UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form
10-Q





(Mark
One)




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


For
the quarterly period ended June 30, 2010





OR




 ̈
            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
001-34437




KIT digital,
Inc.


(Exact
Name of Registrant as Specified in Its Charter)




Delaware
                    11-3447894(State
      or Other Jurisdiction of
                    (I.R.S.
      EmployerIncorporation
      or Organization)
                    Identification
      No.)168
      Fifth Avenue, Suite
      302, New York, New York
                    10010(Address
      of Principal Executive Offices)
                    (Zip
      Code)





+1 (212)
661-4111


(Registrant’s
Telephone Number, Including Area Code)




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 x
  No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).    Yes    ̈
  No  ̈ (not
required)




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




Large
      accelerated Filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
            Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈
  No x





As of
August13, 2010, there were 23,230,279 shares of the registrant’s common stock
outstanding.








KIT
digital, Inc.





TABLE OF
CONTENTS





PagePART
      I - FINANCIAL INFORMATIONItem
      1.
                Financial
      Statements
                2Consolidated
      Balance Sheets - As of June 30, 2010 (unaudited) and December 31,
      2009
                2Consolidated
      Statements of Operations and Comprehensive Income (Loss) - For the three
      and six months ended June 30, 2010 and 2009
    (unaudited)
                3Consolidated
      Statements of Stockholders’ Equity - For the six months ended June 30,
      2010 (unaudited)
                4Consolidated
      Statements of Cash Flows - For the six months ended June 30, 2010 and 2009
      (unaudited)
                5Notes
      to Consolidated Financial Statements (unaudited)
                7Item
2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
                18Item 3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                23Item 4T.
                Controls
      and Procedures
                23PART II - OTHER INFORMATIONItem 1.
                Legal
      Proceedings
                24Item 1A.
                Risk
      Factors
                24Item 2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                24Item 3.
                Defaults
      Upon Senior Securities
                24Item 4.
                Reserved
                24Item 5.
                Other
      Information
                24Item 6.
                Exhibits
                24SIGNATURES
                25








PART
I - FINANCIAL INFORMATION


Item
1.  Financial Statements





KIT
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Amounts in Thousands, Except Share
Data)







June 30,
                            2010
                          
                          
                          December 31,
                            2009 (A)(Unaudited)Assets:Current
      assets:Cash
      and cash equivalents
                          
                          $
                          67,110
                          
                          
                          $
                          6,791Restricted
      cash
                          
                          
                          2,035
                          
                          
                          
                          -Investments
                          
                          
                          932
                          
                          
                          
                          217Accounts
      receivable, net
                          
                          
                          22,512
                          
                          
                          
                          17,258Unbilled
      revenue
                          
                          
                          2,567
                          
                          
                          
                          2,960Inventory
                          
                          
                          1,065
                          
                          
                          
                          708Other
      current assets
                          
                          
                          5,823
                          
                          
                          
                          2,205Total
      current assets
                          
                          
                          102,044
                          
                          
                          
                          30,139Property
      and equipment, net
                          
                          
                          5,786
                          
                          
                          
                          5,697Software,
      net
                          
                          
                          2,920
                          
                          
                          
                          3,436Customer
      list, net
                          
                          
                          5,450
                          
                          
                          
                          4,650Goodwill
                          
                          
                          79,108
                          
                          
                          
                          36,492Total
      assets
                          
                          $
                          195,308
                          
                          
                          $
                          80,414Liabilities
      and Stockholders' Equity:Current
      liabilities:Bank
      overdraft
                          
                          $
                          1,608
                          
                          
                          $
                          2,944Capital
      lease and other obligations
                          
                          
                          801
                          
                          
                          
                          1,218Secured
      notes payable
                          
                          
                          751
                          
                          
                          
                          -Accounts
      payable
                          
                          
                          10,112
                          
                          
                          
                          6,647Accrued
      expenses
                          
                          
                          9,702
                          
                          
                          
                          8,501Income
      tax payable
                          
                          
                          279
                          
                          
                          
                          312Deferred
      tax liability
                          
                          
                          580
                          
                          
                          
                          580Acquisition
      liability
                          
                          
                          2,146
                          
                          
                          
                          1,075Derivative
      liability
                          
                          
                          2,548
                          
                          
                          
                          21,314Other
      current liabilities
                          
                          
                          4,832
                          
                          
                          
                          3,455Total
      current liabilities
                          
                          
                          33,359
                          
                          
                          
                          46,046Capital
      lease and other obligations, net of current
                          
                          
                          567
                          
                          
                          
                          377Secured
      notes payable, net of current and debt discount
                          
                          
                          5,052
                          
                          
                          
                          -Acquisition
      liability, net of current
                          
                          
                          7,560
                          
                          
                          
                          -Total
      liabilities
                          
                          
                          46,538
                          
                          
                          
                          46,423Equity:Stockholders'
      equity:Common
      stock, $0.0001 par value: authorized 30,000,000 shares; issued and
      outstanding 23,230,279 and 10,844,853, respectively
                          
                          
                          2
                          
                          
                          
                          1Additional
      paid-in capital
                          
                          
                          263,861
                          
                          
                          
                          128,263Accumulated
      deficit
                          
                          
                          (112,727
                          )
                          
                          
                          (93,943
                          )Accumulated
      other comprehensive (loss) income
                          
                          
                          (2,366
                          )
                          
                          
                          (330
                          )Total
      stockholders' equity
                          
                          
                          148,770
                          
                          
                          
                          33,991Total
      liabilities and stockholders' equity
                          
                          $
                          195,308
                          
                          
                          $
                          80,414




(A) -
Reference is made to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009, filed with the U.S. Securities and Exchange Commission on
April 5, 2010.




The
Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.


2




KIT
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)


(Amounts
in Thousands, Except Share and Per Share Data)


(Unaudited)





Three months ended
                                                                          
                                                                          
                                                                          S ix months endedJune 30,
                                                                          
                                                                          
                                                                          June 30,2010
                                                                          
                                                                          
                                                                          2009
                                                                          
                                                                          
                                                                          2010
                                                                          
                                                                          
                                                                          2009Revenue
                                                                          
                                                                          $
                                                                          23,055
                                                                          
                                                                          
                                                                          $
                                                                          10,494
                                                                          
                                                                          
                                                                          $
                                                                          40,419
                                                                          
                                                                          
                                                                          $
                                                                          20,118Variable
      and direct third party costs:Cost
      of goods and services
                                                                          
                                                                          
                                                                          6,366
                                                                          
                                                                          
                                                                          
                                                                          3,634
                                                                          
                                                                          
                                                                          
                                                                          10,718
                                                                          
                                                                          
                                                                          
                                                                          7,112Hosting,
      delivery and reporting
                                                                          
                                                                          
                                                                          1,290
                                                                          
                                                                          
                                                                          
                                                                          414
                                                                          
                                                                          
                                                                          
                                                                          2,364
                                                                          
                                                                          
                                                                          
                                                                          696Content
      costs
                                                                          
                                                                          
                                                                          249
                                                                          
                                                                          
                                                                          
                                                                          357
                                                                          
                                                                          
                                                                          
                                                                          484
                                                                          
                                                                          
                                                                          
                                                                          818Direct
      third party creative production costs
                                                                          
                                                                          
                                                                          656
                                                                          
                                                                          
                                                                          
                                                                          1,153
                                                                          
                                                                          
                                                                          
                                                                          1,546
                                                                          
                                                                          
                                                                          
                                                                          1,958Total
      variable and direct third party costs
                                                                          
                                                                          
                                                                          8,561
                                                                          
                                                                          
                                                                          
                                                                          5,558
                                                                          
                                                                          
                                                                          
                                                                          15,112
                                                                          
                                                                          
                                                                          
                                                                          10,584Gross
      profit
                                                                          
                                                                          
                                                                          14,494
                                                                          
                                                                          
                                                                          
                                                                          4,936
                                                                          
                                                                          
                                                                          
                                                                          25,307
                                                                          
                                                                          
                                                                          
                                                                          9,534General
      and administrative expenses:Compensation,
      travel and associated costs (including non-cash stock- based compensation
      of $1,084, $272, $1,636 and $552, respectively)
                                                                          
                                                                          
                                                                          8,536
                                                                          
                                                                          
                                                                          
                                                                          3,481
                                                                          
                                                                          
                                                                          
                                                                          14,186
                                                                          
                                                                          
                                                                          
                                                                          7,174Legal,
      accounting, audit and other professional service fees
                                                                          
                                                                          
                                                                          530
                                                                          
                                                                          
                                                                          
                                                                          160
                                                                          
                                                                          
                                                                          
                                                                          1,220
                                                                          
                                                                          
                                                                          
                                                                          430Office,
      marketing and other corporate costs
                                                                          
                                                                          
                                                                          2,313
                                                                          
                                                                          
                                                                          
                                                                          896
                                                                          
                                                                          
                                                                          
                                                                          4,377
                                                                          
                                                                          
                                                                          
                                                                          1,613Merger
      and acquisition and investor relations expenses
                                                                          
                                                                          
                                                                          886
                                                                          
                                                                          
                                                                          
                                                                          351
                                                                          
                                                                          
                                                                          
                                                                          2,105
                                                                          
                                                                          
                                                                          
                                                                          729Depreciation
      and amortization
                                                                          
                                                                          
                                                                          2,049
                                                                          
                                                                          
                                                                          
                                                                          910
                                                                          
                                                                          
                                                                          
                                                                          3,703
                                                                          
                                                                          
                                                                          
                                                                          1,593Restructuring
      charges
                                                                          
                                                                          
                                                                          (119
                                                                          )
                                                                          
                                                                          
                                                                          195
                                                                          
                                                                          
                                                                          
                                                                          3,574
                                                                          
                                                                          
                                                                          
                                                                          314Integration
      expenses
                                                                          
                                                                          
                                                                          3,378
                                                                          
                                                                          
                                                                          
