10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)


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

For the quarterly period ended June 30, 2006


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 005-15395

MARTHA STEWART LIVING OMNIMEDIA, INC.

(Exact name of registrant as specified in its charter)


Delaware		52-2187059

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


11 West 42^nd Street, New York, NY		10036

(Address of principal executive offices)		(Zip Code)

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

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ


Class	Outstanding as of August 3, 2006
Class A, $0.01 par value		25,377,880
Class B, $0.01 par value		26,791,206

Total		52,169,086

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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


	June 30,			December 31,
	2006			2005
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	36,226		$	20,249
Short-term investments		79,318			83,788
Accounts receivable, net		37,527			55,381
Inventories, net		4,141			3,910
Deferred television production costs		5,268			6,507
Income taxes receivable		519			519
Other current assets		3,542			4,366


Total current assets		166,541			174,720


PROPERTY, PLANT AND EQUIPMENT, net		19,300			19,797

INTANGIBLE ASSETS, net		53,605			53,680

OTHER NONCURRENT ASSETS		6,653			5,631

Total assets	$	246,099		$	253,828


LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	22,892		$	28,545
Accrued payroll and related costs		9,313			7,488
Income taxes payable		735			476
Current portion of deferred subscription revenue		28,424			31,060
Current portion of deferred revenue		6,321			6,578

Total current liabilities		67,685			74,147


DEFERRED SUBSCRIPTION REVENUE		9,678			8,688

DEFERRED REVENUE		7,593			7,321

OTHER NONCURRENT LIABILITIES		2,656			3,041


Total liabilities		87,612			93,197


COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
Class A common stock, $.01 par value, 350,000 shares authorized; 25,305 and 24,882 shares outstanding in 2006 and 2005, respectively		253			249
Class B common stock, $.01 par value, 150,000 shares authorized; 26,791 and 26,873 outstanding in 2006 and 2005, respectively		268			269
Capital in excess of par value		248,627			242,770
Accumulated deficit		(89,886	)		(81,882	)

		159,262			161,406
Less: Class A treasury stock - 59 shares at cost		(775	)		(775	)

Total shareholders’ equity		158,487			160,631

Total liabilities and shareholders’ equity	$	246,099		$	253,828

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

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
REVENUES
Publishing	$	40,888		$	31,707		$	77,176		$	57,062
Broadcasting		11,757			1,847			23,077			2,644
Merchandising		10,165			10,162			21,442			19,554
Internet		4,634			2,235			7,582			5,357

Total revenues		67,444			45,951			129,277			84,617


OPERATING COSTS AND EXPENSES
Production, distribution and editorial		35,507			25,753			68,250			49,998
Selling and promotion		14,052			16,239			30,802			33,377
General and administrative		17,447			36,449			35,269			51,827
Depreciation and amortization		2,236			1,720			4,444			3,407

Total operating costs and expenses		69,242			80,161			138,765			138,609


OPERATING LOSS		(1,798	)		(34,210	)		(9,488	)		(53,992	)
Interest income, net		1,356			890			2,402			1,659


LOSS BEFORE INCOME TAXES		(442	)		(33,320	)		(7,086	)		(52,333	)

Income tax provision		(229	)		(59	)		(296	)		(82	)


LOSS FROM CONTINUING OPERATIONS BEFORE LOSS FROM DISCONTINUED OPERATIONS		(671	)		(33,379	)		(7,382	)		(52,415	)

Loss from discontinued operations		(499	)		(120	)		(622	)		(252	)


NET LOSS	$	(1,170	)	$	(33,499	)	$	(8,004	)	$	(52,667	)


LOSS PER SHARE – BASIC AND DILUTED
Loss from continuing operations	$	(0.01	)	$	(0.65	)	$	(0.14	)	$	(1.03	)
Loss from discontinued operations		(0.01	)		(0.00	)		(0.01	)		(0.00	)

Net loss	$	(0.02	)	$	(0.65	)	$	(0.16	)	$	(1.03	)


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and Diluted		51,176			51,166			51,192			51,015

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

MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statement of Shareholders’ Equity
For the Six Months Ended June 30, 2006
(unaudited, in thousands)


	Class A				Class B						Capital in					Class A
	common stock				common stock						excess of par		Accumulated			Treasury Stock
	Shares		Amount		Shares			Amount			value		Deficit			Shares			Amount			Total
Balance at January 1, 2006		24,882	$	249		26,873		$	269		$	242,770	$	(81,882	)		(59	)	$	(775	)	$	160,631

Net loss		—		—		—			—			—		(8,004	)		—			—			(8,004	)

Issuance of shares in conjunction with stock options exercises		55		—		—			—			236		—			—			—			236

Issuance of shares of stock and restricted stock, net of cancellations and tax liabilities		368		4		—			—			71		—			—			—			75

Non-cash equity compensation		—		—		—			—			5,549		—			—			—			5,549

Shares returned on a net treasury basis		—		—		(82	)		(1	)		1		—			—			—			—


Balance at June 30, 2006		25,305	$	253		26,791		$	268		$	248,627	$	(89,886	)		(59	)	$	(775	)	$	158,487

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

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


	Six Months Ended
	June 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(8,004	)	$	(52,667	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		4,444			3,407
Non-cash equity compensation		5,708			24,495
Changes in operating assets and liabilities		12,920			12,208


Net cash provided by (used in) operating activities		15,068			(12,557	)


CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(3,872	)		(2,023	)
Purchases of short-term investments		(75,262	)		(110,837	)
Sales of short-term investments		79,732			41,120


Net cash provided by (used in) investing activities		598			(71,740	)


CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds received from stock option exercises		236			7,567
Issuance of stock and restricted stock, net of cancellations and tax liabilities		75			286


Net cash provided by financing activities		311			7,853


Net increase (decrease) in cash		15,977			(76,444	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		20,249			104,647


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	36,226		$	28,203

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

Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except share and per share data)

1. Accounting policies

a. General

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

The information included in the foregoing interim condensed consolidated financial statements is unaudited. In the opinion of management, all adjustments which are of a normal recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods do not necessarily indicate the results to be expected for the entire year. These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission with respect to its fiscal year ended December 31, 2005.

b. Use of estimates

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

c. Recent Accounting Standards

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R). This statement supersedes SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock Based Compensation-Transition and Disclosure – an amendment of FASB Statement No. 123,” and Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.” The statement is effective for interim or annual periods beginning after January 1, 2006. Accordingly, effective January 1, 2006, we adopted the fair-value recognition provisions of SFAS No. 123R. See Note 1(f) for further information on the adoption of SFAS No. 123R.

d. Television production costs

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

e. Income taxes

The Company follows Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under the asset and liability method of SFAS 109, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in management’s judgment about the future realization of deferred tax assets. SFAS No. 109 places more emphasis on historical information, such as the Company’s cumulative operating results and its current year taxable income/loss than it places on estimates of future taxable income. Therefore, the Company has added $2,900 to its valuation allowance in the first six months of 2006, resulting in a cumulative balance of $74,500 as of June 30, 2006. The Company intends to maintain a valuation allowance until evidence would support the conclusion that it is more likely than not that the deferred tax asset (“DTA”) could be realized. On a gross basis (before valuation allowances) the Company has Federal net operating loss (“NOL”) carry forwards totaling $92,500 as of December 31, 2005.

