UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) (g) OF THE SECURITIES EXCHANGE ACT OF 1934 or

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

For the Fiscal Year Ended: December 31, 2005

or

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

For the Transition Period from            to           

or

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

Date of event requiring this shell company report                     
For the Transition Period from            to           

Commission file number: 1-11854

NATUZZI S.p.A.

(Exact name of Registrant as specified in its charter)

NATUZZI S.p.A.
(Translation of Registrant’s name into English)

Italy
(Jurisdiction of incorporation or organization)

Via Iazzitiello 47, 70029 Santeramo, Italy
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Name of each class		Name of each exchange on which registered
American Depositary Shares		New York Stock Exchange
Ordinary Shares with a par value of €1.0 each		New York Stock Exchange*

* Not for trading, but only in connection with the registration of the American Depositary Shares

-		Securities registered or to be registered pursuant to Section 12(g) of the Act: None

-		Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

-		Outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2005: 54,681,628 Ordinary Shares

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

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 Act of 1934.

Yes o      No þ

     Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

     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 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 financial statement item the registrant has elected to follow.

Item 17 o       Item 18 þ

     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			4
Risk Factors			4
Forward Looking Information			8
Item 4. Information on the Company			8
Introduction			8
Organizational Structure			9
Strategy			11
Manufacturing			12
Products			17
Markets			19
Incentive Programs and Tax Benefits			22
Management of Exchange Rate Risk			24
Trademarks and Patents			24
Regulation			24
Environmental Regulatory Compliance			25
Insurance			25
Description of Properties			25
Capital Expenditures			27
Item 4. A Unresolved Staff Comments			27
Item 5. Operating and Financial Review and Prospects			27
Critical Accounting Policies			28
Results of Operations			29
Liquidity and Capital Resources			37

TABLE OF CONTENTS
(continued)

		Page
Contractual Obligations and Commitments			38
Related Party Transactions			39
Research and Development			39
Trend Information and Guidance			40
New Accounting Standards under Italian and U.S. GAAP			40
Item 6. Directors, Senior Management and Employees			43
Compensation of Directors and Officers			47
Share Ownership			47
Statutory Auditors			47
External Auditors			48
Employees			48
Item 7. Major Shareholders and Related Party Transactions			49
Major Shareholders			49
Related Party Transactions			50
Item 8. Financial Information			50
Consolidated Financial Statements			50
Export Sales			51
Legal and Governmental Proceedings			51
Dividends			51
Item 9. The Offer and Listing			52
Trading Markets and Share Prices			52
Item 10. Additional Information			54
By-laws			54
Certain Contracts			62
Exchange Controls			62
Taxation			63
Documents on Display			68
Item 11. Quantitative and Qualitative Disclosures About Market Risk			68

TABLE OF CONTENTS
(continued)

		Page
Item 12. Description of Securities Other than Equity Securities			70
PART II			71
Item 13. Defaults, Dividend Arrearages and Delinquencies			71
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			71
Item 15. Controls and Procedures			71
Item 16. [Reserved]			71
Item 16. A Audit committee financial expert			71
Item 16. B Code of Ethics			72
Item 16. C Principal Accountant Fees and Services			72
Item 16. D Exemptions from the Listing Standards for Audit Committees			73
Item 16. E Purchases of Equity Securities by the Issuer and Affiliated Purchasers			73
PART III			74
Item 17. Financial Statements			74
Item 18. Financial Statements			74
Item 19. Exhibits			75
EX-1.1: BY-LAWS
EX-8.1: LIST OF SIGNIFICANT SUBSIDIARIES
EX-12.1: CERTIFICATION
EX-12.2: CERTIFICATION
EX-13.1: CERTIFICATIONS

PRESENTATION OF FINANCIAL AND OTHER 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. For fiscal years ending before December 31, 2002, the audited Consolidated Financial Statements were published in Italian lire, which was legal tender in Italy prior to March 1, 2002. All amounts included in this annual report for each period ending prior to January 1, 2002 have been restated into euro amounts using the official lira-euro exchange rate as of January 1, 1999 (euro 1 is equal to lire 1,936.27).

     In this annual report, references to “€” or “euro” are to the euro; references to “lira”, “lire” or “Lit.” are to the Italian lira (singular) or to the Italian lire (plural); 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 December 30, 2005 of U.S.$ 1.1842 per euro.

     These 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 of one.

     On June 7, 2002 the Company changed its name from Industrie Natuzzi S.p.A. to Natuzzi S.p.A.

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 and shareholders’ equity, see Note 27 to the Consolidated Financial Statements included in Item 18 of this annual report.

		Year Ended At December 31,
		2005				2005				2004				2003				2002				2001
		(millions of
		dollars, except
		per Ordinary
		Share)(2)				(millions of euro, except for Ordinary Share)(1)
Income Statement Data:
Amounts in accordance with Italian GAAP :
Net sales:
Leather- and fabric-upholstered furniture		$	704.4			€	594.8			€	665.5			€	674.0			€	734.7			€	714.0
Other(3)			88.9				75.1				87.9				95.6				70.4				72.1
Total net sales			793.3				669.9				753.4				769.6				805.1				786.1
Cost of sales			(544.0	)			(459.4	)			(484.5	)			(508.8	)			(517.4	)			(520.1	)
Gross profit			249.3				210.5				268.9				260.8				287.7				266.0
Selling expenses			(215.8	)			(182.2	)			(188.2	)			(179.3	)			(145.4	)			(134.8	)
General and administrative expenses			(50.9	)			(43.0	)			(40.7	)			(39.2	)			(40.5	)			(33.5	)
Operating income (loss)			(17.4	)			(14.7	)			40.0				42.3				101.8				97.7
Other income (expense), net(4) (5) (6)			3.5				3.0				(3.9	)			3.7				14.5				(0.2	)
Earnings (loss) before taxes and minority interests			(13.9	)			(11.7	)			36.1				46.0				116.3				97.5
Income taxes			(3.7	)			(3.1	)			(17.6	)			(8.5	)			(25.0	)			(21.9	)
Earnings (loss) before minority interests			(17.6	)			(14.8	)			18.5				37.5				91.3				75.6
Minority interest			0.3				0.2				(0.1	)			(0.2	)			0.1				—
Net earnings (loss)			(17.3	)			(14.6	)			18.4				37.3				91.4				75.6
Net earnings (loss) per Ordinary Share			(0.32	)			(0.27	)			0.34				0.68				1.67				1.37
Amounts in accordance with U.S. GAAP :
Net earnings (loss)			(8.17	)			(6.9	)			18.8				38.0				92.0				71.1
Net earnings (loss) per Ordinary Share (basic and diluted)		$	(0.15	)		€	(0.13	)		€	0.34			€	0.70			€	1.68			€	1.29
Cash dividend per Ordinary Share		$	0.00			€	0.00			€	0.07			€	0.14			€	0.33			€	0.29
Weighted average number of Ordinary Shares Outstanding			54,681,628				54,681,628				54,681,628				54,681,628				54,681,628				55,027,496
Balance Sheet Data :
Amounts in accordance with Italian GAAP :
Current assets		$	455.3			€	384.5			€	389.4			€	383.1			€	402.6			€	491.9
Total assets			787.3				664.9				673.2				692.4				674.5				716.8
Current liabilities			161.3				136.2				131.5				125.2				128.7				252.5
Long-term debt			4.3				3.6				5.0				4.2				3.6				3.3
Minority interest			0.8				0.7				0.9				0.9				0.5				1.5
Shareholders’ equity			560.1				473.0				487.9				515.1				495.8				428.5
Amounts in accordance with U.S. GAAP :
Shareholders’ equity		$	537.3			€	453.7			€	464.5			€	452.3			€	432.3			€	364.4

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 — 2005 Compared to 2004” and Item 11, “Quantitative and Qualitative Disclosures about Market Risk”.

     The following table sets forth the Noon Buying Rate for the euro expressed in U.S. dollars per euro.

Year:		Average(1)				At Period End
2001			0.8909				0.8901
2002			0.9495				1.0485
2003			1.1411				1.2597
2004			1.2478				1.3538
2005			1.2400				1.1842

Month ending:		High				Low
December 31, 2005			1.2041				1.1699
January 31, 2006			1.2287				1.1980
February 28, 2006			1.2100				1.1860
March 31, 2006			1.2197				1.1886
April 30, 2006			1.2624				1.2091
May 31, 2006			1.2888				1.2607

     The effective Noon Buying Rate on June 19, 2006 was 1.2577.

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 the successful implementation of its restructuring plan — The Group experienced a 50.7% decrease in earnings in 2004, and net losses totaling €14.6 million in the fiscal year ended December 31, 2005. The Group attributes this downward trend to price competition from low-cost manufacturers, recurring unfavorable currency

conditions, and a generally unfavorable economy in Italy end Europe, as well as negative results achieved by some non-performing foreign retail units, particularly in the United Kingdom, specific inefficiencies in the Group’s manufacturing operations and the higher impact of fixed costs resulting from a decrease in net sales. There is no guarantee that the Group will be able to achieve or maintain profitability in the future.

     The Group’s future operating and financial performance and business prospects will depend in large part on the successful implementation of the restructuring plan approved by the Group’s Board of Directors on May 18, 2005, after the Group’s first quarter 2005 results showed a continuing negative trend. The goals of the restructuring plan are recovering the Group’s profitability and increasing its competitiveness by reducing manufacturing costs in Italy in order to create a more streamlined cost structure, increasing overall efficiencies, and closing non-performing retail units. The Plan is also aimed at regaining the Group’s market share, especially in the medium-high end of the market, by differentiating the Group’s brands from the competition and strengthening its market reputation. If the restructuring plan is not successful, there could be a material adverse effect on the Group’s financial condition, results of operations and business prospects.

     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.

     In 2005, the Group derived 40.6% of its leather- and fabric-upholstered furniture net sales from the United States and the Americas and 52.7% from Europe. 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 83.9% of net sales of upholstered furniture in 2005 being derived from the sale of leather-upholstered furniture. Leather-upholstered furniture represents a limited, but growing, portion of the market for upholstered furniture. Consumers have the choice of purchasing upholstered furniture in a wide variety of styles, 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 selling prices, which increases price competition in the industry. In particular, manufacturers in countries like China and the countries of Eastern Europe and South America have increased competition in the promotional or 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.

     Fluctuations in currency exchange rates may adversely affect the Group’s results — The Group conducts a substantial part of its business outside of the euro zone. A rise 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 translation 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 2005, approximately 58% of the Group’s net sales, but only approximately 44% 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. 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 79% of the Group’s upholstered furniture production, and the acquisition of cattle hides represents approximately 35% of total cost of goods sold. The raw hides market’s dynamics are dependent on the consumption of beef, the levels of worldwide slaughtering, worldwide weather conditions and on the level of demand in a number of different sectors, including the footwear, leather, automotive, furniture and clothing sectors. The Group’s ability to increase product prices following increases in raw material costs is limited by market forces, and therefore the Group may not be able to maintain its margins during periods of significant increases in raw material costs.

     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 has 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.” The Italian Parliament has replaced these incentive programs with a new investment incentive program for all under-industrialized regions in Italy, which is currently being implemented through grants, research and development benefits. 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 that have been granted tax benefits and export incentives. 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, although under the Deposit Agreement, ADS holders have the right to give instructions to The Bank of New York, 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 as shareholders of a corporation incorporated in the United States.

     Control of the Company — Mr. Pasquale Natuzzi, who founded the Company and is currently Chairman of the Board of Directors, owns 47.6% of the issued and outstanding Ordinary Shares of the Company (52.8% of the Ordinary Shares 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 (having its registered office at Via Gobetti 8, Taranto, Italy) wholly-owned by Mr. Natuzzi.

     In addition, the Natuzzi Family has a right of first refusal to purchase all the rights, warrants or other instruments which The Bank of New York, as Depositary under the Deposit Agreement dated as of May 15, 1993, as amended and restated as of December 31, 2001 (the “Deposit Agreement”), among the Company, The Bank of New York, as Depositary (the “Depositary”), and owners and beneficial owners of American Depositary Receipts (“ADRs”), 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

     Natuzzi 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, 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.

     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. Natuzzi 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 aims to position the Natuzzi brand at the high end of the upholstered furniture market. The Group has structured its product portfolio around three distinct collections: Natuzzi products in the medium-high segment of the market, the Pasquale Natuzzi collection covering the high-end segment and the Italsofa line the lower-end.

     The Group is the world’s leader in the production of leather-upholstered furniture and has a leading share of the market for leather-upholstered furniture in the United States and Europe (as reported by CSIL (“CSIL”), an Italian market research firm, with reference to market information related to the year 2005). 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 manufactures, directly or through third parties, approximately 53% 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 at April 30, 2006, 130 Divani & Divani by Natuzzi 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, as at April 30, 2006, through 149 “Natuzzi” and “Divani & Divani by Natuzzi” stores.

     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 Chairman of the Board of Directors and controlling shareholder of the Company. Substantially all 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.

     In an effort to maximize the efficiency of the Group’s organizational structure, at an extraordinary general meeting held on November 21, 2003, the Company’s shareholders approved the merger of Style & Comfort S.r.l into the Company (the Company owned 100% of the capital stock of Style & Comfort S.r.l. prior to the merger). The merger became effective on January 1, 2004.

     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 8820-111. 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 (telephone number +1 336 888-0351).

Organizational Structure

     As at April 30, 2006, the Company’s principal operating subsidiaries are:

		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			100.00			Shanghai, China			(1	)
Softaly Shanghai 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	)
Divani Due S.r.l.			100.00			Verona, Italy			(4	)
Koineé S.r.l.			100.00			Montesilvano, Italy			(4	)
Nacon S.p.A.			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			97.00			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	)
La Galleria Limited			100.00			London, UK			(4	)
Kingdom of Leather Trustees Limited			100.00			London, UK			(5	)
Natuzzi Netherlands Holding			100.00			Amsterdam, Holland			(5	)
Natuzzi United Kingdom Limited			100.00			London, UK			(5	)
Natuzzi Trade Service S.r.l.			100.00			Bari, Italy			(6	)
Kingdom of Leather Limited			100.00			London, UK			(7	)
Italholding S.r.l.			100.00			Bari, Italy			(7	)
Lagene S.r.l.			100.00			Bari, Italy			(7	)
Natuzzi Asia Ltd			100.00			Hong-Kong, China			(7	)

     See Note 1 to the Consolidated Financial Statements for further information on the Company’s subsidiaries.

Strategy

     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:

     Improving efficiency and reducing operating costs - Due to recurring unfavorable currency conditions, pricing pressure especially in the U.S. and general economic conditions that have negatively affected order flows for Natuzzi-branded products, and as part of the Group’s ongoing efforts to become more efficient and competitive, on May 18, 2005, the Group’s Board of Directors approved a new restructuring plan. The plan is aimed at reducing manufacturing costs in Italy, increasing overall efficiencies so that the Group may become more competitive, recovering profitability through the closing of non-performing retail units and regaining market share especially in the medium-high end of the market, where the Group continues to invest in the Natuzzi brand.

     At the time of its inception, the restructuring plan provided for, among other measures, a temporary work force reduction (“Cassa Integrazione Guadagni - CIG”) of 1,320 positions by the end of 2005 in all departments across the Company, in order to reduce manufacturing costs in Italy. However, due to the accumulation of orders during the summer, and in order to provide for the seasonal increase in order flow reported beginning in the second quarter of 2005, in September 2005 the Group decided to call back about 90% of the workers that were temporarily laid off at the Italian factories. Recently the Group obtained an extension of the temporary work force reduction to cover the period June 2006 - June 2008 to allow the Group to complete all the initiatives and investments to recover profitability and efficiency specifically in the Italian plants. The Group has agreed with the Italian Unions that the number of positions that will be affected by the temporary workforce reduction during the period will not be more than 508.

     Geographical expansion - 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). According to the most recent data available for the year 2005 (source CSIL), the Group is the leader in the leather-upholstered furniture segment in the United States, with a 8.1% market share, and in Europe, with 6.5%. The Group continues to focus on sales and to expand its retail presence outside of its core markets.

     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, the acquisition of companies with existing networks of retail stores, and an increase in the number of Natuzzi stores and Natuzzi

Galleries worldwide. See “—Markets”. As of April 30, 2006, there were 280 Natuzzi stores worldwide, including Divani and Divani by Natuzzi stores. The Natuzzi Galleries program was launched in 2002 and the number of galleries worldwide reached 594 as of April 30, 2006. 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. The Group plans to open additional Natuzzi Stores and Galleries in strategic geographical locations to strengthen its presence in Italy and abroad and is committed to making the marketing investments necessary to increase brand recognition in these markets.

     Product diversification — The Group has taken a number of steps to broaden its product lines, including the development of new models, such as motion furniture, and the introduction of new materials and colors, including select fabrics and microfibers. See “—Manufacturing—Raw Materials” The Group also strives to expand and add value to its product offerings through its “Decorator” concept, which provides customers with “total look room package solutions.” See “— Products.” The Group believes that this approach will also strengthen its relationships with the world’s leading distribution chains, which are interested in offering branded propositions. The Group has invested in Natuzzi Style Centers in Santeramo to serve as a creative hub for the Group’s design activities.

     Expansion in all price segments - The Group is expanding in all price segments of the leather and non-leather upholstered furniture market. The Italsofa lower-priced brand, launched in October 2000, competes in the lower end of the upholstered furniture market and represented about 48.4% of total seats sold by the Group in 2005. Faced with increased competition in this price range, the Group has increased its production capacity and efficiency by investing in production facilities in Brazil, China and Romania, while continuing to emphasize the style and quality associated with the Natuzzi brand. The “Pasquale Natuzzi Collection” competes in the higher end of the upholstered furniture market and offers customers products that are of the highest quality and distinctive in terms of design, materials and project development.

Manufacturing

     As at April 30, 2006, the Group manufactured its products in 11 production facilities located in Italy. Eight of the facilities are engaged in upholstery cutting and sewing and assembly of finished and semi-finished products, and employed 2,579 workers, as at April 30, 2006, 35.2% of whom are not directly involved in production. The Group’s production facilities are located either in, or within a 25-mile radius of, Santeramo, where the Group’s headquarters are located. The assembly operations carried out at the Group production facilities also include the attaching of the foam and covering to the 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 transit through the different production phases up to the storehouse. As part of an effort to decrease costs through increased productivity and flexibility, automatic guided vehicles supervised by a central computer have been installed at one of the Group’s principal assembly facilities to move products through the production chain. In other facilities, materials are currently moved by hand or conveyor belt. Operations

at all of the Group’s production facilities are normally conducted Monday through Friday with two 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 “— ‘Supply-Chain Management’”.

     The Group produces, directly and by subcontracting, 10 grades of leather in approximately 40 finishes and 274 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 used, in varying quantities, in the manufacture of all Natuzzi-branded leather products, while split leather is used in addition to top grain leather in some of the Group’s lower -priced 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 60 workers as at April 30, 2006, 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 produced at the Naples facility pursuant to a patented process results in a high-quality material without using any auxiliary blowing agent and is sold under the “Eco-Flex^TM” trade name. A material specially designed for mattresses is also produced and sold under the “Greenflex^TM” trade name. As a result of intensive R&D activity, the Company has developed a new family of high resilient materials. The different polymer matrix is safer because of its improved flame resistance, and more environmentally-friendly because it can be disposed of without harmful by-products and because the raw materials used to make it create less harmful environmental impact during handling and storage.

