Seasonality

The worldwide art auction market has two principal selling seasons, which generally occur in the second and fourth quarters of the year. Accordingly, Sotheby's (or together with its subsidiaries, unless the context otherwise requires, the "Company") auction business is seasonal, with peak revenues and operating income generally occurring in those quarters. Consequently, first and third quarter results have historically reflected lower Net Auction Sales (as defined below under "Key Performance Indicators") when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of Sotheby's operating expenses. (See Note 2 of Notes to Condensed Consolidated Financial Statements.)

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

This discussion should be read in conjunction with Note 3 ("Segment Reporting") of Notes to Condensed Consolidated Financial Statements.

Overview

As a result of the seasonality of the Auction segment's business, first quarter results typically reflect a net loss. In the first quarter of 2009, Sotheby's reported a net loss of ($34.5) million compared to a net loss of ($12.4) million in the first quarter of 2008. The decline in Sotheby's results is due to a $476 million, or 71%, decrease in Net Auction Sales attributable to a continuing downturn in the international art market. Partially offsetting the impact of the substantial decrease in Net Auction Sales is a 41% improvement in auction commission margin, as well as a $37.5 million, or 25%, decrease in expenses attributable to an array of factors, including management's cost reduction initiatives, a lower volume of Sotheby's auction offerings and favorable changes in foreign currency exchange rates.

A more detailed discussion of each of the significant factors impacting Sotheby's results for the three months ended March 31, 2009 is provided below.

Outlook

The international art market has significantly declined from the peak levels experienced prior to 2009. In particular, the markets for Impressionist and Contemporary Art, which had experienced substantial growth from 2004 to 2007, have been significantly impacted by this downturn and are not expected to approach recent peaks in the near term. As a result, the level of consignments for Sotheby's major spring sales in the second quarter of 2009 is substantially lower than for the same sales in the second quarter of 2008. Accordingly, Sotheby's operating results for the three and six months ended June 30, 2009 are expected to be significantly unfavorable, when compared to the results achieved for the same periods in 2008.

Due to the downturn in the global economy and international art market, on December 1, 2008 and February 26, 2009, the Company's Board of Directors approved restructuring plans impacting the Auction segment in North America, the U.K. and Continental Europe, as well as certain corporate departments. These restructuring plans (collectively, the "2008 Restructuring Plan") are the result of a strategic review of Sotheby's operations conducted by management between December 2008 and February 2009. The 2008 Restructuring Plan is resulting in a 15% decrease in global headcount, a reduction in Sotheby's selling activities in Amsterdam and the vacating of certain premises in connection with a reorganization of Sotheby's European sourcing network. As a result of the adoption of the 2008 Restructuring Plan, the Company recorded Restructuring Charges of $4.3 million and $5.7 million in the fourth quarter of 2008 and the first quarter of 2009, respectively.

In March and April 2009, in response to the continuing downturn in the global economy and the international art market, management conducted a further strategic review of its operations and on April 27, 2009, the Executive Committee of Sotheby's Board of Directors approved another restructuring plan (the "2009 Restructuring Plan") impacting all areas of Sotheby's global operations with the goal of additional significant cost reductions to be achieved through a further 5% reduction in global headcount. The 2009 Restructuring Plan will result in employee-related restructuring charges of approximately $5 million, which will be recognized primarily in the second quarter of 2009.

In total, the 2008 Restructuring Plan and 2009 Restructuring Plan will result in aggregate annual cost savings of approximately $28 million. Of this amount, approximately $16 million is expected to be realized in 2009, almost entirely due to the headcount reductions.

