**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, 2008**





**OR**




**o**
            **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.)





**228
      East 45th Street, 8th Floor, New York, New York 10017**  ****


(Address
      of Principal Executive Offices) (Zip Code)





**(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 o





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 filero
            Accelerated
                filero
            Non-accelerated
                filero
              (do
                not check if smaller reporting company)
            Smaller
                reporting companyx




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


Yes o No x




As
      of
      August 13, 2008, the issuer had outstanding 114,524,313 shares of common
      stock.










**TABLE
      OF CONTENTS**





**Page****PART
                I - FINANCIAL INFORMATION**Item
                1.
            Financial
                StatementsConsolidated
                Balance Sheets - As of June 30, 2008 (unaudited) and December 31,
                2007
            3Consolidated
                Statements of Operations and Comprehensive Income (Loss) - For the
                three
                months and six months ended June 30, 2008 and
                2007(unaudited)
            4Consolidated
                Statements of Cash Flows - For the six months ended June 30, 2008
                and 2007
                (unaudited)
            5Notes
                to Consolidated Financial Statements (unaudited)
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
            18Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            22Item
                4T.
            Controls
                and Procedures
            22**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            23Item
                1A.
            Risk
                Factors
            23Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            23Item
                3.
            Defaults
                Upon Senior Securities
            23Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            23Item
                5.
            Other
                Information
            23Item
                6.
            Exhibits
            23**SIGNATURES**
            24




2


**PART
      I - FINANCIAL INFORMATION**


**ITEM
      1.**  **FINANCIAL
      STATEMENTS.**


**KIT
      DIGITAL, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**(Amounts
      in Thousands, Except Share Data)**





**June
                30, 2008**
            
            **December
                31, 2007 (A)**(Unaudited)***Assets:*****Current
                assets:**Cash
                and cash equivalents
            
            $
            7,308
            
            $
            10,189Accounts
                receivable, net
            
            
            4,944
            
            
            3,057Other
                current assets
            
            
            1,383
            
            
            1,288Restricted
                cash
            
            
            -
            
            
            100**Total
                current assets**
            
            
            13,635
            
            
            14,634Property
                and equipment, net
            
            
            1,634
            
            
            1,307Deferred
                tax assets
            
            
            288
            
            
            263Software,
                net
            
            
            1,348
            
            
            505Customer
                list, net
            
            
            2,346
            
            
            253Domain
                names, net
            
            
            24
            
            
            30Goodwill
            
            
            9,809
            
            
            1,123**Total
                assets**
            
            $
            29,084
            
            $
            18,115***Liabilities
                and Stockholders’ Equity:*****Current
                liabilities:**Bank
                overdraft and other obligations
            
            $
            242
            
            $
            190Accounts
                payable
            
            
            3,600
            
            
            3,121Accrued
                expenses
            
            
            2,757
            
            
            1,616Income
                tax payable
            
            
            143
            
            
            139Acquisition
                liability - Kamera
            
            
            3,000
            
            
            -Other
                current liabilities
            
            
            2,006
            
            
            1,478**Total
                current liabilities**
            
            
            11,748
            
            
            6,544Capital
                lease obligations
            
            
            268
            
            
            292**Total
                liabilities**
            
            
            12,016
            
            
            6,836**Commitments**
            
            
            -
            
            
            -**Minority
                interest**
            
            
            (137
            )
            
            (76
            )**Stockholders’
                equity:**Series
                A preferred shares, $0.0001 par value: authorized 0 and 10,000,000
                shares;
                issued and outstanding 0 and 10,000,000 at June 30, 2008 and December
                31,
                2007
            
            
            -
            
            
            1Common
                stock, $0.0001 par value: authorized 500,000,000 shares; issued and
                outstanding 114,420,868 and 38,936,039 at June 30, 2008 and December
                31,
                2007, respectively
            
            
            11
            
            
            4Additional
                paid-in capital
            
            
            94,642
            
            
            74,820Accumulated
                deficit
            
            
            (77,481
            )
            
            (63,524
            )Accumulated
                other comprehensive income
            
            
            33
            
            
            54**Total
                stockholders’ equity**
            
            
            17,205
            
            
            11,355**Total
                liabilities and stockholders’ equity**
            
            $
            29,084
            
            $
            18,115





(A)
      -
      Reference is made to the Company’s Annual Report on Form 10-KSB for the year
      ended December 31, 2007 filed with the Securities and Exchange Commission in
      April 2008.




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


3


**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 ended****June
                30,**
            
            **June
                  30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Revenue**
            
            $
            5,485
            
            $
            3,584
            
            $
            8,987
            
            $
            6,586**Variable
                and direct third party costs:**Hosting,
                delivery and reporting
            
            
            587
            
            
            589
            
            
            1,102
            
            
            1,272Content
                costs
            
            
            635
            
            
            496
            
            
            819
            
            
            912Direct
                third party creative production costs
            
            
            1,220
            
            
            779
            
            
            1,973
            
            
            1,428**Total
                variable and direct third party costs**
            
            
            2,442
            
            
            1,864
            
            
            3,894
            
            
            3,612**Gross
                profit**
            
            
            3,043
            
            
            1,720
            
            
            5,093
            
            
            2,974**General
                and administrative expenses:**Compensation,
                travel and associated costs (exclusive of non-cash stock-basedcompensation)
            
            
            4,084
            
            
            6,393
            
            
            8,407
            
            
            11,483Non-cash
                stock-based compensation
            
            
            73
            
            
            1,237
            
            
            4,074
            
            
            2,479Legal,
                accounting, audit and other professionalservice
                fees
            
            
            269
            
            
            237
            
            
            614
            
            
            530Office,
                marketing and other corporate costs
            
            
            928
            
            
            1,144
            
            
            1,766
            
            
            2,176Depreciation
                and amortization
            
            
            354
            
            
            242
            
            
            599
            
            
            491Restructuring
                charges
            
            
            146
            
            
            -
            
            
            2,891
            
            
            -Other
                non-recurring charges
            
            
            510
            
            
            -
            
            
            645
            
            
            -Impairment
                of property and equipment
            
            
            -
            
            
            -
            
            
            228
            
            
            -**Total
                general and administrative expenses**
            
            
            6,364
            
            
            9,253
            
            
            19,224
            
            
            17,159**(Loss)
                from operations**
            
            
            (3,321
            )
            
            (7,533
            )
            
            (14,131
            )
            
            (14,185
            )Interest
                income
            
            
            29
            
            
            213
            
            
            90
            
            
            332Interest
                expense - other
            
            
            (40
            )
            
            (26
            )
            
            (54
            )
            
            (33
            )Other
                income
            
            
            111
            
            
            20
            
            
            132
            
            
            20**Net
                (loss) before income taxes**
            
            
            (3,221
            )
            
            (7,326
            )
            
            (13,963
            )
            
            (13,866
            )Income
                tax benefit (expense)
            
            
            -
            
            
            -
            
            
            (1
            )
            
            5**Net
                (loss) before minority interest**
            
            
            (3,221
            )
            
            (7,326
            )
            
            (13,964
            )
            
            (13,861
            )Minority
                interest
            
            
            (89
            )
            
            (33
            )
            
            7
            
            
            (28
            )**Net
                (loss) available to common shareholders**
            
            $
            (3,310
            )
            $
            (7,359
            )
            $
            (13,957
            )
            $
            (13,889
            )**Basic
                and diluted net (loss) per common share**
            
            $
            (0.04
            )
            $
            (0.22
            )
            $
            (0.23
            )
            $
            (0.46
            )**Weighted
                average common shares outstanding**
            
            
            82,800,972
            
            
            33,899,002
            
            
            60,868,506
            
            
            30,459,898**Comprehensive
                (loss):**Net
                (loss)
            
            $
            (3,310
            )
            $
            (7,359
            )
            $
            (13,957
            )
            $
            (13,889
            )Foreign
                currency translation
            
            
            (85
            )
            
            13
            
            
            (21
            )
            
            32**Comprehensive
                (loss)**
            
            $
            (3,395
            )
            $
            (7,346
            )
            $
            (13,978
            )
            $
            (13,857
            )





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


4


**KIT
      DIGITAL, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Amounts
      in Thousands)**


**(Unaudited)**







**Six
                months ended June 30,****2008**
            
            **2007****Operating
                Activities:**Net
                (loss)
            
            $
            (13,957
            )
            $
            (13,889
            )Adjustments
                to reconcile net (loss) to net cash (used) by operating
                activities:Provision
                for doubtful accounts
            
            
            94
            
            
            1Depreciation
            
            
            230
            
            
            146Amortization
                of intangible assets
            
            
            369
            
            
            517Loss
                on impairment of property and equipment
            
            
            228
            
            
            -Non
                cash stock based compensation
            
            
            4,074
            
            
            2,479Issuance
                of warrants for settlement of separation agreements
            
            
            1,038
            
            
            -Minority
                interest in subsidiaries
            
            
            (7
            )
            
            27Changes
                in assets and liabilities:(Increase)
                decrease in:Accounts
                receivable
            
            
            (1,216
            )
            
            161Other
                assets
            
            
            220
            
            
            (289
            )Increase
                (decrease) in:Accounts
                payable
            
            
            (590
            )
            
            922Accrued
                expenses
            
            
            1,050
            
            
            (338
            )Income
                tax payable
            
            
            (23
            )
            
            (53
            )Other
                liabilities
            
            
            229
            
            
            411Total
                adjustments
            
            
            5,696
            
            
            3,984**Net
                Cash (Used) By Operating Activities - Forward**
            
            
            (8,261
            )
            
            (9,905
            )**Investing
                Activities:**Investment
                in restricted cash
            
