Overview

Steiner Leisure Limited is a leading worldwide provider of spa services. We operate our business through three reportable segments: Spa Operations, Products and Schools.

Through our Spa Operations segment, we offer massages and a variety of other body treatments, as well as a broad variety of beauty treatments to women, men and teenagers on cruise ships and at resort spas and two day spas. In connection with these services, we have assisted in the design of spa facilities for many of the ships and resorts that we serve. We conduct our activities pursuant to agreements with cruise lines and resort owners that, generally, give us the exclusive right to offer these types of services at those venues. The cruise lines and resort owners, generally, receive compensation based on a percentage of our revenues at these respective locations and, in certain cases, a minimum annual rental or combination of both.

Through our Products segment, we develop and sell a variety of high quality beauty products under our Elemis and La Therapie brands, and also sell products of third parties. The raw materials for the products we develop are produced for us by a premier European manufacturer. We sell our products at our shipboard and land-based spas pursuant to the same agreements under which we provide spa services at those locations, as well as through third-party outlets. We believe that having our products featured at our luxury spas at sea and on land has assisted us in securing other distribution channels for our products.

Through our Schools segment, we own and operate five post-secondary schools (comprised of a total of 17 campuses) located in Arizona, Colorado, Connecticut, Florida, Maryland, Nevada, Pennsylvania, Utah and Virginia. These schools offer programs in massage therapy and, in some cases, beauty and skin care, and train and qualify spa professionals for health and beauty positions, including, in some cases, within the Steiner family of companies. Among other things, we train the students at our schools in the use of our Elemis and La Therapie products. We offer full-time programs as well as part-time programs for students who work or who otherwise desire to take classes outside traditional education hours. Revenues from our massage and beauty schools, which consist almost entirely of student tuition payments, are derived to a significant extent from the proceeds of loans issued under the U.S. Department of Education's Title IV program and, accordingly, we must comply with a number of regulatory requirements in order to maintain the eligibility of our students and prospective students for loans under this program.

Our revenues are generated principally from our cruise ship operations. Accordingly, our success and our growth are dependent to a significant extent on the success and growth of the travel and leisure industry in general, and on the cruise industry in particular. Our resort spas are dependent on the resort hotel industry for their success. These industries are subject to significant risks that could affect our results of operations.

The success of the cruise and resort industries, as well as our business, is impacted by economic conditions. The overall weakness in the U.S. (where a significant portion of our shipboard and land-based spa customers reside) and other world economies, which began in 2008, including increased unemployment, and the problems in the credit and capital markets, have created a challenging environment for the cruise and resort industries and our business, including our retail beauty products sales. These conditions have impacted consumer confidence and placed considerable negative pressure on discretionary consumer spending, including spending on cruise and resort vacations and our services and products. As a consequence of these economic conditions, our results of operations and financial condition for the third and fourth quarters of 2008 and the first and second quarters of 2009 were adversely affected and the continuation or worsening of these conditions would likely continue to adversely affect our results of operations and financial condition during the period of such continuation or worsening.

A significant factor in our financial results is the amounts we are required to pay under our agreements with the cruise lines and resorts we serve. Certain cruise line agreements provide for increases in percentages of revenues and other amounts payable by us over the terms of those agreements. These payments also may be increased under new agreements with cruise lines and resort venue operators that replace expiring agreements. In general, we have experienced increases in these payments as a percentage of revenues upon entering into new agreements with cruise lines.

Weather also can impact our results. The multiple destructive hurricanes that hit the Southern United States and other regions several years ago caused cancellation or disruption of certain cruises and the closure of certain of our resort spas and campuses of our massage and beauty schools, which had adverse effects on us. In addition, the strong tsunami that hit various Asian regions in December 2004 resulted in damage to, and the closing of, most of our operations in the Maldives during much of 2005. In 2006, we closed two campuses of Utah College of Massage Therapy ("UCMT") for several days due to severe snow conditions and Connecticut Center for Massage Therapy ("CCMT") also has experienced closures as a result of snow conditions.

Historically, a significant portion of our operations has been conducted on ships through entities that are not subject to income taxation in the United States or other jurisdictions. To the extent that our non-shipboard income increases as a percentage of our overall income, the percentage of our overall income that will be subject to tax would increase.

An increasing amount of revenues have come from our sales of products through third party retail outlets, our web sites, mail order and other channels. However, as our product sales grow, continued increases in the rate of such growth are more difficult to attain.