                                                                          747
                                                                          
                                                                          
                                                                          
                                                                          6,299
                                                                          
                                                                          
                                                                          
                                                                          991Total
      general and administrative expenses
                                                                          
                                                                          
                                                                          17,573
                                                                          
                                                                          
                                                                          
                                                                          6,740
                                                                          
                                                                          
                                                                          
                                                                          35,464
                                                                          
                                                                          
                                                                          
                                                                          12,844Loss
      from operations
                                                                          
                                                                          
                                                                          (3,079
                                                                          )
                                                                          
                                                                          
                                                                          (1,804
                                                                          )
                                                                          
                                                                          
                                                                          (10,157
                                                                          )
                                                                          
                                                                          
                                                                          (3,310
                                                                          )Interest
      income
                                                                          
                                                                          
                                                                          27
                                                                          
                                                                          
                                                                          
                                                                          3
                                                                          
                                                                          
                                                                          
                                                                          28
                                                                          
                                                                          
                                                                          
                                                                          4Interest
      expense
                                                                          
                                                                          
                                                                          (248
                                                                          )
                                                                          
                                                                          
                                                                          (178
                                                                          )
                                                                          
                                                                          
                                                                          (340
                                                                          )
                                                                          
                                                                          
                                                                          (317
                                                                          )Amortization
      of deferred financing costs and debt discount
                                                                          
                                                                          
                                                                          (14
                                                                          )
                                                                          
                                                                          
                                                                          (449
                                                                          )
                                                                          
                                                                          
                                                                          (14
                                                                          )
                                                                          
                                                                          
                                                                          (613
                                                                          )Derivative
      income (expense)
                                                                          
                                                                          
                                                                          2,368
                                                                          
                                                                          
                                                                          
                                                                          506
                                                                          
                                                                          
                                                                          
                                                                          (9,075
                                                                          )
                                                                          
                                                                          
                                                                          10,682Other
      income
                                                                          
                                                                          
                                                                          604
                                                                          
                                                                          
                                                                          
                                                                          311
                                                                          
                                                                          
                                                                          
                                                                          788
                                                                          
                                                                          
                                                                          
                                                                          340Net
      (loss) income before income taxes
                                                                          
                                                                          
                                                                          (342
                                                                          )
                                                                          
                                                                          
                                                                          (1,611
                                                                          )
                                                                          
                                                                          
                                                                          (18,770
                                                                          )
                                                                          
                                                                          
                                                                          6,786Income
      tax expense (benefit)
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          1
                                                                          
                                                                          
                                                                          
                                                                          (14
                                                                          )
                                                                          
                                                                          
                                                                          (2
                                                                          )Net
      (loss) income available to common shareholders
                                                                          
                                                                          $
                                                                          (342
                                                                          )
                                                                          
                                                                          $
                                                                          (1,610
                                                                          )
                                                                          
                                                                          $
                                                                          (18,784
                                                                          )
                                                                          
                                                                          $
                                                                          6,784Basic
      and diluted net (loss) income per common share
                                                                          
                                                                          $
                                                                          (0.02
                                                                          )
                                                                          
                                                                          $
                                                                          (0.37
                                                                          )
                                                                          
                                                                          $
                                                                          (1.06
                                                                          )
                                                                          
                                                                          $
                                                                          1.50Basic
      and diluted weighted average common shares outstanding
                                                                          
                                                                          
                                                                          21,404,907
                                                                          
                                                                          
                                                                          
                                                                          4,322,798
                                                                          
                                                                          
                                                                          
                                                                          17,662,700
                                                                          
                                                                          
                                                                          
                                                                          4,535,629Comprehensive
      income (loss):Net
      (loss) income
                                                                          
                                                                          $
                                                                          (342
                                                                          )
                                                                          
                                                                          $
                                                                          (1,610
                                                                          )
                                                                          
                                                                          $
                                                                          (18,784
                                                                          )
                                                                          
                                                                          $
                                                                          6,784Foreign
      currency translation
                                                                          
                                                                          
                                                                          (1,619
                                                                          )
                                                                          
                                                                          
                                                                          414
                                                                          
                                                                          
                                                                          
                                                                          (2,052
                                                                          )
                                                                          
                                                                          
                                                                          377Change
      in unrealized gain on investments, net
                                                                          
                                                                          
                                                                          (53
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          16
                                                                          
                                                                          
                                                                          
                                                                          -Comprehensive
      (loss) income:
                                                                          
                                                                          $
                                                                          (2,014
                                                                          )
                                                                          
                                                                          $
                                                                          (1,196
                                                                          )
                                                                          
                                                                          $
                                                                          (20,820
                                                                          )
                                                                          
                                                                          $
                                                                          7,161





The
Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.


3





KIT
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY


(Amounts in Thousands, Except Share
Data)





Common
                      Stock
                    
                    
                    Common
                      Stock
                      Par Value
                    
                    
                    Additional
                      Paid-in
                      CapitalBalance
      – December 31, 2009
                    
                    
                    10,844,853
                    
                    
                    $
                    1
                    
                    
                    $
                    128,263Issue
      of stock in public offerings, net
                    
                    
                    9,968,253
                    
                    
                    
                    1
                    
                    
                    
                    106,689Issue
      of stock for exercise of stock options
                    
                    
                    13,734
                    
                    
                    
                    —
                    
                    
                    
                    67Issue
      of stock for exercise of warrants
                    
                    
                    568,158
                    
                    
                    
                    —
                    
                    
                    
                    6,946Issue
      of stock for acquisitions
                    
                    
                    1,788,719
                    
                    
                    
                    —
                    
                    
                    
                    19,145Issue
      of warrants for services
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    588Debt
      discount on notes
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    210Issue
      of stock for compensation
                    
                    
                    16,500
                    
                    
                    
                    —
                    
                    
                    
                    190Issue
      of stock for services
                    
                    
                    30,062
                    
                    
                    
                    —
                    
                    
                    
                    317Stock-based
      compensation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,446Foreign
      currency translation adjustment
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Fair
      market value adjustment for available for sale securities
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Balance
      – June 30, 2010
                    
                    
                    23,230,279
                    
                    
                    $
                    2
                    
                    
                    $
                    263,861




Accumulated
                  (Deficit)
                
                
                Accumulated
                  Other
                  Comprehensive
                  Income
                  (Loss)
                
                
                Total
                  Shareholders’
                  EquityBalance
      – December 31, 2009
                
                $
                (93,943
                )
                
                $
                (330
                )
                
                $
                33,991Issue
      of stock in public offerings, net
                
                
                —
                
                
                
                —
                
                
                
                106,689Issue
      of stock for exercise of stock options
                
                
                —
                
                
                
                —
                
                
                
                67Issue
      of stock for exercise of warrants
                
                
                —
                
                
                
                —
                
                
                
                6,946Issue
      of stock for acquisitions
                
                
                —
                
                
                
                —
                
                
                
                19,145Issue
      of warrants for services
                
                
                —
                
                
                
                —
                
                
                
                588Debt
      discount on notes
                
                
                —
                
                
                
                —
                
                
                
                210Issue
      of stock for compensation
                
                
                —
                
                
                
                —
                
                
                
                190Issue
      of stock for services
                
                
                —
                
                
                
                —
                
                
                
                317Stock-based
      compensation
                
                
                —
                
                
                
                —
                
                
                
                1,446Foreign
      currency translation adjustment
                
                
                —
                
                
                
                (2,052
                )
                
                
                (2,052
                )Fair
      market value adjustment for available for sale securities
                
                
                —
                
                
                
                16
                
                
                
                16Net
      loss
                
                
                (18,784
                )
                
                
                —
                
                
                
                (18,784
                )Balance
      – June 30, 2010
                
                $
                (112,727
                )
                
                $
                (2,366
                )
                
                $
                148,770




The
Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.


4





KIT
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amounts
in Thousands)


(Unaudited)








Six months ended June 30,2010
                                
                                
                                2009Operating
      Activities:Net
      (loss) income
                                
                                $
                                (18,784
                                )
                                
                                
                                6,784Adjustments
      to reconcile net loss to net cash used by operating
      activities:Provision
      for doubtful accounts
                                
                                
                                221
                                
                                
                                
                                205Depreciation
                                
                                
                                2,184
                                
                                
                                
                                785Amortization
      of intangible assets
                                
                                
                                1,519
                                
                                
                                
                                808Amortization
      of deferred financing costs
                                
                                
                                2
                                
                                
                                
                                54Amortization
      of debt discount
                                
                                
                                12
                                
                                
                                
                                560Loss
      on disposal of property and equipment
                                
                                
                                87
                                
                                
                                
                                -Derivative
      expense (income)
                                
                                
                                9,075
                                
                                
                                
                                (10,682
                                )Less:
      merger and acquisition expenses
                                
                                
                                822
                                
                                
                                
                                -Non-cash
      stock based compensation
                                
                                
                                1,636
                                
                                
                                
                                631Non-cash
      warrants for services
                                
                                
                                588
                                
                                
                                
                                -Non-cash
      stock for services
                                
                                
                                317
                                
                                
                                
                                41Gain
      on bargain purchase
                                
                                
                                -
                                
                                
                                
                                (26
                                )Changes
      in assets and liabilities:Accounts
      receivable
                                
                                
                                (5,568
                                )
                                
                                
                                (5,795
                                )Unbilled
      revenue
                                
                                
                                186
                                
                                
                                
                                -Inventory
                                
                                
                                127
                                
                                
                                
                                607Other
      assets
                                
                                
                                (2,955
                                )
                                
                                
                                (576
                                )Accounts
      payable
                                
                                
                                352
                                
                                
                                
                                1,249Accrued
      expenses
                                
                                
                                892
                                
                                
                                
                                3,094Income
      tax payable
                                
                                
                                (24
                                )
                                
                                
                                -Other
      liabilities
                                
                                
                                (1,113
                                )
                                
                                
                                (1,607
                                )Total
      adjustments
                                
                                
                                8,360
                                
                                
                                
