UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C. 20549




Form
10-Q




(Mark
One)




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


For
the quarterly period ended June 30, 2009





OR




 ̈
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the transition period from __________ to __________





Commission file number
000-25659




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 301, New York, New York
                10010(Address
      of Principal Executive Offices)
                (Zip
      Code)





+1 (212)
661-4111


(Registrant’s
Telephone Number, Including Area Code)




Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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
August 17, 2009, there were 4,819,591 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, 2009 (unaudited) and December 31,
      2008
                  2Consolidated
      Statements of Operations and Comprehensive Income (Loss) - For the three
      and six months ended June 30, 2009 and 2008
    (unaudited)
                  3Consolidated
      Statements of Cash Flows - For the six months ended June 30, 2009 and 2008
      (unaudited)
                  4Notes
      to Consolidated Financial Statements (unaudited)
                  6Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
                  17Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  24Item
      4T.
                  Controls
      and Procedures
                  25PART
      II - OTHER INFORMATIONItem
      1.
                  Legal
      Proceedings
                  26Item
      1A.
                  Risk
      Factors
                  26Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  26Item
      3.
                  Defaults
      Upon Senior Securities
                  26Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  26Item
      5.
                  Other
      Information
                  26Item
      6.
                  Exhibits
                  26SIGNATURES
                  27









PART
I - FINANCIAL INFORMATION




Item
1.  Financial Statements




KIT
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Amounts
in Thousands, Except Share Data)





June 30, 2009
                                                                
                                                                
                                                                December
                                                                  31, 2008 (A)(Unaudited)Assets:Current
      assets:Cash
      and cash equivalents
                                                                
                                                                $
                                                                2,736
                                                                
                                                                
                                                                $
                                                                5,878Investments
                                                                
                                                                
                                                                200
                                                                
                                                                
                                                                
                                                                -Accounts
      receivable, net
                                                                
                                                                
                                                                14,222
                                                                
                                                                
                                                                
                                                                8,331Inventory,
      net
                                                                
                                                                
                                                                1,523
                                                                
                                                                
                                                                
                                                                2,130Other
      current assets
                                                                
                                                                
                                                                2,152
                                                                
                                                                
                                                                
                                                                1,539Total
      current assets
                                                                
                                                                
                                                                20,833
                                                                
                                                                
                                                                
                                                                17,878Property
      and equipment, net
                                                                
                                                                
                                                                4,131
                                                                
                                                                
                                                                
                                                                2,928Deferred
      tax assets
                                                                
                                                                
                                                                74
                                                                
                                                                
                                                                
                                                                64Software,
      net
                                                                
                                                                
                                                                1,910
                                                                
                                                                
                                                                
                                                                2,265Customer
      list, net
                                                                
                                                                
                                                                2,854
                                                                
                                                                
                                                                
                                                                2,988Domain
      names, net
                                                                
                                                                
                                                                14
                                                                
                                                                
                                                                
                                                                19Goodwill
                                                                
                                                                
                                                                16,150
                                                                
                                                                
                                                                
                                                                15,167Total
      assets
                                                                
                                                                $
                                                                45,966
                                                                
                                                                
                                                                $
                                                                41,309Liabilities
      and Stockholders' Equity:Current
      liabilities:Bank
      overdraft
                                                                
                                                                $
                                                                1,108
                                                                
                                                                
                                                                $
                                                                1,456Capital
      lease and other obligations
                                                                
                                                                
                                                                363
                                                                
                                                                
                                                                
                                                                395Secured
      notes payable
                                                                
                                                                
                                                                1,326
                                                                
                                                                
                                                                
                                                                966Senior
      secured notes payable, net of debt discount of $275 and
    $550
                                                                
                                                                
                                                                1,075
                                                                
                                                                
                                                                
                                                                950Notes
      payable, net of debt discount of $238 and $0
                                                                
                                                                
                                                                2,383
                                                                
                                                                
                                                                
                                                                -Accounts
      payable
                                                                
                                                                
                                                                7,831
                                                                
                                                                
                                                                
                                                                5,775Accrued
      expenses
                                                                
                                                                
                                                                5,336
                                                                
                                                                
                                                                
                                                                2,240Income
      tax payable
                                                                
                                                                
                                                                180
                                                                
                                                                
                                                                
                                                                160Acquisition
      liability – Kamera
                                                                
                                                                
                                                                1,500
                                                                
                                                                
                                                                
                                                                3,000Acquisition
      liability – Visual
                                                                
                                                                
                                                                1,075
                                                                
                                                                
                                                                
                                                                2,218Derivative
      liability
                                                                
                                                                
                                                                2,094
                                                                
                                                                
                                                                
                                                                -Other
      current liabilities
                                                                
                                                                
                                                                2,052
                                                                
                                                                
                                                                
                                                                3,818Total
      current liabilities
                                                                
                                                                
                                                                26,323
                                                                
                                                                
                                                                
                                                                20,978Capital
      lease and other obligations, net of current
                                                                
                                                                
                                                                865
                                                                
                                                                
                                                                
                                                                949Secured
      notes payable, net of current
                                                                
                                                                
                                                                206
                                                                
                                                                
                                                                
                                                                236Acquisition
      liability - Visual, net of current
                                                                
                                                                
                                                                538
                                                                
                                                                
                                                                
                                                                1,075Total
      liabilities
                                                                
                                                                
                                                                27,932
                                                                
                                                                
                                                                
                                                                23,238Equity:Stockholders’
      equity:Common
      stock, $0.0001 par value: authorized 30,000,000 shares; issued and
      outstanding 4,811,379 and 4,183,280, respectively
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Additional
      paid-in capital
                                                                
                                                                
                                                                86,148
                                                                
                                                                
                                                                
                                                                101,057Accumulated
      deficit
                                                                
                                                                
                                                                (68,241
                                                                )
                                                                
                                                                
                                                                (82,499
                                                                )Accumulated
      other comprehensive loss
                                                                
                                                                
                                                                127
                                                                
                                                                
                                                                
                                                                (250
                                                                )Total
      stockholders' equity
                                                                
                                                                
                                                                18,034
                                                                
                                                                
                                                                
                                                                18,308Non-controlling
      interest
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (237
                                                                )Total
      equity
                                                                
                                                                
                                                                18,034
                                                                
                                                                
                                                                
                                                                18,071Total
      liabilities and equity
                                                                
                                                                $
                                                                45,966
                                                                
                                                                
                                                                $
                                                                41,309





(A) -
Reference is made to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008, filed with the U.S. Securities and Exchange Commission on
April 15, 2009.




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
                                                                                                            
                                                                                                            
                                                                                                            Six
      months endedJune 30,
                                                                                                            
                                                                                                            
                                                                                                            June 30,2009
                                                                                                            
                                                                                                            
                                                                                                            2008
                                                                                                            
                                                                                                            
                                                                                                            2009
                                                                                                            
                                                                                                            
                                                                                                            2008Revenue
                                                                                                            
                                                                                                            $
                                                                                                            10,494
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            5,485
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            20,118
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            8,987Variable
      and direct third party costs:Cost
      of goods and services
                                                                                                            
                                                                                                            
                                                                                                            3,634
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            7,112
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -Hosting,
      delivery and reporting
                                                                                                            
                                                                                                            
                                                                                                            414
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            587
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            696
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,102Content
      costs
                                                                                                            
                                                                                                            
                                                                                                            357
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            635
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            818
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            819Direct
      third party creative production costs
                                                                                                            
                                                                                                            
                                                                                                            1,153
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,220
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,958
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,973Total
      variable and direct third party costs
                                                                                                            
                                                                                                            
                                                                                                            5,558
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            2,442
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            10,584
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            3,894Gross
      profit
                                                                                                            
                                                                                                            
                                                                                                            4,936
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            3,043
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            9,534
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            5,093General
      and administrative expenses:Compensation,
      travel and associated costs (including non-cash stock-based compensation
      of $272, $73, $552 and $4,074, respectively)
                                                                                                            
                                                                                                            
                                                                                                            3,481
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            4,157
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            7,174
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            12,481Legal,
      accounting, audit and other professional service
                                                                                                              fees
                                                                                                            
