SEPARATION AGREEMENT

Exhibit 10.8

SEPARATION AGREEMENT

     This Separation Agreement (the “ Agreement ”), dated as of June 10, 2008 (the “ Effective Date ”), is entered into between Martha Stewart Living Omnimedia, Inc. (the “ Company ”) and Susan Lyne (“ Ms. Lyne ”).

     WHEREAS, the parties are party to an Employment Agreement dated as of November 11, 2004 (the “ Employment Agreement ”), pursuant to which Ms. Lyne serves as the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors;

     WHEREAS, Ms. Lyne has informed the Board of Directors of her intention to resign from her positions with the Company pursuant to the terms hereof; and

     WHEREAS, the parties desire that, subject to the terms and conditions set forth herein, (i) Ms. Lyne shall cooperate with the Company to assist in the transition to one or more new Chief Executive Officer(s) (the “ Successor ”) as an advisor to the Company until July 11, 2008 (such date, the “ Resignation Date ”); (ii) Ms. Lyne shall resign as the Company’s President and Chief Executive Officer as of the date hereof; and (iii) Ms. Lyne shall resign as a member of the Company’s Board of Directors on the Resignation Date;

     NOW, THEREFORE, in consideration of these premises and the mutual covenants hereinafter set forth, the parties agree as follows:

     1. (a) Ms. Lyne shall:

     (i) cooperate with the Company and the Successor in efforts to effect an orderly transition;

     (ii) until the Resignation Date, continue to serve as a member of the Company’s Board of Directors;

     (iii) resign as of the date hereof as the Company’s President and Chief Executive Officer pursuant to the terms of the Employment Agreement (as amended hereby); and

     (iv) execute and deliver the Waiver and Release of Claims in the form attached hereto as Exhibit A (the “ Waiver and Release of Claims ”) on the Date of Termination as defined in the Employment Agreement.

     (b) Subject to Section 1(c) below, the Company shall:

     (i) on the Resignation Date, pay Ms. Lyne the sum of the following amounts: (A) the amount of her Base Salary and unused vacation time, each prorated on a daily basis, that was accrued and unpaid as of the Resignation Date; (B) the product obtained by multiplying her Base Salary by a fraction, (x) the numerator of which is the number of calendar days between the Resignation Date, exclusive, and December 31, 2008, inclusive, and (y) the denominator of which is 365; (C) a portion of her expected 2008 bonus in the amount of $540,000; and (D) reimbursement of reasonable attorneys fees in connection with the negotiation and

execution of this Agreement in an amount not to exceed $15,000. The parties will cooperate to the extent required by Ms. Lyne with respect to timing of payments hereunder for purposes of complying with Section 409A of the Internal Revenue Code.

     (ii) on the date that the Company pays annual incentive bonuses to its senior executives in respect of 2008 (the “ 2008 Incentive Bonus ” for each such senior executive), but not later than March 15, 2009, pay Ms. Lyne the amount, if any, by which (A) the product of (x) $900,000 and (y) the percentage multiplier applied to senior executives in the bonus pool, exceeds (B) $540,000; and

     (iii) for purposes of clarification of Section 5 of the Nonqualified Stock Option Agreement dated as of November 11, 2004 between the parties (the “ 2004 Option Agreement ”), deem Ms. Lyne’s Termination of Employment (as defined in the 2004 Option Agreement) to provide that all options which have previously vested under the 2004 Option Agreement remain exercisable until the fifth anniversary of the Resignation Date, subject to Section 1(c) below;

     (c) Notwithstanding anything herein to the contrary, (i) Ms. Lyne shall not be entitled to payment pursuant to Section l(b)(i)(B), and Sections l(b)(ii) and (iii) of this Agreement if she has committed a material breach (following notice by the Company and a reasonable opportunity to cure) of her obligations under this Agreement or under Section 10 of the Employment Agreement (as amended pursuant to Section 2 below, and which amended Employment Agreement shall apply to her service to the Company as an advisor) or under the Waiver and Release of Claims (as defined below), or if Ms. Lyne’s employment with the Company is terminated prior to the Resignation Date by Ms. Lyne without Good Reason or by the Company for Cause.

     2. The parties agree that the Employment Agreement shall hereby be deemed amended as of the Effective Date as follows:

     (a) Section 9 of the Employment Agreement (Termination Payments) is deleted in its entirety;

     (b) Section 10(b) of the Employment Agreement (Noncompetition) is deleted in its entirety;

     (c) Section 10(c) of the Employment Agreement (Nonsolicitation) is amended as follows: the reference therein to “12 months” is amended to read “24 months;” and

     (d) Section 10(d) of the Employment Agreement (Nondisparagement) is amended as follows: the reference therein to “12 months” is amended to read “all periods.”

