Martha Stewart Living Omnimedia 10-Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2007

OR

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

For the transition period from                    to                    

Commission file number 001-15395

MARTHA STEWART LIVING OMNIMEDIA, INC.

(Exact name of registrant as specified in its charter)

Delaware	52-2187059
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
11 West 42nd Street, New York, NY	10036
(Address of principal executive offices)	(Zip Code)

(Registrant’s telephone number, including area code)(212) 827-8000

(Former name, former address and former fiscal year,

if changed since last report)

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. Yesþ      Noo

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 Filero      Accelerated Filerþ      Non-Accelerated Filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso      Noþ

Class	Outstanding as of August 6, 2007
Class A, $0.01 par value		26,740,139
Class B, $0.01 par value		26,722,032
Total		53,462,171

Martha Stewart Living Omnimedia, Inc.

Index to Form 10-Q

	Page
Part I. Financial information
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3. Quantitative and Qualitative Disclosures About Market Risk		26
Item 4. Controls and Procedures		26
Part II. Other Information
Item 1. Legal Proceedings		27
Item 1A. Risk Factors		27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 3. Defaults Upon Senior Securities		27
Item 4. Submission of Matters to a Vote of Security Holders		28
Item 5. Other Information		28
Item 6. Exhibits		29
Signatures		30
EX-10.2: LETTER AGREEMENT
EX-31.1: CERTIFICATION
Ex-31.2: Certification
EX-32: CERTIFICATION

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

MARTHA STEWART LIVING OMNIMEDIA, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)

	June 30,			December 31,
	2007			2006
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	36,571		$	28,528
Short-term investments		45,304			35,321
Accounts receivable, net		45,007			70,319
Inventories, net		5,114			4,448
Deferred television production costs		4,844			4,609
Income taxes receivable		482			482
Other current assets		2,592			3,857
Total current assets		139,914			147,564
PROPERTY, PLANT AND EQUIPMENT, net		18,055			19,616
INTANGIBLE ASSETS, net		53,605			53,605
OTHER NONCURRENT ASSETS		8,401			7,262
Total assets	$	219,975		$	228,047
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	23,702		$	28,053
Accrued payroll and related costs		13,882			13,646
Income taxes payable		1,946			1,011
Current portion of deferred subscription revenue		26,687			28,884
Current portion of deferred revenue		7,245			3,159
Total current liabilities		73,462			74,753
DEFERRED SUBSCRIPTION REVENUE		9,124			10,032
DEFERRED REVENUE		13,163			9,845
OTHER NONCURRENT LIABILITIES		2,244			2,460
Total liabilities		97,993			97,090
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Class A common stock, $.01 par value, 350,000 shares authorized; 26,608 and 26,109 shares outstanding in 2007 and 2006, respectively		266			261
Class B common stock, $.01 par value, 150,000 shares authorized; 26,722 and 26,791 shares outstanding in 2007 and 2006, respectively		268			268
Capital in excess of par value		267,479			257,014
Accumulated deficit		(145,256	)		(125,811	)
		122,757			131,732
Less: Class A treasury stock - 59 shares at cost		(775	)		(775	)
Total shareholders’ equity		121,982			130,957
Total liabilities and shareholders’ equity	$	219,975		$	228,047

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MARTHA STEWART LIVING OMNIMEDIA, INC.
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
REVENUES
Publishing	$	47,478		$	40,888		$	88,096		$	77,176
Merchandising		10,352			10,891			23,952			22,418
Internet		5,183			4,634			8,713			7,582
Broadcasting		10,433			11,757			19,389			23,077
Total revenues		73,446			68,170			140,150			130,253
OPERATING COSTS AND EXPENSES
Production, distribution and editorial		38,881			35,498			78,609			68,247
Selling and promotion		22,172			14,787			42,403			31,781
General and administrative		17,920			17,447			35,239			35,269
Depreciation and amortization		2,263			2,236			4,241			4,444
Total operating costs and expenses		81,236			69,968			160,492			139,741
OPERATING LOSS		(7,790	)		(1,798	)		(20,342	)		(9,488	)
Interest income, net		775			1,356			1,547			2,402
Legal Settlement		432			—			432			—
LOSS BEFORE INCOME TAXES		(6,583	)		(442	)		(18,363	)		(7,086	)
Income tax provision		(154	)		(229	)		(243	)		(296	)
LOSS FROM CONTINUING OPERATIONS BEFORE LOSS FROM DISCONTINUED OPERATIONS		(6,737	)		(671	)		(18,606	)		(7,382	)
Loss from discontinued operations		—			(499	)		—			(622	)
NET LOSS	$	(6,737	)	$	(1,170	)	$	(18,606	)	$	(8,004	)
LOSS PER SHARE – BASIC AND DILUTED
Loss from continuing operations	$	(0.13	)	$	(0.01	)	$	(0.36	)	$	(0.14	)
Loss from discontinued operations		—			(0.01	)		—			(0.01	)
Net loss	$	(0.13	)	$	(0.02	)	$	(0.36	)	$	(0.16	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and Diluted		52,386			51,176			52,382			51,192

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statement of Shareholders’ Equity
For the Six Months Ended June 30, 2007
(unaudited, in thousands)

	Class A				Class B											Class A
	common stock				common stock											treasury stock
										Capital in
										excess of par			Accumulated
	Shares		Amount		Shares			Amount		value			Deficit			Shares			Amount			Total
Balance at January 1, 2007		26,109	$	261		26,791		$	268	$	257,014		$	(125,811	)		(59	)	$	(775	)	$	130,957
Net loss		—		—		—			—		—			(18,606	)		—			—			(18,606	)
Cumulative effect of adoption of FIN 48		—		—		—			—		—			(839	)		—			—			(839	)
Shares returned on a net treasury basis		—		—		(69	)		—		—			—			—			—			—
Issuance of shares in conjunction with stock option exercises		71		1		—			—		286			—			—			—			287
Issuance of shares of stock and restricted stock, net of cancellations and tax liabilities		274		3		—			—		(2,350	)		—			—			—			(2,347	)
Issuance of shares in conjunction with warrant exercise		154		1		—			—		—			—			—			—			1
Equity charge associated with common stock warrant		—		—		—			—		6,462			—			—			—			6,462
Non-cash equity compensation		—		—		—			—		6,067			—			—			—			6,067
Balance at June 30, 2007		26,608	$	266		26,722		$	268	$	267,479		$	(145,256	)		(59	)	$	(775	)	$	121,982

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MARTHA STEWART LIVING OMNIMEDIA, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)

	Six Months Ended
	June 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(18,606	)	$	(8,004	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		4,241			4,444
Non-cash equity compensation		12,872			5,708
Changes in operating assets and liabilities		24,258			12,920
Net cash provided by operating activities		22,765			15,068
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(2,680	)		(3,872	)
Purchases of short-term investments		(102,993	)		(75,262	)
Sales of short-term investments		93,010			79,732
Net cash provided by (used in) investing activities		(12,663	)		598
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds received from stock option exercises		287			236
Issuance of stock and restricted stock, net		(2,346	)		75
of cancellations and tax liabilities
Net cash provided by(used in) financing activities		(2,059	)		311
Net increase in cash		8,043			15,977
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		28,528			20,249
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	36,571		$	36,226

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Accounting policies

a. General

     Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is herein referred to as “we,” “our,” or the “Company.”

