##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 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.
  Delaware
    
    52-2187059(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 11 West 42nd Street, New York, New York
(Address of Principal Executive Offices)
    
    10036
(Zip Code)
 (212) 827-8000
 Securities Registered Pursuant to Section 12(b) of the Act:
 Title of Each ClassClass A Common Stock, Par Value $0.01 Per Share
    
    Name of Each Exchange on Which Registered
NYSE
 Securities Registered Pursuant to Section 12(g) of the Act:
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
   Number of Shares Outstanding As of March 2, 2007:
26,332,385 shares of Class A Common Stock
26,791,206 shares of Class B Common Stock
 Documents Incorporated by Reference.




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##### 



TABLE OF CONTENTS
 Item 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    10Item 1B. Unresolved Staff Comments
    
    
    14Item 2. Properties
    
    
    14Item 3. Legal Proceedings
    
    
    15Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    15Item 6. Selected Financial Data
    
    
    19Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 7A. Quantitative and Qualitative Disclosure About Market Risk
    
    
    36Item 8. Financial Statements and Supplementary Data
    
    
    36Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    36Item 9A. Controls and Procedures
    
    
    36Item 9B. Other Information
    
    
    39Item 10. Directors, Executive Officers and Corporate Governance
    
    
    39Item 11. Executive Compensation
    
    
    39Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    39Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    39Item 14. Principal Accountant Fees and Services
    
    
    39Item 15. Exhibits and Financial Statement Schedules
    
    
    40Signatures
    
    
    43Index to Consolidated Financial Statements, Financial
Statement Schedules and Other Financial Information
    
    
    F-1Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations for the years ended December 31, 2006, 2005
and 2004
    
    
    F-3Consolidated Balance Sheets at December 31, 2006 and 2005
    
    
    F-4Consolidated Statements of Shareholders Equity for the years ended
December 31, 2006, 2005 and 2004
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31,
2006, 2005 and 2004
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Financial Statement Schedule: II  Valuation and Qualifying
Accounts for the years ended December 31, 2006, 2005 and 2004
    
    
    F-25Exhibit Index
    
    
    II-1EX-21: List of SubsidiariesEX-23.1: ConsentEX-31.1: CertificationEX-31.2: CertificationEX-32: CertificationEX-21: LIST OF SUBSIDIARIESEX-23.1: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32: CERTIFICATION
  2




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FORWARD-LOOKING STATEMENTS
  PART I
 
 Item 1. Business.
 OVERVIEW
  
    
    Grow share of
advertising market in our Publishing and Internet segments,
    
    Leverage our brand and design skills in new Merchandising partnerships, and
    
    Launch new Publishing and Internet lifestyle brands.
   
    
    Home: decorating, collecting and renovating.
    
    Cooking and Entertaining: recipes, techniques, and indoor and outdoor entertaining.
    
    Gardening: planting, landscape design and outdoor living.
    
    Crafts: how-to projects.
    
    Holidays: celebrating special days and special occasions.
    
    Organizing: homekeeping, petkeeping, clotheskeeping, restoring and other types of
domestic maintenance.
    
    Weddings: all aspects of planning, celebrating and commemorating a wedding.
    
    Baby and Kids: cooking, decorating, crafts, and other projects and celebrations
surrounding infants and children.
  HISTORY
 Entertaining Martha Stewart Living Martha Stewart
Living Martha by Mail
 3




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##### Table of Contents



BUSINESS SEGMENTS
  PUBLISHING
  Magazines
 Martha Stewart Living. Martha Stewart Living Martha Stewart Living Martha Stewart Living Martha Stewart Living
 Everyday Food. Everyday Food Everyday Food
 Martha Stewart Weddings Martha Stewart Weddings Martha Stewart Weddings Martha Stewart Weddings
 Body + Soul Body +
Soul Dr. Andrew Weils Self Healing Body + Soul
 Blueprint: Design Your Life. Blueprint: Design Your Life Blueprint
 4




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##### Table of Contents



Magazine Summary
  Yearly
    
    Year-EndTitle
    
    Description
    
    Frequency
    
    Rate Base *Martha Stewart Living
    
    Home and womens lifestyle
    
    
    12
    
    
    
    1,900,000Everyday Food
    
    Cooking
    
    
    10
    
    
    
    850,000Martha Stewart Weddings
    
    Weddings
    
    
    4
    
    
    
    N/A
    **Body + Soul
    
    Natural living
    
    
    8
    
    
    
    400,000Blueprint: Design Your Life
    
    Womens lifestyle
    
    
    2
    ***
    
    
    250,000
 *
    
    Current 2007 rate bases are: Martha Stewart Living(1,950,000); Everyday Food(875,000); Body +
Soul(450,000); and Blueprint(initial 2007 issue 350,000 then rising to 400,000 for subsequent
2007 issues)**
    
    Does not have a stated rate base.***
    
    Two test issues in 2006. The Company plans to publish six issues in 2007.
 Special Interest Publications. Martha
Stewart Living Everyday Food
Collectible Cookie Edition Martha Stewart Holiday Handmade Gifts Good Things for Kids
 Magazine Production, Distribution and Fulfillment. Martha Stewart Living
 Books
 Martha Stewarts Homekeeping Handbook: The Essential Guide to Caring for Everything in Your Home.
 Competition
 Martha
Stewart Living Everyday Food Martha Stewart Weddings Blueprint Body + Soul
 Seasonality
 Martha Stewart
Weddings
 5




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MERCHANDISING
  Licensed Retail Partnerships
 Martha Stewart Everyday at Kmart & Sears Canada
    Martha Stewart Collection at Macys
  Martha Stewart Colors at Lowes
  6




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Licensed Manufacturing Partnerships
 Martha Stewart Furniture with Bernhardt
  KB Home / Martha Stewart Homes
  Martha Stewart Crafts
 Martha Stewart Crafts
 Martha Stewart Area Rugs
  Martha Stewart Lighting
  Martha Stewart Carpet Tiles for FLOR
  Martha Stewart Fine China for Waterford Wedgwood
  7




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##### Table of Contents



Summary of License Agreements
 License Partner
    
    Basis For Royalties(a)
    
    Expiration Date(b)Kmart
    
    Retail sales
    
    January 2010Sears Canada
    
    Retail sales
    
    August 2008Macys
    
    Retail sales
    
    January 2013Lowes
    
    Fee based upon gallons tinted from the Martha Stewart Colors palette
    
    December 2009Bernhardt (Furniture)
    
    Wholesale sales
    
    December 2007KB Home (Cary, NC)
    
    Profit sharing calculation for homes
    
    November 2010KB Home (National Agreement)
    
    Aggregate gross sales
    
    February 2011EK Success (Crafts)
    
    Primarily based on wholesale sales
    
    March 2012Safavieh (Area Rugs)
    
    Wholesale sales
    
    June 2010Generation Brands (Lighting)
    
    Wholesale sales
    
    August 2010FLOR (Carpet Tiles)
    
    Wholesale sales
    
    September 2010Waterford
Wedgwood (Fine China)
    
    Wholesale sales
    
    January 2013
 (a)
    
    Basis for royalties is a summary of contractual agreements regarding the calculation of
royalties but does not represent the basis for revenue recognition as several contracts
contain minimum guarantee clauses that require specific accounting application (see Note 2
to Consolidated Financial Statements  Summary of Significant Accounting Policies).
 (b)
    
    Expiration dates are typically a function of the launch date of the program. Therefore,
these expiration dates are subject to change for products that have not been introduced to
date. Furthermore, many contracts contain renewal options.
 Competition
  Seasonality
  INTERNET
 Catalog for Living
 Marthastewart.com
  8




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##### Table of Contents



Martha Stewart Flowers
  Digital Photo Products
  Competition
  Seasonality
  BROADCASTING
  The Martha Stewart Show The Martha Stewart
Show. Martha Stewart Living
 Everyday Food Everyday
Food
  Martha Stewart Living Radio
 9




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Competition
  Intellectual Property
 Martha Stewart Living Martha
Stewart Everyday Martha Stewart Signature Everyday Food Martha Stewart Weddings marthastewart.com, Martha Stewart Flowers, Body + Soul Blueprint
 Available Information
 www.marthastewart.com
 
 Item 1A. Risk Factors.
  Our success depends in part on the popularity of our brand and the reputation and popularity
of our founder, Martha Stewart, and any adverse reactions to publicity relating to Ms. Stewart, or
the loss of her services, could adversely affect our revenues, results of operations and our
ability to maintain or generate a consumer base.
  Our Merchandising business currently relies heavily on revenue from a single source.
  10




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We are expanding our merchandising and licensing programs into new areas and products, the
failure of any of which could diminish the perceived value of our brand, impair our ability to grow
and adversely affect our prospects.
  If The Martha Stewart Show fails to maintain a sufficient audience, if adverse trends develop
in the television production business generally, or if Martha Stewart were to cease to be able to
devote substantial time to our television business, that business would be adversely affected.
  Failure of our television programming to maintain a sufficient audience
 The Martha Stewart Show
 Adverse trends in the television production business generally
  11




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We have placed emphasis on building our Internet community. Failure to fulfill these
undertakings would adversely affect our brand and business prospects.
  
    
    continue to make significant investments in our Internet business, including
upgrading our technology and adding a significant number of new employees;
    
    significantly increase our online traffic and revenue;
    
    attract and retain a base of frequent visitors to our website;
    
    expand the content and products we offer over our website;
    
    respond to competitive developments while maintaining a distinct brand identity;
    
    attract and retain talent for critical positions;
    
    maintain and form relationships with strategic partners to attract more consumers;
    
    continue to develop and upgrade our technologies; and
    
    bring new product features to market in a timely manner.
  If we are unable to predict, respond to and influence trends in what the public finds
appealing, our business will be adversely affected.
  Martha Stewart controls our company through her stock ownership, enabling her to elect who
sits on our board of directors, and potentially to block matters requiring stockholder approval,
including any potential changes of control.
  12




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Our intellectual property may be infringed upon or others may accuse us of infringing on their
intellectual property, either of which could adversely affect our business and result in very
expensive litigation.
  Our business is largely dependent on advertising revenues in our publications, online
operations and broadcasts and failure to attract or retain these advertisers would have a material
adverse effect on our business.
  A loss of the services of other key personnel could have a material adverse effect on our
business.
  We operate in four highly competitive businesses: Publishing, Merchandising, Internet and
Broadcasting each of which subjects us to competitive pressures.
  13