An increasing percentage of cruise passengers who use our services are repeat customers of ours. These repeat customers are less likely to purchase our products than new customers.

Key Performance Indicators

Spa Operations. A measure of performance we have used in connection with our periodic financial disclosure relating to our cruise line operations is that of revenue per staff per day. In using that measure, we have differentiated between our revenue per staff per day on ships with large spas and other ships we serve. Our revenue per staff per day has been affected by the increasing requirements of cruise lines that we place additional non-revenue producing staff on ships with large spas to help maintain a high quality guest experience. We also utilize, as a measure of performance for our cruise line operations, our average weekly revenues. We use these measures of performance because they assist us in determining the productivity of our staff, which we believe is a critical element of our operations. With respect to our resort spas, we measure our performance primarily through average weekly revenues over applicable periods of time.

Schools. With respect to our massage and beauty schools, we measure performance primarily by the number of new student enrollments and the rate of retention of our students. A new student enrollment occurs each time a new student commences classes at one of our schools.

Products. With respect to sales of our products, other than on cruise ships and at our resort and day spas, we measure performance by revenues.

Growth

We seek to grow our business by attempting to obtain contracts for new cruise ships brought into service by our existing cruise line customers and for existing and new ships of other cruise lines, seeking new venues for our resort spas, developing new products and services, seeking additional channels for the distribution of our retail products and seeking to increase the student enrollments at our post-secondary massage and beauty schools. We also consider growth, among other things, through appropriate strategic transactions, including acquisitions and joint ventures.

We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations. This discussion is not intended to be a comprehensive description of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management's judgment in their application. The impact on our business operations and any associated risks related to these policies is discussed under results of operations, below, where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, please see Note 2 in the Notes to the Consolidated Financial Statements in Item 15 of our Annual Report on Form 10-K for 2008 filed with the Securities and Exchange Commission. Note that our preparation of this Quarterly Report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Cost of revenues includes:

º cost of services, including an allocable portion of wages paid to shipboard employees, an allocable portion of payments to cruise lines, an allocable portion of staff-related shipboard expenses, wages paid directly to land-based spa employees, payments to land-based spa venue owners, spa facilities depreciation, as well as, with respect to our schools, directly attributable campus costs such as rent, advertising and employee wages; and

º cost of products, including an allocable portion of wages paid to shipboard employees, an allocable portion of payments to cruise lines, an allocable portion of other staff-related shipboard expenses, as well as costs associated with development, manufacturing and distribution of products.

The allocable portions discussed above are based on the portion of maritime revenues represented by product or service revenues.

Cost of revenues may be affected by, among other things, sales mix, production levels, currency exchange rates, changes in supplier prices and discounts, purchasing and manufacturing efficiencies, tariffs, duties, freight and inventory costs. Certain cruise line and land-based spa agreements provide for increases in the percentages of services and products revenues and/or, as the case may be, the amount of minimum annual payments over the terms of those agreements. These payments may also be increased under new agreements with cruise lines and resort spa and day spa venue owners that replace expiring agreements.

Cost of products includes the cost of products sold through our various methods of distribution. To a lesser extent, cost of products also includes the cost of products consumed in rendering services. This amount is not a material component of the cost of services rendered and would not be practicable to identify separately.

Operating expenses include administrative expenses, salary and payroll taxes. In addition, operating expenses include amortization of certain intangibles relating to our acquisitions of resort spas in 2001, UCMT in April 2006 and CCMT in August 2008.

Revenue Recognition

We do not have critical accounting policies with respect to revenue recognition other than with respect to our massage therapy and beauty schools. Tuition revenue and revenue related to certain nonrefundable fees and charges at our massage and beauty schools are recognized monthly on a straight-line basis over the term of the course of study. At the time a student begins attending a school, a liability (unearned tuition) is recorded for all academic services to be provided and a tuition receivable is recorded for the portion of the tuition not paid up front in cash. Revenue related to sales of program materials, books and supplies are, generally, recognized when the program materials, books and supplies are delivered. We include the revenue related to sales of program materials, books and supplies in the Services Revenue financial statement caption in our Consolidated Statement of Income. If a student withdraws from one of our schools prior to the completion of the academic term, we refund the portion of the tuition already paid that, pursuant to our refund policy and applicable federal and state law and accrediting agency standards, we are not entitled to retain.

