UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 _______________
  FORM
10-K
  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR
15(d)
 OF
      THE SECURITIES EXCHANGE ACT OF 1934
  For the
fiscal year ended December 31,
2008                                                                                           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
                incorporation
      or organization)
              (I.R.S.
      Employer
                Identification
      No.)168
      Fifth Avenue, Suite 301
                New
      York, New York
              10010(Address
      of principal
                executive
      offices)
              (Zip
      Code)
 _______________
   Registrant's
telephone number, including area code:  (646) 502-7484
  Securities
registered pursuant to Section 12(b) of the Act: None
 _______________
   Securities
registered pursuant to Section 12(g) of the Act:
 Common
      Stock, par value $0.001 per
      share(Title
      of class)
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes £  No
þ
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes £  No
þ
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days.    Yes þ  No
£
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  þ
  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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 o  Large
      accelerated filer
              
              o
       Non-accelerated filero  Accelerated
      filer
              
              þ
       Smaller reporting company
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
 Yes £  No
þ
  The
aggregate market value of the common equity held by non-affiliates of the
registrant was $24,861,523 as of June 30, 2008.
  Number of
shares outstanding of the registrant’s common stock as of April 10,
2009:  4,586,700 shares.
  
 KIT
digital, Inc.
  2008
FORM 10-K ANNUAL REPORT
  
 TABLE
OF CONTENTS
  PagePART IItem
      1.
                                    Description
      of Business
                                    1Item
      1A.
                                    Risk
      Factors
                                    5Item
      1B.
                                    Unresolved
      Staff Comments
                                    11Item
      2.
                                    Properties
                                    11Item
      3.
                                    Legal
      Proceedings
                                    12Item
      4.
                                    Submission
      of Matters to a Vote of Security Holders
                                    12PART IIItem
      5.
                                    Market
      for Common Equity and Related Stockholder Matters
                                    13Item
      6.
                                    Selected
      Financial Data
                                    13Item
      7.
                                    Management’s
      Discussion and Analysis or Plan of Operation
                                    14Item
      7A.
                                    Quantitative
      and Qualitative Disclosures about Market Risks
                                    20Item
      8.
                                    Financial
      Statements
                                    20Item
      9.
                                    Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                    20Item
      9A.
                                    Controls
      and Procedures
                                    20Item
      9B.
                                    Other
      Information
                                    21PART IIIItem
      10.
                                    Directors,
      Executive Officers, Promoters and Control Persons;Compliance
      With Section 16(a) of the Exchange Act
                                    22Item
      11.
                                    Executive
      Compensation
                                    27Item
      12.
                                    Security
      Ownership of Certain Beneficial Owners and Managementand
      Related Stockholder Matters
                                    35Item
      13.
                                    Certain
      Relationship and Related Transactions
                                    38Item
      14.
                                    Principal
      Accountant Fees and Services
                                    38Item
      15.
                                    Exhibits
                                    39SIGNATURES
                                    44
 
 
  PART
I
  ITEM
1.  BUSINESS
  Overview
of Our Business
 
 KIT
digital provides enterprise clients an end-to-end technology platform for
managing Internet Protocol (“IP”)-based video, including ingestion, transcoding,
storage, metatagging, localization, editing/repurposing, search optimization,
advertising, syndication and unicast distribution. KIT digital’s “VX” software
is used to manage consumer-focused video distribution for content owners,
distributors and network providers, and is used to manage corporate video assets
and video-based marketing programs for enterprises in the retail/franchising,
consumer & packaged goods, financial services, automotive and government
segments. The KIT VX solution allows for the management of IP-based video assets
for consumption across the “3 screens”:  the computer internet
browser, mobile device and television sets enabled to view programming delivered
via the internet called Internet Protocol Television or (“IPTV”). We offer
creative interface design, branding, strategic planning and technical
integration professional services to complement and enhance the use of our VX
software platform. Our clients can also also access approximately 100
KIT-syndicated channels and 40,000 KIT-syndicated videos.
 
 KIT
digital has hundreds of clients from over 30 countries. Our clients include ABC
Disney, Associated Press, General Motors, Google, IMG, Kmart, Nasdaq, News Corp,
RCS, Telefonica and Verizon.
 
 We have
principal offices in Dubai, Melbourne (Australia), Prague, Toronto, Stockholm,
New York and London, with sales or representative offices in Bogota, Buenos
Aires, Cairo and Singapore.
  Corporate
Information
 
 Our
registered headquarters is located at 168 Fifth Avenue, Suite 301, New York, New
York 10010, and our telephone number is  +1 (646) 502-7484. We
maintain a corporate website at www.kitd.com. The contents of our website are
not part of this annual report.
 
 On March
6, 2009, we filed a certificate of amendment of our certificate of incorporation
to (i) effect a 1-for-35 reverse stock split of our common stock; (ii) decrease
the total number of shares of common stock authorized to be issued from
500,000,000 shares to 30,000,000 shares; and (iii) eliminate the authorization
of a class of preferred stock.  The changes made by the certificate of
amendment were effective on March 9, 2009.  We presently have
4,586,700 outstanding shares of common stock. Effective March 9, 2009, our
ticker symbol on the OTC Bulletin Board was changed to “KDGL” from
“KITD.”
  All share
numbers and prices appearing in this annual report have been adjusted to reflect
the 1-for-35 reverse stock split of our outstanding shares of common stock,
except where otherwise indicated.
  
 Organizational
History
 
 We were
originally incorporated in Delaware in August 1998 under the name Virilitec
Industries, Inc.  For approximately five years prior to December 2003,
Virilitec engaged in unrelated business activities.
 
 In
December 2003, Virilitec completed a reverse merger transaction with our legal
predecessor, ROO Media Corporation (“ROO Media”), a Delaware corporation formed
in March 2001, which was substantially engaged in our present line of
business.  During 2001 and 2002, ROO Media focused on developing and
refining its products and solutions, commencing commercial sales of its
solutions in late 2003.  ROO Media originally developed a technology
platform designed to provide a cost effective, robust and scalable solution to
manage and syndicate video content over the Internet. In February 2004, we
changed our corporate name to ROO Group, Inc.
 
 In
December 2007, we entered into an agreement with KIT Capital, Ltd. (“KIT
Capital”), a company  beneficially controlled and led by Kaleil Isaza
Tuzman, our Chairman and Chief Executive Officer, under which KIT Capital has
provided us managerial services and substantial equity investment (see
“Employment and Management Agreements” below). In May 2008, we again changed our
corporate name to our present name, KIT digital, Inc.
 
 In May
2008, we completed a private placement of 2,142,858 shares of our common stock
at a price of $7.00 per share, and warrants to purchase 2,142,858 shares of
common stock at an exercise price of $11.90 per share, resulting in aggregate
gross cash proceeds of $15,000,000.  In the private placement, KIT
Media, Ltd. (“KIT Media”), a company controlled by Mr. Isaza Tuzman and
affiliated with KIT Capital, purchased 1,008,572 shares of common stock and
warrants to purchase a like number of shares of common stock.
 
 1
 In
addition to its investment of $7,060,000 in the May 2008 private placement, KIT
Media purchased 892,858 shares of common stock at a price of $5.60 per share
(for  total gross cash proceeds to us of $5,000,000) during the course
of 2008, pursuant to KIT Capital’s December 2007 agreement with us. In
conjunction with the purchase of these shares, KIT Media acquired warrants to
purchase 580,358 shares of common stock at an exercise price of $11.90 per
share, subject to the occurrence of certain events that could potentially reduce
the exercise price to $5.60 per share.
 
 KIT Media and KIT Capital currently own
approximately 41.85% of our outstanding shares of common stock.
 
 During
2008, we acquired the remaining 49% minority interest of one of our
subsidiaries. We also completed two primary acquisitions and one minor
acquisition, allowing us to complement our geographical coverage, and service
and technology offerings.
 
 
 Recent
Business Acquisitions
 
 Sputnik
Acquisition
 
 On May
14, 2008, the Company finalized its purchase of the original 51% interest in
Sputnik Agency Pty. Ltd. (“Sputnik”) and acquired the remaining 49% of that
entity, for consideration paid of $4,563,000. A total of $3,530,000 was paid in
cash to the sellers, $751,000 was applied against outstanding loans by the
Company’s 51%-owned subsidiary Reality Group Pty. Ltd. (“Reality”) to Sputnik’s
selling shareholders, and $282,000 was deposited in escrow against certain
potential liabilities. In November 2008, the escrow was released to Sputnik’s
selling shareholders. Therefore, the aggregate cost of the acquisition was
$4,656,000, which includes $93,000 in legal costs related to the
acquisition.
 
 Sputnik’s
sellers and certain of its employees entered into employment agreements
providing, among other things, for their continued employment with Sputnik and
/or Reality and certain restrictive covenants.
 
 Kamera
Acquisition
  On May
19, 2008, we acquired 100% of Kamera Content AB, (“Kamera”) a Stockholm,
Sweden-based company in the business of managing, developing and syndicating
video content for mobile and online distribution. Through its proprietary
software, transcoding and content distribution protocols, Kamera enables
corporate clients such as Associated Press, ABC News, Vodafone, MSN, Orange,
Telefonica, O2, Hutchinson and China Mobile to deliver IP video to their
customers over mobile and online networks.
 
 
 On
closing, we paid $4,500,000 less certain amounts previously owed to us by
Kamera, to the shareholders of Kamera. Pursuant to the terms of the transaction,
we paid an additional $1,500,000 in consideration in March 2009, and the Kamera
shareholders may be entitled to up to an additional $4,500,000 of consideration
payable in 2009 and 2010, subject to the achievement of certain performance
tests. The contingent consideration is payable in our publicly traded shares,
valued at current market prices or cash, as we determine. The performance
criteria relate to retention of staff and clients, and the maintenance and
growth of client revenue and our mobile revenue over the two years ending March
31, 2010.
 
 Kamera’s
software and technical services have become integrated into the Company’s VX
software platform.
 
 Morpheum
Acquisition
  On August
31, 2008, we acquired 100% of Morpheum Internet Services Pty. Ltd. (“Morpheum”)
, a Melbourne, Australia-based company, for consideration paid at closing of
$734,000, plus $56,000 in legal and consulting costs related to the acquisition
for an aggregate cost of $790,000. Morpheum is one of Asia’s leading providers
of web-based content management systems (“CMS”). Morpheum’s software,
LanternCMS, has become integrated into the Company’s VX software
platform.
  Visual
Connection Acquisition
  On
October 5, 2008, through our wholly-owned subsidiary, KIT digital FZ-LLC, we
acquired 100% of Visual Connection, a.s., Czech
Republic-based  company (“Visual”) specializing in the supply and
delivery of comprehensive IPTV solutions. Visual’s clients include television
and radio stations, graphics publishers, audiovisual production and post
production houses, governmental entities, education companies, telephone
companies and healthcare providers.
  2
 Taking
into account certain adjustments made to the original Visual Share Purchase
Agreement  made in March 2009, the purchase price of Visual
was:
  (a)           $1,180,000
in cash;
  (b)           $1,500,000
in shares of our common stock for a total of 163,043 shares,  which
are restricted for sale for 12 months thereafter;
  (c)           potential
earn-out payment aggregating to $3,225,000 in shares of our common stock
(determined based on the the higher of (i) the 20-day trailing weighted average
closing price per share prior to the respective payment date, and (ii) a price
“floor” of $7.70 per share), payable in three equal installments of $1,075,000,
12, 18 and 24 months following closing, subject in each case to achievement of
certain levels of the Company’s net revenues and EBITDA. and the retention of
key Visual personnel; and
  (d)           an
additional potential earn-out of $2,100,000 of shares of our common stock
(determined based on the the higher of (i) the 20-day trailing weighted average
closing price per share prior to the respective payment date, or (ii) a price
“floor” of $7.70 per share), for  achieving certain other net revenues
and EBITDA targets over the 24 month period following closing.
  KIT  retains
the right to substitute payments in cash for all potential issuances
of  common stock described above, irrespective of the trading price of
our common stock.
  Purchase of Reality Minority Interest
 
 On March
6, 2009, we acquired the 49% of Reality we did not already own, in
consideration for issuing the sellers 90,073 shares of our common stock,
valued at $631,000 at the time of issuance.
   Operations
Strategy
  During
2008, we made significant successful changes to the operations of our business,
including: (a) implementation of company-wide focus on enterprise software sales
and related services; (b) elimination of non-core activities related to network
advertising, ad sales, peer-to-peer networking, content production and consumer
portals; (c) reduction of overall general and administrative cost structure; (d)
hiring of key management, technical and sales personnel; (e) implementation of a
company-wide sales commissions program; (f) improved efficiency and reductions
in variable costs such as storage and streaming services; (g) initial
integration of various product modules from acquired entities into integrated VX
software suite; (h) consolidation of technical development personnel in Prague
and Toronto; and (i) relocation of operational headquarters from New York to
Dubai.
 
 We are
focused on the ongoing integration of our regional offices and products units.
Operational initiatives begun and continuing in 2009 include: (i) increased
standardization of client contracts; (ii) improvement of existing company-wide
sales commissions program; (iii) regional expansion and salesforce development
in Asia; (iv) improvement of behavioral analytics and report-routing
capabilities on the VX platform; (v) development of “off-deck” mobile publishing
and delivery capabilities; and (vi) introduction of inter-departmental invoicing
and cost-based accounting.
 
 Intellectual
Property
  We depend
on a portion of technology licensed to us by third parties and a portion owned
and developed by us. We license technology from third parties, including
software that is integrated with internally-developed software and used in our
products to perform certain  functions.
  3
 Products
and Services
  Our KIT
VX technology platform allows enterprise clients to more effectively manage
IP-based video assets, for use in browser, mobile handset and IPTV set-top box
environments. VX is comprised of modular capabilities, administered by our
proprietary content management system. Our standard product offering within VX
includes:
 ·
              Ingestion
      (including satellite or IP-based signal
capture)
 ·
              Transcoding
 ·
              Content
      meta-tagging and editing tools
 ·
              Storage
 ·
              Online
      and mobile video players
 ·
              Integration
      with ad-serving platforms
 ·
              Payment
      gateway integration
 ·
              Search
      engine optimization
 ·
              Optical
      character, speech-to-text and facial
recognition
 ·
              Streaming
      and delivery
 ·
              Dashboard
      usage metrics
 
 Our
professional services offering includes strategic planning, interface design and
deployment, brand positioning and merchandising, content repurposing and
syndication, systems integration, and deployment of IP-based recording and
editing suites.
 
 Competition
  Our
industry is characterized primarily by the expansion of the Internet as a means
to store, manipulate and deliver video.  This expansion is in turn
driven by increased broadband and 3G mobile network penetration
globally.
 
 We
believe that few competitors provide the range of functionality provided by our
VX software suite, but there are a number of competitors that provide certain
elements of the products and services we offer, including:
 
 ·
              Video
      content management and enablement; and·
              Video-centric
      interface design and creative
services.
 
 We
believe the key barriers to entry for the industry in which we operate are: (i)
the intellectual property, timeframe and costs to develop commercially robust,
feature-rich video content management platforms for online, mobile and IPTV
networks, (ii) established enterprise-class business relationships and (iii) the
time and resources involved to train and develop interface design, creative
services and technical integration professional services staff with IP video
expertise.
  
 Video content management and
enablement. There are a number of companies that offer competing tools
for enabling video content for consumption via the Internet and mobile networks,
including The Platform, Brightcove, Saffron Digital, Onstream Media, Silverback
Media, Entriq and The FeedRoom.
 
 Video-centric interface design and
creative services. There are myriad interactive marketing agencies
globally, many of which have some expertise in IP-based video-centric
design.
 
 We
believe that we set ourselves apart from our competitors via:
 
 ·
              The
      breadth and depth of the VX suite functionality;·
              Our
      global client and sales footprint, including multicultural and
      multilingual client services (as opposed to United States focus
      only);
 
 ·
              Our
      integrated online, mobile and IPV set-top box video content enablement
      capability (as opposed to online only),
and
 
 ·
              Our
      multi-format content syndication and repurposing capability;
      and·
              Our
      creative services and integration capabilities (as opposed to software
      provision only).
  4
 Government
Regulation
 
 We are
subject to risks associated with governmental regulation and legal
uncertainties. Few existing laws or regulations specifically apply to the
Internet, other than laws and regulations generally applicable to businesses.
Many laws and regulations, however, are pending and may be adopted in the United
States, individual states and local jurisdictions and other countries with
respect to the Internet. These laws may relate to many areas that impact our
business, including content issues (such as obscenity, indecency and
defamation), caching of content by server products, and the convergence of
traditional communication services with Internet communications, including the
future availability of broadband transmission capability and wireless networks.
These types of regulations are likely to differ between countries and other
political and geographic divisions. Other countries and political organizations
are likely to impose or favor more and different regulation than that which has
been proposed in the United States, thus furthering the complexity of
regulation. The adoption of such laws or regulations, and uncertainties
associated with their validity, interpretation, applicability and enforcement,
may affect the available distribution channels for and costs associated with our
products and services, and may affect the growth of the Internet. Such laws or
regulations may harm our business. Our products and services may also become
subject to investigation and regulation of foreign data protection authorities,
including those in the European Union. Such activities could result in
additional product and distribution costs for us in order to comply with such
regulation.
  Research
and Development
 
 We
continue to pursue opportunities to improve and expand our products and services
and have dedicated resources which continue to review and enhance our technology
platform and the products and solutions we offer. Currently, research and
development is conducted internally, as well as through outsourcing agreements.
We plan to consider opportunities to expand our current content categories to
offer specific lifestyle, children’s content, sport, science and educational
content.   We also explore opportunities including both internal product
development initiatives, as well as partnership opportunities with best-in-class
providers of technology such as Akamai, Viewdle and Pando Networks to further
enhance our distribution and technological infrastructure, and maintain our
competitive position. We cannot assure you, however, that we will achieve our
research and development goals.
 
 Employees
 
 As of
April 1, 2009, we had a total of 172 full-time employees, 16 part-time employees
and 10 consultants based in Asia, Europe, the Middle East and the Americas. We
consider our relations with our employees and consultants to be good. We have no
labor unions.
 