                                                                                                            
                                                                                                            160
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            269
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            430
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            614Office,
      marketing and other corporate costs
                                                                                                            
                                                                                                            
                                                                                                            896
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            928
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,613
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,766Merger
      and acquisition and investor relations expenses
                                                                                                            
                                                                                                            
                                                                                                            351
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            729
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -Depreciation
      and amortization
                                                                                                            
                                                                                                            
                                                                                                            910
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            354
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,593
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            599Restructuring
      charges
                                                                                                            
                                                                                                            
                                                                                                            195
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            146
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            314
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            2,891Other
      non-recurring charges
                                                                                                            
                                                                                                            
                                                                                                            747
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            510
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            991
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            645Impairment
      of property and equipment
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            228Total
      general and administrative expenses
                                                                                                            
                                                                                                            
                                                                                                            6,740
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            6,364
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            12,844
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            19,224Loss
      from operations
                                                                                                            
                                                                                                            
                                                                                                            (1,804
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (3,321
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (3,310
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (14,131
                                                                                                            )Interest
      income
                                                                                                            
                                                                                                            
                                                                                                            3
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            29
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            4
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            90Interest
      expense
                                                                                                            
                                                                                                            
                                                                                                            (178
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (40
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (317
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (54
                                                                                                            )Amortization
      of deferred financing costs and debt discount
                                                                                                            
                                                                                                            
                                                                                                            (449
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (613
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            -Derivative
      income
                                                                                                            
                                                                                                            
                                                                                                            1,626
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            3,576
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -Other
      income
                                                                                                            
                                                                                                            
                                                                                                            311
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            111
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            340
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            132Net
      loss before income taxes
                                                                                                            
                                                                                                            
                                                                                                            (491
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (3,221
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (320
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (13,963
                                                                                                            )Income
      tax (expense) benefit
                                                                                                            
                                                                                                            
                                                                                                            1
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (2
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (1
                                                                                                            )Net
      loss
                                                                                                            
                                                                                                            
                                                                                                            (490
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (3,221
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (322
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (13,964
                                                                                                            )Plus:
      Net (income) loss attributable to the non-controlling
    interest
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (89
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            7Net
      loss available to common shareholders
                                                                                                            
                                                                                                            $
                                                                                                            (490
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (3,310
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (322
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (13,957
                                                                                                            )Basic
      and diluted net loss per common share
                                                                                                            
                                                                                                            $
                                                                                                            (0.11
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (1.40
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (0.07
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (8.03
                                                                                                            )Weighted
      average common shares outstanding
                                                                                                            
                                                                                                            
                                                                                                            4,322,798
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            2,365,743
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            4,535,629
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,739,101Comprehensive
      income (loss):Net
      loss
                                                                                                            
                                                                                                            $
                                                                                                            (490
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (3,310
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (322
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (13,957
                                                                                                            )Foreign
      currency translation
                                                                                                            
                                                                                                            
                                                                                                            414
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (85
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            377
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (21
                                                                                                            )Comprehensive
      income (loss)
                                                                                                            
                                                                                                            $
                                                                                                            (76
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (3,395
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            55
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            (13,978
                                                                                                            )




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


3




KIT
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amounts
in Thousands)


(Unaudited)





Six
      months endedJune 30,2009
                                            
                                            
                                            2008Operating
      Activities:Net
      loss
                                            
                                            $
                                            (322
                                            )
                                            
                                            $
                                            (13,957
                                            )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Provision
      for doubtful accounts
                                            
                                            
                                            205
                                            
                                            
                                            
                                            94Depreciation
                                            
                                            
                                            785
                                            
                                            
                                            
                                            230Amortization
      of intangible assets
                                            
                                            
                                            808
                                            
                                            
                                            
                                            369Amortization
      of deferred financing costs
                                            
                                            
                                            54
                                            
                                            
                                            
                                            -Amortization
      of debt discount
                                            
                                            
                                            560
                                            
                                            
                                            
                                            -Derivative
      income
                                            
                                            
                                            (3,576
                                            )
                                            
                                            
                                            -Loss
      on impairment of property and equipment
                                            
                                            
                                            -
                                            
                                            
                                            
                                            228Loss
      on impairment of goodwill
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,038Non-cash
      stock based compensation
                                            
                                            
                                            631
                                            
                                            
                                            
                                            4,074Non-cash
      stock for services
                                            
                                            
                                            41
                                            
                                            
                                            
                                            -Gain
      on bargain purchase
                                            
                                            
                                            (26
                                            )
                                            
                                            
                                            -Non-controlling
      interest
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (7
                                            )Changes
      in assets and liabilities:Accounts
      receivable
                                            
                                            
                                            (5,795
                                            )
                                            
                                            
                                            (1,216
                                            )Inventories
                                            
                                            
                                            607
                                            
                                            
                                            
                                            -Other
      assets
                                            
                                            
                                            (576
                                            )
                                            
                                            
                                            220Accounts
      payable
                                            
                                            
                                            1,249
                                            
                                            
                                            
                                            (590
                                            )Accrued
      expenses
                                            
                                            
                                            3,094
                                            
                                            
                                            
                                            1,050Income
      tax payable
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (23
                                            )Other
      liabilities
                                            
                                            
                                            (1,607
                                            )
                                            
                                            
                                            229Total
      adjustments
                                            
                                            
                                            (3,546
                                            )
                                            
                                            
                                            5,696Net
      cash used by operating activities - forward
                                            
                                            
                                            (3,868
                                            )
                                            
                                            
                                            (8,261
                                            )Investing
      Activities:Release
      of restricted cash
                                            
                                            
                                            -
                                            
                                            
                                            
                                            100Cash
      paid into investments
                                            
                                            
                                            (200
                                            )
                                            
                                            
                                            -Cash
      received in acquisition of Narrowstep
                                            
                                            
                                            279
                                            
                                            
                                            
                                            -Cash
      paid for completion of acquisition of Sputnik
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (4,563
                                            )Cash
      paid in acquisition of Kamera
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (4,500
                                            )Cash
      received in acquisition of Kamera
                                            
                                            
                                            -
                                            
                                            
                                            
                                            271Cash
      paid in acquisition of Visual
                                            
                                            
                                            (180
                                            )
                                            
                                            
                                            -Proceeds
      from sale of equipment
                                            
                                            
                                            -
                                            
                                            
                                            
                                            33Purchase
      of equipment
                                            
                                            
                                            (1,566
                                            )
                                            
                                            
                                            (582
                                            )Net
      cash used by investing activities - forward
                                            
                                            $
                                            (1,667
                                            )
                                            
                                            $
                                            (9,241
                                            )


4




KIT
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)


(Amounts
in Thousands)


(Unaudited)





Six
      months endedJune 30,2009
                                                
                                                
                                                2008Net
      cash used by operating activities - forwarded
                                                
                                                $
                                                (3,868
                                                )
                                                
                                                $
                                                (8,261
                                                )Net
      cash used by investing activities - forward
                                                
                                                
                                                (1,667
                                                )
                                                
                                                
                                                (9,241
                                                )Financing
      Activities:Proceeds
      from issuance of notes payable
                                                
                                                
                                                2,600
                                                
                                                
                                                
                                                -Proceeds
      from private placement, net
                                                
                                                
                                                -
                                                
                                                
                                                
                                                14,710Proceeds
      from exercise of stock options
                                                
                                                
                                                27
                                                
                                                
                                                
                                                6Bank
      overdraft
                                                
                                                
                                                (348
                                                )
                                                
                                                
                                                51Proceeds
      from issuance of secured notes
                                                
                                                
                                                352
                                                
                                                
                                                
                                                -Payments
      of secured notes
                                                
                                                
                                                (43
                                                )
                                                
                                                
                                                -Payments
      of senior secured note
                                                
                                                
                                                (150
                                                )
                                                
                                                
                                                -Payment
      on capital leases
                                                
                                                
                                                (210
                                                )
                                                
                                                
                                                (60
                                                )Net
      cash provided by financing activities
                                                
                                                
                                                2,228
                                                
                                                
                                                
                                                14,707Effect
      of exchange rate changes on cash and cash equivalents
                                                
                                                
                                                165
                                                
                                                
                                                
                                                (86
                                                )Net
      decrease in cash and cash equivalents
                                                
                                                
                                                (3,142
                                                )
                                                
                                                
                                                (2,881
                                                )Cash
      and cash equivalents - beginning of period
                                                
                                                
                                                5,878
                                                
                                                
                                                
                                                10,189Cash
      and cash equivalents - end of period
                                                
                                                $
                                                2,736
                                                
                                                
                                                $
                                                7,308Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Income
      taxes
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                -Interest
                                                
                                                $
                                                178
                                                
                                                
                                                $
                                                53





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


5




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited)





(1)
Basis 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
business is divided into two segments: Digital Media Solutions and Professional
Services (formerly “Agency Services”). Digital Media 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. Professional Services include technical
integration services, interface design, branding, strategic planning, creative
production, online marketing, media planning and analytics.