Without limiting the foregoing and for avoidance of doubt, Ms. Lyne shall not be entitled to receive any payments pursuant to Section 9 of the Employment Agreement under any circumstances, including but not limited to in the event her employment as an advisor with the Company is terminated prior to the Resignation Date by her for Good Reason or without Good Reason or by the Company without Cause or for Cause. Without limiting anything in this

Agreement and notwithstanding anything in the Employment Agreement to the contrary, the Employment Term thereunder shall not be deemed to extend beyond July 11, 2008. Except as expressly amended by Section 2 of this Agreement, all other terms and provisions of the Employment Agreement shall remain unmodified and in full force and effect, including without limitation Section 12 thereof (Indemnification); provided however, that such Employment Agreement shall apply to Ms. Lyne in her new capacity as an advisor to the Company. For avoidance of doubt, Ms. Lyne’s employment with the Company as an advisor may be terminated prior to the Resignation Date by her for Good Reason or without Good Reason or by the Company without Cause or for Cause pursuant to Section 7 of the Employment Agreement; provided that if Ms. Lyne resigns for Good Reason or is terminated without Cause prior to the Resignation Date, Ms. Lyne shall be entitled to the benefits set forth in Section 1(b) above.

     3. Nothing in this Agreement shall be construed to amend or modify the terms of any agreement executed by the parties, including without limitation (i) the 2004 Option Agreement, (ii) the Restricted Stock Award Agreement dated as of November 11, 2004 between the parties and (iii) the Nonqualified Stock Option Agreement dated as of March 3, 2008 between the parties (the agreements referenced in clauses (i)-(iii) hereof, collectively, the “ Equity Agreements ”).

     4. Ms. Lyne acknowledges and agrees that her execution on the Date of Termination and the enforceability of the Waiver and Release of Claims is an integral part of, and a material inducement to the Company to enter into, this Agreement and agrees that in the event that either (i) Ms. Lyne fails to execute and deliver to the Company the Waiver and Release of Claims or (ii) Ms. Lyne revokes the Waiver and Release of Claims as provided in Section 9 of the Waiver and Release of Claims, the Company may in its sole and absolute discretion revoke this Agreement by giving written notice to Ms. Lyne, in which event this Agreement shall be deemed null and void ab initio and Ms. Lyne shall promptly after receipt of such notice return to the Company any amounts paid to Ms. Lyne pursuant to this Agreement that are in excess of the amounts to which she is entitled to receive under the Employment Agreement. For avoidance of doubt, if the Company revokes this Agreement pursuant to the preceding sentence the Employment Agreement shall not have been deemed amended hereby.

     5. Ms. Lyne’s contribution to the Company’s 401(k) plan will cease on the last day of the Employment Term. When directed by Ms. Lyne, the Company shall pay Ms. Lyne any amounts she contributed or which are vested in such plan in accordance with the terms of such plan. To the extent that Ms. Lyne does not receive any portion of the Company contribution for 2008 under the 401(k) or forfeits any prior Company contributions under the 401(k) plan as of the Resignation Date, Ms. Lyne shall receive a separate cash payment from the Company promptly following the Resignation Date to maker her whole for any such lost payments. Ms. Lyne’s active participation in the Company’s benefits plans shall end on the last day of the Employment Term and she shall retain all rights to vested benefits payable in accordance with the terms of such plans. In addition, until such time as Ms. Lyne is entitled to medical benefits from another employer, but in no event for a period of longer than eighteen (18) months from the Resignation Date, the Company shall reimburse Ms. Lyne for the portion of COBRA benefits Ms. Lyne pays in an amount equal to the contributions that the Company would have made on her behalf had she remained an employee of the Company (i.e., Ms. Lyne will not be reimbursed for that portion of the COBRA premium equal to the amount that was deducted from her payroll for such benefits when she was an employee).

     6. Promptly after the end of the Employment Term, Ms. Lyne shall submit to the Company a reimbursement request, with supporting documentation as required by the Company, for any expenses incurred through such date with respect to which Ms. Lyne is entitled to be reimbursed pursuant to Section 4 of the Employment Agreement (“ Reimbursable Expenses ”) and the Company shall promptly reimburse Ms. Lyne for such expenses (or pay such expenses directly if requested pursuant to the following sentence). Ms. Lyne shall promptly pay any expenses that Ms. Lyne incurred with respect to which the Company could be liable (e.g., expenses incurred on any corporate credit card if the Company may be liable for the payment thereof); except that Ms. Lyne may request the Company to pay directly, in accordance with the Company’s policy and procedure, any Reimbursable Expenses incurred on her Company American Express Corporate Card.

     7. Capitalized terms used and not otherwise defined herein shall have the respective meanings ascribed to such terms in the Employment Agreement.

     8. This Agreement, the Employment Agreement (as amended hereby) and the Waiver and Release of Claims constitute the complete and final agreement between the parties and supersede and replace all prior or contemporaneous agreements, negotiations, or discussions relating to the subject matter of this Agreement, the Employment Agreement and the Waiver and Release of Claims. This Agreement may not be amended except in a writing signed by each of the parties hereto. No waiver of any right set forth in this Agreement shall be effective unless set forth in a writing signed by the party against whom the waiver is to be enforced. All provisions and portions of this Agreement are severable. If any provision or portion of this Agreement or the application of any provision or portion of this Agreement shall be determined to be invalid or unenforceable to any extent or for any reason, all other provisions