We do not have critical accounting policies with respect to allowance for doubtful accounts other than with respect to our massage therapy and beauty schools. We extend unsecured credit to our students for tuition and fees and we record a receivable for the tuition and fees earned in excess of the payment received from or on behalf of a student. We record an allowance for doubtful accounts with respect to accounts receivable using historical collection experience. We review the historical collection experience, consider other facts and circumstances, and adjust the calculation to record an allowance for doubtful accounts as appropriate. If our current collection trends were to differ significantly from our historic collection experience, however, we would make a corresponding adjustment to our allowance. We write off the accounts receivable due from former students when we conclude that collection is not probable.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets in question. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. For certain properties, leasehold improvements are amortized over lease terms, which include renewal periods that may be obtained at our option and that are considered significant to the continuation of our operations and to the existence of leasehold improvements, the value of which would be impaired if we discontinued our use of the leased property. We perform ongoing evaluations of the estimated useful lives of our property and equipment for depreciation purposes. The estimated useful lives are determined and continually evaluated based on the period over which services are expected to be rendered by the asset, industry practice and asset maintenance policies. Maintenance and repair items are expensed as incurred.

We review long-lived assets for impairment whenever events or changes in circumstances indicate, based on estimated future cash flows, that the carrying amount of these assets may not be fully recoverable. In certain cases, the determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of the assets in question.

Goodwill and Intangibles

Pursuant to SFAS 142, goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. The impairment loss is the amount, if any, by which the implied fair value of goodwill and intangibles is less than the carrying value. As of June 30, 2009, we had goodwill of $75.4 million and unamortized intangibles of $6.0 million. As of January 1, 2009, we performed the required annual goodwill impairment test and determined there was no impairment of goodwill. The Company believes that, as of June 30, 2009, no indicators of impairment of our goodwill and intangibles were present which would warrant an interim impairment test.

Accounting for Income Taxes

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current income tax exposure together with an assessment of temporary differences resulting from differing treatment of items for tax purposes and accounting purposes, respectively. These differences result in deferred income tax assets and liabilities which are included in our Consolidated Balance Sheets. We must then assess the likelihood that our deferred income tax assets will be recovered from future taxable income and, to the extent that we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in our Consolidated Statement of Income.

Significant management judgment is required in determining our provision for income taxes, our deferred income tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $33.3 million as of June 30, 2009, due to uncertainties related to our ability to utilize certain of our deferred income tax assets, primarily consisting of net operating losses carried forward, before they expire. The valuation allowance is based on our estimates of taxable income and the period over which our deferred income tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could impact our results of operations and financial condition.

Our resort spas, generally, are required to pay rent based on a percentage of our revenues. In addition, for certain of our resort spas, we are required to pay a minimum rental amount regardless of whether such amount would be required to be paid under the percentage rent agreement. Rent escalations are recorded on a straight-line basis over the term of the lease agreement. We record contingent rent at the time it becomes probable that the rent owed at a resort spa exceed the minimum rent obligation per the lease agreement. Previously recognized rental expense is reversed into income at such time that it is not probable that the specified threshold will be met.

Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance to the Company since the recent accounting pronouncements described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

In April 2009, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") SFAS No. 107-1 and Accounting Principles Board ("APB") Opinion No. 28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP FAS 107-1 and APB 28-1"). These issuances amend SFAS No. 107, "Disclosures about Fair Values of Financial Instruments," and require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. The releases also amend APB Opinion No. 28, "Interim Financial Reporting," to require those disclosures in all interim financial statements. This proposal was effective for interim periods ending after June 15, 2009. We adopted FSP FAS 107-1 and APB 28-1 during the second quarter of 2009 and the adoption of this accounting pronouncement did not have a material effect on our financial position or results of operations.

In April 2009, the FASB issued FSP FAS No. 157-4, "Determining Whether a Market Is Not Active and a Transaction Is Not Distressed" ("FSP FAS 157-4"). FSP FAS 157-4 provides guidance in determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurement purposes as defined in SFAS No. 157, "Fair Value Measurements." FSP FAS 157-4 was effective for interim periods ending after June 15, 2009. We adopted the provisions of FSP FAS 157-4 during the second quarter of 2009 and the adoption of this accounting pronouncement did not have a material effect on our financial position or results of operations.

In April 2009, the FASB issued FSP FAS No. 115-2, FAS No. 124-2, and Emerging Issues Task Force ("EITF") No. 99-20-2, "Recognition and Presentation of Other-Than-Temporary Impairments." This release provides guidance in determining whether impairments in debt securities are other than temporary, and modifies the presentation and disclosures surrounding such instruments to more effectively communicate when an other-than-temporary impairment event has occurred. This Staff Position was effective for interim periods ending after June 15, 2009. We adopted the provisions of this staff position during the second quarter of 2009 and the adoption of this accounting pronouncement did not have a material effect on our financial position or results of operations.

