Summary of MARTHA STEWART LIVING OMNIMEDIA INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
EXECUTIVE SUMMARY
We are an integrated media and merchandising company providing consumers with inspiring lifestyle content and well-designed, high-quality products. Our Company is organized into four business segments: Publishing, Merchandising, Internet and Broadcasting. In the first quarter of 2008, total revenues increased approximately 2% driven by advertising revenue growth in our Publishing, Internet and Broadcasting segments.
Media Update. In the first quarter, all three of our media platforms showed advertising revenue growth driven in part by a change in advertiser category mix as well as an increase in volume.
Publishing
Our books business increased year-over-year due to the acceptance of a manuscript related to our twelve-book, multi-year agreement with Clarkson Potter/Publishers. The improvements in revenues were partially offset by an increase in certain of our expenses, including compensation, paper and distribution. Based on our current outlook, we expect these unfavorable trends in our raw materials to continue including a postal rate increase in the second half of the year.
Internet
In the first quarter of 2008, we continued to experience growth from our online audience with page views increasing, on average, over 40% from the prior year.
Broadcasting
Ongoing efforts to distribute the fourth season of The Martha Stewart Show have resulted in a national clearance of approximately 90% to date. For the current third season of the show, nearly all advertising is sold-out. Merchandising Update. In the first quarter, we benefited from our new initiatives with Macy's for our line of Martha Stewart Collection products; EK Success for our line of broadly-distributed crafts products; and Costco for our co-branded assortment of frozen, fresh and prepared foods. We expect these and other new initiatives to continue providing positive operating results for the full-year. For example, our agreement with 1-800-Flowers.com launched in the second quarter of 2008, and is expected to contribute high-margin income. However, we believe that these new initiatives will be more than offset by the decrease in our Kmart minimum guarantees, and we expect total Merchandising revenues and operating profit to be lower in 2008 as compared to 2007.
Our multi-year agreement with Kmart includes royalty payments based on sales, as well as minimum guarantees. The minimum guarantees have exceeded actual royalties earned from retail sales from 2003 through 2008 primarily due to store closings and historic lower same-store sales trends. For the contract years ending January 31, 2009 and 2010, the minimum guarantees will be substantially lower than prior years. The following are the minimum guaranteed royalty payments (in millions) over the term of the agreement for the respective years ending on the indicated dates:

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

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

For the contract year ended January 31, 2008, our earned royalty based on actual retail sales at Kmart was $24.7 million. Furthermore, $10.0 million of royalties previously paid have been deferred and are subject to recoupment in the periods ending January 31, 2009 and January 31, 2010.

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Results of Operations
Comparison of Three Months Ended March 31, 2008 to Three Months Ended March 31,
2007
PUBLISHING SEGMENT
(in thousands)

                                                               2008                 2007
                                                            (unaudited)          (unaudited)         Variance
Publishing Segment Revenues
Advertising                                                $      22,096        $      21,370        $     726
Circulation                                                       16,550               18,079           (1,529 )
Books                                                              1,767                  646            1,121
Other                                                                379                  524             (145 )

Total Publishing Segment Revenues                                 40,792               40,619              173


Publishing Segment Operating Costs and Expenses
Production, distribution and editorial                            22,233               21,493             (740 )
Selling and promotion                                             15,175               16,596            1,421
General and administrative                                         1,629                  937             (692 )
Depreciation and amortization                                         99                  293              194


Total Publishing Segment Operating Costs and Expenses             39,136               39,319              183


Publishing Segment Operating Income                        $       1,656        $       1,300        $     356

Publishing revenues increased less than 1% for the three months ended March 31, 2008 from the prior year period. Advertising revenue increased $0.7 million despite prior year revenue from Blueprint, a publication that we discontinued at the end of 2007. The increase in advertising revenue was due to higher advertising rates even with a decrease in pages across all our magazine titles. Martha Stewart Living magazine accounted for $0.8 million of the increase while Everyday Food and Body + Soul contributed $0.4 million of the increase to advertising revenue. Circulation revenue decreased $1.5 million due to the prior year contribution of Blueprint as well as lower subscription rate per copy and higher agency commissions in the current period for Martha Stewart Living and Everyday Food. These decreases were partially offset by higher volume of subscription sales for Martha Stewart Living, Body + Soul and Everyday Food. Revenue related to our books business increased $1.1 million primarily due to the acceptance of our fifth manuscript in our 12-book agreement with Clarkson Potter/Publishers.