                                (10,652
                                )Net
      cash used by operating activities - forward
                                
                                
                                (10,424
                                )
                                
                                
                                (3,868
                                )Investing
      Activities:Cash
      paid into restricted cash
                                
                                
                                (2,035
                                )
                                
                                
                                -Cash
      paid into investment
                                
                                
                                (700
                                )
                                
                                
                                (200
                                )Cash
      received in acquisition of Narrowstep
                                
                                
                                -
                                
                                
                                
                                279Cash
      paid in acquisition of Visual
                                
                                
                                (2,900
                                )
                                
                                
                                (180
                                )Cash
      paid in acquisition of Multicast
                                
                                
                                (4,746
                                )
                                
                                
                                -Cash
      received in acquisition of Multicast
                                
                                
                                396
                                
                                
                                
                                -Cash
      paid in acquisition of Benchmark
                                
                                
                                (4,905
                                )
                                
                                
                                -Cash
      received in acquisition of Benchmark
                                
                                
                                2,545
                                
                                
                                
                                -Merger
      and acquisition expenses
                                
                                
                                (822
                                )
                                
                                
                                -Purchase
      of equipment
                                
                                
                                (752
                                )
                                
                                
                                (1,566
                                )Net
      cash used by investing activities - forward
                                
                                $
                                (13,919
                                )
                                
                                
                                (1,667
                                )


5





KIT
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)


(Amounts
in Thousands)


(Unaudited)





Six
      months ended June 30,2010
                                    
                                    
                                    2009Net
      cash used by operating activities - forwarded
                                    
                                    $
                                    (10,424
                                    )
                                    
                                    
                                    (3,868
                                    )Net
      cash used by investing activities - forwarded
                                    
                                    
                                    (13,919
                                    )
                                    
                                    
                                    (1,667
                                    )Financing
      Activities:Proceeds
      from public offering, net
                                    
                                    
                                    106,690
                                    
                                    
                                    
                                    -Proceeds
      from exercise of stock options
                                    
                                    
                                    67
                                    
                                    
                                    
                                    27Proceeds
      from exercise of warrants
                                    
                                    
                                    3,030
                                    
                                    
                                    
                                    -Payments
      for warrant buybacks
                                    
                                    
                                    (23,925
                                    )
                                    
                                    
                                    -Bank
      overdraft
                                    
                                    
                                    148
                                    
                                    
                                    
                                    (348
                                    )Proceeds
      from issuance of secured notes
                                    
                                    
                                    5,762
                                    
                                    
                                    
                                    352Payments
      of secured notes
                                    
                                    
                                    (1,020
                                    )
                                    
                                    
                                    (43
                                    )Payments
      of senior secured note
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (150
                                    )Proceeds
      from issuance of notes payable
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,600Repayments
      of notes payable
                                    
                                    
                                    (4,500
                                    )
                                    
                                    
                                    -Payment
      on capital leases
                                    
                                    
                                    (639
                                    )
                                    
                                    
                                    (210
                                    )Net
      cash provided by financing activities
                                    
                                    
                                    85,613
                                    
                                    
                                    
                                    2,228Effect
      of exchange rate changes on cash
                                    
                                    
                                    (951
                                    )
                                    
                                    
                                    165Net
      increase (decrease) in cash and cash equivalents
                                    
                                    
                                    60,319
                                    
                                    
                                    
                                    (3,142
                                    )Cash
      and cash equivalents - beginning of period
                                    
                                    
                                    6,791
                                    
                                    
                                    
                                    5,878Cash
      and cash equivalents - end of period
                                    
                                    $
                                    67,110
                                    
                                    
                                    
                                    2,736Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Income
      taxes
                                    
                                    $
                                    -
                                    
                                    
                                    
                                    -Interest
                                    
                                    $
                                    340
                                    
                                    
                                    
                                    317





The
Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.


6





KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
in Thousands, Except Share and Per Share Data)


(Unaudited)







(1) Nature of
Business and Nature of Presentation





KIT
digital, Inc. ("we," "us," "our," the "Company" or "KIT digital"), through our
operating subsidiaries, provides enterprise clients an end-to-end technology
platform for managing Internet Protocol (“IP”)-based video assets across the
browser, mobile device and IPTV set-top box-enabled television set. We offer
creative interface design, branding, strategic planning and technical
integration services to complement our “VX”-branded software platform. Our
solutions includes the delivery of IP video software solutions, including
software-as-a-service (“SaaS”) fees, enterprise license fees, software usage
fees, set-up/support services, storage, hardware components, content delivery,
content syndication, and advertising-based monetization. Our solutions also
include technical integration services, interface design, branding, strategic
planning, creative production, online marketing, media planning and
analytics.





The
accompanying interim consolidated financial statements are unaudited and have
been prepared in accordance with accounting principles generally accepted in the
United States of America, or GAAP, for interim financial information. These
financial statements include the accounts of KIT digital and its wholly-owned
subsidiaries. All intercompany transactions and balances have been eliminated in
the accompanying financial statements.





Certain
information and footnote disclosures normally included in the Company’s annual
audited consolidated financial statements and accompanying notes have been
condensed or omitted in these interim financial statements. Accordingly, the
unaudited consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and accompanying
notes included in KIT digital’s annual report on Form 10-K for the year ended
December 31, 2009, filed with the U.S. Securities and Exchange
Commission.





The
results of operations presented in this quarterly report on Form 10-Q are not
necessarily indicative of the results of operations that may be expected for any
future periods. In the opinion of management, these unaudited consolidated
financial statements include all adjustments and accruals, consisting only of
normal recurring adjustments, that are necessary for a fair statement of the
results of all interim periods reported herein.





(2) Recent
Accounting Pronouncements





In
October 2009, the FASB issued Accounting Standards Update on
Multiple-Deliverable Revenue Arrangements, which addresses the accounting for
multiple-deliverable arrangements and requires that the overall arrangement
consideration be allocated to each deliverable in a revenue arrangement based on
an estimated selling price when vendor specific objective evidence or
third-party evidence of fair value is not available. This guidance also
eliminates the residual method of allocation and requires that arrangement
consideration be allocated to all deliverables using the relative selling price
method. This update is effective for fiscal years beginning on or after June 15,
2010 and early adoption is permitted.  We do not expect the adoption
of this update to have a material impact.





In
October 2009, the FASB issued Accounting Standards Update on Certain Revenue
Arrangements That Include Software Elements, which changes the accounting model
for revenue arrangements that include both tangible products and software
elements. Tangible products containing both software and non-software components
that function together to deliver the product’s essential functionality will no
longer be within the scope of Software Revenue Recognition. This update is
effective for fiscal years beginning on or after June 15, 2010 and early
adoption is permitted. We do not expect the adoption of this update to have
a material impact.





(3)
Cash and Cash Equivalents





We
consider all highly liquid investments with original maturities of ninety days
or less when purchased to be cash and cash equivalents. As of June 30, 2010, the
Company had $2,049 of cash equivalents in an account that pays interest at LIBOR
plus 150 basis points. This account is guaranteed and backed by liquid
collateral instruments, and can be redeemed with 14 days prior written notice. As of
June 30, 2010, the Company had $65,061 of cash in low interest-bearing accounts
in accordance with the Company's cash management policy.




7





KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
in Thousands, Except Share and Per Share Data)


(Unaudited )





(4)
Fair Value of Financial Instruments





On
January 1, 2008, we adopted the standard that defines fair value, establishes a
framework for measuring fair value in GAAP and expands disclosure about fair
value measurements. This standard defines fair value as the amount that would be
received upon sale of an asset or paid to transfer a liability in the principal
or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. It also establishes a fair
value hierarchy which prioritizes the types of inputs to valuation techniques
that companies may use to measure fair value. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or
liabilities (Level 1). The next highest priority is given to inputs other than
quoted prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly (Level 2). The lowest priority is given
to unobservable inputs in which there is little or no market data available and
which require the reporting entity to develop its own assumptions (Level
3).





The
assets and liabilities that are measured at fair value on a recurring basis and
are categorized using the fair value hierarchy are Investments and Derivative
Liabilities. Investments are measured using active quoted market prices (Level
1). See Note 10 for fair value hierarchy on the Derivative
Liabilities.





Investments
include an investment in a limited partnership fund which invests, on a hedged
basis, primarily in the U.S. equity markets. This initial investment was made in
March 2009 and a subsequent investment was made in February 2010 and is recorded
at a fair value of $932 since we do not exercise control over this
fund.





(5)
Accounts Receivable





Trade
accounts receivable are stated net of allowances for doubtful accounts. Specific
customer provisions are made when a review of significant outstanding amounts,
customer creditworthiness and current economic trends, indicates that collection
is doubtful. In addition, provisions are made at differing amounts, based upon
the balance and age of the receivable and the Company’s historical collection
experience. Trade accounts are charged off against the allowance for doubtful
accounts or expense when it is probable the accounts will not be recovered. The
allowance for doubtful accounts as of June 30, 2010 and December 31, 2009 was
$972 and $874, respectively.





(6) Concentration
of Credit Risk





Financial
instruments which potentially subject us to concentrations of credit risk
consist principally of cash and cash equivalents and trade accounts receivable.
We place our cash and cash equivalents with high credit quality institutions to
limit credit exposure, and from time to time, obtain collateral for our accounts
where we deem prudent and is feasible. We believe no significant concentration
of credit risk exists with respect to these investments. The amount held in
foreign currencies as of June 30, 2010 and December 31, 2009 was $2,984 and
$2,272, respectively. The amount of cash in excess of FDIC insured amounts as of
June 30, 2010 and December 31, 2009, was $66,360 and $6,541,
respectively.





Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
nature of our customers who are dispersed across many industries and geographic
regions. As of June 30, 2010, no customer accounted for 10% or more of our trade
accounts receivable. As of December 31, 2009, three customers accounted for
approximately 39.6% of our trade accounts receivable. We routinely assess the
financial strength of customers and, based upon factors concerning credit risk,
we establish an allowance for doubtful accounts. Management believes that
accounts receivable credit risk exposure beyond such allowance is
limited.