     The Group owns the land and buildings for its principal assembly facilities located in Santeramo, Matera and Altamura, 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 the new plant in China (for the use of which the land is franchised by the Government for 50 years), while the land and buildings of the remaining production facilities are leased from lessors, with several of whom the Group enjoys long-term relationships. Although the lease terms are of varying lengths, Italian law provides that any such lease must have a minimum term of six years. This minimum term, however, is enforceable only by the lessee. 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 agreements on acceptable terms when they expire. The Group owns substantially all the equipment used in its facilities.

     In 2000, the Group announced the launch of a new, lower-priced upholstered furniture collection, known as Italsofa. The Group currently manufactures the Italsofa Collection outside Italy at plants located in Brazil, China and Romania; if orders exceed production capacity at these other plants, Italsofa products are also manufactured in the Company’s Italian plants.

     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 14% of Natuzzi’s production during the year ended on December 31, 2005). 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, Colombia, Australia, Germany, Uruguay, Scandinavian countries, the United States, 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, Colombia, and Ukraine; those in the middle categories being purchased mainly in Australia, Uruguay, Italy and the United States and those in the highest categories being 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 20 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 overseas 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 most of 2005, the prices paid by the Group remained stable, but during the last quarter of the year prices have increased, especially on the Brazilian market. The factors

influencing the leather prices increasing in the last quarter of the year were due to a reduction in red meat consumption and the exchange rate of the currencies in the markets where we operate. The Group believes that these same conditions will influence the price of cattle hides in 2006 more significantly than in 2005 and is continuing to research new suppliers and sources of cattle hides.

     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 six suppliers who provide the product at the finished stage. Microfibers are purchased in Italy, South Korea, Taiwan and Japan from 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. The microfibers purchased from the Group’s Japanese supplier are the only microfibers the Group purchases in the highest price category. 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 Matera, while those purchased overseas are delivered to an Italian port and then sent to the Matera facility. Only microfibers purchased in Taiwan and South Korea are delivered directly by the suppliers to Chinese and Brazilian ports and then sent to the Shanghai, Salvador de Bahia and Pojuca 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 always 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 2005, fabric prices were stable due to long-term relationships with suppliers and the large volumes purchased by the Group, despite the increases in the cost of raw materials and oil. Microfiber prices have 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. The Group obtains wood and wood products for its wooden frames from suppliers in Italy and Eastern Europe. Through its plants located in Romania, the Group has begun engaging directly in the cutting and transformation 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”

          Organization. In order to speed up the processing of information and material, the Group has set up a new organization. Starting in June 2004, all functions of the supply chain have been aggregated in the HQ Logistics Department according to modern models of Supply Chain Organizations. This type of organization ensures that information and material flows are organized, synchronized and efficient, and consequently it also improves customer service as well.

          Planning (order management, production, procurement). The Group schedules its manufacture and procurement of raw materials and components “on demand”. This system allows the Group to manage a high number of product combinations (in terms of number of models, versions and covering codes) that are offered to customers around the world while maintaining a high level of customer service and low inventory. “On demand” planning reduces the risk of obsolescence even if the products have short lifespans. The Group’s material flow policies, which are defined by the Group’s Logistics Director, have reduced all lead times (except those due to orderbooking backlog, a process that is not managed by the Group’s Logistics Department) to five weeks (average of all orders). Special programs with three-week lead times are provided for a limited number of customers and limited collections and product combinations. The lead times can be longer than described above when an unusually high level of orders are made. The time required for the delivery to the customer varies depending on where the customer is located (transport lead times vary widely depending on the distance between the final destination and the production units).

          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 as well as minimum handling and transportation costs. This system is used for all products and markets in which the Group sells its goods. For example, in the case of furniture being purchased by a U.S. customer, as soon as an order is sent to the Group’s sales office in the United States (High Point, North Carolina), the data is entered directly into the Group’s central computer system, thus saving administrative lead time and allowing the Group to operate more efficiently.

          In order to incur the lowest costs and achieve the best product quality, the Group attains the optimum load level for shipping through the use of “tailor made” software. Since the prices quoted to customers are based on shipments of full containers, if a customer’s order does not represent optimal use of container space, revisions to the customer’s order will be suggested. Upon finalization of the customer’s order, the computer system generates an order proposal that is reviewed to determine feasibility in terms of the types of products, quantity and timing. In order to improve and adapt the above mentioned software to Natuzzi needs, a new research project has been launched in cooperation with the University of Bari and the University of Copenhagen. The expected result is a reduction in transportation costs in the medium- to long-term future.

          This planning process allows for the optimum use of the available technology, capacity and human resources, while minimizing costs and achieving high quality. Once

production is scheduled, the Group’s “Material Requirement Planning Information System” produces a proposed list of raw materials and components to be ordered. This list is analyzed, reviewed and combined with the Group’s global procurement scheduling. All purchases from suppliers are then planned. Procurement lead times are relatively short; leather is generally available within three weeks of ordering and certain components are supplied by a “ready from stock” service. The Group strives to achieve optimum levels of service while keeping inventory low, and to that end the Group constantly seeks, through a synergic collaboration between the Sales and Logistics departments, to improve its capacity to forecast future demand.

          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 2005, the Group shipped 13,327 containers (40’hc) to overseas countries and approximately 8,465 full load mega-trailer trucks to European destinations. In order to guarantee the best price and quality of transportation services, the Group deals directly with shipping companies and logistic operators without resorting to the use of intermediaries.

          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.

          Since September 2003 the Group has operated an on-line Transportation Portal to enable transportation suppliers to provide the Group and its sales force, as well as some customers , an order status report on their assigned shipment, which includes rail station /port arrival, re-shipment and final delivery.

Products

          The Group produces a vast range of upholstered furniture in both leather and fabric in three different styles that reflect the different tastes and lifestyles of our customers: Casual, Urban and Vintage.

          Through this subdivision of three stylistic worlds, where each is characterized by particular colors, ambiance and emotions, the Group is able to establish an immediate connection with different target groups, offering them the best living solution.

          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). The Group offers its

products in 375 different models, 10 leather grades, 31 leather finishes and 230 colors; 7 fabric grades, 23 fabric finishes and 127 colors; and 3 microfiber grades, 4 microfiber finishes and 62 colors. Each of the Group’s models is generally offered in various forms (e.g., sofa, loveseat, armchair, ottoman, sectional components, motion mechanism and body massage chairs). Each model is offered at prices that vary depending principally on the quality and finish of the leather (including whether it is top grain only leather or top grain with split) and the quality of the cushions (including whether they are foam, polyester fiber or feather).

          In addition to the main collection, the Group offers two specialized product lines. The Pasquale Natuzzi Collection includes all three lifestyles mentioned above and represents the highest segment of the Natuzzi brand. It is characterized by a clear elegance achieved through materials and stylistic details that bring out the uniqueness of each creation in this collection. The Italsofa Collection, the Group’s promotional line launched in October 2000, has been successful beyond all predictions, achieving the difficult balance between lower sales prices and Italian style and high quality. Currently there are 104 models in this collection. Based on the results of this collection, the Group offers different coverings for Italsofa products in the Group’s different markets. For the Americas and the Asia Pacific market, leather coverings are offered in 4 grades, 12 finishes and 88 colors, and microfiber coverings are offered in 3 grades, 3 finishes and 34 colors. By contrast, in EMEA (Europe, Middle East and Africa), leather coverings are offered in 4 grades, 12 finishes and 82 colors and microfiber coverings are offered in 3 grades, 4 finishes and 42 colors.

          The Group’s strategy has been to reduce the number of models offered while increasing the available number of versions. This reduction in complexity provides a clearer, more customer-oriented vision for the whole organization. The high degree of personalization offered within each of the lifestyle lines allows the Group to satisfy a wide range of customer tastes and preferences. In addition, by observing consumer choices about product personalization, the Group’s Research and Development department is able to monitor trends and respond to changes in consumer preferences in a timely and focused manner.

          Beyond its upholstered furniture offerings, the Group is committed to developing innovative enhancements to more traditional living room sets (composed of 3-seater/2-seater/chair solutions) through the introduction of accessory furnishings such as coffee tables, lamps, rugs, and wall units. The Group has thus diversified its product line with a new collection of occasional furniture and accessories. The Group aims to keep this collection small, while offering a complete selection to satisfy the different living space needs and tastes of its customers.

          The Group creates new items in response to market demand, concentrating on style, price and dimension. The Group performs extensive and meticulous market analysis of the market segments in which the Group operates, which is generally highly accurate.

          The marketing strategy of the Group is based on offering new models and products with a certain regularity. In the design and creation phase of the new models, the designers’ group is completely dedicated to the study and definition of trends and innovative designs, while keeping in mind the price point objectives indicated by the Group’s market analysis. Only occasionally do the Group’s designers project new models at the specific request of large customers.

          One of the most important tasks on which the Research and Development department focuses is ensuring that the “points of sale” for Natuzzi products are consistent with the Natuzzi brand image and well-adapted to the targeted market segment. The Group’s store-level marketing communication system has been completely re-designed with the aim of reaching customers more directly and incisively. The Group believes that this service simplifies the work of its retailers, which otherwise are forced to put together single elements coming from different suppliers and to have interior decorators dedicated to offering decorating solutions to customers. We believe that the Group is uniquely capable of offering customers complete furnishing solutions.

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 Divani & Divani by Natuzzi and Natuzzi stores.

          In 2005 the Group derived 40.6% of its leather- and fabric-upholstered furniture net sales from the United States and the Americas, 52.7% from Europe and 6.7% from the rest of the world (mainly Australia and Japan). See “— Strategy.”

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

		Leather- and Fabric-Upholstered Furniture Net Sales (millions of euro)
		2005								2004								2003								2002								2001
U.S. and the Americas(1)			241.7				40.6	%			279.4				42.0	%			320.1				47.5	%			366.4				49.9	%			356.4				49.9	%
Europe			313.2				52.7	%			340.1				51.1	%			313.5				46.5	%			326.5				44.4	%			317.9				44.5	%
Rest of the World			39.9				6.7	%			46.0				6.9	%			40.4				6.0	%			41.8				5.7	%			39.7				5.6	%
Total			594.8				100.0	%			665.5				100.0	%			674.0				100.0	%			734.7				100.0	%			714.0				100.0	%

		Leather- and Fabric-Upholstered Furniture Net Sales (in seats)(2)
		2005								2004								2003								2002								2001
U.S. and the Americas(1)			1,386,329				49.3	%			1,564,901				51.0	%			1,699,160				55.6	%			1,572,879				52.0	%			1,376,818				47.9	%
Europe			1,262,887				44.9	%			1,319,740				43.0	%			1,181,566				38.6	%			1,278,296				42.2	%			1,323,736				46.0	%
Rest of the World			162,523				5.8	%			186,330				6.0	%			178,109				5.8	%			176,483				5.8	%			175,704				6.1	%
Total			2,811,739				100.0	%			3,070,971				100.0	%			3,058,835				100.0	%			3,027,658				100.0	%			2,876,258				100.0	%

          1 United States and the Americas. In 2005, net sales of leather- and fabric-upholstered furniture in the United States and the Americas decreased 13.5% to €241.7

million, compared to €279.4 million in 2004, and the number of seats sold decreased 11.4% to 1,386,329, compared to 1,564,901 in 2004.

          The Group’s sales in the United States and the Americas are handled by Natuzzi Americas, the Group’s distribution subsidiary for North and Latin America, 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 at April 30, 2006, the High Point operation had 65 employees.

          Natuzzi Americas has 55 independent sales representatives and sub-representatives in the United States and the Americas. They are supervised by three regional sales and marketing managers, one for each of the U.S. Eastern Region, U.S. Western Region/Latin America and Canada.

          The Group’s principal customers are major retailers. The Group advertises its products to retailers and, recently, to consumers in the United States and the Americas 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 April and October to promote its products. Many of the Group’s larger customers review part of the new offering of models during an informal “pre-market” period one month prior to each High Point fair.

          2 Europe

          2.1 Europe (excluding Italy). In 2005, economic conditions throughout Europe continued to be difficult. In the United Kingdom alone, over 400 furniture stores were closed.

          During 2005, net sales of leather- and fabric-upholstered furniture in Europe (excluding Italy) decreased by 7.8% to €246.2 million, compared to €267.1 million in 2004, and seats sold decreased by 2.8% to 1,015,683.

          Furniture retailers are generally smaller in Europe than in the United States. In Europe (outside Italy), the Group generally deals with buying groups and chains representing 50 to 100 retailers, as well as with independent retailers. While the buying groups place the orders, thereby obtaining the benefits of volume-driven commercial conditions, the Group delivers the products directly to the particular members of the buying groups on whose behalf the orders are placed. In some cases, the Group invoices the buying group. In others, the Group invoices the individual member to whom the products are delivered.

          As in the United States, the Group advertises its products in Europe (outside Italy) to consumers and to retailers directly and through the use of various marketing tools. The Group also promotes its products in Europe through six subsidiaries in Belgium, Denmark, Sweden, Germany, United Kingdom, Switzerland and Spain, as well as through a network of sales agents. The Group also participates in furniture fairs in the most important markets. As at December 31, 2005, the Group had 9 sales agents and sub-agents in Europe. These sales agents are paid on a commission basis.

          Outside Italy, the Company uses franchised or directly owned stores to penetrate markets and implement brand strategies. As of April 30, 2006, 54 franchised single-brand stores were operating in southwest Europe (outside Italy): 27 under the Divani & Divani by Natuzzi name (13 in Greece, 14 in Portugal) and 27 under the Natuzzi name (21 in France, 2 in Malta, 2 in Cyprus and one in each of the United Kingdom and Iceland). As of April 30, 2006, there were 39 directly owned stores in southwest Europe (outside Italy): 8 in Switzerland, 28 in Spain and 2 in United Kingdom under the Natuzzi name. In the United Kingdom, the Group also operated a concession (store-in-store) inside Selfridges Department Store – in London.

          In February of 2006, the Group started the process of liquidating Natuzzi’s subsidiaries in the United Kingdom. The Group intends to retain 2 of the original group of stores (see note 1 to the consolidated financial statement). This decision was driven both by the desire to more precisely position the Natuzzi brand in the medium to high end of the UK market, as well as by the negative performance of most of these stores.

          In Eastern Europe, during 2005 the Group opened 9 new galleries in addition to the 13 already existing.

          Seven of these new galleries were opened in emerging markets like Macedonia, Moldova, Ukraine, Hungary and the Czech Republic where two galleries operate alongside two stores. During 2005 the Group worked toward the conclusion of two important projects: the opening of its first store in Moscow (Russia) and its first store in Warsaw (Poland). These stores were opened in the first months of year 2006.

          2.2 Italy. In 2005, sales of leather- and fabric-upholstered furniture in Italy decreased of 8.20% to €67.0 million, compared to €73.0 million in 2004, and seats sold decreased by 9.9% to 247,203.

          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, 2006, 130 Divani & Divani by Natuzzi stores and 1 Natuzzi store were located in Italy, 20 of which were directly owned.

          In April 2005, the Company acquired Koineè S.r.l. (Koineè), an Italian enterprise that was operating seven “Divani & Divani by Natuzzi” stores. The stores are located in the Abruzzo and Marche regions of Italy. In November 2005, the Company acquired a network of seven stores “Divani & Divani by Natuzzi” located in Rome. On April 5, 2006 the Group opened a store in the center of Milan’s main shopping and commercial area. The primary reason for these acquisitions is the opportunity to maintain and expand the market presence in the aforementioned regions and cities.

          3 Rest of the World

          3.1 Asia-Pacific. Overall sales in the Asia-Pacific market decreased by 13.2% in 2005 to €39.9 million, compared to €46.0 million in 2004. In 2005, sales in Australia were €16.5 million (down 14.9% from 2004), and sales in Japan were €4.2 million (down 43.2% compared to €7.4 million in 2004). This decrease was mainly due to the termination of our distributorship agreement in the market and our decision to directly manage our operations through the establishment of a local operating subsidiary.

          In addition to the operating subsidiary in Japan, the Group manages its Asia-Pacific sales through a commercial office placed within its operating subsidiary, Italsofa Shanghai Ltd, and three agencies located in Australia, Korea and New Zealand.

          As of April 30, 2006, 29 franchised single-brand stores were operating in the Asia Pacific market: 16 in Australia, 10 in China, one in Singapore and two in New Zealand. The 16 stores in Australia operate alongside 29 galleries in David Jones Department Stores.

          3.2 Middle East. 2005 has been an important year for the development of the Natuzzi brand strategy in this area. During the year 4 stores have been opened: one in Lebanon, two in the United Arab Emirates and one in Saudi Arabia, as well as one gallery in Bahrain.

          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 81% of its sales and obtains credit insurance for almost 82% of this amount; 16.5% of the Group’s remaining sales are commonly made to customers on a “cash against documents” and “cash on delivery” basis; and lastly 2.5% 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. In January 2002, during the Cologne Furniture Fair, the Group launched the new Natuzzi “visual identity”, through which the brand name has taken on a new aesthetic and strategic meaning.

          The Natuzzi Communication System was developed to regulate all methods used in each market to advertise the brand name, and operates transversally 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 (the “Mezzogiorno Program”), which includes the area that serves as the center of the Group’s operations. The Mezzogiorno Program provided tax benefits, capital grants and subsidized loans. In particular, a substantial portion of the Group’s earnings before taxes and minority interest from 1994 to 2003 was derived from companies entitled to some extent to such tax exemptions. All 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 1992, the Italian Parliament instructed the Government to replace the Mezzogiorno Program with a new investment incentive program in favor of all under-industrialized regions of Italy. In 1993, the Government confirmed the expiration of the

Mezzogiorno Program by legislative decree and disclosed the broad outlines of the new program, to be defined by subsequent government resolutions. The Parliament has provided the Government with certain funds to honor existing commitments under the Mezzogiorno Program relating to capital grants and subsidized loans. There can be no assurance, however, that the Group will be able to obtain all the capital grant or subsidy benefits to which it may be entitled under such Program.

          The government resolutions adopted thus far to implement the new investment incentive program state that companies making investments in the construction, enlargement, restructuring, conversion, reactivation or relocation of industrial plants may receive a grant based on the total cost of the project. The grant (calculated in terms of the Equivalente Sovvenzione Netto formula) will be approximately 40% of the investment cost for the Mezzogiorno areas in which Natuzzi currently operates. The program also provides for research and development benefits which may not exceed 60% of the investment cost (calculated in terms of the Equivalente Sovvenzione Lordo formula).

          In December 1996, the Company and the “Contract Planning Service” of the Italian Ministry of the Industrial Activities signed a “Program Agreement” with respect to the “Natuzzi 2000 project”. In connection with this project, Natuzzi 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”, Natuzzi should have realized 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 Natuzzi revised its growth and production strategy due to the strong competition of products realized by competitors in countries like China and Brazil. Therefore, as a consequence of this change in the economic environment in 2003 Natuzzi requested to the Italian Ministry of the Industrial Activities the revision of the original “Program Agreement” as follows: reduction of the investment to be realized from €295.2 million to €69.8 million, and reduction of the related capital grants from €145.5 million to €35.0 million. During April 2005 the Company received from the Italian Government the final approval of the “Program Agreement” confirming these revisions. Natuzzi received under the aforementioned project capital grants in 1997 and 2005 for €27.1 million and €7.9 million, respectively. 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 €3.7 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 2006, Natuzzi entered into an agreement with the Italian Ministry for the incentive program denominated “Integrated Package Benefits — Innovation of the working national program 'Developing Local Entrepreneurs'” for the creation of a centralised information system in Santeramo in Colle that will be utilized by all Natizzi 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 of €2.8 million and a loan of €4.3 million, to be repaid at a rate of 0.7% over 10 years.

