported a lower effective negative tax rate than the Group’s Italian subsidiaries. See “Item 4. Information on the Company—Incentive Programs and Tax Benefits.”

Net Loss. The Group reported a net loss of € 62.6 million in 2007, as compared to net earnings of € 12.3 million in 2006. On a per-Ordinary Share, or per-ADS basis, the Group had net losses of € 1.14 in 2007, as compared to a net earnings of € 0.23 in 2006.

As disclosed in Note 27 to the Consolidated Financial Statements included in Item 18 of this annual report, established accounting principles in Italy vary in certain significant respects from generally accepted accounting principles in the United States. Under U.S. GAAP, for the years ended December 31, 2007, 2006 and 2005, the Group would have had net losses of € 60.0 million, net earnings of € 14.5 million, net losses of € 6.9 million, respectively, compared to net losses of € 62.6 million, net earnings of € 12.3 million, net losses of € 14.6 million, respectively, under Italian GAAP for the same periods.

Liquidity and Capital Resources

The Group’s cash and cash equivalents were € 47.3 million as of December 31, 2008, as compared to € 87.5 million as of December 31, 2007. The most significant changes in the Group’s cash flows between 2008 and 2007 are described below.

Cash flows used in operating activities were € 32.0 million in 2008, as compared to cash flows used in operations of € 15.4 million in 2007. This increase in cash flow in operating activities of € 16.6 million from 2007 to 2008 resulted principally due to the negative impact of more timely payments to suppliers, compared to considerable delays in payments to suppliers in 2007. These negative effects were partially off-set by the positive impact of cash flow generated by the reduction of inventory levels in 2008.

Cash flows used in investment activities in 2008 decreased € 12.6 million to € 13.5 million. The decrease in cash used in investment activities in 2008 was due to lower capital expenditures. Capital expenditures were € 16.0 million and € 26.5 million in 2008 and 2007, respectively. In both 2008 and 2007, capital expenditures related primarily to the opening of new Natuzzi stores and galleries as well as improvements at existing manufacturing facilities in order to increase productivity (including the purchase of equipment). In 2008, the Group continued to invest in order to set up the “SAP” for its domestic and foreign companies. See “Item 3. Key Information—Risk Factors—Introduction of a new integrated management system.”

Cash provided by financing activities in 2008 totalled € 4.0 million, as compared to € 3.5 million of cash provided by financing activities in 2007. The cash provided by financing activities in 2008 was positively affected by the increase in short term borrowings and by the higher proceeds of long term-debt.

As of December 31, 2008, the Group had available unsecured lines of credit for cash disbursements totalling € 45.5 million, of which € 9.7 million (or 21.3% of the total) were used. The Group uses these lines of credit to manage its short-term liquidity needs. The unused portions of these lines of credit amounted to approximately € 35.8 million (see Note 11 to the Consolidated Financial Statements included in Item 18 of this annual report) as of December 31, 2008. Amounts borrowed by the Group under these credit facilities are not subject to any restrictions on their use, but are repayable either on demand (for bank overdrafts) or on a short-term basis (for other bank borrowings under existing credit lines). Given their nature, these lines of credit may be terminated by the banks at any time. The Group’s borrowing needs are not subject to seasonal fluctuations.

In light of the recent downturn of the global economy and uncertainty about these conditions in the foreseeable future, we are focused on effective cash management, controlling costs, and preserving cash related to capital expenditures and acquisition of stores. For example, we reviewed all capital projects for 2009 and are committed to execute only those projects that are necessary for business operations or that are projected to have a high rate of return.

Management believes that the Group’s working capital is sufficient for its present requirements. The Group’s principal source of liquidity is its existing cash and cash equivalents, supplemented to the extent needed to meet the Group’s short term cash requirements by accessing the Group’s existing lines of credit. The Group expects to continue relying on existing cash and cash equivalents as its principal source of liquidity in the future. As of December 31, 2008, the Group’s long-term contractual cash obligations amounted to € 71.2 million of which € 13.4 million comes due in 2009 (€ 13.5 million in 2008). See “Item 5. Operating and Financial Review and Prospects—Contractual Obligations and Commitments.” The Group’s long-term debt represented less than 1.0% of shareholders’ equity as of December 31, 2008 and 2007 (see Note 16 to the Consolidated Financial Statements included in Item 18 of this annual report). The Group’s principal uses of funds are expected to be the payment of operating expenses, working capital requirements, capital expenditures and restructuring of operations.