On March
6, 2009, we filed a certificate of amendment of our certificate of incorporation
to (i) effect a 1-for-35 reverse stock split of our common stock; (ii) decrease
the total number of shares of common stock authorized to be issued from
500,000,000 shares to 30,000,000 shares; and (iii) eliminate the authorization
of a class of preferred stock.  The changes made by the certificate of
amendment were effective on March 9, 2009, and per share amounts in the
accompanying financial statements have been adjusted for the reverse stock
split.  On August 13, 2009, our common stock began trading on the
NASDAQ Global Market exchange under the ticker symbol “KITD.” Previously, our
ticker symbol was “KDGL”, as quoted on the OTC Bulletin Board.





The
accompanying unaudited consolidated financial statements of KIT digital, Inc.
and subsidiaries have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions to
Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by general accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary in order to make the interim
financial statements not misleading have been included. The consolidated results
of operations for the three and six months ended June 30, 2009 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2009. These interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and footnotes
thereto of the Company and management’s discussion and analysis of financial
condition and results of operations included in the our annual report on Form
10-K for the year ended December 31, 2008.





(2)
Summary of Significant Accounting Policies





Principles of
Consolidation - Our consolidated financial statements include the
accounts of KIT digital, Inc., and all its wholly-owned subsidiaries. Included
in the consolidation with wholly-owned subsidiary Kamera Content AB (“Kamera”)
are Kamera’s 95%-owned subsidiary Kamera (S) PTE Ltd and its 55%-owned
subsidiary Swegypt Company for Telecommunications (S.A.E).





Management
Estimates - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Certain amounts included in the financial statements are
estimated based on currently available information and management's judgment as
to the outcome of future conditions and circumstances. Changes in the status of
certain facts or circumstances could result in material changes to the estimates
used in the preparation of financial statements and actual results could differ
from the estimates and assumptions.


6




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited)





Foreign Currency
Translation - Assets and liabilities of KIT digital’s foreign
subsidiaries are translated at current exchange rates and related revenues and
expenses are translated at average exchange rates in effect during the periods.
Resulting translation adjustments are recorded as a component of accumulated
other comprehensive income (loss) in stockholders' equity.





Fair Value of
Financial Instruments - On January 1, 2008, we adopted Statement of
Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” SFAS
157 defines fair value, establishes a framework for measuring fair value in GAAP
and expands disclosure about fair value measurements. SFAS 157 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. SFAS 157 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). No Level 2 or Level 3
inputs were used to record assets or liabilities at fair value.




The
following table presents our assets and liabilities that are measured at fair
value on a recurring basis and are categorized using the fair value hierarchy.
See Note 6 for fair value hierarchy on the Derivative Liabilities.




Fair Value Measurements at Reporting Date
      UsingQuoted
      Prices inActive
      Markets for
                                                        
                                                        
                                                        Significant
      Other
                                                        
                                                        
                                                        Significant
      OtherIdentical
      Assets
                                                        
                                                        
                                                        Observable
      Inputs
                                                        
                                                        
                                                        Unobservable
      InputsDescription
                                                        
                                                        June 30, 2009
                                                        
                                                        (Level 1)
                                                        
                                                        
                                                        (Level 2)
                                                        
                                                        
                                                        (Level 2)Investments
                                                        
                                                        $
                                                        200
                                                        
                                                        $
                                                        200
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -




Risk
Concentrations - Financial instruments which potentially subject us to
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable. From time to time, we obtain collateral for our
cash and cash equivalent accounts where we deem prudent and is feasible. We
believe no significant concentration of credit risk exists with respect to these
investments. The amount of cash beyond insured amounts as of June 30, 2009 was
$2,720.




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. The allowance for doubtful accounts as of June 30, 2009 was $1,267. As
of June 30, 2009, two customers accounted for approximately 25.8% 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.





Impairment of
Long-Lived Assets - We review our long-lived assets and identifiable
intangibles for impairment at least annually and whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When such factors and circumstances exist, we compare the projected
undiscounted future cash flows associated with the future use and disposal of
the related asset or group of assets to their respective carrying amounts.
Impairment, if any, is measured as the excess of the carrying amount over the
fair value based on market value (when available) or discounted expected cash
flows of those assets, and is recorded in the period in which the determination
is made.





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, 2009, we had $2,001 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 written notice.


7




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited )




Investments
– Investments include an investment in a limited partnership fund which
invests, on a hedged basis, primarily in the U.S. equity markets. This
investment was made in March 2009 and is recorded at a fair value of
$200.





Property and
Equipment - Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided for using the straight-line and declining
balance methods of accounting over the estimated useful lives of the assets
which range from one year to twenty years.





Routine
maintenance and repair costs are charged to expense as incurred and renewals and
improvements that extend the useful life of the assets are capitalized. Upon
sale or retirement, the cost and related accumulated depreciation are eliminated
from the respective accounts and any resulting gain or loss is reported in the
statement of operations.





Income Taxes
- Pursuant to SFAS No. 109, "Accounting for Income Taxes," income tax
expense (or benefit) for the year is the sum of deferred tax expense (or
benefit) and income taxes currently payable (or refundable). Deferred tax
expense (or benefit) is the change during the year in a company's deferred tax
liabilities and assets. Deferred tax liabilities and assets are determined based
on differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.





Intangible Assets
- Amortizable intangible assets of the Company are recorded at cost less
accumulated amortization. Amortization is computed using the straight-line
method over the estimated useful lives of the assets, with periods of up to five
years. Goodwill is reviewed for impairment at least annually and all other
intangible assets are reviewed for impairment if events or circumstances
indicate that carrying amounts may not be recoverable (See Note 6).





Inventory
- Inventories are 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. Our
estimates of future product demand may not be accurate and we may understate or
overstate the provision required for excess and obsolete inventory. Accordingly,
any significant unanticipated changes in demand could have a significant impact
on the value of our inventory and results of operations.  As of June
30, 2009 and December 31, 2008, our reserves for excess and obsolete inventory
were $135 and $157, respectively.




Derivative
Financial Instruments - Upon the adoption of EITF 07-05 “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock”
on January 1, 2009, certain of our financial instruments with “down-round”
protection features are no longer considered indexed to our Company’s stock for
purposes of determining whether they meet the first part of the scope exception
in paragraph 11(a) of Statement 133. As such, these instruments no longer meet
the conditions to obtain equity classification and are required to be carried as
derivative liabilities, at fair value with changes in fair value reflected in
our income (loss).  The fair value of the investor warrants issued in
the May 2008 private placement was $5,670 and $2,094 on January 1, 2009 and June
30, 2009, respectively.


8




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited)




Research and
Development - Costs incurred in research and development are expensed as
incurred. Software development costs are required to be capitalized when a
product’s technological feasibility has been established through the date the
product is available for general release to customers. We do not capitalize any
software development costs, as technological feasibility is generally not
established until a working model is completed, at which time substantially all
development is complete.