     The information included in the foregoing interim condensed consolidated financial statements is unaudited. In the opinion of management, all adjustments which are of a normal recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods do not necessarily indicate the results to be expected for the entire year. These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) with respect to the Company’s fiscal year ended December 31, 2006.

b. Use of estimates

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management does not expect such differences to have a material effect on the Company’s consolidated financial statements.

c. Recent Accounting Standards

     In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold which a tax position is required to meet before being recognized in the financial statements. It further provides guidance on derecognition and measurement of tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, effective January 1, 2007, we adopted the minimum threshold recognition provisions of FIN 48. See Note 1(e) for further information on the adoption of FIN 48.

     In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands on required disclosures about fair value measurement. SFAS 157 will be effective for the Company on January 1, 2008 and will be applied prospectively. The Company is currently assessing whether adoption of SFAS 157 will have an impact on our financial statements but does not believe the adoption of SFAS 157 will have a material impact on the Company’s financial position, cash flows, or results of operations.

     In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). Under SFAS 159, entities may choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. SFAS 159 also establishes recognition, presentation, and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 will be effective for us beginning January 1, 2008. The Company is currently assessing whether adoption of SFAS 159 will have an impact on our financial statements but does not believe the adoption of SFAS 159 will have a material impact on the Company’s financial position, cash flows, or results of operations.

d. Television production costs

     Television production costs are capitalized and amortized based upon estimates of future revenues to be received and future costs to be incurred for the applicable television product. The Company bases its estimates on existing

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contracts for programs, historical advertising rates and ratings as well as market conditions. Estimated future revenues and costs are adjusted regularly based upon actual results and changes in market and other conditions.

e. Income taxes

     The Company follows SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under the asset and liability method of SFAS 109, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in management’s judgment about the future realization of deferred tax assets. SFAS 109 places more emphasis on historical information, such as the Company’s cumulative operating results and its current year results than it places on estimates of future taxable income. Therefore, the Company has added $13.0 million to its deferred tax asset (“DTA”) and valuation allowance in the first six months of 2007, resulting in a cumulative balance for both its DTA and valuation allowance of $75.1 million as of June 30, 2007. The DTA balance as of June 30, 2007 primarily consists of the Federal net operating loss (“NOL”), and also includes amounts for state NOLs, accrued compensation, and other DTAs which are not included in the Federal NOL. The Company intends to maintain a valuation allowance until evidence would support the conclusion that it is more likely than not that the DTA could be realized. On a gross basis (before valuation allowances), the Company had Federal NOL carry-forwards totaling $92.3 million as of December 31, 2006, which can be applied to future taxable income. Such loss carry-forwards have remaining lives ranging from 4 to 20 years.

     As of January 1, 2007, the Company adopted the provisions of FIN 48, which establishes guidance on the accounting for uncertain tax positions. FIN 48 provides for a recognition threshold and measurement attribute as part of a two-step tax position evaluation process prescribed in FIN 48. The cumulative effect of $0.8 million for adopting FIN 48 is recorded in retained earnings as an adjustment to accumulated deficit in the opening balance as of January 1, 2007. This adjustment primarily relates to a protest filed in response to an Internal Revenue Service (“IRS”) assessment of the 2000 tax year and the effect in subsequent years. The appeal is anticipated to be completed by the end of 2007. Upon audit, $2.2 million of deductions for location rental expenditures was disallowed. The Company has been granted an appeal. The Company believes the $2.2 million was an ordinary and necessary business expense deductible pursuant to Internal Revenue Code (“I.R.C.”) §162. As part of the 2001 through 2003 tax year audits, the IRS has identified similar concerns regarding the location rental expenditure deductions taken by the Company. The Company believes the deductions taken were ordinary and necessary business expenses, deductible pursuant to I.R.C. §162. The Company has reserved for the portion of the potential settlement in years 2001 – 2003 that is not offset by NOLs.

     As of June 30, 2007, the Company had a FIN 48 liability balance of $2.0 million. Of this amount, $1.5 million represented unrecognized tax benefits, which if recognized at some point in the future would favorably impact the effective tax rate and $0.5 million is interest. The Company continues to treat interest and penalties due to a taxing authority on unrecognized tax positions as interest and penalty expense. As of June 30, 2007, the Company recorded $0.5 million of accrued interest and penalties in the statement of financial position. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for the years before 2000 and state examinations for the years before 2003. The Company reasonably anticipates that as a result of audit settlements and statute closures over the next twelve months, the liability will be reduced through cash payments of approximately $1.0 million.

f. Equity Compensation

     We currently have several stock incentive plans that permit us to grant various types of share-based incentives to key employees, directors and consultants. The primary types of incentives granted under these plans are stock options and restricted shares of common stock. The Compensation Committee of the Board of Directors may grant up to a maximum of 10,000,000 underlying shares of common stock under the Martha Stewart Living Omnimedia, Inc. Amended and Restated 1999 Stock Incentive Plan (the “1999 Option Plan”), and up to a maximum of 600,000 underlying shares of common stock under the Company’s Non-Employee Director Stock and Option Compensation Plan (the “Non-Employee Director Plan”). In November 1997, the Company established the Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan (the “1997 Option Plan”). The Company has an agreement with Martha Stewart whereby she periodically returns to the Company shares of Class B common stock owned by her or her affiliates in amounts corresponding on a net treasury basis to the number of options exercised

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under the 1997 Option Plan during the relevant period. Accordingly, options outstanding under this plan are not dilutive. No further awards will be made from this plan.

     Effective January 1, 2006, non-cash compensation expense is measured under SFAS No. 123 (revised 2004) “Share-Based Payment,” (“SFAS 123(R)”) and SEC Staff Accounting Bulletin No. 107, using the modified prospective transition method, and includes non-cash compensation relating to grants issued prior to fiscal 2006.

     In consideration of the execution of a consulting agreement under which Mark Burnett, an influential producer of television programming, agreed to act as an advisor and consultant to the Company with respect to various television matters in September 2004, the Company issued to Mr. Burnett a warrant to purchase 2,500,000 shares of the Company’s Class A common stock at an exercise price of $12.59 per share. Under the initial agreement, the shares covered by the warrant would have vested and become exercisable in three tranches, subject to the achievement of various milestones achieved with respect to certain television programs. The first two tranches representing a total of 1,666,666 shares vested in 2005 and were exercised in 2006. However, under the terms of this warrant, the third tranche (i.e., 833,333 shares) did not vest. No shares remain eligible for issuance under this warrant.