Contractual Obligations and Commitments

The Group’s current policy is to fund its cash needs, accessing its cash on hand and existing lines of credit, consisting of short-term credit facilities and bank overdrafts, to cover any short-term shortfall. The Group’s policy is to procure financing and access credit at the Company level, with the liquidity of Group companies managed through a cash-pooling zero-balancing arrangement with a centralized bank account at the Company level and sub-accounts for each subsidiary. Under this arrangement, cash is transferred to the sub-accounts as needed on a daily basis to cover the subsidiaries’ cash requirements, but any balance on the sub-accounts must be transferred back to the top account at the end of each day, thus centralizing coordination of the Group’s overall liquidity and optimizing the interest earned on cash held by the Group.

As of December 31, 2008, the Group’s long-term debt consisted of € 3.8 million (including the current portion of such debt) outstanding under subsidized loans granted by the Italian government (see “Item 4. Incentive Programs and Tax Benefits”) and its short-term debt consisted of € 9.7 million outstanding under its existing lines of credit, comprised entirely of bank overdrafts. This compares to € 2.4 million of long-term debt and € 7.6 million of short-term debt outstanding as of December 31, 2007.

As of December 31, 2008, all of the Group’s long-term debt and short-term debt were denominated in euro. For the maturity profile of the Group’s long-term debt, please consult the table labelled “Contractual Obligations” below. Short-term overdrafts are payable on demand. Other bank borrowings under existing lines of credit have other short-term maturities. The bulk of the group’s long-term debt bears interest at a fixed rate of 2.25% per annum, with more than 44% of its long-term debt bearing interest at 0.25% per annum. The Group’s short-term debt bears interest at floating rates, with a weighted average interest rate per annum of 3.31% and 6.22% on the Group’s overdraft and other short-term borrowings, respectively, as of December 31, 2008, compared to 5.03% and 6.18%, respectively, as of December 31, 2007. The Group does not have outstanding any other debt instruments, except that it has entered into domestic currency swaps to reduce its exposure to the risk of short-term declines in the value of its foreign-currency denominated revenues and not for speculative or trading purposes. For additional information on these currency swaps, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Exchange Rate Risks.

The Group maintains cash and cash equivalents in the currencies in which it conducts its operations, principally euro, U.S. dollars, Canadian dollars, Australian dollars and British pounds.

The following tables set forth the material contractual obligations and commercial commitments of the Group ( of the type required to be disclosed pursuant to Item 5F of Form 20-F) as of December 31, 2008:

		Payments Due by Period
		(thousands of euro)
						Less than												After 5
Contractual Obligations		Total				1 year				2-3 years				4-5 years				years
Long-Term Debt(1)			3,780				514				1,353				1,315				598
Interest due on Long Term Debt (2)			235				57				96				59				23
Operating Leases (3)			67,175				12,794				22,150				16,267				15,964
Total Contractual Cash Obligations			71,190				13,365				23,599				17,641				16,585

Under Italian law the Company and its Italian subsidiaries are required to pay a termination indemnity to their employees when these cease their employment with the Company or the relevant subsidiary. Likewise, the Company and its Italian subsidiaries are required to pay an indemnity to their sales agents upon termination of the sales agent’s agreement. As of December 31, 2008, the Group had accrued an aggregate employee termination indemnity of € 31.7 million. In addition, as of December 31, 2008, the Company had accrued a provision for contingent liabilities of € 10.5 million, a sales agent termination indemnity of € 1.4 million and a one-time termination indemnity benefit of € 2.5 million. The one-time termination benefit includes the amount to be paid on the separation date to certain workers to be terminated on an involuntary base. See Notes 3(n) and 17 of the Consolidated Financial Statements included in Item 18 of this annual report. These amounts are not reflected in the table above since it is not possible to determine when the amounts that have been accrued will become payable.

Amount of Commitment Expiration Per Period

Total

(thousands of euro)

Amounts

Less than

After 5

Other Commitments

Committed

1 year

2-3 years

4-5 years

years

Guarantees(1)

26,005

26,005

—

—

—

The Group is also involved in a number of claims (including tax claims) and legal actions arising in the ordinary course of business. As of December 31, 2008, the Group had accrued provisions relating to these contingent liabilities in the amount of €10.5 million. See “Item 8. Financial Information—Legal and Governmental Proceedings” and Note 17 to the Consolidated Financial Statements included in Item 18 of this annual report.