          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” names. These names and certain other trademarks, such as “Divani & Divani by Natuzzi”, have been registered as such in Italy, in the European Union, in 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 which 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-United States 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 “— Environmental Regulatory Compliance”, Item 10,

“Additional Information — Exchange Controls” and Item 10, “Additional Information — Taxation”.

Environmental Regulatory Compliance

          The Group operates its own tannery in the province of Udine and another facility for the foam production in Naples.

          The activities of these two facilities are subject to both Italian and European laws and regulations. The Group believes that it operates these and 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 at April 30, 2006 are set forth below:

		Size
		(approximate
		square
Location		meters)				Function
Santeramo in Colle (BA) – Italy			29,000			Headquarters, prototyping, manufacturing of wooden frames, leather cutting, sewing and product assembly, showroom (Owned)
Santeramo in Colle, Iesce (BA) – Italy			27,500			Leather cutting, sewing and product assembly (Owned)
Matera la martella – Italy			38,000			Fabric cutting, sewing and product assembly (Owned)
Matera Iesce – Italy			12,500			Leather cutting, sewing and product assembly (Owned)
Altamura (BA) via dell’Avena – Italy			5,800			Leather cutting, sewing (Owned)
Altamura (BA) via Graviscella – Italy			8,500			Product assembly (Owned)
Altamura (BA) c.da Fornello– Italy			7,000			Warehouse (Owned)
Altamura (BA) via della Paglia – Italy			3,300			Training school, warehouse (Owned)
Altamura (BA) NDS – Italy			3,700			Accessory Furnishings warehouse (Owned)
Ginosa (TA) – Italy			14,500			Leather cutting, sewing and product assembly (Owned)
Laterza (TA) – Italy			10,000			Leather cutting, sewing and product assembly (Owned)
Laterza (TA) – Italy			13,000			Leather cutting, leather warehouse (Owned)
Laterza (TA) – Italy			20,000			Leather cutting, leather warehouse (Owned)
Qualiano (NA) – Italy			12,000			Polyurethane foam production (Owned)
Pozzuolo del Friuli (UD) – Italy			20,000			Leather dyeing and finishing (Owned)
Montebello (VI) – Italy			5,500			Leather warehouse (Leased)
High Point — North Carolina — U.S.A.			10,000			Office and showroom for Natuzzi Americas (Owned)
Baia Mare – Romania			70,200			Leather cutting, sewing and product assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill production and wood and wooden product manufacturing (Owned)
Shanghai – China			43,500			Leather cutting, sewing and product assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill production (Owned)
Shanghai – China			15,000			Leather cutting, sewing and product assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill production (Leased)
Salvador de Bahia (Bahia) – Brazil			28,000			Leather cutting, sewing and product assembly, manufacturing of wooden frames, polyurethane foam shaping, fiberfill production (Owned)
Pojuca (Bahia) – Brazil         .			30,000			Leather cutting, sewing and product 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 2005, the Group continued to utilize subcontractors to meet demand.

          The Group also directly manages 64 stores (of which 20 located in Italy), but it is not the owner of any of them.

Capital Expenditures

          The following table sets forth the Group’s capital expenditures for each year in the three-year period ended December 31, 2005:

		Year ending December 31,
		(millions of Euro)
		2005				2004				2003
Land and plants			3.4				9.5				11.3
Equipment			10.1				17.7				12.8
Other			11.6				27.2				23.2
Total			25.1				54.4				47.3

          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 the expansion of the Company’s retail network. In 2005, capital expenditures were primarily made to open new Natuzzi stores and galleries, as well as to make improvements at existing facilities (such as those located in Bahia Mare, Romania, in Pozzuolo del Friuli, Italy, and other facilities located in and around Santeramo in Colle, Italy) in order to increase productivity and production capacity. The Group expects that capital expenditures in 2006, to be financed with cash flow from operations, will be approximately €25 million mainly directed to improvements of existing plants as well as to opening new Natuzzi stores and galleries.

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 affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Group’s financial presentation could be materially different if different estimates, judgements or assumptions were used. The following discussion addresses the estimates, judgements 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, judgement or assumption were used.

          Recoverability of Long-lived Assets — The Group periodically reviews the carrying value of the long-lived assets held and used and that 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.

          During 2005, the Company didn’t record impairment losses for goodwill, and it recorded €2.8 million of write-off of fixed assets attributable most of them to the closure of several stores managed directly by the Company.

          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 credit worthiness of its customers and general economic conditions. Changes to assumptions relating to these estimates could affect actual results. The reader should be cautioned that actual results may

differ significantly from the Group’s estimates if factors such as general economic conditions and the credit worthiness of its customers are different from the Group’s assumptions.

          Revenue Recognition - Under Italian GAAP, the Group recognizes sales revenue, and accrues costs associated with the sales revenue, 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 terms that risks and ownership are transferred to the customer when the customer takes possession of the goods. These terms are ‘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(d) to the Consolidated Financial Statements included in Item 18 of this annual report.

Results of Operations

          Summary — In 2005, price pressure from competitors in countries that are able to produce goods at lower costs, and economic stagnation in some of our major markets, contributed to a decrease of net sales of 11.1% compared to 2004. Units sold decreased, by 8.4%, due to the negative performance suffered in Americas (-11.4%), in the Rest of the World (-12.8%) and in Europe (-4.3%). Italsofa, the Group’s lower-priced brand continued to represent a growing percentage of the Group’s total seats sold, 48.4% of total seats sold in 2005 compared to 35.3% in 2004.

          In 2005 the Group showed a net loss of € 14.6 million, whereas one year earlier it reported net earnings of € 18.4 million. On a per Ordinary Share, or ADS basis, net losses for 2005 totaled € 0.27 down from earnings per share of € 0.34 reported in 2004. The decrease was primarily caused by the negative results recorded by foreign distribution companies that in the whole year 2005 realized net losses for €23.7 million. In particular, our United Kingdom distribution company continued to poorly perform also in 2005 and, as a result, the Group closed 9 stores during the first four months of 2006. The closing of the abovementioned stores is a consequence of the decision of the Group to relocate directly owned stores in the London Area. In addition net losses were caused by lower efficiencies in manufacturing operations, as well as to higher impact of fixed costs resulting from the decrease in net sales. Finally, 2005 net result was negatively affected by the obsolescence charges of € 6.7 million regarding, in particular, leather used in the Company’s manufacturing process.

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

		Year Ended December 31,
		2005				2004				2003
Net sales			100.0	%			100.0	%			100.0	%
Cost of sales			68.6				64.3				66.1
Gross profit			31.4				35.7				33.9
Selling expenses			27.2				25.0				23.3

		Year Ended December 31,
		2005				2004				2003
General and administrative expenses			6.4				5.4				5.1
Operating income (loss)			(2.2	)			5.3				5.5
Other income (expense), net			0.4				(0.5	)			0.5
Income taxes			0.4				2.4				1.1
Net earnings (loss)			(2.2	)			2.4				4.9

          See Item 4, “Information on the Company — Markets”, for tables setting forth the Group’s net leather- and fabric-upholstered furniture sales and unit sales, which are broken down by geographic market, for the years ended December 31, 2001 through 2005.

          2005 Compared to 2004 — Net sales for 2005, including sales of leather- and fabric-upholstered furniture and other sales (principally polyurethane foam, leather sold to third parties and accessories), decreased 11.1% to €669.9 million compared to 2004.

          Net sales for 2005 of leather- and fabric-upholstered furniture decreased 10.6% to €594.8 million compared to 2004. The 10.6% decrease was due to a 8.4% decrease in units sold and to a 2.2% adverse change in the mix of products and product prices, with a higher proportion of sales of lower priced furniture. Net sales for the Natuzzi-branded furniture accounted for 66.4% of our net sales for 2005, and net sales of Italsofa products accounted for 33.6% of our net sales for 2005. Net sales for 2005 of Natuzzi-branded furniture decreased 22.1%, while net sales of Italsofa-branded furniture increased 26.1% compared to 2004. During 2005 the euro did not appreciate significantly against the major currencies, and therefore net sales were not significantly affected by exchange rate fluctuations.

          Net sales for 2005 of leather-upholstered furniture decreased 8.9% to €498.9 million compared to 2004, and net sales for 2005 of fabric-upholstered furniture decreased 18.5% to €95.9 million compared to 2004.

          In the Americas, net sales for 2005 of upholstered furniture decreased 13.5% to €241.7 million compared to 2004, and seats sold decreased by 11.4% at 1,386,329, because of persistent pricing pressures in the U.S. market. Net sales from the lower-priced Italsofa-branded furniture increased 20.1% compared to 2004, while net sales from the higher-priced Natuzzi-branded furniture decreased 25.8%. In Europe, net sales for 2005 of upholstered furniture decreased 7.9% to €313.2 million compared to 2004, due to a 18.9% decrease in net sales of Natuzzi-branded furniture partially offset by a growth in net sales of Italsofa-branded furniture (+31.4%). In the rest of the world, net sales for 2005 of upholstered furniture decreased 13.2% to €39.9 million compared to 2004. Also in this case net sales for Natuzzi-branded furniture decreased 24.2%, while net sales of Italsofa-branded furniture increased 33.0%.

          Net sales for 2005 of Natuzzi-branded furniture decreased 22.1% to €394.9 million compared to 2004. During the same period, net sales of the lower-priced Italsofa furniture increased 26.1% to €199.9 million compared to 2004. The continued growth of Italsofa was due to consumer price sensitivity resulting from sluggish economic conditions worldwide and the Group’s ability to offer Italsofa products at attractive prices. The Group currently believes that the impact on our sales from the growing percentage of sales represented by lower-priced Italsofa furniture relative to the higher-priced Natuzzi brand furniture will be counterbalanced in the medium- to long-term (three to five years) by the Group’s expectation

of an increasing penetration of the Natuzzi brand in the medium-high end of the upholstery market as a result of the adopted marketing initiatives. However, we can give no assurance that we will achieve our objectives, since our expectations are subject to inherent risks and uncertainties. See “Item 3 — Forward Looking Information”.

          Total net sales of Divani & Divani by Natuzzi, Natuzzi Stores and Kingdom of Leather stores decreased 11.4% in 2005 to €113.9 million compared to 2004.

          In 2005, total seats sold decreased 8.4% to 2,811,739 from 3,070,971 sold in 2004. The negative performance was recorded in the Americas (11.4% down to 1,386,329 seats), in the rest of the world (12.8% down to 162,523 seats) and in Europe (4.3% down to 1,262,886 seats).

          Considering that in 2005 units sold of the lower-priced Italsofa furniture increased 25.4% while units sold from the higher-priced Natuzzi brand furniture decreased 26.9%, presented below are change in our volume sales by brand in our principal markets.

          In terms of seats sold under the Natuzzi brand, the Group recorded negative results in USA (-30.3%), Italy (-14.8%), Canada (-20.9%), the United Kingdom (-44.9%), Belgium (-18.9%), France (-31.8%), Australia (-33.3%), Holland (-22.7%), Germany (-38.4%), Portugal (-23.6%), Japan (-54.4%), Switzerland (-32.8%), Sweden (-34.9%), Greece (-27.2%) and Norway (-34.0%). Positive performances were reported in Spain (+8.5%), Denmark (+111.0%) and Chile (+27.8%).

          In terms of seats sold under the Italsofa brand, the Group reported significant growth in many countries: USA (+23.1%), Germany (+109.0%), France (+50.0%), Sweden (+51.8%), Belgium (+114.2%), Spain (+33.8%), Holland (+77.6%), Australia (+35.6%), Italy (+348.4% realized by Ikea stores), Ireland (+4.9%), Switzerland (+157.2%), Russia (+18.1%), and Austria (+69.6%). Negative performances were reported in United Kingdom (-20.0%), Norway (-6.1%), Canada (-29.2%) and Denmark (-5.3%).

          Other net sales decreased 14.6% to €75.1 million compared to 2004. The decrease was mainly attributable to lower sales of living room accessories (20.6% decrease compared to 2004), polyurethane foam (14.61% decrease compared to 2004) and raw materials sold to third parties (9.1% decrease compared to 2004).

          Cost of goods sold decreased by 5.2% to €459.5 million or 68.6% of net sales in 2005, from €484.6 million or 64.3% of net sales in 2004. The decrease in cost of sales was primarily attributable to a decrease in the quantity of leather purchased as a result of a decrease in sales. The increase in cost of goods sold, as a percentage of net sales, was due to lower efficiencies achieved in manufacturing operations as well as to higher impact of fixed costs resulting from the decrease in net sales. In addition 2005 cost of goods sold was negatively affected by the obsolescence charges of € 6.7 million regarding, in particular, leather used in the Company’s manufacturing process.

          The Group’s gross profit decreased 21.7% in 2005 to €210.5 million compared to 2004, as a result of the factors described above.

          Selling expenses for 2005 decreased 3.2% to €182.2 million compared to 2004, and as a percentage of net sales increased from 25.0% in 2004 to 27.2% in 2005. This decrease was attributable to a reduction in variable costs, such as commissions and transportation

costs, as well as to lower advertising expenses. The decrease in transportation costs was partially off set by higher oil prices reported in 2005. In terms of percentage of net sales, the 2.2% increase was due to higher fixed costs from investments in the “Natuzzi Galleries” and “Natuzzi Stores” program (30.0% increase compared to 2004), and to an increase in store rent (17.9% increase compared to 2004), as well as to lower net sales. Also in this case lower net sales determined higher incidence of selling expenses.

          General and administrative expenses for 2005 increased 5.6% to €43.0 million compared to 2004, and as a percentage of net sales increased from 5.4% in 2004 to 6.4% in 2005. This increase was primarily attributable to higher directors’ fees and administrative salaries. In addition the Group reported an increase in administrative salaries mainly determined by the consolidation of companies acquired in 2005 (see Consolidated Financial Statements Item 18 of this annual report).

          The Group had an operating loss for 2005 of €14.7 million compared to operating income of €40.0 million in 2004, as a result of the factors above described.

          Other income (expense), net increased to €3.0 million in 2005 from other expense, net of €3.9 million in 2004. Net interest income (expense), included in other income (expense), net, in 2005 was €0.1 million, compared to €(0.6) million in 2004.

          Foreign exchange gains (losses), net, included in other income (expense), net, were €(1.6) million in 2005, compared to a net gain of €2.3 million in 2004. Foreign exchange losses in 2005 were mainly due to the following reasons:

	–		A net realized loss of €4.3 million in 2005 (compared to a gain of €5.0 million in 2004) on the domestic currency swaps due to the difference between the forward rate of the domestic currency swaps and the spot rate at which the domestic currency swaps were closed (the Company uses the forward rate to hedge its price risks against unfavorable exchange variations);
	–		A net realized gain of €5.4 million in 2005 (compared to a loss of €1.0 million in 2004), from the difference between the invoice exchange rate and the collection/payment exchange rate;
	–		During 2005 the Italian Accounting Profession changed the Italian accounting standard regarding the translation of the financial statements of a foreign subsidiary (see Note 3(c) to the Consolidated Financial Statements in Item 18 of this annual report). According to the new accounting principle, the exchange difference resulting from the translation of the financial statements of a foreign subsidiary expressed in a foreign currency has to be recorded as a direct adjustment to shareholders’ equity. Therefore in 2005 the Group did not record in the statement of earnings exchange differences from the conversion of the non euro financial statements of the Company’s subsidiaries, while in 2004 recorded a gain of €1.4 million. Had the new Italian standard not been adopted in 2005, the Company would have recognized, in 2005, a foreign exchange gain of €1.7 million in the consolidated statement of earnings. The comparative financial statements of prior years have not been adjusted to apply the new Italian GAAP foreign currency translation standard retrospectively.
	–		A net unrealized gain of €2.1 million in 2005 (compared to an unrealized loss of €10.2 million in 2004) on accounts receivable and payable;

–

An unrealized loss of €4.8 million in 2005 (compared to an unrealized gain of €7.1 million in 2004), from mark-to-market of domestic currency swaps.

          The Group also recorded other income, included in other income (expense), in 2005 of €4.5 million compared to other expense of €5.6 million reported in 2004. The gain in 2005 was mainly due to the following reasons:

	–		Revenue from capital grants of €4.4 million. In 2005, Natuzzi received under the aforementioned project “Natuzzi 2000” additional capital grants amounting to €7.9 million. A part of these capital grants, amounting to €4.4 million, is related to depreciation of property, plant and equipment recorded in the consolidated statements of earnings in the years prior to 2005. Therefore, for this reason the amount of €4.4 million has been classified under the caption “other income (expense), net”. Another portion of these capital grants, amounting to €0.3 million has been classified in the net sales as they relate to depreciation of 2005. The remaining portion of €3.2 million has been classified in the consolidated balance sheet at December 31, 2005 as deferred income, and it will be charged to statements of earnings as revenue on a systematic basis over the useful life of the related asset. See Note 24 to the Consolidated Financial Statements included in Item 18 of this Annual Report.
	–		Other expenses of €2.8 million deriving from the write-off of fixed assets, most of them related to leasehold improvements related to the closure of some stores managed directly by Natuzzi.
	–		Revenue for incentive benefit of €2.1 million. This incentive is measured on the basis of the export sales realized by the subsidiary Italsofa Bahia Ltd.
	–		Expense of €0.6 million represents the provision established for the penalties that the Company expects to pay to landlords of several stores located in England for the early termination of the related operating leases. Actual amounts payable may be higher.
	–		Other income, net of €1.4 million.

          Since 2003, the Company does not follow hedge accounting, and records all fair value changes of its domestic currency swaps in the income statement.

          The Group’s effective income tax rate for 2005 was 26.5% of the loss before taxes and minority interest, compared to 48.9% of the earnings before taxes and minority interest in 2004.

          The Group’s domestic companies recorded an effective tax rate negative of 34.9%, and the Group’s foreign companies recorded an effective tax rate positive of 9.4%. For domestic companies, the Group’s tax rate was negatively affected by 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 on 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 net loss, it might be subject to this regional tax. In 2005, most domestic companies of Natuzzi reported losses but had to pay IRAP.

          Some foreign subsidiaries (Italsofa Shanghai Ltd, Softaly Shanghai Ltd, Italsofa Bahia Ltd, Minuano Nordeste S.A. and Italsofa Romania) are entitled to take advantage of significant tax benefits, such as corporate income tax exemptions or reductions of the corporate income tax rates, the most significant of which will expire in 2012. As a consequence, foreign subsidiaries reported a lower effective tax rate than our domestic subsidiaries.

          The Group had a net loss of €14.6 million in 2005 compared to net earnings of €18.4 million in 2004. On a per Ordinary Share, or ADS basis, the Group had a net loss of €0.27 in 2005 compared to net earnings of €0.34 in 2004.