     On August 11, 2006, in connection with Mr. Burnett’s continued services as executive producer of the syndicated daytime television show,The Martha Stewart Show, the Company issued an additional warrant to Mr. Burnett to purchase up to 833,333 shares at an exercise price of $12.59 per share, subject to vesting pursuant to certain performance criteria. During the first quarter of 2007, the portion of the warrant related to the clearance of season three of the syndicated show vested and was subsequently exercised. This vesting resulted in a charge of $5.6 million in the first quarter. Mr. Burnett exercised this portion of the warrant on a cashless basis, pursuant to which he acquired 154,112 shares and forfeited 262,555 shares based on the closing price of our Class A common stock of $19.98 the day prior to exercise. The remaining half of this warrant vested in July 2007 when the various milestones relating to the production ofThe Martha Stewart Showwere achieved. This warrant will expire on March 17, 2012. For the three and six month periods ended June 30, 2007, the Company recognized approximately $0.9 million and $6.6 million, respectively, in non-cash equity compensation related to this warrant. The non-cash equity compensation expense related to the vesting of the first tranche of the warrant was valued using the following average assumptions: risk-free interest rate – 5.06%; dividend yield – zero; expected volatility – 35.4%; contractual life – 5.13 years; average fair market value per option granted – $13.32. The non-cash equity compensation expense related to the amortization of the second tranche of the warrant was valued using the following average assumptions: risk-free interest rate – 4.64%; dividend yield – zero; expected volatility – 33.04%; contractual life – 4.72 years; average fair market value per option granted – $8.41.

     During the three and six month periods ended June 30, 2007, the Company charged $0.9 million to non-cash equity compensation expense in connection with the accelerated vesting of certain equity awards pursuant to non-recurring employee-related separation agreements.

g. Reclassifications

     Certain prior year financial information has been reclassified to conform to fiscal 2007 financial statement presentation.

h. Other

     Production, distribution and editorial expenses; selling and promotion expenses; and general and administrative expenses are all presented exclusive of depreciation and amortization which is shown separately within “Operating Costs and Expenses.”

2. Newsstand Adjustment

     The Company has historically paid newsstand-related fees based in part on certain estimates provided by our distribution partner. In the second quarter of 2006, we questioned amounts related to a portion of these bills. As a result of our negotiations with our distributor, we reached a settlement agreement pursuant to which we received a one-time refund in the amount of $3.2 million. The refund was recorded as a reduction to the Publishing segment’s selling and promotion costs line on our condensed consolidated statements of operations for the three and six months ended June 30, 2006. We also recorded interest income of $0.3 million related to the settlement.

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3. Inventories

     Inventory is comprised of paper stock. The inventory balance at June 30, 2007 and December 31, 2006 was $5.1 million and $4.4 million, respectively.

4. Loss per share

     Loss per share is computed in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”). Basic loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during each period. Diluted loss per share reflects the potential dilution that would occur from the exercise of stock options and warrants and the vesting of restricted stock.

     As of June 30, 2007 and 2006, antidilutive options, warrants, and restricted stock that are excluded from the computation of diluted earnings per share because the effect would have been antidilutive were 3,139,064 and 5,280,492 respectively.

5. Industry segments

     The Company is a leading creator of original how-to content and related products for homemakers and other consumers. The Company’s business segments are Publishing, Merchandising, Internet and Broadcasting. The Publishing segment primarily consists of the Company’s magazine operations, and also those related to its book operations. The Merchandising segment primarily consists of the Company’s operations related to the design of merchandise and related promotional and packaging materials that are distributed by its retail and manufacturing licensees in exchange for royalty income. The Internet segment consists of the advertising-supported websitemarthastewart.com, operations relating to direct-to-consumer floral business and sales of digital photo products. The Broadcasting segment primarily consists of the Company’s television production operations which produce television programming that airs in syndication and on cable, as well as the Company’s radio operations.

6. Related Party Transactions

     The Company currently has a consulting agreement with CAK Entertainment, Inc., an entity for which Mr. Charles Koppelman serves as Chairman and Chief Executive Officer. Mr. Koppelman was Chairman of the Board and a Director of the Company at the time of the agreement and thereafter. This October 2005 agreement superseded a previous consulting agreement with him, which was entered into while Mr. Koppelman was Vice Chairman and a Director. As of June 30, 2007, Mr. Koppelman has vested in 35% of the potential bonus compensation of this consulting agreement. During the second quarter of 2007, the Company and Mr. Koppelman agreed to amend the vesting conditions for a portion of the bonus compensation potentially payable to Mr. Koppelman and CAK Entertainment pursuant to the Company’s consulting agreement with CAK Entertainment. The amendment, attached as Exhibit 10.2 to this report, replaces a performance trigger tied to revenue goals with new performance criteria relating to adjusted EBITDA and acquisition goals. Additional details of the January 2005 and October 2005 agreements and a description of other related party transactions are included in the Company’s Annual Report on Form 10-K filed with the SEC Commission with respect to its fiscal year ended December 31, 2006.

7. Discontinued Operations

     In June 2002, the Company decided to exit The Wedding List, a wedding registry and gift business that was reported within the Internet business segment. In the second quarter of 2006, a review of the accrual of future lease commitments, net of anticipated sublease rental income, resulted in a charge of $0.4 million. The anticipated sublease income was determined by estimating future cash flows based upon current market conditions. In the third quarter of 2006, the Company signed a sublease. Based on the sublease agreement, as well as the additional reserve taken in the second quarter of 2006, we do not anticipate any further losses from discontinued operations. The loss from operations, which is generated primarily from facility related expenses, was as follows (in thousands):

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007		2006			2007		2006
Loss from operations		—	$	(499	)		—	$	(622	)

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     In this report, the terms “we,” “us,” “our” and “Company” refer to Martha Stewart Living Omnimedia, Inc., and its subsidiaries.

EXECUTIVE SUMMARY

     We believe that our second quarter results demonstrate the continuing growth and diversification of the Company. In the quarter, the Company hired a President of Media, consolidating the positions of President, Publishing and President, Internet and centralizing sales and marketing across all media. We anticipate that this will allow the Company to focus on internet expansion and cross platform content and advertising opportunities. To that end, the Company also made a strategic decision to reallocate some of our long-term investment inBlueprintto our Internet segment. We continued to increase our advertising pages and rates in our magazines, entered into a five-year 10-book agreement with Clarkson Potter/Publishers and launched our introductoryMartha Stewart Craftsline of paper-based crafting and storage products at Michaels arts and crafts stores.

Publishing Update.In the second quarter of 2007, we continued to benefit from an increase in advertising pages and rates across our magazines and, based on current trends, we expect to see continued year-over-year growth in this regard in the near-term. The Company announced an agreement with Clarkson Potter/Publishers to publish 10 books over a five-year period, beginning this fall withMartha Stewart Living Cookbook Volume I: The Original ClassicsandMartha Stewart Living Cookbook Volume II: The New Classics.

Merchandising Update.TheMartha Stewart Collectionexclusively at Macy’s andmacys.comis currently rolling into stores and is expected to officially launch with an extensive marketing campaign later in the third quarter of 2007. The line encompasses a broad range of home goods, including bed and bath textiles, housewares, casual dinnerware, flatware and glassware, cookware, holiday decorating, and tree-trimming items.

     Earlier in the second quarter of 2007, we announced an agreement to sell a co-branded food line with Costco to focus on high-quality, high-volume fresh, frozen and refrigerated foods. We also announced a multiyear endorsement deal with U.S. affiliates of SVP Worldwide, makers ofSinger,Husqvarna VikingandPfaffsewing machines. Under the agreement, the Company will endorse and promoteSinger,Husqvarna VikingandPfaffsewing machines and accessories. Additionally, we will air demonstrations of the sewing products onThe Martha Stewart Showperiodically through the current and upcoming seasons.