Related Party Transactions

Please see “Item 7. Major Shareholders and Related Party Transactions” of this annual report.

Product & Retail Development

The Product & Retail Development department has set up, following a strategic analysis, a Center for Retail Competence whose main objectives are, on a world wide basis, the following:

•

to draw the retail business model for the Group;

•

to design an auditing and control system for the Group’s retail business model under the supervision of top management;

•

to define the consumer segments to be targeted;

•

to define a product mix more consistent with targeted consumers and market;

•

to define a store concept consistent with the Natuzzi brand’s high-end positioning;

•

to define store formats (size, location, aesthetic and commercial features);

•

to define development plans and network re-positioning; and

•

to define the correct communication tools and training.

The expansion of products that the Group offers for the high-end segment has required an adjustment to the lay-out of the products at the points of sale. The Natuzzi product offer is increasingly oriented towards the concept of total living. Therefore, the mono-brand Natuzzi points of sales have been recently refurnished in order to re-create a complete living room environment, including the use of interior decorations.

Innovation remains a strategic activity for the Group. Product and Retail Development efforts in 2008 have continued to focus on the design of new products, particularly the study of more appropriate furniture coverings, and on improvement of the manufacturing process, with the goal of anticipating the preferences of our target consumers. See “Item 4. Information on the Company—Products” and “Item 4. Information on the Company—Manufacturing.”

The Group conducts all of its activities in accordance with stringent quality standards and has earned the ISO 9001 certification for quality and the ISO 14001 certification for its low environmental impact. The ISO 14001 certification applies also to the Company’s tannery subsidiary, Natco S.p.A. The plant of Laterza and the Santeramo headquarters have received a further ISO 9001 certification for the design and production of furnishing and accessories.

In 2008, the Group invested approximately € 8.7 million in research and development activities, compared to € 10.1 million and € 9.4 million in 2007 and 2006, respectively. More than 150 highly-qualified people work in these activities, and more than 100 new sofa models are generally introduced each year. The Group conducts its research and development efforts in its headquarters in Santeramo in Colle, Italy.

New Accounting Standards under Italian and U.S. GAAP

Process of Transition to International Accounting Standards — Following the entry into force of European Regulation No. 1606 of July 2002, EU companies whose securities are traded on regulated markets in the EU have been required, since 2005, to adopt International Financial Reporting Standards (“IFRS”), formerly known as IAS, in the preparation of their consolidated financial statements. Given that the Company’s securities are only traded on the NYSE, the Company is not subject to this requirement and continues to report its financial results in accordance with Italian GAAP and to provide the required reconciliation of certain items to U.S. GAAP in the Company’s annual reports on Form 20-F.

Italian GAAP — The are no recently issued accounting standards under Italian GAAP that have not been adopted by the Group.

U.S. GAAP — The new accounting standards under U.S. GAAP relevant for the Company are outlined below:

SFAS No. 141R and SFAS No. 160:

In December 2007, the FASB issued FASB Statement No. 141R, Business Combinations (Statement 141R) and FASB Statement No. 160, Non-controlling Interest in Consolidated Financial Statements — an amendment to ARB No. 51 (Statement 160). Statement 141R and 160 require most identifiable assets, liabilities, non-controlling interest, and goodwill acquired in a business combination to be recorded at “full fair value” and require non-controlling interest (previously referred to as minority interest) to be reported as a component of equity, which changes the accounting for transactions with non-controlling interest holders. Both Statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. Statement 141R will be applied to business combinations occurring after the effective date. Statement 160 will be applied prospectively to all non- controlling interests, including any that arose before the effective date. The Company is currently evaluating the provisions of these standards, but does not expect adoption to have a material impact on its financial position and results of operations.

SFAS No. 157:

On January 1, 2008, the Company adopted the provisions of FASB Statement No. 157, Fair Value Measurements (Statement 157), for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Statement 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Statement 157 also established a framework for measuring fair value and expands disclosures about fair value measurements. FASB Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157”, delays the effective date of Statement 157 until fiscal year beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. In accordance with FSP FAS 157-2, the Company has not applied the provisions of Statement 157 to the measurement of long-lived assets upon recognition of an impairment charge during 2008 (see Notes 9, 24 and 27 (k) to the Consolidated Financial Statements included in Item 18 of this annual report).

On January 1, 2009, the Company was required to apply the provisions of Statement 157 to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company has evaluated these provisions and it has concluded that the adoption of this provisions will not have a material impact on its financial position and results of operations.

