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 AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND
2008

This discussion should be read in conjunction with Note 1 ("Basis of Presentation") and Note 4 ("Segment Reporting") of Notes to Condensed Consolidated Financial Statements.

Overview

Sotheby's reported a net loss of ($57.8) million in the third quarter of 2009, as compared to a net loss of ($47) million in the prior year. The higher third quarter net loss is due to a significant increase in Sotheby's effective income tax rate as discussed under "Income Tax Expense (Benefit)" below. Despite the higher third quarter net loss, Sotheby's pre-tax loss decreased by 32% from ($68.7) million to ($47.1) million. This improvement is primarily due to a $50.1 million, or 38%, decrease in expenses, as well as $42 million in auction guarantee losses recognized in the third quarter of 2008 that were not repeated in the current year. The overall decrease in pre-tax loss for the quarter is partially offset by an 80% decrease in third quarter Net Auction Sales, which is largely attributable to a change in the timing of the early summer Contemporary Art sales in London, as well the non-recurring September 2008 Beautiful Inside My Head Forever sale, featuring new Contemporary Art works by Damien Hirst.

For the nine months ended September 30, 2009, Sotheby's reported a net loss of ($80.1) million, as compared to net income of $35.8 million in the prior year. The unfavorable comparison versus the prior year is due to a 70% decrease in Net Auction Sales caused by a downturn in the international art market resulting from a weakening global economy and the associated turbulence in world financial and credit markets that began in September 2008, as well a significant increase in Sotheby's effective income tax rate as discussed under "Income Tax Expense (Benefit)" below. The net loss for the current year-to-date period is partially mitigated by a decrease of $137.8 million, or 31%, in expenses, as well as $51.5 million in auction guarantee losses recognized in the prior year that were not repeated in 2009.

The significant decreases in expenses for the three and nine months ended September 30, 2009 are due 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. The overall reduction in expenses versus the prior year-to-date period is partially offset by restructuring charges of $11 million in the current period, as well as the $18.4 million benefit recorded in the second quarter of 2008 as a result of the reversal of the remaining liability related to the settlement of antitrust related civil litigation.

A more detailed discussion of each of the significant factors impacting Sotheby's results for the three and nine months ended September 30, 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 Art 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 the peaks achieved in those years in the near term. However, there has been a steady improvement in the percentage of lots successfully sold at Sotheby's Impressionist Art and Contemporary Art auctions since the fourth quarter of 2008. Additionally, in the second half of 2009 to-date, Net Auction Sales have averaged a significantly higher percentage of presale low estimates as compared to results for the first half of 2009. Management believes that these improvements, along with encouraging sales results in the fourth quarter to-date, are indications that the market is adjusting to current price levels and should give confidence to consignors and buyers that there is now an improved marketplace. (See statement on Forward Looking Statements.)

Sotheby's results for the three and nine months ended September 30, 2009 and 2008 are summarized below (in thousands of dollars):

                                                   Three Months Ended
                                                      September 30,            Favorable/(Unfavorable)
                                                 -----------------------    -----------------------------
                                                    2009         2008          $ Change         % Change
                                                 ----------    ---------    ---------------    ----------
Revenues:
Auction and related revenues                      $  40,000    $  62,289     $      (22,289 )       (35.8 %)
Finance revenues                                      2,240        3,687             (1,447 )       (39.2 %)
Dealer revenues                                       1,834        8,396             (6,562 )       (78.2 %)
License fee revenues                                    764        1,174               (410 )       (34.9 %)
Other revenues                                           88          427               (339 )       (79.4 %)
                                                 -- -------    - -------    -- ------------    --- ------
Total revenues                                       44,926       75,973            (31,047 )       (40.9 %)