 ITEM
1A.  RISK FACTORS
  You
should carefully consider the risks described below as well as other information
provided to you in this annual report, including information in the section of
this document entitled “Forward-Looking Statements.” The risks and uncertainties
described below are not the only ones facing us. Additional risks and
uncertainties not presently known to us or that we currently believe are
immaterial may also impair our business operations. If any of the following
risks actually occur, our business, financial condition or results of operations
could be materially adversely affected, the value of our common stock could
decline, and you may lose all or part of your investment.
 
 Risks
Related to Our Business
 
 We have a history of losses which may
continue and which may negatively impact our ability to achieve our business
objectives.
 
 We have
incurred losses since our inception.  For the years ended December 31,
2008 and 2007, we generated revenue of $23,401,000 and $13,929,000,
respectively, and incurred  net losses of $18,975,000 and $34,564,000,
respectively. At December 31, 2008, we had working capital of $2,011,000 (total
current assets less total current liabilities not including the acquisition
liabilities payable in stock) and an accumulated deficit of
$82,499,000.  There can be no assurance that future operations will be
profitable. A failure to increase our revenues significantly or improve our
gross margins will harm our business. Even if we do achieve profitability, we
may not be able to sustain or increase profitability on a quarterly or annual
basis in the future. If our revenues do not grow at an appropriate rate, our
gross margins erode or do not improve, or our operating expenses increase at a
rate greater than our revenue increase, our operating results will suffer. The
prices we charge for our products and services may decrease, which would reduce
our revenues and harm our business. If we are unable to sell our products or
services at acceptable prices relative to our costs, or if we fail to develop
and introduce on a timely basis new products and services from which we can
derive additional revenues, our financial results will suffer.
  5
 Our operating units have limited
operating histories and we cannot ensure the long-term successful operation of
our business.
 
 Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by growing companies in new and rapidly evolving markets,
such as the digital media software markets, in which we operate. We must meet
many challenges including:
 
 ·
              Establishing
      and maintaining broad market acceptance of our products and services, and
      converting that acceptance into direct and indirect sources of
      revenue;
 
  
 ·
                  Establishing
      and maintaining adoption of our technology on a wide variety of platforms
      and devices;·
                  Timely
      and successfully developing new products, product features and services,
      and increasing the functionality and features of existing products and
      services;
 
 ·
              Developing
      services and products that result in high degrees of customer satisfaction
      and high levels of customer usage;
  ·
              Successfully
      responding to competition, including competition from emerging
      technologies and solutions;
 
 ·
              Developing
      and maintaining strategic relationships to enhance the distribution,
      features, content and utility of our products and services;
      and·
              Identifying,
      attracting and retaining talented technical and creative services staff at
      reasonable compensation levels.
 
 Our
business strategy may be unsuccessful and we may be unable to address the risks
we face in a cost-effective manner, if at all. If we are unable to successfully
address these risks, our business will be harmed.
  Our
resources may not be sufficient to manage our expected growth; failure to
properly manage our potential growth would be detrimental to our
business.
 
 We may
fail to adequately manage our anticipated future growth. Any growth in our
operations may place a significant strain on our administrative, financial and
operational resources, and increase demands on our management and on our
operational and administrative systems, controls and other resources. We cannot
assure you that our existing personnel, systems, procedures or controls will be
adequate to support our operations in the future or that we will be able to
successfully implement appropriate measures consistent with our growth strategy.
As part of this growth, we may have to implement new operational and financial
systems, procedures and controls to expand, train and manage our employee base,
and maintain close coordination among our technical, accounting, finance,
marketing, sales and editorial staff. We cannot guarantee that we will be able
to do so, or that if we are able to do so, we will be able to effectively
integrate them into our existing staff and systems. There may be greater strain
on our systems mainly because we have acquired several businesses over the last
15 months and have had to devote significant management time and expense to the
ongoing integration and alignment of management, systems, controls and
marketing. To the extent we acquire other businesses, we will also need to
integrate and assimilate new operations, technologies and personnel. If we are
unable to manage growth effectively, such as if our sales and marketing efforts
exceed our capacity to install, maintain and service our products or if new
employees are unable to achieve performance levels, our business, operating
results and financial condition could be materially adversely
affected.
  If we do not successfully develop new
products and services, our business will be harmed.
 
 Our
business and operating results would be harmed if we fail to expand our suite of
products and services (either through internal product or capability development
initiatives or through partnerships with best-in-class providers of digital
media technologies) that achieve widespread market acceptance or that fail to
generate significant revenue or gross profits to offset our operating and other
costs. We may not successfully identify, develop and market new product and
service opportunities in a timely manner. If we introduce new products and
services, they may not attain broad market acceptance or contribute meaningfully
to our revenue or profitability. Competitive or technological developments may
require us to make substantial, unanticipated investments in new products and
technologies or in new strategic partnerships, and we may not have sufficient
resources to make these investments. Because the markets for our products and
services are subject to rapid change, we must expand and/or evolve our product
and service offerings quickly. Delays and cost overruns could affect our ability
to respond to technological changes, evolving industry standards, competitive
developments or customer requirements.
 
 6
 If use of the Internet or wireless
data market does not continue to grow, or if the Internet or wireless
infrastructure cannot support demands placed on it by continued growth, our
business will be harmed.
  The
growth of our business depends on the continued growth of the Internet as a
medium for media consumption, communications, electronic commerce and
advertising, and also on the growth of the wireless data market, including the
growth of devices with multimedia capability. Our business will be harmed
if these markets and usage do not continue to grow, particularly as a
source of media information and entertainment and as a vehicle for commerce in
goods and services, or if widespread adoption of technology to access data and
multimedia content on wireless devices does not occur. If Internet usage and the
wireless data market grow, the Internet and wireless infrastructure may not be
able to support the demands placed on it by such growth, specifically the
demands of delivering high-quality media content. If this were to occur, our
business and financial condition would be harmed.
 
 We may be subject to legal liability
for providing third-party products, services or content.
 
 We have
arrangements to offer third-party products, services, content or advertising via
distribution on our websites. We may be subject to claims concerning these
products, services, content or advertising by virtue of our involvement in
marketing, branding, broadcasting or providing access to them, even if we do not
ourselves host, operate, or provide access to these products, services, content
or advertising. While our agreements with these parties often provide that we
will be indemnified against such liabilities, such indemnification may not be
adequate. It is also possible that if any information provided directly by us
contains errors or is otherwise negligently provided to users, third parties
could make claims against us. Investigating and defending any of these types of
claims is expensive, even if the claims do not result in liability. While to
date we have not been subject to material claims, if any potential claims do
result in liability, we could be required to pay damages or other penalties,
which could harm our business and our operating results.
 
 Our competitors may be larger and
have greater financial and other resources than we do and those advantages could
make it difficult for us to compete with them.
  The
market for software and services for media delivery over the Internet is
relatively new and constantly changing. We expect that competition will continue
to intensify. Increased competition may result in price reductions, reduced
margins, loss of customers, and changes in our business and marketing
strategies, any of which could harm our business. Current and potential
competitors may have longer operating histories, greater name recognition, more
employees and significantly greater financial, technical, marketing, public
relations and distribution resources than we do. In addition, new competitors
with potentially unique or more desirable products or services may enter the
market at any time. The competitive environment may require us to make changes
in our products, pricing, licensing, services or marketing to maintain and
extend our current brand and technology. Price concessions or the emergence of
other pricing, licensing and distribution strategies or technology solutions of
competitors may reduce our revenue, margins or market share, any of which will
harm our business. Other changes we have to make in response to competition
could cause us to expend significant financial and other resources, disrupt our
operations, strain relationships with partners, or release products and
enhancements before they are thoroughly tested, any of which could harm our
operating results and stock price.
  Any failure of our network could lead
to significant disruptions in our services business, which could damage our
reputation, reduce our revenues or otherwise harm our business.
  Our
business is dependent upon providing our customers with fast, efficient and
reliable services. A reduction in the performance, reliability or availability
of our websites and network infrastructure may harm our ability to distribute
our products and services to our clients, as well as our reputation and ability
to attract and retain clients, customers, advertisers and content providers. Our
systems and operations are susceptible to, and could be damaged or interrupted
by outages caused by fire, flood, power loss, telecommunications failure,
Internet or mobile network breakdown, earthquake and similar events. Our systems
are also subject to human error, security breaches, power losses, computer
viruses, break-ins, “denial of service” attacks, sabotage, intentional acts of
vandalism and tampering designed to disrupt our computer systems, websites and
network communications, and our systems could be subject to greater
vulnerability in periods of high employee turnover. A sudden and significant
increase in traffic on our websites or demand from the mobile users could strain
the capacity of the software, hardware and telecommunications systems that we
deploy or use. This could lead to slower response times or system failures. Our
failure to protect our network against damage from any of these events will harm
our business.
 
 7
 Our
operations also depend on receipt of timely feeds from our content providers,
and any failure or delay in the transmission or receipt of such feeds could
disrupt our operations. We also depend on web browsers, Internet service
providers (“ISPs”) and online service providers to provide Internet users access
to our websites and the websites of our customers on which we display
advertising. Many of these providers have experienced significant outages in the
past, and could experience outages, delays and other difficulties due to system
failures unrelated to our systems.
 
 We depend on various third parties to
maintain our communications hardware and perform most of our computer hardware
operations. If the third parties’ hardware and operations fail, our business
will be harmed.
 
 Substantially
all of our communications hardware and most of our computer hardware operations
are operated by third parties. If any of these providers’ hardware and
operations fail, our reputation and business will suffer. We do not have
complete backup systems for these operations. We have a limited disaster
recovery plan in the event of damage from fire, floods, hurricanes, earthquakes,
power loss, telecommunications failures, break-ins and similar events. Our
operations are dependent on our ability to protect our computer systems against
these unexpected adverse events. If any of the foregoing occurs, we may
experience a complete system shutdown. We have service level agreements in place
with some telecommunication providers. A problem with, or failure of, our
communications hardware or operations could result in interruptions or increases
in response times on the Internet sites of our customers. If we cannot maintain
our system in the event of unexpected occurrences, make necessary modifications
and/or improvements to the technology, such deficiencies could have a material
adverse effect upon our business, financial condition and results of
operations.
   We
depend on technology licensed to us by third parties. If we are unable to
maintain these licenses, our operations and financial condition will be
materially adversely affected.
 
 We
license technology from third parties, including software that is integrated
with internally developed software and used in our products to perform key
functions. The loss of, or our inability to maintain, these licenses could
result in increased costs or delay sales of our products. We anticipate that we
will continue to license technology from third parties in the future. This
technology may not continue to be available on commercially reasonable terms, if
at all. Although we do not believe that we are substantially dependent on any
individual licensed technology, some of the software that we license from third
parties could be difficult for us to replace. The loss of any of these
technology licenses could result in delays in the license of our products until
equivalent technology, if available, is developed or identified, licensed and
integrated. The use of additional third-party software would require us to
negotiate license agreements with other parties, which could result in higher
royalty payments and a loss of product differentiation.
  We
depend on content licensed to us by third parties. If we are unable to maintain
these licenses, our operations and financial condition will be materially
adversely affected.
 
 We rely
on content provided by third parties to increase market acceptance of our
products and services. Currently, our major third-party content providers are
Associated Press, ABC News, IMG, Reuters and Fox. If third parties do not
develop or offer compelling content to be delivered over the Internet or
wireless data market, or grant necessary licenses to us or our customers to
distribute or perform such content, our business will be harmed and our products
and services may not achieve or sustain broad market acceptance. We rely on
third-party content providers to develop and offer content in formats that
can be delivered using our products. We also rely entirely on third-party
content for our programming and content offerings. In some cases, we pay
substantial fees to obtain content for these services. We cannot guarantee that
third-party content providers will continue to support our technology or offer
compelling content in our formats, nor can we guarantee that we will be able to
secure licenses to third-party content or that such licenses will be available
at commercially reasonable rates, to encourage and sustain broad market
acceptance of our products and services. The failure to do so would materially
adversely harm our business operations and financial condition.
  If we do not adequately protect our
intellectual property rights, we may experience a loss of revenue and our
operations may be materially harmed.
 
 A portion
of our software was acquired from third parties. We have not registered
copyrights on any of the software we have developed. We rely upon
confidentiality agreements signed by our employees, consultants and third
parties to protect our intellectual property. We cannot assure you that we can
adequately protect our intellectual property or successfully prosecute potential
infringement of our intellectual property rights. Also, we cannot assure you
that others will not assert rights in, or ownership of, trademarks and other
proprietary rights of ours or that we will be able to successfully resolve these
types of conflicts to our satisfaction. Our failure to protect our intellectual
property rights may result in a loss of revenue and could materially adversely
affect our operations and financial condition.
 
 8
 If we are unable to retain the
services of Kaleil Isaza Tuzman and Gavin Campion or if we are unable to
successfully recruit qualified personnel, we may not be able to continue
operations.
 
 Our
success depends to a significant extent upon the continued service of Kaleil
Isaza Tuzman, our Chairman and Chief Executive Officer, and Gavin Campion, our
President. The loss of the services of Mr. Isaza Tuzman and Mr. Campion could
have a material adverse effect on our growth, revenues, and prospective
business. We have entered into an executive management agreement with KIT
Capital, an entity beneficially controlled by Mr. Isaza Tuzman, providing for
the services of Mr. Isaza Tuzman and other KIT Capital personnel, for a term of
three years, pursuant to which Mr. Isaza Tuzman serves as Chief Executive
Officer. We have also entered into an employment agreement with Mr. Campion. If
either Mr. Isaza Tuzman or Mr. Campion were to resign, the loss could result in
loss of sales, delays in new product development and diversion of management
resources, and we could face high costs and substantial difficulty in hiring a
qualified successor and could experience a loss in productivity while any such
successor obtains the necessary training and experience. In addition, in order
to successfully implement and manage our business plan, we are dependent upon,
among other things, successfully recruiting qualified personnel who are familiar
with the specific issues facing the Internet media industry. In particular, we
must hire and retain experienced management personnel to help us continue to
grow and manage our business, and skilled software engineers to further our
research and development efforts. Competition for qualified personnel is
intense. If we do not succeed in attracting new personnel or in retaining and
motivating our current personnel, our business could be harmed.
 
 We
may be unable to integrate successfully recent acquisitions and realize the full
benefits of the combined businesses.
 
 The
acquisitions of Kamera, Morpheum and Visual have involved the integration of
businesses that have previously operated separately. The difficulties of
combining the operations of these businesses include:
 
 •
              the
      challenge of effecting integration while carrying on the ongoing
      businesses;
 
 •
              the
      necessity of coordinating geographically separate organizations;
      and
 
 •
              effective
      integration of personnel with diverse business
  backgrounds.
  Poorly
handling the process of integrating operations could cause an interruption of,
or a lessening of our activities and the loss of key personnel. The diversion of
management’s attention, or any delays or difficulties encountered in connection
with the integration of the acquired operations could have an adverse effect on
our business, financial condition or results of operations.
  Our
growth strategy depends, in part, on our acquiring complementary businesses and
assets and expanding their existing operations, which we may be unable to
do.
  Our
growth strategy is based, in part, on our ability to acquire other complementary
businesses and assets. The success of this acquisition strategy will depend, in
part, on our ability to accomplish the following:
 
 •
              Identify
      suitable businesses or assets to buy;•
              Complete
      the purchase of those businesses on terms, or over a timeframe, acceptable
      to us; and•
              Improve
      the results of operations of each of the businesses that we buy or
      successfully integrate its
operations.
 
 There can
be no assurance that we will be successful in pursuing any or all of these
steps. Our failure to implement our acquisition strategy could have an adverse
effect on other aspects of our business strategy and our business in
general.
  Fluctuations
in foreign currency exchange rates affect our operating results in U.S. dollar
terms.
  A portion
of our revenues arises from international operations. Revenues generated
and expenses incurred by our international subsidiaries are often denominated in
the currencies of the local countries. As a result, our consolidated U.S. dollar
financial statements are subject to fluctuations due to changes in exchange
rates as the financial  results of our international subsidiaries are
translated from local currencies into U.S. dollars. In addition, our
financial results are subject to changes in exchange rates that impact the
settlement of transactions in non-local currencies.
  9
 
 We
may be required to record a significant charge to earnings if our goodwill,
amortizable intangible assets, or investments in equity interests become
impaired.
  We are
required under generally accepted accounting principles to test goodwill for
impairment at least annually and to review our amortizable intangible assets and
investments in equity interests for impairment when events or changes in
circumstance indicate the carrying value may not be recoverable. Factors that
could lead to impairment of goodwill and amortizable intangible assets include
significant adverse changes in the business climate and declines in the
financial condition of our business. Factors that could lead to impairment of
investments in equity interests include a prolonged period of decline in the
stock price or operating performance of, or an announcement of adverse changes
or events by, the company in which we invested. We have recorded and may be
required in the future to record additional charges to earnings if a portion of
our goodwill, amortizable intangible assets, or investments in equity interests
becomes impaired. Any such charge would adversely impact our
results.
  Our
international operations are subject to increased risks which could harm our
business, operating results and financial condition.
  In
addition to uncertainty about our ability to continue to generate revenues from
our foreign operations and expand our international market position, there are
risks inherent in doing business internationally, including:
  •
              
              trade
      barriers and changes in trade
regulations;
  •
              
              difficulties
      in developing, staffing, and simultaneously managing a large number of
      varying foreign operations as a result of distance, language, and cultural
      differences;
 
 •
              
              the
      need to comply with varied local laws and
  regulations;
  •
              
              longer
      payment cycles;
  •
              
              Possible
      credit risk and higher levels of payment
fraud;
  •
              
              profit
      repatriation restrictions and foreign currency exchange
      restrictions;
  •
              
              political
      or social unrest, economic instability or human rights
    issues;
  •
              
              geopolitical
      events, including acts of war and
terrorism;
  •
              
              import
      or export regulations;
  •
              
              compliance
      with U.S. laws (such as the Foreign Corrupt Practices Act), and local laws
      prohibiting corrupt payments to government
  officials;
 
 •
              
              laws
      and business practices that favor local competitors or prohibit foreign
      ownership of certain businesses;
and
  •
              
              different
      and more stringent user protection, data protection, privacy and other
      laws.
  Violations
of complex foreign and U.S. laws and regulations that apply to our international
operations could result in fines, criminal sanctions against us, our officers or
our employees, prohibitions on the conduct of our business and damage to our
reputation.
  Although
we have implemented policies and procedures designed to promote compliance with
these laws, there can be no assurance that our employees, contractors or agents
will not violate our policies. These risks inherent in our international
operations and expansion increase our costs of doing business internationally
and could result in harm to our business, operating results and financial
condition.
 