            
            100
            
            
            (101
            )Issuance
                of notes receivable
            
            
            -
            
            
            (1,194
            )Cash
                paid in acquisition of MyVideoDaily
            
            
            -
            
            
            (250
            )Cash
                paid for completion of acquisition of Sputnik
            
            
            (4,563
            )
            
            -Cash
                paid in acquisition of Kamera
            
            
            (4,500
            )
            
            -Cash
                received in acquisition of Kamera
            
            
            271
            
            
            -Capitalization
                of content
            
            
            -
            
            
            (65
            )Proceeds
                from sale of equipment
            
            
            33
            
            
            -Purchase
                of data center equipment and other equipment
            
            
            (582
            )
            
            (204
            )**Net
                Cash (Used) By Investing Activities - Forward**
            
            $
            (9,241
            )
            $
            (1,814
            )




5


**KIT
      DIGITAL, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (continued)**


**(Amounts
      in Thousands)**


**(Unaudited)**







**Six
                months ended June 30,****2008**
            
            **2007****Net
                Cash (Used) By Operating Activities - Forwarded**
            
            $
            (8,261
            )
            $
            (9,905
            )**Net
                Cash (Used) By Investing Activities - Forwarded**
            
            
            (9,241
            )
            
            (1,814
            )**Financing
                Activities:**Proceeds
                from private placement, net
            
            
            14,710
            
            
            23,880Proceeds
                from exercise of stock options
            
            
            6
            
            
            -Proceeds
                from exercise of warrants
            
            
            -
            
            
            13Bank
                overdraft and other obligations
            
            
            51
            
            
            (206
            )Payment
                on capital leases
            
            
            (60
            )
            
            (32
            )**Net
                Cash Provided By Financing Activities**
            
            
            14,707
            
            
            23,655**Effect
                of Exchange Rate Changes on Cash**
            
            
            (86
            )
            
            (33
            )**Net
                (Decrease) Increase in Cash and Cash Equivalents**
            
            
            (2,881
            )
            
            11,903**Cash
                and Cash Equivalents - Beginning of Period**
            
            
            10,189
            
            
            11,937**Cash
                and Cash Equivalents - End of Period**
            
            $
            7,308
            
            $
            23,840**Supplemental
                Disclosures of Cash Flow Information:**Cash
                paid during the period for:Income
                taxes
            
            $
            -
            
            $
            -Interest
            
            $
            53
            
            $
            33**Supplemental
                Disclosures of Non-cash Investing and Financing
                Activities:**Issuance
                of stock in investment in MyVideoDaily
            
            $
            -
            
            $
            250Acquisition
              liability-Kamera
            
            $
            3,000
            
            $
            -Satisfaction
                of loans in Sputnik acquisition
            
            $
            750
            
            $
            -





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


6





**KIT
      DIGITAL, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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


**(Unaudited)**









***(1)
      Basis of Presentation***





The
      accompanying unaudited consolidated financial statements of KIT digital, Inc.
      and subsidiaries (collectively, the “Company”) 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, 2008 are not necessarily indicative of the results that may
      be
      expected for the year ending December 31, 2008. 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 Company’s annual report on Form 10-KSB for the year ended
      December 31, 2007.





***(2)
      Summary of Significant Accounting Policies***





***(A)
      Principles of Consolidation*** The
      consolidated financial statements include the accounts of KIT digital, Inc.,
      its
      wholly-owned subsidiary KIT Media Corporation, its wholly-owned subsidiary
      Bickhams Media, Inc. (“Bickhams”), its 51% owned subsidiary the Reality Group
      Pty. Ltd. (“Reality Group”), its wholly-owned subsidiary Kamera Content AB
      (“Kamera”) (included as of the acquisition date of May 19, 2008) and its
      wholly-owned subsidiary KIT HD, Inc. Included in the consolidation with KIT
      Media Corporation are KIT Media Corporation’s wholly-owned subsidiary KIT
      digital Pty. Ltd. and KIT digital Pty. Ltd.’s wholly-owned subsidiary Undercover
      Media Pty. Ltd. (“Undercover Media”), its wholly-owned subsidiary KIT digital
      Limited, its wholly-owned subsidiary KIT Broadcasting Limited, its wholly-owned
      subsidiary Sputnik Agency Pty. Ltd. (“Sputnik”) (formerly Factory212 Pty. Ltd.)
      and its wholly-owned subsidiary KIT TV Pty. Ltd. Included in the consolidation
      with Bickhams is Bickhams’ wholly-owned subsidiary VideoDome.com Networks, Inc.
      (“VideoDome.com”).  Included
      in the consolidation with Kamera are Kamera’s 95% owned subsidiary Kamera (S)
      PTE LTD and its 55% owned subsidiary Swegypt Company for Telecommunications
      (S.A.E).





***(B)
      Reclassifications -*** The
      classification of expenses in the consolidated statements of operations have
      been modified beginning with this Form 10-Q for the period ended June 30, 2008.
      Management believes these changes present additional information to the users
      of
      the financial statements and has been made on a prospective basis with
      previously reported amounts reclassified to conform to the presentation for
      the
      current period.





***(C)
      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.
      Every effort is made to ensure the integrity of such estimates.





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





***(E)
      Fair Value of Financial Measurements -*** On
      the
      first day of fiscal 2008, the Company 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). The Company does
      not
      have any applicable assets as of June 30, 2008.




7


**KIT
        DIGITAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Amounts
        in Thousands, Except Share and Per Share Data)**
 **(Unaudited)**


***(F)
      Going Concern -*** The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern, which contemplates the realization
      of assets and the satisfaction of liabilities in the normal course of business.
      Since its inception, the Company has incurred losses, had an accumulated
      deficit, and has experienced negative cash flows from operations. This raises
      doubt about the Company’s ability to continue as a going concern. Management
      expects cash flows from operating activities to improve, primarily as a result
      of an increase in revenue and a decrease in costs, although there can be no
      assurance thereof. On April 16, 2008, the Company was provided with notice
      of
      exercise by KIT Capital Limited (“KIT Capital”) of
      its right pursuant to Section 4.5 of the Executive Management Agreement by
      and
      between the Company and KIT Capital dated December 18, 2007 (the “Management
      Agreement”) to purchase
      $5,000 of the Company's common stock, provided that the Company approve the
      issuance of certain warrants in exchange for KIT Capital facilitating certain
      corporate actions and foregoing certain rights granted to it in the
      Executive Management Agreement (see Note 13 Subsequent Events). On May 8, 2008,
      the Company entered into a common stock purchase agreement pursuant to which
      the
      Company sold an aggregate of $15,000 of shares of common stock and warrants
      to
      accredited investors (the “May Financing”) (see Note 8 Stock Issuances). Having
      completed the May Financing, the Company does not anticipate that it will need
      to raise additional capital to achieve its operational and acquisition growth
      plan. The accompanying consolidated financial statements do not include any
      adjustments that might be necessary should the Company be unable to continue
      as
      a going concern.





***(G)
      Impairment of Long-Lived Assets -*** The
      Company reviews its long-lived assets and identifiable intangibles for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable. When such factors and
      circumstances exist, management compares 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.





***(H)
      Cash and Cash Equivalents -*** The
      Company considers all highly liquid investments with original maturities of
      90
      days or less to be cash and cash equivalents.





***(I)
      Property and Equipment -*** Property
      and equipment are stated at cost. Depreciation is provided for using the
      straight-line and declining balance methods of accounting over the estimated
      useful lives of the assets.





***(J)
      Intangible Assets -*** 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. All intangible
      assets are reviewed for impairment annually or more frequently if deemed
      necessary, and no impairment write-offs were recorded during each of the three
      and six month periods ended June 30, 2008 and 2007.





***(K)
      Risk Concentrations -*** Financial
      instruments which potentially subject the Company to concentrations of credit
      risk consist principally of cash and cash equivalents and trade accounts
      receivable. To limit credit exposure, the Company places its cash and cash
      equivalents with high credit quality institutions, which invest primarily in
      commercial paper, high quality corporate obligations, and high quality asset
      and
      loan backed securities. Management believes 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 customers who are dispersed across many geographic regions.
      Management believes that accounts receivable credit risk exposure beyond such
      allowance is limited. The allowance as of June 30, 2008 was $333.





The
      Company generally does not require collateral for its financial instruments.





***(L)
      Revenue Recognition -*** Revenues
      are derived principally from digital media management, software licenses and
      professional services. Revenue is recognized when service has been
      provided.





***(M)
      Earnings (Loss) Per Share Calculation -*** Net
      loss
      per share is based on the weighted average number of shares outstanding.




8


**KIT
        DIGITAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Amounts
        in Thousands, Except Share and Per Share Data)**
 **(Unaudited)**


Earnings
      (loss) per common share are calculated under the provisions of SFAS No. 128,
      “Earnings per Share,” which establishes standards for computing and presenting
      earnings per share. SFAS 128 requires the Company to report both basic earnings
      (loss) per share, which is based on the weighted average number of common shares
      outstanding during the period, and diluted earnings (loss) per share, which
      is
      based on the weighted average number of common shares outstanding plus all
      potential dilutive common shares outstanding. Options and warrants are not
      considered in calculating diluted earnings (loss) per share since considering
      such items would have an anti-dilutive effect. Potential shares from the
      conversion of Series A Preferred Stock are excluded as any conversion thereof
      would also have an anti-dilutive effect.





***(N)
      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. The Company’s share-based awards include stock options,
      warrants and restricted stock awards.