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We have been named as a defendant in a class action lawsuit, the settlement of which has not
yet received final judicial approval.
 In re Martha Stewart Living Omnimedia, Inc. Securities Litigation In re Martha Stewart Living Omnimedia, Inc.
Securities Litigation Item 3  Legal Proceedings
 
 Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
  Approximate AreaLocation
    
    Use
    
    in Square Feet601 West 26th Street 
New York, NY
    
    Product design facilities, photography studio, Merchandising and Internet offices, test kitchens, and prop storage
    
    
    149,42111 West 42nd Street 
New York, NY
    
    Principal executive and administrative offices; publishing offices; and sales offices
    
    
    92,649226 West 26th Street 
New York, NY
    
    Executive and administrative office for television production
    
    
    22,000221 West 26th Street 
New York, NY
    
    Television production facilities
    
    
    20,00042 Pleasant Street 
Watertown, MA
    
    Publishing office for Body & Soul Group
    
    
    7,860Satellite Sales Offices 
in MI, IL & CA
    
    Advertising sales offices primarily for the Publishing segment
    
    
    7,500
    14




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Item 3. Legal Proceedings.
 In re Martha Stewart Living Omnimedia, Inc. Securities Litigation, 02-CV-6273
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
 Market for the Common Stock
  Q1
    
    Q2
    
    Q3
    
    Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q42005
    
    2005
    
    2005
    
    2005
    
    2006
    
    2006
    
    2006
    
    2006High Sales Price
    
    $
    37.45
    
    
    $
    30.60
    
    
    $
    34.74
    
    
    $
    25.39
    
    
    $
    19.80
    
    
    $
    21.47
    
    
    $
    19.30
    
    
    $
    23.21Low Sales Price
    
    $
    20.00
    
    
    $
    19.50
    
    
    $
    23.90
    
    
    $
    16.28
    
    
    $
    16.30
    
    
    $
    16.01
    
    
    $
    14.76
    
    
    $
    17.46
  15




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Dividends
  Recent Sales of Unregistered Securities and Use of Proceeds
 The Martha Stewart Show The Martha Stewart Show
 16




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Issuer Purchases of Equity Securities
  Maximum Number (orTotal Number of
    
    Approximate DollarShares (or Units)
    
    Value) of Shares (orTotal Number of
    
    
    
    
    
    Purchased as Part of
    
    Units) that may yet beShares (or Units)
    
    Average Price Paid
    
    Publicly Announced
    
    Purchased under thePeriod
    
    Purchased
    
    per Share (or Unit)
    
    Plans or Programs
    
    Plans or ProgramsJanuary 2006(1)
    
    
    1,650
    
    
    $
    18.38
    
    
    Not applicable
    
    Not applicableFebruary 2006(1)
    
    
    
    
    
    
    
    
    
    Not applicable
    
    Not applicableMarch 2006(1)
    
    
    5,570
    
    
    $
    16.92
    
    
    Not applicable
    
    Not applicableApril 2006(1)
    
    
    
    
    
    
    
    
    
    Not applicable
    
    Not applicableMay 2006(1)
    
    
    
    
    
    
    
    
    
    Not applicable
    
    Not applicableJune 2006(1)
    
    
    6,504
    
    
    $
    17.61
    
    
    Not applicable
    
    Not applicableJuly 2006(1)
    
    
    1,650
    
    
    $
    17.10
    
    
    Not applicable
    
    Not applicableAugust 2006(1)
    
    
    1,867
    
    
    $
    17.15
    
    
    Not applicable
    
    Not applicableSeptember 2006(1)
    
    
    3,207
    
    
    $
    18.44
    
    
    Not applicable
    
    Not applicableOctober 2006(1)
    
    
    9,194
    
    
    $
    19.72
    
    
    Not applicable
    
    Not applicableNovember 2006(1)
    
    
    31,081
    
    
    $
    21.58
    
    
    Not applicable
    
    Not applicableDecember 2006(1)
    
    
    2,075
    
    
    $
    20.75
    
    
    Not applicable
    
    Not applicableTotal for year ended December 31, 2006
    
    
    62,798
    
    
    $
    19.47
    
    
    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.
 17




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Notwithstanding anything to the contrary set forth in any of our filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might
incorporate Securities and Exchange Commission filings, in whole or in part, the following
performance graph will not be incorporated by reference into any such filings.
 Performance Graph
  COMPARE CUMULATIVE TOTAL RETURN
AMONG MARTHASTEWART LIVING OMNIMEDIA, INC.,
S&P COMPOSITE INDEX AND SIC CODE INDEX
 
  
 *
    
    The hypothetical investment price in our Class A Common Stock is $16.45 per share at
12/31/01.**
    
    The Publishing Index consists of companies that are primarily publishers of periodicals,
although many also conduct other businesses, including owning and operating television stations and
cable networks, and is weighted according to market capitalization of the companies in the index.
The hypothetical investment assumes investment in a portfolio of equity securities that mirror the
composition of the Publishing Index. 18




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Item 6. Selected Financial Data.
 SELECTED FINANCIAL DATA
Five Years ended December 31,
(in thousands except per share data)
 2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002INCOME STATEMENT DATAREVENUESPublishing
    
    $
    156,559
    
    
    $
    125,765
    
    
    $
    95,960
    
    
    $
    135,529
    
    
    $
    182,064Merchandising
    
    
    69,504
    
    
    
    58,819
    
    
    
    53,386
    
    
    
    53,395
    
    
    
    48,896Internet
    
    
    15,775
    
    
    
    11,258
    
    
    
    27,512
    
    
    
    30,813
    
    
    
    36,873Broadcasting
    
    
    46,503
    
    
    
    16,591
    
    
    
    10,580
    
    
    
    26,111
    
    
    
    27,216Total revenues
    
    
    288,341
    
    
    
    212,433
    
    
    
    187,438
    
    
    
    245,848
    
    
    
    295,049Operating income (loss)
    
    
    (2,833
    )
    
    
    (78,311
    )
    
    
    (60,004
    )
    
    
    (6,405
    )
    
    
    19,993Income (loss) from continuing operations
    
    
    (16,250
    )
    
    
    (75,295
    )
    
    
    (59,073
    )
    
    
    (1,923
    )
    
    
    13,314Loss from discontinued operations
    
    
    (745
    )
    
    
    (494
    )
    
    
    (526
    )
    
    
    (848
    )
    
    
    (2,909
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,137
    )Net income (loss)
    
    $
    (16,995
    )
    
    $
    (75,789
    )
    
    $
    (59,599
    )
    
    $
    (2,771
    )
    
    $
    7,268PER SHARE DATAEarnings per share:Basic & Diluted  Income (loss)
from continuing operations
    
    $
    (0.32
    )
    
    $
    (1.48
    )
    
    $
    (1.19
    )
    
    $
    (0.04
    )
    
    $
    0.27Basic & Diluted  Loss from
discontinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    
    (0.06
    )Basic & Diluted  Cumulative effect
of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.06
    )Basic & Diluted  Net income (loss)
    
    $
    (0.33
    )
    
    $
    (1.49
    )
    
    $
    (1.20
    )
    
    $
    (0.06
    )
    
    $
    0.15Weighted average common shares outstandingBasic
    
    
    51,312
    
    
    
    50,991
    
    
    
    49,712
    
    
    
    49,389
    
    
    
    49,250Diluted
    
    
    51,312
    
    
    
    50,991
    
    
    
    49,712
    
    
    
    49,389
    
    
    
    49,343Dividends per common share
    
    $
    0.50
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    FINANCIAL POSITIONCash and cash equivalents
    
    $
    28,528
    
    
    $
    20,249
    
    
    $
    104,647
    
    
    $
    165,566
    
    
    $
    158,840Short-term investments
    
    
    35,321
    
    
    
    83,788
    
    
    
    35,309
    
    
    
    3,100
    
    
    
    20,110Total assets
    
    
    228,047
    
    
    
    253,828
    
    
    
    264,678
    
    
    
    309,102
    
    
    
    324,542Shareholders equity
    
    
    130,957
    
    
    
    160,631
    
    
    
    187,628
    
    
    
    236,665
    
    
    
    236,635OTHER FINANCIAL DATACash flow provided by (used in)
operating activities
    
    $
    (5,711
    )
    
    $
    (30,349
    )
    
    $
    (22,226
    )
    
    $
    (9,634
    )
    
    $
    38,042Cash flow provided by (used in)
investing activities
    
    
    40,125
    
    
    
    (58,300
    )
    
    
    (39,756
    )
    
    
    15,956
    
    
    
    28,777Cash flow provided by (used in)
financing activities
    
    
    (26,135
    )
    
    
    4,251
    
    
    
    1,063
    
    
    
    404
    
    
    
    4,053
 19




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NOTES TO SELECTED FINANCIAL DATA
 General
  Earnings from continuing operations
 Fiscal 2006
 Fiscal 2005
 Fiscal 2004
 Fiscal 2003
 Fiscal 2002
 20




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 EXECUTIVE SUMMARY
  Publishing
 Martha Stewart Living, Martha Stewart Weddings, Everyday
Food, Body + Soul; Blueprint: Design Your Life Blueprint
 Martha Stewart Living
 Merchandising
  Martha
Stewart Collection
  1/31/02
    
    1/31/03
    
    1/31/04
    
    1/31/05
    
    1/31/06
    
    1/31/07
    
    1/31/08
    
    1/31/09
    
    1/31/10Minimum
Royalty
Amounts
    
    
    $15.3
    
    
    
    $40.4
    
    
    
    $47.5
    
    
    
    $49.0
    
    
    
    $54.0
    
    
    
    $59.0
    
    
    
    $65.0
    
    
    
    $20.0
    
    
    
    $15.0
  21




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Internet
     Broadcasting
 The Martha Stewart Show Everyday Food Martha Stewart Living
Radio
 The Martha Stewart Show The Martha Stewart Show The Martha Stewart Show Everyday Food
  22




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RESULTS OF OPERATIONS
 Comparison for the Year Ended December 31, 2006 to Year Ended December 31, 2005.
 PUBLISHING SEGMENT
 (in thousands)
    
    2006
    
    
    2005
    
    
    VariancePublishing RevenueAdvertising
    
    $
    83,285
    
    
    $
    52,032
    
    
    $
    31,253Circulation
    
    
    69,721
    
    
    
    68,607
    
    
    
    1,114Other
    
    
    3,553
    
    
    
    5,126
    
    
    
    (1,573
    )Total Publishing Segment Revenue
    
    
    156,559
    
    
    
    125,765
    
    
    
    30,794Publishing Operating Costs and ExpensesProduction, distribution and editorial
    
