Martha Stewart Living Omnimedia (MSO) on Thursday posted a better-than-expected quarterly profit but said advertising sales continue to suffer amid the legal woes of its founder.

The media and merchandising company said Martha Stewart's (search) obstruction of justice trial slammed advertising revenue and the company projected a loss for the current quarter. Shares were down 3 percent in early see-saw trading.

Martha Stewart Living said it has "prepared for the various possible outcomes" of Stewart's criminal trial. Jury deliberations in the case began on Wednesday.

In a statement, Chief Executive Sharon Patrick said fourth-quarter results exceeded expectations but "we continued to feel the negative impact of the events surrounding Martha Stewart's personal legal situation."

Net profit totaled $4.6 million, or 9 cents a share, reversing a year-earlier loss of $2 million, or 4 cents a share. Revenue slipped to $70.9 million from $77.6 million in the prior-year quarter.

The company said it expects a loss of 20 cents a share for the current first quarter, hurt by advertising declines. Last year the flagship Martha Stewart Living magazine (search) saw ad pages drop 35 percent.

Analysts' average forecast for the first quarter is a loss of 12 cents a share loss, according to two analysts surveyed by Reuters Research, a unit of Reuters Group Plc.

Martha Stewart, who transformed a catering business into a media empire, is accused of lying to investigators probing a suspicious sale of shares of drugmaker ImClone Systems Inc. (IMCL). She has pleaded innocent.

Her company has not been accused of any crimes. But analysts say its future could hinge on the outcome of the trial because the business is so closely tied to her personal reputation.

Fourth-quarter operating profit was 10 cents a share. That exceeded analysts' average target of 6 cents a share, according to research firm Reuters Research.

The company posted an operating loss of 3 cents a share a year earlier. Excluding a special restructuring charge, it recorded a profit of 6 cents a share.

For the full year 2003, the company lost 4 cents a share on an operating basis, its first annual loss since going public in 1999. But it said its financial position remains strong with $169 million in cash and no debt on its balance sheet.

The company faces a lawsuit from retail partner Kmart Holdings Corp. over disputed royalties Kmart says it is owed. Martha Stewart Living said it plans to fight the suit and enforce the terms of its deal with Kmart.

It said it excluded $3.3 million in disputed royalties from fourth-quarter results because of the litigation.

Overall, quarterly merchandising revenue climbed, helped by sales of holiday products sold at Kmart stores and a new furniture line.

The company's stock has climbed this year on apparent optimism about the possible outcome of Stewart's trial. The shares are up about 40 percent since the beginning of 2003.