The
      Company 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 three months
      ended June 30, 2008 and 2007, the Company recognized $73 and $1,237,
      respectively, of stock-based compensation expense as part of its statement
      of
      operations in the consolidated financial statements. For the six months ended
      June 30, 2008 and 2007, the Company recognized $4,074 and $2,479, respectively,
      of stock-based compensation expense as part of its statement of operations
      in
      the consolidated financial statements.





The
      estimated fair value underlying the Company’s 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 has reserved
      14,000,000 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. Also, on March 17, 2008,
      the
      Board of Directors resolved that, subject to the agreement of the individuals,
      a
      surrender of options under the 2004 Stock Option Plan were exchanged for options
      under the 2008 Incentive Stock Plan. A total of 3,540,500 stock options in
      the
      2004 Stock Option Plan were surrendered, of which a total of 1,715,183 stock
      options were cancelled or expired and a total of 1,824,717 stock options were
      forfeited. These were exchanged for a total of 1,335,500 stock options under
      the
      2008 Incentive Stock Plan.





Under
      the
      2004 Stock Option Plan, the Company granted options with an exercise price
      of
      $0.1745 to purchase 2,100,000 shares of its common stock during the six months
      ended June 30, 2008. During the six months ended June 30, 2008, a total of
      1,265,754 stock options vested, a total of 2,505,115 stock options were
      cancelled or expired, a total of 2,902,136 stock options were forfeited, and
      1,205,555 stock options were unvested as of June 30, 2008. A total of 3,173,333
      stock options were outstanding on June 30, 2008.





Under
      the
      2008 Incentive Stock Plan, the Company granted options with exercise prices
      ranging from $0.08 to $0.28 to purchase 14,596,250 shares of its common stock
      during the six months ended June 30, 2008. During the six months ended June
      30,
      2008, a total of 2,270,246 stock options vested, 84,829 stock options were
      exercised, 817,599 stock options were forfeited with 11,508,445 stock options
      unvested as of June 30, 2008. A total of 13,693,862 stock options were
      outstanding on June 30, 2008.





Also
      included in non-cash compensation are warrants to purchase 1,200,000 shares
      of
      common stock with an exercise price of $0.133 issued to Robin Smyth on March
      30,
      2008 that vest over 36 months from the issue date. During the six months ended
      June 30, 2008, a total of 100,000 warrants vested with 1,100,000 warrants
      unvested as of June 30, 2008.




9


**KIT
        DIGITAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Amounts
        in Thousands, Except Share and Per Share Data)**
 **(Unaudited)**


***(3)
      Notes Receivable***





On
      March
      6, 2007, Reality Group Pty. Ltd. issued a promissory note to the Company in
      the
      principal amount of $380. Pursuant to the promissory note, the Company advanced
      to Reality Group the sum of $190 on March 6, 2007 and $190 on March 13, 2007.
      Interest on the promissory note accrues at the rate of 8% per annum. The
      promissory note is due on June 30, 2008 and is secured by all the assets of
      Reality Group. In addition, Grant Lee and Mike Bollan agreed to pledge 20%
      of
      the ordinary shares of Reality Group which they own as security for Reality
      Group’s obligations under the promissory note. These eliminated in
      consolidation. As part of the Sputnik acquisition, these notes were extinguished
      as of May 12, 2008.





On
      May
      11, 2007, Reality Group Pty. Ltd. issued a promissory note to the Company in
      the
      principal amount of $400. Pursuant to the promissory note, the Company advanced
      to Reality Group the sum of $400 on May 11, 2007. Interest on the promissory
      note accrues at the rate of 8% per annum. The promissory note is due on May
      11,
      2008. These eliminated in consolidation. As part of the Sputnik acquisition,
      these notes were extinguished as of May 12, 2008.





***(4)
      Acquisitions***





*Sputnik
      Acquisition*





On
      March
      31, 2008, the Company entered into Share Purchase Agreements (in aggregate,
      the
“SPA”) with shareholders (the “Sellers”) holding 100% of shares in Sputnik
      Agency Pty. Ltd., an Australian entity (“Sputnik”). The closing date for the SPA
      was May 12, 2008 (the”Closing Date”).





Prior
      to
      the Closing Date, the Company, through its wholly-owned subsidiary in Australia,
      KIT Broadcasting Limited (“KIT Broadcast”), was a provisional 51% shareholder in
      Sputnik, with this original 51% ownership in Sputnik being subject to the
      payment of certain earn-out provisions (“Earn-Out Payment”) by KIT Broadcast in
      order to remain in force, in accordance with the Share Purchase Agreement dated
      October 28, 2005 between KIT Broadcast and the sellers of Sputnik, being Lee
      Investment Trust, Bollen Investment Trust and Campion Investment
      Trust.





Pursuant
      to the terms of the SPA, the Company consummated the original 51% ownership
      and
      acquired the remaining 49% interest in the Sputnik by acquiring 490 additional
      shares (the “Shares”) from the Sellers. The purchase price for the Shares was
      $1,774 (the “Purchase Price”), with $1,024 of this total paid in cash and the
      remainder paid in a non-cash manner as described below.





In
      addition to the Purchase Price, the Earn Out Payment due in the amount of $2,789
      was paid to the Sellers at Closing, in cash. From the Purchase Price and the
      Earn Out Payment in aggregate, the sum of $282 was held back in Escrow against
      warranties provided by the Sellers in the SPA.





The
      Company had an outstanding shareholder loan owed to it by Reality Group Pty.
      Ltd., an Australian entity (“Reality”), in the fully compounded amount of
      Australian$965, as of February 29, 2008 (the “Corporate Loan”). The Company is a
      51% shareholder in Reality. In addition, Reality has a loan in the fully
      compounded amount of Australian$374 as of February 29, 2008 (the “Directorial
      Loan”) owed to Reality by Grant Lee (“Lee”), one of the Sellers who is also a
      shareholder in Reality. Lee agreed to satisfy, as part of the Sputnik
      transaction, repayment of the Directorial Loan to the Company and his pro-rata
      share of the Corporate Loan. The loans were satisfied through the transaction
      as
      follows:





(i)
            The
                sum of $603, from the Purchase Price, payable to Lee for his Shares
                for
                his remaining 49% ownership in Sputnik, was applied dollar-for-dollar
                against 49% of the Corporate Loan and 100% of the Directorial Loan
                on a
                pro rata basis (the “Lee
                Payments”).





(ii)
            The
                sum of $147, payable to Mike Bollen for his Shares, for his remaining
                49%
                ownership in Sputnik, was applied dollar-for-dollar against 49% of
                the
                Corporate Loan (the “Bollen
                Payment”).





It
      was
      further agreed that if any surplus remained of the Corporate Loan and the
      Directorial Loan, after the Lee Payments and the Bollen Payment, at the election
      of Lee and Bollen, respectively, such surplus shall be (a) paid in cash to
      the
      relevant party, or (b) used to enhance said party’s equity ownership in Reality
      by an allocation of shares based on a valuation of Reality to be determined
      by
      an independent third party mutually agreed by the Company, Bollen, and Lee
      and,
      with the cost of the third-party valuation to be borne by the Company, so long
      as it is not in excess of $30. This valuation shall be completed within thirty
      (30) days of the date of the election by Bollen and/or Lee.




10


**KIT
        DIGITAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Amounts
        in Thousands, Except Share and Per Share Data)**
 **(Unaudited)**


Sellers
      Gavin Campion (now the Company’s President), Josie Brown and Nick Cummins were
      each required, as part of the acquisition, to remain in the employment of
      Sputnik or the Company by entering into employment agreements (the “Employment
      Agreements”) pursuant to which each would: (i) receive salary, benefits, options
      issuance, incentive compensation and termination and severance payments
      commensurate with similarly situated executives of the Company; (iii) to the
      extent they own shares of the Company’s common stock, be entitled to
      substantially the same rights and privileges as the other common stockholders,
      including the right to participate in a change of control event of the Company
      and the right to receive any distributions made by the Company; and (iv) as
      partial consideration for the Sputnik transaction, agree to IP assignment,
      non-disclosure, non-compete and non-solicit covenants during the term of his
      employment and for a period of two years thereafter.





At
      Closing, the Company paid the Sellers an aggregate of $3,530, net of (i) the
      $282 held back in Escrow against warranties provided by the Sellers in the
      SPA
      and (ii) the $750 in total from the Lee Payments and Bollen Payments to satisfy
      the Corporate Loan and Directorial Loan. Therefore, the total cost of the
      Sputnik acquisition was $4,563.





*Kamera
      Acquisition*





On
      May
      19, 2008, the Company entered into a definitive Share Purchase Agreement
      (“Kamera SPA”) with Kamera Content AB, a Swedish company which is in the
      business of development, operation and sale of content for mobile and online
      distribution (“Kamera”). Upon entry into the Kamera SPA, the Company assumed
      day-to-day management and control of Kamera. The consummation of the Kamera
      acquisition was predicated upon several administrative items, including the
      physical delivery of Kamera stock certificates to the Company and a working
      capital calculation as of May 18, 2008 (the “Completion Items”). The Completion
      Items were satisfactory complied with by June 25, 2008 (the “Completion Date”),
      and as such the acquisition was completed on said Completion Date.





The
      purchase price for 100% of the shares in Kamera (the “Total Shares”) was based
      on a minimum of 90% of the Total Shares tendering for purchase by the Company,
      and the Kamera SPA provided for an adjustment to the purchase price to reflect
      the number of Sale Shares as a percentage of the Total Shares purchased by
      the
      Company at closing. Since 100% of the shares in Kamera were sold on the
      Completion Date, no such adjustment to the purchase price was
      required.