Magazine Publication Schedule

                                               Quarter ended March 31,
                                             2008                  2007

         Martha Stewart Living             Three Issues         Three Issues
         Everyday Food                     Three Issues         Three Issues
         Body + Soul                        Two Issues           Two Issues
         Special Interest Publications      Two Issues           Two Issues
         Blueprint (a)                             N/A            One Issue

(a) Launched in May 2006 and discontinued in 2007 as a stand-alone publication with no future issues planned.

Production, distribution and editorial expenses increased $0.7 million, primarily due to both higher print order and higher rates related to physical costs to distribute the magazines, partially offset by savings related to the closure of Blueprint. Selling and promotion expenses decreased $1.4 million due to lower circulation marketing costs and more favorable fulfillment rates associated with Martha Stewart Living and Everyday Food partially offset by an increase in circulation marketing costs for Body + Soul. The decrease in selling and promotion expenses is also due to savings from discontinuing Blueprint. General and administrative expenses increased $0.7 million primarily due to higher compensation costs.

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MERCHANDISING SEGMENT
(in thousands)

                                                            2008                 2007
                                                         (unaudited)          (unaudited)         Variance
Merchandising Segment Revenues
Kmart earned royalty                                    $       4,558        $       5,954        $  (1,396 )
Kmart minimum true-up                                           3,806                2,648            1,158
Other                                                           4,702                4,998             (296 )

Total Merchandising Segment Revenues                           13,066               13,600             (534 )


Merchandising Segment Operating Costs and Expenses
Production, distribution and editorial                          3,090                3,272              182
Selling and promotion                                           1,437                1,649              212
General and administrative                                      1,919                1,807             (112 )
Depreciation and amortization                                      24                   96               72


Total Merchandising Segment Operating Costs and
Expenses                                                        6,470                6,824              354


Merchandising Segment Operating Income                  $       6,596        $       6,776        $    (180 )

Merchandising revenues decreased 4% for the three months ended March 31, 2008 from the prior year period. Actual retail sales of our product at Kmart declined 21% on a comparable store and total store basis due to lower same-store sales trends and decreased assortment of product categories. The pro-rata portion of revenues related to the contractual minimum amounts covering the specified periods, net of amounts subject to recoupment, is listed separately above. For the contract years ending January 31, 2009 and January 31, 2010, the minimum royalty amount is expected to be $20 million and $15 million, respectively. Furthermore, $10 million of royalties previously received have been deferred and are subject to recoupment in the periods ending January 31, 2009 and January 31, 2010. Other revenues included sales from new initiatives such as the Martha Stewart Collection at Macy's and macys.com and our co-branded food products at Costco. The increases from these new initiatives were offset by the 2007 endorsement and promotional agreement with U.S. affiliates of SVP Worldwide, makers of Singer, Husqvarna Viking and Pfaff sewing machines with no comparable revenue in 2008.
Total operating costs and expenses decreased $0.4 million primarily due to lower compensation costs.

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INTERNET SEGMENT
(in thousands)

                                                             2008                 2007
                                                          (unaudited)          (unaudited)          Variance
Internet Segment Revenues
Advertising                                              $       2,310        $       1,766        $      544
Product                                                          1,104                1,764              (660 )

Total Internet Segment Revenues                                  3,414                3,530              (116 )


Internet Segment Operating Costs and Expenses
Production, distribution and editorial                           3,049                3,713               664
Selling and promotion                                            1,199                1,199                 0
General and administrative                                       1,035                  965               (70 )
Depreciation and amortization                                      378                  156              (222 )

Total Internet Segment Operating Costs and Expenses              5,661                6,033               372


Internet Segment Operating Loss                          $      (2,247 )      $      (2,503 )      $      256

Internet revenues decreased 3% for the three months ended March 31, 2008 from the prior year period. Advertising revenue increased $0.5 million due to higher advertising rates and an increase in advertising volume. Product revenue decreased $0.7 million due to the transition of our flowers program from Martha Stewart Flowers, which generated sales through Valentine's Day, to our new, co-branded agreement with 1-800-Flowers.com which is expected to begin generating revenue in the second quarter for the Merchandising segment.
Production, distribution and editorial costs decreased $0.7 million due primarily to prior year use of freelancers and consultants and technology costs related to the 2007 re-design of marthastewart.com as well as lower inventory and shipping expenses for our flowers business related to the transition to our new program with 1-800-Flowers.com. These savings are partially offset by an increase in headcount and related compensation costs. Depreciation and amortization expenses increased $0.2 million due to the 2007 launch of the redesigned website and the related depreciation costs.