In October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active”, which was effective immediately. FSP FAS 157-3 clarifies the application of Statement 157 in cases where the market for a financial instrument is not active and provides an example to illustrate key considerations in determining fair value in those circumstances. The Company has evaluated the provisions of FSP FAS 157-3 and it has concluded that the adoption of this provision will not have a material impact on its financial position and results of operations.

SFAS No. 159:

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115 (Statement 159). Statement 159 gives the Company the irrevocable option to carry most financial assets and liabilities at fair value that are not currently required to be measured at fair value. If the fair value option is elected, changes in fair value would be recorded in earnings at each subsequent reporting date. Statement 159 is effective for the Company’s 2008 fiscal year. The adoption of Statement 159 did not have any impact on the Company’s consolidated financial statements.

SFAS No. 161:

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Accounting for Derivative Instruments and Hedging Activities (Statement 161), which amends FASB Statement No. 133. Statement 161 requires companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No.133, and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. The required disclosures include the fair value of derivative instruments and their gains or losses in tabular format, information about credit-risk-related contingent features in derivative agreements, counterparty credit risk, and the company’s strategies and objectives for using derivative instruments. The Statement expands the current disclosure framework in FASB Statement No.133. Statement 161 is effective prospectively for periods beginning on or after November 15, 2008. The Company has evaluated the provisions of this standard and it has concluded that the adoption will not have a material impact on its financial position and results of operations.

SFAS No. 165:

In May 2009, the FASB issued Statement of Financial Accounting Standard No. 165, Subsequent Events (Statement 165) addressing accounting and disclosure requirements related to subsequent events. Statement 165 requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued, depending on the company’s expectation of whether it will widely distribute its financial statements to its shareholders and other financial statement users. Companies will be required to disclose the date through which subsequent events have been evaluated. Statement 165 refers to subsequent events that provide additional evidence about conditions that existed at the balance-sheet date as “recognized subsequent events.” These have historically been called Type I subsequent events. “Nonrecognized subsequent events,” historically called Type II subsequent events, provide evidence about conditions that arose after the balance-sheet date. Statement 165 requires companies to reflect in their financial statements the effects of subsequent events that provide additional evidence about conditions at the balance-sheet date (recognized subsequent events). Statement 165 prohibits companies from reflecting in their financial statements the effects of subsequent events that provide evidence about conditions that arose after the balance-sheet date (nonrecognized subsequent events), but requires information about the events to be disclosed if the financial statements would otherwise be misleading. These disclosures include the nature of the event and either an estimate of its financial effect or a statement that an estimate cannot be made. Statement 165 does not change subsequent-events guidance included in other US GAAP. Statement 165 is effective for interim or annual financial periods ending after June 15, 2009 and should be applied prospectively. The Company has evaluated the provisions of this standard and it has concluded that the adoption will not have a material impact on its financial position and results of operations.

FSP FAS No. 142-3:

In April 2008, the FASB issued FASB Staff Position FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement 142. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The Company has evaluated the provisions of this FSP and it has concluded that its adoption will not have a material impact on its financial position and results of operations.

Item 6. Directors, Senior Management and Employees

The directors and executive officers of the Company as of May 31, 2009 were as follows:

Name		Age				Position with the Company
Pasquale Natuzzi *			69			Chairman of the Board of Directors, Chief Executive Officer and Chief Brand Officer (ad interim)
Antonia Isabella Perrone *			39			Director
Annamaria Natuzzi *			43			Director
Giuseppe Antonio D’Angelo *			43			Outside Director
Maurizia Iachino Leto di Priolo *			60			Outside Director
Francesco Giannaccari *			44			Outside Director
Mario Lugli *			62			Outside Director
Giacomo Santucci **			53			Outside Director
Mariano Domingo			56			Chief Financial Officer
Annunziata Natuzzi			45			Chief Executive Officer of Natco S.p.A. and Transformation Top 8 Vice President
Cosimo Bardi			34			Product Development Vice President
Francesco Basile			40			People Management & Organization Senior Vice President
Umberto Bedini			53			Operations Senior Vice President
Cary Benson			49			President and Chief Executive Officer of Natuzzi Americas Inc.
Massimiliano Caforio			40			Legal and Corporate Affairs Vice President
Cosimo Cavallo			49			Region UK, S-A-E Europe & Middle East Senior Vice President
Silvia Di Rosa			45			IR & Financial Marketing Vice President
Oliver Heil			42			Region A-O-A Senior Vice President
Jan Mentens			41			Region North & Central Europe Senior Vice President
Fernanda Pelati			51			Italy & Retail Worldwide Senior Vice President
Paola Peretti			34			Corporate Comm. & Think Bold Team Vice President
Christian Schwab			43			Region B-R-I Senior Vice President
Stefano Sette			40			Natuzzi Brand Group Senior Vice President and Chairman of Nacon S.p.A
Giuseppe Stano			50			Key Global Account Management Vice President
Giacomo Ventolone			41			Region Latin America Vice President

