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CNN PEOPLE IN THE NEWS

Profile of Martha Stewart

Aired March 3, 2005 - 22:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


(BEGIN VIDEOTAPE)
ANNOUNCER: Ahead in this special edition of PEOPLE IN THE NEWS, she's the homemaking legend who's become one of America's most famous inmates.

MARTHA STEWART: What was a small personal matter became over the last two years an almost fatal circus event of unprecedented proportions.

ANNOUNCER: Her drive for perfection as a young girl led her to become the ultimate diva of domesticity.

UNIDENTIFIED FEMALE: What Martha did she brought style to the masses.

ANNOUNCER: But then her involvement in a stock scandal led to a devastating trial and a five month stay in the big house.

WALTER DELLINGER, STEWART'S ATTORNEY: You have to get up when you're told to get up, eat when you're told to eat, lights out when you're told that lights are out.

ANNOUNCER: Now, an exclusive peak at the domestic diva inside prison. Has doing time changed the queen of pristine?

UNIDENTIFIED MALE: She softened. She's listening.

ANNOUNCER: Can a kinder, gentler Martha make a comeback on reality TV?

MARK BURNETT, CREATOR, "THE APPRENTICE": Most people were telling me I was out of my mind. It would never work.

ANNOUNCER: The rise, fall and rise again of Martha Stewart now on PEOPLE IN THE NEWS.

(END VIDEOTAPE)

PAULA ZAHN, CNN ANCHOR: Hi, everyone. Welcome to this special edition of PEOPLE IN THE NEWS. I'm Paula Zahn.

Time's up for Martha Stewart but what's next for the disgraced domestic diva and what of her time behind bars?

Over the next hour an inside look at how Martha has coped as a convict with never before seen footage of her in prison. It's the story of a remarkable rise, a devastating fall and the promise of an even more remarkable comeback.

(BEGIN VIDEOTAPE)

ZAHN (voice-over): For the world's most famous homemaker, the experience must have been surreal. Once TV's foremost expert on fine dining and decorating, whipping up gourmet lamb...

STEWART: Baby lamb chops just saying the words makes my mouth water.

ZAHN: And crafting the perfect planner suddenly a convict subjected to strip searches, eating prison food, scrubbing toilets and floors.

DELLINGER: It's a prison (UNINTELLIGIBLE). One's life is regimented. You have to get up when you're told to get up, eat when you're told to eat, lights out when you're told that lights are out.

BURNETT: When I was there, she was asked to clean the floor waxing machine the afternoon after I was leaving. That is a crappy job getting that wax off that old floor machine. She embraced it well. "This afternoon I'm going to clean the machine, some paraffin, some turpentine, a wire brush. I know exactly how to do it." Martha embraces everything.

ZAHN: Before she began her prison term, 63-year-old Martha Stewart had become a business legend turning a small catering business into a multimillion dollar empire.

HAYES ROTH, BRAND CONSULTANT, LANDOR ASSOCIATES: The Martha Stewart brand is a remarkable institution and it starts from a person who comes from nothing and nowhere and builds this entire icon that is all around the American way of living.

ZAHN: But in 2002, a highly publicized stock scandal and charges of lying to the government sent Stewart and her empire crashing down. A humiliating trial and a five-month prison sentence followed an image of perfection shattered by a guilty verdict.

STEWART: Today is a shameful day. It's shameful for me and for my family.

ZAHN: Certainly enough damage to break anyone's spirits. But in this home video a rare glimpse of the domestic diva while serving her term in Alderson, West Virginia. Here she is a relaxed Martha greeting friends, seemingly happy. Has prison actually been a good thing for Martha Stewart?

DELLINGER: She seems different to me than from when I first met her to discuss doing the appeals in that I do think there is more calm about her.

RICHARD FEIGEN, FRIEND: If I had to prescribe this it's the best five months she'll ever spend. ZAHN: Financially it may have been Martha's best five months too. When convicted, her companies profits plummeted but halfway through her sentence shares of Martha Stewart stock had nearly tripled.

JEFFREY TOOBIN, CNN LEGAL ANALYST: Martha Stewart has had the most profitable tenure in federal prison of any prisoner in history.