The
      purchase price was in the form of a combination of cash and stock consideration
      as follows — based on a debt-free Kamera and neutral working capital at Kamera
      at the time of closing:





·
            Cash
                Consideration: $4,500 payable at closing, less (i) $300 plus accrued
                interest paid by the Company to Kamera previously as an advance against
                the Cash Consideration, pursuant to a Content Distribution Agreement
                signed between Kamera and the Company on March 12, 2008, (ii) a $500
                deposit (the “Deposit”) paid to Kamera’s escrow agent on May 19, 2007 as a
                further advance against the Cash Consideration, and (iii) a working
                capital adjustment based on neutral working capital as of May 18,
                2008,
                and a dollar-for-dollar adjustment for any negative working capital
                at
                that date.





·
            Stock
                Consideration, subject to performance criteria as set forth in a
                further
                paragraph below: (a) $1,500
                equivalent in shares in the Company or its successor (the “KIT Shares”),
                with the number determined based on the 10 day trailing weighted
                average
                market trading price six months from Completion Date, issued six
                months
                from Completion Date;(b) $1,500
                equivalent in KIT Shares, with the number determined based on the
                20 day
                trailing weighted average market trading price 13 months from Completion
                Date, issued 13 months from Completion Date; and(c) subject to the Company achieving certain performance criteria,
                $3,000
                equivalent inKIT
                Shares, with the number determined based on the 20 day trailing weighted
                average market trading price 21 months from Completion Date, issued
                21
                months from Completion Date.





Notwithstanding the
      above ,
      the
      Company has the right in its sole discretion to substitute payment
      in cash as an alternative to the issuance of all or part of the KIT Shares.
      Additionally, if the
      KIT
      Shares cease to be listed on a recognized stock exchange (for avoidance of
      doubt, the NASDAQ OTC market shall constitute a recognized stock exchange),
      any
      Stock Consideration still outstanding at such time is to be paid in cash instead
      of in KIT Shares.




11


**KIT
        DIGITAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Amounts
        in Thousands, Except Share and Per Share Data)**
 **(Unaudited)**


The
      performance criteria for the allocation of the KIT Shares set forth in (c)
      of
      the Stock Consideration paragraph above are the following:





(a)
            The
                parties have determined that particular employees identified in the
                Kamera
                SPA shall be retained in the continuing operation at least to the
                following extent: a minimum 75% of the employees in question shall
                be
                retained during 12 months from the closing and a minimum of 65% of
                these
                employees be retained during 21 months from the closing.Key
                personnel will be retained in the employment of the Company for a
                period
                of 21 months from closing; provided that any
                termination by the Company of the employment of a member of the key
                personnel shall not mean that this criteria has not been met, unless
                the
                termination qualifies as a termination based on personal reasons
                according
                to the Swedish Employment Protection Act (*Sw.
                personliga sk’l enligt lagen om anst’llningsskydd*);





(b)
            Clients
                must be retained in any ongoing operations and 80% ofKamera’s
                existing clientsas
                of April 1, 2008 (the “Existing Clients”) must continue as
                clientsthrough March 31, 2009 and revenue from the Existing Clients must
                have
                grown during that 12 month period by more than 10%. However, if revenue
                growth is more than 10% fromtheExisting
                Clientsin
                the 12 monthsendingMarch 31, 2009, a correspondingly (number of percentage units by
                which
                revenue growth exceeds 10%) lower percentage of client retention
                is
                acceptable provided that the client retention is not below 60%;





(c)
            Clients
                must be retained in any ongoing operations and 70% oftheExisting
                Clientsmust continue as clients through December 31, 2009 and revenue from
                these
                clients must have grown during that 9 month period by more than 8%.
                However, if revenue growth is more than 8% fromtheExisting
                Clientsas
                of April 1, 2009 in the 9 months ended December 31, 2009, a
                correspondingly (number of percentage units by which revenue growth
                exceeds 8%) lower percentage of client retention is acceptable provided
                that the client retention is not below 50%;
                and





(d)
            The
                revenue generated through the Company’s mobile business (including the
                results of the mobile business at Kamera on a pro forma basis) during
                the
                12 month period as from April 1, 2007 up to and including March 31,
                2008,
                which shall be determined prior to closing, must be at least maintained
                in
                the period of 12 months as from June 1, 2008 up to and including
                May 31
                2009 and increased by 10% in the 12 month period from June 1, 2009
                up to
                and including February 28,, 2010.





Kamera
      is
      based in Stockholm, Sweden, with certain back-office operations in Cairo, Egypt.
      Through its proprietary software and content distribution agreements, Kamera
      enables corporate clients such as Vodafone, MSN, Orange, Telefonica, O2,
      Hutchinson and China Mobile to deliver IPTV channels to their customers over
      mobile and online networks. Kamera’s content library includes localized,
      ready-to-publish clips from ABC News, Associated Press, SNTV and others, and
      its
      proprietary ingestion engine allows for video content to be transcoded into
      a
      variety of mobile/digital formats.





The
      aggregate cost of the acquisition of Kamera was $7,500. This is comprised of
      the
      $4,500 paid at closing plus $3,000 accrued for the consideration payable six
      and
      13 months from Completion Date and is included in the Balance Sheet in “Acquisition
      liability - Kamera”. The Company
      has
      not recorded the contingent liability of $3,000 in consideration that is payable
      21 months from Completion Date as it is not certain that the performance
      criteria will be met. The Company has allocated the aggregate cost of the
      acquisition to Kamera’s net tangible and identifiable intangible assets based on
      their estimated fair values. The excess of the aggregate cost of the acquisition
      over the net estimated fair value of the tangible and identifiable intangible
      assets and liabilities assumed was recorded to goodwill. Below is a summary
      of
      the allocation of the aggregate cost of the acquisition.




12


**KIT
        DIGITAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Amounts
        in Thousands, Except Share and Per Share Data)**
 **(Unaudited)**


**Aggregate Cost****of
                the****Acquisition****($
                in thousands)**Intangible
                assets—developed technology
            
            $
            1,000Intangible
                assets—customer relationships
            
            
            1,500Acquired
                assets and liabilities, net
            
            
            23Goodwill
            
            
            4,977**Total**
            
            **$**
            **7,500**




Selected
        unaudited pro forma combined results of operations, assuming the Kamera
        acquisition occurred on January 1, 2008 using actual unaudited figures prior
        to
        acquisition, are presented as follows:
 
 **Three
                  months ended**
              
              **Six
                  months ended****June
                  30, 2008**
              
              **June
                  30, 2008****Revenue**
              
              $
              6,214
              
              $
              10,725**Net
                  (loss) available to common shareholders**
              
              $
              (3,766
              )
              $
              (14,689
              )**Basic
                  and diluted net (loss) per common share**
              
              $
              (0.05
              )
              $
              (0.24
              )




***(5)
      Goodwill***





Goodwill
      of $9,809 represents the excess of acquisition costs over the fair value of
      net
      assets of the Reality acquisition of $1,033, the Kamera acquisition of $4,977,
      the Sputnik acquisition of $3,709 and KIT digital Limited of $90. There was
      no
      impairment of goodwill during each of the three and six month periods ended
      June
      30, 2008 and 2007.





***(6)
      Commitments and Contingencies***





*Employment
      Agreements -* On
      December 18, 2007, the Company entered into the Management Agreement with KIT
      Capital for a term commencing on January 9, 2008 and terminating on January
      9, 2011, unless sooner terminated or mutually extended. As a result of this
      Management Agreement, KIT Capital designated Kaleil Isaza Tuzman as Chief
      Executive Officer, Jamie Levine as Head of Communications and Rosario Davi
      as
      Corporate Development Manager of the Company. Jamie Levine was subsequently
      replaced by another employee of KIT Capital. The Management Agreement provided
      for an aggregate compensation for KIT Capital as follows: (i) $51 monthly,
      which
      includes the cost of at least 3 employees inclusive of benefits and taxes,
      (ii)
      signing incentive payment of $69, (iii) an incentive bonus equal to the greater
      of (x) the preceding twelve months’ base compensation or (y) the previous
      month’s monthly installment of base compensation multiplied by twelve if the
      Company shall achieve 2 consecutive quarters of profitability or the Company’s
      total monthly revenue equals of exceeds $6,000 (iv) A “phantom
      stock
      plan” for 2,100,000
      shares that vest over a 36-month period. Specific terms of this plan are subject
      to finalization. The Management Agreement provides that upon termination
      of the Management Agreement or after the Management Agreement’s expiration date
      for any reason except cause (as defined in the Management Agreement), the
      Company shall pay KIT Capital, in addition to any other payments due hereunder,
      a cash severance payment equal to the greater of (i) the total amount paid
      to
      KIT Capital during the preceding twelve months, including base compensation
      and
      all bonuses, or (ii) the previous month’s monthly installment of base
      compensation multiplied by twelve.




*Litigation* - The
      Company’s wholly-owned subsidiary, ROO HD, Inc. (“ROO HD”) (currently KIT HD,
      Inc.), has been served as a defendant in a lawsuit entitled Julie Vittengl *et
      al.* vs. ROO
      HD, Inc., a purported class action pending in New York Supreme Court, Saratoga
      County. The suit, brought by four former employees of Wurld Media, Inc.
      (“Wurld”) purportedly on behalf of themselves and “others similarly situated,”
claims that ROO HD’s acquisition of certain assets of Wurld was a fraudulent
      conveyance and that ROO HD is the alter-ego of Wurld. Plaintiffs seek the
      appointment of a receiver to take charge of the Company’s property in
      constructive trust for plaintiffs and payment of plaintiffs’ unpaid wages and
      costs of suit, both in an unspecified dollar amount. **** ROO HD
      filed its answer to the complaint in January 2008, and there have been no
      developments in this action since then. Management believes that the suit is
      without merit and intends to defend the Company vigorously.