(7)
Inventory





Inventory
is valued at the lower of cost (first-in, first-out method) or market and are
comprised of finished goods. On a quarterly basis, we review inventory
quantities on hand and analyze the provision for excess and obsolete inventory
based primarily on product age in inventory and our estimated sales forecast,
which is based on sales history and anticipated future demand. As of June 30,
2010 and December 31, 2009, our reserves for excess and obsolete inventory were
$110 and $136, respectively.


8





KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
in Thousands, Except Share and Per Share Data)


(Unaudited)




(8)
Secured Notes Payable





In April
2010, we received $5,000 in gross proceeds from the issuance of a note. Interest
is payable monthly in advance at 12.7% per year and matures on July 1,
2013.  We paid interest only of $22 for April 2010 and agreed to pay
interest only of $42 for the next nine months. Commencing on February 1, 2011,
payments for principal and interest are due in thirty equal consecutive payments
of $188. A final balloon payment of $538 will be due and payable upon maturity.
The note is secured by the Company’s property, including accounts receivable and
inventory.  In conjunction with the borrowing, we issued to the lender
a warrant entitling it to purchase, for $14.24 per share, 40,976 shares of our
common stock with a five year life through April 15, 2015. A debt discount of
$183 was recorded related to these warrants and is being amortized over the term
of the loan.





In June
2010, we received $1,000 in gross proceeds from the issuance of a note. Interest
is payable monthly in advance at 12.7% per year and matures on September 1,
2013.  We paid interest only of $5 for June 2010 and agreed to pay
interest only of $8 for the next nine months. Commencing on April 1, 2011
payments for principal and interest are due in thirty equal consecutive payments
of $38. A final balloon payment of $108 will be due and payable upon maturity.
The note is secured by the Company’s property, including accounts receivable and
inventory.  In conjunction with the borrowing, we issued to the lender
a warrant entitling it to purchase, for $13.76 per share, 8,480 shares of our
common stock with a five year life through June 14, 2015. A debt discount
of $27 was recorded related to these warrants and is being amortized over the
term of the loan.





(9)
Acquisitions





In late
March 2010, we acquired Multicast Media Technologies, Inc., a United States
company engaged in live event broadcasting, internet video and targeted
multimedia communications (“Multicast”), in exchange for 2,379,714 shares of our
common stock and approximately $4,750 in cash (the “Cash Consideration”). The
share consideration issuable to Multicast stockholders was reduced to 1,312,034
shares of KIT digital common stock (the “Merger Shares”), after giving effect to
adjustments for assumption by KIT digital of existing indebtedness and other
liabilities of Multicast in the amount of approximately $5,927. The merger
consideration is subject to adjustment upwards or downwards to the extent that
the closing working capital of Multicast is greater or less than zero and
subject to the final fair valuation of Merger Shares. The Cash Consideration and
Merger Shares were delivered as follows: (i) $4,000 in cash and 842,500 shares
of our stock promptly following the closing; and (ii) a “holdback amount” of an
additional $746 in cash and 469,534 shares of KIT digital common stock, less any
amount used by KIT digital to offset negative working capital and satisfy
indemnity claims as described below, will be delivered to such stockholders not
later than one year after the closing or such later date as all indemnity claims
have been resolved. Of the total “holdback amount,” $712 in cash and 196,798
Merger Shares will be used to offset any negative working capital balance of
Multicast as of the effective date of the merger. The remaining $34 in cash and
272,736 Merger Shares being held back by KIT digital will be used to indemnify
KIT digital against any breaches of representations, warranties and covenants by
Multicast, as well as against certain additional specified liabilities The
Company has allocated the aggregate cost of the acquisition to Multicast’s net
tangible and identifiable intangible assets based on their estimated fair
values. The excess of the aggregate cost of the acquisition over the net
estimated fair value of the tangible and identifiable intangible assets and
liabilities assumed was recorded to goodwill.





The
following table summarizes the preliminary estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.





Current
      assets
                  
                  $
                  612Property
      and equipment
                  
                  
                  1,548Intangible
      assets – developed software
                  
                  
                  200Intangible
      assets – customer list
                  
                  
                  1,600Goodwill
                  
                  
                  20,530Total
      assets acquired
                  
                  
                  24,490Current
      liabilities and assumed debt
                  
                  
                  (7,025
                  )Net assets acquired
                  
                  $
                  17,465





On May
14, 2010, we acquired Benchmark Broadcast Systems Pte. Ltd., a Singapore company
engaged in providing asset management solutions and integration of broadcast
video systems, and subsidiaries (“Benchmark”), in exchange for 353,744 shares of
our common stock valued at $4,775 and approximately $4,905 in cash (the “Cash
Consideration”) at the time of acquisition. The estimated aggregate cost of the
acquisition of Benchmark was $19,386. Additionally, the cost includes $1,119 for
the working capital due to the seller, $1,028 estimated to be due after one year
from closing based on a percentage of revenue and meeting earnings targets and
$7,560 estimated to be due after two years from closing based on a percentage of
revenue and meeting earnings targets. Of these amounts, $2,146 is included in
the Balance Sheet in “Acquisition liability” and $7,560 is in the Balance Sheet
in “Acquisition liability, net of current.” Pursuant to the agreement, we have
put $2,000 into escrow for potential future obligations, which is included in
“Restricted Cash” in the Balance Sheet as of June 30, 2010. We have allocated
the aggregate cost of the acquisition to Benchmark’s net tangible and
identifiable intangible assets based on their estimated fair values. The excess
of the aggregate cost of the acquisition over the net estimated fair value of
the tangible and identifiable intangible assets and liabilities assumed was
recorded as goodwill.





The
following table summarizes the preliminary estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.





Current
      assets
                  
                  $
                  2,523Property
      and equipment
                  
                  
                  166Goodwill
                  
                  
                  19,010Total
      assets acquired
                  
                  
                  21,699Current
      liabilities and assumed debt
                  
                  
                  (4,858)Net assets acquired
                  
                  $
                  16,841





In June
2010, we paid $2,900 in cash and issued 122,911 shares of our common stock
valued at $1,250 to the former shareholders of Visual Connection a.s.
(“Visual”), pursuant to an amendment to the Visual Share Purchase Agreement
dated October 5, 2008 (“Visual SPA”) and in satisfaction of all remaining
earn-out provisions. We have recorded an increase of $3,075 to “Goodwill” in the
Balance Sheet as of June 30, 2010 and a reduction of $1,075 of the previously
recorded contingent liability.


9


KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
in Thousands, Except Share and Per Share Data)


(Unaudited) 
 
 (9)
Acquisitions (continued)





Selected
unaudited pro forma combined results of operations for the six months ended June
30, 2009, assuming the Multicast and Benchmark acquisitions occurred on January
1, 2009 using actual unaudited figures from each entity prior to acquisition,
are presented as follows:





Total
      revenue
                    
                    $
                    32,974Net
      income
                    
                    $
                    5,701





Selected
unaudited pro forma combined results of operations for the six months ended June
30, 2010, assuming the Multicast and Benchmark acquisitions occurred on January
1, 2010 using actual unaudited figures from each entity prior to acquisition,
are presented as follows:





Total
      revenue
                      
                      $
                      47,375Net
      income
                      
                      $
                      (19,029
                      )





The
acquisitions of Nunet AG and The FeedRoom, Inc. from October 2009 are not
presented above in the proforma combined results of operations for the six
months ended
June 30, 2009 as portions of these businesses were discontinued and management
believes that the organization and nature of these businesses have changed
significantly after acquisition.





(10)
Derivative Liabilities





Upon the
adoption of a new standard effective January 1, 2009, instruments which contain
full ratchet anti-dilution provisions will no longer be considered indexed to a
company’s own stock for purposes of determining whether it meets the first part
of the scope exception. The adoption required us to (1) evaluate our
instrument’s contingent exercise provisions and (2) evaluate the instrument’s
settlement provisions. Based upon applying this approach to instruments within
the scope of the consensus, we have determined that certain of our warrants
which were classified in stockholders’ equity on December 31, 2008, no longer
meet the definition of Indexed to a Company’s Own Stock provided in the
Consensus. Accordingly, effective on January 1, 2009, we were required to
reclassify those warrants, at their fair value, into liabilities. The accounting
standard requires that the fair value of these liabilities be re-measured at the
end of every reporting period with the change in value over the period reported
in the statement of operations. The difference between the amount the warrants
were originally recorded in the financial statements and the fair value of the
instruments on January 1, 2009 was considered a cumulative effect of a change in
accounting principle and required an adjustment to the opening balance of
retained earnings and a reduction in additional paid-in capital in the amount of
$8,498 and $24,235, respectively. The derivative liability as of January 1, 2009
was $15,736. These amounts have been adjusted for the errors noted in fair value
computations. See Note 16, “Correction of errors” for further details. The
common shares indexed to the derivative financial instruments used in the
calculation of the fair value and recorded as liabilities at January 1, 2009,
December 31, 2009 and June 30, 2010 were 5,806,230, 4,794,400 and 741,353,
respectively. The number of shares for the determination of the liability have
been computed based on the effective exercise price used in the valuation. The
actual number of common shares indexed to the warrants at January 1, 2009,
December 31, 2009 and June 30, 2010 were 2,886,038, 4,794,400 and 741,353,
respectively.





We
estimate fair values of derivative financial instruments using various
techniques (and combinations thereof) that are considered to be consistent with
the objective measuring fair values. In selecting the appropriate technique, we
consider, among other factors, the nature of the instrument, the market risks
that it embodies and the expected means of settlement. For less complex
derivative instruments, such as free-standing warrants, we generally use the
Black-Scholes-Merton (“BSM”) option valuation technique, adjusted for the effect
of dilution, because it embodies all of the requisite assumptions (including
trading volatility, estimated terms, dilution and risk free rates) necessary to
fair value these instruments.