Such loss carry forwards have remaining lives ranging from 4 to 20 years. The DTA balance as of June 30, 2006, primarily consists of the federal NOL, and also includes amounts for state NOLs, accrued compensation, and other DTAs which are not included in the federal NOL. The Company is currently the subject of various ongoing federal, state and local audits. MSLO has filed a protest in response to an IRS assessment of the 2000 tax year. Upon audit, $2,200 of deductions for location rental expenditures was disallowed. MSLO requested an appeal. MSLO believes the $2,200 was an ordinary and necessary business expense, deductible pursuant to I.R.C. §162. Although the outcome of each of the audits cannot be predicted with certainty, or in certain cases an estimate can not reasonably be made as of June 30, 2006, the Company has made accounting estimates as required under U.S. generally accepted accounting principles. Accordingly, the Company currently has recorded an accrual of $737 for all ongoing audits. Management believes the ultimate outcome of all audits will not have a material effect on the financial position of the Company. The Company has also recorded a receivable in the amount of $519 which represents refundable federal and state income taxes.

f. Equity Compensation

We currently have several stock incentive plans that permit us to grant various types of share-based incentives to key employees, directors and consultants. The primary types of incentives granted under these plans are stock options and restricted shares of common stock. The Compensation Committee of the Board of Directors (the “Committee”) may grant up to a maximum of 10,000,000 underlying shares of common stock under the Martha Stewart Living Omnimedia, Inc. Amended and Restated 1999 Stock Incentive Plan (the “1999 Option Plan”), and up to a maximum of 600,000 underlying shares of common stock under the Non-Employee Director Stock and Option Compensation Plan. In November 1997, the Company established the Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan (the “1997 Option Plan”). The Company has an agreement with Martha Stewart whereby she will periodically return to the Company shares of Class B common stock owned by her or her affiliates in amounts corresponding on a net treasury basis to the number of options exercised under the 1997 Option Plan during the relevant period. Accordingly, options outstanding under this plan are not dilutive. No further awards will be made from this plan.

Prior to January 1, 2006, we accounted for these plans under SFAS No. 123. As permitted under this standard, compensation cost was recognized using the intrinsic value method described in APB No. 25. Effective January 1, 2006, we adopted the fair-value recognition provisions of SFAS No. 123R and Securities and Exchange Commission Staff Accounting Bulletin No. 107 using the modified prospective transition method; therefore prior periods have not been restated. Compensation cost recognized in the three and six month periods ended June 30, 2006 includes the relevant portion (the amount vesting in the respective periods) of share based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.

Stock Options

Stock options are granted with exercise prices not less than the fair market value of our common stock at the time of the grant, and with an exercise term not to exceed 10 years. The Committee determines the vesting period for our stock options. Generally, employee stock options vest ratably on each of the first four anniversaries of the grant date. Non-employee director options are subject to various vesting schedules ranging from one to three years. Option awards usually provide for accelerated vesting upon retirement, death, or disability. Severance of a participant in the Martha Stewart Living Omnimedia, Inc. Executive Severance Plan also triggers accelerated vesting of all participant equity awards. During the three and six month periods ended June 30, 2005 we granted an insignificant amount of options. During the three months ended June 30, 2006, we granted 52,500 options to our Board of Directors for their continuing service. During the six months ended June 30, 2006, we granted 77,500 options to our Board of Directors representing a new director grant as well as continuing service grants.

As a result of adopting SFAS No. 123R on January 1, 2006, the Company’s loss before taxes and net loss for the three month period ended June 30, 2006, are $740 higher than if we continued to account for stock-based compensation under APB No. 25. For the six month period ended June 30, 2006, our loss before taxes and net loss are $1,344 higher. This resulted in an increase in our reported loss per share of $0.01 and $0.03 for the three and six month periods ended June 30, 2006, respectively. Compensation expense is recognized in the production, distribution and editorial, the selling and promotion, and the general and administrative expense lines of our condensed consolidated statements of operations. As of June 30, 2006, there was $2,741 of total unrecognized

compensation cost related to nonvested stock options to be recognized over a weighted average period of 2.0 years.

The intrinsic values of options exercised during the six months ended June 30, 2006 and 2005 were not significant. The total cash received from the exercise of stock options for the six months ended June 30, 2006 and 2005 was $236 and $7,567, respectively, and is classified as financing cash flows.

No employee options were granted during the six months ended June 30, 2005. The fair value of the options granted during the six months ended June 30, 2006 was estimated on the date of their grant using the Black-Scholes option-pricing model on the basis of the following weighted average assumptions:


	2006
risk-free interest rates		4.77	%
dividend yields	zero
expected volatility		65.47	%
expected option life	3.75 years
Average fair market value per option granted	$	8.72

Changes in outstanding options under the Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan during the six month period ending June 30, 2006 are as follows:


				Weighted
	Number of			average
	shares			exercise price
Outstanding as of December 31, 2005		114,581		$	0.60
Exercised		(22,162	)		0.60

Outstanding as of June 30, 2006		92,419		$	0.60


Options exercisable at June 30, 2006		92,419		$	0.60

Options available for grant at June 30, 2006	zero

Changes in outstanding options under the Martha Stewart Living Omnimedia, Inc. Amended and Restated 1999 Stock Incentive Plan and the Non-Employee Director Stock and Option Compensation Plan during the six month period ending June 30, 2006 are as follows:


				Weighted
	Number of			average
	shares			exercise price
Outstanding as of December 31, 2005		1,686,208		$	18.13
Granted		177,500			17.00
Exercised		(32,525	)		6.88
Cancelled		(4,500	)		7.02

Outstanding as of June 30, 2006		1,826,683		$	18.25


Options exercisable at June 30, 2006		1,002,304		$	18.50

Options available for grant at June 30, 2006		5,459,967

The following table summarizes information about the stock options outstanding under the Company’s option plans as of June 30, 2006:


	Weighted
	Average		Options Outstanding				Options Exercisable
	Remaining				Weighted				Weighted
	Contractual				Average				Average
Range of Exercise Price	Life in		Number		Exercise		Number		Exercise
Per Share	Years		Outstanding		Price		Exercisable		Price
$0.60		1.4		92,419	$	0.60		92,419	$	0.60
$6.78 - $10.61		3.3		351,725		8.05		211,513		8.12
$14.90 - $15.75		4.6		20,825		15.38		20,825		15.38
$15.90		5.6		150,000		15.90		150,000		15.90
$16.45 - $18.90		7.4		711,433		18.23		267,266		18.72
$19.92 - $26.25		8.1		240,900		21.04		100,900		21.99
$26.56 - $33.75		6.5		351,800		27.72		251,800		27.39

$0.60 - $33.75		6.1		1,919,102	$	17.40		1,094,723	$	16.99

The table below presents the pro forma effect on net loss and basic and diluted loss per share for the three and six months ended June 30, 2005 if we had applied the fair value recognition provisions of SFAS No. 123 to options granted under our stock option plans. For purposes of this pro forma disclosure, the value of the options is estimated using the Black-Scholes option pricing model.


	Three months ended			Six months ended
	June 30, 2005			June 30, 2005
Net loss, as reported	$	(33,499	)	$	(52,667	)
Add back: Total stock option based employee compensation expense included in net loss		1,040			2,245
Deduct: Total stock option based employee compensation expense determined under fair value based method for all awards		(1,367	)		(2,660	)


Pro forma net loss	$	(33,826	)	$	(53,082	)


Loss per share:
Basic and diluted — as reported	$	(0.65	)	$	(1.03	)
Basic and diluted — pro forma	$	(0.66	)	$	(1.04	)

Restricted stock

Restricted stock represents shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. In 2005, the market value of restricted stock awards on the date of grant was recorded as a reduction of capital stock. In connection with the adoption of SFAS No. 123R in 2006, we

reclassified the unamortized restricted stock to additional paid-in capital. Restricted stock is expensed ratably over the restriction period, ranging from three to four years. Restricted stock expense for the three months ended June 30, 2006 and 2005 was $1,663 and $3,799, respectively. Restricted stock expense for the six months ended June 30, 2006 and 2005 was $3,749 and $6,743, respectively.