    
    83,770
    
    
    
    75,342
    
    
    
    (8,428
    )Selling and promotion
    
    
    63,386
    
    
    
    62,076
    
    
    
    (1,310
    )General and administrative
    
    
    2,777
    
    
    
    2,695
    
    
    
    (82
    )Depreciation and amortization
    
    
    600
    
    
    
    987
    
    
    
    387Total Publishing Segment Operating Costs and Expenses
    
    
    150,533
    
    
    
    141,100
    
    
    
    (9,433
    )Publishing Segment Operating Income/(Loss)
    
    $
    6,026
    
    
    $
    (15,335
    )
    
    $
    21,361
 Martha Stewart Living Everyday Food Weddings Body + Soul Blueprint The Martha Rules Blueprint
 
 Year ended December 31,Magazine Publication Schedule
    
    2006
    
    2005Martha Stewart Living
    
    Twelve Issues
    
    Twelve IssuesMartha Stewart Weddings(a)
    
    Four Issues
    
    Five IssuesEveryday Food
    
    Ten Issues
    
    Ten IssuesSpecial Interest Publications
    
    Five Issues
    
    Seven IssuesBody + Soul
    
    Eight Issues
    
    Eight IssuesBlueprint(b)
    
    Two Issues
    
    N/A
 
 (a)
    
    In 2005, we published one special Martha Stewart Weddingsissue.(b)
    
    New publication launched in May 2006. Martha Stewart Living Blueprint  Blueprint
 23




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##### Table of Contents



MERCHANDISING SEGMENT
 (in thousands)
    
    2006
    
    
    2005
    
    
    VarianceMerchandising RevenueKmart earned royalty
    
    $
    29,853
    
    
    $
    31,126
    
    
    $
    (1,273
    )Kmart minimum true-up
    
    
    26,126
    
    
    
    18,708
    
    
    
    7,418Other
    
    
    13,525
    
    
    
    8,985
    
    
    
    4,540Total Merchandising Segment Revenue
    
    
    69,504
    
    
    
    58,819
    
    
    
    10,685Merchandising Operating Costs and ExpensesProduction, distribution and editorial
    
    
    11,956
    
    
    
    10,475
    
    
    
    (1,481
    )Selling and promotion
    
    
    3,145
    
    
    
    3,135
    
    
    
    (10
    )General and administrative
    
    
    6,853
    
    
    
    5,655
    
    
    
    (1,198
    )Depreciation and amortization
    
    
    1,021
    
    
    
    845
    
    
    
    (176
    )Total Merchandising Segment Operating Costs and Expenses
    
    
    22,975
    
    
    
    20,110
    
    
    
    (2,865
    )Merchandising Segment Operating Income
    
    $
    46,529
    
    
    $
    38,709
    
    
    $
    7,820
   24




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##### Table of Contents



INTERNET SEGMENT
 (in thousands)
    
    2006
    
    
    2005
    
    
    VarianceInternet RevenueAdvertising and other
    
    $
    8,196
    
    
    $
    2,516
    
    
    $
    5,680Product sales
    
    
    7,579
    
    
    
    8,742
    
    
    
    (1,163
    )Total Internet Segment Revenue
    
    
    15,775
    
    
    
    11,258
    
    
    
    4,517Internet Operating Costs and ExpensesProduction, distribution and editorial
    
    
    10,444
    
    
    
    10,719
    
    
    
    275Selling and promotion
    
    
    3,335
    
    
    
    1,649
    
    
    
    (1,686
    )General and administrative
    
    
    2,410
    
    
    
    1,476
    
    
    
    (934
    )Depreciation and amortization
    
    
    117
    
    
    
    951
    
    
    
    834Total Internet Segment Operating Costs
and Expenses
    
    
    16,306
    
    
    
    14,795
    
    
    
    (1,511
    )Internet Segment Operating Loss
    
    $
    (531
    )
    
    $
    (3,537
    )
    
    $
    3,006
   25




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##### Table of Contents



BROADCASTING SEGMENT
 (in thousands)
    
    2006
    
    
    2005
    
    
    VarianceBroadcasting RevenueAdvertising
    
    $
    16,969
    
    
    $
    6,363
    
    
    $
    10,606Radio
    
    
    7,504
    
    
    
    939
    
    
    
    6,565Licensing and other
    
    
    22,030
    
    
    
    9,289
    
    
    
    12,741Total Broadcasting Segment Revenue
    
    
    46,503
    
    
    
    16,591
    
    
    
    29,912Broadcasting Operating Costs and ExpensesProduction, distribution and editorial
    
    
    32,043
    
    
    
    29,393
    
    
    
    (2,650
    )Selling and promotion
    
    
    4,324
    
    
    
    4,177
    
    
    
    (147
    )General and administrative
    
    
    8,726
    
    
    
    8,901
    
    
    
    175Depreciation and amortization
    
    
    3,026
    
    
    
    1,321
    
    
    
    (1,705
    )Total Broadcasting Segment Operating Costs
and Expenses
    
    
    48,119
    
    
    
    43,792
    
    
    
    (4,327
    )Broadcasting Segment Operating Loss
    
    $
    (1,616
    )
    
    $
    (27,201
    )
    
    $
    25,585
 Martha Stewart Living Radio
 The Martha Stewart Show
 CORPORATE
 (in thousands)
    
    2006
    
    
    2005
    
    
    VarianceCorporate Operating Costs and ExpensesGeneral and administrative
    
    $
    49,407
    
    
    $
    67,254
    
    
    $
    17,847Depreciation and amortization
    
    
    3,834
    
    
    
    3,693
    
    
    
    (141
    )Total Corporate Operating Costs and Expenses
    
    
    53,241
    
    
    
    70,947
    
    
    
    17,706Corporate Operating Loss
    
    $
    (53,241
    )
    
    $
    (70,947
    )
    
    $
    17,706
  26




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##### Table of Contents



INTEREST INCOME, NET
 LITIGATION RESERVE In re Martha Stewart Living Omnimedia, Inc.
Securities Litigation
 INCOME TAX PROVISION
 LOSS FROM DISCONTINUED OPERATIONS.
 NET LOSS
 27




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RESULTS OF OPERATIONS
 Comparison for the Year Ended December 31, 2005 to Year Ended December 31, 2004.
 PUBLISHING SEGMENT
 (in thousands)
    
    2005
    
    
    2004
    
    
    VariancePublishing RevenueAdvertising
    
    $
    52,032
    
    
    $
    34,084
    
    
    $
    17,948Circulation
    
    
    68,607
    
    
    
    60,086
    
    
    
    8,521Other
    
    
    5,126
    
    
    
    1,790
    
    
    
    3,336Total Publishing Segment Revenue
    
    
    125,765
    
    
    
    95,960
    
    
    
    29,805Publishing Operating Costs and ExpensesProduction, distribution and editorial
    
    
    75,342
    
    
    
    62,546
    
    
    
    (12,796
    )Selling and promotion
    
    
    62,076
    
    
    
    55,321
    
    
    
    (6,755
    )General and administrative
    
    
    2,695
    
    
    
    2,236
    
    
    
    (459
    )Depreciation and amortization
    
    
    987
    
    
    
    472
    
    
    
    (515
    )Total Publishing Segment Operating Costs
and Expenses
    
    
    141,100
    
    
    
    120,575
    
    
    
    (20,525
    )Publishing Segment Operating Loss
    
    $
    (15,335
    )
    
    $
    (24,615
    )
    
    $
    9,280
 Martha Stewart Living Martha Stewart Living Body + Soul Everyday Food Body + Soul Dr.
Weils Self Healing Martha Stewart Living The Martha Rules
 Year ended December 31,Magazine Publication Schedule
    
    2006
    
    2005Martha Stewart Living
    
    Twelve Issues
    
    Twelve IssuesMartha Stewart Weddings(a)
    
    Five Issues
    
    Five IssuesEveryday Food
    
    Ten Issues
    
    Ten IssuesSpecial Interest Publications
    
    Seven Issues
    
    Eight IssuesBody + Soul(b)
    
    Eight Issues
    
    Four Issues
 
 (a)
    
    In 2004 and 2005, we published one special Martha Stewart Weddingsissue in each year.(b)
    
    Acquired in August 2004 and therefore was not included in prior periods. Martha Stewart Living
 28




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Martha Stewart Living Everyday Food Everyday Food
 MERCHANDISING SEGMENT
 (in thousands)
    
    2005
    
    
    2004
    
    
    VarianceMerchandising RevenueKmart earned royalty
    
    $
    31,126
    
    
    $
    32,434
    
    
    $
    (1,308
    )Kmart minimum true-up
    
    
    18,708
    
    
    
    13,074
    
    
    
    5,634Other
    
    
    8,985
    
    
    
    7,878
    
    
    
    1,107Total Merchandising Segment Revenue
    
    
    58,819
    
    
    
    53,386
    
    
    
    5,433Merchandising Operating Costs and ExpensesProduction, distribution and editorial
    
    
    10,475
    
    
    
    9,832
    
    
    
    (643
    )Selling and promotion
    
    
    3,135
    
    
    
    99
    
    
    
    (3,036
    )General and administrative
    
    
    5,655
    
    
    
    6,268
    
    
    
    613Depreciation and amortization
    
    
    845
    
    
    
    760
    
    
    
    (85
    )Total Merchandising Segment Operating Costs and Expenses
    
    
    20,110
    
    
    
    16,959
    
    
    
    (3,151
    )Merchandising Segment Operating Income
    
    $
    38,709
    
    
    $
    36,427
    
    
    $
    2,282
 Martha Stewart Everyday
  29




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INTERNET SEGMENT
 (in thousands)
    
    2005
    
    
    2004
    
    
    VarianceInternet RevenueAdvertising and other
    
    $
    2,516
    
    
    $
    692
    
    
    $
    1,824Product sales
    
    
    8,742
    
    
    
    26,820
    
    
    
    (18,078
    )Total Internet Segment Revenue
    
    
    11,258
    
    
    
    27,512
    
    
    
    (16,254
    )Internet Operating Costs and ExpensesProduction, distribution and editorial
    
    
    10,719
    
    
    
    29,912
    
    
    
    19,193Selling and promotion
    
    
    1,649
    
    
    
    1,735
    
    
    
    86General and administrative
    
    
    1,476
    
    
    
    3,739
    
    
    
    2,263Depreciation and amortization
    
    
    951
    
    
    
    987
    
    
    
    36Total Internet Segment Operating Costs and Expenses
    
    
    14,795
    
    
    