Results of Operations for the Three Months Ended March 31, 2009 and 2008

     Sotheby's results for the three months ended March 31, 2009 and 2008 are
summarized below (in thousands of dollars):


                                     Three Months Ended
                                         March 31,               Favorable/(Unfavorable)
                                  ------------------------    -----------------------------
                                    2009          2008           $ Change         % Change
                                  ---------    -----------    ---------------    ----------
Revenues:
Auction and related revenues      $  45,978     $  107,938     $      (61,960 )       (57.4 )%
Finance revenues                      2,419          3,512             (1,093 )       (31.1 )%
Dealer revenues                       4,746         16,685            (11,939 )       (71.6 )%
License fee revenues                    779            591                188          31.8 %
Other revenues                          506            535                (29 )        (5.4 )%
                                  - -------    -- --------    --- -----------    --- ------
Total revenues                       54,428        129,261            (74,833 )       (57.9 )%

Expenses **                         110,219        147,671             37,452          25.4 %
                                  - -------    -- --------    --- -----------    --- ------
Operating loss                      (55,791 )      (18,410 )          (37,381 )             *
Net interest expense                 (9,554 )       (5,338 )           (4,216 )       (79.0 )%
Other (expense) income               (1,348 )        2,623             (3,971 )             *
                                  - -------    -- --------    --- -----------    --- ------
Loss before taxes                   (66,693 )      (21,125 )          (45,568 )             *
Equity in (losses) earnings of
investees, net of taxes                (151 )        1,237             (1,388 )             *
Income tax benefit                  (32,352 )       (7,493 )           24,859               *
                                  - -------    -- --------    --- -----------    --- ------
Net loss                          $ (34,492 )  $   (12,395 )   $      (22,097 )             *
                                  - -------    -- --------    --- -----------    --- ------

Key performance indicators:
Aggregate Auction Sales (a)       $ 236,945     $  781,549      $    (544,604 )       (69.7 )%
Net Auction Sales (b)             $ 199,654     $  675,684      $    (476,030 )       (70.5 )%
Private Sales (c)                 $  64,806     $  114,437      $     (49,631 )       (43.4 )%
Consolidated Sales (d)            $ 306,497     $  912,671      $    (606,174 )       (66.4 )%
Auction commission margin (e)         19.2%          13.6%                N/A          41.2 %
Average loan portfolio (f)        $ 157,738     $  170,105      $     (12,367 )        (7.3 )%

* Represents a change in excess of 100%.

** Expenses for the three months ended March 31, 2009 include restructuring charges of $5.7 million.

(a) Represents the hammer (sale) price of property sold at auction plus buyer's premium.

(b) Represents the hammer (sale) price of property sold at auction.

(c) Represents the total purchase price of property sold in private sales brokered by Sotheby's.

(d) Consolidated Sales is equal to the sum of Aggregate Auction Sales, Private Sales and Dealer revenues.

(e) Represents total auction commission revenues as a percentage of Net Auction Sales.

(f) Represents the average loan portfolio of Sotheby's Finance segment.

Impact of Changes in Foreign Currency Exchange Rates

     For the three months ended March 31, 2009, changes in foreign currency
exchange rates had a net favorable impact of approximately $5.7 million on
Sotheby's results, when compared to the same period in the prior year, as
detailed in the table below (in thousands of dollars):


                                                               Favorable /
      Three Months Ended March 31, 2009                       (Unfavorable)
      ----------------------------------------------------   ---------------
      Total revenues                                         $        (8,588 )
      Total expenses                                                  13,853
                                                             -- ------------
      Operating loss                                                   5,265
      Net interest expense and other                                     483
                                                             -- ------------
      Impact of changes in foreign currency exchange rates    $        5,748
                                                             -- ------------

Revenues

     For the three months ended March 31, 2009 and 2008, revenues consisted of
the following (in thousands of dollars):


                                                               Favorable/(Unfavorable)
                                                            -----------------------------
Three Months Ended March 31            2009       2008         $ Change        % Change
----------------------------------   --------   ---------   --------------    -----------