          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 US GAAP, for the years ended December 31, 2005, 2004 and 2003, the Group would have had net losses of €6.9 million, net earnings of €18.8 million and net earnings €38.0 million, respectively, compared to net losses of € 14.6 million, net earnings of €18.4 million and net earnings of €37.3 million, respectively, under Italian GAAP for the same periods.

          2004 Compared to 2003 — Net sales for 2004, including sales of leather- and fabric-upholstered furniture and other sales (principally polyurethane foam, leather sold to third parties and accessories), decreased 2.1% to €753.4 million compared to 2003.

          Net sales for 2004 of leather- and fabric-upholstered furniture decreased 1.3% to €665.5 million compared to 2003. The 1.3% decrease was due to a 4.3% appreciation of the euro against the major currencies, particularly the U.S. dollar, to a 0.4% increase in units sold and to a 2.6% increase in the mix of products and product prices. Net sales for 2004 of Natuzzi-branded furniture decreased 2.4%, while net sales of Italsofa-branded furniture increased 2.6% compared to 2003. Net sales for 2004 of leather-upholstered furniture decreased 0.4% to €547.9 million compared to 2003, and net sales for 2004 of fabric-upholstered furniture decreased 5.2% to €117.6 million compared to 2003.

          In the Americas, net sales for 2004 of upholstered furniture decreased 12.7% to €279.4 million compared to 2003 because of the unfavorable conversion of sales made in dollars to euro, and because of persistent pricing pressure in the U.S. market, both contributing to a decrease in units sold (-7.9%). In Europe, net sales for 2004 of upholstered furniture increased 8.5% to €340.1 million compared to 2003 due to a marked growth in net sales of Italsofa-branded furniture (35.2%). In the rest of the world, net sales for 2004 of upholstered furniture increased 13.9% to €46.0 million compared to 2003.

          Net sales for 2004 of Natuzzi-branded furniture decreased 2.4% to €507.0 million compared to 2003. During the same period, net sales of the lower-priced Italsofa furniture increased 2.6% to €158.5 million compared to 2003. The continued growth of Italsofa was due to consumer price sensitivity resulting from sluggish economic conditions worldwide and the Group’s ability to offer Italsofa products at attractive prices. The Group currently believes that the impact on our sales from the growing percentage of sales from the lower-priced Italsofa furniture relative to the higher-priced Natuzzi brand furniture will be counterbalanced in the medium- to long-term (three to five years) by the increasing penetration of the Natuzzi brand in the medium-high end of the upholstery market expected by the Group as a result of the marketing initiatives adopted. However, we can give no

assurance that we will achieve our objectives, since our expectations are subject to inherent risks and uncertainties. See “Item 3 — Forward Looking Information”.

          Total net sales of Divani & Divani by Natuzzi, Natuzzi Stores and Kingdom of Leather stores increased 21.0% in 2004 to €128.6 million compared to 2003.

          In 2004, total seats sold increased 0.4% to 3,070,971 from 3,058,835 sold in 2003. The slight increase was due to an increase of 11.7% in Europe (1,319,740 seats) and a 4.6% increase in the rest of the world (excluding Europe) (186,330 seats), which together offset a 7.9% decrease reported in Americas (1,564,900 seats).

          The negative performance of Natuzzi products in the Americas was caused by our decreased ability to offer competitive prices in the United States resulting from the appreciation of the euro against the U.S. dollar and the growing presence in that market of imported products from countries, such as China, with lower manufacturing costs. In the Americas, seats sold in 2004 by the higher priced Natuzzi brand decreased 8.0%, and seats sold by the lower priced Italsofa brand decreased 7.7% compared to 2003. In particular, the decrease in units sold in the Americas included a decrease in the United States of 10.2% partially offset by higher sales in Canada (+8.4%) and other minor markets (+70.3%).

          Seats sold in Europe increased from 1,181,566 in 2003 to 1,319,740 in 2004. The positive performance achieved in Europe reflects the success of the Group’s lower-priced brand, Italsofa. Units sold for Italsofa brand increased by 37.6% from 317,925 in 2003 to 437,558 in 2004, while units sold for Natuzzi brand slightly increased from 863,641 in 2003 to 882,182 in 2004. Positive results were reported in many countries: United Kingdom (+12.5%), Spain (58,4%), France (12.0%), Belgium (31.6%), Norway (49.9%), Switzerland (8.3%), Sweden (12.5%), and Portugal (43.3%). Negative performances were suffered in Germany (-13.7%), Holland (-5.9%), Ireland (-13.1%) and Greece (-8.9%).

          In the rest of the world, seats sold increased from 178,109 in 2003 to 186,330 in 2004. The rise included increases in Australia (+17.1%), Korea (+28.0%), China (23.2%), Turkey (+41.9%), Taiwan (+49.0%), which were partially offset by lower sales in Japan (-5.5%), New Zealand (-18.9%) and Israel (-23.4%).

          In 2004, total leather-upholstered seats sold increased 1.5% to 2,345,044 from 2,310,121 seats sold in 2003, while total fabric-upholstered seats sold decreased 3.0% to 725,927 from 748,714 seats sold in 2003.

          The Natuzzi brand sold 1,986,461 seats in 2004, 2.9% less than in 2003, while sales of Italsofa seats increased 7.0% to 1,084,510 compared to 2003.

          Other net sales decreased 8.1% to €87.9 million compared to 2003. The decrease is mainly attributable to the lower sales of living room accessories (15.5% decrease compared to 2003), polyurethane foam (3.1% decrease compared to 2003) and raw materials sold to third parties (8.8% decrease compared to 2003).

          Cost of goods sold decreased by 4.8% to €484.5 million or 64.3% of net sales in 2004, from €508.8 million or 66.1% of net sales in 2003. The decrease in cost of sales was attributable primarily to a decrease in the quantity of leather purchased as a result of a

decrease in order flows for leather upholstery compared to 2003, as well as to a decrease in the average price of leather due to the Group’s purchasing policies and, to a lesser extent, to savings resulting from efficiencies achieved in manufacturing operations.

          The Group’s gross profit increased 3.1% in 2004 to €268.9 million compared to 2003, as a result of the factors described above.

          Selling expenses for 2004 increased 5.0% to €188.2 million compared to 2003, and as a percentage of net sales increased from 23.3% in 2003 to 25.0% in 2004. This increase was caused primarily by our continued investment in the “Natuzzi Galleries” and “Natuzzi Stores” program, which resulted in higher marketing expenses (5.5% increase compared to 2003), store rent (27.0% increase compared to 2003) and depreciation costs (41.2% increase compared to 2003), and to a lesser degree, by increased transportation costs (3.1% increase compared to 2003), which were due to higher oil prices.

          General and administrative expenses for 2004 increased 3.8% to €40.7 million compared to 2003, and as a percentage of net sales increased slightly from 5.1% in 2003 to 5.4% in 2004.

          Operating income for 2004 decreased 5.4% to €40.0 million compared to €42.3 million reported in 2003, as a results of the factors described above.

          Other income (expense), net decreased to €(3.9) million in 2004 from a net income of €3.6 million in 2003. Net interest income (expense), included in other income (expense), net, in 2004 was €(0.6) million, compared to €0.5 million in 2003.

          Foreign exchange gains, net, also included in other income (expense), net, were €2.3 million in 2004, compared to €6.3 million in 2003. The gain in 2004 was mainly due to the following:

	–		A net realized gain of €5.0 million in 2004 (compared to a gain of €25.4 million in 2003) on the domestic currency swaps due to the difference between the forward rate of the domestic currency swaps and the spot rate at which the domestic currency swaps were closed (the Company uses the forward rate to protect its price risks against unfavorable exchange variations);
	–		A net realized loss of €1.0 million in 2004 (compared to a loss of €7.6 million in 2003), from the difference between the invoice exchange rate and the collection/payment exchange rate;
	–		A gain of €1.4 million (compared to a loss of €1.2 million in 2003) recorded in the consolidated statement of earnings from the conversion of non-euro financial statements of the Company’s subsidiaries;
	–		A net unrealized loss of €10.2 million in 2004 (compared to an unrealized loss of €16.6 million in 2003) on accounts receivable and payable; and
	–		An unrealized gain of €7.1 million in 2004 (compared to an unrealized gain of €6.3 million in 2003), from the mark-to-market of domestic currency swaps.

          The Group also recorded other expense in 2004 of €5.6 million compared to other expense of €3.1 million reported in 2003. The loss in 2004 was mainly due to the following:

	–		A loss of €6.1 million in 2004 due to the impairment of goodwill related to the Group’s operations and expectations in the United Kingdom;
	–		A gain of €3.4 million in 2004 realized from the by disposal of the subsidiary “Spagnesi S.p.A.”;
	–		An expense net of €1.3 million deriving from the write-off of fixed assets;
	–		Other expense, net of €1.5 million in 2004.

          Since 2003, the Company does not follow hedge accounting, and records all fair hedge accounting, and records all fair value changes of its domestic currency swaps in the income statement.

          The Group’s effective income tax rate for 2004 was 48.9%, compared to 18.5% in 2003. The higher rate was due to the expiring, on December 27, 2003, of the last domestic tax exemption and to the negative impact of certain other expenses, recorded in the consolidated statement of earnings, that are not fiscally deductible.

          Net earnings decreased from €37.3 million in 2003 to €18.4 million in 2004. On a per Ordinary Share, or ADS basis, net earnings decreased from €0.68 in 2003 to €0.34 in 2004. As a percentage of net sales, net earnings decreased from 4.9% in 2003 to 2.4% in 2004.

          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. Net earnings under U.S. GAAP for the years ended December 31, 2004, 2003 and 2002 would have been €18.8 million, €38.0 million and €92.0 million, respectively, compared to net earnings under Italian GAAP for the same periods of €18.4 million, €37.3 million and €91.4 million, respectively.

          Effect of Inflation — Management believes that the impact of inflation was not material to the Group’s net sales or operating income in the three years ended December 31, 2005.

Liquidity and Capital Resources

          Cash and cash equivalents were €89.7 million at December 31, 2005 compared to €87.3 million at December 31, 2004. The most significant changes in the Group’s cash flow are described below.

          Cash flows from operations were €23.1 million in 2005, compared to €68.3 million in 2004. This decrease of €45.2 million from 2004 to 2005 resulted principally from the Group’s net loss of €14.6 million in 2005, which was mainly caused by the negative results of the Group’s foreign distribution companies. These companies realized net losses of €23.7 million. In addition, the decrease in cash flows from operations was due to a slight increase in working capital, compared to a significant decrease in working capital during 2004. In 2004 cash flow generated by working capital was higher than 2005 because of the significant decrease in net receivables, as a consequence of the positive results achieved in reducing collection periods for clients. In 2005 the Group continued to achieve positive results in

credit collection, but the positive impact was lower than in 2004, when the reduction of collection periods for clients was much more significant.

          Cash flows used in investment activities in 2005 decreased €16.1 million to €21.0 million. The decrease in cash used in investment activities was due to lower capital expenditures partially offset by lower inflow generated by disposals of businesses and long lived assets. Capital expenditures were €20.9 million and €51.9 million in 2005 and 2004, respectively. In 2005, capital expenditures were primarily made to open new Natuzzi stores and galleries as well as to make improvements at existing facilities in order to increase productivity and production capacity, which included the purchase of equipment.

          The positive effect on our cash flows used in investment activities from decreased capital expenditures and the Government grants received was partially offset by (i) a decrease of €5.5 million in cash flows from disposals of business, which in 2004 were solely due to the sale of Spagnesi S.p.A. for cash consideration of €5.5 million, and (ii) a decrease of €8.5 million in cash flows from disposals of long-lived assets. In 2005, the Group generated €916 thousands from the sale of fixed assets, such as machinery, equipment and a portion of a building located in Taranto, Italy. The positive effect of decreased capital expenditures and the Government grants received was also partially offset by a €1.9 million increase in cash used for the purchase of businesses, from €0.1 million in 2004 to €2.0 million in 2005. In 2005, the Company acquired Koineè S.r.l., an enterprise based in a town close to Pescara operating seven “Divani & Divani by Natuzzi” stores; a network of seven “Divani & Divani by Natuzzi” stores in Rome; and a store in the center of Milan’s main shopping and commercial area. See Note 1 to the Consolidated Financial Statements included in Item 18 of this Annual Report.

          Cash used for financing activities in 2005 totaled €3.8 million compared to €6.0 million in the previous year. This decrease primarily reflects lower dividends paid to shareholders, €3.8 million in 2005 compared to €7.7 million in 2004, which was partially offset by increased long-term debt repayments, from €1.3 million in 2004 to € 2.1 million in 2005, and decreased long-term debt proceeds, from €1.3 million in 2004 to €0.5 million in 2005.

          As at December 31, 2005, the Group had available lines of credit for cash disbursements totaling €93.0 million, 8.3% of which were used. The unused portion of these lines of credit amounted to approximately €85.2 million (see Note 11 to the Consolidated Financial Statements included in Item 18 of this annual report). The Group’s long-term debt represented less than 1% of shareholders’ equity at December 31, 2005 and 2004 (see Note 16 to the Consolidated Financial Statements included in Item 18 of this annual report).

          Management believes that the Group’s working capital is sufficient for its present requirements. The Group’s principal source of funds is expected to be cash flows generated from operating activities, cash on hand and amounts available under its lines of credit. The Group’s principal use of funds is expected to be the payment of operating expenses, working capital requirements and capital expenditures.

Contractual Obligations and Commitments

          The following tables set forth the contractual obligations and commercial commitments of the Group as at December 31, 2005:

		Payments Due by Period (in euro thousands)
						Less than				1-3								After 5
Contractual Obligations		Total				1 year				years				4-5 years				years
Long-Term Debt(1)			4,008				426				1,620				525				1,437
Interest on long term debt			469				83				172				97				117
Operating Leases(2)			61,643				12,443				21,969				17,860				9,371
Total Contractual Cash Obligations			66,120				12,952				23,761				18,482				10,925

Amount of Commitment Expiration Per

Total

Period (in euro thousands)

Amounts

Less than

1-3

After 5

Other Commitments

Committed

1 year

years

4-5 years

years

Guarantees(1)

26,005

26,005

—

—

—

Related Party Transactions

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

Research and Development

          Innovation remains a strategic activity for the Group. Research and development efforts in 2005 have continued to focus on the design of new products and improvements in the manufacturing process. See Item 4, “Information on the Company—Manufacturing” and Item 4, “Information on the Company—Products and Design”. During 2005, the Group’s investments in research and development activities was €10.0 million, the same amount as in 2004. Approximately 150 highly qualified people work in these activities, and more than 100 new products are generally introduced each year. The Group conducts its research and development efforts at its headquarters in Santeramo.

          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 low environmental impact production. The ISO 14001 certification applies also to Natuzzi’s tannery subsidiary, Natco S.p.A.

Trend Information and Guidance

           Although the operating economic and currency scenario in which the Company has been operating remains unfavorable, the Group has experienced an improvement in sales starting in the second half of 2005 and continuing through the first quarter of 2006, particularly in Europe.

          Total net sales during the first three months of 2006 were at €188.2 million, increasing by 13.0% from €166.6 million, for the first quarter of 2005. In terms of seats sold, the Group sold 747,152 units during the first quarter of 2006, 6.1% less than the first quarter of 2005.

          The Group continues to see mixed results between its major product lines, with the Italsofa line continuing to exhibit growth (up 42.2% over the first quarter of 2005, at € 58.3 million), and the Natuzzi brand line (up 3.5% over the first quarter 2005, at €109.1 million) still adversely affected by competitive pricing pressure, particularly evident in United States.

          After reporting net losses in 2005 for the first time in its corporate history, the Group recorded net income of €6.8 million during the first quarter of 2006, principally as a consequence of the restructuring efforts that have been undertaken since June 2005 – namely more efficient cost management and the closing of non-performing retail units — together with more favorable currency conditions in the period.

          Although during first quarter 2006 the Group reported an encouraging positive results, Natuzzi’s top management is aware that rising energy prices and interest rates will continue to adversely affect consumers’ discretionary spending and, as a consequence, the furniture industry. In addition, the Group’s profitability and pricing flexibility has been and continues to be adversely affected by the strength in the value of the Euro against the U.S. dollar. As a result, the ability of the Group to improve its competitiveness largely depends on the Group’s ability to implement the current restructuring process of its operations and improve its retail activities. See Item 3, “Risk Factors”.

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 are required to adopt International Financial Reporting Standards (“IFRS”), formerly known as IAS, in the preparation of their 2005 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 in Form 20-F.

          Italian GAAP – The new accounting standard under Italian GAAP relevant for the Company is outlined below.

          During September 2005, effective as of December 31, 2005, the Italian Accounting Profession has changed the Italian accounting standard No. 17, “Consolidated Financial Statements”, with regard to the translation of the financial statements of a foreign subsidiary expressed in a foreign currency.

          Under the previous accounting principle an Italian parent company was allowed to translate the financial statements of a foreign subsidiary expressed in a foreign currency using the following two methodologies:

          (a) if the foreign subsidiary was considered an integral part of the parent company due to various factors including intercompany transactions, financing, and cash flow indicators, its financial statements expressed in the foreign currency was translated directly into euro from the local currency as follows: (i) year-end exchange rate for monetary assets and liabilities, (ii) historical exchange rates for non monetary assets and liabilities, share capital and retained earnings, and (iii) average exchange rates during the year for revenues and expenses except for those revenues and expenses related to assets and liabilities translated at historical exchange rates. The resulting exchange differences on translation were recognized in other income (expenses), net, in the consolidated statements of earnings;

          (b) if the foreign subsidiary was not considered an integral part of a parent company, its financial statements expressed in the foreign currency was translated directly into euro as follows: (i) year-end exchange rate for assets and liabilities, (ii) historical exchange rates for share capital and retained earnings, and (iii) average exchange rates during the year for revenues and expenses. The resulting exchange differences on translation were recorded as a direct adjustment to shareholders’ equity.

          As indicated above, effective as of December 31, 2005, the Italian Accounting Profession has eliminated the option (a) indicated above.

          Therefore, under Italian GAAP as from December 31, 2005, an Italian parent company must translate the financial statements of a foreign subsidiary expressed in a foreign currency using only option (b) indicated above. This means that the financial statements of a foreign subsidiary expressed in the foreign currency must be translated directly into euro as follows: (i) year-end exchange rate for assets and liabilities, (ii) historical exchange rates for share capital and retained earnings, and (iii) average rates during the year for revenues and expenses. The resulting exchange differences on translation have to be recorded as a direct adjustment to shareholders’ equity. This approach effectively ignores the operating environment of the foreign entity, in particular if the local currency is also the functional currency.

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

- SFAS No. 151: In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” (SFAS 151), which is an amendment of Accounting Research Bulletin No. 43, “Inventory Pricing.” SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. The provisions of SFAS 151 are effective for inventory costs incurred beginning January 1, 2006, and are applied on a prospective basis. The Company does not expect the adoption of SFAS 151 will have a significant impact on the Company’s consolidated financial statements.

- SFAS No. 153: In December 2004, the FASB issued SFAS Statement No. 153, Exchanges of Nonmonetary Assets, which eliminates an exception in APB 29 for nonmonetary exchanges of similar productive assets and replaces it with a general exception

for exchanges of nonmonetary assets that do not have commercial substance. This Statement will be effective for the Company for nonmonetary asset exchanges occurring on or after January 1, 2006. Application of this statement will not have an impact on the consolidated financial statements of the Company.