Estimating
fair values of derivative financial instruments requires the development of
significant and subjective estimates that may, and are likely to, change over
the duration of the instrument with related changes in internal and external
market factors. In addition, option-based techniques (such as BSM) are highly
volatile and sensitive to changes in the trading market price of our common
stock. Since derivative financial instruments are initially and subsequently
carried at fair values, our income (expense) going forward will reflect the
volatility in these estimates and assumption changes. Under the terms of the new
accounting standard, increases in the trading price of the company’s common
stock and increases in fair value during a given financial quarter result in the
application of non-cash derivative expense. Conversely, decreases in the trading
price of the company’s common stock and decreases in trading fair value during a
given financial quarter result in the application of non-cash derivative
income.


10





KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
in Thousands, Except Share and Per Share Data)


(Unaudited)




(10)
Derivative Liabilities (continued)





The
following table summarizes the components of derivative liabilities as of June
30, 2010, December 31, 2009 and the re-measurement date, January 1,
2009:





June 30,
                    2010
                  
                  
                  December
                    31, 2009
                  
                  
                  Re-measurement
                    date
                    January 1, 2009Fair
      value of warrants with anti-dilution provisions
                  
                  $
                  (2,548
                  )
                  
                  $
                  (21,314
                  )
                  
                  $
                  (15,736
                  )Significant
      assumptions (or ranges):Trading
      market values  (1)
                  
                  $
                  8.82
                  
                  
                  $
                  11.00
                  
                  
                  
                  5.25Term
      (years)
                  
                  
                  2.86
                  
                  
                  3.35
      to 4.00
                  
                  
                  $
                  4.35
      to 5.00Volatility   (1)
                  
                  
                  59.41
                  %
                  
                  
                  61.98
                  %
                  
                  
                  101.98
                  %Risk-free
      rate   (2)
                  
                  
                  1.00
                  %
                  
                  
                  1.70
                  %
                  
                  
                  1.55
                  %Effective
      Exercise price  (3)
                  
                  $
                  7.00
                  
                  
                  $
                  7.00
                  
                  
                  $
                  5.92





Fair
value hierarchy:





(1)
            Level 1 inputs are quoted prices
      in active markets for identical assets and liabilities, or derived there
      from. Our trading market values and the volatilities that are calculated
      thereupon are level 1
inputs.


(2)
            Level 2 inputs are inputs other
      than quoted prices that are observable. We use the current published
      yields for zero-coupon US Treasury Securities, with terms nearest the
      remaining term of the warrants for our risk free
    rate.


(3)
            Level 3 inputs are unobservable
      inputs. Inputs for which any parts are level 3 inputs are classified as
      level 3 in their entirety. The remaining term used equals the remaining
      contractual term as our best estimate of the expected term and the
      effective exercise price which is based on the stated exercise price
      adjusted for anti-dilution
provisions.





The
effects on our income (expense) associated with changes in the fair values of
our derivative financial instruments for the three months ended June 30, 2010
and 2009 was $2,368 and $1,626, respectively. Included in the $2,368 income for
the three months ended June 30, 2010 is a gain on settlement of $21 related
to the repurchase of warrants. The effects on our income (expense) associated
with changes in the fair values of our derivative financial instruments for the
six months ended June 30, 2010 and 2009 was $(9,075) and $3,576, respectively.
Included in the $(9,075) expense for the six months ended June 30, 2010 is a
loss on settlement of ($3,016) related to the repurchase of
warrants.





See Note
16, “Correction of errors”, for a description of the correction of an error
related to the derivative liability for the three and six months ended June 30,
2009.





On March
7, 2010, our board of directors approved the repurchase of certain outstanding
warrants with exercise prices below the then-current market price from certain
warrant holders (who had acquired the warrants in prior private placement
financings), including KIT Media, an entity controlled by Kaleil Isaza Tuzman,
our Chairman and Chief Executive Officer and Wellington Management Company
(“Wellington”), an entity with greater than a 10% holding in KIT digital’s
outstanding common stock at the time of the transaction. KIT Media and
Wellington are considered related parties of the Company. The terms of the
warrant repurchase were identical for KIT Media and Wellington, and the
negotiation of such terms was led by Wellington. The Company offered to purchase
and cancel these warrants at 133% of the intrinsic value of the warrants
(intrinsic value being based on a 20-day trailing volume weighted average price
of the underlying common stock).  These warrants with anti-ratchet
dilution provisions totaling 3,030,747 were cancelled effective on March 31,
2010. These warrants were included in the warrant buyback liability as at March
31, 2010 and were paid after such date. We also repurchased and cancelled
another 347,835 and 4,860 warrants with anti-ratchet dilution provisions during
the quarters ended March 31, 2010 and June 30, 2010, respectively, at varying
prices, from parties other than KIT Media and Wellington for $1,141 and $14,
respectively.


11





KIT DIGITAL, INC. AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
in Thousands, Except Share and Per Share Data)


(Unaudited)







(11) Stock-Based
Compensation





On March
17, 2008, the board of directors adopted an incentive compensation plan (the
“2008 Incentive Stock Plan”). The 2008 Incentive Stock Plan currently has
reserved 857,143 shares of common stock for issuance. The 2004 Stock Option Plan
has reserved 342,858 shares of common stock for issuance. In November 2009, our
board of directors voted unanimously to increase the number of shares which may
be issued under the 2008 Incentive Plan by 2,642,857 to an aggregate of
3,500,000 shares of common stock subject to ratification by our stockholders at
our next Annual Meeting of Stockholders.





The
Company’s outstanding unvested stock options have maximum contractual terms of
up to five years, principally vest on a quarterly basis ratably over four years
and were granted at exercise prices equal to the market price of the Company’s
common stock on the date of grant. The Company’s outstanding stock options are
exercisable into shares of the Company’s common stock. The Company measures the
cost of employee services received in exchange for an award of equity
instruments, including grants of employee stock options, warrants and restricted
stock awards, based on the fair value of the award at the date of grant in
  accordance with the modified prospective method. The Company uses the
Black-Scholes model for purposes of determining the fair value of stock options
granted and recognizes compensation costs ratably over the requisite service
period, net of estimated forfeitures.





On May 8,
2010, our board of directors authorized the issuance of 2,141,013 stock options
pursuant to the 2008 Incentive Stock Plan, at a strike price of $12.36 per share
(reflecting the previous trading day’s closing price), subject to approval by a
majority of the Company’s shareholders at the next Annual Meeting of
Stockholders. These stock options carry a four-year quarterly vesting term and a
five-year exercise term. In aggregate, as of May 17, 2010, shares underlying the
Company’s total issued employee stock options represent less than 14% of the
Company’s outstanding common shares. The board of directors had not authorized a
substantial issuance of stock options since June 2008. The board of directors
authorized the issuance of the 2,141,013 stock options to (a) account for the
addition of over 200 staff members since the last authorized options issuance,
(b) incentivize all staff for future performance, and (c) adjust existing
employees’ options levels to account for dilution in the Company’s total shares
outstanding that has occurred over time. Kaleil Isaza Tuzman, Gavin Campion and
Robin Smyth did not receive any new options as part of this
issuance.





For the
three months ended June 30, 2010 and 2009, we recognized $1,084 and $272,
respectively, of non-cash stock-based compensation expense in the consolidated
statements of operations. Also included in non-cash stock-based compensation are
warrants to purchase 34,286 shares of common stock with an exercise price of
$4.655 issued on March 30, 2008, that vest over three years from the issue date.
During the three months ended June 30, 2010, a total of 2,857 of these warrants
vested with 25,714 vested and 8,572 unvested as of June 30, 2010. The intrinsic
value as of June 30, 2010 of these outstanding warrants and exercisable warrants
are $143 and $107, respectively.





For the
six months ended June 30, 2010 and 2009, we recognized $1,636 and $552,
respectively, of non-cash stock-based compensation expense in the consolidated
statements of operations. Included in the 2010 amount of $1,636, is $190 of
stock issued for compensation. Also included in non-cash stock-based
compensation are warrants to purchase 34,286 shares of common stock with an
exercise price of $4.655 issued on March 30, 2008, that vest over three years
from the issue date. During the six months ended June 30, 2010, a total of 5,714
of these warrants vested.





As of
June 30, 2010, there was approximately $9,973 of total unrecognized compensation
cost related to unvested share-based compensation grants, which is expected to
be amortized over a weighted-average period of 3.4 years.





12


KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
in Thousands, Except Share and Per Share Data)


(Unaudited)








(11)
Stock-Based Compensation (continued)





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes model with the following weighted-average
assumptions:





Six Months EndedJune
                    30, 2010
                  
                  
                  Six
                    Months Ended
                    June
                    30, 2009Expected
      life (in years)
                  
                  
                  4.01
                  
                  
                  
                  5.00Risk-free
      interest rate
                  
                  
                  1.76
                  %
                  
                  
                  1.88
                  %Volatility
                  
                  
                  37.78
                  %
                  
                  
                  105.61
                  %Dividend
      yield
                  
                  
                  0
                  
                  
                  
                  0





A summary
of the status of stock option awards and changes during the six months ended
June 30, 2010 are presented below:





Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life (Years)
                      
                      
                      Intrinsic
                        ValueOutstanding
      at December 31, 2009
                      
                      
                      877,973
                      
                      
                      
                      7.14Granted
                      
                      
                      2,193,306
                      
                      
                      
                      12.34Exercised
                      
                      
                      (13,734
                      )
                      
                      
                      4.89Cancelled,
      expired, or forfeited
                      
                      
                      (64,204
                      )
                      
                      
                      8.86Outstanding
      at June 30, 2010
                      
                      
                      2,993,341
                      
                      
                      
                      10.92
                      
                      
                      
                      4.49
                      
                      
                      $
                      -Exercisable
      at June 30, 2010
                      
                      
                      661,723
                      
                      
                      
                      8.65
                      
                      
                      
                      3.89
                      
                      
                      $
                      112





The
weighted-average grant-date fair value of option awards granted during the six
months ended June 30, 2010 was $3.94.