ZAHN: And while serving time, Martha landed prime time TV deals with "Apprentice" creator Mark Burnett.

BURNETT: Even though many people told me I was crazy at the time but the reason I went to Martha in her worst time I saw a great comeback story. Americans love a comeback story.

ZAHN: A comeback story? Is it possible that Martha Stewart can turn her devastation, a conviction, a prison sentence into triumph? From her post Connecticut estate to a prison cell to prime time TV it's been a dramatic rise, fall and rise again for the woman who came to embody the American dream.

Martha's story begins the way millions of American stories have begun with a voyage of courage a century ago, Martha's Polish grandparents sailed by the Statue of Liberty into New York Harbor in 1906.

The new immigrants set up first in Newark. Later, Martha's father would move to Nutley, New Jersey just 20 minutes from Manhattan. Martha and her five siblings grew up in a modest three- bedroom home. They all knew who was in charge at 86 Elm Street their father Eddie Kostyra.

CHRISTOPHER BYRON, BIOGRAPHER: He clearly had a severe drinking problem. He was unable to hold a job for any particular length of time. Martha's friends did not want to go in the Kostyra house because there was constant yelling in there.

Martha's ex-husband Andrew Stewart referred to him as a Willie Loman figure who just sort of stumbled downhill through life until he finally wound up at the ultimate dead end job.

ZAHN: Stewart has said it's very painful but claims to see every performance of "Death of a Salesman" she can. She says her father was indeed Willie Loman, bent over with life's disappointments.

Like Willie, Edward Kostyra was a salesman. He had dreamed about being a doctor but ended up commuting to New York City selling pharmaceuticals. A financial failure, Kostyra was a stern father demanding perfection from his children, even in the garden.

STEWART: We had this cobblestone path in our garden and it had weeds in it, you know, in between the -- my father gave me a little broken off screwdriver and he said "Take out all the grass." I think I was three. So, I sat out there all day, you know, and I became his pet because of that. ZAHN: With her father's drive for perfection, Martha also became every teacher's pet. At her elementary school and in high school, it was more of the same, an A student. Her yearbook quote reads "I do what I please and I do it with ease."

Coming up next, the first image of a picture perfect Martha.

BYRON: This was unquestionably one of the major turning points in her life because it lifted her onto a national stage.

ZAHN: But later, a rise to fame takes a toll on her personal life.

UNIDENTIFIED FEMALE: Martha continued to succeed and Andy grew more distant.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

ANNOUNCER: We now return to PEOPLE IN THE NEWS.

(BEGIN VIDEOTAPE)

ZAHN (voice-over): In the 1960s, Martha Kostyra was deep into her studies at Barnard, an elite college in New York City. Just 20 minutes from her childhood home, it was a world away in sophistication.

To help pay school bills, Martha applied and was chosen to appear in "Glamour" magazine's best dressed college girls of 1961. Biographer Chris Byron says it was a huge break for the small town girl.

BYRON: This was unquestionably one of the major turning points in her life because it lifted her onto a national stage.

ZAHN: She modeled for Tareyton cigarettes, was a Breck girl and made a Lifebuoy soap commercial.

ANNOUNCER: Stop! Now you can odor-proof your body.

BYRON: She didn't do her own voice on Lifebuoy though because she still had a Jersey accent so they did a voice dub for her.

ZAHN: The much photographed girl from Jersey was about to make a serious change in her life. She tells "Glamour" magazine "life pleases her, in particular a young man named Andy."

Years later when Martha published her "Weddings" book, she shared with the world a snapshot of her Andy, the man she married in 1961. Andrew Stewart was a law student and Martha was 19 years old. She carried simple daisies. It must have seemed a very good thing.

After marriage, Martha stepped off the model runway and onto the floor of the New York Stock Exchange. It was the late '60s. The market was strong and Martha's father-in-law, a broker, encouraged her to try her luck. Stewart was one of the first women on the floor.

BYRON: She was a stock broker in a miniskirt and drop-dead blonde looks and did really well.

ZAHN: The next stop for the Stewarts suburban Connecticut. They slapped down $34,000 for an old dilapidated house in Westport, renovated it themselves and called it Turkey Hill Farm.