Expenses**                                           83,217      133,321             50,104          37.6 %
                                                 -- -------    - -------    -- ------------    --- ------
Operating loss                                      (38,291 )    (57,348 )           19,057          33.2 %
Net interest expense                                (10,741 )     (8,672 )           (2,069 )       (23.9 %)
Extinguishment of debt                                    -       (2,477 )            2,477         100.0 %
Write-off of credit facility amendment fees          (2,489 )          -             (2,489 )             *
Other income (expense)                                4,423         (228 )            4,651               *
                                                 -- -------    - -------    -- ------------    --- ------
Loss before taxes                                   (47,098 )    (68,725 )           21,627          31.5 %
Equity in earnings of investees, net of taxes           113          445               (332 )       (74.6 %)
Income tax expense (benefit)                         10,813      (21,234 )          (32,047 )             *
                                                 -- -------    - -------    -- ------------    --- ------
Net loss                                          $ (57,798 )  $ (47,046 )   $      (10,752 )       (22.9 %)
                                                 -- -------    - -------    -- ------------    --- ------
Key performance indicators:
Aggregate Auction Sales (a)                       $ 155,971    $ 750,407     $     (594,436 )       (79.2 %)
Net Auction Sales (b)                             $ 130,188    $ 637,135     $     (506,947 )       (79.6 %)
Private Sales (c)                                 $ 101,690    $  97,516     $        4,174           4.3 %
Consolidated Sales (d)                            $ 259,495    $ 856,319     $     (596,824 )       (69.7 %)
Auction commission margin (e)                          22.7 %       15.2 %              N/A          49.1 %
Average loan portfolio (f)                        $ 150,253    $ 187,964     $      (37,711 )       (20.1 %)

                                                      Nine Months Ended
                                                        September 30,             Favorable/(Unfavorable)
                                                  --------------------------    ----------------------------
                                                     2009           2008            $ Change        % Change
                                                  -----------    -----------    ----------------    --------
Revenues:
Auction and related revenues                      $   236,985    $   460,620     $      (223,635 )     (48.6 %)
Finance revenues                                        6,904         10,849              (3,945 )     (36.4 %)
Dealer revenues                                        19,635         49,872             (30,237 )     (60.6 %)
License fee revenues                                    2,313          2,683                (370 )     (13.8 %)
Other revenues                                            838          1,371                (533 )     (38.9 %)
                                                  - ---------    - ---------    -- -------------    --------
Total revenues                                        266,675        525,395            (258,720 )     (49.2 %)

Expenses **                                           312,457        450,281             137,824        30.6 %
                                                  - ---------    - ---------    -- -------------    --------
Operating (loss) income                               (45,782 )       75,114            (120,896 )           *
Net interest expense                                  (30,175 )      (20,192 )            (9,983 )     (49.4 %)
Extinguishment of debt                                  1,039         (2,477 )             3,516             *
Write-off of credit facility amendment fees            (3,750 )            -              (3,750 )           *
Other income (expense)                                    590         (1,399 )             1,989             *
                                                  - ---------    - ---------    -- -------------    --------
(Loss) income before taxes                            (78,078 )       51,046            (129,124 )           *
Equity in earnings of investees, net of taxes             204          1,982              (1,778 )     (89.7 %)
Income tax expense                                      2,235         17,269              15,034        87.1 %
                                                  - ---------    - ---------    -- -------------    --------
Net (loss) income                                 $   (80,109 )  $    35,759     $      (115,868 )           *
                                                  - ---------    - ---------    -- -------------    --------
Key performance indicators:
Aggregate Auction Sales (a)                       $ 1,150,723    $ 3,703,515     $    (2,552,792 )     (68.9 %)
Net Auction Sales (b)                             $   963,385    $ 3,173,858     $    (2,210,473 )     (69.6 %)
Private Sales (c)                                 $   300,133    $   303,761     $        (3,628 )      (1.2 %)
Consolidated Sales (d)                            $ 1,470,491    $ 4,057,148     $    (2,586,657 )     (63.8 %)
Auction commission margin (e)                            21.1 %         14.8 %               N/A        42.5 %
Average loan portfolio (f)                        $   153,885    $   185,524     $       (31,639 )     (17.1 %)

Legend:

* Represents a change in excess of 100%.

** Expenses for the three and nine months ended September 30, 2009 include restructuring charges of $0.5 million and $11 million, respectively. Expenses for the nine months ended September 30, 2008 include a benefit of $18.4 million recognized in the second quarter of 2008 as a result of the reversal of the remaining liability related to the vendor's commission discount certificates issued by Sotheby's in 2003 in conjunction with the settlement of the antitrust related civil litigation.

(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.