A summary of our nonvested restricted stock shares as of June 30, 2006 and changes during the six month period ended June 30, 2006 is as follows:


				Weighted
				Average Grant
	Shares			Date Value

Nonvested at December 31, 2005		708,943		$	16,997
Granted		401,316			7,043
Vested (1)		(89,225	)		(2,469	)
Forfeitures		(52,792	)		(1,303	)

Nonvested at June 30, 2006		968,242		$	20,268


(1)		The shares vested during the period ended June 30, 2006 include 13,435 shares of our common stock surrendered by recipients in order to fulfill their tax withholding obligations.

The fair value of nonvested shares is determined based on the closing stock price of our common stock on the grant date. The weighted-average grant date fair values of nonvested shares granted during the periods ended June 30, 2006 and 2005 were $7,043 and $13,445 respectively. As of June 30, 2006 there was $20,345 of total unrecognized compensation cost related to nonvested restricted stock arrangements to be recognized over a weighted-average period of 1.9 years.

Additional outstanding equity grants

In consideration of the execution of a consulting agreement under which Mark Burnett has agreed to act as an advisor and consultant to the Company with respect to various television matters, in September 2004, the Company issued to Mr. Burnett a warrant to purchase 2,500,000 shares of the Company’s Class A Common Stock at an exercise price of $12.59 per share. Under the initial agreement, the shares covered by the warrant would vest and become exercisable in three tranches, subject to the achievement of various milestones achieved with respect to certain television programs. The first two tranches representing a total of 1,666,666 shares vested in 2005. However, under the terms of this warrant, the third tranche ( i.e. , 833,333 shares) will not vest. In the first half of 2005, however, we began negotiating with Mr. Burnett regarding his continued services and compensation; if such negotiations result in an agreement, the terms may include the grant of a new warrant covering a number of shares similar in magnitude to the unvested tranche from the original warrant, a portion of which may vest in 2006. The warrant will expire on March 17, 2012. These shares are unregistered and not covered by our existing equity plans.

In January 2005, the Company entered into a consulting agreement with Charles Koppelman who was then Vice Chairman and a Director of the Company. Pursuant to the terms of the agreement, Mr. Koppelman was paid a fee of $450 per annum, payable monthly, and received 50,000 shares of restricted stock, which would vest upon the Company entering into a merchandising licensing agreement. The vesting provisions of the restricted stock were met in May 2005 and, accordingly, the Company issued 50,000 shares to Mr. Koppelman, which had an aggregate value of $1,260 on the date of issuance. Because the shares were issued as a result of the execution of a licensing agreement, the value of the shares will be amortized over the four year term of the agreement, which began in November 2005. In addition, Mr. Koppelman received 200,000 options to purchase shares of the Company’s Class A common stock equal to the stock’s fair market value on the date of grant. The options vest 50% on the first and second anniversary and have a 10 year term. The options had an aggregate value of $3,313 on the date of issuance, based upon the Black- Scholes option pricing model. The expense associated with these options is recognized over the two year vesting period based upon their fair value at the end of each period. For the three and six month periods ended June 30, 2006, the Company recognized $409 and $705, respectively, in non-cash equity compensation expense under this consulting agreement. The non-cash equity compensation expense related to the options was valued using the Black-Scholes option pricing model using the following assumptions: risk free

interest rate- 5.04%; dividend yield- zero; expected volatility-64.66%; contractual life-8.57 years; average fair market value per option granted — $10.64.

In October 2005, the Company entered into a two-year consulting agreement with CAK Entertainment, Inc. an entity for which Mr. Charles Koppelman serves as Chairman and Chief Executive Officer. Mr. Koppelman was Chairman of the Board and Director of the Company at the time of the agreement and thereafter. The agreement extends for a third year unless terminated by either party. Pursuant to the terms of the consulting arrangement, CAK Entertainment will make the consulting services of Mr. Koppelman available on a non-exclusive basis to assist the Company’s President and Chief Executive Officer in identifying and addressing strategic opportunities for the Company, including, without limitation, helping to identify, develop, design, structure and negotiate transactions or other business collaborations involving merchandising (through catalogs, direct marketing, internet commerce, and/or retail stores); book publishing; magazine, radio and television ventures; and other areas in which the Company may seek to do business.

In consideration for Mr. Koppelman’s services, the Company agreed to pay CAK Entertainment $725 per annum, payable in equal monthly installments. This annual amount supersedes the annual compensation payable to Mr. Koppelman pursuant to the January 2005 consulting agreement between the Company and Mr. Koppelman. In addition, the Company agreed to grant Mr. Koppelman (i) options to purchase 200,000 shares of the Company’s Class A common stock, with an exercise price equal to the stock’s fair market value on date of grant, and (ii) 75,000 shares of the Company’s Class A common stock. Mr. Koppelman also will be eligible to receive a performance fee of up to $3,000 conditioned upon the achievement of certain performance milestones. The options, shares of restricted stock and earn-out of the performance fee are all subject to performance-based vesting conditions. The vesting provisions of a portion of both the restricted stock and the options were met in April 2006. Accordingly, the Company issued 3,750 shares to Mr. Koppelman, which had an aggregate value of $73 on the date of issuance. Mr. Koppelman vested in 10,000 options which had an aggregate value of $146 on the date of issuance, based upon the Black- Scholes option pricing model. Because the shares and options were issued as a result of the execution of a merchandising agreement, the value of the shares and options will be amortized over the remaining five year term of the agreement, which is expected to begin during the first quarter of 2007. Accordingly, the Company has not begun to recognize non-cash compensation expense related to the merchandising agreement.

For the three and six months ended June 30, 2006, the Company recognized $181 and $363, respectively, as a consulting expense under this consulting agreement.

In March 2006, the Company entered into an agreement with an agency which will provide the Company with marketing communications services. Pursuant to terms of the agreement, the Company has offered to grant the agency an option to purchase 100,000 shares of the Company’s Class A Common Stock with an exercise price equal to the stock’s fair market value on date of grant. The option will vest in five equal increments of 20,000 upon reaching certain performance milestones. During the six months ended June 30, 2006, no vesting occurred in conjunction with this agreement.

g. Reclassifications

Certain prior year financial information has been reclassified to conform to fiscal 2006 financial statement presentation.

2. Newsstand Adjustment

The Company has historically paid newsstand-related fees based in part on certain estimates provided by our distribution partner. We recently questioned amounts related to a portion of these bills. As a result of our negotiations with our distributor, we reached a settlement agreement pursuant to which we received a one-time refund in the amount of $3,200. The refund has been recorded as a reduction to the Publishing segment’s selling and promotion costs line on our condensed consolidated statements of operations for the three and six months ended June 30, 2006. We have also recorded interest income of $300 related to the settlement.

3. Inventories

Inventory is comprised of paper stock. The inventory balance at June 30, 2006 and December 31, 2005 is $4,141 and $3,910 respectively.

4. Loss per share

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

As of June 30, 2006 and 2005, antidilutive options, warrants, and restricted stock that are excluded from the computation of diluted earnings per share because the effect would have been antidilutive were 5,295,342 and 5,223,985 respectively.

5. Industry segments

The Company is a leading creator of original “how to” content and related products for homemakers and other consumers. The Company’s business segments are Publishing, Broadcasting, Merchandising and Internet. The Publishing segment primarily consists of the Company’s magazine operations, and also those related to its book operations. The Broadcasting segment primarily consists of the Company’s television production operations which produce television programming that airs in syndication and on cable, and also those related to its radio operations. The Merchandising segment consists of the Company’s operations related to the design of merchandise and related promotional and packaging materials that are distributed by its retail and manufacturing partners in exchange for royalty income. The Internet segment comprises the Company’s operations relating to its website marthastewart.com, its direct-to-consumer floral business, and its catalog, Martha Stewart: The Catalog For Living, which was discontinued in early 2005.