    36,373
    
    
    
    21,578Internet Segment Operating Loss
    
    $
    (3,537
    )
    
    $
    (8,861
    )
    
    $
    5,324
   30




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BROADCASTING SEGMENT
 (in thousands)
    
    2005
    
    
    2004
    
    
    VarianceBroadcasting RevenueAdvertising
    
    $
    6,363
    
    
    $
    4,134
    
    
    $
    2,229Radio
    
    
    939
    
    
    
    75
    
    
    
    864Licensing and other
    
    
    9,289
    
    
    
    6,371
    
    
    
    2,918Total Broadcasting Segment Revenue
    
    
    16,591
    
    
    
    10,580
    
    
    
    6,011Broadcasting Operating Costs and ExpensesProduction, distribution and editorial
    
    
    29,393
    
    
    
    14,371
    
    
    
    (15,022
    )Selling and promotion
    
    
    4,177
    
    
    
    1,267
    
    
    
    (2,910
    )General and administrative
    
    
    8,901
    
    
    
    3,420
    
    
    
    (5,481
    )Depreciation and amortization
    
    
    1,321
    
    
    
    230
    
    
    
    (1,091
    )Total Broadcasting Segment Operating Costs and Expenses
    
    
    43,792
    
    
    
    19,288
    
    
    
    (24,504
    )Broadcasting Segment Operating Loss
    
    $
    (27,201
    )
    
    $
    (8,708
    )
    
    $
    (18,493
    )
   CORPORATE
 (in thousands)
    
    2005
    
    
    2004
    
    
    VarianceCorporate Operating Costs and ExpensesGeneral and administrative
    
    $
    67,254
    
    
    $
    50,024
    
    
    $
    (17,230
    )Depreciation and amortization
    
    
    3,693
    
    
    
    4,223
    
    
    
    530Total Corporate Operating Costs and Expenses
    
    
    70,947
    
    
    
    54,247
    
    
    
    (16,700
    )Corporate Operating Loss
    
    $
    (70,947
    )
    
    $
    (54,247
    )
    
    $
    (16,700
    )
  31




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INTEREST INCOME, NET
 INCOME TAX PROVISION
 LOSS FROM DISCONTINUED OPERATIONS
 NET LOSS
 32




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Overview
  
    
    One-time dividend of $0.50 per share for a total cash payment of $(26.1) million
    
    Cash portion of the legal settlement of $(13.0) million
    
    Capital expenditures of $(8.3) million
  Cash Flows from Operating Activities
  The Martha Stewart Show
  Cash Flows from Investing Activities
  33




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##### Table of Contents



The Martha Stewart Show
 Body + Soul Dr.
Weils Self Healing
 Cash Flows from Financing Activities
   Cash Requirements
  Payments due by period (in thousands)Less than
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsLong-Term Debt Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    $
    33,548
    
    
    $
    10,011
    
    
    $
    16,689
    
    
    $
    4,090
    
    
    $
    2,758Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term
Liabilities Reflected on
the Companys Balance
Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    33,548
    
    
    $
    10,011
    
    
    $
    16,689
    
    
    $
    4,090
    
    
    $
    2,758
    34




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 General
   Revenue Recognition
   Television Production Costs
  35




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##### Table of Contents



Intangible Assets
   Long-Lived Assets
  Advertising Costs
  Non-Cash Equity Compensation
  
 Deferred Income Tax Asset Valuation Allowance
  Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
  
 Item 8. Financial Statements and Supplementary Data.
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Managements Report on Internal Control Over Financial Reporting
 Evaluation of Disclosure Controls and Procedures
  36




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##### Table of Contents



Evaluation of Changes in Internal Control Over Financial Reporting
  Managements Report on Internal Control Over Financial Reporting
   37




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
         
 38




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##### Table of Contents



Item 9B. Other Information.
  PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
 ELECTION OF DIRECTORS INFORMATION CONCERNING
EXECUTIVE OFFICERS AND OUR FOUNDER, MEETINGS AND COMMITTEES OF THE BOARD SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
 Item 11. Executive Compensation.
 MEETINGS AND COMMITTEES OF THE BOARD COMPENSATION OF OUTSIDE DIRECTORS, DIRECTOR COMPENSATION TABLE, COMPENSATION
COMMITTEE REPORT, COMPENSATION DISCUSSION AND ANALYSIS, SUMMARY COMPENSATION TABLE, GRANTS OF
PLAN-BASED AWARDS IN 2006, OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END, OPTION EXERCISES AND
STOCK VESTED DURING 2006, POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT EQUITY COMPENSATION
PLAN INFORMATION
 
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
 CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS MEETINGS AND COMMITTEES OF THE
BOARD
 
 Item 14. Principal Accountant Fees and Services.
 PRINCIPAL ACCOUNTANT FEES AND SERVICES
 39




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
  Exhibits:
 ExhibitNumber
    
    
    
    Exhibit Title3.1
    
    
    
    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).4.1
    
    
    
    Warrant to purchase shares of Class A Common Stock, dated September 17, 2004 (incorporated by reference to the Companys
quarterly report on Form 10-Q for the period ended September 30, 2006).4.2
    
    
    
    Warrant to purchase shares of Class A Common Stock, dated August 11, 2006 (incorporated by reference to the Companys
quarterly report on Form 10-Q for the period ended September 30, 2006).10.1
    
    
    
    Form of Stockholders Agreement (incorporated by reference to the Registration Statement).10.2
    
    
    
    1999 Stock Incentive Plan (incorporated by reference to the Registration Statement), as amended by Exhibits 10.2.1, 10.2.2
and 10.31.10.2.1
    
    
    
    Amendment No. 1 to the 1999 Stock Incentive Plan, dated as of March 9, 2000 (incorporated by reference to our Annual
Report
on Form 10-K for the year ended December 31, 1999, File Number 001-15395 (the 1999 10-K)) as amended by Exhibits 10.2.2
and 10.31.10.2.2
    
    
    
    Amendment No. 2 to the Amended and Restated 1999 Stock Incentive Plan, dated as of May 11, 2000 (incorporated by
reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (the June 2000 10-Q)) as amended by
Exhibit 10.31.10.3
    
    
    
    1999 Non-Employee Director Stock and Option Compensation Plan (incorporated by reference to the Registration Statement)
as amended by Exhibit 10.32.10.4
    
    
    
    Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan (incorporated by reference to the
Registration Statement).10.5
    
    
    
    Form of Employment Agreement, dated as of October 22, 1999, by and between Martha Stewart Living Omnimedia, Inc. and
Martha Stewart (incorporated by reference to the Registration Statement) as amended by Exhibit 10.20.10.6
    
    
    
    Form of Intellectual Property License and Preservation Agreement, dated as of October 22, 1999, by and between Martha
Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to the Registration Statement).10.7
    
    
    
    Form of Location Rental Agreement, dated as of October 22, 1999, by and between Martha Stewart Living Omnimedia, Inc. and
Martha Stewart (incorporated by reference to the Registration Statement) as amended by Exhibit 10.7.1 and 10.21.10.7.1
    
    
    
    Amendment, dated as of January 1, 2003, to Location Rental Agreement, dated as of October 22, 1999, by and between Martha
Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to our Annual Report on Form 10-K for the
year ended December 31, 2002 (the 2002 10-K)) as amended by Exhibit 10.21.10.8
    
    
    
    Lease, dated as of September 24, 1992, between Tishman Speyer Silverstein Partnership and Time Publishing Ventures, Inc.,
as amended by First Amendment of Lease dated as of September 24, 1994 between 11 West 42 Limited Partnership and Time
Publishing Ventures, Inc. (incorporated by reference to the Registration Statement).10.9
    
    
    
    Lease, dated as of March 31, 1998, between 11 West 42 Limited Partnership and Martha Stewart Living Omnimedia LLC
(incorporated by reference to the Registration Statement).10.10
    
    
    
    Lease, dated August 20, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia LLC (incorporated by
reference to the Registration Statement).
 40




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##### Table of Contents



ExhibitNumber
    
    
    
    Exhibit Title10.10.1
    
    
    
    First Lease Modification Agreement, dated December 24, 1999, between 601 West Associates LLC and Martha Stewart Living
Omnimedia, Inc. (incorporated by reference to the 1999 10-K).10.11
    
    
    
    Lease, dated as of October 1, 2000, between Newtown Group Properties Limited Partnership and Martha Stewart Living
Omnimedia, Inc. (incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001(the
June 2001 10-Q)).10.12
    
    
    
    License Agreement, dated June 21, 2001 by and between Kmart Corporation and MSO IP Holdings, Inc. (incorporated by
reference to the June 2001 10-Q) as amended by Exhibit 10.22.10.14.1
    
    
    
    Split-Dollar Life Insurance Agreement, dated February 28, 2001, by and among Martha Stewart Living Omnimedia, Inc.,
Martha Stewart and The Martha Stewart Family Limited Partnership (incorporated by reference to our Annual Report on Form
10-K for the year ended December 31, 2000 (the 2000 10-K)) as amended by Exhibits 10.14.2 and 10.14.3.10.14.2
    
    
    
    Amendment, dated January 28, 2002, to Split-Dollar Life Insurance Agreement, dated February 28, 2001, by and between
Martha Stewart Living Omnimedia, Inc., Martha Stewart and The Martha Stewart Family Limited Partnership (incorporated by
reference to our Annual Report on Form 10-K for the year ended December 31, 2001 (the 2001 10-K)) as amended by Exhibit
10.14.3.10.14.3
    
    
    
    Amendment, dated as of January 1, 2003, to Split-Dollar Life Insurance Agreement, dated February 28, 2001, as amended, by
and among Martha Stewart Living Omnimedia, Inc., Martha Stewart and The Martha Stewart Family Limited Partnership
(incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2002 (the 2002 10-K)).10.15
    
    
    
    Investment Agreement, dated as of January 8, 2002, by and among Martha Stewart Living Omnimedia, Inc., The Martha Stewart
Family Limited Partnership, ValueAct Capital Partners, L.P., ValueAct Capital Partners II, L.P. and ValueAct Capital
International, Ltd (incorporated by reference to the 2001 10-K).10.16
    
    
    
    2002 Executive Severance Pay Plan (incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).10.17
    
    
    
    2002 Performance-Based Executive Bonus Plan (incorporated by reference to the 2002 10-K).10.18
    
    
    
    2003 Key Executive Bonus Plan (incorporated by reference to our Annual Report on Form 10-K for the year ended December
31, 2003 (the 2003 10-K)).10.20
    
    
    