13





KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
in Thousands, Except Share and Per Share Data)


(Unaudited)







(12)
Stock Issuances





During
the quarter ended March 31, 2010, we issued 6,771,093 shares of common stock. Of
this amount, we issued 2,980,000 shares in the January 2010 public offering,
350,000 shares in the February 2010 over-allotment, 1,541,624 shares in the
March 2010 public offering, 231,244 shares in the March 2010
over-allotment,  1,312,034 shares for the acquisition of Multicast,
308,007 shares for the exercise of warrants with proceeds of $1,448, 7,622
shares for the exercise of options with proceeds of $41, 16,500 shares for
compensation valued at $190 and 24,062 shares for services valued at
$236.





On
January 26, 2010, we completed an underwritten public offering of 2,980,000
shares of our common stock, pursuant to our shelf registration statement on Form
S-3 (No. 333-162325), which was originally filed and declared effective in
October 2009, and related prospectus supplement dated January 21,
2010.  We sold such shares in the offering at a price of $10.50 per
share and received $31,290 in gross proceeds and approximately $28,890 in net
proceeds, after deducting underwriting discounts, commissions, legal fees and
other estimated offering expenses.  The impact of the public offering
increased our total stockholders’ equity by $28,890.  As part of the
offering, we granted the underwriters an over-allotment option to purchase an
additional 447,000 shares of common stock at the same price per share through
February 20, 2010.  We subsequently sold 350,000 additional shares of
common stock pursuant to the over-allotment option on February 23, 2010, and
received $3,675 in gross proceeds and approximately $3,433 in net
proceeds.





On March
9, 2010, we completed an underwritten public offering of 1,541,624 shares of our
common stock, pursuant to our shelf registration statement on Form S-3 (No.
333-164655), which was originally filed and declared effective in February 2010,
and related prospectus supplement dated March 4, 2010.  We sold such
shares in the offering at a price of $9.73 per share and received $15,000 in
gross proceeds and approximately $14,075 in net proceeds, after deducting
underwriting discounts, commissions, legal fees and other estimated offering
expenses. The impact of the public offering increased our total stockholders’
equity by $14,075. We subsequently sold 231,244 additional shares of common
stock pursuant to an underwriters’ over-allotment option on March 22, 2010, and
received $2,250 in gross proceeds and approximately $2,087 in net
proceeds.





KIT Media
Ltd., an entity controlled by Kaleil Isaza Tuzman, our Chairman and Chief
Executive Officer (“KIT Media”), purchased $1,750 of common stock (179,856
shares) in the March 9, 2010 offering, at the same price and on the same terms
as the other investors in this offering.





During
the quarter ended June 30, 2010, we issued 5,614,333 shares of common stock. Of
this amount, we issued 4,230,770 shares in the April 2010 public offering,
634,615 shares in the May 2010 over-allotment, 353,774 shares in the acquisition
of Benchmark, 122,911 shares in the final payout of the acquisition of Visual,
260,151 shares for the exercise of warrants with proceeds of $1,582, 6,112
shares for the exercise of options with proceeds of $26 and 6,000 shares for
services valued at $82.





On April 27, 2010, we completed an
underwritten public offering of 4,230,770 shares of our common stock, pursuant
to our shelf registration statement on Form S-3 (No. 333-164655), which was
originally filed and declared effective in February 2010, and related prospectus
supplement dated April 22, 2010. We sold such shares in the offering at a price
of $13.00 per share and received $55,000 in gross proceeds and approximately
$50,574 in net proceeds, after deducting underwriting discounts, commissions,
legal fees and other estimated offering expenses. We subsequently sold 634,615
additional shares of common stock pursuant to an underwriters’ over-allotment
option on May 6, 2010, and received $8,250 in gross proceeds and approximately
$7,628 in net proceeds. KIT Capital purchased $1,300 of common
stock (100,000 shares) in the April 27, 2010 offering at the same price and on
the same terms as the other investors in this offering.




As of
June 30, 2010, the outstanding warrants (excluding the warrants included in the
derivative liability of 741,353 and stock-based compensation of 34,286) were
702,245 with a weighted average exercise price of $22.81. As of December 31,
2009, the outstanding warrants (excluding the warrants included in the
derivative liability of 4,794,400 and stock-based compensation of 34,286) were
510,639 with a weighted average exercise price of $51.36.





In April
2010, the Company repurchased and cancelled a warrant to purchase 47,143 shares
from Robin Smyth, our Chief Financial Officer. The terms of the warrant
repurchase were identical to Wellington and KIT Media, the negotiation of which
terms was led by Wellington.


14





KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
in Thousands, Except Share and Per Share Data)


(Unaudited )








(13)
Restructuring Charges





In the
first quarter of 2010, management approved restructuring plans for all
entities acquired since September 2009. Management expects to complete the
restructuring by the end of the year. Restructuring charges include the costs of
future employee terminations, contract settlements and facility closing
costs.





The
following table summarizes the restructuring charges for the three and six
months ended June 30, 2010, respectively:





Three months ended
                    
                    
                    Six months endedJune 30, 2010
                    
                    
                    June 30, 2010Employee
      termination costs
                    
                    $
                    -
                    
                    
                    $
                    2,632Contract
      settlements
                    
                    
                    26
                    
                    
                    
                    67Facility
      closing costs
                    
                    
                    (145
                    )
                    
                    
                    875Total
      restructuring charges
                    
                    $
                    (119
                    )
                    
                    $
                    3,574





The
following table summarizes the restructuring activity for the three and six
months ended June 30, 2010:





Employee
                      Termination
                      Costs
                    
                    
                    Contract
                      Settlements
                    
                    
                    Facility
                      Closing Costs
                    
                    
                    TotalBalance
      as of December 31, 2009
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    829
                    
                    
                    $
                    829Additions
                    
                    
                    2,632
                    
                    
                    
                    41
                    
                    
                    
                    1,020
                    
                    
                    
                    3,693Cash
      payments
                    
                    
                    (6
                    )
                    
                    
                    -
                    
                    
                    
                    (446
                    )
                    
                    
                    (452
                    )Balance
      as of March 31, 2010
                    
                    $
                    2,626
                    
                    
                    $
                    41
                    
                    
                    $
                    1,403
                    
                    
                    $
                    4,070Additions
                    
                    
                    -
                    
                    
                    
                    26
                    
                    
                    
                    -
                    
                    
                    
                    26Reversal
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (145
                    )
                    
                    
                    (145
                    )Cash
      payments
                    
                    
                    (362
                    )
                    
                    
                    (50
                    )
                    
                    
                    (548
                    )
                    
                    
                    (960
                    )Balance
      as of June 30, 2010
                    
                    $
                    2,264
                    
                    
                    $
                    17
                    
                    
                    $
                    710
                    
                    
                    $
                    2,991





The
accrued restructuring of $2,991 is included in accrued expenses in the
consolidated balance sheets as of June 30, 2010, respectively.





The
Company recorded restructuring charges of $195 and $314 for the three and six
months ended June 30, 2009, respectively. These amounts are comprised of
employee termination costs related to the reorganization of the Company of $96
and $143 and facility closing costs related to the closing of one of the
Melbourne, Australia offices and one of the Dubai offices of $99 and $171 for
the three and six months ended June 30, 2009, respectively.





(14)
Integration Expenses





The
Company has recorded integration charges related to the redundancy in staff and
consultants during reorganization, corporate rebranding related to the
reorganization, and the integration of acquired companies and assets of $3,378
and $6,299 for the three and six months ended June 30, 20010,
respectively.





The
Company has recorded integration charges related to the redundancy in staff and
consultants for the transition of technology infrastructure during
reorganization due to the centralizing of resources in Prague of $747 and $991
for the three and six months ended June 30, 2009, respectively.


15




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
in Thousands, Except Share and Per Share Data)


(Unaudited )







(15)
Segment Reporting





We have
presented geographical location for revenue and assets below. We have presented
operating segments in the past for Digital Media Solutions and Professional
Services but since Professional Services represents less than 10% of total
assets and total revenues and we expect this segment to continue to decrease, we
are not presenting financial information for operating segments.





The following table provides
revenue and assets by major geographical location.


Three months ended
                    
                    
                    Six months endedJune 30,
                    
                    
                    June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Revenue:EMEA
                    
                    $
                    9,494
                    
                    
                    $
                    6,773
                    
                    
                    $
                    21,537
                    
                    
                    $
                    13,609AsiaPac
                    
                    
                    5,379
                    
                    
                    
                    3,148
                    
                    
                    
                    8,196
                    
                    
                    $
                    5,426Americas
                    
                    
                    8,182
                    
                    
                    
                    573
                    
                    
                    
                    10,686
                    
                    
                    $
                    1,083Total
      revenue
                    
                    $
                    23,055
                    
                    
                    $
                    10,494
                    
                    
                    $
                    40,419
                    
                    
                    $
                    20,118
 
 June 30,
                      
                      
                      December 31,2010
                      
                      
                      2009Assets:EMEA
                      
                      $
                      28,958
                      
                      
                      $
                      21,887AsiaPac
                      
                      
                      8,936
                      
                      
                      
                      3,743Americas
                      
                      
                      9,672
                      
                      
                      
                      4,447Corporate
                      
                      
                      147,742
                      
                      
                      
                      50,337Total
      assets
                      
                      $
                      195,308
                      
                      
                      $
                      80,414


16





KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
in Thousands, Except Share and Per Share Data)


(Unaudited)







(16)
Correction of Errors





Our
previously issued financial statements have been corrected for the
following;





An
adjustment was made on September 30, 2009 for an increase in the common shares
indexed to the financial instruments for both warrants that were mistakenly not
included and for a change in the calculation of the fair value for the
anti-dilution provision that increases the common shares indexed to the
financial instruments. As of January 1, 2009, the effect of the correction
increased the derivative liability by $10,066 to $15,736, decreased retained
earnings by $6,082 and decreased additional paid-in capital by $3,984. As of
June 30, 2009, the effect of the correction increased the derivative liability
by $2,960 and increased the derivative income by $7,106, in addition to the
corrections above as of January 1, 2009 to the consolidated balance sheet. As of
June 30, 2009, the corrected consolidated balance sheet has a derivative
liability of $5,054 and total liabilities of $30,892. In the three and six
months ended June 30, 2009, the corrected consolidated statement of
operations has a derivative income of $506 and $10,682 and a net (loss)
income available to common shareholders of $(1,610) and 6,784, with a basic and
diluted net income per common share of $(0.37) and $1.50.