Auction and related revenues:
Auction commission revenues          $ 38,422   $  92,219   $      (53,797 )        (58.3 )%
Auction expense recoveries                876       1,425             (549 )        (38.5 )%
Private sale commissions                4,767      11,184           (6,417 )        (57.4 )%
Principal activities                     (850 )    (1,638 )            788           48.1 %
Catalogue subscription revenues         1,273       1,756             (483 )        (27.5 )%
Other                                   1,490       2,992           (1,502 )        (50.2 )%
                                     - ------   - -------   -- -----------    -- --------
Total auction and related revenues     45,978     107,938          (61,960 )        (57.4 )%
                                     - ------   - -------   -- -----------    -- --------
Other revenues:
Finance revenues                        2,419       3,512           (1,093 )        (31.1 )%
Dealer revenues                         4,746      16,685          (11,939 )        (71.6 )%
License fee revenues                      779         591              188           31.8 %
Other                                     506         535              (29 )         (5.4 )%
                                     - ------   - -------   -- -----------    -- --------
Total other revenues                    8,450      21,323          (12,873 )        (60.4 )%
                                     - ------   - -------   -- -----------    -- --------
Total revenues                       $ 54,428   $ 129,261   $      (74,833 )        (57.9 )%
                                     - ------   - -------   -- -----------    -- --------

Auction and Related Revenues

For the three months ended March 31, 2009, auction and related revenues decreased $62 million, or 57%, when compared to the same period in the prior year, principally due to lower auction commission revenues, and, to a much lesser extent, lower private sale commissions. Also impacting the comparison of auction and related revenues to the prior period are changes in foreign currency exchange rates, which contributed approximately $7.9 million to the decrease.

Auction Commission Revenues - For the three months ended March 31, 2009, auction commission revenues decreased $53.8 million, or 58%, when compared to the same period in the prior year, principally due to a $476 million, or 71%, decrease in Net Auction Sales, partially offset by a 41% improvement in auction commission margin. See "Net Auction Sales" and "Auction Commission Margin" below for a discussion of these key performance indicators.

Net Auction Sales - For the three months ended March 31, 2009, Net Auction Sales decreased $476 million, or 71%, when compared to the same period in the prior year. The remainder of the decrease in Net Auction Sales is largely due to the downturn in the international art market that began in September of 2008, which has resulted in fewer consignments, lower sell through rates and decreased average selling prices. Specifically, the decline in first quarter Net Auction Sales is due to the following factors:

• A $342.9 million, or 75%, decrease in the winter Impressionist and Contemporary Art sales held in London, as significantly fewer works were offered and sold at these auctions in February 2009, when compared to the prior period.

• The (RED) charity auction held in New York in February 2008, which totaled $37.9 million in Net Auction Sales. There was no comparable charitable auction conducted in the first quarter of 2009.

• The discontinuation of Chinese Contemporary Art sales in New York, which totaled $19.2 million in March, 2008. These sales will be consolidated into the Company's Hong Kong sales beginning in the second quarter of 2009.

• A $9 million, or 13%, decrease in sales of Old Master Paintings.

• During the current period, Net Auction Sales decreased approximately $35.5 million as a result of changes in foreign currency exchange rates.

The overall decrease in Net Auction Sales was minimally offset by Sotheby's first ever sales conducted in Doha, Qatar, which were held in March 2009 and totaled $15.3 million.

Auction Commission Margin - Auction commission margin represents total auction commission revenues as a percentage of Net Auction Sales. Typically, auction commission margins are higher for lower value works of art or collections, while higher valued property earns lower margins. In certain situations, auction commission margins are adversely impacted by arrangements whereby auction commissions are shared with consignors or with Sotheby's partners in auction guarantees. In such situations, in an effort to reduce its financial exposure under auction guarantees, Sotheby's may: (a) share auction commissions with consignors in order to secure high value consignments without issuing auction guarantees and/or (b) enter into risk and reward sharing arrangements with unaffiliated partners whereby Sotheby's reduces its financial exposure under an auction guarantee in exchange for sharing the auction commission. Additionally, Sotheby's may also share auction commissions with a consignor as part of an auction guarantee, typically in exchange for a portion of the hammer (sale) price in excess of a negotiated amount.