Non-GAAP Financial Information

In addition to using net income to assess the organization’s overall financial health, Company management uses net income before interest, taxes, depreciation, amortization and non-cash equity compensation (“adjusted EBITDA”), a non-GAAP financial measure, to evaluate the performance of our businesses on a real-time basis. Adjusted EBITDA is considered an important indicator of operational strength, is a direct component of the Company’s annual compensation program, and is a significant factor in helping our management determine how to allocate resources and capital. Adjusted EBITDA is used in addition to and in conjunction with results presented in accordance with GAAP. Management considers adjusted EBITDA to be a critical measure of operational health because it captures all of the revenue and ongoing operating expenses of our businesses without the influence of (i) interest charges, which result from our capital structure, not our ongoing business efforts, (ii) taxes, which relate to the overall organizational financial return, not that of any one business, (iii) the capital expenditure costs associated with depreciation and amortization, which are a function of historical decisions on infrastructure and capacity, and (iv) the cost of non-cash equity compensation which, as a function of our stock price, can be highly variable, is not necessarily an indicator of current operating performance for any individual business unit, and is amortized over the appropriate period.

Adjusted EBITDA provides a means to directly evaluate the ability of our business operations to generate returns on a real-time basis. We provide disclosure of adjusted EBITDA because we believe it is useful for investors to have means to assess our performance as we do. While adjusted EBITDA is a customized non-GAAP measure, it also provides a means to analyze, value and compare our operating capabilities to those of companies with whom we compete, many of which have different compensation plans, depreciation and amortization costs, capital structures and tax burdens. But please note that our non-GAAP results may differ from similar measures used by other companies, even if similar terms are used to identify such measures.

A limitation of adjusted EBITDA is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues for our overall organization. Management evaluates the costs of such tangible and intangible assets through other financial measures such as capital expenditures. Management also evaluates the cost of capitalized tangible and intangible assets by analyzing returns provided on the capital dollars deployed. A further limitation of adjusted EBITDA is that it does not include stock compensation expense related to our workforce. Adjusted EBITDA should be considered in addition to, and not as a substitute for, net income or other measures of financial performance reported in accordance with GAAP.

Revenues for each segment are presented in the condensed consolidated income statements. Income (loss) from operations for each segment is as follows:

(in thousands)


	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	(unaudited)						(unaudited)
	2006			2005			2006			2005
ADJUSTED EBITDA
Publishing	$	6,905		$	(2,595	)	$	7,746		$	(10,286	)
Broadcasting		1,238			(2,664	)		1,886			(4,827	)
Merchandising		5,610			6,274			12,334			12,375
Internet		110			(897	)		159			(2,145	)

Adjusted EBITDA before Corporate Expenses		13,863			118			22,125			(4,883	)
Corporate Expenses		(10,690	)		(11,332	)		(21,462	)		(21,207	)

ADJUSTED EBITDA		3,173			(11,214	)		663			(26,090	)


NON-CASH EQUITY COMPENSATION
Publishing		708			453			1,418			1,243
Broadcasting		59			17,293			279			17,365
Merchandising		238			122			515			207
Internet		36			10			53			19
Corporate Expenses		1,694			3,398			3,442			5,661

Total Non-Cash Equity Compensation		2,735			21,276			5,707			24,495


DEPRECIATION AND AMORTIZATION
Publishing		135			248			319			495
Broadcasting		755			101			1,500			147
Merchandising		254			209			508			418
Internet		68			239			103			491
Corporate Expenses		1,024			923			2,014			1,856

Total Depreciation and Amortization		2,236			1,720			4,444			3,407


OPERATING INCOME/(LOSS)
Publishing		6,062			(3,296	)		6,009			(12,024	)
Broadcasting		424			(20,058	)		107			(22,339	)
Merchandising		5,118			5,943			11,311			11,750
Internet		6			(1,146	)		3			(2,655	)

Operating Income/(Loss) before Corporate Expenses		11,610			(18,557	)		17,430			(25,268	)
Corporate Expenses		(13,408	)		(15,653	)		(26,918	)		(28,724	)


Total Operating Loss		(1,798	)		(34,210	)		(9,488	)		(53,992	)

Interest income, net		1,356			890			2,402			1,659


LOSS BEFORE INCOME TAXES		(442	)		(33,320	)		(7,086	)		(52,333	)

Income tax provision		(229	)		(59	)		(296	)		(82	)


LOSS FROM CONTINUING OPERATIONS BEFORE LOSS FROM DISCONTINUED OPERATIONS		(671	)		(33,379	)		(7,382	)		(52,415	)

Loss from discontinued operations		(499	)		(120	)		(622	)		(252	)


NET LOSS	$	(1,170	)	$	(33,499	)	$	(8,004	)	$	(52,667	)

6. Related Party Transaction

Martha Stewart had submitted a claim, pursuant to the Corporation’s By-laws, for reimbursement of certain expenses relating to her defense of the count of the federal criminal indictment against her alleging she made false and misleading statements intended to influence the price of the Corporation’s stock. Ms. Stewart’s defense of this count was successful and a judgment of acquittal was entered in her favor. The Corporation and Ms. Stewart submitted the question of whether or not she is entitled to indemnification to an independent expert on Delaware law. On March 15, 2005 the independent expert determined that Ms. Stewart is entitled to indemnification. Accordingly, the Company reimbursed Ms. Stewart $2,800 for this claim. The Corporation believes that the amount reimbursed to Ms. Stewart is reimbursable to the Corporation under its Directors’ & Officers’ insurance policy and, accordingly, does not believe that the payment will result in an expense to the Corporation. As of June 30, 2006, certain payments have already been reimbursed under the Directors’ & Officers’ insurance policy and have been applied to the total claim. Accordingly, the Company has recorded a $1,815 receivable on its balance sheet as of June 30, 2006.

The Company currently has a consulting agreement with CAK Entertainment, Inc. and entity for which Mr. Charles Koppelman serves as Chairman and Chief Executive Officer. Mr. Koppelman was Chairman of the Board and a Director of the Company at the time of the agreement and thereafter. This agreement superseded a previous consulting agreement with him, which was entered into while Mr. Koppelman was Vice Chairman and a Director. The details of the agreements are included under note 1.f.

7. Discontinued Operations

In June 2002, the Company decided to exit The Wedding List, a wedding registry and gift business that was reported within the Internet business segment. In the second quarter of 2006, a review of the accrual of future lease commitments, net of anticipated sublease rental income, resulted in a charge of $376. The anticipated sublease income was determined by estimating future cash flows based upon current market conditions. The loss from operations, which is generated primarily from facility related expenses, was as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Loss from operations	$	(499	)	$	(120	)	$	(622	)	$	(252	)

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

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

EXECUTIVE SUMMARY

We believe that our second quarter results demonstrate that we continue to recover from the negative effects to our business that resulted from criminal and civil proceedings, and related publicity surrounding Martha Stewart’s sale of non-Company stock in December 2001. Though not all the related legal proceedings have concluded, our business has demonstrated solid improvement in 2005 and significant improvement thus far in 2006. This includes an increase in advertising pages and rates and improved newsstand results at our flagship magazine, Martha Stewart Living; the growth in advertising at our internet segment; the launch of our new syndicated television program, MARTHA in September 2005; and the launch of the Martha Stewart Living Radio channel on SIRIUS satellite radio in November 2005. In 2006, we are re-investing a portion of our earnings to accelerate the development of Blueprint magazine, re-launch our website to take further advantage of the growth in online media, and support the roll-out of our new merchandising initiatives.

Recent Broadcasting Developments. Viewer response to our new syndicated television program, MARTHA, has been favorable and the show was recently nominated for six, and awarded one, Daytime Emmy award. In January, we announced that season two of MARTHA will be available in more than 90% of U.S. television households. However, our cable distribution partner chose not to renew our agreement; we are currently exploring other platforms to augment our broadcast distribution. As a result, we expect that the show in season two will show a modest loss. However, we believe that the show has great promotional value for the Company’s businesses and products.