     In the second quarter of 2007, we launched two retail programs: ourMartha Stewart Colors paint program that is currently sold at over 1,400 Lowe’s home improvement stores nationwide, and ourMartha Stewart Craftsline at more than 900 Michaels arts and crafts stores and onmarthastewartcrafts.com.

     In the third quarter of 2007, we intend to expand our home decorating portfolio with the launches ofMartha Stewart Floor Designswith FLOR,Martha Stewart Rugsand the portable lighting component of ourMartha Stewart Lightingline.

Kmart Agreement.The Company’s agreement with Kmart provides for certain minimum guaranteed royalty payments. The minimum guarantees have and are expected to exceed actual royalties earned from retail sales through January 31, 2008 due to past store closings, lower same-store sales trends and decreased assortment of product categories. For the contract years ending January 31, 2009 and 2010, the minimum guarantees will be substantially lower than in prior years. The specific computation is discussed in the paragraph below. The following are the minimum guaranteed royalty payments (in millions) over the term of the agreement:

	1/31/02		1/31/03		1/31/04		1/31/05		1/31/06		1/31/07		1/31/08		1/31/09		1/31/10
Minimum Royalty Amounts	$	15.3	$	40.4	$	47.5	$	49.0	$	54.0	$	59.0	$	65.0	$	20.0	$	15.0

11

     For the year ending January 31, 2009, the minimum royalty amount is the greater of $20 million or 50% of the earned royalty for the year ending January 31, 2008. For the year ending January 31, 2010, the minimum royalty amount is the greater of $15 million or 50% of the earned royalty for the year ending January 31, 2009.

     For the year ended January 31, 2007, our royalty based on retail sales was $29.5 million. Furthermore, $10.0 million of royalties previously paid have been deferred and are subject to recoupment in the periods ending January 31, 2009 and January 31, 2010.

Internet Update.In the second quarter of 2007, we formally launched the re-designed website,marthastewart.com. We will continue to add content and optimize the site as part of our efforts to grow our online audience and share of the online advertising market.

Broadcasting Update.Upfront advertising sales are nearly complete for season three ofThe Martha Stewart Show, which will be broadcast in approximately 95% of markets nationwide. The Company recently announced a distribution deal with the DIY Network for a new half-hour series,The Martha Stewart CraftsTV show. Set to premiere in the fourth quarter of 2007, the initial 39 episodes will be culled from the Company’s original lifestyles series,Martha Stewart Living.

Subsequent Event.After the close of the quarter, we invested $10 million in an entity primarily funded by GTCR Golder Rauner, LLC that acquired Wilton Industries, Inc. and Dimensions Holdings, LLC. This entity, renamed Wilton Products, Inc. already owns EK Success. In connection with our investment in Wilton Products, we renegotiated the terms of our prior equity holdings and extended our license into the area of crafting associated with Wilton Industries, namely food crafts (such as cake decoration), party favors and celebrations.

12

Results of Operations

Comparison of Three Months Ended June 30, 2007 to Three Months Ended June 30, 2006

PUBLISHING SEGMENT
(in thousands)

	2007		2006
	(unaudited)		(unaudited)		Variance
Publishing Revenue
Advertising	$	27,840	$	22,624	$	5,216
Circulation		18,343		17,768		575
Other		1,295		496		799
Total Publishing Segment Revenue		47,478		40,888		6,590
Publishing Operating Costs and Expenses
Production, distribution and editorial		23,497		21,771		(1,726	)
Selling and promotion		17,809		12,201		(5,608	)
General and administrative		827		719		(108	)
Depreciation and amortization		295		135		(160	)
Total Publishing Operating Costs and Expenses		42,428		34,826		(7,602	)
Operating Income	$	5,050	$	6,062	$	(1,012	)

     Publishing revenues increased $6.6 million, or 16%, to $47.5 million for the three months ended June 30, 2007, from $40.9 million for the three months ended June 30, 2006. Advertising revenue increased $5.2 million, primarily due to an increase in both advertising pages and rate inMartha Stewart Livingmagazine, which accounted for $3.2 million of the increase.Everyday FoodandBody + Soulalso contributed $1.5 million of the increase to advertising revenue due to increased pages and rate. Circulation revenue increased $0.6 million primarily due to a special issue ofMartha Stewart Weddingspublished in 2007, with no comparable 2006 issue. Other revenue increased $0.8 million primarily due to the delivery of one book in the quarter related to the new 10-book agreement with Clarkson Potter/Publishers.

Magazine Publication Schedule

	Second Quarter 2007	Second Quarter 2006
Martha Stewart Living	Three Issues	Three Issues
Everyday Food	Three Issues	Three Issues
Martha Stewart Weddings	Three Issues	Two Issues
Blueprint	One Issue	One Issue
Body + Soul	Two Issues	Two Issues
Dr. Andrew Weil’s Self Healing Newsletter	Three Issues	Three Issues

     Production, distribution and editorial expenses increased $1.7 million, primarily reflecting the higher physical costs associated with the increase in advertising pages and circulation ofMartha Stewart Living. Selling and promotion expenses increased $5.6 million, primarily due to a favorable 2006 one-time newsstand expense reduction adjustment of $3.2 million related to the settlement of certain newsstand-related fees. Additionally, selling and promotion expenses increased due to a 2007 non-recurring, employee-related separation charge and higher compensation costs as well as higher marketing costs associated withEveryday Food. Included within the Publishing segment is a $2.0 million investment inBlueprintcompared to an investment of $1.7 million in the prior year quarter.

13

MERCHANDISING SEGMENT
(in thousands)

	Three Months Ended June 30,
	2007		2006
	(unaudited)		(unaudited)		Variance
Merchandising Revenue
Kmart earned royalty	$	6,791	$	8,649	$	(1,858	)
Other		3,561		2,242		1,319
Total Merchandising Segment Revenue		10,352		10,891		(539	)
Merchandising Operating Costs and Expenses
Production, distribution and editorial		3,111		2,911		(200	)
Selling and promotion		1,958		821		(1,137	)
General and administrative		1,736		1,787		51
Depreciation and amortization		97		254		157
Total Merchandising Operating Costs and Expenses		6,902		5,773		(1,129	)
Operating Income	$	3,450	$	5,118	$	(1,668	)

     Merchandising revenues decreased $0.5 million, or 5%, to $10.4 million for the three months ended June 30, 2007, from $10.9 million for the three months ended June 30, 2006. Actual retail sales of our product at Kmart declined 21% on a comparable store basis and 22% on a total store basis. The royalty rate under our agreement with Kmart increased approximately 3% on February 1, 2007. We expect the minimum guarantees will exceed actual royalties earned from retail sales through January 31, 2008 due to store closings, lower same-store sales trends and decreased assortment of product categories. For the contract years ending January 31, 2009 and 2010, the minimum guarantees will be substantially lower than prior years. Other revenue increased due to services we provided to our partners for creative services projects including KB Home model merchandising and other related projects. Other revenue also increased due to sales ofMartha Stewart Craftsas well as other new initiatives.