On March 23, 2009, the Board of Directors accepted the resignation of Aldo Uva as Chief Executive Officer. Mr. Uva had originally been appointed as Chief Executive Officer on July 2, 2008. The Board appointed Mr. Pasquale Natuzzi as Chief Executive Officer to succeed Mr. Uva.

Pasquale Natuzzi, currently Chairman of the Board of Directors, Chief Executive Officer and Chief Brand Officer (ad interim), founded the Company in 1959. Mr. Natuzzi held the title of Sole Director of the Company from its incorporation in 1972 until 1991, when he became the Chairman of the Board of Directors.

Antonia Isabella Perrone is a Director and is involved in the main areas of Natuzzi Group management, from the definition of strategies to retail distribution, marketing and brand development, and foreign transactions. In 1998, she was appointed Sole Director of a company in the agricultural-food sector, wholly owned by the Natuzzi family. She became part of the Natuzzi Group in 1994, dealing with marketing and communication for the Italian market under the scope of Retail Development Management until 1997. She has been married to Pasquale Natuzzi since 1997.

Annamaria Natuzzi is a Director of the Company and holds 2.6% of the Company’s outstanding share capital. She is currently involved in defining Group strategy. She entered the Group in 1980, first working in Production Management (until 1985) and then with Sales Management (until 1995), mainly dealing with the Italian and European markets. She gained significant experience in the Research & Development Management, where she remained until 2004. She is the daughter of Pasquale Natuzzi.

Giuseppe Antonio D’Angelo is an Outside Director of the Company and is currently Senior Vice President, and president of EMEA and Latin America Regions, with General Mills. Before joining General Mills in 2000, he acquired significant international experience in the sales and marketing management of multinational companies such as The Pillsbury Co. International (from 1997 to 2000), S.C. Johnson & Son (from 1991 to 1997) and Procter & Gamble (from 1989 to 1991).

Maurizia Iachino Leto di Priolo is an Outside Director of the Company. She has gained expertise in the executive search field as a Partner at Spencer Stuart Italy, an executive search consulting firm. Since 2001, she has been advising quoted and private companies on corporate governance. Since 2007, she has been leading the Governance Practice at Key2people. Ms. Iachino was President of Save the Children Italy from 2001 to 2007, she is a board member of several non-profit organizations, and is a member of the scientific committee of Ned Community, the Italian Community of Non-Executive Directors.

Francesco Giannaccari is an Outside Director of the Company and is the CEO for Tom Ford Europe and International Franchisees. He is also the CEO for Pelletteria Artigiana, the company producing leather accessories for Tom Ford. He was Head of International Operations with Abercrombie & Fitch from 2005 to 2007. Mr. Giannaccari developed his career as controller for the Rinascente Group (from 1991 to 1997) and subsequently joined the GUCCI Group, where he became CFO for Gucci Europe (from 1998 to 2001) before accepting the office of Vice Executive President of Bottega Veneta (a subsidiary of the GUCCI Group NV) from 2001 to 2005.

Mario Lugli is an Outside Director of the Company and is a lawyer who specializes in corporate law. His professional experience (from 1973 to 2006) includes service as General Counsel and Head of Corporate Legal Affairs for important groups such as Luxottica, Albacom, RCS Media Group, FIAT, Montedison and IRI-Italstat. Since 2007, Mr. Lugli has been as Independent Director in companies such as Banca Italease Network S.p.A. (where he also holds the office of Vice President), AMSA S.p.A. and member of the Board of Auditors in Investimenti Infrastrutture SpA, ENI Trading and Shipping SpA, and ENI Servizi SpA. He was appointed auditor for the Ministry of Justice in 1995. He is also Senior Advisor in Corporate Governance for Key2People Executive Search.