Recent Internet Developments. On June 27, 2006, we announced a multiyear agreement with Kodak Imaging Network to develop a line of branded Martha Stewart personalized photo products. The new line will be sold on the KODAK EASYSHARE Gallery web site at www.kodakgallery.com and at www.marthastewart.com. The line is expected to debut in late September with a large selection of holiday offerings such as cards and photo books. Other products and new categories are expected to be introduced at the end of the year and throughout 2007.

Recent Merchandising Developments. On April 6, 2006 we announced that we signed a licensing agreement with Macy’s and that we expect to launch a line of Martha Stewart Collection products in the fall of 2007, to be sold in approximately 700 Macy’s home stores nationwide. The Martha Stewart Collection line will encompass a broad range of home goods – including bed and bath textiles, housewares, casual dinnerware, flatware and glassware, cookware, holiday decorating and trim-a-tree items. We expect to record the revenue related to this licensing arrangement in our Merchandising segment.

On March 12, 2006 the first community of Martha Stewart-branded homes created pursuant to our initial agreement with KB Home opened in Cary, North Carolina, and was well received by consumers. In February 2006, we announced an expanded agreement with KB Home, pursuant to which we anticipate KB Home will build homes throughout the U.S. and creating a line of interior and exterior home products.

In March 2006, we entered into a licensing agreement with Safavieh, a leading manufacturer and importer of fine rugs, to create a line of Martha Stewart-branded area rugs, to be sold in independent furniture stores and independent rug stores.

On June 20, 2006, we announced an agreement with Quality Home Brands, LLC, a manufacturer of leading brands of lighting and home décor products, to manufacture a new line of Martha Stewart-branded lighting and ceiling fans. Initial products are expected to be introduced in spring 2007.

On July 25, 2006, we announced a multiyear agreement with FLOR, Inc., an eco-friendly manufacturer of residential, high-style modular floor coverings, to manufacture a new line of Martha Stewart-branded carpet tiles. The products will be available through the FLOR catalog and online at www.florcatalog.com beginning in 2007.

Kmart Agreement. The Company’s current agreement with Kmart provides for certain minimum guaranteed royalty payments. Due principally to store closures (since the signing of the agreement in June 2001, Kmart has closed approximately 30% of its stores) and lower same-store sales, we expect the minimum guarantees will significantly exceed the royalties that otherwise would be earned from actual retail sales through 2007. For the contract years ending January 31, 2009 and 2010 (the extension years), the minimum guarantees will be substantially lower than in prior years. The specific computation is discussed in the paragraph below. The following are the minimum guaranteed royalty payments (in millions) over the term of the agreement:


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

For the year ending January 31, 2009, the minimum royalty amount is the greater of $20 million or 50% of the earned royalty for the year ending January 31, 2008. For the year ending January 31, 2010 the minimum royalty amount is the greater of $15 million or 50% of the earned royalty for the year ending January 31, 2009. Furthermore, up to $3.8 million of the January 31, 2005 and January 31, 2006 minimum royalty payments and $2.5 million of the January 31, 2007 and January 31, 2008 minimum royalty payments, but not more than $10.0 million in the aggregate over the term of the agreement, will be deferred and subject to recoupment in the periods ending January 31, 2009 and January 31, 2010.

Stock-Based Compensation. In accordance with a new accounting rule, SEC Staff Accounting Bulletin No. 107, stock-based compensation is no longer presented as a separate line on our income statement. The stock-based compensation is now presented in the same lines as cash compensation paid to the same individuals. Stock-based compensation recognized in prior periods has been reclassified to conform to the presentation in the current period. Additionally, the company has adopted SFAS No. 123R using the modified-prospective method. In 2006 the Company expects to recognize expense of $1,800 from unvested options due to the implementation of SFAS No. 123R. The majority of the expense will be in the Corporate segment.

Results of Operations

Comparison of Three Months Ended June 30, 2006 to Three Months Ended June 30, 2005

PUBLISHING SEGMENT


	2006		2005
	(unaudited)		(unaudited)			Variance
Publishing Revenue
Advertising	$	22,624	$	13,615		$	9,009
Circulation		17,768		17,612			156
Other		496		480			16

Total Publishing Segment Revenue		40,888		31,707			9,181


Publishing Operating Costs and Expenses
Production, distribution and editorial		21,771		19,032			(2,739	)
Selling and promotion		12,201		15,030			2,829
General and administrative		719		693			(26	)
Depreciation and amortization		135		248			113

Total Publishing Operating Costs and Expenses		34,826		35,003			177


Operating Income/(Loss)	$	6,062	$	(3,296	)	$	9,358

Publishing revenues increased $9.2 million, or 29%, to $40.9 million for the three months ended June 30, 2006, from $31.7 million for the three months ended June 30, 2005. Advertising revenue increased $9.0 million, primarily due to an increase in both advertising pages and rate in Martha Stewart Living magazine, as well as increases in both pages and rates at Everyday Food and Martha Stewart Weddings. Circulation revenue increased $0.2 million primarily due to an increase in rate from the Dr. Andrew Weil’s Self Healing newsletter along with the inclusion of circulation revenue from the launch of Blueprint magazine; this is partially offset by lower Weddings circulation revenue and lower revenue from our Special Interest Publications, as the 2005 period contained additional issues of both (see chart below). The increase in revenue per subscriber from the Dr. Andrew Weil’s Self Healing newsletter is due to the prior year accounting treatment of subscribers acquired in a purchase transaction. In accordance with purchase accounting rules, revenue per subscriber was reduced in the year of acquisition. Current year results are recorded on an actual basis.

Magazine Publication Schedule


	Second Quarter 2006	Second Quarter 2005

Martha Stewart Living	Three Issues	Three Issues
Martha Stewart Weddings	Two Issues	Three Issues
Everyday Food	Three Issues	Three Issues
Body + Soul	Two Issues	Two Issues
Special Interest Publications	Zero Issues	One Issue
Blueprint	One Issue	Zero Issues

Production, distribution and editorial expenses increased $2.7 million, primarily reflecting the additional costs associated with the increase in advertising pages in Martha Stewart Living, which results in higher physical costs, as well as the costs associated with Blueprint, a magazine we are currently testing. Selling and promotion expenses decreased $2.8 million, primarily due to a one-time newsstand expense reduction adjustment of $3.2 million related to the settlement of certain newsstand-related fees. Included within the Publishing segment is a $1.7 million loss in Blueprint compared to a loss $0.4 million in the prior year quarter.

BROADCASTING SEGMENT


	2006		2005
	(unaudited)		(unaudited)			Variance
Broadcasting Revenue
Advertising	$	3,615	$	865		$	2,750
Radio		1,875		—			1,875
Licensing and other		6,267		982			5,285

Total Broadcasting Segment Revenue		11,757		1,847			9,910


Broadcasting Operating Costs and Expenses
Production, distribution and editorial		7,699		1,497			(6,202	)
Selling and promotion		817		814			(3	)
General and administrative		2,062		19,493			17,431
Depreciation and amortization		755		101			(654	)

Total Broadcasting Operating Costs and Expenses		11,333		21,905			10,572


Operating Income/(Loss)	$	424	$	(20,058	)	$	20,482

Broadcasting revenues increased $9.9 million, to $11.8 million for the quarter ended June 30, 2006, from $1.8 million for the quarter ended June 30, 2005. Both advertising and licensing revenue increased primarily due to the inclusion of revenue related to our nationally syndicated program which launched on September 12, 2005. Revenue from Martha Stewart Living Radio was $1.9 million. Neither program existed in the prior year period.