 
 Risks
Related to Our Securities
  Our historic stock price has been
volatile and the future market price for our common stock is likely to continue
to be volatile. Further, the limited market for our shares will make our price
more volatile. This may make it difficult for stockholders to sell our common
stock for a positive return on stockholders investment.
 
 10
 The
public market for our common stock has historically been very volatile. Any
future market price for our shares is likely to continue to be very volatile.
This price volatility may make it more difficult for stockholders to sell shares
when stockholders want at prices stockholders find attractive. We do not know of
any one particular factor that has caused volatility in our stock price.
However, the stock market in general has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies. Broad market factors and the investing public’s
negative perception of our business may reduce our stock price, regardless of
our operating performance. Further, the market for our common stock is limited
and we cannot assure you that a larger market will ever be developed or
maintained. Market fluctuations and volatility, as well as general economic,
market and political conditions, could reduce our market price. There is a risk
that earn out payments in our shares may occur at inopportune times. As a
result, this may make it difficult or impossible for stockholders to sell our
common stock for a positive return on stockholders investment.
 
 Our
officers and directors have significant voting power and may take actions that
may not be in the best interests of other stockholders.
 
 Our
executive officers and directors control approximately 42.22% of our outstanding
voting securities.  If these stockholders act together, they will be
able to exert significant control over our management and affairs requiring
stockholder approval, including approval of significant corporate
transactions.  This concentration of ownership may have the effect of
delaying or preventing a change in control and might adversely affect the market
price of our common stock.  This concentration of ownership may not be
in the best interests of all of our stockholders.
  We
do not anticipate paying dividends in the foreseeable future; you should not buy
our stock if you expect dividends.
 
 We currently intend to retain our
future earnings to support operations and to finance expansion and, therefore,
we do not anticipate paying any cash dividends on our common stock in the
foreseeable future.  You should not buy our shares if you are
expecting to receive cash dividends.
 
 
 FORWARD-LOOKING
STATEMENTS
 
 Information
in this annual report contains forward-looking statements. These forward-looking
statements can be identified by the use of words such as “believes,”
“estimates,” “could,” “possibly,” “probably,” “anticipates,” “projects,”
“expects,” “may,” or “should” or other variations or similar words. No
assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to those
forward-looking statements, including certain risks and uncertainties that could
cause actual results to vary materially from the future results anticipated by
those forward-looking statements. A description of key factors that have a
direct bearing on our results of operations is provided above under “Risk
Factors” beginning on page 5 of this annual report.
 
 ITEM
1B.  UNRESOLVED STAFF COMMENTS
  None
  ITEM
2.  PROPERTIES
  We have
principal offices in Dubai, Melbourne (Australia), Prague, Toronto, Stockholm,
New York and London, with sales or representative offices in Bogota, Buenos
Aires, Cairo and Singapore.
 
 Our Dubai
office is located at Dubai Media City, Building #9, Suite #107, Dubai, UAE.
These premises consists of 780 square feet of office space. We are currently
exiting this month-to-month lease.
   
 Our main
Melbourne office is located at 116 -122 Chapel Street, Windsor 3181, Victoria,
Australia. These premises consist of 8,611 square feet of office
space.
 
 We have a
second Melbourne office located at 210 Albert Road, South Melbourne 3205,
Victoria, Australia. These premises consist of 18,654 square feet of office
space.
 
 11
 Our
Prague office is located at Slezska 113, 13000, Czech Republic. These premises
consist of approximately 12,750 square feet of office space.
 
 Our
Toronto office is located at 2595 Skymark Avenue, Mississauga, Ontario. These
premises consist of approximately 6,000 square feet of office
space.
 
 Our
Stockholm office is located at Drottninggatan 92-94 111 36, Stockholm, Sweden.
These premises consist of approximately 2,200 square feet of office
space.
 
 Our New
York office is located at 168 Fifth Avenue, Suite 301, New York, NY 10010. These
premises consist of 2,400 square feet of office space.
  Our
London office is a serviced office located at 3 More London Riverside, London
SE1 2RE, United Kingdom. These premises consist of approximately 1,400 square
feet of office space.
 
 
 Our Bogotá office is located at Cra 7
#74-64 Edificio Corficaldos, Of 1203, Bogotá, Colombia.
 
 Our
Buenos Aires office is located at Tacuari 237, Piso 7, C1024AAF, Ciudad de
Buenos Aires, Argentina.
 
 Our Cairo
office is located at 1121 Corniche El Nile St., Maspero, Cairo 11221,
Egypt.
 
 Our
Singapore office is located at 10 Anson Road, #32-11, International Plaza,
Singapore 079903, Singapore.
 
  
 ITEM
3.  LEGAL PROCEEDINGS
  Other
than 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 otherwise material to the financial condition of
our business. None of our directors, officers or affiliates is
involved.
 
 In
November 2007, our wholly-owned subsidiary, KIT HD, Inc. (“KIT HD”), was named
as the defendant in a purported class action lawsuit entitled Julie Vittengl
et al. vs. KIT HD, in
New York Supreme Court, Saratoga County, New York.  The suit, brought
by four former employees of Wurld Media, Inc. (“Wurld”), purportedly on behalf
of themselves and “others similarly situated,” claims that KIT HD’s acquisition
of certain assets of Wurld was a fraudulent conveyance and that KIT 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.  KIT 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 we intend to defend ourself
vigorously should the case become active.
 
 In
December 2007, Rick Gell and Todd Pavlin, two former consultants of KIT Media
Corporation (“KIT Media”) sued that entity together with KIT digital, Inc. and
its former Vice-Chairman Robert Petty and KIT Media’s former President and Chief
Operating Officer Steve Quinn in New York Supreme Court, New York County, New
York, alleging breach of an oral employment agreement, fraudulent inducement and
other claims relating to the plaintiffs’ employment at KIT
Media.  Last year, defendants moved to dismiss the complaint, and in
March 2009 the court dismissed all of plaintiffs’ claims save their breach of
contract claim on the grounds that it is based on an alleged oral agreement,
which plaintiffs may be able to prove. We believe that there is no merit to this
suit, and we intend to continue to defend ourself vigorously.
  
 ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  No
matters were submitted to a vote of security holders during the fourth quarter
of 2008.
  12
 PART
II
  ITEM
5. MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
  
 Market
Information
  Our
shares of common stock are currently quoted and listed for trading on the OTC
Bulletin Board under the trading symbol KDGL.  From May 29, 2008 to
March 9, 2009 (the date of our 1-for-35 reverse stock split), our trading symbol
was KITD.  Prior to May 29, 2008, when our corporate name was ROO
Group, Inc., our trading symbol was RGRP.
  The
following table sets forth the high and low closing prices for our common stock
for the periods indicated as reported by the OTC Bulletin Board.
  Year ended December 31,Quarter
                            
                            2007
                            
                            
                            2008
                            
                            
                            2009High
                            
                            
                            Low
                            
                            
                            High
                            
                            
                            Low
                            
                            
                            High
                            
                            
                            LowFirst
                            
                            $
                            153.99
                            
                            
                            $
                            88.55
                            
                            
                            $
                            8.58
                            
                            
                            $
                            2.10
                            
                            
                            $
                            9.25
                            
                            
                            $
                            5.95Second
                            
                            
                            110.95
                            
                            
                            
                            65.80
                            
                            
                            
                            14.70
                            
                            
                            
                            5.25
                            
                            
                            
                            --
                            
                            
                            
                            --Third
                            
                            
                            70.00
                            
                            
                            
                            24.50
                            
                            
                            
                            11.20
                            
                            
                            
                            6.65
                            
                            
                            
                            --
                            
                            
                            
                            --Fourth
                            
                            
                            40.25
                            
                            
                            
                            4.87
                            
                            
                            
                            9.45
                            
                            
                            
                            3.85
                            
                            
                            
                            --
                            
                            
                            
                            --
 
  On April
10, 2009, the closing price of our common stock, as reported by the OTC Bulletin
Board, was $8.40 per share.
  These
high and low closing prices represent prices quoted by broker-dealers on the OTC
Bulletin Board.  The quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions, and may not necessarily represent
actual transactions.
  As of
April 10, 2009, there were 4,586,700 shares of our common stock outstanding and
approximately 240 holders of record of our common stock.  However, we
believe that there are significantly more beneficial holders of our common stock
holding their shares in “street name.”
  The
transfer agent of our common stock is Continental Stock Transfer & Trust
Co., 17 Battery Place, New York, New York 10004, telephone number: (212)
509-4000.
 
 Dividends
 
 We have
not declared any dividends to date. We have no present intention of paying cash
dividends on our common stock at any time in the foreseeable future as we intend
to use earnings, if any, to generate growth. The payment by us of dividends, if
any, in the future rests within the discretion of our board of directors and
will depend upon, among other things, our earnings, capital requirements and
financial condition, as well as other relevant factors. There are no
restrictions in our certificate of incorporation or by-laws on declaring
dividends. The terms of our senior secured promissory note with Genesis Merchant
Partners, LP prohibit us from paying dividends on our common stock.
 
 Equity
Repurchases
  None.
  Equity
Compensation Plan Information
  The
information set forth below in Item 11 of this report under the caption “Equity
Compensation Plan Information” is incorporated herein by reference in its
entirety.
   ITEM 6.  SELECTED FINANCIAL
DATA
  Not
applicable.
  13
  ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Overview
 
 Through
our operating subsidiaries, we 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 online video player deployment, ingestion and transcoding video content
for internet and mobile devices, IPTV set-top box development, IPTV recording
and editing suite deployment, video content localization and syndication,
digital rights management, hosting, storage and content delivery. We currently
provide video solutions internationally through our offices in Dubai, Melbourne
(Australia), Prague, Toronto, Stockholm, New York, London, Cairo, Singapore,
Buenos Aires and Bogotá. To support IPTV enablement, we provide systems
integration and integrated marketing solutions, including 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”), offers clients a full range of traditional marketing 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
KIT digital, Inc. and its consolidated subsidiaries (collectively, “we,” “us,”
or “our”), for the year ended December 31, 2008 and 2007. 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 the cessation of non-core
business activities, (iii) the regionalization of profit and loss accountability
and (iv) recent business acquisitions, our management recently reviewed and
modified the categorization of costs in the Consolidated Statements of
Operations. The new categories are presented below under Results of Operations.
Management believes these changes in classifications present additional
information to the readers of the financial statements and have been made on a
prospective basis with previously reported amounts re-categorized to conform to
the presentation for the current period.
 
 
 Results
of Operations - Year Ended December 31, 2008 Compared to the Year Ended December
31, 2007
 
 REVENUE.
Consolidated revenue increased by $9,472,000 from $13,929,000 for the year ended
December 31, 2007 to $23,401,000 for the year ended December 31, 2008, an
increase of 68%.
 
 Digital
Media segment revenue increased by $8,582,000 from $9,525,000 for the year ended
December 31, 2007 to $18,107,000 for the year ended December 31, 2008, an
increase of 90%. The increase is principally due to an  increase in
customers, increased spending by  existing customers, and revenue from
the acquired companies not included in prior period results.
 
 Agency
Services segment revenue increased by $890,000 from $4,404,000 for the year
ended December 31, 2007 to $5,294,000 for the year ended December 31, 2008, an
increase of 20%. The increase is primarily from the growth of client base and
increases in spending by  existing clients.
 
 VARIABLE
AND DIRECT THIRD PARTY COSTS
 
 COST OF
GOODS AND SERVICES. Cost of goods and services of $2,845,000 represents the
costs of equipment and services by Visual for the supply of digital media and
IPTV solutions, services and components; no such expenses were incurred prior to
the acquisition of Visual in October 2008.
 
 HOSTING,
DELIVERY AND REPORTING. These costs decreased by $317,000 from $2,341,000 for
the year ended December 31, 2007 to $2,024,000 for the year ended December 31,
2008. These costs decreased primarily due to the termination of the use of
external marketing tools that were used in 2007 and the establishment of an
internal datacenter which reduced our reliance on third party
suppliers.
 
 CONTENT
COSTS. Content costs increased by $1,115,000 from $1,304,000 for the year ended
December 31, 2007 to $2,419,000 for the year ended December 31, 2008, an
increase of 86%. The increase is primarily  due to the inclusion of
costs from  Kamera  (acquired May 2008) not included in
prior period results.
 
 14
 DIRECT
THIRD PARTY CREATIVE PRODUCTION COSTS. Direct third party creative production
costs decreased by $133,000 from $3,242,000 for the year ended December 31, 2007
to $3,109,000 for the year ended December 31, 2008, a decrease of 4%
attributable to lower costs in the Agency Services segment.
 
 GENERAL
AND ADMINISTRATIVE EXPENSES
 
 COMPENSATION,
TRAVEL AND ASSOCIATED COSTS (EXCLUSIVE OF NON-CASH STOCK-BASED COMPENSATION).
These costs decreased by $8,342,000 from $23,839,000 for the year ended December
31, 2007 to $15,497,000 for the year ended December 31, 2008, a decrease of 35%.
The decrease was primarily due to the broad cost cutting measures begun in the
first quarter of 2008 which included a reduction in headcount and salary levels
offset in part by increases due to acquisitions.
 
 NON-CASH
STOCK-BASED COMPENSATION. Non-cash stock-based compensation expense increased 3%
by $121,000, from $4,748,000 for the year ended December 31, 2007 to $4,869,000
for the year ended December 31, 2008.
 
 LEGAL,
ACCOUNTING, AUDITING AND OTHER PROFESSIONAL SERVICES FEES. These expenses
decreased by $580,000 from $1,807,000 for the year ended December 31, 2007 to
$1,227,000 for the year ended December 31, 2008, a decrease of 32%, primarily
due to lower legal fees.
 
 OFFICE, MARKETING AND OTHER CORPORATE
COSTS. These expenses decreased by $477,000 from $3,988,000 for the year ended
December 31, 2007 to $3,511,000 for the year ended December 31, 2008, a decrease
of 12%. The decrease was primarily due to the broad cost cutting measures begun
in the first quarter of 2008 and includes a reduction in marketing related
expenses.
  MERGER
AND ACQUISITION AND INVESTOR RELATION EXPENSES. Merger and acquisition and
investor relation expenses were $427,000 for the year ended December 31, 2008.
There were no such expenses in 2007.
  
 DEPRECIATION
AND AMORTIZATION. Depreciation and amortization expense decreased 21% by
$465,000 from $2,236,000 for the year ended December 31, 2007 to $1,771,000 for
the year ended December 31, 2008. This has remained relatively constant
primarily due to the increases related to the acquisitions of Visual in October
2008, Kamera in May 2008 and Morpheum in September 2008 offsetting the
depreciation and amortization that decreased due to the assets of approximately
$4.3 million acquired from the asset purchase agreement with Wurld Media in July
2007 which were subsequently abandoned in December 2007.
  RESTRUCTURING
CHARGES. Restructuring charges of $3,068,000 for the year ended December 31,
2008 consist of employee termination costs, contract settlements and facility
closing costs. There were no restructuring charges for the year ended December
31, 2007.
 
 OTHER
NON-RECURRING CHARGES. Other non-recurring charges of $1,111,000 for the year
ended December 31, 2008 consist of IT overlap, acquisition costs, recruiting
costs, relocation of headquarters, corporate rebranding and write-off of a prior
year disputed charge. There were no other non-recurring charges for the year
ended December 31, 2007.
 
 SETTLEMENT
OF MYVIDEODAILY AGREEMENT. A settlement of $500,000 for the year ended December
31, 2007 was paid upon the execution of the settlement agreement with RJM Price
& Company, Inc. and Robertson Price on October 18, 2007.
 
 IMPAIRMENT
OF PROPERTY AND EQUIPMENT. Impairment of property and equipment was $229,000 for
the year ended December 31, 2008 and $788,000 for the year ended December 31,
2007. In 2008, the impairment related to the abandonment of assets due to the
downsizing of our London office. In 2007, a loss on impairment of property and
equipment of $788,000 was recorded related to the abandonment of the assets of a
business that we acquired in the agreement with Wurld Media.
 
 IMPAIRMENT
OF GOODWILL AND INTANGIBLE ASSETS. In 2007, a loss on impairment of goodwill and
intangible assets of $3,374,000 was recorded. This is comprised of $2,783,000
related to the abandonment of the software assets of a business that we acquired
in the agreement with Wurld Media, $255,000 related to the impairment of
content, $250,000 related to the impairment of goodwill related to the
MyVideoDaily acquisition and $86,000 related to the impairment of customer lists
acquired from Cooee. There were no impairment charges in 2008.
 
 15
 INTEREST
INCOME. Interest income decreased by $561,000 from $725,000 for the year ended
December 31, 2007 to $164,000 for the year ended December 31, 2008, a decrease
of 77%. This decrease was primarily due to a decrease in our cash and cash
equivalents related to the timing of the proceeds from private
placements.
 
 INTEREST
EXPENSE, OTHER. Interest expense, other, increased by $158,000 from $70,000 for
the year ended December 31, 2007 to $228,000 for the year ended December 31,
2008, an increase of 226%. This increase was due to the issuance of $1,500,000
of a senior secured note in November 2008 and the addition of debt and capital
lease obligations acquired in the acquisition of Visual in October
2008
  AMORTIZATION
OF DEFERRED FINANCING COSTS. Amortization of deferred financing costs was
$110,000 for the year ended December 31, 2008. These costs result from the
issuance of $1,500,000 of a senior secured note in November 2008.
 
 OTHER
INCOME/(EXPENSE). Other income increased by a net $82,000. Other expense was
$51,000 for the year ended December 31, 2007 as compared to other income of
$31,000 for the year ended  December 31, 2008. This was primarily due
to a foreign currency gain on the settlement of notes receivable.
  REGISTRATION
RIGHTS LIQUIDATED DAMAGES. Registration rights liquidated damages were $117,000
for the year ended December 31, 2008 and $792,000 for the year ended December
31, 2007.
 
 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
$18,966,000 for the year ended December 31, 2008 compared to $34,426,000 for the
year ended December 31, 2007, a decrease of $15,460,000, or 45%.
 