- SFAS No. 123 R: In December 2004, the FASB issued SFAS No.123 (revised 2004), Share-Based Payment, which is a revision of SFAS No.123, Accounting for Stock-Based Compensation. SFAS No.123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No.123(R) is similar to the approach described in SFAS No. 123. However, SFAS No.123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company intends to adopt the “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No.123(R) for all share-based payments granted or modified after the effective date and (b) based on the requirements of SFAS No.123 for all awards granted to employees prior to the effective date of SFAS No.123(R) that remain unvested on the effective date.

As permitted by SFAS No.123, the company currently accounts for share-based payments to employees using the APB Opinion No. 25 intrinsic-value method. Accordingly, the adoption of the SFAS No.123(R) fair value method will affect the Company’s results of operations. The Company has not yet determined the impact, if any, that the adoption of SFAS 123 (R) will have on the Company’s consolidated financial statements.

- FASB interpretation No. 47: In March 2005, the FASB issued FASB Interpretation (FIN) No. 47 Accounting for Conditional Asset Retirement Obligations, which clarifies that a liability (at fair value) must be recognized for asset retirement obligations when it has been incurred if the amount can be reasonably estimated, even if settlement of the liability is conditional on a future event. FIN 47 is effective as of December 31, 2005. The Company currently does not have any assets retirement obligations.

- EITF 04-1: In October 2004, the EITF reached a consensus on EITF 04-1, “Accounting for Preexisting relationships between the Parties to a Business Combination”. EITF 04-1 addresses various elements connected to a business combination between two parties that have a pre-existing relationship and the settlement of the pre-existing relationship in conjunction with the business combination. The Company applied the provisions of EITF 04-1 to business combinations consummated.

- SFAS No. 154: In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections – a Replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS 154 requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also redefines “restatement” as the revising of previously issued financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

- EITF 05-06: In June 2005 the EITF reached a consensus on EITF 05-6, “Determining the amortization period for leasehold improvements”. The issue is how to

determine the amortization period for leasehold improvements acquired subsequent to inception of lease, including leasehold improvement acquired in a business combination. For both cases the Task Force reached the consensus that the leasehold improvements acquired should be amortized over the shorter of the useful life of the assets and the hypothetical lease term. This consensus does not apply to pre-existing improvements and it is effective for reporting periods beginning after June 29, 2005. The Company does not believe that the adoption of EITF 05-6 will have a significant impact on the consolidated financial statements.

Item 6. Directors, Senior Management and Employees

          The directors, executive officers and officers of the Company at June 10, 2006 were as follows:

Name		Age				Position with the Company
Pasquale Natuzzi			66			Chairman of the Board of Directors
Ernesto Greco			55			Chief Executive Officer, Member of the Board of Directors
Giuseppe Desantis			43			General Manager, Vice Chairman of the Board of Directors
Daniele Tranchini			47			Chief Sales & Marketing Officer, Member of the Board of Directors
Giambattista Massaro			44			General Manager of Purchasing and Overseas Operations, Member of the Board of Directors
Gianluca Monteleone			39			Marketing and Communication Director, Member of the Board of Directors
Giuseppe Russo Corvace			56			Managing Director for Accounting and Finance, Member of the Board of Directors
Armando Branchini			61			Outside Director
Stelio Campanale			44			Outside Director
Pietro Gennaro			84			Outside Director
Enrico Vitali			45			Outside Director
Enrico Carta			58			Human Resources and Organization Director
Nicola V.M. Dell’Edera			44			Chief Financial Officer a.i. and Finance Director
Giovanni Costantino			42			Research and Development Director
Annunziata Natuzzi			42			Chief Executive Officer of Natco S.p.A.
Gaetano De Cataldo			42			Executive Vice President of Finance and Operations of Natuzzi Americas, Inc.
José Manuel Gulias Roo			48			Spain and Portugal Country Manager
Cesare Laberinti			73			Chairman and Managing Director of IMPE S.p.A
Bo Lippert-Larsen			44			Nordic Region Country Manager
Jan Mentens			39			Benelux Country Manager
Giovanni Mercadante			49			Accounting Director
Ottavio Milano			40			Control and Internal Auditing Director
Nick Moore			44			Managing Director of Natuzzi United Kingdom Ltd
Achille Poretta			48			Information Systems Director
Dave Riches			46			Finance Director of Natuzzi United Kingdom Ltd
Bodo Rupp			47			Germany, Switzerland and Austria Country Manager
Fredrick Starr			74			President and Chief Executive Officer of Natuzzi Americas Inc.

Name		Age				Position with the Company
Francesco Stasolla			40			Chairman and Managing Director of Italsofa Romania S.r.l.
Richard Tan			46			Chairman and Managing Director of Italsofa (Shanghai) Ltd and Softaly (Shanghai) Ltd
Vito Testini			52			Managing Director of Minuano Nordeste S.A and Italsofa Bahia Ltd
Fernando R. Vitale			40			General Manager and Director of Italsofa Bahia Ltda.

           Pasquale Natuzzi, who serves as Chairman of the Board of Directors, founded the Company in 1959 and acted as its principal executive officer until June 2006. 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.

          Ernesto Greco is the Chief Executive Officer of the Group and member of the Board of Directors since June 6, 2006. Mr. Greco holds a degree in Mechanical Engineering and a Master in Business Administration from CUOA, Italy. He developed his career in various areas within multinational Companies, such as Montedison, Hewlett-Packard, Wang Laboratories. Before his appointment in Natuzzi, he was CFO of Bulgari, world leader in the luxury goods business.

          Giuseppe Desantis is General Manager and Vice Chairman of the Board of Directors. He became Vice Chairman of the Company in 1991. From 1988 to 1991, he was Assistant to Mr. Natuzzi. In 1987, he managed the Company’s pricing and costing department. From 1984, when he joined the Company, to 1986 he worked in the Company’s accounting department.

          Daniele Tranchini is the Chief Sales and Marketing Officer and member of the Board of Directors. He joined the Company in June 2004 after studying Marketing and Business Administration in the United States. He was previously the Managing Director of J.Walter Thompson.

          Giambattista Massaro is General Manager of Purchasing and Overseas Operations and member of the Board of Directors. From 1992 to 1993 he was assistant to Mr. Natuzzi and from 1990 to 1992 he was Pricing and Costs Manager. He joined the Company in 1987 as a buyer. He is also Chairman of Natco S.p.A , Nacon S.p.A. and Natuzzi Trade Service S.r.l. as well as Director of Italsofa Bahia Ltda., Italsofa Romania S.r.l. and Natuzzi Asia Ltd.

          Gianluca Monteleone is Marketing and Communication Director and member of the Board of Directors. He joined the Company and became a Director in 1999. He was previously a brand manager at Johnson & Johnson, Italy and Marketing Manager at Sara Lee International.

          Giuseppe Russo Corvace acts as Managing Director for Accounting and Finance and is a member of the Board of Directors. He is a partner of Vitali, Romagnoli, Piccardi e Associati, a major Italian law and tax consulting firm serving the Company and other major domestic and multinational companies. He has also served as a consultant to non-profit organizations. He serves as member of the Board of Auditors of a number of other Italian companies. He is delegated by the Board to supervise all activities related to domestic and international tax issues.

          Armando Branchini has been an Outside Director of the Company since 2001. He

founded InterCorporate — Strategie e Impresa, a consultancy firm specializing in business strategies and strategic marketing. He is a professor of Strategic Marketing of Luxury Goods at the IULM University in Milan. From 1973 through 1987, he was responsible for establishing and implementing a marketing program aimed at supporting the entrance and development of Italian fashion in principal international markets.

          Stelio Campanale is an Outside Director of the Company and has been a member of the Board of Directors since 1991. He was Legal Counsel of the Company from 1991 to 1997, and then served as a consultant of the Company. He was previously a senior consultant at Praxi S.p.A., a corporate consulting company, from 1988 to 1990.

          Pietro Gennaro has been an Outside Director of the Company since 1993. He is the founder of Gennaro-Boston Associati, an Italian management consulting firm that is a subsidiary of the Boston Consulting Group. He is currently a professor at the University of Pavia and at ISTUD, a senior management business school. Mr. Gennaro is also a management consultant to major companies in Italy, serving as Chief Executive Officer of PGA — Strategia e Organizzazione, a management consultancy. Previously, he has also served as President of Waste Management Italia.

          Enrico Vitali has been an Outside Director of the Company since 1994. He is a Certified Public Accountant and a partner of Vitali, Romagnoli, Piccardi e Associati, a major Italian law and tax consulting firm serving the Company and other major domestic and multinational companies. Mr. Vitali also serves as a member of the Boards of Statutory Auditors and the Boards of Directors of a number of other Italian companies.

          Enrico Carta joined the Company in February 2002 as Human Resources and Organization Director. He has served as human resources manager over several years for some of the most important Italian industrial and consulting firms.

          Giovanni Costantino has served as Research and Development Director of the Group since 1999. He was previously a consultant for furnishings and was in charge of developing the Company’s “Decorator” program.

          Annunziata Natuzzi is the Chief Executive Officer of Natco S.p.A.. 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 Italian Sales Department and in the International Sales Administration Department. She has worked in the Personnel Department since 1990.

          Gaetano De Cataldo is Executive Vice President of Finance and Operations of Natuzzi Americas, Inc. He previously served the Company as Sales Manager for Latin America. From 1995 to 1997, he was International Franchisee Operations Manager, and from 1993 to 1995 he was Assistant Sales Administration Manager. He joined the Company in 1990 as a customer service representative.

          Nicola Vittorio Maria Dell’Edera is Chief Financial Officer a.i. and Finance Director. He joined the Company in 1999. From 1997 to 1999, he was head of the Financial Analysis Department in the New York branch of Banca di Roma, an Italian bank. He previously worked in Banca di Roma’s branches in Rome and Bari.

          José Manuel Gulias Roo has been Managing Director of the subsidiary Natuzzi

Ibérica since June 2004. He joined the Group in June 2004. Previously, Mr. Gulias Roo worked for HL-Display, a world-leading supplier of the retail industry.

          Cesare Laberinti is Chairman and Managing Director of IMPE S.p.A., the subsidiary engaged in polyurethane foam operations.

          Bo Lippert-Larsen is Nordic Region Country Manager. He is Managing Director of Natuzzi Nordic ApS, the Copenhagen-based subsidiary of the Group. He joined Natuzzi in December 2002.

          Jan Mentens has been Benelux Country Manager since April 2003. He is Managing Director of Natuzzi Benelux NV.

          Giovanni Mercadante is Accounting Director. He joined the Company in 1983.

          Ottavio Milano is Control and Internal Auditing Manager. He joined the Company in May 1992.

          Nick Moore joined the Group in January 2006 as Managing Director for Natuzzi United Kingdom Ltd. Nick previously held the position of Retail Director for Orange UK (a subsidiary of France Telecom)for 5 years. Prior to that he worked for Habitat Group for 12 years in various retail positions including Head of Franchises and New Markets, Head of Selling Systems and culminating in Group Head of Retail.

          Achille Poretta is the Information System Director. He joined the company in March 2006. Until 2005 he worked in Accenture. Previously he worked for Carrefour Italia as Information Technology Director.

          David Riches is Finance Director for Natuzzi United Kingdom Ltd. He joined the Group in January 2002. Previously he held the position of Finance Director for Hi-Tec Sports International Ltd (a wholly owned subsidiary of Hi-Tec Sports PLC) and prior to that he worked for Amstrad PLC for 10 years in various finance positions culminating in being Financial Controller and Company Secretary.

          Bodo Rupp has been leading Natuzzi Germany since December 2004, after a long period at Nike USA. He manages the development of business.

          Fredrick Starr is President and CEO of Natuzzi Americas, Inc. He joined the Company in October 2001. Since retiring in 1998 from Thomasville Furniture Industries, where he served as President for 16 years, he has been involved in several business and civic efforts. Most recently, he has worked with Style Craft Metal Beds as part owner and adviser. Additionally, he was appointed by Governor Hunt to lead an effort to bring Major League Baseball to North Carolina, has served as President of Piedmont Triad Partnership and is currently on the North Carolina Environmental Management Commission.

          Francesco Stasolla is Chairman and Managing Director of Italsofa Romania S.r.l.. He started at Natuzzi in January 1988 as a buyer.

          Richard Tan is Chairman and Managing Director of Italsofa (Shanghai) as well as Softaly (Shanghai) Limited. He has been in the upholstery business for 17 years. In November 2000, he began cooperation with Natuzzi Asia Ltd for the start-up of the Chinese production operations. He was appointed as Chairman of Italsofa (Shanghai) Limited on

October 2002.

          Vito Testini is Production Manager of Minuano Nordeste S.A. and Italsofa Bahia Ltd. He joined the Company in 1985. After a period work in production, he has been Quality Manager of the Group since 2000. From 2000 to 2003 he was Production Director of Italsofa Bahia Ltda.

          Fernando R. Vitale is General Manager and Director of the Brazilian subsidiary Italsofa Bahia Ltda. Previously, he worked for 15 years at Curtume Touro Ltda., a Brazilian leather tannery.

          Annunziata Natuzzi is the daughter of Pasquale Natuzzi. There are no other family relationships among the directors and executive officers of the Company.

          Directors are elected for three-year terms. The next election of Directors will take place in April 2007. See Item 10, “Additional Information — By-laws — Board of Directors”.

Compensation of Directors and Officers

          Aggregate compensation paid by the Group to the directors and officers named above was approximately €8.1 million in 2005.

          On January 24, 2006, pursuant to the Natuzzi Stock Incentive Plan 2004-2009 (the “Plan”) approved by the Shareholders’ Ordinary Meeting on July 26, 2004, the first tranche of 29,245 Natuzzi Ordinary Shares relating to the 2004 MBO Awards, were assigned to the Natuzzi Directors and Officers participating in the Plan. The second tranche of 29,236 Natuzzi ordinary shares will be assigned from January 15 to January 31, 2007. These same Directors and Officers were also awarded, with reference to the 2004 MBO Awards, 216,920 stock options whose exercise price was fixed at $10.04 and that can be vested until January 15, 2009. Because of an exercise price greater than the stock market price, no stock option has vested so far.

Share Ownership

          Mr. Pasquale Natuzzi owns 47.6% of the issued and outstanding Ordinary Shares. As from December 16, 2003, Mr. Natuzzi holds his entire beneficial ownership of Natuzzi S.p.A. shares (other than 196 ADSs) through INVEST 2003 S.r.l., an Italian holding company (having its registered office at Via Gobetti 8, Taranto, Italy) wholly-owned by Pasquale Natuzzi. Each of Annunziata Natuzzi and Anna Maria Natuzzi owns 2.6% of the issued and outstanding Ordinary Shares. To our knowledge, none of the Company’s other directors and officers listed above owns one percent or more of the Ordinary Shares. See Item 7, “Major Shareholders and Related Party Transactions — Major Shareholders”.

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 April 30, 2004.

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

          During 2005, our statutory auditors received in the aggregate approximately €285,000 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, except to the independent auditor.

          The Company is relying 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 16, “Exemption from Listing Standards for Audit Committees” for more information.

External Auditors

          On April 30, 2004, 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 at December 31, 2005, the Group had 7,846 employees (3,633 in Italy and 4,213 abroad), as compared to 6,832 and 6,230 on December 31, 2004 and 2003, respectively. As at April 30, 2006, the Group had 7,975 employees (3,614 in Italy and 4,361 abroad). As at April 30, 2006, the average age of the Group’s employees was approximately 33 years. Historically, there has been very little turnover among the Group’s employees. The Group maintains a company intranet and, as a major employer in the Bari/Santeramo area, is, in the view of management, an important participant in community life.

          Italian law provides that, upon termination of employment for whatever reason, employees located in Italy are entitled to receive certain indemnity payments based on length of employment. As at March 31, 2006, the Company had €33.8 million reserved for such termination indemnities, such reserves being equal to the amounts, calculated on a percentage basis, required by Italian law.

          The Group has continued to expand its presence overseas thanks to the new production plants in Brazil, Romania and China and the establishment of some new

distribution subsidiaries. The corporate structure has been reinforced by the hiring of new skilled and experienced managers and employees.

          In Italy the effects of the “Biagi reform” continue, allowing the Group to adopt new, highly flexible employment contracts. One such contract is the project work contract, an innovative employment agreement that has enabled the Group to hire employees for the limited purpose of completing a particular project during a predetermined period. These new employment contracts have enhanced the Group’s ability to recruit and hire workers quickly and to do so with a high degree of flexibility.

          During 2005, the Group has reduced its training activities, focusing on training only new employees in the production and sales and marketing areas.

          During 2004, the Group’s compensation philosophy was focused on rewarding management and employees for the achievement of specified performance goals and for improvement in the Company’s share price. In 2004 the Group launched the Stock Incentive Plan (the “SIP”) for key management employees. The purpose of the SIP is to provide designated employees of the Group with incentives and rewards to motivate them to increase the Group’s value and to encourage them to continue their employment with the Group. The SIP was approved by the shareholders of Natuzzi at the Extraordinary Meeting of Shareholders on July 23, 2004. At that meeting, the shareholders approved the issuance of up to 3,000,000 shares under the SIP, 500,000 of which may be issued upon settlement of restricted stock units. Under the SIP, employees of the Group selected by a committee of the Board of Directors were offered the opportunity to receive options to purchase ordinary shares of Natuzzi and grants of restricted stock units instead of payment of their 2004 and 2005 MBO Awards. The options to purchase and the restricted stock units vest or become exercisable only on the achievement of certain designated performance targets. Under the SIP, the Group assigned 113,820 restricted stock units and 369,752 stock options for MBO 2004. On January 24, 2006 the Natuzzi Board of Directors, in accordance with the Natuzzi Stock Incentive Plan 2004-2009, approved the issuance without consideration of 56,910 new Natuzzi ordinary shares in favor of the beneficiary employees. See Note 20 to the Consolidated Financial Statements of this annual report for a more detailed description of the operation of the SIP.

Item 7. Major Shareholders and Related Party Transactions

Major Shareholders

          Mr. Pasquale Natuzzi, who founded the Company and served as its chief executive officer until June 2006, and who is currently Chairman of the Board of Directors, owns 47.6% of the issued and outstanding Ordinary Shares of the Company (52.8% of the Ordinary Shares if the Ordinary Shares owned by members of Mr. Natuzzi’s immediate family (the Natuzzi Family) are aggregated) and controls the Company, including its management and the selection of its Board of Directors. Since December 16, 2003, Mr. Natuzzi holds his entire beneficial ownership of Natuzzi S.p.A. shares (other than 196 ADSs) through INVEST 2003 S.r.l., an Italian holding company (having its registered office at Via Gobetti 8, Taranto, Italy) wholly-owned by Pasquale Natuzzi.

          The following table sets forth information, as reflected in the records of the Company as at March 31, 2006, with respect to each person who owns more than 5% of the Company’s Ordinary Shares or ADSs.

		Number of				Percent
		Shares Owned				Owned
Pasquale Natuzzi(1)			26,064,906				47.6	%
Royce & Associates, LLC			5,209,100				9.5	%
Brandes Investment Partners, LP			4,540,281				8.3	%
Tweedy, Browne Company, L.L.C			4,050,759				7.4	%

          In addition, the Natuzzi Family has a right of first refusal to purchase all the rights, warrants or other instruments which The Bank of New York, 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. None of the shares held by the above shareholders have any special voting rights.