Revenue
Recognition - We recognize revenue in accordance with the following
authoritative literature: AICPA Statement of Position ("SOP") No. 97-2,
"Software Revenue Recognition" and Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition in Financial
Statements", which requires that four basic criteria be met before revenue can
be recognized: (i) persuasive evidence that an arrangement exists; (ii) the
price is fixed or determinable; (iii) collectability is reasonably assured; and
(iv) product delivery has occurred or services have been rendered. We recognize
revenue, net of sales taxes assessed by any governmental
authority.  Revenues are derived principally from the delivery of
digital media solutions and professional services. Our revenues include fees
charged for software-as-a-service (“SaaS”), enterprise licenses, software usage,
storage, software set-up/support services, hardware components, content
delivery, content syndication fees, advertising-based monetization and
professional services.  Revenue is recognized when the product and/or
service has been provided to the customer. We may enter into agreements whereby
we guarantee a minimum service level, or a minimum number of impressions,
click-throughs or other criteria on our software platform’s points of
distribution for a specified period. To the extent these guarantees are not met,
we may defer recognition of the corresponding revenue until guaranteed delivery
levels are achieved.





Stock-Based
Compensation - On January 1, 2006, the Company adopted SFAS No. 123R,
“Share-Based Payment.” Among other items, SFAS 123R requires companies to record
compensation expense for share-based awards issued to employees and directors in
exchange for services provided. The amount of the compensation expense is based
on the estimated fair value of the awards on their grant dates and is recognized
over the required service periods. Our share-based awards include stock options,
warrants and restricted stock awards.





We
adopted SFAS 123R using the modified prospective transition method, which
requires the application of the accounting standard to all share-based awards
issued on or after January 1, 2006 and any outstanding share-based awards that
were issued but not vested as of January 1, 2006. For the six months ended June
30, 2009 and 2008, we recognized $552 and $4,074, respectively, of stock-based
compensation expense in the consolidated statements of operations.





The
estimated fair value underlying our calculation of compensation expense for
stock options is based on the Black-Scholes-Merton pricing model. SFAS 123R
requires forfeitures of share-based awards to be estimated at the time of grant
and revised, if necessary, in subsequent periods if estimates change based on
the actual amount of forfeitures experienced.





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. Under the 2008 Incentive
Stock Plan, options may be granted which are intended to qualify as Incentive
Stock Options under Section 422 of the Internal Revenue Code of 1986 or which
are not intended to qualify as Incentive Stock Options thereunder. In addition,
direct grants of stock or restricted stock may be awarded.





Under the
2004 Stock Option Plan, we did not grant options to purchase shares of our
common stock during the six months ended June 30, 2009. During the six months
ended June 30, 2009, a total of 9,166 stock options vested, no stock options
were cancelled or expired, no stock options were forfeited, and 36,111 stock
options were unvested as of June 30, 2009. A total of 81,429 stock options were
outstanding under this plan on June 30, 2009.





Under the
2008 Incentive Stock Plan, we granted options with exercise prices of $7.00 to
purchase 87,119 shares of our common stock during the six months ended June
30, 2009. During the six months ended June 30, 2009, a total of 10,014 stock
options vested, 9565 stock options were exercised, and 56,484 stock options were
cancelled, expired or forfeited with 259,887 stock options unvested as of June
30, 2009. A total of 447,553 stock options were outstanding under this plan on
June 30, 2009.


9




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited)





Also
included in non-cash compensation are warrants to purchase 34,286 shares of
common stock with an exercise price of $4.655 issued to Robin Smyth, our former
Chief Financial Officer on March 30, 2008, that vest over 36 months from the
issue date. During the six months ended June 30, 2009, a total of 5,714 warrants
vested with 20,000 warrants unvested as of June 30, 2009.





Net Income (Loss)
Per Share - We compute net income (loss) per common share under
the provisions of SFAS No. 128, "Earnings per Share," which establishes
standards for computing and presenting earnings per share. SFAS No. 128 requires
us to report both basic net (loss) income per share, which is based on the
weighted average number of common shares outstanding during the period, and
diluted net (loss) income per share, which is based on the weighted average
number of common shares outstanding plus all potentially dilutive common shares
outstanding. All equivalent shares underlying options and warrants were excluded
from the calculation of diluted loss per share because we had net losses for all
periods presented and therefore equivalent shares would have an anti-dilutive
effect.





Reclassification
- Certain prior period amounts have been reclassified to conform to the
current presentation.





Recent Accounting
Pronouncements – In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, Interim Financial Reporting, to require those
disclosures in summarized financial information at interim reporting periods.
This FSP shall be effective for interim reporting periods ending after June 15,
2009. The
adoption of FSP FAS 107-1 did not have a material impact on the Company’s
consolidated financial statements.





In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments. This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. The FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. The FSP shall be effective for interim and annual reporting periods
ending after June 15, 2009. As of
June 30, 2009, the Company did not have any debt securities that had
other-than-temporary impairments that contained both a credit and non-credit
component. Accordingly, adoption of FSP FAS 115-2 and FSP FAS 124-2 did not have
an impact on the Company’s consolidated financial
statements.




In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”).
SFAS No. 165 establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS No. 165 is effective for interim
or annual financial reporting periods ending after June 15, 2009. The
Company adopted SFAS No. 165 as of June 30, 2009, which was the required
effective date. The Company evaluated its June 30, 2009 consolidated
financial statements for subsequent events through August 10, 2009, the
date the financial statements were issued. The Company is not aware of any
subsequent events that would require recognition or disclosure in the financial
statements.




In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162” (“SFAS 168”), which is effective for interim and annual
periods ending after September 15, 2009. SFAS 168 makes the FASB Accounting
Standards Codification (“Codification”) the single authoritative source for U.S.
GAAP. The Codification replaces all previous U.S. GAAP accounting standards. The
adoption of SFAS 168 will only impact references for accounting
guidance.




10




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited)





In April
2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies, to
address some of the application issues under SFAS 141(R). The FSP deals with the
initial recognition and measurement of an asset acquired or a liability assumed
in a business combination that arises from a contingency provided the asset or
liability’s fair value on the date of acquisition can be determined. When the
fair value can’t be determined, the FSP requires using the guidance under SFAS
No. 5, Accounting for Contingencies, and FASB Interpretation (FIN) No. 14,
Reasonable Estimation of the Amount of a Loss. This FSP was effective for assets
or liabilities arising from contingencies in business combinations for which the
acquisition date is on or after January 1, 2009. SFAS 141(R) may have a material
impact on our consolidated financial statements if or when it enters into
another business transaction.




(3)
Notes Payable
 
 On May 1,
2009, we issued a convertible interim promissory note up to a maximum of $5,000
to KIT Media, Ltd. of which we received gross proceeds of $2,250 in the quarter
ended June 30, 2009. Interest is payable monthly in arrears at 8% and matures on
April 30, 2010.  The principal is due at maturity. A debt discount of
$448 was recorded related to this debt and is being amortized thru the
conversion date of August 18, 2009. As of August 18, 2009, we converted these
notes into our common stock as part of the public offering.
 
 On April
8, 2009, we received gross proceeds of $350 related to the issuance of a
convertible note to Granahan McCourt Capital, LLC. The note is interest
free.  The principal is due at maturity. A debt discount of $75 was
recorded related to this debt and was amortized thru June 30, 2009. As of August
18, 2009, we converted these notes into our common stock as part of the public
offering.




(4)
Acquisitions





On March
6, 2009, we acquired the remaining 49% outstanding share capital that we did not
previously own in subsidiary Reality Group Pty. Ltd., in consideration of
issuing the sellers 90,073 shares of our common stock for a total purchase price
of $631.  Reality Group’s activities are part of the Professional
Services segment of our business.





On April
8, 2009, we acquired certain of the operating assets and
assumed specified liabilities of Narrowstep, Inc. (“Narrowstep”) in an
asset purchase agreement, in exchange for 25,000 shares of restricted common
stock valued at $213. The Company has allocated the aggregate cost of the
acquisition to net tangible and identifiable intangible assets based on their
estimated fair values.





The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (April 8, 2009).





Current
      assets
                                            
                                            $
                                            670Property
      and equipment
                                            
                                            
                                            296Intangible
      assets - customer lists
                                            
                                            
                                            313Total
      assets acquired
                                            
                                            
                                            1,279Current
      liabilities
                                            
                                            
                                            1,040Total
      liabilities assumed
                                            
                                            
                                            1,040Net assets acquired
                                            
                                            $
                                            239Gain
      on bargain purchase
                                            
                                            $
                                            26





A gain on
bargain purchase of $26 was recorded to other income in the three months ended
June 30, 2009.