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BROADCASTING SEGMENT
(in thousands)

                                                                 2008                 2007
                                                              (unaudited)          (unaudited)         Variance
Broadcasting Segment Revenues
Advertising                                                  $       7,094        $       3,542        $   3,552
Radio                                                                1,875                1,875                0
Licensing and other                                                  1,593                3,539           (1,946 )

Total Broadcasting Segment Revenues                                 10,562                8,956            1,606


Broadcasting Segment Operating Costs and Expenses
Production, distribution and editorial                               7,647               11,250            3,603
Selling and promotion                                                  903                  786             (117 )
General and administrative                                           1,728                2,156              428
Depreciation and amortization                                          109                  862              753

Total Broadcasting Segment Operating Costs and Expenses             10,387               15,054            4,667


Broadcasting Segment Operating Income / (Loss)               $         175        $      (6,098 )      $   6,273

Broadcasting revenues increased 18% for the three months ended March 31, 2008 from the prior year period. Advertising revenue increased $3.6 million primarily due to the increase in advertising inventory (related to our revised season 3 distribution agreement), partially offset by a decline in household ratings. Licensing revenue decreased $1.9 million primarily due to the exchange of season 3 license fees for additional advertising inventory. This decrease was partially offset by new international distribution agreements as well as a domestic distribution agreement in the secondary cable market with the Fine Living Network.
Production, distribution and editorial expenses decreased $3.6 million due principally to a 2007 non-cash charge of $5.7 million associated with the vesting of a portion of a warrant granted in connection with the production of The Martha Stewart Show. This prior-year, one-time charge was partially offset by 2008 distribution costs which were previously reported net of licensing revenues in 2007. We also expect to have continued production cost savings of approximately $2.8 million for season 3 as compared to season 2. Depreciation and amortization decreased $0.8 million as the set for The Martha Stewart Show was fully depreciated as of the second quarter of 2007.

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CORPORATE
(in thousands)

                                                            2008                 2007
                                                         (unaudited)          (unaudited)          Variance
Corporate Operating Costs and Expenses
General and administrative                              $       9,969        $      11,455        $    1,486
Depreciation and amortization                                     746                  571              (175 )

Total Corporate Operating Costs and Expenses                   10,715               12,026             1,311


Corporate Operating Loss                                $     (10,715 )      $     (12,026 )      $    1,311

Corporate operating costs and expenses decreased 11% for the three months ended March 31, 2008 from the prior year period. General and administrative expenses decreased $1.5 million primarily due to lower non-cash and cash compensation costs as well as lower professional fees.
OTHER ITEMS
Interest Income, net. Interest income, net, was $0.5 million for the quarter ended March 31, 2008 compared to $0.8 million for the prior year quarter. The decrease was attributable primarily to a lower yield from our investments. Income tax expense. Income tax expense for the quarter ended March 31, 2008 was $0.2 million, compared to a $0.1 million expense in the prior year quarter. Net Loss. Net loss was $(4.2) million for the quarter ended March 31, 2008, compared to a net loss of $(11.9) million for the quarter ended March 31, 2007, as a result of the factors described above.

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LIQUIDITY AND CAPITAL RESOURCES
Overview
During the first quarter of 2008, our overall cash, cash equivalents and short-term investments increased $32.8 million from December 31, 2007 principally from the satisfaction of our 2007 year-end receivable due from Kmart in the amount of $47.6 million. This cash inflow was partially offset by the payment of 2007 bonuses and our investment in WeddingWire. Cash, cash equivalents and short-term investments were $90.1 million and $57.3 million at March 31, 2008 and December 31, 2007, respectively. Subsequent to March 31, 2008, we acquired certain assets related to Emeril Lagasse and paid approximately $45.0 million in cash as well as $5.0 million in shares of our Class A Common Stock. The acquisition agreement also includes a potential additional payment of up to $20 million, in 2013, based upon the achievement of certain operating metrics in 2011 and 2012, a portion of which may be payable, at our election, in shares of our Class A Common Stock. We also borrowed $30.0 million from Bank of America to partially offset the cash payment related to the acquisition. We believe, as described further below, that our available cash balances and short-term investments together with continued positive cash flow from operations will be sufficient to meet our operating and recurring cash needs for the remainder of 2008 inclusive of the acquisition and related debt financing.
Cash Flows from Operating Activities
Cash flows provided by operating activities were $39.5 million and $24.4 million for the three months ended March 31, 2008 and 2007, respectively. In 2008, cash flow from operations was primarily due to the changes in operating assets and liabilities of $35.9 million, the majority of which was the result of the satisfaction of the 2007 year-end receivable due from Kmart. Operating assets and liabilities also benefited from collections of advertising receivables from the fourth-quarter 2007, typically the strongest quarter for advertising revenue. These inflows were partially offset by the payment of 2007 bonuses and expenses paid in the normal course of business. Cash Flows from Investing Activities
Cash flows provided by (used in) investing activities were $21.0 million and $(5.6) million for the three months ended March 31, 2008 and 2007, respectively. Cash flows provided by investing activities in the first quarter of 2008 resulted from significant sales of short-term investments of $26.3 million in advance of our acquisition of the Emeril Lagasse assets partially offset by an investment in WeddingWire of $(5.0) million. Cash Flows from Financing Activities
Cash flows (used in) provided by financing activities were $(1.4) million and $0.1 million for the three months ended March 31, 2008 and 2007, respectively. Cash flows used in financing activities during the first quarter of 2008 were due to the cash costs associated with remitting payroll related tax obligations associated with the vesting of certain restricted stock grants. Debt
We have a line of credit with Bank of America in the amount of $5.0 million, which is generally used to secure outstanding letters of credit. Under the terms of the credit agreement, we are required to satisfy certain debt covenants, with which we were compliant as of March 31, 2008. We had no outstanding borrowings under this facility as of March 31, 2008. On a total line of $5.0 million, we currently have letters of credit drawn of $2.7 million.
Subsequent to the quarter ended March 31, 2008, we entered into an agreement with Bank of America for a $30.0 million term loan with principal installments of $1.5 million to be paid quarterly commencing June 30, 2008. In the next 12 months, $6.0 million in principal payments will be due. The interest rate on the loan is equal to a floating rate of 1-month LIBOR plus 1.00% and is expected to increase to 1-month LIBOR plus 2.85% when the cash collateral supporting the loan is replaced with asset collateral related to the acquisition. We expect to pay the principal installments and interest expense with cash from operations. The loan terms include financial covenants, failure of which could result in an acceleration of repayment or a full payment on demand.
The loan agreement also contains a variety of customary affirmative and negative covenants that, among other things, limit our and our subsidiaries' ability to incur additional debt, suffer the creation of liens on their assets, pay