 Liquidity
and Capital Resources
 
 As of
December 31, 2008, we had cash and cash equivalents of $5,878,000 and a working
capital deficit of approximately $3,100,000, which if reduced for the
acquisition liabilities for Kamera and Visual that can be paid in stock of
$5,111,000, becomes a working capital surplus of $2,011,000. On May 8, 2008, we
sold an aggregate of $15,000,000 in shares of common stock and warrants to
accredited investors.  On December 31, 2008 we sold $5,000,000 of
shares of common stock to KIT Media, Ltd as part of the management agreement
dated December 19, 2007. The $5,000,000 was received in two tranches of
$2,500,000; the first on August 12, 2008 and the balance of $2,500,000 on
December 31, 2008.
 
 Net cash
used in operating activities was $12,816,000 for the year ended December 31,
2008 compared to $20,785,000 for the year ended December 31, 2007, a decrease of
$7,969,000, or 38%. The decrease in net cash used in operating activities is
primarily related to the reduction in costs due to cost saving measures
implemented in 2008.
 
 Net cash
used by investing activities was $11,715,000 for the year ended December 31,
2008 compared to $4,342,000 for the year ended December 31, 2007, an increase in
net cash used in investing activities of $7,373,000, or 170%. In 2008, this
primarily consisted of cash paid for the completion of the acquisition of
Sputnik of $4,656,000, net cash paid in the acquisition of Kamera of $4,363,000,
net cash paid in the acquisition of Morpheum of $649,000, net cash paid in the
acquisition of Visual of $1,201,000 and purchase of assets of
$960,000  which primarily consists of assets for our new data center.
In 2007, this primarily consisted of investment in assets acquired from Wurld
Media of $3,174,000 in 2007 and the cash used in the investment in
MyVideoDaily
 
 Net cash
provided by financing activities was $20,352,000 for the year ended December 31,
2008 compared to $23,345,000 for the year ended December 31, 2007. In 2008, this
primarily consisted of net proceeds of $14,680,000 from the May 2008 private
placement, $5,000,000 from KIT Media in September 2008 and December 2008
described above and proceeds from the issuance of the $1,500,000 senior secured
note in November 2008. In 2007, our net cash provided by financing activities
primarily consisted of net proceeds from the May 2007 private placement of
$23,875,000.
 
 Recent Securities Offerings
  In May
2008, we completed a private placement of 2,142,857 units.  Each unit
was comprised of one share of common Stock and a warrant to purchase one share
of common stock.  The units were sold at a price of $7.00 per unit or
an aggregate of $15,000,000.  The warrants have an exercise price of
$11.90 per share, a term of five years and provide the investors with “full
ratchet” anti-dilution protection as to the exercise price of each
warrant.
  16
 KIT
Media, Ltd. purchased an aggregate of 1,008,572 units in the May 2008 private
placement, consisting of 1,008,572 shares of common stock and 1,008,572 shares
of common stock underlying the warrants.  Kaleil Isaza Tuzman, our
Chairman and Chief Executive Officer, holds a controlling interest in KIT
Media.  For more information about this transaction, please see our
registration statement on Form S-1, effective December 5, 2008.
  In
addition to its investment of $7,060,000 in the May 2008 private placement, KIT
Media purchased 892,858 shares of common stock at a price of $5,60 per share
(for  total gross cash proceeds of $5,000,000 for the Company) during
the course of 2008, pursuant to KIT Capital’s December 2007 agreement with the
Company. In conjunction with the purchase of these shares, KIT Media acquired
warrants to purchase 580,358 shares of common stock at an exercise price of
$11.90 per share, subject to the occurrence of certain events that could
potentially reduce the exercise price to $5.60 per share.
 
 In
November 2008, we received $1,500,000 in gross proceeds from non-convertible
debt sold to Genesis Merchant Partners, LP, pursuant to the terms of a note
purchase agreement.  The loan bears cash interest payable monthly in
arrears, and matures on December 31, 2009.  The principal is repayable
in monthly installments of $75,000 beginning in May 2009, with the remainder of
the principal due at maturity.  The note is secured by the Company’s
property, including accounts receivable and inventory, but excludes any security
interests in Visual and Reality or assets of these subsidiaries.  In
conjunction with the borrowing, we issued to Genesis Merchant Partners, LP a
warrant entitling it to purchase, for $11.90 per share, 139,286 shares of our
common stock through October 31, 2013.
  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 years ended December 31, 2008 and 2007. We cannot assure you
that future inflation will not have an adverse impact on our operating results
and financial condition.
 
 Critical
Accounting Policies and Estimates
 
 The
policies discussed below are considered by our management to be critical to an
understanding of our financial statements and their application places the most
significant demands on our management’s judgment of matters that are inherently
uncertain. Specific risks for these critical accounting policies are described
below. For these policies, our management cautions that future events rarely
develop as forecast, and that best estimates may routinely require
adjustment.
  The SEC
has issued cautionary advice to elicit more precise disclosure about accounting
policies that management believes are most critical in
portraying  financial results and that require management’s most
difficult subjective or complex judgments.
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make judgments
and estimates. On an ongoing basis, we evaluate our estimates, the most
significant of which include establishing allowances for doubtful accounts and
determining the recoverability of our long-lived tangible and intangible assets.
The basis for our estimates are historical experience and various assumptions
that are believed to be reasonable under the circumstances, given the available
information at the time of the estimate, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily available from other sources. Actual results may differ from the
amounts estimated and recorded in our financial statements.
  We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
  17
 Revenue
Recognition
 We
recognize revenue in accordance with the following authoritative literature:
AICPA Statement of Position (SOP) No. 97-2, Software Revenue Recognition
and Securities and Exchange Commission (SEC) Staff Accounting Bulletin
(SAB) No. 104, Revenue
Recognition in Financial Statements. which requires that four basic
criteria be met before revenue can be recognized: (i) persuasive evidence
that an arrangement exists; (ii) the price is fixed or determinable;
(iii) collectability is reasonably assured; and (iv) product delivery
has occurred or services have been rendered. We recognize revenue, net of sales
taxes assessed by any governmental authority.  Revenues are derived
principally from professional services, digital media management, advertising
and delivery of digital media solutions.  Revenue is recognized when
the product and/or service has been provided to the customer. We may enter into
agreements whereby we guarantee a minimum number of advertising impressions,
click-throughs or other criteria on our websites or products for a specified
period. To the extent these guarantees are not met, we may defer recognition of
the corresponding revenue until guaranteed delivery levels are
achieved.
  Inventories
  We value
inventories at the lower of cost (first-in, first-out method) or market and are
comprised of finished goods. On a quarterly basis, we review inventory
quantities on hand and analyze the provision for excess and obsolete inventory
based primarily on product age in inventory and our estimated sales forecast,
which is based on sales history and anticipated future
demand.   Our estimates of future product demand may not be
accurate and we may understate or overstate the provision required for excess
and obsolete inventory. Accordingly, any significant unanticipated changes in
demand could have a significant impact on the value of our inventory and results
of operations. As of December 31, 2008 our reserve for excess and obsolete
inventory was $157,000.
  
 Cash and Cash Equivalents
 We
consider all highly liquid investments with original maturities of ninety days
or less when purchased to
 be cash
and cash equivalents.
 
 Allowance
for Doubtful Accounts
 We
maintain an allowance for doubtful accounts for estimated losses resulting from
our customers not making their required payments. Based on historical
information, we believe that our allowance is adequate. Changes in general
economic, business and market conditions could result in an impairment in the
ability of our customers to make their required payments, which would have an
adverse effect on cash flows and our results of operations. The allowance for
doubtful accounts is reviewed monthly and changes to the allowance are updated
based on actual collection experience. We use a combination of the specific
identification method and analysis of the aging of accounts receivable to
establish an allowance for losses on accounts receivable. The allowance for
doubtful accounts as of December 31, 2008 and 2007 was $571,000 and $282,000,
respectively.
 
 Tangible
and Intangible Asset Impairment
 We review
our long-lived assets and identifiable intangibles for impairment at least
annually and whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When such factors and
circumstances exist, we compare the projected undiscounted future cash flows
associated with the future use and disposal of the related asset or group of
assets to their respective carrying amounts. Impairment, if any, is measured as
the excess of the carrying amount over the fair value based on market value
(when available) or discounted expected cash flows of those assets, and is
recorded in the period in which the determination is made. In assessing the
recoverability of our goodwill, we review goodwill for impairment at each
reporting period to determine whether events and circumstances continue to
support the indefinite useful life of the asset. Then, we perform the first step
of the goodwill impairment test which compares the fair value of the reporting
unit with its carrying value, including goodwill. The fair value of the
reporting unit is based on expected future cash flows associated with the group
of assets. This valuation method is used if quoted market prices are not
available. If the fair value of the reporting unit exceeds the carrying amount,
goodwill is not impaired. If the carrying amount of a reporting unit exceeds its
fair value, the second step of the goodwill impairment test shall be performed.
The second step, used to measure the amount of impairment loss, compares the
implied fair value of reporting unit goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to the excess.
 
 Recently-Issued
Accounting Standards
 
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”), and SFAS No. 160, “Accounting and
Reporting of Non-controlling Interest in Consolidated Financial Statements, an
amendment of ARB 51” (“SFAS 160”), which will change the accounting for and
reporting of business combination transactions and noncontrolling interests in
consolidated financial statements. The provisions of SFAS 141R and
SFAS 160 were effective for the Company on January 1, 2009. SFAS 141R
had no impact on previously recorded acquisitions. SFAS 160 requires changes in
classification and presentation of minority interests in the consolidated
balance sheets, statements of income, and statements of stockholders’
equity.
  18
 In
February 2008, the FASB issued FASB Staff Position (“FSP”)
No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP
FAS 157-2”), which delays the effective date of SFAS No. 157, “Fair
Value Measurements” (“SFAS 157”) for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually) for
fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years for items within the scope of this FSP. The adoption of FSP
FAS 157-2 is not expected to have a material impact on the Company’s
consolidated financial position, cash flows, or results of
operations.
  In April
2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP FAS 142-3”), to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under
SFAS No. 141R. The provisions of FSP FAS 142-3 were effective for the
Company on January 1, 2009 and are not expected to have a material impact
on the Company’s consolidated financial position, cash flows, or results of
operations
  In May
2008, the FASB issued FSP Accounting Principles Board Opinion (“APB”)
No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”),
which requires the issuer of certain convertible debt instruments that may be
settled in cash (or other assets) on conversion to separately account for the
liability (debt) and equity (conversion option) components of the instrument in
a manner that reflects the issuer’s nonconvertible debt borrowing rate. FSP APB
14-1 became effective for the Company on January 1, 2009 and requires
retroactive application. The Company is currently evaluating the impact of
adopting FSP 14-1 on the Company’s consolidated financial position, cash flows
and results of operations.
  In
November 2008, the FASB ratified the consensus reached by the EITF on Issue EITF
No. 08-6, “Equity Method Investment Accounting Considerations” (“EITF
08-6”), which clarifies the accounting for certain transactions and impairment
considerations involving equity method investments. The prospective provisions
of EITF 08-6 were effective for the Company on January 1, 2009. The
adoption of EITF 08-6 is not expected to have a material impact on the Company’s
consolidated financial position, cash flows, or results of
operations.
 
 The
Company adopted SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB Statement
No. 115” (“SFAS 159”) as of January 1, 2008. SFAS 159
permits entities to elect to measure many financial instruments and certain
other items at fair value. The Company did not elect the fair value option for
any assets or liabilities, which were not previously carried at fair value.
Accordingly, the adoption of SFAS 159 had no impact on the Company’s
consolidated financial statements
 
 19
  SPECIAL
NOTE ON FORWARD-LOOKING STATEMENTS
  This
report contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934. These forward-looking statements are based
largely on our expectations and are subject to a number of risks and
uncertainties, certain of which are beyond our control. Actual results could
differ materially from these forward-looking statements as a result of, among
other factors, risks related to our history of net losses and accumulated
deficits; integration of acquired businesses; future capital requirements;
competition and technical advances; dependence on the market for digital
advertising; and other risks. In light of these risks and uncertainties, there
can be no assurance that the forward-looking information contained in this
report will in fact occur.
  ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  We
conduct our operations in primary functional currencies: the United States
dollar, the British pound, the Australian dollar, the Swedish krona and the
Czech koruna. We currently do not hedge any of our foreign currency exposures
and are therefore subject to the risk of exchange rate fluctuations. However, we
attempt to employ a “natural hedge” by matching as much as possible in like
currencies our client revenues with associated client delivery costs. We invoice
our international customers primarily in U.S. dollars, British pounds,
Australian dollars, Euros, Swedish kronor, Czech koruna and Australian
dollars.
  We are
exposed to foreign exchange rate fluctuations as the financial results of
foreign subsidiaries are translated into U.S. dollars in consolidation and as
our foreign currency consumer receipts are converted into U.S. dollars. Our
exposure to foreign exchange rate fluctuations also arises from payables and
receivables to and from our foreign subsidiaries, vendors and
customers.
  Financial instruments which
potentially subject us to concentrations of credit risk consist principally of
cash and cash equivalents and trade accounts receivable. We place our cash and
cash equivalents with high credit quality institutions to limit credit exposure,
and from time to time, obtain collateral for our accounts where we deem prudent
and is feasible. We believe that no significant concentration of credit risk
exists with respect to these investments.
 
 Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
wide variety of our customers who are dispersed across many geographic regions.
We routinely assess the financial strength of customers and, based upon factors
concerning credit risk, we establish an allowance for uncollectible accounts.
Our management believes that accounts receivable credit risk exposure beyond
such allowance is limited.
 
 ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  The
response to this item is submitted as a separate section of this report
beginning on page F-1.
  ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  None
  ITEM
9A.  CONTROLS AND PROCEDURES.
 
 As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and chief
financial officer of our disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is: (1) accumulated and communicated to our management, including
our chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure; and (2) recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. There was no change to our internal controls or in other factors that
could affect these controls during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
 
 Changes
in Internal Control Over Financial Reporting
 
 During
the quarter ended December 31, 2008, there were no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
  20
  Management’s
Annual Report on Internal Control Over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Our internal control system was designed to provide reasonable
assurance to our management and our board of directors regarding the preparation
and fair presentation of published financial statements. All internal control
systems, no matter how well designed have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation. Our management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control - Integrated Framework - Guidance for
Smaller Public Companies (the COSO criteria). Based on our assessment we believe
that, as of December 31, 2008, our internal control over financial
reporting is effective based on those criteria.
 
 Attestation
Report of our Registered Public Accounting Firm
 
 This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Our management's report was not subject to attestation by our
independent registered public accounting firm pursuant to rules of the SEC that
permit us to provide only management's report in this annual
report.
 
  ITEM
9B.  OTHER INFORMATION.
 
 None
  21
 PART
III
  ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  Directors
and Executive Officers
  The following table sets forth the names and ages
of our directors and executive officers, and their positions with us, as of
March  31, 2009:
 
 Name
                        
                        Age
                        
                        PositionKaleil
      Isaza Tuzman
                        
                        37
                        
                        Chairman
      of the Board and Chief Executive OfficerGavin
      Campion
                        
                        36
                        
                        President
      and DirectorRobin
      Smyth
                        
                        55
                        
                        Chief
      Financial Officer and DirectorKamal
      El-Tayara
                        
                        38
                        
                        DirectorSteven
      G. Felsher
                        
                        60
                        
                        DirectorDaniel
      Hart
                        
                        35
                        
                        DirectorLars
      Kroijer
                        
                        37
                        
                        DirectorWayne
      Walker
                        
                        50
                        
                        Director
  The
principal occupations for the past five years (and, in some instances, for prior
years) of each of our directors and executive officers are as
follows:
  Kaleil Isaza Tuzman was
elected Chairman of the Board and Chief Executive Officer effective January 9,
2008. Mr. Isaza Tuzman previously served as the President and Chief Operating
Officer of JumpTV Inc. (TSX, AIM: JTV), a leader in broadcasting international
television and sports over the Internet. He has been a venture capitalist and
entrepreneur in digital media since the late 1990s, as managing partner of KIT
Capital Partners, a Dubai and New York-based merchant bank focusing on new media
companies.  Mr. Isaza Tuzman has served as Chairman and Chief
Executive Officer of KPE, Inc., a leading digital media services company with
clients such as Sony Entertainment, Viacom and Carnival Cruises, and as Chairman
and Chief Executive Officer of govWorks, Inc., a venture-backed government
technology services firm. Mr. Isaza Tuzman previously worked at Goldman Sachs,
on investment banking and risk arbitrage teams. He has been a member of the
Council on Foreign Relations, a U.S. trade representative, and was recently
named one of the 100 Most Influential Hispanics by Hispanic
Magazine.  Mr. Isaza Tuzman graduated magna cum laude from Harvard
University, with graduate certificates in International Relations from El
Colegio de Mexico and in Latin American Studies from Harvard
University.  Mr. Isaza Tuzman is also on the board of directors of
Automated Benefits (TSX Venture: AUT), Oakwood TAC, KIT Media Corporation,
Reality Group Pty Ltd, Undercover Media Pty Ltd, KIT digital Pty. Ltd., KIT
digital Limited, KIT Media Ltd., Bickhams Media Inc, VideoDome.com Networks Inc,
KIT Broadcasting Ltd, Sputnik Agency Pty Ltd and KIT TV Pty Ltd.
 
 Gavin Campion was appointed
President in April 2008 and elected a Director on November 17, 2008. Mr. Campion
has served as managing director of Sputnik Agency Pty Ltd., an Australian-based
interactive marketing agency. Under his leadership, Sputnik won the B&T
Interactive Agency of the Year award in 2007. In 1999, Mr. Campion co-founded
Reality Group Pty Ltd., a subsidiary of KIT digital, which is based in
Melbourne, Australia. Since its formation, Reality Group has attracted blue-chip
advertising clients such as Holden (General Motors), BP, TABCORP, Saab
Australia, Tontine and Dennis Family Corp. Through 2008, Mr. Campion served as
Chief Executive Officer of Shoppers Advantage, a leading Australian e-commerce
company, and as a director of Presidential Card, Australia’s largest discount
loyalty program.
  Robin Smyth currently serves
as our Chief Financial Officer and a Director.  Mr. Smyth also served
as our Chief Financial Officer from December 2003 through December 2006. Mr.
Smyth was appointed as a Director on December 3, 2003, the effective date of the
merger with KIT Media Corporation. Mr. Smyth became involved with KIT Media
Corporation in 2002 and was appointed a Director in 2003. Since 1998, Mr. Smyth
was a partner at Infinity International, a consulting and IT recruitment
operation.  During the period from 1990 to 1998, Mr. Smyth worked for
three years as Executive Vice President of Computer Consultants International in
the United States and for five years in London as Chief Executive Officer of
Computer Consultants International's European operations.  Mr. Smyth
was Secretary and a Director of the All-States group of companies involved in
merchant banking operations, where he was responsible for corporate banking
activities. Mr. Smyth is also on the board of directors of KIT Media
Corporation, Reality Group Pty Ltd, Undercover Media Pty Ltd, KIT digital
Pty. Ltd., KIT digital Limited, Bickhams Media Inc, KIT Broadcasting
Ltd, Sputnik Agency Pty Ltd, KIT TV Pty Ltd, VideoDome.com Networks
Inc. and Corporate Advice Pty Ltd.
 