From this meager beginning grew a domestic multimedia corporation. The company's foundation was scrumptious food. Headquarters was the kitchen at Turkey Hill Farm.

Martha, the former model and stock trader, had a new career in mind catering. She baked breads, whipped up chocolate mousse and set pretty tables. The former straight-A student learned to present the perfect party.

In 1982, Stewart's first book "Entertaining," the first ever full-color cookbook was published by Westport's "Hostess Extraordinaire." More than a million copies of the book have sold.

Stewart dedicated the book to her father for instilling in her a love for all things beautiful and to Alexis, her daughter, for her patience. "BusinessWeek" writer Diane Brady says Alexis tolerated quite a lot at Turkey Hill Farm.

DIANE BRADY, "BUSINESSWEEK": Her daughter essentially has told me that there's not ten seconds when her mother has not thought about the business.

ZAHN: Martha has said Alexis and others grew accustomed to her jam-packed calendar.

STEWART: They're pretty used to my workaholic schedule and my life is my work and my work is my life.

ZAHN: Alexis went on to attend Barnard, her mother's alma mater, one of her college friends, Columbia University student Peter Bacanovic. Alexis would eventually introduce Bacanovic to her mother.

SHARON COTLIAR, STAFF CORRESPONDENT, "PEOPLE" MAGAZINE: Peter was very good friends with Alexis and very good friends with Martha. He escorted Martha to a lot of events. He was her broker and he was a family friend.

ZAHN: A family friend who would later become even more entangled in Martha Stewart's life.

In 1987, Martha's work and life collided head on. Absorbed in her new catering business, she and husband Andy began to drift apart. Biographer Chris Byron says the marriage began to unravel when Martha became more obsessed with work.

BYRON: From everything I know and everything I've read and everybody I've talked to, this relates directly to how she learned to deal with people by watching how her parents dealt with each other. In the end, after 25 years of marriage, Andy Stewart said "I'm going out for coffee and Danish and he never came back."

UNIDENTIFIED FEMALE: As Martha and Andy grew more and more apart he became closer to an assistant Robin Fairclough and, in fact, in the end when he left Martha he started a relationship with Robin and he ended up marrying her.

ZAHN: Martha has said that for years she blamed herself for the divorce. She wondered what she had done wrong. Two years later, Martha's daughter Alexis introduced her to the man she was dating, ImClone founder Sam Waksal.

UNIDENTIFIED FEMALE: Alexis Stewart dated Sam Waksal, despite the fact there's about a 20-year age gap between them but from all accounts that did not upset Martha. When the relationship ended between Alexis and Sam, the friendship with Martha continued.

ZAHN: In fact, Martha seemed to revel in her daughter's romance. Her 1989 book "Martha Stewart's Christmas" includes a photo of the pair, along with a caption, "Alexis and her boyfriend Sam Waksal embrace in what they thought was a private moment."

The love affair wouldn't last but Martha and Waksal's friendship would. With the aid of stockbroker and pal Peter Bacanovic, Martha began investing heavily in Waksal's biotech company. It was a financial decision that would come back to haunt her.

Coming up next on PEOPLE IN THE NEWS, Martha's ever expanding empire.

STEWART: It's a good thing.

ZAHN: But later, from good to catastrophic, the gracious living guru embroiled in scandal.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

ANNOUNCER: Welcome back to PEOPLE IN THE NEWS.

(BEGIN VIDEOTAPE)

ZAHN (voice-over): By 1990, Martha Stewart's marriage was over. She'd keep her last name but wouldn't need it.

STEWART: This is an amazing hand tool.

ZAHN: Soon, she'd be on a first name basis with America.

STEWART: We were joking that Kmart should be called M-Mart, how about K-Marta?

ZAHN: And in her new marriage with Time Warner, she began publishing her own magazine, on the cover Martha, inside more Martha. Martha was everywhere. The big question would anyone want to buy that much Martha? The answer a resounding yes, there were millions of people eager to live in Martha's world.

BRADY: She sort of hits a common nerve in a lot of people. A friend of mine calls it homemaker porn essentially. It's aspiring to a lifestyle that you can't have and it's a fantasy world.

STEWART: Just like people, roses need to be fed and watered.