Production, distribution and editorial expenses increased $6.2 million due principally to the launch of our syndicated program; a portion of the production-related expenses are deferred for matching against future revenue. As of June 30, 2006 our deferred production cost balance was $5.3 million. Selling and promotion expense was flat. General and administrative expense decreased $17.4 million, primarily because results from the prior year’s quarter include a non-cash charge of $16.8 million associated with the vesting of a portion of a warrant granted in connection with the production of the syndicated TV program. Depreciation and amortization expenses increased due to leasehold improvements and fixed asset additions related to our new television studio.

MERCHANDISING SEGMENT


	2006		2005
	(unaudited)		(unaudited)		Variance
Merchandising Revenue
Kmart earned royalty	$	8,649	$	8,986	$	(337	)
Other		1,516		1,176		340

Total Merchandising Segment Revenue		10,165		10,162		3


Merchandising Operating Costs and Expenses
Production, distribution and editorial		2,920		2,594		(326	)
Selling and promotion		86		19		(67	)
General and administrative		1,787		1,397		(390	)
Depreciation and amortization		254		209		(45	)

Total Merchandising Operating Costs and Expenses		5,047		4,219		(828	)


Operating Income	$	5,118	$	5,943	$	(825	)

Merchandising revenues remained flat at $10.2 million for the quarter ended June 30, 2006 compared to the quarter ended June 30, 2005. Revenue related to our earned royalty at Kmart declined slightly due to store closures and lower same store-sales offset by higher royalty rate. The royalty rate under our agreement with Kmart increased approximately 3.1% on February 1, 2006. We expect the minimum guarantees will exceed actual royalties earned from retail sales through 2007 primarily due to store closings and 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. Other revenue increased primarily due to revenue related to our new program with KB Home.

Production, distribution and editorial as well as general and administrative expenses increased due largely to investment in personnel to support the growing number of merchandising initiatives we have forged in recent months.

INTERNET


	2006		2005
	(unaudited)		(unaudited)			Variance
Internet
Product	$	2,511	$	2,027		$	484
Advertising and Other		2,123		208			1,915

Total Internet Segment Revenue		4,634		2,235			2,399


Internet Operating Costs and Expenses
Production, distribution and editorial		3,117		2,528			(589	)
Selling and promotion		948		354			(594	)
General and administrative		495		260			(235	)
Depreciation and amortization		68		239			171

Total Internet Operating Costs and Expenses		4,628		3,381			(1,247	)

Operating Income/(Loss)	$	6	$	(1,146	)	$	1,152

Internet revenues increased $2.4 million, to $4.6 million for the three months ended June 30, 2006, from $2.2 million for the three months ended June 30, 2005. Advertising and other revenue increased due to an increase in web traffic, ad rates, and sell-through. Page views on our site increased 117% year-over-year to a monthly average of 37 million page views from 17 million in the three months ended June 30, 2005. The increase in product revenue was due to increased sales at our direct-to-consumer floral business.

Production, distribution and editorial costs increased $0.6 million due to investment in personnel along with higher fulfillment costs at our direct-to-commerce floral business. Selling and promotion expense increased $0.6 million related to higher compensation expenses associated with developing an internet advertising sales force.

CORPORATE


	2006			2005
	(unaudited)			(unaudited)			Variance
Corporate Operating Costs and Expenses
Production, distribution and editorial	$	—		$	102		$	102
Selling and promotion		—			22			22
General and administrative		12,384			14,606			2,222
Depreciation and amortization		1,024			923			(101	)

Total Corporate Operating Costs and Expenses		13,408			15,653			2,245


Operating Loss	$	(13,408	)	$	(15,653	)	$	2,245

Corporate operating costs and expenses decreased $2.3 million, to $13.4 million for the three months ended June 30, 2006, from $15.7 million for the three months ended June 30, 2005. General and administrative expenses decreased $2.2 million, largely due to lower professional fees and employee-related costs.

OTHER ITEMS

Interest Income, net. Interest income, net, was $1.4 million for the quarter ended June 30, 2006 compared to $0.9 million for the prior year quarter. The increase was primarily attributable to interest received from a settlement of newsstand fees along with higher interest rates.

Income tax expense. Income tax expense for the quarter ended June 30, 2006 was $0.2 million, compared to an income tax expense of $0.1 million for the quarter ended June 30, 2005. The current period provision includes a valuation allowance of $0.4 million against certain deferred tax assets.

Loss from discontinued operations. Loss from discontinued operations was $(0.5) million for the quarter ended June 30, 2006, compared to loss of $(0.1) million for the quarter ended June 30, 2005. Discontinued operations represent the operations of the Wedding List, which the Company decided to discontinue in 2002. The current year expenses are related primarily to facilities.

Net Loss. Net loss was $(1.2) million for the quarter ended June 30, 2006, compared to a net loss of $(33.5) million for the quarter ended June 30, 2005, as a result of the factors mentioned above.

Comparison of Six Months Ended June 30, 2006 to Six Months Ended June 30, 2005

PUBLISHING SEGMENT


	2006		2005
	(unaudited)		(unaudited)			Variance
Publishing Revenue
Advertising	$	40,461	$	22,295		$	18,166
Circulation		35,439		33,773			1,666
Other		1,276		994			282

Total Publishing Segment Revenue		77,176		57,062			20,114


Publishing Operating Costs and Expenses
Production, distribution and editorial		42,016		35,611			(6,405	)
Selling and promotion		27,371		31,631			4,260
General and administrative		1,461		1,349			(112	)
Depreciation and amortization		319		495			176

Total Publishing Operating Costs and Expenses		71,167		69,086			(2,081	)


Operating Income/(Loss)	$	6,009	$	(12,024	)	$	18,033

Publishing revenues increased $20.1 million, or 35%, to $77.2 million for the six months ended June 30, 2006, from $57.1 million for the six months ended June 30, 2005. Advertising revenue increased $18.2 million, primarily due to an increase in both advertising pages and rate in Martha Stewart Living magazine which accounted for $14.1 million of the increase. Circulation revenue increased $1.7 million primarily due to an increase in rate from the Dr. Andrew Weil’s Self Healing newsletter along with higher circulation revenue from Martha Stewart Living magazine, and the inclusion of circulation revenue from the launch of Blueprint magazine; this is partially offset by lower Weddings and Special Interest Publication circulation revenue, as the 2005 period contained an extra issue of Weddings and one Special Interest Publication. The increase in revenue per subscriber from the Dr. Andrew Weil’s Self Healing newsletter is due to the prior year accounting treatment of subscribers acquired in a purchase transaction. In accordance with purchase accounting rules, revenue per subscriber was reduced in the year of acquisition. Current year results are recorded on an actual basis.

Magazine Publication Schedule


	First Half 2006	First Half 2005

Martha Stewart Living	Six Issues	Six Issues
Martha Stewart Weddings	Two Issues	Three Issues
Everyday Food	Six Issues	Six Issues
Body + Soul	Four Issues	Four Issues
Special Interest Publications	Two Issues	Three Issues
Blueprint	One Issue	Zero Issues

Production, distribution and editorial expenses increased $6.4 million, primarily reflecting the additional costs associated with the increase in advertising pages in Martha Stewart Living, which results in higher physical costs, as well as the costs associated with Blueprint, a magazine we are currently testing. Selling and promotion expenses decreased $4.3 million, primarily due primarily due to a one-time newsstand expense reduction adjustment of $3.2 million related to the settlement of certain newsstand-related fees along with lower subscription acquisition costs in both Martha Stewart Living and Everyday Food. Included within the Publishing segment is a $2.8 million investment in Blueprint compared to an investment of $0.6 million for the first six months ended June 30, 2005.