In
      December 2007, Rick Gell and Todd Pavlin, two former consultants of ROO Media
      Corporation (“ROO Media”) (currently KIT Media Corporation) sued that entity
      together with ROO Group, Inc. (currently KIT digital, Inc.) and our founder
      and
      Vice-Chairman Robert Petty and ROO Media’s former President and Chief Operating
      Officer Steve Quinn in New York Supreme Court, New York County, alleging breach
      of an oral employment agreement, fraudulent inducement and other claims relating
      to the plaintiffs’ employment at ROO Media. Defendants have moved to dismiss the
      complaint and are awaiting the Court’s decision. Management believes that the
      suit is without merit and intends to defend the Company vigorously.





13


**KIT
      DIGITAL, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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


**(Unaudited)**





***(7)
      Preferred Shares***





On
      March
      30, 2008, the Board of Directors and stockholders holding a majority of the
      Company’s voting stock approved the filing of an amendment to the Company’s
      Certificate of Incorporation to reduce its authorized preferred stock from
      20,000,000 to 10,000,000 shares. Also, on March 30, 2008, the stockholders
      holding a majority of the Company’s voting stock approved the filing of an
      amendment to its Certificate of Designation of the Series A Preferred Stock
      to
      provide for automatic conversion of the outstanding Series A Preferred stock
      into 400,000 shares of common stock. The conversion of the Series A Preferred
      Stock into common stock was conditional upon the effectuation of the amendment
      to the Certificate of Incorporation to reduce the authorized preferred stock
      from 20,000,000 to 10,000,000 shares. On May 19, 2008, the Company filed the
      amendment to its Certificate of Incorporation to reduce the authorized preferred
      stock from 20,000,000 to 10,000,000 shares. On May 22, 2008, the Company filed
      the amendment to the Certificate of Designation of the Series A Preferred to
      provide for the automatic conversion of the outstanding Series A Preferred
      Stock
      into 400,000 shares of common stock.





***(8)
      Stock Issuances***





On
      January 25, 2007, the Company entered into an agreement with News Corporation
      (“News Corp Agreement”). The News Corp Agreement provided for the issuance of
      2,000,000 shares of the Company’s common stock upon execution of the News Corp
      Agreement, which were to be held in escrow and released to News Corporation
      on
      January 1, 2008 if the average monthly revenues from News Corporation and its
      affiliates for the three month period ended December 31, 2007 were not less
      than
      the revenue from News Corporation and its affiliates for the one month period
      ending December 31, 2006 (the “Revenue Target”). On February 7, 2008, the
      Company released the 2,000,000 shares of its common stock to News Corporation
      for meeting the Revenue Target. The shares were valued at $0.17 per share,
      or
      $340, and that amount was recorded as sales and marketing expense on December
      31, 2007.





The
      Company also agreed to issue an additional 2,000,000 shares of its common stock
      to News Corporation if within three years of the date of the News Corp Agreement
      the average monthly revenue from News Corporation and its affiliates for any
      consecutive three month period equals at least six times the Revenue Target.
      Further, the Company agreed that if the foregoing is not timely achieved, it
      shall issue to News Corporation warrants to purchase 2,000,000 shares of the
      Company’s common stock, which shall be exercisable for a term of two years at a
      price of $2.70. The exercise price of the warrants will be subject to customary
      anti-dilution protection for stock splits, recapitalizations, stock dividends
      and the like. No expenses have been recorded for this commitment to date, as
      management is unable to estimate this contingent liability.




The
      Company has granted News Corporation piggy-back registration rights in
      connection with the shares issuable pursuant to the News Corp
      Agreement.





On
      May 8,
      2008, as part of the May Financing, the Company entered into a Securities
      Purchase Agreement pursuant to which it sold 75,000,000 units to 35 accredited
      investors, each unit comprising of one share of common stock plus one warrant
      to
      purchase one share of common stock. The May Financing closed on May 8, 2008.
      The
      units were sold at a price of $0.20 per unit for aggregate gross proceeds of
      $15,000. The warrants have an exercise price of $0.34 per share and a term
      of
      five years. These warrants were valued under the Black-Scholes-Merton method
      as
      $20,250. The warrants provide the investors with full ratchet anti-dilution
      protection with relation to the exercise price of each warrant. KIT Media
      Limited (“KIT Media”), an affiliate of KIT Capital, was the largest investor in
      the May Financing, investing $7,060 for a total of 35,300,000 units. The
      Company’s Chief Executive Officer, Kaleil Isaza Tuzman, holds a controlling
      interest in KIT Media.





Pursuant
      to the terms of the Securities Purchase Agreement entered into with each of
      the
      accredited investors, the Company agreed to prepare and file a registration
      statement with the SEC registering the resale of the shares of common stock
      and
      the shares underlying the warrants on or prior to 30 days following the closing
      date. If the registration statement or any subsequent registration statement
      required to be filed by the Company is not filed within such time, the Company
      is required to pay liquidated damages to the investors equal to 1% of the dollar
      amount of their investment per month (pro rata on a 30-day basis), up to a
      maximum of 10% until the registration statement is filed. Further, if the
      registration statement is not declared effective within (i) 90 days of the
      closing (or in the event of a review by the SEC, within 120 days following
      the
      closing date), or (ii) 5 trading days after being notified that the registration
      will not be reviewed or will not be subject to further review, the Company
      is
      required to pay liquidated damages to the investors equal to 1% of the dollar
      amount of their investment per month (pro rata on a 30-day basis), up to a
      maximum of 10% until the registration statement is declared effective; provided
      that if one or more registration statements shall not be effective two years
      after the closing, the Company shall be required to pay an additional 8% in
      liquidated damages. In the event one or more registration statements are filed
      and declared effective, but shall thereafter cease to be effective and such
      lapse is not cured within 10 business days, the Company shall be required to
      pay
      liquidated damages to the investors equal to 1% of the dollar amount of their
      investment per month (pro rata on a 30-day basis), up to a maximum of 10% until
      the earlier of (i) the date the lapse is cured or (ii) the earlier of the
      expiration of the date on which all of the securities purchased by the investors
      can be sold either under the registration statement or pursuant to Rule 144.
      Although management filed the registration statement 71 days following the
      closing date, management expects the accredited investors will voluntarily
      forgo
      the liquidated damages in light of the circumstances that led to the
      delay—namely, the proper integration of Kamera’s financial results post the
      Kamera Acquisition. Furthermore, management expects the registration statement
      to be declared effective within 120 days of the closing of the May Financing.
      The Company has not registered the 35,300,000 shares of common stock or the
      35,300,000 shares underlying warrants purchased by KIT Media in the May
      Financing (See Note 13 Subsequent Events).




14


**KIT
      DIGITAL, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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


**(Unaudited)**








Merriman
      Curhan Ford & Co. and Brimberg & Co., registered broker-dealers, acted
      as placement agents for the May Financing.  In
      connection with the May Financing, the Company paid the placement agents a
      cash
      fee of an aggregate $155. In addition, the Company issued to the placement
      agents 823,750 and 422,458 warrants to purchase shares of common stock with
      an
      exercise price of $0.01 and $0.34 per share exercisable for a period of five
      years and were valued under the Black-Scholes-Merton method as $222 and $118,
      respectively. In connection with the May Financing, the Company received net
      proceeds of $14,710 after payment of placement agents fees of $155, legal fees
      and expenses of $130 and escrow agent fees of $5.





***(9)
      Restructuring Charges***





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 will receive a lump-sum payment of
      $100, less applicable tax withholding and deductions, within 9 months, and
      another lump-sum payment of $100, less applicable tax withholding and
      deductions, within 13 months. 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.





***(10)
      Other Non-recurring Charges***





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.





***(11)
      Impairment of Property and Equipment***





In
      March
      2008, the Company decided to sublease its former offices in London and move
      to
      another location to reduce costs. This includes removing and abandoning the
      leasehold improvements and furniture and fixtures in the London office. Due
      to
      its office relocation, the Company recorded and impairment charge for certain
      property and equipment which totaled $228 during the three months ended March
      31, 2008. This amount is segregated within the Statement of
      Operations.




15


**KIT
        DIGITAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Amounts
        in Thousands, Except Share and Per Share Data)**
 **(Unaudited)**


***(12)
      Segment Reporting***





The
      Company derives its revenue from two major operating segments. These operating
      segments are presented on a worldwide basis and include: Digital Media and
      Agency Services.




Digital
      Media operations includes software licenses, maintenance fees, content delivery,
      online and mobile property development and management, website and mobile
      platform implementation, and advertising-based monetization.





Agency
      Services operations include direct marketing, incentive programs, internal
      communications, customer relationship management, sales promotion, creative
      production, sponsorships, online marketing, media planning, media buying and
      packaging. Although the Agency Services segment includes online media, its
      activities are broader than the video-centric activities of the Company’s
      Digital Media segment. As its 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”, all prior period information has been reported to conform
      to the new segment presentation. 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 the Company’s corporate
      executives, corporate governance costs, fees for professional service providers
      including audit, legal, tax, insurance, and other corporate
      expenses.