11




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited)





(5)
Acquisition Liabilities





On March
9, 2009, we issued 300,539 shares of our common stock in satisfaction of a
$1,500 acquisition liability incurred in connection with the acquisition of
Kamera Content AB (“Kamera”) in 2008. This reduced the remaining total liability
included in the Balance Sheet in “Acquisition liability - Kamera” to $1,500 as
of June 30, 2009.





On March
31, 2009, we issued 163,044 shares of our common stock to the former
shareholders of Visual Connection a.s. (“Visual”), pursuant to the Visual Share
Purchase Agreement dated October 5, 2008, in satisfaction of a $1,500
acquisition liablility. This reduced the liability included in the Balance Sheet
in “Acquisition liability – Visual” to $1,075 and “Acquisition liability –
Visual, net of current” to $538 as of June 30, 2009.




(6)
Derivative Liabilities





In June
2008, the Emerging Issues Task Force issued EITF Consensus No. 07-05
“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity's Own Stock”.  Under EITF 07-05, 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 in paragraph 11(a) of Statement 133.  The
adoption of this EITF 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 to liabilities.  SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“FAS 133”) requires that the
fair value of these liabilities be re-measured at the end of every reporting
period with the change in value reported in the statement of
operations.  The difference between the amount at which the warrants
were originally recorded in the financials and the fair value of the instruments
on January 1, 2009 was considered a cumulative effect of a change in the
accounting principle, and required an adjustment to the opening balance of
retained earnings in the amount of $14,580.  The common shares indexed
to the derivative financial instruments recorded as liabilities at January 1,
2009 and June 30, 2009 were 2,142,858.





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 small
changes in trading volatility and the trading market price of our common stock,
and BSM does not effectively capture the cash-exercise nature of our warrants
(and lack of liquidity in the underlying instrument). Since derivative financial
instruments are initially and subsequently carried at fair values, our income
(loss) will reflect the variability of the BSM method, the volatility in these
estimates, and any changes made in the assumptions upon which these estimates
are predicated.




The
following tables summarize the components of derivative liabilities as of June
30, 2009 and the re-measurement date, January 1, 2009:


12




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited)




June 30, 2009
                      
                      
                      Re-measurement
                        date
                        January 1, 2009Investor
      warrants issued in May 2008 private placement
                      
                      $
                      (2,094
                      )
                      
                      $
                      (5,670
                      )Significant
      assumptions (or ranges):Trading
      market values  (1)
                      
                      $
                      7.37
                      
                      
                      $
                      5.25Term
      (years)
                      
                      
                      3.86
                      
                      
                      
                      4.35Volatility   (1)
                      
                      
                      43.80
                      %
                      
                      
                      101.98
                      %Risk-free
      rate   (2)
                      
                      
                      2.09
                      %
                      
                      
                      1.55
                      %Effective
      Exercise price
                      
                      $
                      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 (loss) associated with changes in the fair values of our
derivative financial instruments for the three and six months ended June 30,
2009 was $1,626 and 3,576, respectively.




(7)
Stock Issuances
 
 During
the quarter ended March 31, 2009, we issued 562,476 shares of common stock. Of
this amount we issued 8,820 shares from the exercise of stock options and
received $25 in gross proceeds.
 
 During
the quarter ended June 30, 2009, we issued 65,623 shares of common stock. Of
this amount, we issued 748 shares from the exercise of stock options and
received $2 in gross proceeds.


13




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited)





(8)
Restructuring Charges





The
Company recorded restructuring charges of $314 in the six months ended June 30,
2009. This amount is comprised of employee termination costs related to the
reorganization of the Company of $143 and facility closing costs of $171 related
to the closing of one of the Melbourne, Australia offices and one of the Dubai,
UAE offices.





The
Company recorded restructuring charges of $2,891 in the six months ended June
30, 2008. This amount is comprised of employee termination costs related to the
reorganization of the Company of $2,653, contract settlement and facility
closing costs of $238 related to the closing of the Clifton Park, New York
office and the closing of one of the Melbourne, Australia offices, and vendor
settlements related to the reorganization. Included in the employee termination
costs are $2,397 related to the settlement of separation agreements as described
below. On March 26, 2008 and March 30, 2008, the Company reached negotiated
settlements with Robert Petty and Robin Smyth, respectively, restructuring their
respective employment agreements, each of which involved one-time cash severance
payments. In exchange for entering into new, “at will” employment agreements,
Messrs. Petty and Smyth will receive upfront cash settlements of $675 and $275,
respectively, as well as fully-vested warrants to purchase an aggregate of 7
million and 1.65 million shares, respectively, of the Company’s common stock, at
a strike price equal to the 3-day weighted average of closing price of the
Company’s common stock prior to the effective date. These warrants have been
valued under the Black-Scholes-Merton method at $1,038. These warrants will
become exercisable in 1/12 increments on a monthly basis starting six months
from the effective date. Also, Mr. Smyth is to receive additional
lump-sum payments of $200, less applicable tax withholding and deductions. As of
June 30, 2009, Mr. Smyth received $75 of these payments. Mr. Smyth’s
restructured employment agreement involves certain warrant-based incentives
which can be earned over a period of 3 years based on ongoing service to the
Company. As part of their respective settlements, Messrs. Petty and Smyth agreed
to vote their preferred shares according to the Company’s designation. Included
in the $2,397, are cash payments of $1,150, $1,088 related to the valuation of
the warrants and $209 in legal fees paid on behalf of Mr. Petty which is part of
Mr. Petty’s separation agreement.





(9)
Other Non-Recurring Charges





The
Company has recorded other non-recurring charges of $991 in the six months ended
June 30, 2009 related to the redundancy in staff and consultants during
reorganization , corporate rebranding related to the reorganization, integration
of acquired companies and assets, and legal and consulting fees related to
financing.





The
Company has recorded other non-recurring charges of $645 in the six months ended
June 30, 2008 related to the redundancy in staff and consultants for the
transition of technology infrastructure during reorganization due to the
centralizing of resources in Toronto, recruiting costs for the centralizing of
resources in Toronto, legal fees for the acquisitions of Kamera and Sputnik, and
corporate rebranding related to the reorganization.


14




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited)







(10)
Impairment of Property and Equipment





In March
2008, we decided to downsize our office in London and move to another location
to reduce costs. This included removing and abandoning the leasehold
improvements and furniture and fixtures in the former London office. Due to this
office relocation, we recorded an impairment charge for certain property and
equipment, which totaled $229, during the six months ended June 30, 2008. This
amount was recorded as a loss on impairment of property and equipment in the
Statement of Operations.





(11)
Segment Reporting





We derive
our revenue from two operating segments. These operating segments are presented
on a worldwide basis and include: Digital Media Solutions and Professional
Services.





Digital
Media Solutions includes the comprehensive delivery of IP video software
solutions, including SaaS fees, enterprise license fees, software usage fees,
storage, set-up/support services, hardware components, content delivery, content
syndication, and advertising-based monetization. Our IP digital asset management
platform, branded as “VX”, allows for management of IP video assets for
consumption on the computer browser, mobile devices and the IPTV set-top box
enabled television set. Our software is generally hosted in our facilities, and
delivered as a service, but we occasionally sell upfront enterprise licenses
which allow for hosting and deployment of our VX suite at the client
site.





Professional
Services is designed to support and complement the Digital Media Solutions
segment of our business, and includes technical integration services, interface
design, branding, strategic planning, creative production, sponsorships, online
marketing, media planning, data management and analytics.





The
emphasis of our business is the Digital Media Solutions segment. As our
operations continue to evolve, the Company will continue to regularly review the
business to determine if there is a need to make changes to these reported
segments.





In
accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information,” the following table provides revenue and segment income
(loss) from operations for each of the segments. Segment income (loss) from
operations, as shown below, is the performance measure used by management to
assess segment performance and excludes the effects of: stock-based
compensation, amortization of intangible assets and corporate expenses.
Corporate expenses consist of those costs not directly attributable to a
segment, and include: salaries and benefits for our corporate executives,
corporate governance costs, fees for professional service providers including
audit, legal, tax, insurance, and other corporate expenses.