     Selling and promotion expenses increased $1.1 million primarily due to services we provided to our partners for creative services projects including KB Home model merchandising and other related projects.

14

INTERNET SEGMENT
(in thousands)

	Three Months Ended June 30,
	2007			2006
	(unaudited)			(unaudited)		Variance
Internet
Advertising	$	2,480		$	2,123	$	357
Product		2,703			2,511		192
Total Internet Segment Revenue		5,183			4,634		549
Internet Operating Costs and Expenses
Production, distribution and editorial		4,149			3,117		(1,032	)
Selling and promotion		1,806			948		(858	)
General and administrative		1,023			495		(528	)
Depreciation and amortization		349			68		(281	)
Total Internet Operating Costs and Expenses		7,327			4,628		(2,699	)
Operating Income/(Loss)	$	(2,144	)	$	6	$	(2,150	)

     Internet revenues increased $0.5 million, or 12%, to $5.2 million for the three months ended June 30, 2007, from $4.6 million for the three months ended June 30, 2006. Advertising revenue increased $0.4 million due to higher advertising rates and higher sales of advertising inventory. Higher revenue from our direct-to-consumer floral business contributed to the increase in product revenue of $0.2 million.

     Production, distribution and editorial costs increased $1.0 million due primarily to higher compensation costs. Selling and promotion expense increased $0.9 million related to media buying costs to market the website as well as higher compensation expenses. General and administrative expenses increased $0.5 million due to increases in personnel and facilities allocations. Depreciation and amortization expenses increased $0.3 million due to the 2007 launch of the redesigned website and the related depreciation costs.

15

BROADCASTING SEGMENT
(in thousands)

	Three Months Ended June 30,
	2007			2006
	(unaudited)			(unaudited)		Variance
Broadcasting Revenue
Advertising	$	4,740		$	3,918	$	822
Radio		1,875			1,876		(1	)
Licensing and other		3,818			5,963		(2,145	)
Total Broadcasting Segment Revenue		10,433			11,757		(1,324	)
Broadcasting Operating Costs and Expenses
Production, distribution and editorial		8,124			7,699		(425	)
Selling and promotion		599			817		218
General and administrative		1,744			2,062		318
Depreciation and amortization		837			755		(82	)
Total Broadcasting Operating Costs and Expenses		11,304			11,333		29
Operating Income/(Loss)	$	(871	)	$	424	$	(1,295	)

     Broadcasting revenues decreased $1.3 million, or 11%, to $10.4 million for the quarter ended June 30, 2007, from $11.8 million for the quarter ended June 30, 2006. Advertising revenue increased due to a greater number of product integrations at higher rates than in the prior year period, and an increase in advertising rates, partially offset by a decline in ratings. Licensing revenue decreased primarily due to the lack of distribution in the secondary cable market for season 2 ofThe Martha Stewart Show. Additionally, licensing revenue decreased due to the timing of season 2 international renewals as well as lower license fees from stations for season 2 compared to season 1.

     Production, distribution and editorial expenses increased $0.4 million due principally to non-cash charges associated with the vesting of a portion of a warrant granted in connection with the production of the syndicated TV program. These costs are partially offset by lower production costs for season 2 ofThe Martha Stewart Showcompared to season 1. General and administrative expenses decreased $0.3 million due to lower professional fees and the reduction of 2007 facility expenses due to the shutdown of the Connecticut television studios.

16

CORPORATE
(in thousands)

	Three Months Ended June 30,
	2007			2006
	(unaudited)			(unaudited)			Variance
Corporate Operating Costs and Expenses
General and administrative	$	12,590		$	12,384		$	(206	)
Depreciation and amortization		685			1,024			339
Total Corporate Operating Costs and Expenses		13,275			13,408			133
Operating (Loss)	$	(13,275	)	$	(13,408	)	$	133

     Corporate operating costs and expenses decreased $0.1 million, or 1%, to $13.3 million for the three months ended June 30, 2007, from $13.4 million for the three months ended June 30, 2006. General and administrative expenses increased $0.2 million, largely due to non-recurring, employee-related separation costs. Depreciation and amortization expenses decreased $0.3 million as certain computer software assets are now fully depreciated.

OTHER ITEMS

Interest Income, net.Interest income, net, was $0.8 million for the quarter ended June 30, 2007, compared to $1.4 million for the prior year quarter. The decrease was attributable primarily to lower average balances of cash, cash equivalents and short-term investment balances as compared to the prior year quarter.

Income tax expense. Income tax expense for both quarters ended June 30, 2007 and June 30, 2006 was $0.2 million.

Loss from discontinued operations. The Company had no loss from discontinued operations in the current period compared to a loss of $(0.5) million for the quarter ended June 30, 2006. Discontinued operations represent the operations of The Wedding List, which the Company divested in 2002. The prior year expenses are related primarily to facilities.

Net Loss. Net loss was $(6.7) million for the quarter ended June 30, 2007, compared to a net loss of $(1.2) million for the quarter ended June 30, 2006, as a result of the factors described above.

17

Comparison of Six Months Ended June 30, 2007 to Six Months Ended June 30, 2006

PUBLISHING SEGMENT
(in thousands)

	2007		2006
	(unaudited)		(unaudited)		Variance
Publishing Revenue
Advertising	$	49,209	$	40,461	$	8,748
Circulation		36,422		35,439		983
Other		2,465		1,276		1,189
Total Publishing Segment Revenue		88,096		77,176		10,920
Publishing Operating Costs and Expenses
Production, distribution and editorial		44,989		42,016		(2,973	)
Selling and promotion		34,405		27,371		(7,034	)
General and administrative		1,764		1,461		(303	)
Depreciation and amortization		588		319		(269	)
Total Publishing Operating Costs and Expenses		81,746		71,167		(10,579	)
Operating Income	$	6,350	$	6,009	$	341

     Publishing revenues increased $10.9 million, or 14%, to $88.1 million for the six months ended June 30, 2007, from $77.2 million for the six months ended June 30, 2006. Advertising revenue increased $8.7 million, primarily due to an increase in both advertising pages and rate inMartha Stewart Livingmagazine, which accounted for $5.3 million of the increase.Everyday FoodandBody + Soulalso contributed $2.8 million of the increase to advertising revenue due to increased pages and rate. Circulation revenue increased $1.0 million primarily due to a special issue ofMartha Stewart Weddingspublished in 2007, with no comparable 2006 issue, as well as two issues ofBlueprintpublished in 2007 as compared to one test issue in 2006. The increase is partially offset by lower Special Interest Publication circulation revenue which included prior year subscription and newsstand revenue while the current period was newsstand only. Other revenue increased $1.2 million primarily due to the delivery of one book in the period related to the new 10-book agreement with Clarkson Potter/Publishers as well as the release of the book,Everyday Food: Great Food Fast.