Giacomo Santucci is an Outside Director of the Company and he received an MBA from Bocconi Milan and a degree in Economics from Brussel University. He has also served in many important roles in the Fashion Industry with Gucci, Prada and Ferragamo and currently runs his own consultancy firm.

Mariano Domingo is the Chief Financial Officer & IT-Lean of the Company and he joined the Company in November 2008. In an 18-year career with Sara Lee Corporation, a US-based fortune 500 company with operations around the globe, Mr. Domingo occupied positions of increasing responsibility. Most recently, he was Vice-President & Country CFO Iberica, and general manager of financial shared services. In addition, he acted as European project leader for the implementation of the SAP platform across all Sara Lee subsidiaries.

Annunziata Natuzzi is the Chief Executive Officer of Natco S.p.A. and the Transformation Top 8 Vice President. She joined the Company in 1981. She started working in the Production Department and, in two years, worked briefly in all of the departments of the Group. She has extensive experience in the Group’s Italian Sales Department and in the International Sales Administration Department. She has worked in the Group’s Human Resources Department from 1990 to 2007. Annunziata Natuzzi is the daughter of Pasquale Natuzzi.

Cosimo Bardi is the Product Development Vice President and he joined the Company in 2004. After the degree in Economics, he gained an experience in Danone S.p.A., the global leader in cultured dairy products, where he occupied positions of increasing responsibility as Key Account, Regional Key Account, Hypermarket/Category Merchandiser.

Francesco Basile is People Management & Organization Senior Vice President. He joined the Company in 1997 as Recruiting and Training Manager. Mr. Basile previously worked in SIEMENS Nixdorf Information system AG Group as HR manager and was in charge of trade union relations.

Umberto Bedini is the Operations Senior Vice President. He joined the Company in January 2009. Mr. Bedini previously occupied key functions within a number of large international groups, including Gruppo Farmaceutico Angelini, Rockwell Rimoldi, Merloni Elettrodomestici and Candy Group. Since 2004, Mr. Bedini has been a partner and CEO of ECA Consulting.

Cary Benson has been the President and Chief Executive Officer of Natuzzi Americas since November 29, 2007. Beginning in 1997, he served as President and Chief Marketing Officer at American Leather with responsibility for sales, marketing and merchandising. As an equity partner, he left the company in 2006, when a buyout of American Leather took place. Prior to that, Mr. Benson was President and CEO of Elmo American Leather from 1994 to 1997, and held several sales and marketing positions with Steelcase from 1982 to 1994. He has a degree in advertising from Michigan State University.

Massimiliano Caforio is the Legal Director of the Group. Mr. Caforio holds a degree in Law from University of Perugia (Italy) and a Master’s degree in Law from University of Alicante (Spain). He is an attorney licensed to practice in Italy. He developed his career as a Lecturer in Commercial and Intellectual Property Law at the University of Perugia and in private practice as an attorney with international law firms such as Luis Barcala Sierra Law Firm (Spain) and Bugnion Patent and Trademark Office (Italy), before joining the Versace Group for seven years as its Group Legal Officer.

Cosimo Cavallo is the Region UK, S-A-E Europe & Middle East Senior Vice President. He joined the Company in May 2008. He developed his career as a Commercial Director in important firms like Neuhaus, a Belgian manufacturer of top-range chocolate products, confectionary and biscuits, Nicoletti S.p.A and Sara Lee Knit Product Europe Division Champion.

Silvia Di Rosa is the IR & Financial Marketing Vice President. She joined the company in January 2009. Most recently, from 1999 to 2008, Ms. Di Rosa worked for Beni Stabili S.p.A., where she headed the Investor and Media Relations Department and reported to the CEO. She previously worked for Gruppo Ericsson SpA — Erifin S.p.A. and, from 1990 to 1999, was in the Managing Director’s staff at Sanpaolo Imi S.p.A.

Oliver Heil joined the Group in October 2006 is the Region UK, S-A-E Europe & Middle East Senior Vice President. He has nearly nine years of experience working in China. Before joining Natuzzi, Mr. Heil worked approximately three years as Vice President of Swatch Group China, responsible for RADO China, a subsidiary of the Swatch Group, the biggest watch conglomerate in the world. He has also held the position of Managing Director of Metro Cash&Carry China. He began his career at L’Oreal Germany in a variety of marketing and sales positions.

Jan Mentens has been Benelux Country Manager since April 2003. He is the Region North & Central Europe Senior Vice President.