 22
 Kamal El-Tayara was elected a
Director and Chairman of our Audit Committee effective January 14, 2008. Mr.
El-Tayara is the managing partner of MNA Partners, a Dubai-based merchant bank,
and has served in such capacity since 2004.  Mr. El-Tayara has more
than 11 years of experience working in the investment banking and financial
transactions arena in the Middle East and other markets. Prior to establishing
his own firm, Mr. El-Tayara was with investment banks Merrill Lynch and Salomon
Smith Barney. In early 2003, Mr. El-Tayara managed the corporate finance
initiatives of MBC Group, MENA’s (Middle East and North Africa) largest media
company, where he participated in the set up of Alarabiya News Channel, for
which he acted as Chief Financial Officer. Mr. El-Tayara also set up the Swiss
EFG Bank in Dubai, for which he acted as the Dubai Head. Mr. El-Tayara is an
electrical engineering graduate from the American University of Beirut (with
distinction) and holds an M.B.A. from INSEAD in Fontainebleau, France. Mr.
El-Tayara is fluent in English, French and Arabic.
 
 Steven G. Felsherwas elected
a Director effective November 17, 2008 and Chairman of the Audit Committee on
February 15, 2009.  He was the Vice Chairman and Chief Financial
Officer of Grey Global Group Inc., one of the largest marketing communications
firms in the world until his departure in 2007 after 28 years. Mr. Felsher was
responsible for overseeing Grey’s financial operations, investor relations,
acquisitions and other corporate functions.  In these and prior roles,
Mr. Felsher assisted Grey in becoming one of the most respected, responsible and
successful independent companies in the marketing communications
industry.  Since 2007 when he left Grey, Mr. Felsher has worked with a
number of intellectual property, marketing services and not-for-profit companies
to help them achieve their business goals. Mr. Felsher received a B.A. degree
from Dickinson College, was a Thomas J. Watson Fellow doing research in Greece
and Turkey, and graduated from Yale Law School.
 
 Daniel Hart was elected a
Director effective March 31, 2008. Mr. Hart is the founder and managing partner
of River Road Ventures, a private equity and advisory firm.  Mr.
Hart’s background combines venture capital and financing experience with chief
executive officer/operating experience and expertise in digital media, wireless,
semiconductor, enterprise software and technology convergence.  Mr.
Hart most recently led River Road’s investments in Nextivity, a leading
ASIC-based wireless products company, and Slipgate Ironworks, a
highly-innovative massively multiplayer online gaming studio. Prior to River
Road Ventures, Mr. Hart founded Fundamental Capital, an investment partnership
which pioneered the integration of operational leadership with early-stage
venture capital, creating over $1 billion in market value in less than five
years.  Mr. Hart received a B.A. degree in economics from Harvard
University.
  Lars Kroijer was elected a
Director and Chairman of our Compensation Committee effective February 7,
2008.  Mr. Kroijer is the Chief Executive Officer of Holte Capital
Ltd, a London-based special situations hedge fund which he founded in 2002.
Prior to establishing Holte Capital, Mr. Kroijer served in the London office of
HBK Investments focusing on special situations investing and event-driven
arbitrage.  In addition, he previously worked at SC Fundamental, a
value-focused hedge fund based in New York, and the investment banking division
of Lazard Freres in New York.  Mr. Kroijer graduated magna cum laude
from Harvard University and received an M.B.A. from Harvard Business
School.
 
 
 Wayne Walker was elected a
Director and Chairman of our Compliance Committee effective January 14,
2008.  Mr. Walker is the managing partner of Philadelphia-based Walker
Nell Consultants, Inc. and Walker Bowman, PC and has served in such
capacity since 2004. Mr. Walker has more than 20 years of experience in
corporate law and corporate restructuring. Prior to establishing Walker Nell,
Mr. Walker was the Principal of Parente Randolph, LLC, an accounting and
consulting firm in Philadelphia. He previously served as Senior Counsel of
DuPont Corporation and as former Chairman of the global charity Habitat for
Humanity. Mr. Walker received a J.D. degree from Catholic University in
Washington, DC. and a B.A. degree from Loyola University in New
Orleans.  He also studied finance for non-financial managers at the
University of Chicago’s Graduate School of Business.
  On March
9, 2009, Jonathan Hirst was named our Chief Financial Officer effective April
27, 2009.
  Mr.
Hirst, age 59, is an experienced financial executive who, over the course of his
career, has been involved with and led the acquisition and sale of more than 50
companies in media, marketing services, advertising and public
relations.  From September 2006 through February 2008, Mr. Hirst was a
consultant with BT Associates, LLC, a strategic and financial consulting firm in
New York servicing the professional communication industry.  From
November 2004 to August 2006, he was the Executive Vice President and Chief
Financial Officer of Lowe Worldwide, Inc., a global multi-unit international
marketing communications services division of The Interpublic Group of
Companies, Inc., From January 1996 to October 2004, Mr. Hirst was the Senior
Vice President of International Finance of Grey Global Group Inc., a leading
communications services company (acquired by WPP Group plc in
2005).  He was responsible for successfully developing and leading
profit improvement programs at Grey Global, as well as later with Lowe
Worldwide.  Earlier in his career, Mr. Hirst spent 1981 to 1991 at
Saatchi & Saatchi US Management Company, where he oversaw the financial
performance of Saatchi & Saatchi PLC’s operations in the United
States.  Mr. Hirst started his career at a predecessor of
PricewaterhouseCoopers LLC and at McKinsey & Co.  With global
experience in the advertising and consulting industry, Mr. Hirst has lived and
worked in London, Paris and New York.  He is a member of the Institute
of Chartered Accountants (FCA), with B.A and M.A. degrees in economics from the
University of Cambridge in the United Kingdom and an M.B.A. from INSEAD
(European Institute of Business Management) in Paris, France.
  23
 Mr. Smyth
has agreed to resign as our Chief Financial Officer effective April 27,
2009.  Mr. Smyth remains on our board of directors.
  All
directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors.  Officers are elected
annually by the board of directors and serve at the discretion of the
board.
  Family
Relationships
  There are
no family relationships among our directors and executive officers.
  Legal
Proceedings
  As of the
date of this annual report, there are no material proceedings to which any of
our directors, executive officers, affiliates or stockholders is a party adverse
to us.
  Board
of Directors and Corporate Governance
  Our board
of directors is responsible for establishing broad corporate policies and for
overseeing our overall management.  In addition to considering various
matters which require board approval, the board provides advice and counsel to,
and ultimately monitors the performance of, our senior management.
  We
established an Audit Committee, Compensation Committee and Compliance Committee
in 2008.  The charters for the Audit Committee, Compensation Committee
and Compliance Committee are available at our website,
www.kit-digital.com.  Kamal El-Tayara, Steven G. Felsher, Daniel Hart,
Lars Kroijer and Wayne Walker are independent members of our board of directors,
under Nasdaq’s independence standards.  Each of the board committees
is composed of two or more of these independent members.
  The
board, its committees and our management strive to perform and fulfill their
respective duties and obligations in a responsible and ethical
manner.  The board and the Audit, Compensation and Compliance
Committees each perform annual self evaluations.  We have adopted a
Code of Ethics that applies to our Chief Executive Officer and Chief Financial
Officer.  Our Code of Ethics was filed with our amended annual report
on Form 10-KSB/A for the year ended December 31, 2003.  Upon request,
we will provide to any person without charge a copy of our Code of
Ethics.  Any such request should be mailed to KIT digital, Inc., 168
Fifth Avenue, Suite 301, New York, New York 10010, Attention: Chief Financial
Officer.
  
  Committees
of the Board
  Audit
Committee.  The board has an
Audit Committee comprised of four non-employee directors, Messrs. Felsher
(Chairman), El-Tayara, Kroijer and Walker. Each member of the Audit Committee is
independent as defined under Nasdaq’s listing standards.  The board of
directors has determined that each committee member qualifies as an “audit
committee financial expert.”  The Audit Committee functions pursuant
to a written charter, under which the committee has such powers as may be
assigned to it by the board from time to time.  The Audit Committee
was established in 2008.  In 2007 and until the formation of the Audit
Committee in 2008, the entire board of directors performed the functions of the
Audit Committee.  The Audit Committee is currently charged with, among
other things:
  ·
              recommending
      to the board of directors the engagement or discharge of our independent
      public accountants, including pre-approving all audit and non-audit
      related services;
  ·
              the
      appointment, compensation, retention and oversight of the work of the
      independent auditor engaged by us for the purpose of preparing or issuing
      an audit report or performing other audit review or attest services for
      us;
  24
  ·
              establishing
      procedures for the receipt, retention and treatment of complaints received
      by us regarding accounting, internal accounting controls or auditing
      matters and for the confidential, anonymous submission by our employees of
      concerns regarding questionable accounting or auditing
      matters;
  ·
              approving
      the scope of the financial audit;
  ·
              requiring
      the rotation of the lead audit
partner;
  ·
              consulting
      regarding the completeness of our financial
  statements;
  ·
              reviewing
      changes in accounting principles;
  ·
              reviewing
      the audit plan and results of the auditing engagement with our independent
      auditors and with our officers;
  ·
              reviewing
      with our officers, the scope and nature and adequacy of our internal
      accounting and other internal controls over financial reporting and
      disclosure controls and procedures;
  ·
              reviewing
      the adequacy of the Audit Committee Charter at least
    annually;
  ·
              meeting
      with our Internal Auditor on a regular
basis;
  ·
              performing
      an internal evaluation of the Audit Committee on an annual basis;
      and
  ·
              reporting
      to the board of directors on the Audit Committee's activities, conclusions
      and recommendations.
  Compensation
Committee.  The board has a
Compensation Committee comprised of two non-employee directors, Messrs. Kroijer
(Chairman) and Hart as at December 31, 2008.  Each member of the
Compensation Committee is independent as defined under Nasdaq’s listing
standards.  The Compensation Committee functions pursuant to a written
charter, under which the committee has such powers as may be assigned to it by
the board from time to time.  The Compensation Committee was
established in 2008.  In 2007 and until the formation of the
Compensation Committee in 2008, the entire board of directors performed the
functions of the Compensation Committee.  The Compensation Committee
is currently charged with, among other things, assisting the board
in:
  ·
              approving
      and evaluating the compensation of directors and executive
      officers;
  ·
              establishing
      strategies and compensation policies and programs for employees to provide
      incentives for delivery of value to our
  shareholders;
  ·
              establishing
      policies to hire and retain senior executives, with the objective of
      aligning the compensation of senior management with our business and the
      interests of our shareholders;
  ·
              together
      with management, surveying the amount and types of executive compensation
      paid by comparable companies, and engaging consultants as necessary to
      assist them;
  ·
              periodically
      reviewing corporate goals and objectives relevant to executive
      compensation and making recommendations to the board for
      changes;
  ·
              assisting
      management in evaluating each executive officer's performance in light of
      corporate goals and objectives, and recommending to the board (for
      approval by the independent directors) the executive officers'
      compensation levels based on this
evaluation;
  ·
              overseeing
      our stock option plan or other stock-based plans with respect to our
      executive officers and employee board members, who are subject to the
      short-swing profit restrictions of Section 16 of the Securities Exchange
      Act of 1934, as amended;
  ·
              reviewing
      the overall performance of our employee benefit plans
      and  making recommendations to the board regarding
      incentive-compensation plans and equity-based
  plans;
  25
  ·
              together
      with the Compliance Committee, reviewing and making recommendations to the
      independent directors of the board regarding the form and amount of
      director compensation;
  ·
              ensuring
      that our compensation policies meet or exceed all legal and regulatory
      requirements and any other requirements imposed on us by the board;
      and
  ·
              producing
      an annual report on executive compensation for inclusion in our
      information statement.
  In
general, the Compensation Committee formulates and recommends compensation
policies for board approval, oversees and implements these board-approved
policies, and keeps the board apprised of its activities on a regular
basis.  In addition, the Compensation Committee together with the
Compliance Committee, develops criteria to assist the board's assessment of the
Chief Executive Officer's leadership of the Company.
  Compliance
Committee.  The board has a
Compliance Committee comprised of three non-employee directors, Messrs. Walker
(Chairman), El-Tayara and Kroijer. Each member of the Compliance Committee is
independent as defined under Nasdaq’s listing standards.  The
Compliance Committee functions pursuant to a written charter, under which the
committee has such powers as may be assigned to it by the board from time to
time.  The Compliance Committee was established in 2008.  In
2007 and until the formation of the Compliance Committee in 2008, the entire
board of directors performed the functions of the Compliance
Committee.  The Compliance Committee is currently charged with, among
other things, assisting the board in:
  ·
              identifying
      individuals qualified to become board members and recommending that the
      board select a group of director nominees for each next annual meeting of
      our stockholders;
  ·
              ensuring
      that the Audit, Compensation and Compliance Committees of the board have
      the benefit of qualified and experienced "independent"
      directors;
  ·
              developing
      and recommending to the board a set of effective corporate governance
      policies and procedures applicable to us, and reviewing and reassessing
      the adequacy of such guidelines annually and recommending to the board any
      changes deemed appropriate;
  ·
              periodically
      reviewing the charters of all board committees and recommending to the
      committees and board any changes deemed
  appropriate;
  ·
              developing
      policies on the size and composition of the
  board;
  ·
              conducting
      annual evaluations of the performance of the board, committees of the
      board and individual directors;
  ·
              reviewing
      conflicts of interest and the independence status of
      directors;
  ·
              together
      with the Compensation Committee, reviewing and making recommendations to
      the independent directors of the board regarding the form and amount of
      director compensation;
  ·
              reviewing
      the structure of our senior staffing and management succession plans with
      the Chief Executive Officer;
  ·
              together
      with the Compensation Committee, developing criteria to assist the board's
      assessment of the Chief Executive Officer's leadership of the company;
      and
  ·
              generally
      advising the board (as a whole) on corporate governance
      matters.
  Selection
of Nominees for the Board of Directors
  The
Compliance Committee is responsible for evaluating potential candidates to serve
on our board of directors, and for selecting nominees to be presented for
election to the board at our Annual Meeting of Stockholders.  In
evaluating potential director candidates, the Compliance Committee considers the
skills and characteristics possessed by each candidate in the context of the
perceived needs of the board at that point in time.  Among the factors
considered by the Compliance Committee in considering a potential nominee are
the following:
  ·
              the
      nominee's independence;
  26
  ·
              the
      nominee's relevant professional skills and depth of business
      experience;
  ·
              the
      nominee's character, judgment and personal and professional
      integrity;
  ·
              the
      nominee's ability to read and understand financial
    statements;
  ·
              the
      nominee's willingness to commit sufficient time to attend to his or her
      duties and responsibilities as a member of the
  board;
  ·
              the
      nominee's qualifications for membership on certain committees of the
      board;
  ·
              any
      potential conflicts of interest involving the nominee;
  and
  ·
              the
      make up and diversity of our existing
board.
  In
identifying potential candidates for the board, the committee relies on
recommendations from a number of possible sources, including current
directors.  The Compliance Committee may also retain outside
consultants or search firms to help in identifying potential candidates for
membership on the board.
  The
Compliance Committee will consider any written suggestions of stockholders for
director nominations.  The recommendation must include the name and
address of the candidate, a brief biographical description and a description of
the person's qualifications.  Recommendations should be mailed to KIT
digital, Inc., 168 Fifth Avenue, Suite 301, New York, New York 10010,
Attn:  Chief Financial Officer.  The Compliance Committee
will evaluate in the same manner candidates suggested in accordance with this
policy and those recommended by other sources.  The Committee has full
discretion in considering all nominations to the board of
directors.  Stockholders who would like to nominate a candidate for
director must comply with the requirements described in our
by-laws.
  Director
Compensation
  With the
exception of compensation and fees paid to Messrs. Isaza Tuzman, Campion and
Smyth pursuant to their agreements described below, all directors are reimbursed
for their reasonable out-of-pocket expenses incurred in connection with their
duties to us.  In addition, on March 17, 2008, a resolution was
unanimously passed by our directors granting new members to the board the
following compensation package:
 
 
 ·
              Grant
      of stock options to purchase 8,143 shares of our common stock pursuant to
      our 2008 Incentive Stock Plan.
 
 ·
              Annual
      compensation in the amount of $25,000, payable in arrears for the
      preceding calendar year on February 15 of every year beginning 2009, which
      may be paid in either cash or options (priced using the
      “Black-Scholes-Merton” options pricing model), or a combination of both.
      The form of payment (i.e., cash, stock options or a combination) will be
      determined by us in our sole discretion; provided that if we are operating
      income (or EBITDA) positive in the preceding calendar year, such
      determination may be made by each independent
  director.
 
 ·
              Fees
      of $2,000 per board meeting attended; $1,500 per committee meeting
      chaired; and $750 per committee meeting attended but not chaired. The
      foregoing fees will be discounted by 50% when meetings are attended or
      chaired telephonically. Payment will be made according to the same
      schedule and in the same manner as set forth in the paragraph
      above.
 
 
 ·
              All
      dollar amounts set forth above will be increased by 50% immediately
      following the first fiscal quarter during which we are operating income
      (or EBITDA) positive.
 