ZAHN: Almost immediately, Stewart branched out to TV, landing a deal with NBC's "Today Show."

UNIDENTIFIED FEMALE: Martha is here this morning with an assortment of beautiful roses and some tips on how to make arrangements for the home from her new magazine "Martha Stewart Living."

ZAHN: Within the first year, Time Warner and Stewart had a weekly show in syndication. Millions of Martha smiles later, "Time" magazine declared Stewart one of the most influential people of 1996.

She now had all the trappings of fame, including smearing critics. In his unauthorized biography of Stewart, Chris Byron has catalogued some good things and a lot more downright unpleasant things about his Westport, Connecticut neighbor.

BYRON: She is very, very short-tempered with people and, as she's gotten older, it's gotten more so. Countless sources have told us the same thing that she's extremely difficult to deal with.

ZAHN: For many years, Martha used her home in Westport as her TV studio until neighbors rebelled.

BYRON: They went crazy. They were getting 16-wheeler tractor trailer trucks coming up here. Sometimes there were traffic jams. That's her house right there.

ZAHN: Eventually the neighborhood became hostile.

BYRON: This is like the DMZ and Beirut. These walls just arose.

ZAHN: But art dealer and long time friend Richard Feigen says Martha is a great neighbor. He lies close by another one of Martha's homes, a 153-acre farm in Bedford, New York.

FEIGEN: The place is absolutely beautiful. Everything she's done is in the most incredible taste.

ZAHN: Feigen says the town's old guard was apprehensive of Martha's lofty plans for the estate.

FEIGEN: A lady across the road was very upset because she said "I want to look out my windows and see those cows."

ZAHN: But when the case went before the zoning board, Martha whipped up a peace offering.

FEIGEN: Martha brought a big box of chocolate chip cookies that she had baked and she went around and offered everybody in the courtroom, including the lady who wanted to look at the cows, a chocolate chip cookie.

ZAHN: Eventually, Martha got most of what she wanted.

As the '90s came to a close for Martha, it seemed business was everything and everywhere. Stewart found the road to fortune wherever she traveled.

BRADY: I think the temptation for any successful entrepreneur is to always go global.

ZAHN: The Martha Stewart brand was seen in merchandising, magazines, the Internet, on radio and TV. In 1999, Stewart took the big leap, taking a company Martha Stewart Living Omnimedia, public on the New York Stock Exchange but the risk was apparent. Martha and the brand were one and the same.

TOOBIN: From the day that Martha Stewart Living Omnimedia opened they warned their investors "We are extremely dependent on the person whose name is on the company." Inside the company they talk about the bus problem. What if Martha gets hit by a bus?

ZAHN: Investors bought the one woman brand anyway and by the closing bell, Martha was a paper billionaire. She celebrated by serving orange juice and brioche to money thirsty traders. It was a very Martha moment.

Her gamble was an instant success, partly because of her marketing vision, which included Kmart. Stewart has been associated with Kmart since 1987 bringing affordable style to the masses.

STEWART: It's good. It's useful. It's appealing. It's attractive and it's cheap.

ZAHN: Even as Kmart faced bankruptcy, Martha never left the store aisles.

STEWART: It's pretty hard to run out on a partner that's down, you know. That's not our style.

ZAHN: But Martha paid a price for her loyalty. Her stock took a beating, subtle proof that the media mogul could be bruised.

Coming up next on PEOPLE IN THE NEWS Martha Stewart's empire shattered by a stock scandal.

TOOBIN: It turns out it wasn't a bus but Martha got hit.

ZAHN: And later an exclusive look inside prison with Martha.

DELLINGER: I'm eating these chicken wings and I'm thinking gee her standards have really changed.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

(NEWSBREAK)

ZAHN: Welcome back to PEOPLE IN THE NEWS.

From successful and savvy businesswoman to convict, and now perhaps a return to prominence by way of reality TV. For Martha Stewart, it's been a turbulent journey of legal travails, prison and trying to get her career back on track.

We continue now with our profile of Martha Stewart, including an exclusive look at her life in lockup.

(BEGIN VIDEOTAPE)

ZAHN (voice-over): By 2000, Martha Stewart was America's richest self-made woman. It had been only a year since her company went public. And her brand was bursting with success.