Fernanda Pelati is the Italy & Retail Worldwide Senior Vice President. She joined the Company in September 2008. She previously worked from 1991 to 2003 at IKEA, where she covered the several positions, culminating in her service as Human Resources Director Europe. She then served as CEO for Gruppo Coin S.p.A. from 2003 to 2005. During the period 2006-2007 she worked as an independent consultant.

Paola Peretti is the Corporate Comm. & Think Bold Team Vice President. She joined the Company in September 2008. She has had extensive experience in the publishing and communications sectors, working initially for Rizzoli (1998-1999) as Junior Product Manager. She then moved to Mondadori (1999-2000), starting at Donna Moderna. In 2003, Ms. Peretti moved to Avvenire, a newspaper in the process of redesign, where she was the Marketing Director. From 2004 to 2006, she worked for the Piacenza local marketing agency.

Christian Schwab is the Region B-R-I Senior Vice President. He joined the Company in January 2009. He has recently worked at Nestlè, where he was Assistant Vice President and Head of the Nestlè Professional Beverage Centre since 2006. Prior to joining Nestlè, he gained significant experience in multinational companies such as Tetra pack, where he undertook increasingly important roles in the Budapest, Nairobi and St. Petersburg offices until becoming Regional Director for Europe of the Food Service Business Unit in London.

Stefano Sette is the Natuzzi Brand Group Vice President and Chairman of Nacon S.p.A. He joined the Company in 1990, starting in the Sales Administration and Accounting Department.

Giuseppe Vito Stano is the Key Global Account Management Vice President after being Sales Administration Director of the Company since 1991. He is also Sole Director of Natuzzi Americas, Inc. From 1986 to 1991, he was Executive Vice President of Natuzzi Upholstery Inc. (currently Natuzzi Americas, Inc.) in the United States. Prior to that, Mr. Stano was Assistant Vice President of Natuzzi Upholstery Inc. He joined the Group in 1980, as a staff member of the Company’s Export Department.

Giacomo Ventolone is the Vice President for the Latin America Region. He joined the company in 1997 and progressively advanced to become a member of the staff for Pasquale Natuzzi and reported directly to the Managing Director. Mr. Ventolone began his career as a freelancer with Pryngeps Gallery, where from 1992 to 1995 he was responsible for the creation of communication tools for the industry. He then spent two years working in marketing & sales at De Agostini Diffusione del Libro.

Regional Managers — In 2009, as part of the implementation of the 2009-2011 Business Plan, the Group has been in the process of reorienting its focus from three regions (the United States and the Americas, Europe and the Rest of the World) to seven regions: Italy, Europe 1 (Germany, Austria, Switzerland, the Benelux countries, Nordic countries and Baltic countries), Europe 2 (UK, Ireland, the Adriatic and South-Central Europe, and the Middle East), North America, BRI (Brazil, Russia and India), Latin America and AOA (Asia, New Zealand, Australia and Africa). The Group is currently in the process of hiring Regional Managers for each of these seven regions.

Compensation of Directors and Officers

The Company has not established a compensation committee. As a matter of Italian law, the compensation of executive directors is determined by the Board of Directors, while the Company’s shareholders generally determine the base compensation of all the Board members, including non-executive directors. Compensation of the Company’s executive officers is determined by the Chairman of the Board. A list of significant differences between the Group’s corporate governance practices and those followed by U.S. companies listed on the New York Stock Exchange may be found at www.natuzzi.com. See “Item 16G. Corporate Governance” for a description of these significant differences.

Aggregate compensation paid by the Group to the directors and officers was approximately € 4.1 million in 2008.

At the beginning of 2009, the Company established an equity-based incentive program as part of the Group’s new overall Incentive and Retention Plan for the period 2009-2011. The Program replaced the existing incentive program that had been in place from 2004-2009 (see Item 10 and Note 20 to the Consolidated Financial Statements included in Item 18 of this annual report).

The Program provides for the payment of a bonus calculated on the basis of the achievement of the objectives indicated in the 2009-2011 Business Plan. See “Item 3. Key Information—Risk Factors” for a description of the objectives of the 2009-2011 Business Plan. Participation in the Program is extended to certain top managers of the Group, as selected among the Group’s top Directors and Officers.

According to the Incentive Program’s terms and conditions, at the beginning of each fiscal year the Company determines a set of targets for each participant, based on the 2009-2011 Business Plan. Depending on the actual level of achievement of such targets, participants are entitled to receive in each fiscal year a bonus calculated as a percentage of their annual gross compensation, up to 70%.