    Amendment, dated as of March 15, 2004 to the Employment Agreement, dated October 22, 1999, as amended, by and between the
Company and Martha Stewart (incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March
31, 2004 (the March 2004 10-Q)).10.21
    
    
    
    Amendment, dated as of March 15, 2004 to the Location Rental Agreement, dated October 22, 1999, as amended, by and
between the Company and Martha Stewart (incorporated by reference to the March 2004 10-Q).10.22
    
    
    
    Amendment, dated as of April 22, 2004 to the License Agreement, by and between MSO IP Holdings, Inc. and Kmart
Corporation, dated June 21, 2001 (incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004).10.23
    
    
    
    Employment Agreement dated as of September 17, 2004, between Martha Stewart Living Omnimedia, Inc. and Martha Stewart
(incorporated by reference to the September 23, 2004 8-K).10.24
    
    
    
    Location Rental Agreement dated as of September 17, 2004, between Martha Stewart Living Omnimedia, Inc. and Martha
Stewart (incorporated by reference to the September 23, 2004 8-K).10.25
    
    
    
    Letter Agreement dated September 17, 2004 between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated
by reference to the September 23, 2004 8-K).10.26
    
    
    
    Employment Agreement dated as of November 11, 2004, between Martha Stewart Living Omnimedia, Inc. and Susan Lyne
(incorporated by reference to our Current Report on Form 8-K filed on November 16, 2004 (the November 16, 2004 8-K)).10.27
    
    
    
    Restricted Stock Agreement dated as of November 11, 2004, between Martha Stewart Living Omnimedia, Inc. and Susan Lyne
(incorporated by reference to the November 16, 2004 8-K).10.28
    
    
    
    Stock Option Agreement dated as of November 11, 2004, between Martha Stewart Living Omnimedia, Inc. and Susan Lyne
(incorporated by reference to the November 16, 2004 8-K).10.29
    
    
    
    2005 Executive Severance Pay Plan (incorporated by reference to our Current Report on Form 8-K filed on January 6, 2005).10.30
    
    
    
    Form of Restricted Stock Award Agreement for use under the Martha Stewart Living Omnimedia, Inc. Amended and Restated
1999 Stock Inventive Plan (incorporated by reference to our Current Report on Form 8-K filed on January 14, 2005).10.31
    
    
    
    Amendment No. 2 to the Amended and Restated 1999 Stock Incentive Plan (incorporated by reference to our Current Report on
Form 8-K filed on May 17, 2005 (the May 17, 2005 8-K)).
 41




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##### Table of Contents



ExhibitNumber
    
    
    
    Exhibit Title10.32
    
    
    
    Amendment No. 1 to the Martha Stewart Living Omnimedia, Inc. Non-Employee Director Stock and Option Compensation Plan
(incorporated by reference to the May 17, 2005 8-K).10.33
    
    
    
    Martha Stewart Living Omnimedia, Inc. Annual Incentive Plan (incorporated by reference to the May 17, 2005 8-K).10.34
    
    
    
    Employment Agreement dated as of May 2, 2005, between Martha Stewart Living Omnimedia, Inc. and Robin Marino
(incorporated by reference to our Current Report on Form 8-K filed on June 10, 2005).10.35
    
    
    
    Employment Agreement dated as of July 21, 2005, between Martha Stewart Living Omnimedia, Inc. and John R. Cuti
(incorporated by reference to our Current Report on Form 8-K filed on September 8, 2005).10.36
    
    
    
    Consulting Agreement dated as of October 21, 2005 between Martha Stewart Living Omnimedia, Inc. and CAK Entertainment
Inc., an entity for which Mr. Charles A. Koppelman serves as Chairman and Chief Executive Officer (incorporated by
reference to our Current Report on Form 8-K filed on October 21, 2005 (the October 21, 2005 8-K)).10.37
    
    
    
    Consulting Agreement between Charles A. Koppelman and Martha Stewart Living Omnimedia, Inc. dated January 24, 2005
(incorporated by reference to the October 21, 2005 8-K).10.38
    
    
    
    Registration Rights Agreement between Charles A. Koppelman and Martha Stewart Living Omnimedia, Inc. dated January 24,
2005 (incorporated by reference to the October 21, 2005 8-K).10.39
    
    
    
    Employment Agreement dated as of November 15, 2005, between Martha Stewart Living Omnimedia, Inc. and Sheraton Kalouria
(incorporated by reference to our Current Report on Form 8-K filed on November 22, 2005).10.40
    
    
    
    Separation Agreement dated as of March 7, 2006, between Martha Stewart Living Omnimedia, Inc. and James Follo
(incorporated by reference to our Current Report on Form 8-K filed on March 8, 2006).10.41
    
    
    
    Employment Agreement dated as of July 24, 2006, between Martha Stewart Living Omnimedia, Inc. and Holly Brown
(incorporated by reference to our Current Report on Form 8-K filed on July 26, 2006).10.42
    
    
    
    Employment Agreement dated as of July 24, 2006, between Martha Stewart Living Omnimedia, Inc. and Howard Hochhauser
(incorporated by reference to our Current Report on Form 8-K filed on July 26, 2006).10.43
    
    
    
    Warrant Registration Rights Agreement dated as of August 11, 2006, between Martha Stewart Living Omnimedia, Inc. and Mark
Burnett (incorporated by reference to the Companys quarterly report on Form 10-Q for the period ended September 30,
2006).10.44
    
    
    
    Letter Agreement dated as of October 24, 2006, between Martha Stewart Living Omnimedia, Inc. and Robin Marino
(incorporated by reference to our Current Report on Form 8-K filed on October 25, 2006).10.45
    
    
    
    Bonus Conversion Policy (incorporated by reference to our Current Report on Form 8-K filed on February 27, 2007).10.46
    
    
    
    Form of Restricted Stock Unit Award Agreement (incorporated by reference to our Current Report on Form 8-K filed on
February 27, 2007).21*
    
    
    
    List of Subsidiaries.23.1*
    
    
    
    Consent of Independent Registered Public Accounting Firm.31.1*
    
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32*
    
    
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 
    
    indicates management contracts and compensatory plans*
    
    indicates filed herewith Disclosures Required by Section 303A.12 of the NYSE Listed Company Manual.
 42




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##### Table of Contents



SIGNATURES
  MARTHA STEWART LIVING OMNIMEDIA, INC.By:
    /s/ Susan LyneName:
    Susan LyneTitle:
    President and Chief Executive Officer  Signature
    
    Title/s/ Susan Lyne
    
    President, Chief Executive Officer andSusan Lyne
    
    Director (Principal Executive Officer)/s/ Howard Hochhauser
    
    Chief Financial OfficerHoward Hochhauser
    
    (Principal Financial and Accounting Officer)/s/ Rick Boyko
    
    DirectorRick Boyko/s/ Michael Goldstein
    
    DirectorMichael Goldstein/s/ Jill A. Greenthal
    
    DirectorJill A. Greenthal/s/ Charles Koppelman
    
    Chairman of the BoardCharles Koppelman/s/ Wenda Harris Millard
    
    DirectorWenda Harris Millard/s/ Thomas C. Siekman
    
    Lead Independent DirectorThomas C. Siekman/s/ Bradley E. Singer
    
    DirectorBradley E. Singer
  43




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, 
FINANCIAL STATEMENT SCHEDULES AND OTHER

FINANCIAL INFORMATION
 Consolidated Financial Statements:Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations for each of the three years in the period
ended December 31, 2006, 2005 and 2004
    
    
    F-3Consolidated Balance Sheets at December 31, 2006 and 2005
    
    
    F-4Consolidated Statements of Shareholders Equity for each of the three years in the
period ended December 31, 2006, 2005, and 2004
    
    
    F-5Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2006, 2005, and 2004
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Financial Statement Schedule:II  Valuation and Qualifying Accounts for each of the three years ended December 31,
2006, 2005 and 2004
    
    
    F-25
  F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
        
 F-2




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##### Table of Contents



MARTHA STEWART LIVING OMNIMEDIA, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Years Ended December 31, 2006, 2005 and 2004
 (in thousands except per share data)
 2006
    
    
    2005
    
    
    2004REVENUESPublishing
    
    $
    156,559
    
    
    $
    125,765
    
    
    $
    95,960Merchandising
    
    
    69,504
    
    
    
    58,819
    
    
    
    53,386Internet
    
    
    15,775
    
    
    
    11,258
    
    
    
    27,512Broadcasting
    
    
    46,503
    
    
    
    16,591
    
    
    
    10,580Total revenues
    
    
    288,341
    
    
    
    212,433
    
    
    
    187,438OPERATING COSTS AND EXPENSESProduction, distribution and editorial
    
    
    138,213
    
    
    
    125,929
    
    
    
    116,661Selling and promotion
    
    
    74,190
    
    
    
    71,037
    
    
    
    58,422General and administrative
    
    
    70,173
    
    
    
    85,981
    
    
    
    65,687Depreciation and amortization
    
    
    8,598
    
    
    
    7,797
    
    
    
    6,672Total operating costs and expenses
    
    
    291,174
    
    
    
    290,744
    
    
    
    247,442OPERATING LOSS
    
    
    (2,833
    )
    
    
    (78,311
    )
    
    
    (60,004
    )Interest income, net
    
    
    4,511
    
    
    
    3,423
    
    
    
    1,799Legal Settlement
    
    
    (17,090
    )
    
    
    
    
    
    
    LOSS BEFORE INCOME TAXES
    
    
    (15,412
    )
    
    
    (74,888
    )
    
    
    (58,205
    )Income tax provision
    
    
    (838
    )
    
    
    (407
    )
    
    
    (868
    )LOSS FROM CONTINUING OPERATIONS
    
    
    (16,250
    )
    
    
    (75,295
    )
    
    
    (59,073
    )Loss from discontinued operations
    
    
    (745
    )
    
    
    (494
    )
    
    
    (526
    )NET LOSS
    
    $
    (16,995
    )
    
    $
    (75,789
    )
    
    $
    (59,599
    )LOSS PER SHAREBasic and diluted  Loss from continuing operations
    
    $
    (0.32
    )
    
    $
    (1.48
    )
    
    $
    (1.19
    )Basic and diluted  Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )Basic and diluted  Net loss
    
    $
    (0.33
    )
    
    $
    (1.49
    )
    
    $
    (1.20
    )WEIGHTED AVERAGE COMMON SHARES OUTSTANDINGBasic and Diluted
    
    
    51,312
    
    
    
    50,991
    
    
    
    49,712DIVIDENDS PER COMMON SHARE
    
    $
    0.50
    
    
    
    n/a
    
    
    
    n/a
 The accompanying notes are an integral part of these consolidated financial statements.
 F-3




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##### Table of Contents



MARTHA STEWART LIVING OMNIMEDIA, INC.
 