**Three
                months ended**
            
            **Six
                months ended****June
                30,**
            
            **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Revenue:**Digital
                Media
            
            $
            3,480
            
            $
            2,238
            
            $
            5,853
            
            $
            4,417Agency
                Services
            
            
            2,005
            
            
            1,346
            
            
            3,134
            
            
            2,169**Total
                revenue**
            
            $
            5,485
            
            $
            3,584
            
            $
            8,987
            
            $
            6,586**Operating
                (loss) income:**Digital
                Media
            
            $
            (2,227
            )
            $
            (5,673
            )
            $
            (5,606
            )
            $
            (10,366
            )Agency
                Services
            
            
            176
            
            
            (93
            )
            
            189
            
            
            (292
            )Corporate
            
            
            (1,270
            )
            
            (1,767
            )
            
            (8,714
            )
            
            (3,527
            )**Total
                operating (loss) income**
            
            $
            (3,321
            )
            $
            (7,533
            )
            $
            (14,131
            )
            $
            (14,185
            )**June
                  30,**
            
            
            
            
            **December
                31,****2008**
            
            
            
            
            **2007****Assets:**Digital
                Media
            
            $
            6,091
            
            
            
            
            $
            5,049Agency
                Services
            
            
            1,876
            
            
            
            
            
            1,887Corporate
            
            
            21,117
            
            
            
            
            
            11,179**Total
                assets**
            
            $
            29,084
            
            
            
            
            $
            18,115








***(13)
      Subsequent Events***


On
      April
      16, 2008, the Company was provided with notice of exercise by KIT Capital of
      its
      right pursuant to Section 4.5 of the Management Agreement by and between the
      Company and KIT Capital, dated December 18, 2007 to purchase $5,000 of the
      Company's common stock, either directly or through an affiliated entity, at
      a
      price of $0.16 per share (“KIT Capital Notice”).  At
      the
      time, KIT Capital and the Company tentatively agreed, conditional upon the
      review and approval of an independent committee of the Company's Board of
      Directors, that KIT Capital would (A) waive its right under the Management
      Agreement to purchase 51% of the Company's preferred stock; and (B) waive its
      right to require the Company to register the shares of common stock underlying
      the $5,000 investment pursuant to Section 4.5 of the Management Agreement,
      in
      consideration for the issuance by the Company of a five-year warrant to purchase
      2,800,000 shares of the Company's common stock at an exercise price of $0.16
      per
      share.




16


**KIT
        DIGITAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Amounts
        in Thousands, Except Share and Per Share Data)**
 **(Unaudited)**


Subsequent
        to the KIT Capital Notice, however, the May Financing was completed for a
        total
        of $15,000, as part of which KIT Media, an affiliate of KIT Capital, was
        the
        largest investor, at an investment level of $7,060 for a total of 35,300,000
        Units (common shares and warrants). KIT Media, at the behest of the Company,
        forewent its registration rights in the subsequent S-1 registration statement
        filed in relation to the May Financing, both for the registration of its
        35,300,000 common shares and the registration of its 35,300,000 warrants.
        As a
        result of this registration waiver, KIT Capital’s facilitation of the Company’s
        previous capital restructuring (including elimination of the Company’s preferred
        securities), and other factors surrounding the impairment of KIT Capital’s
        economic rights pursuant to the Management Agreement, on August 11, 2008
        the
        Board of Directors of the Company provisionally agreed, in conjunction with
        the
        receipt of $5,000 as originally offered as part of the KIT Capital Notice,
        to
        grant KIT Media 15,625,000 five-year warrants at a $0.16 strike price
        (representing 50% warrant coverage on this investment tranche, as opposed
        to the
        100% warrant coverage available to outside investors in the May Financing),
        in
        exchange for a fulsome mutual settlement of any disputes that might have
        arisen
        from the Management Agreement, subject to external counsel’s review and
        acceptable legal documentation.
 
 As
        such,
        the Company expects to receive the remaining funds from the final $5,000
        investment from KIT Media forthwith, for which it has already received certain
        funds as of August 13, 2008. These funds are being held in escrow pending
        resolution of the abovementioned matter, and are not accounted for in the
        Company’s reported cash balances.




17





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




Certain
      statements contained herein constitute forward-looking statements. In some
      cases, you can identify forward-looking statements by terminology such as “may,”
“will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“predict,” “potential” or “continue,” the negative of such terms, or other
      comparable terminology. All statements other than statements of historical
      fact
      made in this report are forward looking. In particular, the statements herein
      regarding industry prospects and future results of operations or financial
      position are forward-looking statements. Because such statements include risks
      and uncertainties, actual results may differ materially from those expressed
      or
      implied by such forward-looking statements as a result of certain factors,
      including, but not limited to, risks associated with the integration of
      businesses following an acquisition, competitors with broader product lines
      and
      greater resources, emergence into new markets, the termination of any of our
      significant contracts, our inability to maintain working capital requirements
      to
      fund future operations, or our inability to attract and retain highly qualified
      management, technical and sales personnel.




**Overview**





We,
      through our operating subsidiaries, are in the business of providing Internet
      software products and solutions that enable our customers to distribute video
      content through Internet websites and mobile devices. Our core activities
      include video player deployment, ingestion and transcoding, localization,
      content syndication, digital rights management, hosting, storage and content
      delivery. We currently provide video solutions internationally through our
      offices in Dubai, Melbourne (Australia), Stockholm, London, Toronto, New York,
      Cairo, Singapore and Bogotá. To support the core Internet protocol television,
      or IPTV, enablement, we provide integrated marketing solutions, including
      strategic planning, creative services, media planning and buying, design
      services, brand and retail advertising, and data management and
      analytics. Our
      subsidiary, Reality Group Pty.
      Ltd.
      (“Reality Group”) is an
      advertising agency offering clients a full range of traditional advertising
      services including media buying and planning, creative development, and
      packaging.





Set
      forth
      below is a discussion of the financial condition and results of operations
      of
      our company, KIT digital, Inc. and its consolidated subsidiaries (collectively,
      “we,” “us,” or “our”), for the three and six months ended June 30, 2008 and
      2007. The consolidated financial statements include the accounts of KIT digital,
      Inc., its wholly-owned subsidiary KIT Media Corporation, its wholly-owned
      subsidiary Bickhams Media, Inc. (“Bickhams”), its 51% owned subsidiary the
      Reality Group, its wholly-owned subsidiary Kamera Content AB (included as of
      the
      acquisition date of May 19, 2008) and its wholly-owned subsidiary KIT HD, Inc.
      Included in the consolidation with KIT Media Corporation are KIT Media
      Corporation’s wholly-owned subsidiary KIT digital Pty. Ltd. and KIT digital Pty.
      Ltd.’s wholly-owned subsidiary Undercover Media Pty. Ltd. (“Undercover Media”),
      its wholly-owned subsidiary KIT digital Limited, its wholly-owned subsidiary
      KIT
      Broadcasting Limited, its wholly-owned subsidiary Sputnik Agency Pty. Ltd.
      (“Sputnik”) (formerly Factory212 Pty. Ltd.) and its wholly-owned subsidiary KIT
      TV Pty. Ltd. Included in the consolidation with Bickhams is Bickhams’
wholly-owned subsidiary VideoDome.com Networks, Inc. (“VideoDome.com”). Included
      in the consolidation with Kamera Content AB are Kamera Content AB’s 95% owned
      subsidiary Kamera (S) PTE LTD and its 55% owned subsidiary Swegypt Company
      for
      Telecommunications (S.A.E). 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, and in light
      of recent and prospective business changes, including but not limited to (i)
      the
      integration of our Sputnik subsidiary, (ii) the closure of the RBS business
      unit
      and the cessation of certain other business activities, (iii) the
      regionalization of profit and loss accountability and (iv) the acquisition
      of
      Kamera, our management recently reviewed and modified the categorization of
      costs in the statements of operations. The new categories are presented below
      in
      the Results of Operations. Our management believes these changes in
      classifications present additional information to the users of the financial
      statements and have been made on a prospective basis with previously reported
      amounts recategorized to conform with the presentation for the current
      period.





**Results
      of Operations - Three Months Ended June 30, 2008 Compared to the Three Months
      Ended June 30, 2007**





REVENUE.
      Consolidated revenue increased by $1,901,000 from $3,584,000 for the three
      months ended June 30, 2007 to $5,485,000 for the three months ended June
      30, 2008, an increase of 53%.





Digital
      Media segment revenue increased by $1,242,000 from $2,238,000 for the three
      months ended June 30, 2007 to $3,480,000 for the three months ended June 30,
      2008, an increase of 55%. The increase is principally from the increase in
      customers, increase in spending by our existing customers, and the inclusion
      of
      revenue of the acquisition of Kamera in May 2008 not included in prior period
      results.





18


Advertising
      Agency segment revenue increased by $659,000 from $1,346,000 for the three
      months ended June 30, 2007 to $2,005,000 for the three months ended June 30,
      2008, an increase of 49%. The increase is primarily from the increase in
      customers and the increase in spending by our existing customers.





VARIABLE
      AND DIRECT THIRD PARTY COSTS





HOSTING,
      DELIVERY AND REPORTING. These costs decreased by $2,000 from $589,000 for the
      three months ended June 30, 2007 to $587,000 for the three months ended June
      30,
      2008. These costs remained the same due to the offset of the increase in costs
      due to the overlap of data centers in 2008 less the termination of the use
      of
      external marketing tools that were used in 2007.





CONTENT
      COSTS. Content costs increased by $139,000 from $496,000 for the three months
      ended June 30, 2007 to $635,000 for the three months ended June 30, 2008, an
      increase of 28%. The increase is primarily from the increase due to the
      inclusion of costs related to the acquisition of Kamera in May 2008 not included
      in prior period results less the decrease in content costs due to cost cutting
      measures to reduce monthly minimums and rates.





DIRECT
      THIRD PARTY CREATIVE PRODUCTION COSTS. Direct third party creative production
      costs increased by $441,000 from $779,000 for the three months ended June 30,
      2007 to $1,220,000 for the three months ended June 30, 2008, an increase of
      57%.
      This increase is primarily due to the increase in costs related to the Agency
      Services segment.