For the three months ended September 30, 2009, changes in foreign currency exchange rates had a net unfavorable impact of approximately $0.9 million on Sotheby's results. For the nine months ended September 30, 2009, changes in foreign currency exchange rates had a net favorable impact of approximately $1.5 million on Sotheby's results. The following table summarizes the impact of changes in foreign currency exchange rates on Sotheby's results for the periods (in thousands of dollars):

                                                         Favorable /
Three Months Ended September 30, 2009                   (Unfavorable)
----------------------------------------------------   ---------------
Total revenues                                         $        (5,436 )
Total expenses                                                   4,681
                                                       -- ------------
Operating loss                                                    (755 )
Net interest expense and other                                     (88 )
                                                       -- ------------
Impact of changes in foreign currency exchange rates   $          (843 )
                                                       -- ------------

                                                         Favorable /
Nine Months Ended September 30, 2009                    (Unfavorable)
----------------------------------------------------   ---------------
Total revenues                                         $       (29,728 )
Total expenses                                                  30,311
                                                       -- ------------
Operating loss                                                     583
Net interest expense and other                                   1,003
                                                       -- ------------
Impact of changes in foreign currency exchange rates   $         1,586
                                                       -- ------------

Revenues

     For the three and nine months ended September 30, 2009 and 2008, revenues
consisted of the following (in thousands of dollars):


                                                               Favorable/(Unfavorable)
                                                             ----------------------------
Three Months Ended September 30        2009        2008         $ Change        % Change
----------------------------------   ---------   ---------   ---------------    ---------

Auction and related revenues:
Auction commission revenues          $  29,495   $  96,929   $       (67,434 )      (69.6 %)
Auction expense recoveries                 582       2,999            (2,417 )      (80.6 %)
Private sale commissions                 9,453       6,704             2,749         41.0 %
Principal activities                    (1,829 )   (47,364 )          45,535         96.1 %
Catalogue subscription revenues          1,153       1,657              (504 )      (30.4 %)
Other                                    1,146       1,364              (218 )      (16.0 %)
                                     - -------   - -------   -- ------------    --- -----
Total auction and related revenues      40,000      62,289           (22,289 )      (35.8 %)
                                     - -------   - -------   -- ------------    --- -----
Other revenues:
Finance revenues                         2,240       3,687            (1,447 )      (39.2 %)
Dealer revenues                          1,834       8,396            (6,562 )      (78.2 %)
License fee revenues                       764       1,174              (410 )      (34.9 %)
Other                                       88         427              (339 )      (79.4 %)
                                     - -------   - -------   -- ------------    --- -----
Total other revenues                     4,926      13,684            (8,758 )      (64.0 %)
                                     - -------   - -------   -- ------------    --- -----
Total revenues                       $  44,926   $  75,973   $       (31,047 )      (40.9 %)
                                     - -------   - -------   -- ------------    --- -----

                                                               Favorable/(Unfavorable)
                                                             ----------------------------
Nine Months Ended September 30         2009        2008         $ Change        % Change
----------------------------------   ---------   ---------   ---------------    ---------

Auction and related revenues:
Auction commission revenues          $ 203,117   $ 470,089   $      (266,972 )      (56.8 %)
Auction expense recoveries               4,526      10,535            (6,009 )      (57.0 %)
Private sale commissions                24,186      26,840            (2,654 )       (9.9 %)
Principal activities                    (2,888 )   (60,003 )          57,115         95.2 %
Catalogue subscription revenues          3,735       5,345            (1,610 )      (30.1 %)
Other                                    4,309       7,814            (3,505 )      (44.9 %)
                                     - -------   - -------   -- ------------    --- -----
Total auction and related revenues     236,985     460,620          (223,635 )      (48.6 %)
                                     - -------   - -------   -- ------------    --- -----
Other revenues:
Finance revenues                         6,904      10,849            (3,945 )      (36.4 %)
Dealer revenues                         19,635      49,872           (30,237 )      (60.6 %)
License fee revenues                     2,313       2,683              (370 )      (13.8 %)
Other                                      838       1,371              (533 )      (38.9 %)
                                     - -------   - -------   -- ------------    --- -----
Total other revenues                    29,690      64,775           (35,085 )      (54.2 %)
                                     - -------   - -------   -- ------------    --- -----
Total revenues                       $ 266,675   $ 525,395   $      (258,720 )      (49.2 %)
                                     - -------   - -------   -- ------------    --- -----