 CONSOLIDATED BALANCE SHEETS
 December 31, 2006 and 2005
 (in thousands except per share data)
 2006
    
    
    2005ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    28,528
    
    
    $
    20,249Short-term investments
    
    
    35,321
    
    
    
    83,788Accounts receivable, net
    
    
    70,319
    
    
    
    55,381Inventories, net
    
    
    4,448
    
    
    
    3,910Deferred television production costs
    
    
    4,609
    
    
    
    6,507Income taxes receivable
    
    
    482
    
    
    
    519Other current assets
    
    
    3,857
    
    
    
    4,366Total current assets
    
    
    147,564
    
    
    
    174,720PROPERTY, PLANT AND EQUIPMENT,net
    
    
    19,616
    
    
    
    19,797INTANGIBLE ASSETS,net
    
    
    53,605
    
    
    
    53,680OTHER NON-CURRENT ASSETS
    
    
    7,262
    
    
    
    5,631Total assets
    
    $
    228,047
    
    
    $
    253,828LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued liabilities
    
    $
    28,053
    
    
    $
    28,545Accrued payroll and related costs
    
    
    13,646
    
    
    
    7,488Income taxes payable
    
    
    1,011
    
    
    
    476Current portion of deferred subscription revenue
    
    
    28,884
    
    
    
    31,060Current portion of deferred royalty revenue
    
    
    3,159
    
    
    
    6,578Total current liabilities
    
    
    74,753
    
    
    
    74,147DEFERRED SUBSCRIPTION REVENUE
    
    
    10,032
    
    
    
    8,688DEFERRED REVENUE
    
    
    9,845
    
    
    
    7,321OTHER NON-CURRENT LIABILITIES
    
    
    2,460
    
    
    
    3,041Total liabilities
    
    
    97,090
    
    
    
    93,197COMMITMENTS AND CONTIGENCIESSHAREHOLDERS EQUITYClass A common stock, $.01 par value, 350,000
shares authorized: 26,109 and 24,882 shares
issued in 2006 and 2005, respectively
    
    
    261
    
    
    
    249Class B common stock, $.01 par value, 150,000
shares authorized; 26,791 and 26,873 shares
outstanding in 2006 and 2005, respectively
    
    
    268
    
    
    
    269Capital in excess of par value
    
    
    257,014
    
    
    
    242,770Accumulated deficit
    
    
    (125,811
    )
    
    
    (81,882
    )131,732
    
    
    
    161,406Less Class A treasury stock  59 shares at cost
    
    
    (775
    )
    
    
    (775
    )Total shareholders equity
    
    
    130,957
    
    
    
    160,631Total liabilities and shareholders equity
    
    $
    228,047
    
    
    $
    253,828
 The accompanying notes are an integral part of these consolidated financial statements.
 F-4




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##### Table of Contents



MARTHA STEWART LIVING OMNIMEDIA, INC.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 For the Years Ended December 31, 2006, 2005 and 2004
 (in thousands)
 RetainedClass A
    
    
    Class B
    
    
    Capital in
    
    
    Earnings
    
    
    Class Acommon stock
    
    
    common stock
    
    
    excess of par
    
    
    (Accumulated
    
    
    Treasury StockShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    value
    
    
    deficit)
    
    
    Shares
    
    
    Amount
    
    
    TotalBalance at January 1, 2004
    
    
    19,628
    
    
    $
    196
    
    
    
    30,059
    
    
    $
    301
    
    
    $
    183,437
    
    
    $
    53,506
    
    
    
    (59
    )
    
    $
    (775
    )
    
    $
    236,665Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,599
    )
    
    
    
    
    
    
    
    
    
    
    (59,599
    )Conversion of shares
    
    
    786
    
    
    
    8
    
    
    
    (786
    )
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares returned on net treasury basis
    
    
    
    
    
    
    
    
    
    
    (150
    )
    
    
    (2
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares in conjunction with
stock options exercises
    
    
    824
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    4,294
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,303Issuance of shares of stock and
restricted stock, net of cancellations
and tax liabilities
    
    
    422
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    (3,244
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,240
    )Non-cash equity compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,499Balance at December 31, 2004
    
    
    21,660
    
    
    
    217
    
    
    
    29,123
    
    
    
    291
    
    
    
    193,988
    
    
    
    (6,093
    )
    
    
    (59
    )
    
    
    (775
    )
    
    
    187,628Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75,789
    )
    
    
    
    
    
    
    
    
    
    
    (75,789
    )Conversion of shares
    
    
    1,828
    
    
    
    18
    
    
    
    (1,828
    )
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares returned on net treasury basis
    
    
    
    
    
    
    
    
    
    
    (422
    )
    
    
    (4
    )
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares in conjunction with
stock options exercises
    
    
    585
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    7,954
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,960Issuance of shares of stock and
restricted stock, net of cancellations
and tax liabilities
    
    
    809
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (3,717
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,709
    )Expense associated with common stock
warrant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,755
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,755Non-cash equity compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,786
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,786Balance at December 31, 2005
    
    
    24,882
    
    
    
    249
    
    
    
    26,873
    
    
    
    269
    
    
    
    242,770
    
    
    
    (81,882
    )
    
    
    (59
    )
    
    
    (775
    )
    
    
    160,631Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,995
    )
    
    
    
    
    
    
    
    
    
    
    (16,995
    )Shares returned on a net treasury basis
    
    
    
    
    
    
    
    
    
    
    (82
    )
    
    
    (1
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares in conjunction with
stock options exercises
    
    
    151
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,583Issuance of shares of stock and
restricted stock, net of cancellations
and tax liabilities
    
    
    332
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (794
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (791
    )Issuance of shares in conjunction with
warrant exercises
    
    
    744
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Common stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,934
    )
    
    
    
    
    
    
    
    
    
    
    (26,934
    )Expense associated with common stock
warrant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,261
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,261Non-cash equity compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,194Balance at December 31, 2006
    
    
    26,109
    
    
    $
    261
    
    
    
    26,791
    
    
    $
    268
    
    
    $
    257,014
    
    
    $
    (125,811
    )
    
    
    (59
    )
    
    $
    (775
    )
    
    $
    130,957
 The accompanying notes are an integral part of these consolidated financial statements.
 F-5




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##### Table of Contents



MARTHA STEWART LIVING OMNIMEDIA, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Years Ended December 31, 2006, 2005 and 2004
 (in thousands)
 2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (16,995
    )
    
    $
    (75,789
    )
    
    $
    (59,599
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    8,598
    
    
    
    7,797
    
    
    
    6,672Deferred income tax expense
    
    
    
    
    
    
    
    
    
    
    3,851Non-cash equity compensation
    
    
    13,811
    
    
    
    44,580
    
    
    
    9,499Changes in operating assets and liabilities, net of acquisitionAccounts receivable, net
    
    
    (14,938
    )
    
    
    (24,050
    )
    
    
    9,049Inventories
    
    
    (538
    )
    
    
    1,319
    
    
    
    2,256Other current assets
    
    
    509
    
    
    
    (793
    )
    
    
    1,135Deferred television production costs
    
    
    1,898
    
    
    
    (6,507
    )
    
    
    3,465Other non-current assets
    
    
    (1,946
    )
    
    
    1,145
    
    
    
    (2,328
    )Accounts payable and accrued liabilities
    
    
    5,626
    
    
    
    1,021
    
    
    
    (4,812
    )Income taxes
    
    
    572
    
    
    
    5,867
    
    
    
    3,979Deferred subscription revenue
    
    
    (832
    )
    
    
    4,920
    
    
    
    2,124Deferred royalty revenue
    
    
    (895
    )
    
    
    10,461
    
    
    
    3,438Other non-current liabilities
    
    
    (581
    )
    
    
    (320
    )
    
    
    (955
    )(11,125
    )
    
    
    (6,937
    )
    
    
    17,351Net cash used in operating activities
    
    
    (5,711
    )
    
    
    (30,349
    )
    
    
    (22,226
    )CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (8,342
    )
    
    
    (9,822
    )
    
    
    (947
    )Purchases of short-term investments
    
    
    (189,755
    )
    
    
    (137,876
    )
    
    
    (40,909
    )Sales of short-term investments
    
    
    238,222
    
    
    
    89,398
    
    
    
    8,700Acquisition of business, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (6,600
    )Net cash provided by (used in) investing activities
    
    
    40,125
    
    
    
    (58,300
    )
    
    
    (39,756
    )CASH FLOWS FROM FINANCING ACTIVITIESDividends paid
    
    
    (26,101
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    750
    
    
    
    7,960
    
    
    
    4,303Issuance of stock, warrants and restricted stock,
net of cancellations and tax liabilities
    
    
    (784
    )
    
    
    (3,709
    )
    
    
    (3,240
    )Net cash provided by (used in) financing activities
    
    
    (26,135
    )
    
    
    4,251
    
    
    
    1,063Net increase (decrease) in cash
    
    
    8,279
    
    
    
    (84,398
    )
    
    
    (60,919
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    20,249
    
    
    
    104,647
    
    
    
    165,566CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    28,528
    
    
    $
    20,249
    
    
    $
    104,647
 The accompanying notes are an integral part of these consolidated financial statements.
 F-6




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. THE COMPANY
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
  Cash and Cash Equivalents
  Short-term Investments
  Revenue Recognition
        F-7




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##### Table of Contents



Television Production Costs
  Intangible Assets
     AccumulatedAccumulated
    
    
    
    
    
    
    
    
    
    AmortizationAmortization
    
    
    
    
    
    
    
    
    
    -PublishingPublishing
    
     Publishing
    
    Publishing
    
    Publishing
    
    Subscriber(in thousands)
    
    Goodwill
    
     Goodwill
    
    Trademarks
    
    Subscriber Lists
    
    Lists
    
    TotalBalance January 1, 2005
    
    $
    67,841
    
    
    $
    (14,752
    )
    
    $
    500
    
    
    $
    900
    
    
    $
    (225
   )
    
    $
    54,264Adjustments to goodwill
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16Amortization  expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )
    
    
   (600
    )Balance
December 31, 2005
    
    
    67,857
    
    
    
    (14,752
    )
    
    
    500
    
    
    
    900
    
    
    
    (825
    )
    
    
    53,680Adjustments to
goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75
    )
    