15


KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited)







Three
      months ended
                                                            
                                                            Six
      months endedJune 30,
                                                            
                                                            June 30,2009
                                                            
                                                            
                                                            2008
                                                            
                                                            2009
                                                            
                                                            
                                                            2008Revenue:Digital
      Media
                                                            
                                                            $
                                                            8.946
                                                            
                                                            
                                                            $
                                                            3,480
                                                            
                                                            
                                                            $
                                                            17,774
                                                            
                                                            
                                                            $
                                                            5,853Professional
      Services
                                                            
                                                            
                                                            1,548
                                                            
                                                            
                                                            
                                                            2,005
                                                            
                                                            
                                                            
                                                            2,344
                                                            
                                                            
                                                            
                                                            3,134Total
      revenue
                                                            
                                                            $
                                                            10,494
                                                            
                                                            
                                                            $
                                                            5,485
                                                            
                                                            
                                                            $
                                                            20,118
                                                            
                                                            
                                                            $
                                                            8,987Operating
      (loss) income:Digital
      Media
                                                            
                                                            $
                                                            582
                                                            
                                                            
                                                            $
                                                            (2,227
                                                            )
                                                            
                                                            $
                                                            1,154
                                                            
                                                            
                                                            $
                                                            (5,606
                                                            )Professional
      Services
                                                            
                                                            
                                                            64
                                                            
                                                            
                                                            
                                                            176
                                                            
                                                            
                                                            
                                                            (53
                                                            )
                                                            
                                                            
                                                            189Corporate
                                                            
                                                            
                                                            (2,450
                                                            )
                                                            
                                                            
                                                            (1,270
                                                            )
                                                            
                                                            
                                                            (4,411
                                                            )
                                                            
                                                            
                                                            (8,714
                                                            )Total
      operating (loss) income
                                                            
                                                            $
                                                            (1,804
                                                            )
                                                            
                                                            $
                                                            (3,321
                                                            )
                                                            
                                                            $
                                                            (3,310
                                                            )
                                                            
                                                            $
                                                            (14,131
                                                            )June
      30,
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            December
      31,2009
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            2008Assets:Digital
      Media
                                                            
                                                            $
                                                            22,495
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            15,901Professional
      Services
                                                            
                                                            
                                                            1,517
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            836Corporate
                                                            
                                                            
                                                            21,954
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            24,572Total
      assets
                                                            
                                                            $
                                                            45,966
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            41,309





(12)
Subsequent Events





On August
18, 2009, we completed the sale of 3,960,000 shares of our common stock at a
price of $7.00 per share in a public offering, 3,410,000 shares were sold by us
and 550,000 shares were sold by certain existing, unaffiliated stockholders. The
gross proceeds of the common stock sold by us was $23,870. We did not receive
any proceeds from the sale of shares by the selling stockholders. In connection
with the public offering, we received net cash proceeds of approximately $18,200
after underwriting discounts, commissions and fees, legal fees and expenses,
other fees and the conversion of interim promissory notes of $3,350 payable to
KIT Media and $350 payable to Granahan McCourt Capital, LLC.





KIT
Media, Ltd., our largest single stockholder, controlled by Kaleil Isaza Tuzman,
our Chairman and Chief Executive Officer, has purchased $4,004 of common stock
(572,000 shares) in this August 18, 2009 offering, in part through the
conversion into common stock of an interim note payable by us in the amount of
$3,350. All shares sold to KIT Media were at the same price and on the same
terms as the other investors in this offering. Gavin Campion, our President, is
also an investor in KIT Media, as are several members of our board of
directors.




On August
18, 2009, we repaid the entire principal balance of the non-convertible note of
$1,275 owed to Genesis Merchant Partners, LP.


16


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 Dubai, Melbourne (Australia), Prague, Toronto, Stockholm, New York,
London, Cairo, Singapore, Buenos Aires and Bogotá. 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, 2009 and 2008. 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, 2009 Compared to Three Months Ended
June 30, 2008





Revenue. Consolidated revenue
increased by $5,009 from $5,485 for the three months ended June 30, 2008 to
$10,494 for the three months ended June 30, 2009, an increase of
91%.





Digital
Media segment revenue increased by $5,466 from $3,480 for the three months ended
June 30, 2008 to $8,946 for the three months ended June 30, 2009, an increase of
157%. The increase was principally due to an increase in customers,
increased spending by existing customers, and revenue from the acquired
companies not included in prior period results.





Professional
Services segment revenue decreased by $457 from $2,005 for the three months
ended June 30, 2008 to $1,548 for the three months ended June 30, 2009, a
decrease of 23%. The decrease was primarily from the decreases in spending
by existing clients.


17




Variable
and Direct Third Party Costs





Cost of Goods and Services.
Cost of goods and services of $3,634 represents the costs for the supply of IPTV
solutions, services and components; no expenses were classified as such prior to
the acquisition of Visual in October 2008.





Hosting, Delivery and
Reporting. These costs decreased by $173 from $587 for the three months
ended June 30, 2008 to $414 for the three months ended June 30, 2009, a decrease
of 29%. These costs decreased primarily due to the establishment of an internal
datacenter which reduced our reliance on third party suppliers.





Content Costs. Content costs
decreased by $278 from $635 for the three months ended June 30, 2008 to $357 for
the three months ended June 30, 2009, a decrease of 44%. 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 $67 from $1,220 for the three months ended June 30, 2008 to $1,153 for the
three months ended June 30, 2009, a decrease of 5% attributable to lower costs
in the Professional Services segment.





General
and Administrative Expenses





Compensation, Travel and Associated
Costs (Exclusive of Non-Cash Stock-Based Compensation). These costs
decreased by $875 from $4,084 for the three months ended June 30, 2008 to $3,209
for the three months ended June 30, 2009, a decrease of 21%. The decrease was
primarily due to the broad cost cutting measures begun in the first quarter of
2008 which included a reduction in headcount and salary levels offset in part by
increases due to our business acquisitions.





Non-Cash Stock-Based
Compensation. Non-cash stock-based compensation expense increased 273% by
$199, from $73 for the three months ended June 30, 2008 to $272 for the three
months ended June 30, 2009.





Legal, Accounting, Audit and Other
Professional Services Fees. These expenses decreased by $109 from $269
for the three months ended June 30, 2008 to $160 for the three months ended June
30, 2009, a decrease of 41%, primarily due to lower legal fees.





Office, Marketing and Other Corporate
Costs. These expenses decreased by $32 from $928 for the three months
ended June 30, 2008 to $896 for the three months ended June 30, 2009, a decrease
of 3%. The decrease was primarily due to the broad cost cutting measures begun
in the first quarter of 2008 and includes a reduction in marketing related
expenses.




Merger and Acquisition and Investor
Relation Expenses. Merger and acquisition and certain investor relation
expenses were $351 for the three months ended June 30, 2009. There were no such
expenses in the three months ended June 30, 2008.





Depreciation and Amortization.
Depreciation and amortization expense increased 157% by $556 from $354 for the
three months ended June 30, 2008 to $910 for the three months ended June 30,
2009. These costs have increased primarily due to the increases related to the
acquisitions of Kamera in May 2008 and Visual in October 2008.




Restructuring Charges.
Restructuring charges increased 34% by $49, from $146 for the three months ended
June 30, 2008 to $195 for the three months ended June 30, 2009.





Other Non-Recurring Charges.
Other non-recurring charges increased 46% by $237 from $510 for the three months
ended June 30, 2008 to $747 for the three months ended June 30, 2009. These
charges have increased primarily due to the migration of certain technical and
operational functions from Toronto and Stockholm offices to our Prague
office.


18





Interest Income. Interest
income decreased by $26 from $29 for the three months ended June 30, 2008 to $3
for the three months ended June 30, 2009, a decrease of 90%. This decrease was
primarily due to a decrease in our cash and cash equivalents related to the
timing of the proceeds from our May 2008 private placement.