The bonus is distributed as follows:

	•		40% of the bonus is paid in cash; and
	•		60% of the bonus is automatically converted, based on the fair market value of the Company’s stock, in rights to receive a correspondent number of the Company’s common shares.

The cash-settled portion of the bonus is paid to the beneficiaries in the year immediately following the year in which the bonus is accrued, provided that, among other conditions, the participants maintain a working relationship with the Group.

The equity-settled portion of the bonus generally vests in 2012, provided that (i) the participants maintain a working relationship with the Group until December 31, 2011, and/or (ii) the objectives of the 2009-2011 Business Plan are achieved. In addition, the achievement of the 2009-2011 Business Plan objectives has a multiplicative effect on the total number of rights to receive shares granted to each participant under the Program (i.e., 3 times for SVP and 2.5 times for VP).

Share Ownership

Mr. Pasquale Natuzzi, who founded the Company and is currently its Chief Executive Officer and Chairman of the Board of Directors, beneficially owns 29,358,089 Ordinary Shares, representing 53.5% of the Ordinary Shares outstanding (58.7% of the Ordinary Shares outstanding if the 5.2% of the Ordinary Shares owned by members of Mr. Natuzzi’s immediate family (the “Natuzzi Family”) are aggregated). As a result, Mr. Natuzzi controls the Group, including its management and the selection of its Board of Directors. Since December 16, 2003, Mr. Natuzzi has held his entire beneficial ownership of Natuzzi S.p.A. shares (other than 196 ADSs) through INVEST 2003 S.r.l., an Italian holding company wholly-owned by Mr. Natuzzi and having its registered office at Via Gobetti 8, Taranto, Italy. On April 18, 2008, INVEST 2003 S.r.l. purchased 3,293,183 American Depositary Shares, each representing one Ordinary Share, at the price U.S.$ 3.61 per ADS. For more information, refer to Schedule 13D filed with the U.S. Securities and Exchange Commission (“SEC”) on April 24, 2008. In relation to the “Natuzzi Stock Incentive Plan 2004-2009” (see “Item 10. Additional Information—Authorization of Shares”), the total number of new Natuzzi ordinary shares that were assigned without consideration to the beneficiary employees in 2006, 2007 and 2008 represents 0.3% of the current outstanding shares.

Statutory Auditors

The following table sets forth the names of the three members of the board of statutory auditors of the Company and the two alternate statutory auditors and their respective positions, as of the date of this annual report. The current board of statutory auditors was elected for a three-year term on May 3, 2007.

Name		Position
Francesco Venturelli		Chairman
Cataldo Sferra		Member
Costante Leone		Member
Giuseppe Pio Macario		Alternate
Vittorio Boscia		Alternate

During 2008, our statutory auditors received in the aggregate approximately € 204,000 in compensation for their services to the Company and its Italian subsidiaries.

According to Rule 10A-3 of the Securities Exchange Act of 1934, companies must establish an audit committee meeting specific requirements. In particular, all members of this committee must be independent and the committee must adopt a written charter. The committee’s prescribed responsibilities include (i) the appointment, compensation, retention and oversight of the external auditors; (ii) establishing procedures for the handling of “whistle blower” complaints; (iii) discussion of financial reporting and internal control issues and critical accounting policies (including through executive sessions with the external auditors); (iv) the approval of audit and non-audit services performed by the external auditors; and (v) the adoption of an annual performance evaluation. A company must also have an internal audit function, which may be out-sourced, as long as it is not out-sourced to the external auditor.

The Company relies on an exemption from these audit committee requirements provided by Exchange Act Rule 10A-3(c)(3) for foreign private issuers with a board of statutory auditors established in accordance with local law or listing requirements and subject to independence requirements under local law or listing requirements. See “Item 16D. Exemption from Listing Standards for Audit Committees” for more information.

External Auditors

On May 3, 2007, at the annual general shareholders’ meeting, KPMG S.p.A., with offices in Bari, Italy, was appointed as the Company’s external auditors for a three-year period.

Employees

As of December 31, 2008, the Group had 7,569 employees (3,431 in Italy and 4,138 abroad), as compared to 8,219 on December 31, 2007. As of April 30, 2009, the total number of employees was 7,061 (3,433 in Italy and 3,628 abroad), and their average age was approximately 34 years.