 ITEM
11.  EXECUTIVE COMPENSATION
  Executive
Officer Compensation
 
 The
following table sets forth information concerning the annual and long-term
compensation of our Chief Executive Officer and the other named executive
officers, for services as executive officers for the last two fiscal
years.
  27
 Summary
Compensation Table
  Name
      and Principal Position
                                                Year
                                                Salary
                                                  ($ )
                                                Bonus
                                                  ($ )
                                                Stock
                                                  Awards
                                                  ($ )
                                                All Other
                                                  Compensation
                                                  ($ )
                                                Total ($ )Kaleil
      Isaza Tuzman (1) (amounts paid to KIT Capital, a company controlled by Mr.
      Isaza Tuzman)
                                                2008
                                                289,652
                                                
                                                
                                                
                                                289,652Chairman
      and Chief Executive Officer
                                                2007
                                                -Gavin
      Campion (2)
                                                2008
                                                130,833
                                                
                                                
                                                
                                                130,833President
      and Director
                                                2007
                                                -Robin
      Smyth (3)
                                                2008
                                                213,167
                                                
                                                
                                                275,000
                                                488,167Chief
      Financial Officer,
                                                2007
                                                250,000
                                                150,000
                                                
                                                
                                                400,000Secretary,
      Treasurer, Principal Accounting Officer and DirectorRobert Petty (4)
                                                2008
                                                151,619
                                                
                                                
                                                675,000
                                                826,619Former
      Chief Executive
                                                2007
                                                344,500
                                                
                                                
                                                
                                                344,500Officer,
      President and
                                                  Chairman
      of the BoardLou
      Kerner (5)
                                                2008
                                                -Former
      Chief Financial Officer and Former Principal Accounting
      Officer
                                                2007
                                                124,359
                                                75,000
                                                
                                                
                                                199,359
  (1)
              Kaleil
      Isaza Tuzman serves as the Chairman of the Board and Chief Executive
      Officer and was appointed to these positions on January 9, 2008. The total
      amount paid to KIT Capital in 2008 was $573,284. The amount paid to Mr,
      Tuzman of $289,652 of the total paid to KIT Capital was represented to us
      by Mr. Isaza Tuzman. The other amounts paid to KIT Capital are for other
      KIT Capital personnel dedicated full-time to KIT digital and includes
      employer taxes, healthcare costs and other benefits. It also includes KIT
      Capital corporate fees, including legal, accounting, insurance, data
      hosting and parking related to KIT digital.(2)
              Gavin
      Campion serves as the President and Director. Mr. Campion was appointed
      President on April 1, 2008 and was appointed as a Director on November 17,
      2008. The compensation listed is only for Mr. Campion’s services as an
      executive officer, upon his appointment as President and not for his prior
      service.(3)
              Mr.
      Smyth currently serves as Chief Financial Officer, Secretary, Treasurer
      and Principal Accounting Officer, and Director. Mr. Smyth served as our
      Chief Financial Officer and Principal Accounting Officer from December
      2003 through December 2006 and from August 9, 2007.  Mr. Smyth
      has resigned from his positions as an executive officer effective April
      27, 2009. Included in All Other Compensation is the payment of $275,000
      related to the settlement of the separation agreement on March 31,
      2008.(4)
              Mr.
      Petty previously served as Chief Executive Officer, President and Chairman
      of the Board through January 8, 2008. Mr. Petty became our Chief Executive
      Officer, President and Chairman on December 3, 2003. Mr. Petty’s
      employment with us terminated on March 26, 2008, and he resigned as a
      director on November 17, 2008. Included in All Other Compensation is the
      payment of $675,000 related to the settlement of the separation agreement
      on March 26, 2008.(5)
              Mr.
      Kerner was our Chief Financial Officer and Principal Accounting Officer
      from November 17, 2006 through August 2007.
 
  28
  Options
Grants in Last Fiscal Year
  The
following table sets forth information with respect to grants of options to
purchase our common stock to the named executive officers during the year ended
December 31, 2008.
  Name
                
                Number
      of Securities Underlying Options/ SARs
                  Granted
      (#)
                
                %
      of Total
                  Options/ SARs
      Granted to
                  Employees
      in
                  Fiscal
      Year(%)
                
                Exercise or Base
      Price ($/Sh)
                
                Expiration DateKaleil
      Isaza Tuzman (through KIT Capital)
                
                
                60,000
                
                
                10.2
                
                
                $6.11
                
                
                
                January
      9, 2013Kaleil
      Isaza Tuzman (through KIT Capital)
                
                
                20,000
                
                
                3.4
                
                
                $9.80
                
                
                
                June
      21, 2013Gavin
      Campion
                
                
                34,286
                
                
                5.8
                
                
                $2.80
                
                
                
                March
      17, 2013Gavin
      Campion
                
                
                20,000
                
                
                3.4
                
                
                $9.80
                
                
                
                June
      21, 2013Robin
      Smyth
                
                
                11,715
                
                
                2.0
                
                
                $2.80
                
                
                
                March
      17, 2013Robin
      Smyth
                
                
                7,143
                
                
                1.2
                
                
                $9.80
                
                
                
                June
      21, 2013
  
   Aggregate
Option Exercises In Last Fiscal Year
  No
options were exercised by the named executive officers during the most recent
fiscal year.
  Outstanding
Equity Awards at Fiscal Year End
 
 Option
      Awards
                                                                                              
                                                                                              Stock
      AwardsName
                                                                                              
                                                                                              Number
      of Securities Underlying Unexercised Options Exercisable
                                                                                              
                                                                                              
                                                                                              Number
      of Securities Underlying Unexercised Options Unexercisable
                                                                                              
                                                                                              Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options
                                                                                              
                                                                                              Option
      Exercise Price ($)
                                                                                              
                                                                                              Option
      Expiration Date
                                                                                              
                                                                                              Number
      of Shares or Units of Stock that have not vested
                                                                                              
                                                                                              Market
      Value of Shares or Units of Stock that have not vested
                                                                                              
                                                                                              Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      that have not vested
                                                                                              
                                                                                              Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights that have not vestedKaleil
      Isaza Tuzman
                                                                                              
                                                                                              
                                                                                              32,223
                                                                                              
                                                                                              
                                                                                              
                                                                                              27,777
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              6.11
                                                                                              
                                                                                              January
      9, 2013Kaleil
      Isaza Tuzman
                                                                                              
                                                                                              
                                                                                              2,500
                                                                                              
                                                                                              
                                                                                              
                                                                                              17,500
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              9.80
                                                                                              
                                                                                              June
      21, 2013Gavin
      Campion
                                                                                              
                                                                                              
                                                                                              15,134
                                                                                              
                                                                                              
                                                                                              
                                                                                              19,152
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              2.80
                                                                                              
                                                                                              March  17,
      2013Gavin
      Campion
                                                                                              
                                                                                              
                                                                                              2,500
                                                                                              
                                                                                              
                                                                                              
                                                                                              17,500
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              9.80
                                                                                              
                                                                                              June  21,
      2013Robin
      Smyth
                                                                                              
                                                                                              
                                                                                              11,715
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              2.80
                                                                                              
                                                                                              March
      17, 2013Robin
      Smyth
                                                                                              
                                                                                              
                                                                                              893
                                                                                              
                                                                                              
                                                                                              
                                                                                              6,250
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              9.80
                                                                                              
                                                                                              June  21,
      2013
 
 Equity
Compensation Plan Information
  The
following table shows information with respect to each equity compensation plan
under which our common stock is authorized for issuance as of the year ended
December 31, 2008.
 
 29
 Equity
Compensation Plan Information
 
 Plan
      category
                          
                          Number of securities
                            to be issued upon
                            exercise of
                            outstanding options,
                            warrants and rights
                          
                          Weighted average
                            exercise price of
                            outstanding options,
                            warrants and rights
                          
                          Number of securities
                            remaining available for
                            future issuance under
                            equity compensation
                            plans (excluding
                            securities reflected in
                            column (a)Equity
      compensation plans approved by security holders
                          
                          
                          
                          420,184
                          
                          $6.47
                          
                          
                          
                          436,959Equity
      compensation plans not approved by security holders
                          
                          
                          
                          81,429
                          
                          $8.14
                          
                          
                          
                          261,429Total
 
 
 In April
2004, our board of directors adopted a stock option plan (the “2004 Option
Plan”).  Pursuant to this plan, which expires on April 1, 2014,
incentive stock options or non-qualified options to purchase an aggregate of
28,572 shares of common stock may be issued, as adjusted.  The plan
may be administered by our board of directors or by a committee to which
administration of the plan, or part of the plan, may be delegated by our board
of directors. Options granted under this plan are not generally transferable by
the optionee except by will, the laws of descent and distribution or pursuant to
a qualified domestic relations order, and are exercisable during the lifetime of
the optionee only by such optionee. Options granted under the plan vest in such
increments as is determined by our board of directors or designated committee.
To the extent that options are vested, they must be exercised within a maximum
of three months of the end of the optionee's status as an employee, director or
consultant, or within a maximum of 12 months after such optionee's termination
or by death or disability, but in no event later than the expiration of the
option term. The exercise price of all stock options granted under the plan will
be determined by our board of directors or designated committee. With respect to
any participant who owns stock possessing more than 10% of the voting power of
all classes of our outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market value
on the grant date.
 
 In
November 2006, our board of directors increased the number of shares which may
be issued under the 2004 Option Plan to an aggregate of 228,572 shares of common
stock. The number of shares subject to the 2004 Option Plan was subsequently
increased to 342,858 shares effective April 3, 2007.
 
 To date,
we have 81,429 options outstanding under the 2004 Option Plan, as amended, of
which 60,000 options were issued to KIT Capital, Ltd. pursuant to the terms of
the Executive Management Agreement, dated as of December 18,
2007.  Our board of directors believes in order to attract and retain
the services of executives and other key employees, it is necessary for us to
have the ability and flexibility to provide a compensation package which
compares favorably with those offered by other companies and, accordingly, voted
unanimously to adopt the 2008 Incentive Stock Plan.
 
 
 As of
December 31, 2008, the following options have been granted under our 2004 Stock
Plan:
 
 Options
      Issued under 2004 Option PlanExercise
                                        
                                        Date
                                        
                                        Vest
                                        
                                        ExpirationOptionee
                                        
                                        Quantity
                                        
                                        Price
      ($)
                                        
                                        Granted
                                        
                                        Date
                                        
                                        DateKIT
      Capital, Ltd.
                                        
                                        
                                        60,000
                                        
                                        6.111
                                        
                                        January
      9, 2008
                                        
                                        Over
      36 months
                                        
                                        January
      9, 2013KIT
      Capital, Ltd.
                                        
                                        
                                        20,000
                                        
                                        9.80
                                        
                                        March
      17,2008
                                        
                                        Over
      48 months
                                        
                                        March
      17,
2013
 
 
 KIT
digital 2008 Incentive Stock Plan
  In March
2008, our board of directors adopted the KIT digital, Inc. 2008 Incentive Stock
Plan (the “2008 Incentive Plan”).  In light of recent financing
activities by us which increased the total number of outstanding shares of our
common stock, our board of directors believed in order to (i) bring the number
of authorized shares of common stock available for future grant under the 2008
Incentive Plan into proportion with the recently increased number of outstanding
shares and (ii) attract and retain the services of executives and other key
employees, it was necessary for us to have the ability and flexibility to
provide a compensation package which compares favorably with those offered by
other companies and accordingly, voted unanimously to adopt the amendment to the
2008 Incentive Plan, providing for an additional 457,143 authorized, unissued
shares of common stock available for future grants under the 2008 Incentive
Plan.  The holders of a majority of our outstanding shares of common
stock approved the amendment to our 2008 Incentive Plan at our stockholders
meeting held on November 6, 2008.
  30
 Set forth
below is a summary of the 2008 Incentive Plan, but this summary is qualified in
its entirety by reference to the full text of the 2008 Incentive Plan, which has
been filed with the SEC, and any stockholder who wishes to obtain a copy of the
2008 Incentive Plan may do so by written request to KIT digital, Inc., 168 Fifth
Avenue, Suite 301, New York, New York 10010, Attention: Chief Financial
Officer.
 
 Description
of the 2008 Incentive Stock Plan
 
 The 2008
Incentive Plan initially reserved 400,000 shares of common stock for issuance
and has reserved an additional 457,143, as described above, for a total of
857,143 shares of common stock for issuance. Under the 2008 Incentive 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. In addition, direct grants of
stock or restricted stock may be awarded.
 
 Purpose. The primary purpose
of the 2008 Incentive Plan is to attract and retain the best available personnel
in order to promote the success of our business and to facilitate the ownership
of our stock by employees and others who provide services to us.
 
 Administration. The 2008
Incentive Plan is administered by our board of directors, provided that the
board may delegate such administration to the Compensation
Committee.
 
 Eligibility. Under the 2008
Incentive Plan, options may be granted to employees, officers, directors or
consultants, as provided in the 2008 Incentive Plan.
 
 Terms of Options. The term of
each option granted under the 2008 Incentive Plan will be contained in a stock
option agreement between the optionee and us and such terms will be determined
by the board of directors consistent with the provisions of the 2008 Incentive
Plan, including the following:
 
 ·
              Purchase Price. The
      purchase price of the common stock subject to each incentive stock option
      will not be less than the fair market value (as set forth in the 2008
      Incentive Plan), or in the case of the grant of an incentive stock option
      to a principal stockholder, not less that 110% of fair market value of
      such common stock at the time such option is
  granted.
 
 ·
              Vesting. The dates on
      which each option (or portion thereof) will be exercisable and the
      conditions precedent to such exercise, if any, will be fixed by the board
      of directors, in its discretion, at the time such option is granted.
      Unless otherwise provided in the grant agreement, in the event of a change
      of control (as set forth in the 2008 Incentive Plan), 50% of the vesting
      restrictions will terminate.
 
 ·
              Expiration. Any option
      granted to an employee will become exercisable over a period of no longer
      than five years. No option will in any event be exercisable after five
      years from, and no Incentive Stock Option granted to a ten percent
      shareholder will become exercisable after the expiration of five years
      from the date of the option.
 
 ·
              Transferability. No
      option will be transferable, except by will or the laws of descent and
      distribution, and any option may be exercised during the lifetime of the
      optionee only by such optionee. No option granted under the 2008 Incentive
      Plan shall be subject to execution, attachment or other
      process.
 
 ·
              Option Adjustments. In
      the event of any change in the outstanding stock by reason of a stock
      split, stock dividend, combination or reclassification of shares,
      recapitalization, merger, or similar event, the board or the committee may
      adjust proportionally (a) the number of shares of common stock (i)
      reserved under the 2008 Incentive Plan, (ii) available for Incentive Stock
      Options and Nonstatutory Options and (iii) covered by outstanding stock
      awards or restricted stock purchase offers; (b) the stock prices related
      to outstanding grants; and (c) the appropriate fair market value and other
      price determinations for such grants. In the event of a corporate merger,
      consolidation, acquisition of property or stock, separation,
      reorganization or liquidation, the board or the committee will be
      authorized to issue or assume stock options, whether or not in a
      transaction to which Section 424(a) of the Code applies, and other grants
      by means of substitution of new grant agreements for previously issued
      grants or an assumption of previously issued
  grants.
   31
 ·
              Termination, Modification and
      Amendment. The board may, insofar as permitted by law, from time to
      time, suspend or terminate the 2008 Incentive Plan or revise or amend it
      in any respect whatsoever, except that without the approval of the
      stockholders, no such revision or amendment may (i) increase the number of
      shares subject to the 2008 Incentive Plan, (ii) decrease the price at
      which grants may be granted, (iii) materially increase the benefits to
      participants, or (iv) change the class of persons eligible to receive
      grants under the 2008 Incentive Plan; provided no such action may alter or
      impair the rights and obligations under any option, or stock award, or
      restricted stock purchase offer outstanding as of the date thereof without
      the written consent of the
participant.
 
 Grants
under the 2008 Incentive Plan
  Through
December 31, 2008, we have granted an aggregate of 420,184 options under the
2008 Incentive Plan, including the following grants to officers and
directors:
 
 Name
      and Position
                    
                    Dollar Value
                    
                    No. of OptionsKamal
      El-Tayara, Director
                    
                    $
                    58,425
                    
                    12,214Daniel
      Hart, Director
                    
                    
                    72,675
                    
                    12,214Lars
      Kroijer, Director
                    
                    
                    58,425
                    
                    12,214Wayne
      Walker, Director
                    
                    
                    58,425
                    
                    12,214Gavin
      Campion, President
                    
                    
                    273,000
                    
                    54,286Robin
      Smyth, Chief Financial Officer and Director
                    
                    
                    96,200
                    
                    18,857
 
 The
options issued to date provide for immediate vesting of 6.25% per quarter for
the period start date to issue date or January 1, 2007 to issue date, whichever
is the shortest period with the balance of the options vesting in equal
quarterly amounts over a four-year period.
  In
addition, our board of directors has approved the grant of 81,429 options to new
independent directors upon their appointment to the board. The board also
approved annual compensation of $25,000, payable in arrears for the preceding
calendar year on February 15 of every year beginning 2009, which may be paid in
either cash or stock options (priced using the “Black-Scholes-Merton” options
pricing model), or a combination of both.
 
 Employment
and Management Agreements
 
 KIT Capital Management
Agreement.  During 2008, the managerial services of Kaleil
Isaza Tuzman, our Chairman and Chief Executive Officer, and two non-executive
personnel, were provided to us through KIT Capital, which is beneficially
controlled by Mr. Isaza Tuzman.  For these services, we paid KIT
Capital aggregate fees of  $641,784 for these three individuals in
2008 (which included a signing incentive payment of $68,500).
 
 Under the
Executive Management Agreement, dated as of December 18, 2007, with KIT Capital,
the services of Mr. Isaza Tuzman and two non-executive personnel have been
provided to us and our subsidiaries at an initial monthly rate of $50,800, with
an incentive bonus equal to the greater of (i) the preceding 12 months’ base
compensation or (ii) the previous month’s monthly installment of base
compensation multiplied by 12 if we achieve two consecutive quarters of
profitability or our total monthly revenue equals or exceeds $6.0
million.  The Executive Management Agreement commenced on January 9,
2008 and expires on January 9, 2011, unless sooner terminated or extended by
mutual agreement.
 
 Under the
Executive Management Agreement, we issued to KIT Capital stock options to
purchase 60,000 shares of our common stock at an exercise price of $6.11 per
share, of which 20,000 options vested as of January 9, 2008, and the remainder
vest in equal monthly increments over a period of three years.  We
also established a “phantom” stock plan, pursuant to which we granted “phantom”
shares equal to 60,000 shares of common stock vesting in equal monthly
increments over a three-year period.
 