Magazine Publication Schedule

	First Half 2007	First Half 2006
Martha Stewart Living	Six Issues	Six Issues
Everyday Food	Six Issues	Six Issues
Martha Stewart Weddings	Three Issues	Two Issues
Blueprint	Two Issues	One Issue
Body + Soul	Four Issues	Four Issues
Dr. Andrew Weil’s Self Healing Newsletter	Six Issues	Six Issues
Special Interest Publications	Two Issues	Two Issues

     Production, distribution and editorial expenses increased $3.0 million, primarily reflecting the higher physical costs associated with the increase in advertising pages and circulation ofMartha Stewart Livingas well as the costs associated with publishing two issues ofBlueprintin 2007 as compared to one test issue in 2006. Selling and promotion expenses increased $7.0 million, primarily due to a favorable 2006 one-time newsstand expense reduction adjustment of $3.2 million related to the settlement of certain newsstand-related fees. Additionally, selling and promotion expenses increased due to a 2007 non-recurring, employee-related separation charge, higher compensation costs, an increase in newsstand distribution ofMartha Stewart Livingand higher marketing costs associated withEveryday Food. Included within the Publishing segment is a $3.8 million investment inBlueprintcompared to an investment of $2.7 million for the six months ended June 30, 2006.

18

MERCHANDISING SEGMENT
(in thousands)

	Six Months Ended June 30,
	2007		2006
	(unaudited)		(unaudited)		Variance
Merchandising Revenue
Kmart earned royalty	$	12,745	$	15,069	$	(2,324	)
Kmart minimum true-up		2,648		2,193		455
Other		8,559		5,156		3,403
Total Merchandising Segment Revenue		23,952		22,418		1,534
Merchandising Operating Costs and Expenses
Production, distribution and editorial		6,384		6,043		(341	)
Selling and promotion		3,607		1,149		(2,458	)
General and administrative		3,542		3,407		(135	)
Depreciation and amortization		193		508		315
Total Merchandising Operating Costs and Expenses		13,726		11,107		(2,619	)
Operating Income	$	10,226	$	11,311	$	(1,085	)

     Merchandising revenues increased $1.5 million, or 7%, to $24.0 million for the six months ended June 30, 2007, from $22.4 million for the six months ended June 30, 2007. Actual retail sales of our product at Kmart declined 19% on a comparable store basis and 20% on a total store basis. The royalty rate under our agreement with Kmart increased approximately 3% on February 1, 2007. The pro-rata portion of revenue related to the contractual minimum amounts covering the current period, net of amounts subject to recoupment, is listed separately above. For the contract years ending January 31, 2009 and 2010, the minimum guarantees will be substantially lower than prior years. We expect the minimum guarantees will exceed actual royalties earned from retail sales through January 31, 2008 primarily due to store closings, lower same-store sales trends and decreased assortment of product categories. Other revenue increased largely due to the execution of the endorsement and promotional agreement with U.S. affiliates of SVP Worldwide, makers ofSinger,Husqvarna VikingandPfaffsewing machines. Additionally, other revenue increased due to services we provided to our partners for creative services projects including KB Home model merchandising and other related projects. Sales of new initiatives includingMartha Stewart Craftscontributed to other revenue as well.

     Selling and promotion expenses increased $2.5 million primarily due to services we provided to our partners for creative services projects including KB Home model merchandising and other related projects.

19

INTERNET SEGMENT
(in thousands)

	Six Months Ended June 30,
	2007			2006
	(unaudited)			(unaudited)		Variance
Internet
Advertising	$	4,246		$	3,402	$	844
Product		4,467			4,180		287
Total Internet Segment Revenue		8,713			7,582		1,131
Internet Operating Costs and Expenses
Production, distribution and editorial		7,862			5,025		(2,837	)
Selling and promotion		3,005			1,577		(1,428	)
General and administrative		1,988			874		(1,114	)
Depreciation and amortization		505			103		(402	)
Total Internet Operating Costs and Expenses		13,360			7,579		(5,781	)
Operating Income/(Loss)	$	(4,647	)	$	3	$	(4,650	)

     Internet revenues increased $1.1 million, or 15%, to $8.7 million for the six months ended June 30, 2007, from $7.6 million for the six months ended June 30, 2006. Advertising revenue increased $0.8 million due to higher advertising rates and higher sales of advertising inventory.

     Production, distribution and editorial costs increased $2.8 million due primarily to higher compensation costs and technology expenses. Selling and promotion expense increased $1.4 million due to higher compensation expenses associated with developing an internet advertising sales force and higher media buying costs to market the website. General and administrative expenses increased $1.1 million due to increases in personnel and facilities allocations. Depreciation and amortization expenses increased $0.4 million due to the 2007 launch of the redesigned website and the related depreciation costs.

20

BROADCASTING SEGMENT
(in thousands)

	Six Months Ended June 30,
	2007			2006
	(unaudited)			(unaudited)		Variance
Broadcasting Revenue	��
Advertising	$	8,283		$	8,301	$	(18	)
Radio		3,750			3,751		(1	)
Licensing and other		7,356			11,025		(3,669	)
Total Broadcasting Segment Revenue		19,389			23,077		(3,688	)
Broadcasting Operating Costs and Expenses
Production, distribution and editorial		19,374			15,163		(4,211	)
Selling and promotion		1,386			1,684		298
General and administrative		3,899			4,623		724
Depreciation and amortization		1,699			1,500		(199	)
Total Broadcasting Operating Costs and Expenses		26,358			22,970		(3,388	)
Operating Income/(Loss)	$	(6,969	)	$	107	$	(7,076	)

     Broadcasting revenues decreased $3.7 million, or 16%, to $19.4 million for the six months ended June 30, 2007, from $23.1 million for the six months ended June 30, 2006. Advertising revenue decreased slightly due to a decline in ratings partially offset by a greater number of product integrations at higher rates than in the prior year period, as well as an increase in advertising rates. Licensing revenue decreased primarily due to the lack of distribution in the secondary cable market for season 2 ofThe Martha Stewart Show. Additionally, licensing revenue decreased due to the timing of season 2 international renewals as well as lower license fees from stations for season 2 compared to season 1.

     Production, distribution and editorial expenses increased $4.2 million due principally to a non-cash charge of $6.6 million associated with the vesting of a portion of a warrant granted in connection with the production of the syndicated TV program. These costs are partially offset by lower production costs forThe Martha Stewart Showwhich are approximately $1.7 million less for season 2 compared to season 1. General and administrative expenses decreased $0.7 million due to a 2006 asset write-down as well as the reduction of 2007 facility expenses due to the shutdown of the Connecticut television studios.

21

CORPORATE
(in thousands)

	Six Months Ended June 30,
	2007			2006
	(unaudited)			(unaudited)			Variance
Corporate Operating Costs and Expenses
General and administrative	$	24,046		$	24,904		$	858
Depreciation and amortization		1,256			2,014			758
Total Corporate Operating Costs and Expenses		25,302			26,918			1,616
Operating (Loss)	$	(25,302	)	$	(26,918	)	$	1,616

     Corporate operating costs and expenses decreased $1.6 million, or 6%, to $25.3 million for the six months ended June 30, 2007, from $26.9 million for the six months ended June 30, 2006. General and administrative expenses decreased $0.9 million principally due to lower non-cash compensation costs partially offset by non-recurring, employee-related separation costs. Depreciation and amortization expenses decreased $0.8 million as certain computer software assets are now fully depreciated.