Partly as a result of reduced auction commission margins in early 2008, Sotheby's implemented a buyer's premium rate increase that became effective on June 1, 2008. In salesrooms in the U.S., the buyer's premium became 25% on the first $50,000 of hammer (sale) price; 20% on the portion of hammer price above $50,000 up to and including $1 million; and 12% on any remaining amount above $1 million. Generally, in foreign salesrooms, these U.S. dollar thresholds were translated into an appropriate fixed local currency amount. For auction sales conducted through May 31, 2008, the buyers' premium charged was generally 25% of the hammer price on the first $20,000, 20% of the hammer price above $20,000 up to and including $500,000 and 12% of any remaining amount over $500,000.

As detailed in the table above under "Key Performance Indicators," for the three months ended March 31, 2009, auction commission margin increased approximately 41% (from 13.6% to 19.2%), when compared to the same period in the prior year. The increase in auction commission margin versus the prior year is influenced by the following factors:

• A change in sales mix, as a substantially lower portion of Net Auction Sales in 2009 was at the high-end of Sotheby's business where auction commission margins are traditionally lower. Furthermore, auction commission margin in the first quarter of 2008 was negatively impacted by sales from the (RED) charity auction, as Sotheby's auction commissions for this sale were donated to the United Nations Foundation. There was no equivalent auction conducted in the first quarter of 2009.

• A significant decrease in the use of auction guarantees and related risk reduction arrangements and strategies in response to the downturn in the international art market, as well as the current uncertain and challenging economic environment. As discussed above, when management employs such risk reduction arrangements and strategies, Sotheby's shares its auction commissions with consignors or with its partners in auction guarantees.

• The impact of the increased buyer's premium rate structure that became effective in June 2008, as outlined above.

Private Sale Commissions-The level of private sale commissions earned by Sotheby's can vary significantly from period to period. For the three months ended March 31, 2009, private sale commissions decreased $6.4 million, or 57%, primarily due to a lower volume of high-end private sales in the current period, reflecting the downturn in the international art market.

For the three months ended March 31, 2009, Finance revenues decreased $1.1 million, or 31%, when compared to the same period in the prior year, principally due to lower benchmark interest rates earned on the loan portfolio and a 7% decrease in the average loan portfolio balance (from $170.1 million to $157.7 million). (Note: For the purposes of Management's Discussion and Analysis, Finance revenues are presented on a consolidated basis and do not include intercompany revenues earned by the Finance segment from Sotheby's Auction segment, which are eliminated in consolidation. See Note 3 of Notes to Condensed Consolidated Financial Statements.)

Dealer Segment Results

Dealer revenues consist of revenues earned from the sale of property held by Noortman Master Paintings, an art dealer based in The Netherlands, and objects purchased by Sotheby's for investment purposes, as well as Sotheby's share of gains resulting from the sale of property purchased by art dealers through unsecured loans from Sotheby's. Dealer cost of sales includes the net book value of Dealer inventory sold during the period and any writedowns to the carrying value of Dealer inventory. The table below summarizes revenues, cost of sales and (loss) profit for the Dealer segment for the three months ended March 31, 2009 and 2008 (in thousands of dollars):

                                                        Favorable/(Unfavorable)
                                                     -----------------------------
Three Months Ended March 31     2009       2008         $ Change        % Change
---------------------------   --------   ---------   --------------    -----------

Dealer revenues               $  4,746   $  16,685   $      (11,939 )        (71.6 )%
Dealer cost of sales            (8,666 )   (15,918 )          7,252           45.6 %
                              - ------   - -------   -- -----------    -- --------

Dealer (loss) profit          $ (3,920 ) $     767   $       (4,687 )              *
                              - ------   - -------   -- -----------    -- --------

Legend:
* Represents a change in excess of 100%.

The unfavorable comparison of Dealer segment results to the prior year is primarily attributable to $3.5 million in Dealer inventory writedowns, representing an increase of $1.5 million from the prior year, as well as the $1.5 million profit earned on the sale of an individual painting in the first quarter of 2008, for which there was no comparable sale in the current period.