    
    (75
    )Balance
December 31, 2006
    
    $
    67,857
    
    
    $
    (14,752
    )
    
    $
    500
    
    
    $
    900
    
    
    $
    (900
    )
    
    $
    53,605
 Impairment of Long-lived assets
  F-8




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##### Table of Contents



Deferred
Income Tax Asset Valuation Allowance
  Inventories
  Advertising Costs
  Reclassification Adjustments
  Loss Per Share
   Property, Plant and Equipment
    Studio sets
    
    2  10 yearsFurniture, fixtures and equipment
    
    3  5 yearsComputer hardware and software
    
    3  5 yearsLeasehold improvements
    
    life of lease
 Use of Estimates
  F-9




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##### Table of Contents



Equity Compensation
   Black-Scholes Assumptions
  Stock Options and Warrants
  F-10




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##### Table of Contents



2006Risk-free interest rates
    
    
    4.5%  5.2
    %Dividend yields
    
    ZeroExpected volatility
    
    
    35.5%  65.7
    %Expected option life
    
    2.5   9.5 yearsAverage fair market value per option granted
    
    $
    7.29  $14.59
   Number of
    
    
    Weighted averageoptions
    
    
    exercise priceOutstanding as of December 31, 2005
    
    
    114,581
    
    
    $
    0.60Exercised
    
    
    (54,937
    )
    
    
    0.60Outstanding as of December 31, 2006
    
    
    59,644
    
    
    $
    0.60Options exercisable at December 31, 2006
    
    
    59,644
    
    
    $
    0.60Options available for grant at December 31, 2006
    
    Zero
 F-11




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##### Table of Contents



Number of
    
    
    Weighted averageoptions
    
    
    exercise priceOutstanding as of December 31, 2005
    
    
    1,686,208
    
    
    $
    18.13Granted
    
    
    137,500
    
    
    
    17.68Exercised
    
    
    (96,108
    )
    
    
    7.54Cancelled
    
    
    (4,250
    )
    
    
    11.34Outstanding as of December 31, 2006
    
    
    1,723,350
    
    
    $
    18.70Options exercisable at December 31, 2006
    
    
    1,187,512
    
    
    $
    18.24Equity available for grant at December 31, 2006
    
    
    5,532,699
  Weighted
    
    
    Options Outstanding
    
    
    Options ExercisableAverage
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageRange of Exercise Price
    
    Contractual
    
    
    Number
    
    
    Exercise
    
    
    Number
    
    
    ExercisePer Share
    
    Life in Years
    
    
    Outstanding
    
    
    Price
    
    
    Exercisable
    
    
    Price$0.60
    
    
    0.9
    
    
    
    59,644
    
    
    $
    0.60
    
    
    
    59,644
    
    
    $
    0.60$6.78-$10.61
    
    
    2.7
    
    
    
    292,092
    
    
    
    8.14
    
    
    
    237,088
    
    
    
    7.90$14.90-$15.75
    
    
    4.1
    
    
    
    18,725
    
    
    
    15.38
    
    
    
    18,725
    
    
    
    15.38$15.90
    
    
    5.1
    
    
    
    150,000
    
    
    
    15.90
    
    
    
    150,000
    
    
    
    15.90$16.45-$18.90
    
    
    6.8
    
    
    
    670,633
    
    
    
    18.45
    
    
    
    429,799
    
    
    
    18.65$19.92-$26.25
    
    
    7.6
    
    
    
    240,100
    
    
    
    21.04
    
    
    
    100,100
    
    
    
    22.00$26.56-$33.75
    
    
    6.0
    
    
    
    351,800
    
    
    
    27.72
    
    
    
    251,800
    
    
    
    27.39$0.60-$33.75
    
    
    5.7
    
    
    
    1,782,994
    
    
    $
    18.09
    
    
    
    1,247,156
    
    
    $
    17.40
  2005
    
    2004Risk-free interest rates
    
    
    3.74
    %
    
    
    3.47
    %Dividend yields
    
    Zero
    
    
    ZeroExpected volatility
    
    
    68.3
    %
    
    
    68.5
    %Expected option life
    
    3.0 years
    
    
    4.7 yearsAverage fair market value per option granted
    
    $
    12.01
    
    
    $
    9.06
 F-12




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##### Table of Contents



(in thousands, except per share data)
    
    2005
    
    
    2004Net loss, as reported
    
    $
    (75,789
    )
    
    $
    (59,599
    )Add back: Total stock option based
employee compensation expense
included in net loss
    
    
    3,496
    
    
    
    5,149Deduct: Total stock option based
employee compensation expense
determined under fair value based
method for all awards
    
    
    (5,512
    )
    
    
    (7,136
    )Pro forma net loss
    
    $
    (77,805
    )
    
    $
    (61,586
    )Loss per share:Basic and diluted  as reported
    
    $
    (1.49
    )
    
    $
    (1.20
    )Basic and diluted  pro forma
    
    $
    (1.53
    )
    
    $
    (1.24
    )
 Restricted Stock
   WeightedAverage Grant(in thousands, except share data)
    
    Shares
    
    
    Date ValueNonvested at December 31, 2005
    
    
    708,943
    
    
    $
    16,997Granted
    
    
    449,105
    
    
    
    7,855Vested (1)
    
    
    (204,121
    )
    
    
    (4,876
    )Forfeitures
    
    
    (83,633
    )
    
    
    (1,924
    )Nonvested at December 31, 2006
    
    
    870,294
    
    
    $
    18,052
 
 (1)
    
    Included in these gross shares vested during the period ended December 31, 2006, 62,798
shares of our common stock were surrendered by recipients in order to fulfill their tax
withholding obligations.  Recent Accounting Pronouncements
  F-13




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##### Table of Contents



3. ACCOUNTS RECEIVABLE, NET
  (in thousands)
    
    2006
    
    
    2005Advertising
    
    $
    26,722
    
    
    $
    20,208Licensing
    
    
    41,273
    
    
    
    31,527Other
    
    
    6,085
    
    
    
    5,95274,080
    
    
    
    57,687Less: reserve for credits and uncollectible accounts
    
    
    3,761
    
    
    
    2,306$
    70,319
    
    
    $
    55,381
  4. INVENTORIES
  (in thousands)
    
    2006
    
    
    2005Paper
    
    $
    4,448
    
    
    $
    3,910
 5. PROPERTY, PLANT AND EQUIPMENT, NET
  (in
thousands)
    
    2006
    
    
    2005Studios and equipment
    
    $
    4,202
    
    
    $
    10,304Furniture, fixtures and equipment
    
    
    9,071
    
    
    
    10,426Computer hardware and software
    
    
    22,938
    
    
    
    18,708Leasehold improvements
    
    
    26,716
    
    
    
    23,948Total Property, Plant and Equipment
    
    
    62,927
    
    
    
    63,386Less: accumulated depreciation and amortization
    
    
    43,311
    
    
    
    43,589Net Property, Plant and Equipment
    
    $
    19,616
    
    
    $
    19,797
  F-14




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##### Table of Contents



6. LINE OF CREDIT
  7. STOCKHOLDERS EQUITY
 Common Stock
   8. EMPLOYEE AND NON-EMPLOYEE BENEFIT AND COMPENSATION PLANS
 Retirement Plans
   Employee Stock Compensation Plans
      F-15




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##### Table of Contents



Non-Employee Equity Compensation Plans
  The Martha Stewart Show The Martha Stewart Show
   F-16




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##### Table of Contents



Related Party
Transactions
 Executive Bonus Plan
   Other
  9. INCOME TAXES
   (in thousands)
    
    2006
    
    
    2005
    
    
    2004Current Income Tax (Expense)/BenefitFederal
    
    $
    (399
    )
    
    $
    (20
    )
    
    $
    1,755State and local
    
    
    (77
    )
    
    
    (96
    )
    
    
    1,401Foreign
    
    
    (362
    )
    
    
    (291
    )
    
    
    (173
    )Total current income tax (expense)/benefit
    
    
    (838
    )
    
    
    (407
    )
    
    
    2,983Deferred Income Tax ExpenseFederal
    
    
    
    
    
    
    
    
    
    
    (3,754
    )State and local
    
    
    
    
    
    
    
    
    
    
    (97
    )Total deferred income tax expense
    
    
    
    
    
    
    
    
    
    
    (3,851
    )Income tax provision from continuing
operations
    
    $
    (838
    )
    
    $
    (407
    )
    
    $
    (868
    )
 F-17




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##### Table of Contents



(in thousands)
    
    2006
    
    
    2005
    
    
    2004Computed tax at the federal statutory rate of 35%
    
    $
    5,655
    
    
    $
    26,384
    
    
    $
    20,556State income taxes, net of federal benefit
    
    
    (50
    )
    
    
    (62
    )
    
    
    848Non-deductible compensation
    
    
    (5,486
    )
    
    
    (994
    )
    
    
    (1,608
    )Non-deductible expense
    
    
    (226
    )
    
    
    (164
    )
    
    
    (163
    )Non-deductible litigation settlement
    
    
    (5,981
    )
    
    
    
    
    
    
    Non-taxable foreign income
    
    
    225
    
    
    
    232
    
    
    
    152Non-taxable interest income
    
    
    6
    
    
    
    10
    
    
    
    253Valuation allowance
    
    
    4,816
    
    
    
    (26,104
    )
    
    
    (28,286
    )Benefit of net operating loss (NOL) and tax
credits carried back or forward
    
    
    240
    
    
    
    
    
    
    
    7,090Other
    
    
    (37
    )
    
    
    291
    
    
    
    290Provision for income taxes
    
    $
    (838
    )
    
    $
    (407
    )
    
    $
    (868
    )Effective tax rate
    
    
    5.2
    %
    
    
    0.5
    %
    
    
    1.5
    %
  (in thousands)
    
    2006
    
    
    2005Deferred Tax AssetsProvision for doubtful accounts
    
    $
    1,020
    
    
    $
    990Accrued rent
    
    
    1,465
    
    
    
    1,667Reserve for newsstand returns
    
    
    1,319
    
    
    
    1,182Accrued compensation
    
    
    6,594
    
    
    
    15,948Deferred royalty revenue
    
    
    4,015
    
    
    
    2,947NOL/credit carryforwards
    
    
    46,211
    
    
    
    45,276Depreciation and amortization
    
    
    1,034
    
    
    
    3,200Other
    
    
    648
    
    
    
    468Total deferred tax assets
    
    
    62,306
    
    
    
    71,678Deferred Tax LiabilitiesPrepaid expenses
    
    
    (165
    )
    