OTHER ITEMS

Interest Income, net.Interest income, net, was $1.5 million for the six months ended June 30, 2007, compared to $2.4 million for the prior year period. The decrease was attributable primarily to lower average balances of cash, cash equivalents and short-term investment balances as compared to the prior year quarter partially offset by higher average interest rates.

Income tax expense. Income tax expense for the six months ended June 30, 2007 was $0.2 million, compared to income tax expense of $0.3 million for the six months ended June 30, 2006.

Loss from discontinued operations. The Company had no loss from discontinued operations in the current period compared to a loss of $(0.6) million for the six months ended June 30, 2006. Discontinued operations represent the operations of The Wedding List, which the Company divested in 2002. The prior year expenses are related primarily to facilities.

Net Loss. Net loss was $(18.6) million for the six months ended June 30, 2007, compared to a net loss of $(8.0) million for the six months ended June 30, 2006, as a result of the factors described above.

22

Liquidity and Capital Resources

Overview

     In the first half of 2007, we improved our overall liquidity by generating positive cash flow from operations. Cash, cash equivalents and short-term investments were $81.9 million and $63.8 million at June 30, 2007 and December 31, 2006, respectively. Our cash flow from operations largely benefited from the satisfaction of a year-end receivable due from Kmart in the amount of $38.2 million. We believe, as described further below, that our available cash balances and short-term investments together with continued positive cash flow from operations will be sufficient to meet our operating and recurring cash needs for 2007.

Cash Flows from Operating Activities

     Cash flows provided by operating activities were $22.8 million and $15.1 million for the six months ended June 30, 2007 and 2006, respectively. In 2007, cash flow from operations was primarily due to the changes in operating assets and liabilities of $24.3 million, the majority of which was the result of the satisfaction of a year-end receivable due from Kmart. Operating assets and liabilities also benefited from an increase in deferred revenue as certain of our media deals have been pre-paid, partially offset by the increase in Publishing accounts receivable due to higher advertising sales across our publications.

Cash Flows from Investing Activities

     Cash flows provided by (used in) investing activities were $(12.7) million and $0.6 million for the six months ended June 30, 2007 and 2006, respectively. Cash flows used in investing activities in the first quarter of 2007 resulted from purchases of short-term investments of $(103.0) million and capital expenditures of $(2.7) million partially offset by sales of short-term investments of $93.0 million. Cash provided from operations as described above enabled the purchases of short-term investments and capital expenditures. Cash used for capital expenditures was due to the addition of a fractional ownership interest in a corporate aircraft and the continued investment in the websitemarthastewart.com.

Cash Flows from Financing Activities

     Cash flows provided by (used in) financing activities were $(2.1) million and $0.3 million for the six months ended June 30, 2007 and 2006, respectively. Cash flows used in financing activities were primarily due to the cash costs associated with remitting payroll related tax obligations associated with the vesting of certain restricted stock grants partially offset by proceeds received from exercise of stock options.

Other

     We also have a line of credit with Bank of America in the amount of $5.0 million, which is generally used to secure outstanding letters of credit. Under the terms of the credit agreement, the Company is required to satisfy certain debt covenants which we were compliant with as of June 30, 2007. We had no outstanding borrowings under this facility as of June 30, 2007. Of a total line of $5.0 million, we currently have letters of credit drawn on $2.1 million.

Seasonality and Quarterly Fluctuations

     Several of our businesses can experience fluctuations in quarterly performance. Our Publishing segment results can vary from quarter to quarter due to publication schedules. Revenues from our Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonality of certain product lines. In addition, we recognize a substantial portion of the revenue resulting from the difference between the minimum royalty amount under the Kmart contract and royalties paid on actual sales in the fourth quarter of each year, when the amount can be determined. In our Internet segment, revenue frommarthastewartflowers.comis tied to key holidays during the year, while advertising revenue onmarthastewart.comis tied to traffic among other key factors and is typically highest in the fourth quarter of the year. Advertising revenue from our Broadcasting segment is highly dependent on ratings which fluctuate throughout the television season following general viewer trends. Ratings tend to be highest during the fourth quarter and lowest in the summer months.

23

Off-Balance Sheet Arrangements

     We have no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

General

 ��   Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, deferred production costs, long-lived assets and accrued losses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     We believe that, of our significant accounting policies, the following may involve the highest degree of judgment and complexity.

Revenue Recognition

     We recognize revenues when realized or realizable and earned. Revenues and associated accounts receivable are recorded net of provisions for estimated future returns, doubtful accounts and other allowances.

     The Emerging Issues Task Force reached a consensus in May 2003 on Issue No. 0021, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”) which became effective for revenue arrangements entered into in the third quarter of 2003. In an arrangement with multiple deliverables, EITF 00-21 provides guidance to determine a) how the arrangement consideration should be measured, b) whether the arrangement should be divided into separate units of accounting, and c) how the arrangement consideration should be allocated among the separate units of accounting. The Company has applied the guidance included in EITF 00-21 in establishing revenue recognition policies for its arrangements with multiple deliverables. For agreements with multiple deliverables, if the Company is unable to put forth vendor specific objective evidence required under EITF 00-21 to determine the fair value of each deliverable, then the Company will account for the deliverables as a combined unit of accounting rather than separate units of accounting.

     Publishing advertising revenue is recorded upon release of magazines for sale to consumers and is stated net of agency commissions and cash and sales discounts. Subscription revenue is recognized on a straight-line basis over the life of the subscription as issues are delivered. Newsstand revenues in our Publishing segment are recognized based upon assumptions with respect to future returns. We base our estimates on our historical experience and current market conditions. Reserves are adjusted regularly based upon actual results. We maintain allowance for doubtful accounts for estimated losses resulting from the inability of our customers or licensing counterparties to make required payments. If the financial condition of our customers or licensing counterparties were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. Licensing based revenue, most of which are in our Merchandising segment, are accrued on a monthly basis based on the specific terms of each contract. Under certain agreements, revenue is accrued based on actual sales while others contain minimum guarantees that are earned evenly over the fiscal year. Revenue related to our agreement with Kmart is recorded on a monthly basis based on actual retail sales, until the last period of the year, when we recognize a substantial majority of the true-up between the minimum royalty amount and royalties paid on actual sales, when such amounts are determinable. Payments are generally made by our partners on a quarterly basis. Internet advertising revenues are generally based on the sale of impression-based advertisements, which are recorded in the period in which the advertisements are delivered. Television advertising revenues are recorded when the related commercial is aired and is recorded net of agency commission, estimated reserves for television audience underdelivery and distribution fees. Television royalties are recorded as earned in accordance with specific terms of each agreement.

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Income taxes

     The Company follows the SFAS 109, “Accounting for Income Taxes.” Under the asset and liability method of SFAS 109, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in management’s judgment about the future realization of deferred tax assets. SFAS 109 places more emphasis on historical information, such as the Company’s cumulative operating results and its current year results than it places on estimates of future taxable income.

