3. (Loss) Earnings Per Share

Basic (loss) earnings per share—Basic (loss) earnings per share attributable to Sotheby's common shareholders is computed under the two-class method using the weighted average number of common shares outstanding during the period. The two-class method requires that the amount of net income attributable to participating securities be deducted from consolidated net income in the computation of basic earnings per share. In periods with a net loss, the net loss attributable to participating securities is not deducted from consolidated net loss in the computation of basic loss per share as the impact would be anti-dilutive. Sotheby's participating securities include unvested share-based payments to employees that have non-forfeitable rights to dividends such as restricted stock and restricted stock units.

Diluted (loss) earnings per share—Diluted (loss) earnings per share attributable to Sotheby's common shareholders is computed in a similar manner to basic (loss) earnings per share under the two-class method, using the weighted average number of common shares outstanding during the period and, if dilutive, potential common shares outstanding during the period. Sotheby's potential common shares include the following:

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Unvested performance share units and incremental common shares issuable upon the exercise of stock options. Such potential common shares are included in the computation of diluted earnings per share using the treasury stock method.

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Deferred stock units issued pursuant to the Sotheby's Stock Compensation Plan for Non-Employee Directors.

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In reporting periods during which the average trading price of Sotheby's Common Stock exceeds the $34 per share conversion price of its 3.125% Convertible Notes (the "Convertible Notes"), the net shares that would be delivered to settle the conversion premium assuming all of the Convertible Notes are redeemed.

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In reporting periods during which the average trading price of Sotheby's Common Stock exceeds the $44.905 per share exercise price of the warrants that were sold in conjunction with the issuance of the Convertible Notes (the "Warrants"), the net shares that would be delivered to settle the Warrants as calculated under the treasury stock method.

During each of the first three quarters of 2011, the average trading price of Sotheby's Common Stock exceeded the $34 per share conversion price of the Convertible Notes. As a result, for the nine months ended September 30, 2011, 1.1 million shares of Sotheby's Common Stock were included in the calculation of weighted average diluted shares outstanding related to the Convertible Notes. (See Note 6 for additional information related to the Convertible Notes.)

During the first quarter of 2011, the average trading price of Sotheby's Common Stock exceeded the $44.905 per share exercise price of the Warrants. However, the average trading price of Sotheby's Common Stock did not exceed the exercise price of the Warrants in the second and third quarters of 2011. As a result, for the three and nine months ended September 30, 2011, zero and 21,000 shares of Sotheby's Common Stock, respectively, were included in the calculation of weighted average diluted shares outstanding related to the Warrants.

For the three months ended September 30, 2011 and 2010, 2.5 million and 1.9 million potential common shares were excluded from the computation of diluted earnings per share. For the nine months ended September 30, 2011 and 2010, no potential common shares were excluded from the computation of diluted earnings per share.

The table below summarizes the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2011 and 2010 (in thousands of dollars, except per share amounts):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011		2010

Basic:
Numerator:
Net (loss) income attributable to Sotheby's	$	(29,719	)	$	(19,361	)	$	99,936	$	64,701
Less: Net income attributable to participating securities		N/A			N/A			1,169		1,575

Net (loss) income attributable to Sotheby's common shareholders	$	(29,719	)	$	(19,361	)	$	98,767	$	63,126


Denominator:
Weighted average common shares outstanding		67,410			66,377			67,263		66,238

Basic (loss) earnings per share - Sotheby's common shareholders	$	(0.44	)	$	(0.29	)	$	1.47	$	0.95


Diluted:
Numerator:
Net (loss) income attributable to Sotheby's	$	(29,719	)	$	(19,361	)	$	99,936	$	64,701
Less: Net income attributable to participating securities		N/A			N/A			1,142		1,560

Net (loss) income attributable to Sotheby's common shareholders	$	(29,719	)	$	(19,361	)	$	98,794	$	63,141


Denominator:
Weighted average common shares outstanding		67,410			66,377			67,263		66,238
Weighted average dilutive potential common shares outstanding		N/A			N/A			1,812		787

Denominator for calculation of diluted earnings per share		67,410			66,377			69,075		67,025

Diluted (loss) earnings per share - Sotheby's common shareholders	$	(0.44	)	$	(0.29	)	$	1.43	$	0.94