On April 1, 2009, we adopted the provisions of SFAS No. 165, "Subsequent Events" ("SFAS 165"), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of this standard did not have a material impact on our financial position or results of operations.

Results of Operations

The following table sets forth for the periods indicated, certain selected
income statement data expressed as a percentage of revenues:

                                                Three Months Ended       Six Months Ended
                                                     June 30,                June 30,
                                                2009         2008        2009        2008

Revenues:
  Services                                         70.4 %       65.8 %     70.8  %     66.2 %
  Products                                         29.6         34.2       29.2        33.8
   Total revenues                                 100.0        100.0      100.0       100.0
Cost of revenues:
  Cost of services                                 57.1         54.2       57.4        54.1
  Cost of products                                 24.5         24.0       22.9        24.2
   Total cost of revenues                          81.6         78.2       80.3        78.3
   Gross profit                                    18.4         21.8       19.7        21.7
Operating expenses:
  Administrative                                    3.2          5.7        4.3         5.8
  Salary and payroll taxes                          7.4          7.5        7.8         7.8
   Total operating expense                         10.6         13.2       12.1        13.6
   Income from operations                           7.8          8.6        7.6         8.1
Other income (expense):
  Interest expense                                   --         (0.1 )       --        (0.1 )
  Other income                                       --          0.1         --         0.1
   Total other income (expense)                      --           --         --          --
   Income before provision for income taxes         7.8          8.6        7.6         8.1
Provision for income taxes                          0.7          0.8        0.7         0.7
Net income                                          7.1  %       7.8 %      6.9  %      7.4 %

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

REVENUES

Revenues of our reportable segments for the three months ended June 30, 2009 and
2008, respectively, were as follows:

                                         Three Months Ended        % Change
                                              June 30,
            Revenue:                    2009            2008
            Spa Operations Segment $  89,932,000   $ 105,588,000   (14.8%)
            Products Segment          18,268,000      24,855,000   (26.5%)
            Schools Segment           14,216,000      11,089,000    28.2%
            Other                     (4,790,000 )    (5,859,000 )   N/A
              Total                $ 117,626,000   $ 135,673,000    13.3%

Total revenues decreased approximately 13.3%, or $18.1 million, to $117.6 million in the second quarter of 2009 from $135.7 million in the second quarter of 2008. Of this decrease, $6.5 million was attributable to a decrease in services revenues and $11.6 million was attributable to a decrease in products revenues.

Spa Operations Segment Revenues. Spa Operations segment revenues decreased approximately 14.8%, or $15.7 million, to $89.9 million in the second quarter of 2009 from $105.6 million in the second quarter of 2008. Average weekly revenues for our resorts decreased 22.4% to $21,886 in the second quarter of 2009 from $28,213 in the second quarter of 2008. We had an average of 2,054 shipboard staff members in service in the second quarter of 2009, compared to an average of 2,031 shipboard staff members in service in the second quarter of 2008. Revenues per shipboard staff per day decreased by 13.7% to $404 in the second quarter of 2009 from $468 in the second quarter of 2008. Average weekly revenues for our shipboard spas decreased by 10.8% to $47,443 in the second quarter of 2009 from $53,177 in the second quarter of 2008. The decrease in revenues and the key performance indicators referenced above were primarily attributable to a softening of the economy worldwide, resulting in reduced spending by consumers at our spas.

Products Segment Revenues. Product segment revenues decreased approximately 26.5%, or $6.6 million to $18.3 million in the second quarter of 2009 from $24.9 million in the second quarter of 2008. This decrease is primarily attributable to a softening of the economy worldwide, resulting in reduced spending by consumers.

School Segment Revenues. School segment revenues increased approximately 28.2%, or $3.1 million to $14.2 million in the second quarter of 2009 from $11.1 million in the second quarter of 2008. This increase in revenues was primarily attributable to increased enrollments, otherwise increased student populations and the purchase of CCMT.

COST OF SERVICES

Cost of services decreased $6.4 million to $67.2 million in the second quarter of 2009 from $73.6 million in the second quarter of 2008. Cost of services as a percentage of services revenues decreased to 81.2% in the second quarter of 2009 from 82.4% in the second quarter of 2008. This decrease in cost of services as a percentage of service revenues was primarily due to the improved performance of . . .