Martha Stewart’s multimedia company, reeling from the jailed domestic diva’s legal woes and declining ad revenue, posted a bigger third-quarter loss than a year ago, and predicted a larger-than-expected drop in the fourth quarter.

Still, yesterday’s results beat Wall Street expectations, and Martha Stewart Living Omnimedia Inc. said it is “increasingly optimistic” about prospects for an advertising recovery in 2005, when Ms. Stewart is expected to return to her company.

Ms. Stewart, founding editorial director and former chairwoman and CEO, was convicted in March of lying to investigators about her sale of Im-Clone Systems Inc. shares, and began serving a five-month prison term October 8. After her release, Ms. Stewart, who owns about 60% of the company’s shares, will be serving another five months of house arrest. She’s appealing her case.

Martha Stewart Living posted a loss of $14.97 million, or 30 cents per share, during the three-month period ended September 30. That compared with a loss of $3.94 million, or 8 cents per share, in the year-ago period.

Analysts expected a loss of 47 cents per share.

Revenue, which dropped across all divisions, fell 24.4% to $38.69 million from $51.18 million a year ago.

“Despite the losses in the quarter, we continue to benefit from strong consumer support for our products, which offer that unique blend of ‘Martha Stewart’ brand attributes – inspirational ‘how-to’ ideas translated into products that stand for quality, style, usefulness, and affordability,” the president and chief executive, Sharon L. Patrick, said in a statement.

The company warned losses in the fourth quarter could be 20 cents a share; analysts expected a loss of 7 cents per share.

For the nine-month period, Martha Stewart Living lost $52.27 million, or $1.05 a share, compared with a loss of $5.14 million, or 10 cents a share, a year ago. Revenue were $127.23 million in the period, compared with $174.99 million in the year-ago period.