LAURENCE LEEDS, HEDGE FUNDS MANAGER, BUCKINGHAM CAPITAL MGMT.: She brought style and fashion and elegance to middle America. And they loved it.

ZAHN: Television, print, merchandising, Stewart had built an empire and she was queen. But it was all about to come crashing down.

In 2002, federal prosecutors disclosed they were investigating Martha Stewart for her sale of ImClone stock. Of particular interest was Stewart's relationship with her old friend, ImClone founder Sam Waksal.

CHRISTOPHER BYRON, BIOGRAPHER: When she began palling around socially with this Waksal guy, who ran ImClone, she picked the worst. And that guy has gotten her in all the trouble that she is in today. He led her right to that trough.

ZAHN: Waksal and Stewart had both sold their ImClone stock one day before the FDA decided not to review the company's highly touted cancer drug, Erbitux. They shared something else in common, the same stockbroker, another of Martha's friends, Peter Bacanovic. As Waksal was being indicted for insider trading, prosecutors called Stewart in for questioning.

BYRON: She put on a performance that basically boiled down to, how dare you ask me these questions? I'm Martha Stewart.

I think she really believed that.

ZAHN: Martha Stewart told investigators and the public that she had no insider knowledge of the FDA decision.

DANIEL KADLEC, SENIOR WRITER, "TIME": Her defense has been that she had a standing sell order at $60. And when the stock fell below $60, her broker was supposed to make the trade. There are other people at Merrill Lynch who investigated and couldn't find any proof that that was actually the case.

UNIDENTIFIED MALE: Ms. Stewart is charged with..

ZAHN: The U.S. Justice Department indicted Stewart on June 4, 2003, on charges of conspiracy, obstruction of justice and securities fraud. With the indictment came a hailstorm of negative publicity. She hired crisis manager George Sard. The goal, to tell Martha Stewart's side of the story without endangering her defense.

GEORGE SARD, CRISIS MANAGER: The entire case was based on her public statements and statements to prosecutors. So, we knew we needed to find a way to keep her in touch with her public. And that was where the idea of the Web site came up.

ZAHN: Stewart used the Web site to post statements about her trial and to thank her loyal supporters. The site provided Stewart the public outlet she wanted. But her personal image continued to take hits and so did her companies.

JEFFREY TOOBIN, CNN SR. LEGAL ANALYST: It's not the kind of company where you can say, oh, well it was just the CEO's misconduct. Look at the rest of the company. She is the company.

ZAHN: At the time of her indictment, Stewart had stepped down as chairman and CEO of Omnimedia. But the tailspin continued. Her stock failed to recover.

In January 2004, the trial began, the United States vs. Martha Stewart. She entered court followed by her co-defendant, Peter Bacanovic.

UNIDENTIFIED FEMALE: Martha!

UNIDENTIFIED FEMALE: Martha!

ZAHN: It became a familiar scene.

UNIDENTIFIED FEMALE: We love you, Martha. You go, girl.

ZAHN: On March 5, 2004, the waiting was over.

UNIDENTIFIED FEMALE: We are just hearing word of a verdict.

JUDY WOODRUFF, CNN ANCHOR: Martha Stewart found guilty on all the counts against her.

ZAHN: The conviction left many in the courtroom stunned.

SHARON COTLIAR, "PEOPLE": Nobody expected her to be found guilty on all four counts.

(BEGIN VIDEO CLIP, "LARRY KING LIVE")

MARTHA STEWART, CHAIRMAN & CEO, MARTHA STEWART LIVING OMNIMEDIA: All of us thought that there would be exoneration. We were so wrong, obviously. (END VIDEO CLIP)

ZAHN: But, true to form, Martha Stewart kept her composure as the jury read the verdict.

COTLIAR: She was amazingly solid. There was no knee-buckling, no emotion. Her daughter fainted, but she didn't show any emotion other than a brief gulp when she heard the first guilty.

ZAHN: Four months later, more bad news for the media maven. Judge Miriam Cedarbaum slapped Stewart with a sentence of five months in prison and five months house arrest. Stewart remained on bail while her conviction was appealed.