          As of May 31, 2006, 54,738,538 Ordinary Shares were outstanding. As of the same date, there were 25,829,181 ADSs (equivalent to 25,829,181 Ordinary Shares) outstanding. The ADSs represented 47.2% of the total number of outstanding Natuzzi Ordinary Shares.

          Since certain of the shares and ADSs were held by brokers or other nominees, the number of direct record holders in the United States may not be fully indicative of the number of direct beneficial owners in the United States or of where the direct beneficial owners of such shares are resident.

Related Party Transactions

          No member of the board of directors or board of statutory auditors and no senior officer (including close members of any such person’s families) nor any enterprise over which any such person is able to exercise a significant influence has had any interest in any transactions that are or were unusual in their nature or conditions or are or were material to the Company, and that were either effected since January 1, 2003 or that were effected during an earlier period and remain in any respect outstanding or unperformed. The Company has not provided any loans or guarantees to or for the benefit of any such person since January 1, 2003 or that remain outstanding or unperformed.

Item 8. Financial Information

Consolidated Financial Statements

          Please refer to Item 18, “Financial Statements” of this annual report.

Export Sales

          Export sales from Italy totaled approximately €323.7 million in 2005, down 25.5% compared with 2004. That figure represented 54.4% of the Group’s 2005 net leather- and fabric-upholstered furniture sales.

Legal and Governmental Proceedings

          In early 2005, the National Institute for Social Security (INPS – Istituto Nazionale di Previdenza Sociale) requested that the Company pay approximately €16.3 million of social security contributions related to the periods between November 1995 to May 2001. The Company did not pay these contributions because it benefited from certain exemptions granted by the Italian government in connection with personnel employed under “Training and Work Experience” contracts (Contratti di formazione e lavoro). In 2004, the European Court of Justice ruled that such exemptions constitute State financial aid, and thus conflict with European Union laws and regulations on free competition, and the European Commission ordered the Italian government to collect all social security contributions not paid in reliance on these exemptions. The Company believes that it complied with the law in force at the time it took the exemptions and that the request from INPS with respect to periods up to February 2000 should be barred by the statute of limitations up to February 2000 in accordance with Italian Law 335/1995. As such, the Company has set aside only €457,000 to cover the social security contributions in connection with employees hired after March 2000. See note 21 to the Consolidated Financial Statements included in item 18 of this annual report.

          Apart from the proceeding described above, neither the Company nor any of its subsidiaries is a party to any legal or governmental proceeding that is pending or, to the Company’s knowledge, threatened or contemplated against Natuzzi or any such subsidiary that, if determined adversely to Natuzzi or any such subsidiary, would have a materially adverse effect, either individually or in the aggregate, on the business, financial condition or results of operations of the Group.

Dividends

          The Group’s policy is to maintain a dividend payout ratio of approximately 20%. In light of the Group’s negative results for the year ended December 31, 2005 the Group did not distribute dividends for the year ended December 31, 2005.

          The table below sets forth the cash dividends paid per Ordinary Share in respect of each of the years indicated, and translated into dollars per ADS (each representing one Ordinary Share) at the Noon Buying Rate on the date or dates the respective dividends were first payable.

		Dividends per				Translated into
Year ended December 31,		Ordinary Share				dollars per ADS
2005		Not distributed				Not distributed
2004		€	0.0673			$	0.09
2003		€	0.1366			$	0.15
2002		€	0.3300			$	0.35
2001		€	0.2872			$	0.26

          The payment of future dividends will depend upon the Company’s earnings and financial condition, capital requirements, governmental regulations and policies and other factors. Accordingly, there can be no assurance that dividends in future years will be paid at a rate similar to dividends paid in past years or at all.

          Dividends paid to owners of ADSs or Ordinary Shares who are United States residents qualifying under the Income Tax Convention will generally be subject to Italian withholding tax at a maximum rate of 15%, provided that certain certifications are timely given. Such withholding tax will be treated as a foreign income tax which U.S. owners may elect to deduct in computing their taxable income, or, subject to the limitations on foreign tax credits generally, credit against their United States federal income tax liability. See Item 10, “Additional Information — Taxation — Taxation of Dividends”.

Item 9. The Offer and Listing

Trading Markets and Share Prices

          Natuzzi’s Ordinary Shares are listed on the New York Stock Exchange (“NYSE”) in the form of ADSs under the symbol “NTZ”. Neither the Company’s Ordinary Shares nor its ADSs are listed on a securities exchange outside the United States. The Bank of New York is the Company’s Depositary for purposes of issuing the ADRs evidencing ADSs.

          Trading in the ADSs on the NYSE commenced on May 13, 1993. The following table sets forth, for the periods indicated, the high and low closing prices per ADS as reported by the NYSE.⁽¹⁾

		New York Stock Exchange
		Price per ADS
		High				Low
		(in U.S. dollars)
2001
First Quarter			14.050				12.125
Second Quarter			14.150				11.500
Third Quarter			14.000				10.150
Fourth Quarter			14.640				10.860
2002
First Quarter			15.700				13.910
Second Quarter			16.100				13.350
Third Quarter			15.040				10.920
Fourth Quarter			10.970				9.120
2003
First Quarter			10.050				7.240
Second Quarter			9.600				7.990
Third Quarter			10.390				7.820
Fourth Quarter			11.000				9.460
2004
First Quarter			11.550				10.150
Second Quarter			11.550				10.150
Third Quarter			10.800				9.230
Fourth Quarter			11.170				10.010
2005
First Quarter			11.650				10.290
Second Quarter			10.270				8.100
Third Quarter			9.000				8.050
Fourth Quarter			8.400				6.760
2006
First Quarter			7.810				7.100
Monthly Data:
December 2005			7.660				6.980
January 2006			7.790				7.100
February 2006			7.530				7.100
March 2006			7.810				7.300
April 2006			7.570				6.860
May 2006			7.600				7.100
June 2006 (through June 19)			7.350				7.110

Item 10. Additional Information

By-laws

          The following is a summary of certain information concerning the Company’s shares and By-laws (Statuto) and of Italian law applicable to Italian stock corporations whose shares are not listed in a regulated market in the European Union, as in effect at the date of this annual report. The summary contains all the information that the Company considers to be material regarding the shares but does not purport to be complete and is qualified in its entirety by reference to the By-laws or Italian law, as the case may be.

          Italian companies whose shares are not listed on a regulated market of the European Union are governed by the rules of the Italian civil code as modified by the reform of the corporate law provisions of the Italian civil code, which took effect on January 1, 2004.

          On July 23, 2004 the Company’s shareholders approved a number of amendments to the Company’s By-laws dictated or made possible by the so-called “corporate law reform”. The following summary takes into account the corporate law reform and the consequent amendments to the Company’s By-laws.

          General — The issued share capital of the Company consists of 54,681,628 Ordinary Shares, par value €1.0 per share. All the issued shares are fully paid, non-assessable and in registered form.

          The Company is registered with the Companies’ Registry of Bari at n. 19551, with its registered office in Bari, Italy.

          As set forth in Article 3 of the By-laws, the Company’s corporate purpose is the production, marketing and sale of sofas, armchairs, furniture in general and raw materials used for their production. The Company is generally authorized to take any actions necessary or useful to achieve its corporate purpose.

          Authorization of Shares — The extraordinary meeting of the Company’s shareholders held on July 23, 2004 authorized the Company’s board of directors to carry out a free capital increase of up to €500,000.00, and a capital increase against payment of up to €3.0 million to be issued, in connection with the grant of stock options to employees of the Company. On January 24, 2006 the Natuzzi Board of Directors, in accordance with the Regulations of the “Natuzzi Stock Incentive Plan 2004-2009”, approved by the Board of Directors in a meeting held on July 23, 2004, decided to issue without consideration 56,910 new Natuzzi ordinary shares in favor of the beneficiary employees. Consequently, the number of the Natuzzi ordinary shares were increased on the same date from 54,681,628 to 54,738,538.

          Form and Transfer of Shares — The Company’s Ordinary Shares are in certificated form and are freely transferable by endorsement of the share certificate by or on behalf of the registered holder, with such endorsement either authenticated by a notary in Italy or elsewhere or by a broker-dealer or a bank in Italy. The transferee must request that the Company enter his name in the register of shareholders in order to establish his rights as a shareholder as against the Company.

          Dividend Rights — Payment by the Company of any annual dividend is proposed by the board of directors and is subject to the approval of the shareholders at the annual

shareholders’ meeting. Before dividends may be paid out of the Company’s unconsolidated net income in any year, an amount at least equal to 5.0% of such net income must be allocated to the Company’s legal reserve until such reserve is at least equal to one-fifth of the par value of the Company’s issued share capital. If the Company’s capital is reduced as a result of accumulated losses, dividends may not be paid until the capital is reconstituted or reduced by the amount of such losses. The Company may pay dividends out of available retained earnings from prior years, provided that, after such payment, the Company will have a legal reserve at least equal to the legally required minimum. No interim dividends may be approved or paid.

          Dividends will be paid in the manner and on the date specified in the shareholders’ resolution approving their payment (usually within 30 days of the annual general meeting). Dividends which are not collected within five years of the date on which they become payable are forfeited to the benefit of the Company. Holders of ADSs will be entitled to receive payments in respect of dividends on the underlying shares through The Bank of New York, as ADR depositary, in accordance with the deposit agreement relating to the ADRs.

          Voting Rights — Registered holders of the Company’s Ordinary Shares are entitled to one vote per Ordinary Share.

          As a registered shareholder, the Depositary (or its nominee) will be entitled to vote the Ordinary Shares underlying the ADSs. The Deposit Agreement requires the Depositary (or its nominee) to accept voting instructions from holders of ADSs and to execute such instructions to the extent permitted by law. Neither Italian law nor the Company’s By-laws limit the right of non-resident or foreign owners to hold or vote shares of the Company.

          Board of Directors — Pursuant to the Company’s By-laws, the Company may be run by a sole director or by a board of directors, consisting of seven to eleven individuals. The Company is currently run by a board of directors composed by eleven individuals, and the description below will refer to such system. The board of directors is elected at a shareholders’ meeting, for the period established at the time of election but in no case for longer than three fiscal years. A director, who may be but is not required to be a shareholder of the Company, may be re-appointed for successive terms. The board of directors has complete power of ordinary and extraordinary administration of the Company after specific authorization in the cases requested by the law and in particular may perform all acts it deems advisable for the achievement of the Company’s corporate purposes, except for the actions reserved by applicable law or the By-laws to a vote of the shareholders at an ordinary or extraordinary shareholders’ meeting. See also “—Meetings of Shareholders”.

          The board of directors must appoint a chairman (Presidente) and may appoint a vice-chairman. The chairman of the board of directors is the legal representative of the Company. The board of directors may delegate certain powers to one or more managing directors (amministratori delegati), determine the nature and scope of the delegated powers of each director and revoke such delegation at any time. The managing directors must report to the board of directors and board of statutory auditors at least every 180 days on the Company’s business and the main transactions carried out by the Company or by its subsidiaries.

          The board of directors may not delegate certain responsibilities, including the preparation and approval of the draft financial statements, the approval of merger and de-

merger plans to be presented to shareholders’ meetings, increases in the amount of the Company’s share capital or the issuance of convertible debentures (if any such power has been delegated to the board of directors by vote of the extraordinary shareholders’ meeting) and the fulfillment of the formalities required when the Company’s capital has to be reduced as a result of accumulated losses that reduce the Company’s stated capital by more than one-third. See also “—Meetings of Shareholders”.

          The board of directors may also appoint a general manager (direttore generale), who reports directly to the board of directors and confer powers for single acts or categories of acts to employees of the Company or persons unaffiliated with the Company.

          Meetings of the board of directors are called no less than five days in advance by registered letter, fax, telegram or e-mail by the chairman on his own initiative and must be called upon the request of any director or statutory auditor. Meetings may be held in person, or by video-conference or tele-conference, in the location indicated in the notice convening the meeting, or in any other destination, each time that the chairman may consider necessary. The quorum for meetings of the board of directors is a majority of the directors in office. Resolutions are adopted by the vote of a majority of the directors present at the meeting. In case of a tie, the chairman has the deciding vote.

          Directors having any interest in a proposed transaction must disclose their interest to the board and to the statutory auditors, even if such interest is not in conflict with the interest of the Company in the same transaction. The interested director is not required to abstain from voting on the resolution approving the transaction, but the resolution must state explicitly the reasons for, and the benefit to the Company of, the approved transaction. In the event that these provisions are not complied with, or that the transaction would not have been approved without the vote of the interested director, the resolution may be challenged by a director or by the board of statutory auditors if the approved transaction may be prejudicial to the Company. A managing director having any such interest in a proposed transaction within the scope of his powers must solicit prior board approval of such transaction. The interested director may be held liable for damages to the Company resulting from a resolution adopted in breach of the above rules. Finally, directors may be held liable for damages to the Company if they illicitly profit from insider information or corporate opportunities.

          The board of directors may transfer the Company’s registered office within Italy or make other amendments to the Company’s By-laws when these amendments are required by law, set up and eliminate secondary offices, approve mergers by absorption into the Company of any subsidiary in which the Company holds at least 90% of the issued share capital and reductions of the Company’s share capital in case of withdrawal of a shareholder. The board of directors may also approve the issuance of shares or convertible debentures, if so authorized by the shareholders’ meeting.

          Under Italian law, directors may be removed from office at any time by the vote of shareholders at an ordinary shareholders’ meeting. However, if removed in circumstances where there was no just cause, such directors may have a claim for indemnification against the Company. Directors may resign at any time by written notice to the board of directors and to the chairman of the board of statutory auditors. The board of directors must appoint substitute directors to fill vacancies arising from removals or resignations, subject to the approval of the board of statutory auditors, to serve until the next ordinary shareholders’

meeting. If at any time more than half of the members of the board of directors appointed at a shareholders’ meeting resign, such resign is ineffective until the majority of the new board of directors has been appointed. In such a case, the remaining members of the board of directors (or the board of statutory auditors if all the members of the board of directors have resigned or ceased to be directors) must promptly call an ordinary shareholders’ meeting to appoint the new directors.

          Shareholders determine the remuneration of directors at ordinary shareholders’ meeting appointing them. The board of directors, after consultation with the board of statutory auditors, may determine the remuneration of directors that perform management or other special services for the Company, such as the managing director, within a maximum amount established by the shareholders. Directors are entitled to reimbursement for expenses reasonably incurred in connection with their functions.

          Statutory Auditors — In addition to electing the board of directors, the Company’s shareholders elect a board of statutory auditors (Collegio Sindacale), appoint its chairman and set the compensation of its members. At ordinary shareholders’ meetings of the Company, the statutory auditors are elected for a term of three fiscal years, may be re-elected for successive terms and may be removed only for cause and with the approval of a competent court. Expiration of their office will have no effect until a new board is appointed. Membership of the board of statutory auditors is subject to certain good standing, independence and professional requirements. In particular, at least one member must be a certified auditor.

          The Company’s By-laws provide that the board of statutory auditors shall consist of three statutory auditors and two alternate statutory auditors (who are automatically substituted for a statutory auditor who resigns or is otherwise unable to serve).

          The Company’s board of statutory auditors is required, among other things, to verify that the Company (i) complies with applicable laws and its By-laws, (ii) respects principles of good governance, and (iii) maintains adequate organizational structure and administrative and accounting systems. The Company’s board of statutory auditors is required to meet at least once every ninety days. The board of statutory auditors reports to the annual shareholders’ meeting on the results of its activity and the results of the Company’s operations. In addition, the statutory auditors of the Company must be present at meetings of the Company’s board of directors and shareholders’ meetings.

          The statutory auditors may decide to call a meeting of the shareholders or the board of directors, ask the directors information about the management of the Company, carry out inspections and verifications at the Company and exchange information with the Company’s external auditors. Any shareholder may submit a complaint to the board of statutory auditors regarding facts that such shareholder believes should be subject to scrutiny by the board of statutory auditors, which must take any complaint into account in its report to the shareholders’ meeting. If shareholders collectively representing 5% of the Company’s share capital submit such a complaint, the board of statutory auditors must promptly undertake an investigation and present its findings and any recommendations to a shareholders’ meeting (which must be convened immediately if the complaint appears to have a reasonable basis and there is an urgent need to take action). The board of statutory auditors may report to the competent court serious breaches of directors’ duties.

          External Auditor — The corporate law reform requires companies to appoint an external auditor or a firm of external auditors, each of them qualified to act in such capacity under Italian law, that shall verify (i) during the fiscal year, that the company’s accounting records are correctly kept and accurately reflect the company’s activities, and (ii) that the financial statements correspond to the accounting records and the verifications conducted by the external auditors and comply with applicable rules. The external auditor or the firm of external auditors express their opinion on the financial statements in a report that may be consulted by the shareholders prior to the annual shareholders’ meeting.

          The external auditor or the firm of external auditors is appointed for a three-year term and its compensation is determined by a vote at an ordinary shareholders’ meeting, having heard the board of statutory auditors, and may be removed only for just cause by a vote of the shareholders’ meeting and with the approval of a competent court.

          On April 30, 2004, the Company’s shareholders appointed KPMG S.p.A., with legal offices at Via Vittor Pisani, 25, 20124 Milano, Italy, as its external auditors for a fifth consecutive three-year term.

          For the entire duration of their office the external auditors or the firm of external auditors must meet certain requirements provided for by law.

          Meetings of Shareholders — Shareholders are entitled to attend and vote at ordinary and extraordinary shareholder’s meetings. Votes may be cast personally or by proxy. Shareholder meetings may be called by the Company’s board of directors (or the board of statutory auditors) and must be called if requested by holders of at least 10% of the issued shares. If a shareholders’ meeting is not called despite the request by shareholders and such refusal is unjustified, a competent court may call the meeting. Shareholders are not entitled to request that a meeting of shareholders be convened to vote on matters which, as a matter of law, shall be resolved on the basis of a proposal, plan or report by the Company’s board of directors.

          The Company may hold general meetings of shareholders at its registered office in Bari, at its executive offices in Santeramo or elsewhere within Italy or at locations outside Italy, following publication of notice of the meeting in any of the following Italian newspapers: “Il Sole 24 ore”, “Corriere della Sera” or “La Repubblica” at least 15 days before the date fixed for the meeting.

          Shareholders’ meetings must be convened at least once a year. The Company’s annual stand-alone financial statements are prepared by the board of directors and submitted for approval to the ordinary shareholders’ meeting which must be convened within 120 days after the end of the fiscal year to which such financial statements relate. This term may be extended to up to 180 days after the end of the fiscal year, as long as the Company continues to be bound by law to draw up consolidated financial statements or if particular circumstances concerning its structure or its purposes so require. At ordinary shareholders’ meetings, shareholders also appoint the external auditors, approve the distribution of dividends, appoint the board of directors and statutory auditors, determine their remuneration and vote on any matter the resolution or authorization of which is entrusted to them by law.

          Extraordinary shareholders’ meetings may be called to vote on proposed amendments to the By-laws, issuance of convertible debentures, mergers and de-mergers, capital increases and reductions, when such resolutions may not be taken by the board of

directors. Liquidation of the Company must be resolved upon by an extraordinary shareholders’ meeting.