Interest Expense. Interest
expense increased by $138 from $40 for the three months ended June 30, 2008 to
$178 for the three months ended June 30, 2009. This increase was primarily due
to the issuance of a $1,500 senior secured note in November 2008 and the
addition of debt and capital lease obligations acquired in the acquisition of
Visual in October 2008




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
and interim promissory notes payable of $2,250 to KIT Media Ltd. and $350 to
Granahan McCourt Capital, LLC during the quarter ended June 30,
2009.





Derivative income. Derivative
income was $1,626 for the three months ended June 30, 2009. Under EITF 07-05 and
FAS 133, the company recorded a reduction in the fair value of warrants
containing reset provisions in the three months ended June 30,
2009.





Other Income/(Expense). Other
income increased by $200. Other income was $111 for the three months ended June
30, 2008 as compared to other income of $311 for the three months
ended June 30, 2009. This increase was primarily due to the gain on
settlement of a non-operating liability and a gain on the bargain purchase of
Narrowstep.




Net Loss Available to Common
Shareholders. As a result of the factors described above, we reported net
loss available to common shareholders of $490 for the three months ended June
30, 2009 compared to net loss of $3,310 for the three months ended June 30,
2008, an improvement of $2,820, or 85%.





Results
of Operations - Six Months Ended June 30, 2009 Compared to Six Months Ended June
30, 2008





Revenue. Consolidated revenue
increased by $11,131 from $8,987 for the six months ended June 30, 2008 to
$20,118 for the six months ended June 30, 2009, an increase of
124%.





Digital
Media segment revenue increased by $11,921 from $5,853 for the six months ended
June 30, 2008 to $17,774 for the six months ended June 30, 2009, an increase of
204%. The increase was principally due to an increase in customers,
increased spending by existing customers, and revenue from the acquired
companies not included in prior period results.





Professional
Services segment revenue decreased by $790 from $3,134 for the six months ended
June 30, 2008 to $2,344 for the six months ended June 30, 2009, a decrease of
25%. The decrease was primarily from the decreases in spending
by existing clients.


19





Variable
and Direct Third Party Costs





Cost of Goods and Services.
Cost of goods and services of $7,112 represents the costs for the supply of IPTV
solutions, services and components; no expenses were classified as such prior to
the acquisition of Visual in October 2008.





Hosting, Delivery and
Reporting. These costs decreased by $406 from $1,102 for the six months
ended June 30, 2008 to $696 for the six months ended June 30, 2009, a decrease
of 37%. These costs decreased primarily due to the establishment of an internal
datacenter which reduced our reliance on third party suppliers.





Content Costs. Content costs
were $819 for the six months ended June 30, 2008 and $818 for the six months
ended June 30, 2009. These costs are the same primarily due to the increase
related to the inclusion of costs from Kamera (acquired May 2008) not
included in prior period results offset by the decrease which 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 $15 from $1,973 for the six months ended June 30, 2008 to $1,958 for the six
months ended June 30, 2009, a decrease of 1% attributable to lower costs in the
Professional Services segment.





General
and Administrative Expenses





Compensation, Travel and Associated
Costs (Exclusive of Non-Cash Stock-Based Compensation). These costs
decreased by $1,785 from $8,407 for the six months ended June 30, 2008 to $6,622
for the six months ended June 30, 2009, a decrease of 21%. The decrease was
primarily due to the broad cost cutting measures begun in the first quarter of
2008 which included a reduction in headcount and salary levels offset in part by
increases due to our business acquisitions.





Non-Cash Stock-Based
Compensation. Non-cash stock-based compensation expense decreased 86% by
$3,522, from $4,074 for the six months ended June 30, 2008 to $552 for the six
months ended June 30, 2009.





Legal, Accounting, Audit and Other
Professional Services Fees. These expenses decreased by $184 from $614
for the six months ended June 30, 2008 to $430 for the six months ended June 30,
2009, a decrease of 30%, primarily due to lower legal fees.





Office, Marketing and Other Corporate
Costs. These expenses decreased by $153 from $1,766 for the six months
ended June 30, 2008 to $1,613 for the six months ended June 30, 2009, a decrease
of 9%. The decrease was primarily due to the broad cost cutting measures begun
in the first quarter of 2008 and includes a reduction in marketing related
expenses.




Merger and Acquisition and Investor
Relation Expenses. Merger and acquisition and certain investor relation
expenses were $729 for the six months ended June 30, 2009. There were no such
expenses in the six months ended June 30, 2008.





Depreciation and Amortization.
Depreciation and amortization expense increased 166% by $994 from $599 for the
six months ended June 30, 2008 to $1,593 for the six months ended June 30, 2009.
These costs have increased primarily due to the increases related to the
acquisitions of Kamera in May 2008 and Visual in October 2008.




Restructuring Charges.
Restructuring charges decreased 89% by $2,577, from $2,891 for the six months
ended June 30, 2008 to $314 for the six months ended June 30, 2009. The decrease
is primarily due to the termination costs of $2,397 related to the settlement of
separation agreements in 2008.





Other Non-Recurring Charges.
Other non-recurring charges increased 54% by $346 from $645 for the six months
ended June 30, 2008 to $991 for the six months ended June 30, 2009. These
charges have increased primarily due to the migration of certain technical and
operational functions from Toronto and Stockholm offices to our Prague
office.


20


Impairment of Property and
Equipment. Impairment of property and equipment was $228 for the six
months ended June 30, 2008. In 2008, the impairment related to the abandonment
of assets due to the downsizing of our London office.




Interest Income. Interest
income decreased by $86 from $90 for the six months ended June 30, 2008 to $4
for the six months ended June 30, 2009, a decrease of 96%. This decrease was
primarily due to a decrease in our cash and cash equivalents related to the
timing of the proceeds from the May 2008 private placement.





Interest Expense. Interest
expense increased by $263 from $54 for the six months ended June 30, 2008 to
$317 for the six months ended June 30, 2009. This increase was primarily due to
the issuance of a $1,500 senior secured note in November 2008 and the addition
of debt and capital lease obligations acquired in the acquisition of Visual in
October 2008




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
result from the issuance of $1,500 of a senior secured note in November 2008 and
notes payable of $2,250 to KIT Media Ltd. and $350 to Granahan McCourt Capital,
LLC during the quarter ended June 30, 2009.





Derivative income. Derivative
income was $3,576 for the six months ended June 30, 2009. Under EITF 07-05 and
FAS 133, the company recorded a reduction in the fair value of warrants
containing reset provisions in the six months ended June 30, 2009.





Other Income/(Expense). Other
income increased by $208. Other income was $132 for the six months ended June
30, 2008 as compared to other income of $340 for the six months ended June
30, 2009. This increase was primarily due to the gain on settlement of a
non-operating liability and a gain on the bargain purchase of
Narrowstep.




Net Loss Available to Common
Shareholders. As a result of the factors described above, we reported net
loss available to common shareholders of $322 for the six months ended June 30,
2009 compared to net loss of $13,957 for the six months ended June 30, 2008, an
improvement of $13,637, or 98%.





Liquidity
and Capital Resources





As of
June 30, 2009, we had cash and cash equivalents of $2,736 and a working capital
deficit of approximately $5,490, which if reduced for the acquisition
liabilities for Kamera and Visual that can be paid in stock of $2,575 and the
derivative liability which has a non-cash valuation of $2,094, becomes a working
capital deficit of $821. Management anticipates that going-forward, KIT digital
will generate sufficient cash flows from its operating activities to meet its
capital requirements. As of August 18, 2009, we received net proceeds of
approximately $18,200 from a public offering of 3,410,000 shares of common stock
and intend to use these proceeds primarily to finance acquisitions, with a
limited portion allocated to repay certain outstanding debts and for general
corporate purposes.





Net cash
used by operating activities was $3,868 for the six months ended June 30, 2009,
compared to $8,261 for the six months ended June 30, 2008, a decrease of $4,393,
or 53%. The decrease in net cash used in operating activities is primarily
related to an increase in revenues from clients, and the reduction in general
and administrative costs including but not limited to the restructuring of
potential earn-out liabilities from prior acquisitions.