STEWART: What was a small personal matter came over the last -- became over the last two years an almost fatal circus event of unprecedented proportions.

TOOBIN: The irony in this case is that she was convicted of lying to cover up a stock transaction which the government conceded was not a criminal offense. She saved about $40,000 by selling on the day that she did. That is what she saved, and she lost hundreds of millions of dollars, her reputation and her time.

ZAHN: Martha was clearly devastated, but never shunned the spotlight. Even with an impending prison term, she continued to be seen out and about in New York. Her attorney, Walter Dellinger, who is handling her appeal, had dinner with Stewart after the trial ended.

WALTER DELLINGER, ATTORNEY FOR STEWART: I was very impressed with how calm she was in the midst of a storm. I thought it might be difficult for her to go to a New York restaurant, so, we would meet somewhere privately. But we didn't. She had walked right through the crowd.

ZAHN: But, at a press conference on September 15, a surprising announcement. Stewart said she would give up her freedom, forego her stay of appeal and begin her sentence immediately.

STEWART: I suppose the best word to use for this very harsh and difficult decision is finality and my intense desire and need to put this nightmare behind me, both personally and professionally.

DELLINGER: I remember saying, even if you win the appeal, how would you feel about having already served your time? "I would feel very good, because I knew I put the company where it needed to go by going ahead and serving this sentence."

ZAHN: When we return, has prison changed Martha? A revealing look at her life as a convict.

And later, an image makeover. Could Martha Trump the Donald?

(BEGIN VIDEO CLIP, "THE APPRENTICE")

DONALD TRUMP, DEVELOPER/BUSINESSMAN: You're fired. (END VIDEO CLIP)

(END VIDEOTAPE)

(COMMERCIAL BREAK)

ANNOUNCER: Now back to PEOPLE IN THE NEWS.

(BEGIN VIDEOTAPE)

ZAHN (voice-over): It had been an agonizing two years for Martha Stewart. Now, after a guilty verdict, the American icon of impeccable style and taste was a convicted felon. Determined to put the ordeal behind her and her struggling company, Martha insisted on beginning her sentence early.

STEWART: Here's Walter Dellinger.

DELLINGER: I was deeply impressed with her decision to make this sacrifice for the company.

I told her and others told her that, if she would just wait for the appeal, it may well be the case that she would never have to serve the sentence. She would never have to go to prison.

ZAHN: In her last public statement before prison, she detailed the things she'd miss the most.

STEWART: And I will miss all of my pets.

ANDY SERWER, CNN CONTRIBUTOR: She enumerated all sorts of animals.

STEWART: My canaries.

SERWER: Chickens and ducks, dogs.

STEWART: My seven lively cats.

SERWER: She didn't mention family members. She didn't mention her own daughter, which struck a lot of people as kind of bizarre, but a lot of what she does is, frankly, a little different. She's a very singular person.

ZAHN: Martha asked to serve her time at the women's prison in Danbury, Connecticut, to be closer to her 90-year-old mother, but Martha wouldn't get her way.

Instead, she would be tucked away in the Appalachian town of Alderson, West Virginia. The Alderson federal prison camp has been home to other famous inmates, singer Billie Holiday, who was serving time for drug possession, Manson follower Squeaky Fromme, and World War II collaborator Tokyo Rose.

The prison is a campus-like facility modeled after Bucknell University. COTLIAR: It's not a cell. It's not really a traditional idea of what people think a prison is, but it is like a barracks-like setting. Martha had said that her job is to the clean administration buildings, which means lots of sweeping and cleaning and emptying garbage cans and possibly even cleaning toilets.

JOSE FIGUEROA, BOYFRIEND OF ALDERSON INMATE: Her daughter visits offense, Alexis.

ZAHN: Jose Figueroa, traveled more than 30 miles to Alderson prison several times a month to see his girlfriend, Vicki. Frequently, he saw Martha there with prisoners.

FIGUEROA: From what I've seen in the prison, I think that she's a very outgoing person. She talks to everyone. Her mom visited around Thanksgiving time. And she came over and introduced her mom to me and several other people in the visiting center. So, you know, she's a very nice person.