GENERAL
      AND ADMINISTRATIVE EXPENSES





COMPENSATION,
      TRAVEL AND ASSOCIATED COSTS (EXCLUSIVE OF NON-CASH STOCK-BASED COMPENSATION).
      These costs decreased by $2,309,000 from $6,393,000 for the three months ended
      June 30, 2007 to $4,084,000 for the three months ended June 30, 2008, a decrease
      of 36%. 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
      salaries.





NON-CASH
      STOCK-BASED COMPENSATION. Non-cash stock-based compensation expense decreased
      by
      $1,164,000 from $1,237,000 for the three months ended June 30, 2007 to $73,000
      for the three months ended June 30, 2008, a decrease of 94%.





LEGAL,
      ACCOUNTING, AUDIT AND OTHER PROFESSIONAL SERVICES FEES. These expenses increased
      by $32,000 from $237,000 for the three months ended June 30, 2007 to $269,000
      for the three months ended June 30, 2008, an increase of 14%.





OFFICE,
      MARKETING AND OTHER CORPORATE COSTS. These expenses decreased by $216,000 from
      $1,144,000 for the three months ended June 30, 2007 to $928,000 for the three
      months ended June 30, 2008, a decrease of 19%. The decrease was primarily due
      to
      the broad cost cutting measures begun in the first quarter of 2008 that continue
      to date and would include a reduction in marketing related
      expenses.





DEPRECIATION
      AND AMORTIZATION. Depreciation and amortization expense increased by $112,000
      from $242,000 for the three months ended June 30, 2007 to $354,000 for the
      three
      months ended June 30, 2008, an increase of 46%. The increase is due to the
      purchase of assets in 2008 for our new data center plus the inclusion of costs
      related to the acquisition of Kamera in May 2008 not included in prior period
      results.





RESTRUCTURING
      CHARGES. Restructuring charges of $146,000 for the three months ended June
      30,
      2008 consist of employee termination costs and facility closing
      costs.





OTHER
      NON-RECURRING CHARGES. Other non-recurring charges of $510,000 for the three
      months ended June 30, 2008 consist of IT overlap, acquisition costs, recruiting
      costs and corporate rebranding.





NON
      OPERATING INCOME AND EXPENSES





INTEREST
      INCOME. Interest income decreased by $184,000 from $213,000 for the three months
      ended June 30, 2007 to $29,000 for the three months ended June 30, 2008, a
      decrease of 86%. This decrease was primarily due to a decrease in our cash
      and
      cash equivalents related to the timing of the proceeds from the private
      placements in May 2007.




INTEREST
      EXPENSE, OTHER. Interest expense, other, increased by $14,000 from $26,000
      for
      the three months ended June 30, 2007 to $40,000 for the three months ended
      June
      30, 2008, an increase of 54%.




19


OTHER
      INCOME. Other income increased by $91,000 from $20,000 for the three months
      ended June 30, 2007 to $111,000 for the three months ended June 30, 2008, an
      increase of 455%. This was primarily due to a foreign currency gain on the
      settlement of notes receivable.




NET
      LOSS
      BEFORE INCOME TAXES AND MINORITY INTEREST. As a result of the factors described
      above, we reported a net loss before income taxes and minority interest of
      $3,221,000 for the three months ended June 30, 2008 compared to $7,326,000
      for
      the three months ended June 30, 2007, a decrease of $4,105,000, or
      56%.





**Results
      of Operations - Six Months Ended June 30, 2008 Compared to the Six Months Ended
      June 30, 2007**





REVENUE.
      Consolidated revenue increased by $2,401,000 from $6,586,000 for the six months
      ended June 30, 2007 to $8,987,000 for the six months ended June 30, 2008,
      an increase of 36%.





Digital
      Media segment revenue increased by $1,436,000 from $4,417,000 for the six months
      ended June 30, 2007 to $5,853,000 for the six months ended June 30, 2008, an
      increase of 33%. The increase is principally from the increase in customers,
      increase in spending by our existing customers, and the inclusion of revenue
      of
      the acquisition of Kamera in May 2008 not included in prior period
      results.





Agency
      Services segment revenue increased by $965,000 from $2,169,000 for the six
      months ended June 30, 2007 to $3,134,000 for the six months ended June 30,
      2008,
      an increase of 44%. The increase is primarily from the increase in customers
      and
      the increase in spending by our existing customers.





VARIABLE
      AND DIRECT THIRD PARTY COSTS





HOSTING,
      DELIVERY AND REPORTING. These costs decreased by $170,000 from $1,272,000 for
      the six months ended June 30, 2007 to $1,102,000 for the six months ended June
      30, 2008. These costs decreased due to the termination of the use of external
      marketing tools that were used in 2007.





CONTENT
      COSTS. Content costs decreased by $93,000 from $912,000 for the six months
      ended
      June 30, 2007 to $819,000 for the six months ended June 30, 2008, a decrease
      of
      10%. The decrease is primarily from the decrease in content costs due to cost
      cutting measures to reduce monthly minimums and rates plus the increase due
      to
      the inclusion of costs related to the acquisition of Kamera in May 2008 not
      included in prior period results.





DIRECT
      THIRD PARTY CREATIVE PRODUCTION COSTS. Direct third party creative production
      costs increased by $545,000 from $1,428,000 for the six months ended June 30,
      2007 to $1,973,000 for the six months ended June 30, 2008, an increase of 38%.
      This increase is primarily due to the increase in costs related to the
      Advertising Agency segment.





GENERAL
      AND ADMINISTRATIVE EXPENSES





COMPENSATION,
      TRAVEL AND ASSOCIATED COSTS (EXCLUSIVE OF NON-CASH STOCK-BASED COMPENSATION).
      These costs decreased by $3,076,000 from $11,483,000 for the six months ended
      June 30, 2007 to $8,407,000 for the six months ended June 30, 2008, a decrease
      of 27%. 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.





NON-CASH
      STOCK-BASED COMPENSATION. Non-cash stock-based compensation expense increased
      by
      $1,595,000 from $2,479,000 for the six months ended June 30, 2007 to $4,074,000
      for the six months ended June 30, 2008, an increase of 64%.





LEGAL,
      ACCOUNTING, AUDITING AND OTHER PROFESSIONAL SERVICES FEES. These expenses
      increased by $84,000 from $530,000 for the six months ended June 30, 2007 to
      $614,000 for the six months ended June 30, 2008, an increase of 16%.





OFFICE,
      MARKETING AND OTHER CORPORATE COSTS. These expenses decreased by $410,000 from
      $2,176,000 for the six months ended June 30, 2007 to $1,766,000 for the six
      months ended June 30, 2008, a decrease of 19%. The decrease was primarily due
      to
      the broad cost cutting measures begun in the first quarter of 2008 that continue
      to date and would include a reduction in marketing related
      expenses.





DEPRECIATION
      AND AMORTIZATION. Depreciation and amortization expense increased by $108,000
      from $491,000 for the six months ended June 30, 2007 to $599,000 for the six
      months ended June 30, 2008, an increase of 22%. The increase is due to the
      purchase of assets in 2008 for our new data center plus the inclusion of costs
      related to the acquisition of Kamera in May 2008 not included in prior period
      results.





20


RESTRUCTURING
      CHARGES. Restructuring charges of $2,891,000 for the six months ended June
      30,
      2008 consist of employee termination costs, contract settlements and facility
      closing costs.





OTHER
      NON-RECURRING CHARGES. Other non-recurring charges of $645,000 for the six
      months ended June 30, 2008 consist of IT overlap, acquisition costs, recruiting
      costs and corporate rebranding.





IMPAIRMENT
      OF PROPERTY AND EQUIPMENT. Impairment of property and equipment was $228,000
      for
      the six months ended June 30, 2008. This is related to the impairment of the
      property and equipment in the London office.





NON
      OPERATING INCOME AND EXPENSES





INTEREST
      INCOME. Interest income decreased by $242,000 from $332,000 for the six months
      ended June 30, 2007 to $90,000 for the six months ended June 30, 2008, a
      decrease of 73%. This decrease was primarily due to a decrease in our cash
      and
      cash equivalents related to the timing of the proceeds from the private
      placements in May 2007.





INTEREST
      EXPENSE, OTHER. Interest expense, other, increased by $21,000 from $33,000
      for
      the six months ended June 30, 2007 to $54,000 for the six months ended June
      30,
      2008, an increase of 64%.




OTHER
      INCOME. Other income increased by $112,000 from $20,000 for the six months
      ended
      June 30, 2007 to $132,000 for the six months ended June 30, 2008, an increase
      of
      560%. This was primarily due to a foreign currency gain on the settlement of
      notes receivable.




NET
      LOSS
      BEFORE INCOME TAXES AND MINORITY INTEREST. As a result of the factors described
      above, we reported a net loss before income taxes and minority interest of
      $13,963,000 for the six months ended June 30, 2008 compared to $13,866,000
      for
      the six months ended June 30, 2007, an increase of $97,000, or 1%.





**Liquidity
      and Capital Resources**





As
      of
      June 30, 2008, we had working capital of approximately $1,887,000 and cash
      and
      cash equivalents of $7,308,000. On May 8, 2008, we sold an aggregate of
      $15,000,000 of shares of common stock and warrants to accredited investors.
      Having completed this financing, we do not anticipate that we will need to
      raise
      additional capital to achieve our operational and acquisition growth plan.
      Pursuant to the KIT Capital Notice and associated negotiations described in
      Note
      13 Subsequent Events above, the Company also expects to receive an additional
      $5,000 in cash forthwith, of which, as of August 13, 2008, certain funds were
      being held in escrow and are not reflected in the Company’s reported cash
      balances.