The
derivative income (expense) reflected in the consolidated statement of
operations and comprehensive income (loss) for the three and six months ended
June 30, 2009 is based on changes in the fair values, adjusted for the
correction of the above mentioned errors.





(17)
Related Party Transactions





In
December 2007, we entered into an agreement with KIT Capital, Ltd. (“KIT
Capital”), a company beneficially controlled and led by Kaleil Isaza
Tuzman, our Chairman and Chief Executive Officer, under which KIT Capital has
provided us managerial services. The total amount paid to KIT Capital and
included in our results of operations in the six months ended June 30, 2010 and
2009 were $220 and $252, respectively.





KIT Media
purchased $1,750 of common stock (179,856 shares) in the March 9, 2010 offering
at the same price and on the same terms as the other investors in this
offering.





KIT
Capital purchased $1,300 of common stock (100,000 shares) in the April 27, 2010
offering at the same price and on the same terms as the other investors in this
offering.




See Note
10, “Derivative Liabilities” for a description of warrant repurchases from KIT
Media and Wellington.





See Note
12, “Stock Issuances”, for a description of warrant repurchase from Robin Smyth,
Chief Financial Offcier.


17





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


(Amounts
in Thousands, Except Share and Per Share Data)





Overview





Through
our operating subsidiaries, we are in the business of providing software
solutions that enable our customers to manage and distribute video content
through Internet websites, mobile devices and IPTV networks. Our core digital
asset management software suite, marketed under the “KIT VX” brand, includes
online and mobile video players, ingestion and trans-coding video content for
Internet and mobile devices, IPTV set-top box development, IPTV recording and
editing suite deployment, video content localization and syndication, digital
rights management, hosting, storage,  content delivery and content
syndication. We currently provide IP video solutions internationally through our
offices in Atlanta, Beijing, Buenos Aires, Chennai, Cologne, Delhi, Dubai,
Kolkata, Melbourne (Australia), Mumbai, Prague, Toronto, Stockholm, New York,
London, Cairo and Singapore. To support IPTV enablement, we provide technical
integration and integrated marketing solutions, including interface design
services, branding, online marketing, data management and
analytics.





Set forth
below is a discussion of the financial condition and results of operations of
KIT digital, Inc. and its consolidated subsidiaries (collectively, “we,” “us” or
“our”), for the three and six months ended June 30, 2010 and 2009. The following
discussion should be read in conjunction with the information set forth in the
consolidated financial statements and the related notes thereto appearing
elsewhere in this report.





As a
component of our management’s review of the financial statements, our management
recently reviewed and modified the categorization of costs in the Consolidated
Statements of Operations. Management believes these changes in classifications
present additional information to the readers of the financial statements and
previously reported amounts were re-categorized to conform to the current
presentation.





Results
of Operations - Three Months Ended June 30, 2010 Compared to Three Months Ended
June 30, 2009





Revenue. Consolidated revenue
increased by $12,561 from $10,494 for the three months ended June 30, 2009 to
$23,055 for the three months ended June 30, 2010, an increase of 120%. This
increase in primarily due an increase in customers, increased spending by
existing customers, and revenue from the acquired companies not included in
prior period results.





Variable
and Direct Third Party Costs





Cost of Goods and Services.
Cost of goods and services increased by $2,732 from $3,634 for the three months
ended June 30, 2009 to $6,366 for the three months ended June 30, 2010, an
increase of 75%. These costs represent the costs of equipment and services for
the supply of digital media and IPTV solutions, services and components. The
increase was due to an increase in revenue for the supply of digital media and
IPTV solutions, services and components and the acquisition of Benchmark in May
2010.





Hosting, Delivery and
Reporting. These costs increased by $876 from $414 for the three months
ended June 30, 2009 to $1,290 for the three months ended June 30, 2010, an
increase of 212%.  These costs increased primarily due to the recent
acquisitions in October 2009 and March 2010.





Content Costs. Content costs
decreased by $108 from $357 for the three months ended June 30, 2009 to $249 for
the three months ended June 30, 2010, a decrease of 30%. The decrease was
primarily due to the elimination of monthly minimum guarantees with many
content providers and the reduction in content providers.




Direct Third Party Creative
Production Costs. Direct third party creative production costs decreased
by $497 from $1,153 for the three months ended June 30, 2009 to $656 for the
three months ended June 30, 2010, a decrease of 43% attributable to lower
revenue requiring creative production costs.


18





General
and Administrative Expenses





Compensation, Travel and Associated
Costs (IncludingNon-Cash Stock-Based Compensation). These costs increased
by $5,055 from $3,481 for the three months ended June 30, 2009 to $8,536 for the
three months ended June 30, 2010, an increase of 145%.  The increase
was primarily due to the recent acquisitions in October 2009, March 2010 and May
2010 and the increase in non-cash stock-based compensation of $812.





Legal, Accounting, Audit and Other
Professional Services Fees. These expenses increased by $370 from $160
for the three months ended June 30, 2009 to $530 for the three months ended June
30, 2010, an increase of 231%,  primarily due to the increase in
audit, Sarbanes-Oxley consulting fees and other legal fees





Office, Marketing and Other Corporate
Costs. These expenses increased by $1,417 from $896 for the three months
ended June 30, 2009 to $2,313 for the three months ended June 30, 2010, an
increase of 158%.  The increase was primarily due to the increases
related to recent acquisitions in October 2009, March 2010 and May
2010.





Merger and Acquisition and Investor
Relation Expenses. Merger and acquisition and certain investor relation
expenses increased by $535 from $351 for the three months ended June 30, 2009 to
$886 for the three months ended June 30, 2010 an increase of 152%. The increase
in costs for the three months are primarily due to the acquisition of Benchmark
in May 2010 and other merger and acquisition activities and investor relation
expenses.





Depreciation and Amortization.
Depreciation and amortization expense increased 125% by $1,139 from $910 for the
three months ended June 30, 2009 to $2,049 for the three months ended June 30,
2010. The increase is primarily attributed to the amortization of intangible
assets and depreciation of long lived assets acquired as part of the
acquisitions of Nunet and Feedroom in October 2009, Multicast in March 2010 and
Benchmark in May 2010.




Restructuring Charges.
Restructuring charges decreased 161% by $314, from an expense of $195 for the
three months ended June 30, 2009 to a gain of $119 for the three months ended
June 30, 2010. This was due to a benefit derived from the lower than expected
payout of facility costs.





Integration expenses.
Integration expenses increased by $2,631 from $747 for the three months ended
June 30, 2009 to $3,378 for the three months ended June 30, 2010. Integration
expenses are related to the redundancy in staff and consultants during
reorganization, corporate rebranding related to the reorganization, and the
integration of acquired companies.





Interest
Income. Interest income
increased by $24 from $3 for the three months ended June 30, 2009 to $27 for the
three months ended June 30, 2010, due to an increase in cash and cash
equivalents.





Interest Expense. Interest
expense increased by $70 from $178 for the three months ended June 30, 2009 to
$248 for the three months ended June 30, 2010, due to an increase in
debt.




Amortization of Deferred Financing
Costs and Debt Discount. Amortization of deferred financing costs and
debt discount were $449 for the three months ended June 30, 2009. These costs
resulted from the issuance of $1,500 of a senior secured note in November 2008
which was repaid in August 2009. Amortization of deferred financing costs and
debt discount were $14 for the three months ended June 30, 2010. These costs
resulted from the issuance of $6,000 of secured notes payable in April 2010 and
June 2010.





Derivative income. Derivative
income was $2,368 for the three months ended June 30, 2010 as compared to $506
for the three months ended June 30, 2009. Derivative income or expense is the
change in the period based on the fair value of warrants containing reset
provisions.





Other Income/(Expense). Other
income increased by $293 from $311 for the three months ended June 30, 2009 to
other income of $604 for the three months ended June 30, 2010, primarily
due to an increase in foreign currency gain.





Net Loss Available to Common
Shareholders. As a result of the factors described above, we reported net
loss available to common shareholders of $342 for the three months ended June
30, 2010 compared to a net loss available to common shareholders of $1,610 for
the three months ended June 30, 2009, a decrease in net loss of
$1,268.


19





Results of Operations - Six Months
Ended June 30, 2010 Compared to Six Months Ended June 30,
2009





Revenue. Consolidated revenue
increased by $20,301 from $20,118 for the six months ended June 30, 2009 to
$40,419 for the six months ended June 30, 2010, an increase of 101%. This
increase in primarily due an increase in customers, increased spending by
existing customers, and revenue from the acquired companies not included in
prior period results.




Variable
and Direct Third Party Costs





Cost of Goods and Services.
Cost of goods and services increased by $3,606 from $7,112 for the six months
ended June 30, 2009 to $10,718 for the six months ended June 30, 2010, an
increase of 51%. These costs represent the costs of equipment and services for
the supply of digital media and IPTV solutions, services and components. The
increase is due to an increase in revenue for the supply of digital media and
IPTV solutions, services and components and the acquisition of Benchmark in May
2010.