 In addition, under the Executive
Management Agreement, KIT Capital received the right to: (a) purchase up to
5,100,000 shares of series A preferred stock at a then purchase price of $0.38
per share from the holders of such shares; (b) purchase from us (i) up to
$5,000,000 of our common stock at a price per share of no higher than a 15%
premium to the closing price of the common stock on December 18, 2007, and (ii)
up to an additional $10,000,000 of our common stock at a price not exceeding 90%
of the five-day trailing weighted average trading price of the common stock at
the time of purchase; and (c) include any such purchased shares of preferred
stock and common stock in a registration statement filed by us with the
SEC.
 
 32
 Notwithstanding
these agreements, subsequent to the date of the Executive Management Agreement,
(a) we effected the automatic conversion of all then outstanding shares of
series A preferred stock into 11,429 shares of common stock, thereby preventing
KIT Capital from purchasing such shares, (b) we requested KIT Capital to waive
its registration rights in respect of its purchase of 1,008,572 shares of common
stock and warrants to purchase a like number of shares in our May 2008
financing, and (c) at the recommendation of our financial advisor, KIT Capital
waived its right to purchase an additional $10,000,000 in securities due to the
potential negative effect on the market price with such a large controlling
stockholder.  For facilitating these corporate actions and waiving its
rights as described above, and for KIT Capital’s investment of $5,000,000 at a
time when similar third-party financing transactions were unavailable and we
required such funds in connection with pending acquisition transactions, we
issued to KIT Capital a warrant to purchase 580,358 shares of our common stock
(representing 65% warrant coverage on KIT Capital’s investment, as compared to
100% warrant coverage in the May 2008 financing transaction), for a term of five
years commencing on December 31, 2008, at an exercise price of $11.90 per share,
subject to the occurrence of certain events that could potentially reduce the
exercise price to $5.60 per share.
 
 The
Management Agreement provides that upon termination of that agreement or after
the expiration date for any reason, except cause (as defined in the Management
Agreement), we are required to pay KIT Capital, in addition to any other
payments due, a cash severance payment equal to the greater of (i) the total
amount paid to KIT Capital during the preceding 12 months, including base
compensation and all bonuses, or (ii) the previous month’s monthly installment
of base compensation multiplied by 12.
 
 Gavin Campion Employment
Agreement.  On March 16, 2008, we entered into an employment
agreement with Gavin Campion to serve as our President.  Pursuant to
the terms of his agreement, Mr. Campion will serve as our President for an
indefinite term, unless terminated by either party upon no less than 30 days
written notice. If the agreement is terminated by Mr. Campion (or by us for the
reasons specified below) prior to two years of consecutive service (April 1,
2010), Mr. Campion will be required to reimburse us for all expenses related to
his employment.  Mr. Campion’s initial base compensation under the
agreement is fixed at $200,000, payable in UAE dirham equivalent (inclusive of
his transportation and housing allowance), plus corporate performance incentive
compensation and a success fee relating to the Sputnik and Reality Group
acquisitions.  Mr. Campion also received stock options to purchase
34,286 shares of our common stock upon entering into the
agreement.  We are entitled to terminate Mr. Campion without advance
notice and without the payment of any benefits upon the occurrence of certain
events, including: (a) a violation of Article 120 of the UAE Labor Law (b) a
breach of his non-competition agreement, (c) after Mr. Campion receives written
notice of conduct which is in violation of our policies, standards and
regulations as established from time to time, a refusal by Mr. Campion to comply
with such policies, standards and regulations, (d) Mr. Campion engages in fraud,
dishonesty or any other act of material misconduct in the performance of his
duties on our behalf, or (e) Mr. Campion violates any material provision of his
employment agreement which is not cured under any applicable cure period
allowable under the agreement.
 
 Robin Smyth
Agreement.  On March 30, 2008, we entered into a Separation and
Re-Employment Agreement with Robin Smyth (the “Smyth Agreement”). Pursuant to
the terms of the Smyth Agreement, Mr. Smyth was retained as Chief Financial
Officer on an “at-will” basis at a base salary of $180,000. In addition, Mr.
Smyth will receive a discretionary bonus and no less than 11,429 stock options.
In addition, Mr. Smyth received two tranches of warrants, the first tranche
provides for the purchase of up to 47,143 shares of our common stock and the
second tranche provides for the right to purchase up to 34,286 shares of our
common stock, both at an exercise price equal to the three-day trailing weighted
average closing price per share as of March 30, 2008 of $4.655. Both warrants
contain vesting provisions. The Smyth Agreement also provides for the
termination of the employment agreement between Mr. Smyth and us, dated as of
November 1, 2004, and the payment of $475,000 in satisfaction of the Company’s
obligations under the November 1, 2004 employment agreement, payable in three
payments of $275,000, $100,000 and $100,000. The first, second and third cash
payments (the first being a non-contingent, guaranteed obligation of ours and
the latter two being contingent only upon Mr. Smyth not being dismissed for
cause, within the meaning of that term in the November 1, 2004 employment
agreement, or having resigned from the Company prior to the second or third cash
payment being made).  Mr. Smyth agreed to resign as our Chief
Financial Officer effective April 27, 2009.
 
 
 Jonathan Hirst Employment
Agreement.  Effective March 9, 2009, Jonathan Hirst entered
into an employment agreement with us to begin employment on March 23, 2009, and
to serve as our Chief Financial Officer beginning on April 27,
2009.  Pursuant to the employment agreement, Mr. Hirst will devote all
of his professional time and attention to our business, will report to Gavin
Campion, our President, and will be based in our Dubai office.
  33
 The
employment agreement provides that Mr. Hirst will receive a fixed salary at an
annual rate of $200,000, inclusive of a transportation and housing
allowance.  Mr. Hirst will also be entitled to receive an annual
performance incentive bonus of up to 50% of his total compensation based on the
success of our financial results as provided in our executive bonus
plan.  We have also agreed to issue Mr. Hirst stock options to
purchase 11,429 shares of common stock (post-split) at an exercise price equal
to the market price on his first date of employment in accordance with the 2008
Incentive Plan.
  The
employment agreement provides for termination of employment by us or Mr. Hirst
at any time on not less than 30 days written notice, or by us immediately upon
an act of fraud, dishonesty or misconduct by Mr. Hirst or a material breach by
him of his obligations to us.  In the event Mr. Hirst’s contract is
terminated by us without cause he will be entitled to compensation for three
months.  The employment agreement also contains covenants (a)
restricting him from engaging in any activities competitive with our business
during the term of his employment agreement and for a period of three months
thereafter, (b) prohibiting him from disclosure of our confidential information
at any time, and (c) confirming that all intellectual property developed by him
and relating to our business constitutes our sole and exclusive
property.  The employment agreement is governed by the laws of the
United Arab Emirates.
  Compensation
Committee Interlock and Insider Participation
 
 As of
December 31, 2008, the Compensation Committee was composed of Lars Kroijer and
Daniel Hart. There are no relationships or transactions involving members of the
Compensation Committee during the year ended December 31, 2008 required to be
reported pursuant to Item 402(j) of Regulation S-K.
  Section
16(a) Beneficial Ownership Reporting Compliance
  Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and persons who beneficially own more than ten percent of a
registered class of our equity securities to file with the SEC initial reports
of ownership and reports of change in ownership of common stock and other equity
securities of the Company.  Officers, directors and greater than ten
percent stockholders are required by SEC regulations to furnish us with copies
of all Section 16(a) forms they file.  Based solely upon a review of
Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(e) during
the year ended December 31, 2008, Forms 5 and any amendments thereto furnished
to us with respect to the year ended December 31, 2008, and the representations
made by the reporting persons to us,we believe that during the year
ended December 31, 2008, our executive officers, directors and all persons who
own more than ten percent of a registered class of our equity securities
complied with all Section 16(a) filing requirements.
  34
 
 ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  The
following table sets forth information regarding the beneficial ownership of the
common stock as of April 10, 2009.  The information in this table
provides the ownership information for each person known by us to be the
beneficial owner of more than 5% of the common stock; each of our directors;
each of our executive officers; and all of our directors and executive officers
as a group.
  Unless
otherwise indicated, the persons named in the table below have sole voting and
investment power with respect to the number of shares indicated as beneficially
owned by them.  Unless otherwise indicated, the address of the
beneficial owner is c/o KIT digital, Inc., 168 Fifth Avenue, Suite 301, New
York, New York 10010.
 
  Name and Address
                                  of Beneficial Owner
                                
                                Shares
      of
                                  Common Stock
      (Including Shares Underlying Other Securities)
                                  Beneficially
                                  Owned 
      (1)
                                
                                Percentage
                                  of
      Shares of Common
                                  Stock
      (Including Shares Underlying Other Securities) Beneficially Owned 
      (1)KIT
      Media Limited
                                  Mill
      Mall, Suite 6
                                  Wickhams
      Cay 1
                                  P.O.
      Box 3085
                                  Road
      Town, Tortola
                                  British
      Virgin Islands
                                
                                
                                3,490,360
                                (2)
                                
                                56.52%KIT Capital, Ltd.
                                  P.O. Box 112888
                                  Dubai, United
      Arab
                                  Emirates
                                
                                
                                60,219
                                (3)
                                
                                1.30%Kaleil
      Isaza Tuzman, sum of above
                                
                                
                                3,550,579
                                (2)(3)
                                
                                57.82%Gavin
      Campion
                                
                                
                                29,546
                                (4)
                                
                                *Robin
      Smyth
                                
                                
                                76,388
                                (5)
                                
                                1.64%Wayne
      Walker
                                
                                
                                15,759
                                (6)
                                
                                *Kamal
      El-Tayara
                                
                                
                                20,619
                                (7)
                                
                                *Lars
      Kroijer
                                
                                
                                15,348
                                (8)
                                
                                *Daniel
      Hart
                                
                                
                                16,760
                                (9)
                                
                                *Steven
      G. Felsher
                                
                                
                                15,348
                                (10)
                                
                                *Paul
      Tudor Jones, IIc/o
      Tudor Investment
                                  Corp.1275
      King streetGreenwich,
      CT 06831
                                
                                
                                161,323
                                (11)
                                
                                3.49%Wellington
      Trust
                                  Company,
      NA75
      State StreetBoston,
      MA 02169
                                
                                
                                167,703
                                (12)
                                
                                3.61%Wellington
      Management
                                  Company,
      LLP75
      State StreetBoston,
      MA 02169
                                
                                
                                493,440
                                (13)
                                
                                9.22%Castlerigg
      Master
                                  Investments
      Ltd.40
      W. 57th
      Street, 26th
      FloorNew
      York, NY 10019
                                
                                
                                577,142
                                (14)
                                
                                11.84%All
      directors and
                                  executive
      officers as a
                                  group
      (8 persons)
                                
                                
                                3,693,204
                                
                                
                                60.92%
  35
 _____________
 *Less
than 1% of outstanding shares of common stock.
  (1)
              Applicable
      percentage ownership is based on 4,586,700 shares of common stock
      outstanding as of April 10, 2009. For purposes of this table, “beneficial
      ownership” is determined in accordance with Rule 13d-3 under the
      Securities Exchange Act of 1934, pursuant to which a person or group of
      persons is deemed to have “beneficial ownership” of any shares of common
      stock that such person has the right to acquire within 60
      days.  For purposes of computing the percentage of outstanding
      shares of common stock held by each person or group of persons named
      above, any shares which such person or persons have the right to acquire
      within 60 days are deemed to be outstanding and beneficially owned by such
      person or persons, but are not deemed to be outstanding for the purpose of
      computing the percentage ownership of any other person.(2)
              Represents
      (a) 1,901,430 shares of common stock, (b) 1,008,572 warrants acquired in
      our May 2008 financing and (c) warrants to purchase 580,358 shares of
      common stock acquired upon exercise of the right vested in that certain
      Executive Management Agreement, dated as of December 18,
      2007.  Kaleil Isaza Tuzman, our Chief Executive Officer, holds a
      controlling interest in KIT Media and holds the voting and dispositive
      power of the shares directly held by KIT Media, Ltd.  For
      purposes of voting, on an actual basis, KIT Media Limited owns 41.46% of
      our outstanding shares. For purposes of voting, on an actual basis, Mr.
      Isaza Tuzman owns 41.85% of our outstanding shares.(3)
              Represents
      (a) 17,858 shares of common stock and (b) shares underlying 60,000 stock
      options granted to KIT Capital pursuant to that certain Executive
      Management Agreement, dated as of December 18, 2007. 20,000 of the options
      vested on January 8, 2008. The remainder of the options vest and become
      exercisable at the rate of 1/36th per month commencing on February 9,
      2008, of which 17,778 options vest within the next 60 days, with an
      exercise price of $6.11 per share and an expiration date of June 21, 2013
      and (c) 20,000 shares of common stock issuable upon the exercise of stock
      options, of which 4,583 vest within the next 60 days, with an
      exercise price of $9.80 share and an expiration date of June 21,
      2013.  Kaleil Isaza Tuzman, our Chief Executive Officer, holds a
      controlling interest in KIT Capital and holds the voting and dispositive
      power of the shares directly held by KIT Capital.  For purposes
      of voting, on an actual basis, KIT Capital owns 0.39% of our
      outstanding shares.  For purposes of voting, on an actual basis,
      Mr. Isaza Tuzman owns 41.85% of our outstanding shares.(4)
              Represents
      (a) 9,188 shares of common stock, (b) 34,286 shares of common stock
      issuable upon the exercise of stock options, of which 16,608 vest
      within the next 60 days, with an exercise price of $2.80 per share and an
      expiration date of March 16, 2013, and (c) 20,000 shares of common stock
      issuable upon the exercise of stock options, of which 3,750 vest
      within the next 60 days, with an exercise price of $9.80 per share and an
      expiration date of June 21, 2013.  For purposes of voting, on an
      actual basis, Mr. Campion owns 0.20% of our outstanding
      shares.(5)
              Represents
      (a) 2,858 shares of common stock owned directly by Mr. Smyth, (b) 11,715
      shares of common stock issuable upon the exercise of stock options, of
      which 11,715 vest within the next 60 days, with an exercise price of $2.80
      per share and an expiration date of March 16, 2013, (c) 81,429 shares of
      common stock issuable upon exercise of warrants, of which 60,476 vest
      within the next 60 days, and are exercisable at an exercise price of $4.66
      per share and have an expiration date of March 30, 2012, and (d) 7,143
      shares of common stock issuable upon the exercise of stock options, of
      which 1,339 vest within the next 60 days, with an exercise price of
      $9.80 per share and an expiration date of June 21, 2013.  For
      purposes of voting, on an actual basis, Mr. Smyth owns 0.06% of our
      outstanding shares.(6)
              Represents
      (a) 1,118 shares of common stock, (b) 8,143 shares of common stock
      issuable upon the exercise of stock options, of which 2,394 vest
      within the next 60 days, with an exercise price of $2.80 per share and an
      expiration date of March 16, 2013, (c) 4,072 shares of common stock
      issuable upon the exercise of stock options, of which 763 vest within
      the next 60 days, with an exercise price of $9.80 per share and an
      expiration date of June 21, 2013, and (d) 11,484 shares of common stock
      issuable upon the exercise of stock options, of which 11,484 vest
      within the next 60 days, with an exercise price of $7.00 per share and an
      expiration date of March 6, 2014 For purposes of voting, on an actual
      basis, Mr. Walker owns 0.02% of our outstanding shares.  36
  (7)
                  Represents
      (a) 2,858 shares of common stock owned directly by Mr. El-Tayara, (b)
      8,143 shares of common stock issuable upon the exercise of stock options,
      of which 2,394 vest within the next 60 days, with an exercise price
      of $2.80 per share and an expiration date of March 16, 2013, (c) 4,072
      shares of common stock issuable upon the exercise of stock options, of
      which 763 vest within the next 60 days, with an exercise price of
      $9.80 per share and an expiration date of June 21, 2013, and (d) 14,604
      shares of common stock issuable upon the exercise of stock options, of
      which 14,604 vest within the next 60 days, with an exercise price of
      $7.00 per share and an expiration date of March 6, 2014.  For
      purposes of voting, on an actual basis, Mr. El-Tayara owns 0.06% of our
      outstanding shares.(8)
                  Represents
      (a) 1,144 shares of common stock, (b) 8,143 shares of common stock
      issuable upon the exercise of stock options, of which 2,394 vest
      within the next 60 days, with an exercise price of $2.80 per share and an
      expiration date of March 16, 2013, (c) 4,072 shares of common stock
      issuable upon the exercise of stock options, of which 763 vest within
      the next 60 days, with an exercise price of $9.80 per share and an
      expiration date of June 21, 2013, and (d) 11,047 shares of common stock
      issuable upon the exercise of stock options, of which 11,047 vest
      within the next 60 days, with an exercise price of $7.00 per share and an
      expiration date of March 6, 2014 For purposes of voting, on an actual
      basis, Mr. Kroijer owns 0.02% of our outstanding shares.(9)
                  Represents(a)
      8,143 shares of common stock issuable upon the exercise of stock options,
      of which 2,036 will be vested within the next 60 days with an exercise
      price of $4.55 per share and an expiration date of March 30, 2013, (b)
      4,072 shares of common stock issuable upon the exercise of stock options,
      of which 763 vest within the next 60 days, with an exercise price of
      $9.80 per share and an expiration date of June 21, 2013, and (c) 13,961
      shares of common stock issuable upon the exercise of stock options, of
      which 13,961 vest within the next 60 days, with an exercise price of
      $7.00 per share and an expiration date of March 6, 2014 For purposes of
      voting, on an actual basis, Mr. Hart owns no outstanding
      shares.(10)
                  Represents(a)
      10,286 shares of common stock issuable upon the exercise of stock options,
      of which 1,929 will be vested within the next 60 days with an exercise
      price of $7.00 per share and an expiration date of February 15, 2014,
      and (b) 13,419 shares of common stock issuable upon the exercise of stock
      options, of which 13,419 vest within the next 60 days, with an
      exercise price of $7.00 per share and an expiration date of March 6,
      2014.  For purposes of voting, on an actual basis, Mr. Felsher
      owns no outstanding shares.(11)
                  As
      reported in a Schedule 13G filed with the SEC on February 9, 2009, The
      Tudor BVI Global Portfolio Ltd. directly owns 25,990 shares of common
      stock and 7,797 warrants to purchase common stock. The Raptor Global
      Portfolio Ltd. directly owns 97,902 shares of common stock and 29,371
      warrants. The Altar Rock Fund L.P. directly owns 202 shares of common
      stock and 61 warrants. Tudor Investment Corporation provides investment
      advisory services to BVI Global Portfolio Ltd. and may be deemed to
      beneficially own the securities held by The Tudor BVI Global Portfolio,
      Ltd. Tudor Investment Corporation disclaims beneficial ownership of the
      securities held by BVI Global Portfolio, Ltd. In addition, Paul Tudor
      Jones II, as the controlling stockholder of Tudor Investment Corporation,
      may be deemed to be the beneficial owner of the shares held by The Tudor
      BVI Global Portfolio, Ltd. Tudor Investment Corporation and Mr. Jones
      disclaim beneficial ownership of the securities held by The BVI Global
      Portfolio Ltd. For purposes of voting, on an actual basis, Mr. Jones and
      affiliated entities own 2.71% of our outstanding shares.(12)
                  As
      reported in a Schedule 13G filed with the SEC on February 17, 2009.
      Represents 102,694 shares of common stock and 65,009 warrants. For
      purposes of voting, on an actual basis, Wellington Trust Company, NA owns
      2.24% of our outstanding shares.(13)
                  As
      reported in a Schedule 13G filed with the SEC on February 17, 2009.
      Represents 261,591 shares of common stock and 177,849 warrants which are
      owned by clients of Wellington Management. Except for Wellington Trust
      Company, NA, none of these clients owns more than 5% of our outstanding
      shares of common stock. For purposes of voting, on an actual basis,
      Wellington Management Company, LLP owns 5.70% of our outstanding
      shares.(14)
                  Represents
      288,571 shares of common stock and 288,571 warrants for Castlerigg Master
      Investments Ltd. For purposes of voting, on an actual basis, Castlerigg
      Master Investments Ltd. owns 6.29% of our outstanding shares.
  37
  ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
  Other
than the Executive Management Agreement described under “Executive Compensation
- Employment and Management Agreements; KIT Capital Management Agreement” above
(which is incorporated herein by reference in its entirety), there are no
relationships or transactions requiring disclosure between us and our related
persons, promoters or control persons.
  Kamal
El-Tayara, Steven G. Felsher, Daniel Hart, Lars Kroijer and Wayne Walker are
independent members of our board of directors, under Nasdaq’s independence
standards.
  ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
  The
following table sets forth the aggregate fees billed or to be billed to us by
MSPC, Certified Public Accountants and Advisors, a Professional Corporation for
the years ended December 31, 2008 and 2007:
  2008
                  