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dividends or repurchase stock, make investments or loans, sell assets, enter into transactions with affiliates other than on arm's length terms, make capital expenditures, merge into or acquire other entities or liquidate. The negative covenants expressly permit us to, among other things: incur an additional $15 million of debt to finance permitted investments or acquisitions; incur an additional $15 million of earnout liabilities in connection with permitted acquisitions; spend up to $30 million repurchasing our stock or paying dividends thereon (so long as no default or event of default existed at the time of or would result from such repurchase or dividend payment and we would be in pro forma compliance with the above-described financial covenants assuming such repurchase or dividend payment had occurred at the beginning of the most recently-ended four-quarter period); make investments and acquisitions (so long as no default or event of default existed at the time of or would result from such investment or acquisition and we would be in pro forma compliance with the above-described financial covenants assuming the acquisition or investment had occurred at the beginning of the most recently-ended four-quarter period); make up to $15 million in capital expenditures in fiscal year 2008 and $7.5 million in each subsequent fiscal year, provided that we can carry over any unspent amount to any subsequent fiscal year (but in no event may we make more than $15 million in capital expenditures in any fiscal year); sell one of our investments (or any asset we might receive in conversion or exchange for such investment); and sell assets during the term of the loan comprising, in the aggregate, up to 10% of our consolidated shareholders' equity, provided we receive at least 75% of the consideration in cash.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our businesses can experience fluctuations in quarterly performance. Our Publishing segment results can vary from quarter to quarter due to publication schedules and seasonality of certain types of advertising. Revenues from our Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonality of certain product lines. In addition, we recognize a substantial portion of the revenue resulting from the difference between the minimum royalty amount under the Kmart contract and royalties paid on actual sales in the fourth quarter of each year, when the amount can be determined. In our Internet segment, revenue from marthastewartflowers.com has been tied to key holidays during the year (although this program was replaced in the first quarter of 2008 by our new program with 1-800-Flowers.com, which launched in the second quarter of 2008 and will be reported in our Merchandising segment), while advertising revenue on marthastewart.com is tied to traffic among other key factors and is typically highest in the fourth quarter of the year. Advertising revenue from our Broadcasting segment is highly dependent on ratings which fluctuate throughout the television season following general viewer trends. Ratings tend to be highest during the fourth quarter and lowest in the summer months.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, deferred production costs, long-lived assets and accrued losses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that, of our significant accounting policies disclosed in our 2007 10-K, the following may involve the highest degree of judgment and complexity. Revenue Recognition
We recognize revenues when realized or realizable and earned. Revenues and associated accounts receivable are recorded net of provisions for estimated future returns, doubtful accounts and other allowances.

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The Emerging Issues Task Force reached a consensus in May 2003 on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") which became effective for revenue arrangements entered into in the third quarter of 2003. In an arrangement with multiple deliverables, EITF 00-21 provides guidance to determine a) how the arrangement consideration should be . . .