    
    (102
    )Total deferred tax liabilities
    
    
    (165
    )
    
    
    (102
    )Valuation allowance
    
    
    (62,141
    )
    
    
    (71,576
    )Net Deferred Tax Asset
    
    $
    
    
    
    $
    
  F-18




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##### Table of Contents



10. RELATED PARTY TRANSACTIONS
      F-19




---



##### Table of Contents



F-20




---



##### Table of Contents



11. COMMITMENTS AND CONTINGENCIES
 Operating Leases
   Operating(in thousands)
    
    Leases2007
    
    $
    10,0112008
    
    
    8,2782009
    
    
    8,4112010
    
    
    2,4162011
    
    
    1,674Thereafter
    
    
    2,758Total minimum lease payments
    
    $
    33,548
 Legal Matters
   F-21




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##### Table of Contents



Other
  12. BUSINESS ACQUISITIONS
 Body + Soul Dr. Andrew Weils Self Healing
 Body + Soul
 . Andrew Weils Self Healing
  13. DISCONTINUED OPERATIONS
  (in thousands)
    
    2006
    
    
    2005
    
    
    2004Net loss from discontinued operations
    
    $
    (745
    )
    
    $
    (494
    )
    
    $
    (526
    )
   (in thousands)
    
    2006
    
    
    2005Total assets
    
    $
    
    
    
    $
    Accounts payable and accrued expenses
    
    
    (1,140
    )
    
    
    (1,024
    )Net liabilities of discontinued operations
    
    $
    (1,140
    )
    
    $
    (1,024
    )
 F-22




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##### Table of Contents



14. OTHER INFORMATION
        15. INDUSTRY SEGMENTS
  (in thousands)
    
    Publishing
    
    Merchandising
    
    Internet
    
    Broadcasting
    
    Corporate
    
    Consolidated2006Revenues
    
    $
    156,559
    
    
    $
    69,504
    
    
    $
    15,775
    
    
    $
    46,503
    
    
    $
    
    
    
    $
    288,341Non-cash equity
compensation
    
    
    2,715
    
    
    
    967
    
    
    
    208
    
    
    
    3,006
    
    
    
    6,915
    
    
    
    13,811Depreciation and
amortization
    
    
    600
    
    
    
    1,021
    
    
    
    117
    
    
    
    3,026
    
    
    
    3,834
    
    
    
    8,598Operating income (loss)
    
    
    6,026
    
    
    
    46,529
    
    
    
    (531
    )
    
    
    (1,616
    )
    
    
    (53,241
    )
    
    
    (2,833
    )Total assets
    
    
    82,824
    
    
    
    37,734
    
    
    
    8,001
    
    
    
    17,106
    
    
    
    82,382
    
    
    
    228,047Capital expenditures
    
    
    770
    
    
    
    70
    
    
    
    3,054
    
    
    
    439
    
    
    
    4,009
    
    
    
    8,3422005Revenues
    
    $
    125,765
    
    
    $
    58,819
    
    
    $
    11,258
    
    
    $
    16,591
    
    
    $
    
    
    
    $
    212,433Non-cash equity
compensation
    
    
    2,154
    
    
    
    569
    
    
    
    38
    
    
    
    17,562
    
    
    
    24,257
    
    
    
    44,580Depreciation and
amortization
    
    
    987
    
    
    
    845
    
    
    
    951
    
    
    
    1,321
    
    
    
    3,693
    
    
    
    7,797Operating income (loss)
    
    
    (15,335
    )
    
    
    38,709
    
    
    
    (3,537
    )
    
    
    (27,201
    )
    
    
    (70,947
    )
    
    
    (78,311
    )Total assets
    
    
    74,968
    
    
    
    29,267
    
    
    
    3,819
    
    
    
    21,222
    
    
    
    124,552
    
    
    
    253,828Capital expenditures
    
    
    242
    
    
    
    125
    
    
    
    191
    
    
    
    6,610
    
    
    
    2,654
    
    
    
    9,8222004Revenues
    
    $
    95,960
    
    
    $
    53,386
    
    
    $
    27,512
    
    
    $
    10,580
    
    
    $
    
    
    
    $
    187,438Non-cash equity
compensation
    
    
    143
    
    
    
    (72
    )
    
    
    
    
    
    
    
    
    
    
    9,428
    
    
    
    9,499Depreciation and
amortization
    
    
    472
    
    
    
    760
    
    
    
    987
    
    
    
    230
    
    
    
    4,223
    
    
    
    6,672Operating income (loss)
    
    
    (24,615
    )
    
    
    36,427
    
    
    
    (8,861
    )
    
    
    (8,708
    )
    
    
    (54,247
    )
    
    
    (60,004
    )Total assets
    
    
    66,914
    
    
    
    24,014
    
    
    
    5,037
    
    
    
    605
    
    
    
    168,108
    
    
    
    264,678Capital expenditures
    
    
    75
    
    
    
    177
    
    
    
    132
    
    
    
    37
    
    
    
    526
    
    
    
    947
 F-23




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##### Table of Contents



16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands except per share data)
 Year ended December 31, 2006
    
    First Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Fourth Quarter
    
    
    TotalRevenues
    
    $
    62,083
    
    
    $
    68,169
    
    
    $
    61,050
    
    
    $
    97,039
    
    
    $
    288,341Operating income/(loss)
    
    
    (7,691
    )
    
    
    (1,790
    )
    
    
    (7,927
    )
    
    
    14,575
    
    
    
    (2,833
    )Income/(loss) from continuing operations
    
    
    (6,712
    )
    
    
    (662
    )
    
    
    (25,090
    )
    
    
    16,214
    
    
    
    (16,250
    )Loss from discontinued operations
    
    
    (123
    )
    
    
    (499
    )
    
    
    (123
    )
    
    
    
    
    
    
    (745
    )Net income/(loss)
    
    $
    (6,835
    )
    
    $
    (1,161
    )
    
    $
    (25,213
    )
    
    $
    16,214
    
    
    $
    (16,995
    )Earnings per share  basic and dilutedIncome/(loss) from continuing operations
    
    $
    (0.13
    )
    
    $
    (0.01
    )
    
    $
    (0.49
    )
    
    $
    0.31
    
    
    $
    (0.32
    )Loss from discontinued operations
    
    
    (0.00
    )
    
    
    (0.01
    )
    
    
    (0.00
    )
    
    
    (0.00
    )
    
    
    (0.01
    )Net income/(loss)
    
    $
    (0.13
    )
    
    $
    (0.02
    )
    
    $
    (0.49
    )
    
    $
    0.31
    
    
    $
    (0.33
    )Weighted average common shares outstandingBasic
    
    
    51,207
    
    
    
    51,176
    
    
    
    51,220
    
    
    
    51,641
    
    
    
    51,312Diluted
    
    
    51,207
    
    
    
    51,176
    
    
    
    51,220
    
    
    
    52,560
    
    
    
    51,312
 Year ended December 31, 2005
    
    First Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Fourth Quarter
    
    
    TotalRevenues
    
    $
    39,545
    
    
    $
    46,926
    
    
    $
    41,324
    
    
    $
    84,637
    
    
    $
    212,433Operating
income/(loss)
    
    
    (19,782
    )
    
    
    (34,210
    )
    
    
    (26,854
    )
    
    
    2,535
    
    
    
    (78,311
    )Income/(loss) from continuing operations
    
    
    (19,036
    )
    
    
    (33,379
    )
    
    
    (25,946
    )
    
    
    3,066
    
    
    
    (75,295
    )Loss from discontinued operations
    
    
    (132
    )
    
    
    (120
    )
    
    
    (122
    )
    
    
    (120
    )
    
    
    (494
    )Net income/(loss)
    
    $
    (19,168
    )
    
    $
    (33,499
    )
    
    $
    (26,068
    )
    
    $
    2,946
    
    
    $
    (75,789
    )Earnings per share  basic and dilutedIncome/(loss) from continuing operations
    
    $
    (0.37
    )
    
    $
    (0.65
    )
    
    $
    (0.51
    )
    
    $
    0.06
    
    
    $
    (1.48
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Net income/(loss)
    
    $
    (0.38
    )
    
    $
    (0.65
    )
    
    $
    (0.51
    )
    
    $
    0.06
    
    
    $
    (1.49
    )Weighted average common shares outstandingBasic
    
    
    50,863
    
    
    
    51,166
    
    
    
    50,849
    
    
    
    51,112
    
    
    
    50,991Diluted
    
    
    50,863
    
    
    
    51,166
    
    
    
    50,849
    
    
    
    52,154
    
    
    
    50,991
 Fourth Quarter Items:
    F-24




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##### Table of Contents



MARTHA STEWART LIVING OMNIMEDIA, INC.
 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 (in thousands)
 AdditionsBalance,
    
    Charged toBeginning of
    
    Costs and
    
    
    
    
    
    Balance,Description
    
    Year
    
    Expenses
    
    Deductions
    
    End of YearAllowance for doubtful
accounts:Year ended December 31,2006
    
    $
    1,221
    
    
    $
    316
    
    
    $
    330
    
    
    $
    1,2072005
    
    
    944
    
    
    
    376
    
    
    
    99
    
    
    
    1,2212004
    
    
    1,126
    
    
    
    383
    
    
    
    565
    
    
    
    944Reserve for audience
underdelivery:Year ended December 31,2006
    
    $
    1,085
    
    
    $
    2,951
    
    
    $
    1,482
    
    
    $
    2,5542005
    
    
    326
    
    
    
    1,135
    
    
    
    376
    
    
    
    1,0852004
    
    
    529
    
    
    
    (93
    )
    
    
    110
    
    
    
    326Reserve for obsolete and
excess inventory:Year ended December 31,
2006
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2005
    
    
    286
    
    
    
    
    
    
    
    286
    
    
    
    2004
    
    
    1,926
    
    
    
    (1,640
    )
    
    
    
    
    
    
    286Reserve for product returns:Year ended December 31,2006
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2005
    
    
    253
    
    
    
    
    
    
    
    253
    
    
    
    2004
    
    
    256
    
    
    
    2,334
    
    
    
    2,337
    
    
    
    253Reserve for valuation
allowance on the deferred
tax asset:Year ended December 31,2006
    
    $
    71,576
    
    
    $
    
    
    
    $
    9,435
    
    
    $
    62,1412005
    
    
    31,953
    
    
    
    45,714
    
    
    
    6,091
    
    
    
    71,5762004
    
    
    
    
    
    
    31,953
    
    
    
    
    
    
    
    31,953
 F-25