ZAHN: Even Jose's 7-year-old son, Manny (ph), saw Martha's softer side.

UNIDENTIFIED MALE: We were outside and I was swinging. And Martha was in the chair. And I was swinging real high. And Martha asked me, can you swing any higher? And I told her I can swing a little bit higher.

RICHARD FEIGEN, FRIEND: She's told me she's learned a lot about how things are on the other side of the tracks. She knows a lot about these families, cares about them. She's gotten sort of mellow.

ZAHN: Martha has taken up prison causes while serving time. In a Christmas letter posted on her Web site, Martha writes about her fellow inmates, encouraging America to think about these women, devoid of care, devoid of love.

DELLINGER: She's really learned a lot about the lives of women who are in prison. She has learned a lot about what she thinks are often about mandatory sentences that are overly harsh, particularly for their women with young children.

ZAHN: Visitors say this newfound passion for prison reform is just part of an overall Martha Stewart transformation.

DELLINGER: I think she's been more reflective than she's really had an opportunity to be, given the intensity of building up that company.

ZAHN: In this exclusive footage, a revealing look at Martha inside prison. Here's Martha cheerfully welcoming friends upon their arrival, here again, chatting it up with visitor after visitor. Friends say gone is the aloof, high-strung Martha they used to know.

FEIGEN: She's achieved a certain kind of serenity. She didn't use to listen much. She knew what she should do and went about it. I mean, now she listens. ZAHN: And does this video show a trimmer, toned Martha? This, visitors say, thanks to yoga classes, daily chores and avoiding the -- quote, unquote -- "bad food."

DELLINGER: She likes the fact that she's getting really buff.

COTLIAR: Friends who visit her say it looks like she spent a few months at the Golden Door Spa and that they're amazed that she looks like she really is relaxed, that she's lost about 10 pounds.

ZAHN: But, apparently, there's one prison snack that isn't off limits for Martha.

DELLINGER: She talk about the vending machine and she says some of the items are really good. For $1.50, you can get chicken wings out of the vending machine cold and put them in a microwave. And she says, they're actually really, really good. I'm eating these chicken wings and I'm thinking saying, gee, her standards have you're changed. She's really...

ZAHN: And while serving time, Martha's finances changed. Halfway through her sentence, her company stock soared. Much of the gain came when rumors first surfaced that Martha had a new friend in the television business, reality TV king Mark Burnett.

MARK BURNETT, REALITY TV MOGUL: I've seen Martha once a month and I was there last week, and she's looking great, you know? She took the punishment on the chin, quite frankly, in the best way possible and has dealt with it.

ZAHN: In his new book, "Jump In," Burnett devotes the entire last chapter to Martha.

BURNETT: It's about taking risk. And a big risk I clearly took was to approach Martha Stewart in the worst of her legal troubles. I just felt I liked her. I liked her brand. I didn't get why everyone was so down. She made a mistake. Pay the price. Move on.

ZAHN: Next on PEOPLE IN THE NEWS.

BURNETT: She has great style, great substance.

ZAHN: You're hired. Could a reality TV deal be Martha's recipe for a rebound?

BURNETT: Quite frankly, most people were telling me, I was out of my mind. It will never work.

(COMMERCIAL BREAK)

ANNOUNCER: Welcome back to PEOPLE IN THE NEWS.

(BEGIN VIDEOTAPE)

ZAHN (voice-over): The last three years must have been a never- ending nightmare, the stock scandal, the trial, the five-month prison sentence. Now Martha Stewart is hoping to put all of that behind her. Those who know her say she's a new person, a transformation mostly due to the relationships she built while in prison.

DELLINGER: She learns what she can learn from the other inmates. She has used it as an occasion to expand and deepen her knowledge of what life is like for folks out there.

FEIGEN: She's softened. She's listening. She is empathizing with a large body of people.

ZAHN: While she is connected with those inside prison, those outside have been reconnecting with her.

ROBIN STEINBERG, MEDIA STRATEGIST, MEDIAVEST: People's attitude started to change. They started to, you know, form a camaraderie for her. And I think it's continuing to grow.

ZAHN: Now all eyes are on Martha as she tries to reclaim her media empire.

SARD: I think she realizes there will be enormous media attention when she comes out of prison.