          The notice of a shareholders’ meeting may specify up to two meeting dates for an ordinary or extraordinary shareholders’ meeting; such meeting dates are generally referred to as “calls”.

          The quorum for an ordinary meeting of shareholders is 50% of the Ordinary Shares, and resolutions are carried by the majority of Ordinary Shares present or represented. At an adjourned ordinary meeting, no quorum is required, and the resolutions are carried by the majority of Ordinary Shares present or represented. Certain matters, such as amendments to the By-laws, the issuance of shares, the issuance of convertible debentures and mergers and de-mergers may only be effected at an extraordinary meeting, at which special voting rules apply. Resolutions at an extraordinary meeting of the Company are carried, on first call, by a majority of the Ordinary Shares. An adjourned extraordinary meeting is validly held with a quorum of one-third of the issued shares and its resolutions are carried by a majority of at least two-thirds of the holders of shares present or represented at such meeting. In addition, certain matters (such as a change in purpose or corporate form of the company, the transfer of its registered office outside Italy, its liquidation prior to the term set forth in its By-laws, the extension of the term and the issuance of preferred shares) must be carried by the holders of more than one-third of the issued shares and more than two-thirds of the shares present and represented at such meeting.

          According to the By-laws, in order to attend any shareholders’ meeting, shareholders, at least five days prior to the date fixed for the meeting, must deposit their share certificates at the offices of the Company or with such banks as may be specified in the notice of meeting, in exchange for an admission ticket. Owners of ADRs may make special arrangements with the Depositary for the beneficial owners of such ADRs to attend shareholders’ meetings, but not to vote at or formally address such meetings. The procedures for making such arrangements will be specified in the notice of such meeting to be mailed by the Depositary to the owners of ADRs.

          Shareholders may appoint proxies by delivering in writing an appropriate instrument of appointment to the Company. Directors, auditors and employees of the Company or of any of its subsidiaries may not be proxies and any one proxy cannot represent more than 20 shareholders.

          Preemptive Rights — Pursuant to Italian law, holders of Ordinary Shares or of debentures convertible into shares, if any, are entitled to subscribe for the issuance of shares, debentures convertible into shares and rights to subscribe for shares, in proportion to their holdings, unless such issues are for non-cash consideration or preemptive rights are waived or limited by an extraordinary resolution adopted by the affirmative vote of holders of more than 50% of the Ordinary Shares (whether at an extraordinary or adjourned extraordinary meeting) and such waiver or limitation is required in the interest of the Company. There can be no assurance that the holders of ADSs may be able to exercise fully any preemptive rights pertaining to Ordinary Shares.

          Preference Shares; Other Securities — The Company’s By-laws allow the Company to issue preference shares with limited voting rights, to issue other classes of equity securities with different economic and voting rights, to issue so-called participation certificates with

limited voting rights, as well as so-called tracking stock. The power to issue such financial instruments is attributed to the extraordinary meeting of shareholders.

          The Company, by resolution of the board of directors, may issue debt securities non-convertible into shares, while it may issue debt securities convertible into shares through a resolution of the extraordinary shareholders’ meeting.

          Segregation of Assets and Proceeds — The Company, by means of an extraordinary shareholders’ meeting resolution, may approve the segregation of certain assets into one or more separate pools. Such pools of assets may have an aggregate value not exceeding 10% of the shareholders’ equity of the company. Each pool of assets must be used exclusively for the carrying out of a specific business and may not be attached by the general creditors of the Company. Similarly, creditors with respect to such specific business may only attach those assets of the Company that are included in the corresponding pool. Tort creditors, on the other hand, may always attach any assets of the Company. The Company may issue securities carrying economic and administrative rights relating to a pool. In addition, financing agreements relating to the funding of a specific business may provide that the proceeds of such business be used exclusively to repay the financing. Such proceeds may be attached only by the financing party and such financing party would have no recourse against other assets of the Company.

          The Company has no present intention to enter into any such transaction and none is currently in effect.

          Liquidation Rights — Pursuant to Italian law and subject to the satisfaction of the claims of all other creditors, shareholders are entitled to a distribution in liquidation that is equal to the nominal value of their shares (to the extent available out of the net assets of the Company). Holders of preferred shares, if any such shares are issued in the future by the Company, may be entitled to a priority right to any such distribution from liquidation up to their par value. Thereafter, all shareholders would rank equally in their claims to the distribution or surplus assets, if any. Ordinary Shares rank pari passu among themselves in liquidation.

          Purchase of Shares by the Company — The Company is permitted to purchase shares, subject to certain conditions and limitations provided for by Italian law. Shares may only be purchased out of profits available for dividends or out of distributable reserves, in each case as appearing on the latest shareholder — approved stand-alone financial statements. Further, the Company may only repurchase fully paid-in shares. Such purchases must be authorized by an ordinary shareholders’ meeting. The number of shares to be acquired, together with any shares previously acquired by the Company or any of its subsidiaries, may not (except in limited circumstances) exceed in the aggregate 10% of the total number of shares then issued and the aggregate purchase price of such shares may not exceed the earnings reserve specifically approved by shareholders. Shares held in excess of such 10% limit must be sold within one year of the date of purchase. Similar limitations apply with respect to purchases of the Company’s shares by its subsidiaries.

          A corresponding reserve equal to the purchase price of such shares must be created in the balance sheet, and such reserve is not available for distribution, unless such shares are sold or cancelled. Shares purchased and held by the Company may be resold only pursuant to a resolution adopted at an ordinary shareholders’ meeting. The voting rights attaching to

the shares held by the Company or its subsidiaries cannot be exercised, but the shares can be counted for quorum purposes in shareholders’ meetings. Dividends attaching to such shares will accrue to the benefit of other shareholders; pre-emptive rights attaching to such shares will accrue to the benefit of other shareholders, unless the shareholders’ meeting authorizes the Company to exercise, in whole or in part, the pre-emptive rights thereof.

          In July 2000, the shareholders of the Company approved a share repurchase program to buy-back up to 4 million shares or €51.6 million during a period of up to 18 months. The Company spent €23.2 million in 2000 and €14.6 million in 2001 to repurchase shares. The Company repurchased 1,782,700 shares in 2000 at an average cost of US$ 11.3 per share and 1,061,200 shares in 2001 at an average cost of US$ 12.3 per share. The repurchase program is no longer in effect. At an extraordinary meeting held in November 2003 the shareholders approved the cancellation of all the treasury shares. Such treasury shares were cancelled effective on February 21, 2004.

          Notification of the Acquisition of Shares — In accordance with Italian antitrust laws, the Italian Antitrust Authority is required to prohibit the acquisition of control in a company which would thereby create or strengthen a dominant position in the domestic market or a significant part thereof and which would result in the elimination or substantial reduction, on a lasting basis, of competition, provided that certain turnover thresholds are exceeded. However, if the turnover of the acquiring party and the company to be acquired exceed certain other monetary thresholds, the antitrust review of the acquisition falls within the exclusive jurisdiction of the European Commission.

          Minority Shareholders’ Rights; Withdrawal Rights — Shareholders’ resolutions which are not adopted in conformity with applicable law or the Company’s By-laws may be challenged (with certain limitations and exceptions) within ninety days by absent, dissenting or abstaining shareholders representing individually or in the aggregate at least 5% of Company’s share capital (as well as by the board of directors or the board of statutory auditors). Shareholders not reaching this threshold or shareholders not entitled to vote at Company’s meetings may only claim damages deriving from the resolution.

          Dissenting or absent shareholders may require the Company to buy back their shares as a result of shareholders’ resolutions approving, among others things, material modifications of the Company’s corporate purpose or of the voting rights of its shares, the transformation of the Company from a stock corporation into a different legal entity, or the transfer of the Company’s registered office outside Italy. According to the reform, the buy-back would occur at a price established by the board of directors, upon consultation with the board of statutory auditors and the Company’s external auditor, having regard to the net assets value of the Company, its prospective earnings and the market value of its shares, if any. The Company’s By-laws may set forth different criteria to determine the consideration to be paid to dissenting shareholders in such buy-backs.

          Each shareholder may bring to the attention of the board of statutory auditors facts or actions which are deemed wrongful. If such shareholders represent more than 5% of the share capital of the Company, the board of statutory auditors must investigate without delay and report its findings and recommendations to the shareholders’ meeting.

          Shareholders representing more than 10% of the Company’s share capital have the right to report to the competent court serious breaches of the duties of the directors, which

may be prejudicial to the Company or to its subsidiaries. In addition, shareholders representing at least 20% of the Company’s share capital may commence derivative suits before the competent court against its directors, statutory auditors and general managers.

          The Company may waive or settle the suit unless shareholders holding at least 20% of the shares vote against such waiver or settlement. The Company will reimburse the legal costs of such action in the event that the claim of such shareholders is successful and the court does not award such costs against the relevant directors, statutory auditors or general managers.

          Any dispute arising out of or in connection with the By-Laws that may arise between the Company and its shareholders, directors, liquidators shall fall under the exclusive jurisdiction of the Tribunal of Bari.

          Liability for Mismanagement of Subsidiaries — Under Italian law, companies and other legal entities that, acting in their own interest or the interest of third parties, mismanage a company subject to their direction and coordination powers are liable to such company’s shareholders and creditors for ensuing damages. This liability is excluded if (i) the ensuing damage is fully eliminated, including through subsequent transactions, or (ii) the damage is effectively offset by the global benefits deriving in general to the company from the continuing exercise of such direction and coordination powers. Direction and coordination powers are presumed to exist, among other things, with respect to consolidated subsidiaries.

          The Company is subject to the direction and coordination of INVEST 2003 S.r.l.

Certain Contracts

          As of December 31, 2005, the Group entrusted approximately 14% of its production needs, primarily relating to the assembly of raw materials and finished parts into finished products, to subcontractors in the Santeramo area.

Exchange Controls

          Currently, there are no Italian exchange controls that would affect the payment of dividends or other remittances to holders of the ADSs or Ordinary Shares who reside outside Italy. The Company is not aware of any plans by the Italian Government to institute any exchange controls that would affect the payment of dividends or other remittances to holders of ADSs or Ordinary Shares who reside outside Italy. Neither Italian law nor the Company’s By-laws limits the right of non-resident or foreign owners to hold or vote the Ordinary Shares or the ADSs.

          However, Italian resident and non-resident investors who transfer, directly or indirectly (through banks or other intermediaries) into or out of Italy, cash, investments or other securities in excess of €12,500.00 must report all such transfers to the Italian Exchange Office (“Ufficio Italiano Cambi” or “UIC”). In the case of indirect transfers, banks or other intermediaries are required to maintain records of all such transfers for five years for inspection by Italian tax and judicial authorities. Non-compliance with these reporting and record-keeping requirements may result in administrative fines or, in the case of false reporting or in certain cases of incomplete reporting, criminal penalties. The UIC is required to maintain reports for a period of ten years and may use such reports, directly or through

other government offices, to police money laundering, tax evasion and any other crime or violation.

          Individuals, non-profit entities and partnerships that are residents of Italy must disclose on their annual tax returns all investments and financial assets held outside Italy, as well as the total amount of transfers to, from, within and between countries other than Italy relating to such foreign investments or financial assets, even if at the end of the taxable period foreign investments or financial assets are no longer owned. No such tax disclosure is required if: (i) the foreign investments or financial assets are exempt from income tax; or (ii) the total value of the foreign investments or financial assets at the end of the taxable period or the total amount of the transfers effected during the fiscal year does not exceed €12,500.00. Corporate residents of Italy are exempt from these tax disclosure requirements with respect to their annual tax returns because this information is required to be discussed in their financial statements.

          The Company cannot assure you that the present regulatory environment in or outside Italy will continue or that particular policies presently in effect will be maintained, although Italy is required to maintain certain regulations and policies by virtue of its membership of the European Union and other international organizations and its adherence to various bilateral and multilateral international agreements.

Taxation

          The following is a summary of certain U.S. federal and Italian tax matters. The summary contains a description of the principal United States federal and Italian tax consequences of the purchase, ownership and disposition of Ordinary Shares or ADSs by a holder who is a citizen or resident of the United States or a U.S. corporation or who otherwise will be subject to United States federal income tax on a net income basis in respect of the Ordinary Shares or ADSs. The summary is not a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase or hold Ordinary Shares or ADSs. In particular, the summary deals only with beneficial owners who will hold Ordinary Shares or ADSs as capital assets and does not address the tax treatment of a beneficial owner who owns 10% or more of the voting shares of the Company or who may be subject to special tax rules, such as banks, tax-exempt entities, insurance companies or dealers in securities or currencies, or persons that will hold Ordinary Shares or ADSs as a position in a “straddle” for tax purposes or as part of a “constructive sale” or a “conversion” transaction or other integrated investment comprised of Ordinary Shares or ADSs and one or more other investments. The summary does not discuss the treatment of Ordinary Shares or ADSs that are held in connection with a permanent establishment through which a non-resident beneficial owner carries on business or performs personal services in Italy.

          The summary is based upon tax laws and practice of the United States and Italy in effect on the date of this annual report, which are subject to change. Investors and prospective investors in Ordinary Shares or ADSs should consult their own advisors as to the U.S., Italian or other tax consequences of the purchase, beneficial ownership and disposition of Ordinary Shares or ADSs, including, in particular, the effect of any state or local tax laws.

          For purposes of the summary, beneficial owners of Ordinary Shares or ADSs who are considered residents of the United States for purposes of the current income tax convention between the United States and Italy (the “Income Tax Convention”), and are not

subject to an anti-treaty shopping provision that applies in limited circumstances, are referred to as “U.S. owners”. Beneficial owners who are citizens or residents of the United States, corporations organized under U.S. law, and U.S. partnerships, estates or trusts (to the extent their income is subject to U.S. tax either directly or in the hands of partners or beneficiaries) generally will be considered to be residents of the United States under the Income Tax Convention. Special rules apply to U.S. owners who are also residents of Italy. A new tax treaty to replace the current Income Tax Convention was signed on August 25, 1999, but has not yet been ratified by Italy. The new treaty would not change significantly the provisions of the Income Tax Convention that are discussed below (except that it would clarify the availability of benefits to certain tax-exempt organizations). These laws are subject to change, possibly on a retroactive basis.

          For the purpose of the Income Tax Convention and the United States Internal Revenue Code of 1986, beneficial owners of ADRs evidencing ADSs will be treated as the beneficial owners of the Ordinary Shares represented by those ADSs.

          Taxation of Dividends

          Italian Tax Considerations — Italian laws provide for the withholding of income tax at a 27% rate on dividends paid by Italian companies to shareholders who are not residents of Italy for tax purposes. Italian laws provide a mechanism under which non-resident shareholders can claim a refund of up to four-ninths of Italian withholding taxes on dividend income by establishing to the Italian tax authorities that the dividend income was subject to income tax in another jurisdiction in an amount at least equal to the total refund claimed. U.S. owners should consult their own tax advisers concerning the possible availability of this refund, which traditionally has been payable only after extensive delays. Alternatively, reduced rates (normally 15%) may apply to non-resident shareholders who are entitled to, and comply with procedures for claiming, benefits under an income tax convention.

          Under the Income Tax Convention, dividends derived and beneficially owned by U.S. owners are subject to an Italian withholding tax at a reduced rate of 15%. However, the amount initially made available to the Depositary for payment to U.S. owners will reflect withholding at the 27% rate. U.S. owners who comply with the certification procedures described below may then claim an additional payment of 12% of the dividend (representing the difference between the 27% rate and the 15% rate, and referred to herein as a “treaty refund”). The certification procedure will require U.S. owners (i) to obtain from the U.S. Internal Revenue Service (“IRS”) a form of certification required by the Italian tax authorities with respect to each dividend payment (Form 6166), unless a previously filed certification will be effective on the dividend payment date (such certificates are effective until March 31 of the year following submission), (ii) to produce a statement whereby the U.S. owner represents to be a U.S. owner individual or corporation and does not maintain a permanent establishment in Italy, and (iii) to set forth other required information. IRS Form 6166 may be obtained by filing a request for certification on IRS Form 8802. (Additional information, including IRS Form 8802, can be obtained from the IRS website at www.irs.gov. Information appearing on the IRS website is not incorporated by reference into this document.) The time for processing requests for certification by the IRS normally is six to eight weeks. Accordingly, in order to be eligible for the procedure described below, U.S. owners should begin the process

of obtaining certificates as soon as possible after receiving instructions from the Depositary on how to claim a treaty refund.

          The Depositary’s instructions will specify certain deadlines for delivering to the Depositary the documentation required to obtain a treaty refund, including the certification that the U.S. owners must obtain from the IRS. In the case of ADSs held by U.S. owners through a broker or other financial intermediary, the required documentation should be delivered to such financial intermediary for transmission to the Depositary. In all other cases, the U.S. owners should deliver the required documentation directly to the Depositary. The Company and the Depositary have agreed that if the required documentation is received by the Depositary on or within 30 days after the dividend payment date and, in the reasonable judgment of the Company, such documentation satisfies the requirements for a refund by the Company of Italian withholding tax under the Convention and applicable law, the Company will within 45 days thereafter pay the treaty refund to the Depositary for the benefit of the U.S. owners entitled thereto.

          If the Depositary does not receive a U.S. owner’s required documentation within 30 days after the dividend payment date, such U.S. owner may for a short grace period (specified in the Depositary’s instructions) continue to claim a treaty refund by delivering the required documentation (either through the U.S. owner’s financial intermediary or directly, as the case may be) to the Depositary. However, after this grace period, the treaty refund must be claimed directly from the Italian tax authorities rather than through the Depositary. Expenses and extensive delays have been encountered by U.S. owners seeking refunds from the Italian tax authorities.

          Distributions of profits in kind will be subject to withholding tax. In that case, prior to receiving the distribution, the holder will be required to provide the Company with the funds to pay the relevant withholding tax.

          United States Tax Considerations - The gross amount of any dividends (that is, the amount before reduction for Italian withholding tax) paid to a U.S. owner generally will be subject to U.S. federal income taxation as foreign source dividend income and will not be eligible for the dividends-received deduction allowed to domestic corporations. Dividends paid in euro will be includable in the income of such U.S. owners in a dollar amount calculated by reference to the exchange rate in effect on the day the dividends are received by the Depositary or its agent. If the euro are converted into dollars on the day the Depositary or its agent receives them, U.S. owners generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. owners who receive a treaty refund may be required to recognize foreign currency gain or loss to the extent the amount of the treaty refund (in dollars) received by the U.S. owner differs from the U.S. dollar equivalent of the euro amount of the treaty refund on the date the dividends were received by the Depositary or its agent. Italian withholding tax at the 15% rate will be treated as a foreign income tax which U.S. owners may elect to deduct in computing their taxable income or, subject to the limitations on foreign tax credits generally, credit against their U.S. federal income tax liability. Dividends will generally constitute foreign-source “passive income” or “financial services income” for U.S. tax purposes.

          Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2011 with respect to the Company’s shares or ADSs will be subject to taxation at a maximum rate of 15% if the

dividends are “qualified dividends”. Dividends paid on the ADSs will be treated as qualified dividends if (i) the Company is eligible for the benefits of a comprehensive income tax treaty with the United States that the IRS has approved for the purposes of the qualified dividend rules and (ii) the Company was not, in the year prior to the year in which the dividend was paid, and is not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”). The Income Tax Convention has been approved for the purposes of the qualified dividend rules. Based on the Company’s audited financial statements and relevant market and shareholder data, the Company believes that it was not treated as a PFIC for U.S. federal income tax purposes with respect to its 2004 or 2005 taxable year. In addition, based on the Company’s audited financial statements and its current expectations regarding the value and nature of its assets, the sources and nature of its income, and relevant market and shareholder data, the Company does not anticipate becoming a PFIC for its 2006 taxable year.