BROADCASTING SEGMENT


	2006		2005
	(unaudited)		(unaudited)			Variance
Broadcasting Revenue
Advertising	$	7,719	$	1,035		$	6,684
Radio		3,750		—			3,750
Licensing and other		11,608		1,609			9,999

Total Broadcasting Segment Revenue		23,077		2,644			20,433


Broadcasting Operating Costs and Expenses
Production, distribution and editorial		15,163		2,787			(12,376	)
Selling and promotion		1,684		1,048			(636	)
General and administrative		4,623		21,001			16,378
Depreciation and amortization		1,500		147			(1,353	)

Total Broadcasting Operating Costs and Expenses		22,970		24,983			2,013


Operating Income/(Loss)	$	107	$	(22,339	)	$	22,446

Broadcasting revenues increased $20.4 million, to $23.1 million for the six months ended June 30, 2006, from $2.6 million for the six months ended June 30, 2005. Both advertising and licensing revenue increased primarily due to the inclusion of revenue related to our nationally syndicated program which launched on September 12, 2005. Revenue from Martha Stewart Living Radio was $3.8 million. Neither program existed in the prior year period.

Production, distribution and editorial expenses increased $12.4 million due principally to the launch of our syndicated program; a portion of the production related expenses are deferred for matching against future revenue. As of June 30, 2006 our deferred production cost balance was $5.3 million. Selling and promotion expense increased $0.6 million primarily due to higher compensation costs associated with our new television show. General and administrative expense decreased $16.4 million; results from the prior year’s quarter include a non-cash charge of $16.8 million associated with the vesting of a portion of a warrant granted in connection with the production of the syndicated TV program. Depreciation and amortization expenses increased due to leasehold improvements and fixed asset additions related to our new television studio.

MERCHANDISING SEGMENT


	2006		2005
	(unaudited)		(unaudited)		Variance
Merchandising Revenue
Kmart earned royalty	$	15,069	$	15,118	$	(49	)
Kmart minimum true-up		2,193		2,078		115
Other		4,180		2,358		1,822

Total Merchandising Segment Revenue		21,442		19,554		1,888


Merchandising Operating Costs and Expenses
Production, distribution and editorial		6,046		5,147		(899	)
Selling and promotion		169		39		(130	)
General and administrative		3,408		2,200		(1,208	)
Depreciation and amortization		508		418		(90	)

Total Merchandising Operating Costs and Expenses		10,131		7,804		(2,327	)


Operating Income	$	11,311	$	11,750	$	(439	)

Merchandising revenues increased $1.9 million, or 10%, to $21.4 million for the six months ended June 30, 2006, from $19.6 million for the six months ended June 30, 2005. Revenue related to our earned royalty at Kmart declined slightly due to store closures and lower same store-sales offset by a higher royalty rate. The royalty rate under our agreement with Kmart increased approximately 3.1% on February 1, 2006. Sales of our product were down on a year-over-year basis. The pro-rata portion of revenue related to the contractual minimum amounts covering the current period, net of amounts subject to recoupment, is listed separately above. We expect the minimum guarantees will exceed actual royalties earned from retail sales through 2007 primarily due to store closings and 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. Other revenue increased primarily due to revenue related to our new program with KB Home.

Production, distribution and editorial as well as general and administrative expenses increased principally due largely to investment in personnel to support the growing number of merchandising initiatives we have forged in recent months.

INTERNET SEGMENT


	2006		2005
	(unaudited)		(unaudited)			Variance
Internet
Product	$	4,180	$	4,972		$	(792	)
Advertising and other		3,402		385			3,017

Total Internet Segment Revenue		7,582		5,357			2,225


Internet Operating Costs and Expenses
Production, distribution and editorial		5,025		6,258			1,233
Selling and promotion		1,577		615			(962	)
General and administrative		874		648			(226	)
Depreciation and amortization		103		491			388

Total Internet Operating Costs and Expenses		7,579		8,012			433


Operating Income/(Loss)	$	3	$	(2,655	)	$	2,658

Internet revenues increased $2.2 million, to $7.6 million for the six months ended June 30, 2006, from $5.4 million for the six months ended June 30, 2005. Advertising and other revenue increased due to an increase in web traffic,

CORPORATE


	2006			2005
	(unaudited)			(unaudited)			Variance
Corporate Operating Costs and Expenses
Production, distribution and editorial	$	—		$	195		$	195
Selling and promotion		—			44			44
General and administrative		24,904			26,629			1,725
Depreciation and amortization		2,014			1,856			(158	)

Total Corporate Operating Costs and Expenses		26,918			28,724			1,806


Operating Loss	$	(26,918	)	$	(28,724	)	$	1,806

Corporate operating costs and expenses decreased $1.8 million, to $26.9 million for the six months ended June 30, 2006, from $28.7 million for the six months ended June 30, 2005. General and administrative expenses decreased $1.7 million, largely due to lower professional fees and employee-related costs.

OTHER ITEMS

Interest Income, net. Interest income, net, was $2.4 million for the six months ended June 30, 2006 compared to $1.7 million for the prior year quarter. The increase was attributable to interest received from a settlement of newsstand fees along with higher interest rates.

Income tax expense. Income tax expense for the six months ended June 30, 2006 was $0.3 million, compared to income tax expense of $0.1 million for the six months ended June 30, 2005. The current period provision includes a valuation allowance of $2.9 million taken against certain deferred tax assets.

Loss from discontinued operations. Loss from discontinued operations was $(0.6) million for the six months ended June 30, 2006, compared to loss of $(0.3) million for the six months ended June 30, 2005. Discontinued operations represent the operations of the Wedding List, which the Company decided to discontinue in 2002. The current year expenses are related primarily to facilities.

Net Loss. Net loss was $(8.0) million for the six months ended June 30, 2006, compared to a net loss of $(52.7) million for the six months ended June 30, 2005, as a result of the above mentioned factors.

Liquidity and Capital Resources

Cash and cash equivalents were $36.2 million and $20.2 million and short-term investments were $79.3 million and $83.8 million at June 30, 2006 and December 31, 2005, respectively. In total, cash and cash equivalents along with short-term investments, were $115.5 million and $104.0 million at June 30, 2006 and December 31, 2005, respectively.

Cash flows provided by operating activities were $15.1 million and $(12.6) million during the six months ended June 31, 2006 and 2005, respectively. Cash flows provided by operating activities during the six months June 30, 2006 were primarily due to a reduction in the net loss for the period to $8.0 million due to an improvement in operating trends primarily in our publishing and broadcasting segments, aided by changes in operating assets and liabilities of $12.9 million, non-cash equity compensation expense of $5.7 million, and depreciation and amortization of $4.4 million. The changes in operating assets and liabilities were primarily due to a decrease in accounts receivable due to the collection of a royalty receivable due from Kmart related to our minimum royalty payment, partially offset by an increase in deferred revenue. Cash used by operating activities during the six months ended June 30, 2005 were primarily due to a net loss for the period of $(52.7) million, partially offset by changes in operating assets and liabilities of $12.2 million, non-cash equity compensation of $24.5 million and depreciation and amortization of $3.4 million. The changes in operating assets and liabilities reflect a decrease in accounts receivable

due principally to the collection of a receivable from Kmart, partially offset by a decrease in certain accounts payable. Included in the non-cash equity compensation was a charge of $16.8 million associated with the vesting of a portion of a warrant granted in connection with the production of the syndicated TV program.

Cash flows provided by investing activities were $0.6 million during the six months ended June 30, 2006, compared to cash flows used in investing activities of $71.7 million during the six months ended June 30, 2005. Cash flows provided by investing activities in 2006 resulted from the net sale of short-term investments of $4.5 million, partially offset by capital expenditures of $3.9 million. Cash flows used in investing activities in 2005 resulted from the net purchase of short-term investments of $69.7 million and capital expenditures of $2.0 million.