HAYES ROTH, BRAND CONSULTANT, LANDOR ASSOCIATES: She has to come out and present this persona of someone who has perhaps fallen from grace a little bit, but has learned from the experience is moving forward. Americans love that. That's a great comeback story.

ZAHN: And the comeback is already under way. Since she has been in prison, Martha Stewart's fortune has grown tremendously.

TOOBIN: Martha Stewart has had the most profitable tenure in federal prison of any prisoner in history. She has made hundreds of millions of dollars and launched her celebrity back in orbit.

ZAHN: And even though she was serving time, the queen of the kitchen had some big plans on the front burner. Her most exciting new entree, prime-time TV. She signed on for two TV shows with reality producer Mark Burnett. And she will begin shooting as soon as she gets out. There's a daytime talk show, in which Stewart will find herself in familiar territory.

BURNETT: I'm taking "Martha Stewart Living," which is her core show on daytime television, but doing it in front of a live audience, where she can interact with real people who need that help. And that's where Martha comes to life.

ZAHN: The other show will have Stewart invading someone else's territory. She is starring in the spinoff of Donald Trump's reality show, "The Apprentice."

BURNETT: "The Apprentice," Martha Stewart. It will be fantastic. It won't be that cooking and baking cakes and flower arranging. That will always be around Martha. But it's about her business acumen, how she took a catering business and turned it into a multibillion-dollar empire. ZAHN: But Martha will have to spend some of her time as a TV star at home. And there won't be any nights out on the town. She'll be under house arrest for five months.

DELLINGER: She'll have a period of home confinement, but she is entitled to work 48 hours a week outside the home. And there's no limit on the amount of work she can do when she is confined in the home.

ZAHN: Stewart and Omnimedia are hoping that the new TV shows prove to be the catalyst for renewed success.

SCOTT ROTHBORT, INVESTMENT ADVISER, LAKEVIEW ASSET MGMT.: I think this is a quick, easy way that they can get Ms. Stewart's name and face back into everyone's living room. And that's what is important. That's what the company needs to do.

ZAHN: But Martha in a boardroom can have an adverse effect on her new image.

ROTH: If she is, as it's been announced, going to come back as another version of the Donald or to do something along those lines, I'm concerned. And I'm concerned because I think her personality has suffered in terms of its sense of arrogance and being distant from the people. And what she needs to do, in my opinion, our opinion, is to bring herself back into more humanistic life.

ZAHN: And some wonder, has Martha's icy image really melted away or is this a clever P.R. scheme?

STEINBERG: I don't think we'll see a P.R. job. I mean, the reason why people love Martha is truly for who Martha is. Martha is not going to change. She went through a life-changing experience. She may become a little bit more humble. But, if Martha changes, the brand is going to change.

ZAHN: Changed or not, Martha's time in prison has paid off handsomely in stock. After falling to all-time lows right before her trial, the price of Martha Stewart Living Omnimedia has rebounded to nearly its IPO price, but the company still has its share of problems.

ROTHBORT: The stock really is an event-driven stock. It's not a stock that trades based upon value. In terms of the publication business, they have really failed to be able to attract advertisers to buy space in their magazines.

ZAHN: But even though her company is losing revenue, it's hard to bet against Martha Stewart. The one-time billionaire, now convicted felon, may be on the verge of a comeback.

LEEDS: She is coming out of this particular difficult period with far more publicity and a platform that's much stronger for her than when she went to jail.

STEINBERG: People want her to come back. They want her to win. They want her to get back to her, you know, roots. This could be the greatest comeback in history.

ZAHN: And to hear Martha tell it, don't count her out.

STEWART: And I'll be back. I will be back.

(END VIDEOTAPE)

ZAHN: Martha Stewart is determined to make a major comeback.

In addition to starring in two new TV shows, she's returning to the magazine that bears her name. She is writing a column for "Martha Stewart Living" and its Web site. She has also indicated that she plans to write a book about her time in prison.

That's it for this edition of PEOPLE IN THE NEWS. I'm Paula Zahn. Thanks so much for joining us.

ANNOUNCER: For more celebrity news, pick up a copy of "People" magazine this week.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com


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