Hosting, Delivery and
Reporting. These costs increased by $1,668 from $696 for the six months
ended June 30, 2009 to $2,364 for the six months ended June 30, 2010, an
increase of 240%.  These costs increased primarily due to the recent
acquisitions in October 2009 and March 2010.





Content Costs. Content costs
decreased by $334 from $818 for the six months ended June 30, 2009 to $484 for
the six months ended June 30, 2010, a decrease of 41%. The decrease is
primarily due to the elimination of monthly minimum guarantees with many
content providers and the reduction in content providers.




Direct Third Party Creative
Production Costs. Direct third party creative production costs decreased
by $412 from $1,958 for the six months ended June 30, 2009 to $1,546 for the six
months ended June 30, 2010, a decrease of 21% attributable to lower revenue
requiring creative production costs.





General
and Administrative Expenses





Compensation, Travel and Associated
Costs (IncludingNon-Cash Stock-Based Compensation). These costs increased
by $7,012 from $7,174 for the six months ended June 30, 2009 to $14,186 for the
six months ended June 30, 2010, an increase of 98%.  The increase was
primarily due to the recent acquisitions in October 2009, March 2010 and May
2010 and the increase in non-cash stock-based compensation of
$1,084.





Legal, Accounting, Audit and Other
Professional Services Fees. These expenses increased by $790 from $430
for the six months ended June 30, 2009 to $1,220 for the six months ended June
30, 2010, an increase of 184%,  primarily due to the increase in
audit, Sarbanes-Oxley consulting fees and other legal fees





Office, Marketing and Other Corporate
Costs. These expenses increased by $2,764 from $1,613 for the six months
ended June 30, 2009 to $4,377 for the six months ended June 30, 2010, an
increase of 171%.  The increase was primarily due to the increases
related to recent acquisitions in October 2009, March 2010and May
2010.




Merger and Acquisition and Investor
Relation Expenses. Merger and acquisition and certain investor relation
expenses increased by $1,376 from $729 for the six months ended June 30, 2009 to
$2,105 for the six months ended June 30, 2010 an increase of 189%. The increase
in costs for the six months are primarily due to the acquisition of Multicast in
March 2010, Benchmark in May 2010 and other merger and acquisition activities
and investor relation expenses.





Depreciation and Amortization.
Depreciation and amortization expense increased 132% by $2,110 from $1,593 for
the six months ended June 30, 2009 to $3,703 for the six months ended June 30,
2010. The increase is primarily attributed to the amortization of intangible
assets and depreciation of long lived assets acquired as part of the
acquisitions of Nunet and Feedroom in October 2009, Multicast in March 2010 and
Benchmark in May 2010.




Restructuring Charges.
Restructuring charges increased by $3,260, from $314 for the six months ended
June 30, 2009 to $3,574 for the six months ended June 30,
2010.  Restructuring charges consist of employee termination costs,
contract settlements and facility closing costs. These charges increased due to
the approved restructuring plan put into place in the first quarter of
2010.


20





Integration expenses.
Integration expenses increased by $5,308 from $991 for the six months ended
June30, 2009 to $6,299 for the six months ended June 30, 2010. Integration
expenses are related to the redundancy in staff and consultants during
reorganization, corporate rebranding related to the reorganization, and the
integration of acquired companies.





Interest Income. Interest
income increased by $24 from $4 for the six months ended June 30, 2009 to $28
for the six months ended June 30, 2010, due to an increase in cash and cash
equivalents.





Interest Expense. Interest
expense increased by $23 from $317 for the six months ended June 30, 2009 to
$340 for the six months ended June 30, 2010, due to an increase in
debt.




Amortization of Deferred Financing
Costs and Debt Discount. Amortization of deferred financing costs and
debt discount were $613 for the six months ended June 30, 2009. These costs
resulted from the issuance of $1,500 of a senior secured note in November 2008
which was repaid in August 2009. Amortization of deferred financing costs and
debt discount were $14 for the six months ended June 30, 2010. These costs
resulted from the issuance of $6,000 of secured notes payable in April 2010 and
June 2010.





Derivative income/expense.
Derivative expense was $9,075 for the six months ended June 30, 2010 as compared
to derivative income of $10,682 for the six months ended June 30, 2009.
Derivative income or expense is the change in the period based on the fair value
of warrants containing reset provisions.





Other Income/(Expense). Other
income increased by $448 from $340 for the six months ended June 30, 2009 to
other income of $788 for the six months ended June 30, 2010, primarily due
to an increase in foreign currency gain.





Net (Loss) Income Available to Common
Shareholders. As a result of the factors described above, we reported net
loss available to common shareholders of $18,784 for the six months ended June
30, 2010 compared to net income available to common shareholders of $6,784 for
the six months ended June 30, 2009, an increase in net loss of
$18,462.





Liquidity and
Capital Resources





As of
June 30, 2010, we had cash and cash equivalents of $67,110 and working capital
of approximately $63,633. During the six months ended June 30, 2010, we received
net proceeds of $106,690 in public offerings, repurchased warrants for $23,925
and paid net cash of $11,210 related to the acquisitions of Benchmark and
Multicast, including the extinguishment of Multicast’s notes payable. We plan to
primarily use net proceeds of the most recent equity offering to finance the
costs of acquiring or investing in competitive and complementary businesses,
products and technologies as a part of our growth strategy. Management
anticipates that going-forward, we will generate sufficient cash flows from
operating activities to meet our capital requirements. We believe that we have
sufficient liquidity to finance our operational and acquisition plan for the
next twelve months.





Net cash
used by operating activities was $9,030 for the six months ended June 30, 2010,
compared to $3,868 for the six months ended June 30, 2009, an increase of
$5,162. The increase in net cash used in operating activities is primarily
related to the increase in receivables attributable to an increase in revenues
and a couple slower paying major clients, an increase in merger and acquisition
and investor relations expenses and restructuring and integration expenses
offset by the accrual for these items in the six months ended June 30,
2010.





Net cash
used by investing activities was $15,313 for the six months ended June 30, 2010,
compared to $1,667 for the six months ended June 30, 2009, a increase in net
cash used in investing activities of $13,646. In 2010, this consisted primarily
of cash paid in the acquisition of Multicast of $4,746 offset by cash received
of $396, cash paid in the acquisition of Benchmark of $4,905 offset by cash
received of $2,545, cash paid into restricted cash related to the Benchmark
acquisition, cash paid in final settlement of Visual acquisition of $2,900, cash
paid into investment of $700 and purchase of equipment of $752. In 2009,
this primarily consisted of cash paid into investment of $200, cash paid in the
acquisition of Visual of $180, the purchase of software of $1,500 and other
equipment of $66.





Net cash
provided by financing activities was $85,613 for the six months ended June 30,
2010, compared to net cash provided by financing activities of $2,228 for the
six months ended June 30, 2009. In 2010, this primarily consisted of the
proceeds from public offerings of $106,690, net proceeds from the issuance of
secured notes of $5,762, proceeds from the exercise of warrants and options of
$3,097 offset by payments related to the buyback of warrants of $23,925,
payments of notes related to the Multicast acquisition of $4,500 and payments of
other notes, capital leases and other obligations of $1,659. In 2009, this
primarily consisted of proceeds from the issuance of note payable of $2,600
offset by payments of capital leases, secured notes and other obligations of
$399.


21


Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.





SPECIAL
NOTE REGARDING FORWARD-LOOKING INFORMATION




This
Form 10-Q includes forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the “Securities Act”), and Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).  We intend such forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in the United
States Private Securities Litigation Reform Act of 1995.  All
statements, other than statements of historical facts, included in this Form
10-Q regarding our strategy, future operations, financial position, future
revenues, projected costs, prospects, plans and objectives of management are
forward-looking statements.  The words “anticipates,” “believes,”
“estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would”
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words. We
cannot guarantee that we actually will achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you should not
place undue reliance on our forward-looking statements.  There are a
number of important factors that could cause our actual results to differ
materially from those indicated by these forward-looking
statements.  These important factors include risks related to our
history of net losses and accumulated deficits, integration of acquired
businesses, future capital requirements, competition and technological advances,
dependence on the market for digital advertising, and other factors that we
identify in this Form 10-Q and in other filings we make with the
SEC.  For additional factors that can affect these forward-looking
statements, see the “Risk Factors” section in our Annual Report on Form 10-K for
the year ended December 31, 2009.  You should read these factors and
other cautionary statements made in this Form 10-Q as being applicable to all
related forward-looking statements wherever they appear in the Form
10-Q.  Except to the extent required by federal securities laws, we do
not assume any obligation to update any forward-looking statements made by
us.


22


ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





See
Item 7A of Part II of our annual report on Form 10-K for the year ended
December 31, 2009. There have been no material changes since disclosure in
the most recently filed Form 10-K.





ITEM
4T. CONTROLS AND PROCEDURES.





Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures





As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and chief
financial officer of our disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is: (1) accumulated and communicated to our management, including
our chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure; and (2) recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. There was no change to our internal controls or in other factors that
could affect these controls during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.





Changes
in Internal Control Over Financial Reporting





There was
no change to our internal controls or in other factors that could affect these
controls during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


23





PART
II - OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS.





None





ITEM
1A. RISK FACTORS.





There are
no material changes in the risk factors previously disclosed in our annual
report on Form 10-K for the year ended December 31, 2009.





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




None





ITEM
3. DEFAULTS UPON SENIOR SECURITIES.





None





ITEM
4. RESERVED




None





ITEM
5. OTHER INFORMATION.




None




ITEM
6. EXHIBITS.





Exhibit No.
            
            Description31.1
            
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
            
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
            
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2
            
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.


24


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




KIT
      DIGITAL, INC.Dated:  August
      16, 2010
            By:
            /s/ Kaleil Isaza TuzmanKaleil
      Isaza TuzmanChairman
      and Chief Executive Officer
              (principal
      executive officer)





Dated:  August
      16, 2010
            By:
            /s/ Robin SmythRobin
      SmythChief
      Financial Officer
              (principal
      financial and accounting
officer)


25