Net
      cash
      used in operating activities was $8,261,000 for the six months ended June 30,
      2008 compared to $9,905,000 for the six months ended June 30, 2007, a decrease
      of $1,644,000, or 17%. The decrease in net cash used in operating activities
      is
      primarily related to the reduction in costs due to cost cutting done in
      2008.





Net
      cash
      used by investing activities was $9,241,000 for the six months ended June 30,
      2008 compared to $1,814,000 for the six months ended June 30, 2007, an increase
      in net cash used in investing activities of $7,427,000, or 409%. The difference
      primarily represents cash paid for the completion of the acquisition of Sputnik
      of $4,500,000 and cash paid in the acquisition of Kamera of $4,563,000 in 2008
      less the cash used in the issuance of $1,194,000 in notes receivable and the
      cash used in the investment in MyVideoDaily of $250,000 in 2007.





Net
      cash
      provided by financing activities was $14,707,000 for the six months ended June
      30, 2008 compared to $23,655,000 for the six months ended June 30, 2007. These
      amounts primarily consisted of net proceeds from private placements of
      $14,710,000 in May 2008 and $23,880,000 in May 2007.





**Market
      Risks**





We
      conduct our operations in primary functional currencies: the United States
      dollar, the British pound, the Australian dollar and the Swedish Krona.
      Historically, neither fluctuations in foreign exchange rates nor changes in
      foreign economic conditions have had a significant impact on our financial
      condition or results of operations. We currently do not hedge any of our foreign
      currency exposures and are therefore subject to the risk of exchange rate
      fluctuations. We invoice our international customers primarily in U.S. dollars,
      except in Europe and Australia, where we invoice our customers primarily in
      British pounds, Euros, Swedish Kronor and Australian dollars,
      respectively.




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. Foreign
      exchange rate fluctuations did not have a material impact on our financial
      results in the three and six months ended June 30, 2008 and
      2007.




21


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. 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 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.





**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, 2008. We cannot assure
      you that future inflation will not have an adverse impact on our operating
      results and financial condition.





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK.**





Not
      required.





**ITEM
      4T. CONTROLS AND PROCEDURES.**





*Evaluation
      of Disclosure Controls and Procedures* .
      Under
      the supervision and with the participation of our management, including our
      President, Chief Executive Officer and Chief Financial Officer, we evaluated
      the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered
      by this report. Based upon that evaluation, our President, Chief Executive
      Officer and Chief Financial Officer concluded that our disclosure controls
      and
      procedures as of the end of the period covered by this report were effective
      such that the information required to be disclosed by us in reports filed under
      the Exchange Act is (i) recorded, processed, summarized and reported within
      the
      time periods specified in the SEC’s rules and forms and (ii) accumulated and
      communicated to our management to allow timely decisions regarding disclosure.
      A
      controls system cannot provide absolute assurance, however, that the objectives
      of the controls system are met, and no evaluation of controls can provide
      absolute assurance that all control issues and instances of fraud, if any,
      within a company have been detected.





*Changes
      in Internal Control Over Financial Reporting.* During
      the most recent quarter ended June 30, 2008, there has been no change in our
      internal control over financial reporting (as defined in Rule 13a-15(f) and
      15d-15(f) under the Exchange Act)) that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.


22


**PART
      II - OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS.**





Except
      as
      set forth below, we are not a party to any pending legal proceeding, nor is
      our
      property the subject of a pending legal proceeding that is not in the ordinary
      course of business or is otherwise material to the financial condition of our
      company’s business. None of our directors, officers or affiliates is involved in
      a proceeding adverse to our business or has a material interest adverse to
      our
      business.





Our
      wholly-owned subsidiary, ROO HD, Inc. (“ROO HD”) (currently KIT HD, Inc.), has
      been served as a defendant in a lawsuit entitled Julie Vittengl et al. vs.
      ROO
      HD, Inc., a purported class action pending in New York Supreme Court, Saratoga
      County. The suit, brought by four former employees of Wurld Media, Inc.
      (“Wurld”) purportedly on behalf of themselves and “others similarly situated,”
claims that ROO HD’s acquisition of certain assets of Wurld was a fraudulent
      conveyance and that ROO HD is the alter-ego of Wurld. Plaintiffs seek the
      appointment of a receiver to take charge of our property in constructive trust
      for plaintiffs and payment of plaintiffs’ unpaid wages and costs of suit, both
      in an unspecified dollar amount. ROO HD filed its answer to the complaint in
      January 2008, and there have been no further developments in this action since
      then. We believe that the suit is without merit and will defend ourselves
      vigorously.





In
      December 2007, Rick Gell and Todd Pavlin, two former consultants of ROO Media
      Corporation (“ROO Media”) (currently KIT Media Corporation) sued that entity
      together with ROO Group, Inc. (currently KIT digital, Inc.) and our founder
      and
      Vice-Chairman Robert Petty and ROO Media’s former President and Chief Operating
      Officer Steve Quinn in New York Supreme Court, New York County, alleging breach
      of an oral employment agreement, fraudulent inducement and other claims relating
      to the plaintiffs’ employment at ROO Media. Defendants have moved to dismiss the
      complaint and are awaiting the Court’s decision. We believe that the suit is
      without merit and will defend ourselves vigorously.





**ITEM
      1A. RISK FACTORS.**





There
      are
      no material changes in the risk factors previously disclosed in our annual
      report on Form 10-KSB for the year ended December 31, 2007.





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




On
        May 8,
        2008, as part of the May Financing, the Company entered into a Securities
        Purchase Agreement pursuant to which it sold 75,000,000 units to 35 accredited
        investors, each unit comprising of one share of common stock plus one warrant
        to
        purchase one share of common stock. The May Financing closed on May 8, 2008.
        The
        units were sold at a price of $0.20 per unit for aggregate gross proceeds
        of
        $15,000. The warrants have an exercise price of $0.34 per share and a term
        of
        five years. These warrants were valued under the Black-Scholes-Merton method
        as
        $20,250. The warrants provide the investors with full ratchet anti-dilution
        protection with relation to the exercise price of each warrant. KIT Media
        Limited (“KIT Media”), an affiliate of KIT Capital, was the largest investor in
        the May Financing, investing $7,060 for a total of 35,300,000 units. The
        Company’s Chief Executive Officer, Kaleil Isaza Tuzman, holds a controlling
        interest in KIT Media.
 
 Pursuant
        to the terms of the Securities Purchase Agreement entered into with each
        of the
        accredited investors, the Company agreed to prepare and file a registration
        statement with the SEC registering the resale of the shares of common stock
        and
        the shares underlying the warrants on or prior to 30 days following the closing
        date. If the registration statement or any subsequent registration statement
        required to be filed by the Company is not filed within such time, the Company
        is required to pay liquidated damages to the investors equal to 1% of the
        dollar
        amount of their investment per month (pro rata on a 30-day basis), up to
        a
        maximum of 10% until the registration statement is filed. Further, if the
        registration statement is not declared effective within (i) 90 days of the
        closing (or in the event of a review by the SEC, within 120 days following
        the
        closing date), or (ii) 5 trading days after being notified that the registration
        will not be reviewed or will not be subject to further review, the Company
        is
        required to pay liquidated damages to the investors equal to 1% of the dollar
        amount of their investment per month (pro rata on a 30-day basis), up to
        a
        maximum of 10% until the registration statement is declared effective; provided
        that if one or more registration statements shall not be effective two years
        after the closing, the Company shall be required to pay an additional 8%
        in
        liquidated damages. In the event one or more registration statements are
        filed
        and declared effective, but shall thereafter cease to be effective and such
        lapse is not cured within 10 business days, the Company shall be required
        to pay
        liquidated damages to the investors equal to 1% of the dollar amount of their
        investment per month (pro rata on a 30-day basis), up to a maximum of 10%
        until
        the earlier of (i) the date the lapse is cured or (ii) the earlier of the
        expiration of the date on which all of the securities purchased by the investors
        can be sold either under the registration statement or pursuant to Rule 144.
        Although management filed the registration statement 71 days following the
        closing date, the management has a reasonable expectation that
        accredited investors will voluntarily forgo the liquidated damages in light
        of
        the circumstances that led to the delay—namely, the proper integration of
        Kamera’s financial results post the Kamera Acquisition. Furthermore, management
        expects the registration statement to be declared effective within 120 days
        of
        the closing of the May Financing. The Company has not registered the 35,300,000
        shares of common stock or the 35,300,000 shares underlying warrants purchased
        by
        KIT Media in the May Financing.
 
 Merriman
        Curhan Ford & Co. and Brimberg & Co., registered broker-dealers, acted
        as placement agents for the May Financing.  In
        connection with the May Financing, the Company paid the placement agents
        a cash
        fee of an aggregate $155. In addition, the Company issued to the placement
        agents 823,750 and 422,458 warrants to purchase shares of common stock with
        an
        exercise price of $0.01 and $0.34 per share exercisable for a period of five
        years and were valued under the Black-Scholes-Merton method as $222 and $118,
        respectively. In connection with the May Financing, the Company received
        net
        proceeds of $14,710 after payment of placement agents fees of $155, legal
        fees
        and expenses of $130 and escrow agent fees of $5.
 
 We
        relied
        upon an exemption from registration requirements pursuant to Rule 506 of
        Regulation D promulgated under the Securities Act of 1933, as
        amended.




**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
                Number**
            
            **Description**31.1
            
            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.





23





**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 13, 2008
            By:
            /s/
                Kaleil Isaza TuzmanKaleil
                Isaza TuzmanChief
                Executive Officer
              (principal
                executive officer)Dated:
                  August 13, 2008
            By:
            /s/
                Robin SmythRobin
                SmythChief
                Financial Officer
              (principal
                financial and accounting officer)







24