Net cash
used by investing activities was $1,667 for the six months ended June 30, 2009,
compared to $9,241 for the six months ended June 30, 2008, a decrease in net
cash used in investing activities of $7,574. In 2009, this primarily consisted
of cash paid into an investment of $200, cash paid in acquisition of Visual of
$180 and purchase of property and equipment of $1,566, which is mainly a
purchase of software.  In 2008, this primarily consisted of the
release of restricted cash of $100, cash paid for the completion of acquisition
of Sputnik of $4,563, cash paid in acquisition of Kamera less cash received in
acquisition of Kamera of $271, and purchase of property and equipment of
$582.


21





Net cash
provided by financing activities was $2,228 for the six months ended June 30,
2009, compared net cash provided by financing activities of $14,707 for the six
months ended June 30, 2008. In 2009, this primarily consisted of proceeds form
issuance of notes payable of $2,600 and proceeds from issuance of secured notes
of $352 less cash used in bank overdraft of $348, payments of senior secured
notes of $150 and payments on capital leases of $210. In 2008, this primarily
consisted of proceeds from the May 2008 private placement of $14,710, cash
provided by bank overdraft of $51 and payment of capital leases of
$60.





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.





Impact
of Inflation





We
believe that inflation has not had a material impact on our results of
operations for the three and six months ended June 30, 2009 and 2008. We cannot
assure you that future inflation will not have an adverse impact on our
operating results and financial condition.





Critical
Accounting Policies and Estimates





The
policies discussed below are considered by our management to be critical to an
understanding of our financial statements and their application places the most
significant demands on our management’s judgment of matters that are inherently
uncertain. Specific risks for these critical accounting policies are described
below. For these policies, our management cautions that future events rarely
develop as forecast, and that best estimates may routinely require
adjustment.




The SEC
has issued cautionary advice to elicit more precise disclosure about accounting
policies that management believes are most critical in portraying financial
results and that require management’s most difficult subjective or complex
judgments.





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make judgments
and estimates. The basis for our estimates are historical experience and various
assumptions that are believed to be reasonable under the circumstances, given
the available information at the time of the estimate, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily available from other sources. Actual results
may differ from the amounts estimated and recorded in our financial
statements.




We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.





Revenue Recognition. We
recognize revenue in accordance with the following authoritative literature:
AICPA Statement of Position (SOP) No. 97-2, Software Revenue Recognition
and Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB)
No. 104, Revenue
Recognition in Financial Statements which requires that four basic
criteria be met before revenue can be recognized: (i) persuasive evidence
that an arrangement exists; (ii) the price is fixed or determinable;
(iii) collectability is reasonably assured; and (iv) product delivery
has occurred or services have been rendered. We recognize revenue, net of sales
taxes assessed by any governmental authority.  Revenues are derived
principally from the delivery of digital media solutions and professional
services. Our revenues include fees charged for software-as-a-service (“SaaS”),
enterprise licenses, software usage, storage, software set-up/support services,
hardware components, content delivery, content syndication fees,
advertising-based monetization and professional services.  Revenue is
recognized when the product and/or service has been provided to the customer. We
may enter into agreements whereby we guarantee a minimum service level, or a
minimum number of impressions, click-throughs or other criteria on our software
platform’s points of distribution for a specified period. To the extent these
guarantees are not met, we may defer recognition of the corresponding revenue
until guaranteed delivery levels are achieved.


22





Inventories. We value
inventories 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.   Our estimates of future product demand may not be
accurate and we may understate or overstate the provision required for excess
and obsolete inventory. Accordingly, any significant unanticipated changes in
demand could have a significant impact on the value of our inventory and results
of operations. As of June 30, 2009, our reserve for excess and obsolete
inventory was $135.




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. 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 that no significant concentration of credit risk
exists with respect to these investments.





Allowance for Doubtful
Accounts. We maintain an allowance for doubtful accounts for estimated
losses resulting from our customers not making their required payments. Based on
historical information, we believe that our allowance is adequate. Changes in
general economic, business and market conditions could result in an impairment
in the ability of our customers to make their required payments, which would
have an adverse effect on cash flows and our results of operations. The
allowance for doubtful accounts is reviewed monthly and changes to the allowance
are updated based on actual collection experience. We use a combination of the
specific identification method and analysis of the aging of accounts receivable
to establish an allowance for losses on accounts receivable. The allowance for
doubtful accounts as of June 30, 2009 was $1,267.





Tangible and Intangible Asset
Impairment. We review our long-lived assets and identifiable intangibles
for impairment at least annually and whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When such
factors and circumstances exist, we compare the projected undiscounted future
cash flows associated with the future use and disposal of the related asset or
group of assets to their respective carrying amounts. Impairment, if any, is
measured as the excess of the carrying amount over the fair value based on
market value (when available) or discounted expected cash flows of those assets,
and is recorded in the period in which the determination is made. In assessing
the recoverability of our goodwill, we review goodwill for impairment at each
reporting period to determine whether events and circumstances continue to
support the indefinite useful life of the asset. We then perform the first step
of the goodwill impairment test which compares the fair value of the reporting
unit with its carrying value, including goodwill. The fair value of the
reporting unit is based on expected future cash flows associated with the group
of assets. This valuation method is used if quoted market prices are not
available. If the fair value of the reporting unit exceeds the carrying amount,
goodwill is not impaired. If the carrying amount of a reporting unit exceeds its
fair value, the second step of the goodwill impairment test shall be performed.
The second step, used to measure the amount of impairment loss, compares the
implied fair value of reporting unit goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to the excess.


23




SPECIAL
NOTE ON FORWARD-LOOKING STATEMENTS




This
report contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934. These forward-looking statements are based
largely on our expectations and are subject to a number of risks and
uncertainties, certain of which are beyond our control. Actual results could
differ materially from these forward-looking statements as a result of, among
other factors, risks related to our history of net losses and accumulated
deficits; integration of acquired businesses; future capital requirements;
competition and technical advances; dependence on the market for digital
advertising; and other risks. In light of these risks and uncertainties, there
can be no assurance that the forward-looking information contained in this
report will in fact occur.




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





We
conduct our operations in the following primary functional currencies: the
United States dollar, the British pound, the Australian dollar, the Swedish
krona and the Czech koruna. We currently do not hedge any of our foreign
currency exposures and are therefore subject to the risk of exchange rate
fluctuations. However, we attempt to employ a “natural hedge” by matching as
much as possible in like currencies our client revenues with associated client
delivery costs. We invoice our international customers primarily in U.S.
dollars, British pounds, Australian dollars, Euros, Swedish kronor, Czech koruna
and Australian dollars.




We are
exposed to foreign exchange rate fluctuations as the financial results of
foreign subsidiaries are translated into U.S. dollars in consolidation and as
our foreign currency consumer receipts are converted into U.S. dollars. Our
exposure to foreign exchange rate fluctuations also arises from payables and
receivables to and from our foreign subsidiaries, vendors and
customers.




24





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 that no significant
concentration of credit risk exists with respect to these
investments.





Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
wide variety of our customers who are dispersed across many geographic regions.
We routinely assess the financial strength of customers and, based upon factors
concerning credit risk, we establish an allowance for uncollectible accounts.
Our management believes that accounts receivable credit risk exposure beyond
such allowance is limited.





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





During
the six months ended June 30, 2009, there were no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.


25




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, 2008.





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




None





ITEM
3. DEFAULTS UPON SENIOR SECURITIES.





None





ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.




None





ITEM
5. OTHER INFORMATION.




None




ITEM
6. EXHIBITS.





Exhibit
      No.
                
                Description31.1
                
                Certification
      by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
      of the Exchange Act.31.2
                
                Certification
      by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
      of the Exchange Act.32.1
                
                Certification
      by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
      of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the
      United States Code.32.2
                
                Certification
      by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
      of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the
      United States Code.


26





SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.




KIT
      DIGITAL, INC.Dated:  August
      19, 2009
              By:
              /s/
      Kaleil Isaza TuzmanKaleil
      Isaza TuzmanChairman
      and Chief Executive Officer
                (principal
      executive officer)





Dated:  August
      19, 2009
              By:
              /s/
      Jonathan HirstJonathan
      HirstChief
      Financial Officer
                (principal
      financial and accounting
officer)


27