          The U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs or common stock and intermediaries though whom such securities are held will be permitted to rely on certifications from issuers to treat dividends as qualified for tax reporting purposes. Because such procedures have not yet been issued, it is not clear whether the Company will be able to comply with the procedures. Holders of the Company’s shares and ADSs should consult their own tax advisers regarding the availability of the reduced dividend tax rate in the light of the considerations discussed above and their own particular circumstances.

          Foreign tax credits may not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities or in respect of arrangements in which a U.S. owner’s expected economic profit is insubstantial. U.S. owners should consult their own advisers concerning the implications of these rules in light of their particular circumstances.

          Distributions of additional shares to U.S. owners with respect to their ADSs that are made as part of a pro rata distribution to all shareholders of the Company generally will not be subject to U.S. federal income tax.

          A beneficial owner of Ordinary Shares or ADSs who is, with respect to the United States, a foreign corporation or a nonresident alien individual, generally will not be subject to U.S. federal income tax on dividends received on Ordinary Shares or ADSs, unless such income is effectively connected with the conduct by the beneficial owner of a trade or business in the United States.

          Taxation of Capital Gains

          Italian Tax Considerations - Under Italian law, capital gains tax (‘CGT”) is levied on capital gains realized by non-residents from the disposal of shares in companies resident in Italy for tax purposes even if those shares are held outside of Italy. Capital gains realized by non-resident holders on the sale of non-qualified shareholdings (as defined below) in companies listed on a stock exchange and resident in Italy for tax purposes (as is Natuzzi’s case) are not subject to CGT.

          A qualified shareholding” consists of securities that entitle the holder to exercise more than 2% of the voting rights of a company with shares listed on a stock exchange in the ordinary meeting of the shareholders or represent more than 5% of the share capital of a company with shares listed on a stock exchange. A “non-qualified shareholding” is any

shareholding that does not meet the above mentioned interest rights to be qualified as a ‘qualified shareholding”.

          The relevant percentage is calculated taking into account the shareholdings sold during the prior 12-month period.

          Upon disposal of a “qualified” shareholding, non-resident shareholders are in principle subject to Italian ordinary taxation on 40% of the capital gain realized.

          The above is subject to any provisions of an income tax treaty entered into by the Republic of Italy, if the income tax treaty provisions are more favourable. The majority of double tax treaties entered into by Italy, in accordance with the OECD Model tax convention, provide that capital gains realized from the disposition of Italian securities are subject to CGT only in the country of residence of the seller.

          United States Tax Considerations - Gain or loss realized by a U.S. owner on the sale or other disposition of Ordinary Shares or ADSs will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between the U.S. owner’s basis in the Ordinary Shares or the ADSs and the amount realized on the disposition (or its dollar equivalent, determined at the spot rate on the date of disposition, if the amount realized is denominated in a foreign currency). Such gain or loss will generally be long-term capital gain or loss if the U.S. owner holds the Ordinary Shares or ADSs for more than one year. The net amount of long-term capital gain recognized by a U.S. owner that is an individual holder before January 1, 2011 generally is subject to taxation at a maximum rate of 15%. Deposits and withdrawals of Ordinary Shares by U.S. owners in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.

          A beneficial owner of Ordinary Shares or ADSs who is, with respect to the United States, a foreign corporation or a nonresident alien individual will not be subject to U.S. federal income tax on gain realized on the sale of Ordinary Shares or ADSs, unless (i) such gain is effectively connected with the conduct by the beneficial owner of a trade or business in the United States or (ii), in the case of gain realized by an individual beneficial owner, the beneficial owner is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.

          Taxation of Distributions from Capital Reserves

          Italian Tax Considerations - Special rules applied to the distribution of capital reserves. Under certain circumstances, such a distribution may be considered as taxable income in the hands of the recipient depending on the reserves of the distributing company outstanding at the time of distribution and the actual nature of the reserves distributed. The application of such rules may also have an impact on the tax basis in the Ordinary Shares or ADSs held and/or the characterization of any taxable income received and the tax regime applicable to it. Non-resident shareholders may be subject to withholding tax and CGT as a result of such rules. You should consult your tax advisor in connection with any distribution of capital reserves.

          Other Italian Taxes

          Estate and Gift Tax — As of October 25, 2001, the Italian estate and gift tax has been abolished and consequently any transfer of shares or ADSs occurring by reason of death or gift as of that date is no longer subject to any Italian estate and gift tax.

          Transfer Tax — An Italian transfer tax is normally payable on the transfer of shares in an Italian company, unless (i) the contract is concluded on a regulated market, or (ii) the shares are transferred to or from a non-Italian resident, on the one hand, and banks or other investment services companies, on the other hand. As a result, the transfer tax concluded either on a regulated market or with a bank or an investment service company will not be payable with respect to any transfers of Ordinary Shares or ADSs involving non-Italian residents.

Documents on Display

          The Company is subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) applicable to foreign private issuers. In accordance therewith, Natuzzi is required to file reports, including annual reports on Form 20-F, and other information with the U.S. Securities and Exchange Commission. These materials, including this annual report on Form 20-F, are available for inspection and copying at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the public reference room. As a foreign private issuer, we have required to make filings with the SEC by electronic means since November 4, 2002. Any filings we make electronically will be available to the public over the Internet at the SEC’s website at http://www.sec.gov. The Form 20-F and reports and other information filed by the Company with the Commission will also be available for inspection by ADS holders at the Corporate Trust Office of The Bank of New York at 101 Barclay Street, New York, New York 10286.

Item 11. Quantitative and Qualitative Disclosures About Market Risk

          The following discussion of the Group’s risk management activities include “forward-looking statements” that involve risks and uncertainties. Actual results could differ materially from those projected in the forward looking statements. See Item 3, “Key Information — Forward Looking Information.” A significant portion of the Group’s net sales, but only approximately 44% of its costs, are denominated in currencies other than the euro, in particular the U.S. dollar.

          The Group is exposed to market risks principally from fluctuations in the exchange rates between the euro and other currencies, including in particular the U.S. dollar, and to a significantly lesser extent, from variations in interest rates.

          Exchange Rate Risks

          The Group’s foreign exchange rate risks in 2005 arose principally in connection with U.S. dollars, British pounds, Canadian dollars, Australian dollars, Swiss francs, Swedish kroner, Norwegian kroner, Danish kroner , Japanese yen.

          As at December 31, 2005 and 2004, the Group had outstanding trade receivables denominated in foreign currencies totaling €66.7 million and €66.3 million, respectively, of which 62,2% and 54.7%, respectively, were denominated in U.S. dollars. On those same

dates, the Group had €23.1 million and €25.9 million, respectively, of trade payables denominated in foreign currencies, principally U.S. dollars. See Notes 6 and 12 to the Consolidated Financial Statements included in Item 18 of this annual report.

          As at December 31, 2005, the Company was a party to a number of forward exchange contracts (known in Italy as domestic currency swaps) designed to hedge future sales denominated in U.S. dollars and other currencies. The Group does not use foreign exchange contracts for speculative trading purposes. At such date, the notional amounts of such forward exchange contracts aggregated €140.1 million (compared to €173.0 million at December 31, 2004), consisting of forward exchange contracts with notional amounts of U.S. dollar 89.0 million, Canadian dollar 27.0 million, Swiss franc 1.0 million, Australian dollar 18.5 million, Japanese yen 200.0 million, British pound 18.8 million, Swedish kroner 31.5 million, Danish kroner 6.3 million, and Norwegian kroner 48.0 million. Such contracts had various maturities extending through December 2005. See Note 25 to the Consolidated Financial Statements included in Item 18 of this annual report.

          The table below summarizes in thousands of euro equivalent the contractual amounts of forward exchange contracts designed to hedge future cash flows from accounts receivable and sales orders at December 31, 2005 and 2004:

		December 31,
Sales		2005				2004
U.S. dollars		€	72,496			€	66,108
British pounds			26,783				51,451
Canadian dollars			17,698				18,629
Australian dollars			10,744				16,173
Norwegian kroner			5,928				8,774
Swedish kroner			3,441				5,932
Japanese yen			1,504				2,740
Swiss francs			656				2,240
Danish kroner			845				940
Total		€	140,095			€	172,987

          As at December 31, 2005, these forward exchange contracts had a net unrealized loss of €4.8 million, versus a net unrealized gain of €7.1 million at December 31, 2004. The Group recorded this amount in other income (expense), net in its Consolidated Financial Statements. See Note 24 to the Consolidated Financial Statements included in Item 18 of this annual report.

          The following table presents information regarding the contract amount in thousands of euro equivalent and the estimated fair value of all of the Group’s forward exchange contracts. Contracts with unrealized gains are presented as “assets” and contracts with unrealized losses are presented as “liabilities”.

		December 31, 2005								December 31, 2004
		Contract				Fair				Contract				Fair
		Amount				Value				Amount				Value
Assets			46,075				392				159,584				7,191
Liabilities			94,020				(5,159	)			13,403				(90	)
Total			140,095				(4,767	)			172,987				7,101

          The Group’s forward exchange contracts as at December 31, 2005 had maturities of maximum 12 months. The potential loss in fair value of the Group’s forward exchange contracts at December 31, 2005 that would have resulted from a hypothetical, instantaneous and unfavorable 10% change in currency exchange rates would have been approximately €21.4 million. This sensitivity analysis assumes an instantaneous unfavorable 10% fluctuation in exchange rates affecting the foreign currencies of the Group’s domestic currency swap contracts.

          For the accounting of transactions entered into in an effort to reduce the Group’s exchange rate risks, see Notes 3, 24 and 25 to the Consolidated Financial Statements included in Item 18 of this annual report.

          Interest Rate Risks - To a significantly lesser extent, the Group is also exposed to interest rate risk. At December 31, 2005, the Group had €11.7 million (representing 1.8% of the Group’s total assets as of that date) in debt outstanding (short-term borrowings and long-term debt, including the current portion of such debt). See Notes 11 and 16 to the Consolidated Financial Statements included in Item 18 of this annual report.

          In the normal course of business, the Group also faces risks that are either non-financial or non-quantifiable. Such risks principally include country risk, credit risk and legal risk.

Item 12. Description of Securities Other than Equity Securities

          Not applicable.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

          None.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

          None.

Item 15. Controls and Procedures

          The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2005. Disclosure controls and procedures are controls and other procedures that are designed to ensure that (i) information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required and (ii) information required to be disclosed in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

          Based on the Company’s evaluation of its disclosure controls and procedures and in preparation for its evaluation of internal controls under Section 404 of the Sarbanes-Oxley Act, the Chief Executive Officer and Chief Financial Officer concluded that some of the Company’s disclosure controls and procedures as of December 31, 2005 needed to be improved and accordingly that the Company’s disclosure controls and procedures as of December 31, 2005 were not fully effective. The management determined that the Company needed a more structured procedure for the collection and internal communication of information from some subsidiaries overseas and determined that some overseas subsidiaries were using accounting and information systems with limited automated procedures.

          In light of the above, in preparing its consolidated financial statements for the year ended December 31, 2005, the Company implemented a number of ad-hoc actions. The Company is also implementing more formal and detailed disclosure controls and procedures for its overseas subsidiaries and working to improve the Company’s disclosure obligations in connection with the reports it files under the Exchange Act. The Group is also continuing to improve its internal controls over financial reporting for its consolidated overseas subsidiaries and has taken measures to implement consistent systems and software throughout the Group

          The Company, based on significant work and knowledge to date, believes there are no material misstatements or omissions of material fact in this annual report and that the financial statements contained in this annual report are fairly presented in all material respects.

          Other than as described above, there has been no change in the Company’s internal control over financial reporting during 2005 that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.

Item 16. [Reserved]

Item 16.A Audit committee financial expert

          The Company has determined that, because of the existence and nature of its board of statutory auditors, it qualifies for an exemption provided by Exchange Act Rule 10A-3(c)(3) from many of the Rule 10A-3(c)(3) audit committee requirements. The board of statutory auditors has determined that each of its members is an “audit committee financial expert” as defined in Item 16A of Form 20-F. For the names of the members of the board of statutory auditors and information regarding the independence of the board of statutory auditors, see “Item 6. Directors, Senior Management and Employees—Statutory Auditors.”

Item 16.B Code of Ethics

          The Company has adopted a code of ethics, as defined in Item 16B of Form 20-F under the Exchange Act. This code of ethics applies, among others, to the Company’s Chief Executive Officer and Chief Financial Officer. The Company’s code of ethics is available on its website at www.natuzzi.com/codeofethics/. If the Company amends the provisions of its code of ethics that apply to the Company’s Chief Executive Officer and Chief Financial Officer, or if the Company grants any waiver of such provisions, it will disclose such amendment or waiver on its website at the same address.

Item 16.C Principal Accountant Fees and Services

          The following table sets forth the aggregate fees billed to the Company by its independent auditors, KPMG in Italy and abroad during the fiscal years ended December 31, 2005 and 2004, for audit fees, audit–related fees, tax fees and all other fees.

		2005				2004
		(in euros)
Audit fees			558,412				463,317
Audit-related fees			—				—
Tax fees			—				—
Other fees			—				—
Total fees			558,412				463,317

          Audit fees in the above table are the aggregate fees billed by KPMG in connection with the audit of the Company’s annual financial statements and the review of our interim financial statements.

          The Company’s audit committee has not established pre-approval policies and procedures for the engagement of our independent auditors for services. The Company’s audit committee expressly approves on a case-by-case basis any engagement of our independent auditors for audit and non-audit services provided to our subsidiaries or to us.

Item 16.D Exemptions from the Listing Standards for Audit Committees.

          The Company is relying on the exemption from listing standards for audit committees provided by Exchange Act Rule 10A-3(c)(3). The basis for this reliance is that the Company’s board of statutory auditors meets the following requirements set forth in Exchange Act Rule 10A-3(c)(3):

–		the board of statutory auditors is established and selected pursuant to Italian law expressly permitting such a board;
–		the board of statutory auditors is required under Italian law to be separate from the Company’s board of directors;
–		the board of statutory auditors is not elected by management of the Company and no Executive Officer of the Company is a member of the board of statutory auditors;
–		Italian Law provides for standards for the independence of the board of statutory auditors from the Company and its management;
–		the board of statutory auditors, in accordance with applicable Italian law and the Company’s governing documents, is responsible, to the extent permitted by Italian law, for the appointment, retention and oversight of the work (including, to the extent permitted by law, the resolution of disagreements between management and the auditor regarding financial reporting) of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company, and
–		to the extent permitted by Italian law, the audit committee requirements of paragraphs (b)(3), (b)(4) and (b)(5) of Rule 10A-3 apply to the Board of Statutory Auditors.

          The Company’s reliance on Rule 10A-3(c)(3) does not, in its opinion, materially adversely affect the ability of its Board of Statutory Auditors to act independently and to satisfy the other requirements of Rule 10A-3.

Item 16.E Purchases of Equity Securities by the Issuer and Affiliated Purchasers

          From January 1, 2005, to December 31, 2005, no purchases were made by or on behalf of the Company or any affiliated purchaser of the Company’s Ordinary Shares or ADSs.

PART III

Item 17. Financial Statements

          Not applicable.

Item 18. Financial Statements

		Page
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets as of December 31, 2005 and 2004		F-2
Consolidated Statements of Earnings for the Years Ended December 31, 2005, 2004 and 2003		F-3
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003		F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003		F-5
Notes to the Consolidated Financial Statements		F-7

Item 19. Exhibits

          1.1 English translation of the by-laws (Statuto) of the Company, as amended and restated as of January 24, 2006.

          2.1 Deposit Agreement dated as of May 15, 1993, as amended and restated as of December 31, 2001, among the Company, The Bank of New York, as Depositary, and owners and beneficial owners of ADRs (incorporated by reference to the Form 20-F filed by Natuzzi S.p.A. with the Securities and Exchange Commission on July 1, 2002, file number 1-11854).

          8.1 List of Significant Subsidiaries.

          12.1 Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

          12.2 Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

          13.1 Certifications pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Report of Independent Registered Public Accounting Firm

To the Shareholders of
Natuzzi S.p.A.

We have audited the accompanying consolidated balance sheets of Natuzzi S.p.A. and subsidiaries (the ‘Natuzzi Group’) as of December 31, 2005 and 2004 and the related consolidated statements of earnings, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the management of Natuzzi S.p.A.. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Natuzzi Group as of December 31, 2005 and 2004 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with established accounting principles in the Republic of Italy.

As discussed in Note 3 (c), the Natuzzi Group adopted the new Italian accounting standard No. 17, “Consolidated Financial Statements”, with regard to the translation of the financial statements of foreign subsidiaries, effective December 31, 2005.

Established accounting principles in the Republic of Italy vary in certain significant respects from generally accepted accounting principles in the United States of America. Information relating to the nature and effect of such differences is presented in note 27 to the consolidated financial statements.

KPMG S.p.A.

Bari, Italy
June 23, 2006

Natuzzi S.p.A. and Subsidiaries

(Expressed in thousands of euros)

		December 31,				December 31,
		2005				2004
ASSETS
Current assets:
Cash and cash equivalents (note 4)			89,723				87,340
Marketable debt securities (note 5)			5				5
Trade receivables, net (note 6)			123,608				137,559
Other receivables (note 7)			46,256				41,169
Inventories (note 8)			115,690				112,601
Unrealized foreign exchange gains (note 25)			—				7,101
Prepaid expenses and accrued income			2,551				2,390
Deferred income taxes (note 14)			6,632				1,227
Total current assets			384,465				389,392
Non current assets:
Property plant and equipment (note 9 and 22)			407,847				389,262
Less accumulated depreciation (note 9 and 22)			(145,054	)			(117,257	)
Net property, plant and equipment			262,793				272,005
Other assets (note 10)			16,616				11,228
Deferred income taxes (note 14)			1,064				602
Total assets			664,938				673,227
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings (note 11)			7,727				5,572
Current portion of long-term debt (note 16)			426				571
Accounts payable-trade (note 12)			73,533				83,737
Accounts payable-other (note 13)			24,768				20,353
Unrealized foreign exchange losses (note 25)			4,767				—
Income taxes (note 14)			2,907				2,521
Salaries, wages and related liabilities (note 15)			22,083				18,732
Total current liabilities			136,211				131,486
Long-term liabilities:
Employees’ leaving entitlement (note 3 (n) )			32,274				29,617
Long-term debt (note 16)			3,582				4,998
Deferred income taxes (note 14)			—				433
Deferred income for capital grants (note 3 (m) )			14,779				12,485
Other liabilities (note 17)			4,358				5,359
Minority interest (note 18)			709				916
Shareholders’ equity (note 19) :
Share capital			54,682				54,682
Reserves			42,292				42,292
Additional paid-in capital			8,282				8,282
Retained earnings			367,769				382,677
Total shareholders’ equity			473,025				487,933
Committments and contingent liabilities (notes 21 and 25)			—				—
Total liabilities and shareholders’ equity			664,938				673,227