Expenses

     For the three months ended March 31, 2009 and 2008, expenses consisted of
the following (in thousands of dollars):


                                                                       Favorable / (Unfavorable)
                                                                     ------------------------------
Three Months Ended March 31                 2009          2008          $ Change         % Change
-------------------------------------    ----------    ----------    ---------------    -----------

Direct costs of services                 $    9,160    $   13,557    $         4,397           32.4 %
Dealer cost of sales                          8,666        15,918              7,252           45.6 %
Marketing expenses                            2,913         5,349              2,436           45.5 %
Salaries and related costs                   47,960        61,171             13,211           21.6 %
General and administrative expenses          30,432        45,464             15,032           33.1 %
Depreciation and amortization expense         5,372         6,212                840           13.5 %
Restructuring charges                         5,716             -             (5,716 )          N/A
                                         - --------    - --------    -- ------------    -- --------
Total expenses                           $  110,219    $  147,671    $        37,452           25.4 %
                                         - --------    - --------    -- ------------    -- --------

Direct Costs of Services

Direct costs of services consists largely of sale specific marketing costs such as auction catalogue production and distribution expenses, sale advertising and promotion expenses and traveling exhibition costs. Also included in direct costs of services are sale-related shipping expenses. The level of direct costs incurred in any period is generally dependent upon the volume and composition of Sotheby's auction offerings. For example, direct costs attributable to single-owner or other high-value collections are typically higher than those associated with standard various-owner sales, mainly due to higher promotional costs for catalogues, special events and traveling exhibitions, as well as higher shipping expenses.

Partially offsetting the overall decrease in direct costs of services is $3.3 million in costs incurred to promote Sotheby's first ever auctions conducted in Doha, Qatar in March of 2009 as part of Sotheby's continued efforts to expand its presence in emerging markets.

Management will continue in its cost containment efforts addressing direct costs of services in 2009, especially with regards to the costs to produce and distribute catalogues. (See statement on Forward Looking Statements.)

Marketing Expenses

Marketing expenses are costs related to the promotion of the Sotheby's brand and consist of the cost of corporate marketing activities (including the cost of client service initiatives) and the cost of strategic sponsorships of cultural institutions.

For the three months ended March 31, 2009, marketing expenses decreased by $2.4 million, or 46%, when compared to the prior period primarily as a result of management's efforts to reduce discretionary spending.

Salaries and Related Costs

     For the three months ended March 31, 2009 and 2008, salaries and related
costs consisted of the following (in thousands of dollars):


                                                                      Favorable / (Unfavorable)
                                                                    ------------------------------
Three months ended March 31              2009            2008          $ Change         % Change
---------------------------------    -------------    ----------    ---------------    -----------

Full-time salaries                   $      30,784    $   35,693    $         4,909           13.8 %
Employee benefits                            2,417         4,977              2,560           51.4 %
Payroll taxes                                4,007         5,598              1,591           28.4 %
Incentive compensation expense               1,578         2,908              1,330           45.7 %
Stock compensation expense                   6,537         8,175              1,638           20.0 %
Other *                                      2,637         3,820              1,183           31.0 %
                                     -- ----------    - --------    -- ------------    -- --------
Total salaries and related costs     $      47,960    $   61,171    $        13,211           21.6 %
                                     -- ----------    - --------    -- ------------    -- --------

* Principally includes the cost of temporary labor and overtime.

For the three months ended March 31, 2009, salaries and related costs decreased $13.2 million, or 22%, when compared to the same period in the prior year. This decrease is principally due to lower levels of full-time salaries, employee benefits, payroll taxes, stock compensation and incentive compensation. Also significantly impacting the comparison of salaries and related costs to the prior period are changes in foreign currency exchange rates, which contributed approximately $6.2 million to the overall decrease.

See discussion below for an explanation of the significant factors . . .