Cash flows provided by financing activities for the six month periods ended June 30, 2006 and 2005 were $0.3 million and $7.9 million, respectively, principally representing proceeds received from the exercise of employee stock options.

We have a line of credit with Bank of America in the amount of $5 million, which is generally used to secure outstanding letters of credit. As of June 30, 2006, we had no outstanding borrowings under this facility. Of a total line of $5.0 million, we currently have letters of credit drawn on $2.1 million.

We believe that our available cash balances and short-term investments together with any funds available under existing credit facilities will be sufficient to meet our operating and recurring cash needs for foreseeable periods. In late July, our Board of Directors declared a special one-time dividend of $0.50 per share. The special dividend will be payable on September 14, 2006, to stockholders of record on August 31, 2006. The cash commitment is approximately $27 million.

Seasonality and Quarterly Fluctuations

Several of our businesses can experience fluctuations in quarterly performance. For example, our Publishing segment results can vary from quarter to quarter due to publication schedules. Revenues from the 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.

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

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

Revenue Recognition

We recognize revenues when realized or realizable and earned. Revenues and associated accounts receivable are recorded net of provisions for estimated future returns, doubtful accounts and other allowances. Newsstand revenues in our Publishing segment and product sales in our Internet segment are recognized based upon assumptions with respect to future returns. We base our estimates on our historical experience and current market conditions. Reserves

are adjusted regularly based upon actual results. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. Revenues for royalties in our Merchandising segment are accrued on a monthly basis based on sales volume provided to us by our partners and payment is generally made by our partners on a quarterly basis. 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. Some of our other merchandising agreements also contain minimum guarantee provisions. The pro rata portion of these minimum guarantees will be recorded when such amounts are both determinable and deemed collectible. Television advertising revenues are recorded when the related commercial is aired and is recorded net of estimated reserves for television audience underdelivery and bad debts. Television royalties are recorded as earned in accordance with specific terms of each agreement. Internet advertising revenues based on the sale of impression-based advertisements are recorded in the period in which the advertisements are delivered.

Income taxes

The Company follows the Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under the asset and liability method of SFAS 109, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in management’s judgment about the future realization of deferred tax assets. SFAS No. 109 places more emphasis on historical information, such as the Company’s cumulative operating results and its current year taxable income/loss than it places on estimates of future taxable income.

Television production costs

Intangible assets

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

In 2005 and 2003, the Company estimated future cash flows based upon individual magazine historical results, current trends and operating cash flows to access the fair value. In 2004, the Company engaged an external valuation services firm to report on the fair value of the Company’s goodwill. No impairment charges were recorded in 2005, 2004 and 2003.

Long-Lived Assets

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

Advertising Cost

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

Non-cash Equity Compensation

Forward-looking Statements and Risk Factors

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

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

	o		an adverse resolution to the pending SEC enforcement proceeding against Ms. Stewart arising from her personal sale of non-Company stock;

	o		adverse resolution of some or all of the Company’s ongoing litigation;

	o		a loss of the services of Ms. Stewart;

	o		a loss of the services of other key personnel;

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

	o		loss or failure of merchandising and licensing programs;

	o		failure to protect our intellectual property;

	o		a softening of the domestic advertising market;

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

	o		unanticipated increases in paper, postage or printing costs;

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

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

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

Certain of these and other factors are discussed in more detail in the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2006, especially under the heading “Item 1A. Risk Factors”, which may be accessed through the SEC’s World Wide Web site at http://www.sec.gov. The Company cautions you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements contained in this Quarterly Report, whether as a result of new information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

None.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

There have been no material developments in the Company’s material outstanding litigation, the history and status of which is summarized below.

On February 3, 2003, the Company was named as a defendant in a Consolidated and Amended Class Action Complaint (the “Consolidated Class Action Complaint”), filed in the United States District Court for the Southern District of New York, by plaintiffs purporting to represent a class of persons who purchased common stock in the Company between January 8, 2002 and October 2, 2002. In re Martha Stewart Living Omnimedia, Inc. Securities Litigation, 02-CV-6273 (JES). The Consolidated Class Action Complaint also names Martha Stewart and seven of the Company’s other present or former officers (Gregory R. Blatt, Sharon L. Patrick, and five other Company officers) as defendants. All such individuals other than Martha Stewart are collectively referred to herein as the “Individual Defendants.” The action consolidated seven class actions previously filed in the Southern District of New York. The claims in the Consolidated Class Action Complaint arise out of Ms. Stewart’s sale of 3,928 shares of ImClone Systems stock on December 27, 2001. The plaintiffs assert violations of Sections 10(b) (and rules promulgated thereunder), 20(a) and 20A of the Securities Exchange Act of 1934. The plaintiffs allege that MSO, Ms. Stewart and the Individual Defendants omitted material information and made statements about Ms. Stewart’s sale that were materially false and misleading. The plaintiffs allege that, as a result of these false and misleading statements, the market price of the Company’s stock was inflated during the putative class periods and dropped after the alleged falsity of the statements became public. The plaintiffs further alleged that the Individual Defendants traded MSO stock while in possession of material non-public information, but as explained below, all such allegations have been dismissed. The Consolidated Class Action Complaint seeks certification as a class action, damages, attorneys’ fees and costs, and further relief as determined by the court. By stipulation of the parties, and an order of the court entered November 10, 2003, all claims asserted in the Consolidated Class Action Complaint pursuant to Section 20A (Insider Trading) of the Securities Exchange Act against the Individual Defendants, and all remaining claims against the Individual Defendants, other than Mr. Blatt and Ms. Patrick, were dismissed without prejudice. On May 19, 2003, the Company’s motion to dismiss the Consolidated Class Action Complaint was denied. The matter remains pending, and discovery is ongoing. While we believe the Company has substantial defenses to the Consolidated Class Action Complaint, we are unable to predict the outcome of that action or reasonably estimate a range of possible loss at this time.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.


		Page
Part I.	Financial information

	Item 1. Financial Statements.		3

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		16

	Item 3. Quantitative and Qualitative Disclosures About Market Risk.		29

	Item 4. Controls and Procedures.		29

Part II.	Other Information

	Item 1. Legal Proceedings.		31

	Item 1A. Risk Factors.		31

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		31

	Item 3. Defaults Upon Senior Securities.		31

	Item 4. Submission of Matters to a Vote of Security Holders.		32

	Item 5. Other Information.		32

	Item 6. Exhibits.		32

	Signatures		33
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATION


	Votes For		Votes Withheld
Rick Boyko		291,075,910		224,417
Michael Goldstein		291,072,721		227,606
Jill Greenthal		291,088,627		211,700
Charles A. Koppelman		291,040,381		259,946
Susan Lyne		291,067,503		232,824
Wenda Harris Millard		291,030,774		269,553
Thomas C. Siekman		291,025,108		275,219
Bradley E. Singer		291,017,313		283,014


Exhibit
Number		Exhibit Title
10.1		Employment Agreement dated as July 25, 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).

10.2		Employment Agreement dated as of July 25, 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).

31.1		Certification of Chief Executive Officer

31.2		Certification of Chief Financial Officer

32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)


MARTHA STEWART LIVING OMNIMEDIA, INC.

	Date:	August 8, 2006

		/s/ Howard Hochhauser

	Name:	Howard Hochhauser
	Title:	Chief Financial Officer

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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1.		I have reviewed this Quarterly Report on Form 10-Q of Martha Stewart Living Omnimedia, Inc.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a—15(e) and 15d—15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a—15(f) and 15d—15(f)) for the registrant and have:

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	(1)		The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

	(2)		The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.


Dated: August 8 , 2006		/s/ Susan Lyne Susan Lyne
		President & Chief Executive Officer

Dated: August 8, 2006		/s/ Howard Hochhauser Howard Hochhauser
		Chief Financial Officer