Auction and Related Revenues

For the three and nine months ended September 30, 2009, auction and related revenues decreased $22.3 million, or 36%, and $223.6 million, or 49%, respectively, when compared to the same periods in the prior year. These decreases are principally due to lower auction commission revenues, partially offset by a substantially lower level of principal activity losses. The comparisons to the prior year are also impacted by unfavorable movements in foreign currency exchange rates, which decreased auction and related revenues by $5.2 million and $26.7 million, respectively.

Auction Commission Revenues - For the three months ended September 30, 2009, auction commission revenues decreased $67.4 million, or 70%, when compared to the same period in the prior year. This decrease is principally due to a decrease of $506.9 million, or 80%, in Net Auction Sales, in part attributable to a change in the timing of the early summer Contemporary Art sales in London. In 2008, these sales were held in early-July and resulted in third quarter Net Auction Sales of $208 million and auction commission revenues of $26 million. However, in 2009, these sales were held in late-June and resulted in second quarter Net Auction Sales of $48 million and auction commission revenues of $9 million. The impact of the overall decrease in Net Auction Sales for the three months ended September 30, 2009 is partially offset by a 49% improvement in auction commission margin.

See "Net Auction Sales" and "Auction Commission Margin" below for a more detailed discussion of these key performance indicators.

Net Auction Sales -For the three and nine months ended September 30, 2009, Net Auction Sales decreased $506.9 million, or 80%, and $2.2 billion, or 70%, respectively, when compared to the same periods in the prior year. These decreases are largely due to the downturn in the international art market resulting from a weakening global economy and the associated turbulence in world financial and credit markets that began in September of 2008. Accordingly, Sotheby's has been unable to achieve auction consignment levels and selling prices comparable to levels attained in the first nine months of 2008.

Specifically, the $506.9 million decline in Net Auction Sales for the three months ended September 30, 2009 is primarily attributable to:

• A change in the timing of the early summer Contemporary Art sales in London. As discussed above, in 2008, these sales were held in early-July and totaled approximately $208 million. However, in 2009, these sales were held in late-June and resulted in second quarter Net Auction Sales of $48 million.

• The Beautiful Inside My Head Forever sale, held in September 2008, which featured the sale of new Contemporary Art works by Damien Hirst. This was the first ever auction dedicated to the work of a single living artist and there was no comparable sale in the third quarter of 2009.

• A $46 million, or 49%, decrease in sales of Old Master Paintings and Drawings in the U.K.

During the three months ended September 30, 2009, Net Auction Sales were unfavorably impacted by changes in foreign currency exchange rates, which contributed $21 million to the overall decrease.

For the nine months ended September 30, 2009, the $2.2 billion decline in Net Auction Sales is primarily attributable to the following factors:

• A decrease of $1.2 billion, or 74%, in recurring worldwide sales of Impressionist Art and Contemporary Art. Significantly fewer works were offered at these auctions in 2009, and works sold at substantially lower prices than in 2008.

• The Beautiful Inside My Head Forever sale held in September 2008 which featured the sale of new Contemporary Art works by Damien Hirst. There was no comparable sale in 2009.

• Decreases in worldwide sales of Asian Art ($163 million), Jewelry ($75 million), American Paintings ($51 million), Russian Art ($51 million) and Old Master Paintings and Drawings ($48 million).

During the nine months ended September 30, 2009, Net Auction Sales were unfavorably impacted by changes in foreign currency exchange rates, which contributed $114 million to the overall decrease.

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 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.

• 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. In particular, the comparison of auction commission margin for the three months ended September 30, 2009 to the prior period is significantly impacted by the change in timing of the early summer Contemporary Art sales in London, as well as the non-recurring Beautiful Inside My Head Forever sale, both of which featured the sale of numerous high-end lots. Furthermore, auction commission margin for the nine months ended September 30, 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 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 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.

In response to the downturn in the international art market that began after September 15, 2008, as well as the challenging economic environment, . . .