     As of January 1, 2007, the Company adopted the provisions of FIN 48, which provides guidance on the accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold which a tax position is required to meet before being recognized in the financial statements. It further provides guidance on derecognition and measurement of tax positions. Disclosure requirements under this guidance includes a rollforward of the beginning and ending unrecognized tax benefits as well as specific detail related to tax uncertainties for which it is reasonably possible the amount of unrecognized tax benefit will significantly increase or decrease within a year. FIN 48 is effective for fiscal years beginning after December 15, 2006. See Note 1(e) to the consolidated financial statements for further discussion on the adoption of FIN 48.

Television production costs

     Television production costs are capitalized and amortized based upon estimates of future revenues to be received and future costs to be incurred for the applicable television product. The Company bases its estimates on existing contracts for programs, historical advertising rates and ratings as well as market conditions. Estimated future revenues and costs are adjusted regularly based upon actual results and changes in market and other conditions.

Intangible assets

     A substantial portion of our intangible assets is goodwill. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. All of the Company’s goodwill is attributable to certain magazines in its Publishing segment. We perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill is impaired. Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value.

Long-Lived Assets

     We review the carrying values of our long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Unforeseen events and changes in circumstances and market conditions and material differences in the value of long-lived assets due to changes in estimates of future cash flows could negatively affect the fair value of our assets and result in an impairment charge.

Advertising Cost

     Advertising costs, consisting primarily of direct-response advertising, are expensed in the period in which the advertising effort takes place.

Non-cash Equity Compensation

     We currently have several stock incentive plans that permit us to grant various types of share-based incentives to key employees, directors and consultants. The primary types of incentives granted under these plans are restricted shares of common stock and stock options. Restricted shares are valued at the market value of traded shares on the date of grant, while stock options are valued using a Black-Scholes option pricing model. The Black-Scholes option pricing model requires numerous assumptions, including expected volatility of our stock price and expected life of the option.

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Deferred Income Tax Asset Valuation Allowance

     We record a valuation allowance to reduce our deferred income tax assets to the amount that is more likely than not to be realized. In evaluating our ability to recover our deferred income tax assets, we consider all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. Our cumulative pre-tax loss in the three most recent fiscal years represents sufficient negative evidence for us to determine that the establishment of a full valuation allowance against the deferred tax asset is appropriate. This valuation allowance offsets deferred tax assets associated with future tax deductions as well as carryforward items. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes. See Note 1(e), “Income Taxes” in the consolidated financial statements for additional information.

Forward-looking Statements and Risk Factors

     This Quarterly Report includes certain “forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts but instead represent only our current beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. These statements can be identified by terminology such as “may,” “will,” “should,” “could”, “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “potential” or “continue” or the negative of these terms or other comparable terminology. The Company’s actual results may differ materially from those projected in these statements, and factors that could cause such differences include the following among others:

o adverse reactions to publicity relating to Martha Stewart by consumers, advertisers and business partners;

o a loss of the services of Ms. Stewart;

o a loss of the services of other key personnel;

o failure to predict, respond to and influence trends in consumer taste;

o loss or failure of merchandising and licensing programs;

o failure to protect our intellectual property;

o a softening of the domestic advertising market;

o changes in consumer reading, purchasing, Internet and/or television viewing patterns;

o unanticipated increases in paper, postage or printing costs;

o operational or financial problems at any of our contractual business partners;

o the receptivity of consumers to our new product introductions; and

o changes in government regulations affecting the Company’s industries.

     Certain of these and other factors are discussed in more detail in the Company’s most recent Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 14, 2007, particularly under the heading “Item 1A. Risk Factors,” which may be accessed through the SEC’s World Wide Web site at http://www.sec.gov. The Company cautions you not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date of this Quarterly Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements contained in this Quarterly Report, whether as a result of new information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

None.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

     Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we record, process, summarize and report the information we must disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, within the time periods specified in the SEC’s rules and forms.

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Evaluation of Changes in Internal Control over Financial Reporting

     Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have determined that, during the second quarter of fiscal 2007, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

     There have been no material changes from legal proceedings as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

ITEM 1A. RISK FACTORS

     There have been no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

     The following table provides information about the Company’s purchases of its common stock during each month of the quarter ended June 30, 2007:

	(a)		(b)		(c)	(d)
						Maximum Number (or
					Total Number of	Approximate Dollar
					Shares (or Units)	Value) of Shares (or
	Total Number of				Purchased as Part of	Units) that may yet be
	Shares (or Units)		Average Price Paid		Publicly Announced	Purchased under the
Period	Purchased		per Share (or Unit)		Plans or Programs	Plans or Programs
Quarter ended June 30, 2007:
April 1-30, 2007(1)		5,380	$	17.86	Not applicable	Not applicable
May 1-31, 2007(1)		3,446		18.40	Not applicable	Not applicable
June 1-30, 2007(1)		6,902		17.48	Not applicable	Not applicable
Total for quarter ended June 30, 2007		15,728	$	17.98	Not applicable	Not applicable

(1) Represents shares withheld by, or delivered to, the Company pursuant to provisions in agreements with recipients of restricted stock granted under the Company’s stock incentive plan allowing the Company to withhold, or the recipient to deliver to the Company, the number of shares having the fair value equal to tax withholding due.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

(a) We held our 2007 Annual Meeting of Stockholders on May 16, 2007.

(b) During the Annual Meeting, holders of Class A Common Stock and Class B Common Stock, voting as one class, voted to elect eight directors to our Board of Directors, each to hold office for a term of approximately one year ending on the date of our next succeeding annual meeting of stockholders

Board of Directors Election Results

	Votes For		Votes Withheld
Rick Boyko		19,633,476		3,116,494
Michael Goldstein		22,192,768		557,202
Jill Greenthal		22,321,219		428,751
Charles A. Koppelman		21,933,308		816,663
Susan Lyne		22,373,634		376,337
Wenda Harris Millard*		22,288,380		461,591
Thomas C. Siekman		22,271,762		478,208
Bradley E. Singer		22,208,910		541,061

* In connection with her appointment as President of Media of the Company, Ms. Millard resigned from the Board of Directors as of July 16, 2007.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.

(a) Exhibits

The following exhibits are filed as part of this report:

Exhibit
Number	Exhibit Title
3.1	Martha Stewart Living Omnimedia, Inc.’s Certificate of Incorporation (incorporated by reference to our Registration Statement on Form S-1, File Number 333-84001 (the “Registration Statement”)).
3.2	Martha Stewart Living Omnimedia, Inc.’s By-Laws (incorporated by reference to the Registration Statement).
10.1	Letter Agreement between Martha Stewart Living Omnimedia, Inc. and Robin Marino – Modification of employment arrangement and grant of restricted stock (incorporated by reference to our Current Report on Form 8-K filed May 1, 2007).
10.2	Letter Agreement between Martha Stewart Living Omnimedia, Inc. and CAK Entertainment – Amendment to the October 21, 2005 Consulting Agreement. *
31.1	Certification of Chief Executive Officer *
31.2	Certification of Chief Financial Officer *
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) *

* filed herewith

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MARTHA STEWART LIVING OMNIMEDIA, INC.
Date:	August 9, 2007
	/s/ Howard Hochhauser
Name:	Howard Hochhauser
Title:	Chief Financial Officer
	(Principal Financial Officer and duly authorized officer)

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