                  
                  2007Audit
      Fees
                  
                  $
                  149,567
                  
                  
                  $
                  109,961Audit-Related
      Fees
                  
                  
                  17,324
                  
                  
                  
                  13,629Tax
      Fees
                  
                  
                  0
                  
                  
                  
                  1,200All
      Other Fees
                  
                  
                  0
                  
                  
                  
                  0
 
 All
services performed by MSPC were pre-approved by the Audit Committee in
accordance with its pre-approval policy adopted in 2007.  The policy
describes the audit, audit-related, tax and other services permitted to be
performed by the independent auditors, subject to the Audit Committee's prior
approval of the services and fees.  On an annual basis, the Audit
Committee will review and provide pre-approval for certain types of services
that may be provided by the independent auditors without obtaining specific
pre-approval from the Audit Committee.  If a type of service to be
provided has not received pre-approval during this annual process, it will
require specific pre-approval by the Audit Committee.  Any proposed
services exceeding pre-approved cost levels or budgeted amounts will also
require separate pre-approval by the committee.
  38
 PART
IV
  ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  (a)(1)
and (2):  The response to this portion of Item 14 is submitted as a
separate section of this report beginning on page F-1.
  (a)(3)
Exhibits:
  Exhibit
                      Number
                    
                    Description2.1
                    
                    Agreement
      and Plan of Merger dated as of December 2, 2003 by and among Virilitec
      Industries, Inc., ROO Media Corporation, VRLT Acquisition Corp., and Jacob
      Roth and Bella Roth (Incorporated by reference to Form 8-K, filed with the
      U.S. Securities and Exchange Commission (the “SEC”) on December 18,
      2003).2.2
                    
                    Stock
      Purchase Agreement dated as of March 11, 2004 by and among the Company and
      the shareholders of Reality Group Pty Ltd (Incorporated by reference to
      Form 8-K, filed with the SEC on May 17, 2004).2.3
                    
                    Asset
      Purchase Agreement dated as of May 26, 2004 by and among the Company,
      Undercover Holdings Pty Ltd. and Undercover Media Pty Ltd. (Incorporated
      by reference to Form 8-K, filed with the SEC on June 16,
      2004).2.4
                    
                    Stock
      Purchase Agreement dated as of September 10, 2004 by and among the Company
      and Avenue Group, Inc. in connection with the purchase of common stock of
      Bickhams Media, Inc. (Incorporated by reference to Form 8-K, filed with
      the SEC on September 22, 2004).2.5
                    
                    Stock
      Purchase Agreement dated as of November 1, 2004 by and between Bickhams
      Media, Inc., ROO Group, Inc., and Daniel and Vardit Aharonoff
      (Incorporated by reference to Form 8-K/A, filed with the SEC on November
      5, 2004).2.6
                    
                    Amendment
      No. 1 dated October 28, 2005 to Stock Purchase Agreement among ROO Group,
      Inc. and the shareholders of Reality Group Pty Ltd. (Incorporated by
      reference to Form 8-K/A, filed with the SEC on November 2,
      2005).2.7
                    
                    Share
      Purchase Agreement dated October 28, 2005 by and among ROO Broadcasting
      Limited and the Sellers thereto (Incorporated by reference to Form 8-K/A,
      filed with the SEC on November 2, 2005).2.8
                    
                    Share
      Purchase Agreement, dated April 30, 2008, between ROO Group, Inc. and
      shareholders of Sputnik Agency Pty Ltd. (Incorporated by reference to Form
      8-K filed with the SEC on May 23, 2008).2.9
                    
                    Share
      Purchase Agreement for the Acquisition of Shares of Kamera Content AB,
      dated May 19, 2008, between KIT digital, Inc. and the Majority
      Shareholders of Kamera Content AB (Incorporated by reference to Form 8-K
      filed with the SEC on May 23, 2008).2.10
                    
                    Share
      Purchase Agreement for the Acquisition of all Issued Shares of Visual
      Connection, a.s., dated October 5, 2008, between KIT digital, Inc. and KIT
      digital FZ-LLC (on the one hand), and Tomas Petru and Jakub Vanek (on the
      other hand) (Incorporated by reference to Form 8-K, filed with the SEC on
      October 9, 2008).3.1
                    
                    Certificate
      of Incorporation of Virilitec Industries, Inc. (Incorporated by reference
      to Form 10-SB (File No. 000-25659), filed with the SEC on March 29,
      1999).3.2
                    
                    Certificate
      of Amendment of Certificate of Incorporation of Virilitec Industries, Inc.
      filed with the State of Delaware on October 31, 2003 (Incorporated by
      reference to Form SB-2 (File No. 333-120605), filed with the SEC on
      November 18, 2004).3.3
                    
                    Certificate
      of Amendment to the Amended Certificate of Incorporation of Virilitec
      Industries, Inc. filed with the State of Delaware on February 18, 2004
      (Incorporated by reference to Form SB-2 (File No. 333-120605), filed with
      the SEC on November 18, 2004).  39
  3.4
                    
                    Certificate
      of Designation, Powers, Preferences and Rights of Series A Preferred
      Stock, filed with the State of Delaware on March 9, 2005 (Incorporated by
      reference to Form 8-K filed with the SEC on March 14,
    2005).3.5
                    
                    Certificate
      of Designation, Powers, Preferences and Rights of Series A Preferred
      Stock, filed with the State of Delaware on March 9, 2005 (Incorporated by
      reference to Form 8-K filed with the SEC on March 14,
    2005).3.6
                    
                    Amendment
      to the Certificate of Designation, Powers, Preferences and Rights of
      Series A Preferred Stock, filed with the State of Delaware on September
      30, 2005 (Incorporated by reference to Form 8-K filed with the SEC on
      October 4, 2005).3.7
                    
                    Certificate
      of Amendment to Amended Certificate of Incorporation, effective as of
      October 3, 2005 (Incorporated by reference to Form 8-K filed with the SEC
      on October 4, 2005).3.8
                    
                    Certificate
      of Amendment to the Certificate of Incorporation filed with the Delaware
      Secretary of State on May 19, 2008 (Incorporated by reference to Form 8-K
      filed with the SEC on June 2, 2008).3.9
                    
                    Certificate
      of Amendment of the Certificate of Incorporation filed with the Secretary
      of State of the State of Delaware effective March 9, 2009 (Incorporated by
      reference to Form 8-K filed with the SEC on March 16,
    2009).3.10
                    
                    Bylaws
      (Incorporated by reference to Form 10-SB (File No. 000-25659), filed with
      the SEC on March 29, 1999).4.1
                    
                    Stock
      Purchase Warrant issued to AJW Offshore, Ltd., dated September 10, 2004
      (Incorporated by reference to Form 8-K, filed with the SEC on September
      16, 2004).4.2
                    
                    Stock
      Purchase Warrant issued to AJW Qualified Partners, LLC, dated September
      10, 2004 (Incorporated by reference to Form 8-K, filed with the SEC on
      September 16, 2004).4.3
                    
                    Stock
      Purchase Warrant issued to AJW Partners, LLC, dated September 10, 2004
      (Incorporated by reference to Form 8-K, filed with the SEC on September
      16, 2004).4.4
                    
                    Stock
      Purchase Warrant issued to New Millennium Capital Partners II, LLC, dated
      September 10, 2004 (Incorporated by reference to Form 8-K, filed with the
      SEC on September 16, 2004).4.5
                    
                    Stock
      Purchase Warrant issued to AJW Offshore, Ltd., dated November 23, 2004
      (Incorporated by reference to Form 8-K, filed with the SEC on November 30,
      2004).4.6
                    
                    Form
      of Warrant, dated May 8, 2008, issued by ROO Group, Inc. to investors in
      the May 2008 Financing (Incorporated by reference to Form 8-K filed with
      the SEC on May 8, 2008).10.1
                    
                    Employment
      Agreement with Robert Petty dated April 1, 2004 (Incorporated by reference
      to Form 10-QSB, filed with the SEC on August 16, 2004).10.2
                    
                    Employment
      Agreement with Robin Smyth dated April 1, 2004 (Incorporated by reference
      to Form 10-QSB, filed with the SEC on August 16, 2004).10.3
                    
                    Employment
      Agreement with Robert Petty dated November 1, 2004 (Incorporated by
      reference to Form SB-2 (File No. 333-120605), filed with the SEC on
      November 18, 2004).10.4
                    
                    Employment
      Agreement with Robin Smyth dated November 1, 2004 (Incorporated by
      reference to Form SB-2 (File No. 333-120605), filed with the SEC on
      November 18, 2004).10.5
                    
                    Sublease
      dated April 1, 2005 (Incorporated by reference to Form 8-K filed with the
      SEC on June 13, 2005).10.6
                    
                    AT&T
      Intelligent Content Distribution Service Agreement dated August 16, 2001
      (Incorporated by reference to Form SB-2 (File No. 333-120605), filed with
      the SEC on November 18, 2004).  40
  10.7
                    
                    Network
      Services Agreement with Speedera Networks, Inc. dated June 1, 2004
      (Incorporated by reference to Form SB-2 (File No. 333-120605), filed with
      the SEC on November 18, 2004).10.8
                    
                    Securities
      Purchase Agreement, dated September 10, 2004, by and among ROO Group, Inc.
      and AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and
      New Millennium Capital Partners II, LLC (Incorporated by reference to Form
      8-K, filed with the SEC on September 16, 2004).10.9
                    
                    Letter
      agreement dated May 12, 2005 between the Company, AJW Offshore, Ltd., AJW
      Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital
      Partners II, LLC (Incorporated by reference to Form 8-K filed with the SEC
      on May 12, 2005).10.10
                    
                    Note
      Purchase Agreement made as of May 18, 2005 by and between ROO Group, Inc.
      and Robert Petty (Incorporated by reference to Form 8-K filed with the SEC
      on May 24, 2005).10.11
                    
                    Registration
      Rights Agreement made as of May 18, 2005 by and among Robert Petty, ROO
      Group, Inc. and the purchasers listed on Schedule I thereto (Incorporated
      by reference to Form 8-K filed with the SEC on May 24,
    2005).10.12
                    
                    Securities
      Purchase Agreement, dated July 18, 2005, by and among ROO Group, Inc. and
      AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
      Millennium Capital Partners II, LLC (Incorporated by reference to Form
      8-K, filed with the SEC on July 22, 2005).10.13
                    
                    Registration
      Rights Agreement, dated as of July 18, 2005, by and among ROO Group, Inc.
      and AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and
      New Millennium Capital Partners II, LLC (Incorporated by reference to Form
      8-K, filed with the SEC on July 23, 2005).10.14
                    
                    Omnibus
      Consent and Waiver dated August 18, 2005 between ROO Group, Inc., AJW
      Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
      Millennium Capital Partners II, LLC (Incorporated by reference to Form 8-K
      filed with the SEC on August 24, 2005).10.15
                    
                    Common
      Stock Purchase Agreement dated August 19, 2005 among ROO Group, Inc. and
      the purchasers listed on Exhibit A thereto (Incorporated by reference to
      Form 8-K filed with the SEC on August 25, 2005).10.16
                    
                    Registration
      Rights Agreement dated August 19, 2005 among ROO Group, Inc. and the
      purchasers listed on Schedule 1 thereto (Incorporated by reference to Form
      8-K filed with the SEC on August 25, 2005).10.17
                    
                    Escrow
      Agreement dated August 19, 2005 among ROO Group, Inc., the purchasers
      signatory thereto and the escrow agent (Incorporated by reference to Form
      8-K filed with the SEC on August 25, 2005).10.18
                    
                    Common
      Stock Purchase Agreement dated October 20, 2005 among ROO Group, Inc. and
      the purchasers listed on Exhibit A thereto (Incorporated by reference to
      Form 8-K filed with the SEC on October 26, 2005).10.19
                    
                    Registration
      Rights Agreement dated October 20, 2005 among ROO Group, Inc. and the
      purchasers listed on Schedule 1 thereto (Incorporated by reference to Form
      8-K filed with the SEC on October 26, 2005).10.20
                    
                    Escrow
      Agreement dated October 20, 2005 among ROO Group, Inc., the purchasers
      signatory thereto and the escrow agent (Incorporated by reference to Form
      8-K filed with the SEC on October 26, 2005).10.21
                    
                    Common
      Stock Purchase Agreement dated December 28, 2005 among ROO Group, Inc. and
      the purchasers listed on Exhibit A thereto (Incorporated by reference to
      Form 8-K filed with the SEC on December 30, 2005).  41
  10.22
                    
                    Escrow
      Agreement dated December 28, 2005 among ROO Group, Inc., the purchasers
      signatory thereto and the escrow agent (Incorporated by reference to Form
      8-K filed with the SEC on December 30, 2005).10.23
                    
                    Registration
      Rights Agreement dated December 28, 2005 among ROO Group, Inc. and the
      purchasers listed on Schedule 1 thereto (Incorporated by reference to Form
      8-K filed with the SEC on December 30, 2005).10.24
                    
                    Securities
      Purchase Agreement dated August 18, 2006 among ROO Group, Inc. and the
      purchasers listed on Exhibit A thereto (Incorporated by reference to Form
      8-K filed with the SEC on August 24, 2006).10.25
                    
                    Escrow
      Agreement dated August 18, 2006 among ROO Group, Inc., the purchasers
      signatory thereto and the escrow agent (Incorporated by reference to Form
      8-K filed with the SEC on August 24, 2006).10.26
                    
                    Securities
      Purchase Agreement dated November 14, 2006 among ROO Group, Inc. and the
      Purchasers listed on Exhibit A thereto (Incorporated by reference to Form
      8-K filed with the SEC on November 20, 2006).10.27
                    
                    Escrow
      Agreement dated November 14, 2006 among ROO Group, Inc., the purchasers
      signatory thereto (Incorporated by reference to Form 8-K filed with the
      SEC on November 20, 2006).10.28
                    
                    Securities
      Purchase Agreement dated May 4, 2007 among ROO Group, Inc., the purchasers
      signatory thereto (Incorporated by reference to Form 8-K filed with the
      SEC on May 10, 2007).10.29
                    
                    Escrow
      Agreement dated May 4, 2007 among ROO Group, Inc., the purchasers
      signatory (Incorporated by reference to Form 8-K filed with the SEC on May
      10, 2007).10.30
                    
                    Asset
      Purchase Agreement dated July 12, 2007 by and among ROO HD, Inc., Wurld
      Media, Inc., Gregory Kerber, and Kirk Feathers (Incorporated by reference
      to Form 8-K filed with the SEC on July 18, 2007).10.31
                    
                    Agreement
      dated January 25, 2007 by and among ROO Group, Inc. and News Corporation
      (Incorporated by reference to Form 8-K/A filed with the SEC on July 26,
      2007).10.32
                    
                    Executive
      Management Agreement, dated as of December 18, 2007, between KIT Capital
      Limited and ROO Group, Inc. (Incorporated by reference to Form 8-K filed
      with the SEC on December 26, 2007).10.33
                    
                    Offer
      of Employment, dated March 16, 2008, between ROO Group, Inc. and Gavin
      Campion (Incorporated by reference to Form 8-K filed with the SEC on March
      21, 2008).10.34
                    
                    ROO
      Group, Inc. 2008 Incentive Stock Plan (Incorporated by reference to Form
      10-K filed with the SEC on April 1, 2008).10.35
                    
                    Separation
      Agreement and Release, dated March 30, 2008, between ROO Group, Inc. and
      Robert Petty (Incorporated by reference to Form 10-K filed with the SEC on
      April 1, 2008).10.36
                    
                    Separation
      and Re-Employment Agreement, dated March 30, 2008 between ROO Group, Inc.
      and Robin Smyth (Incorporated by reference to Form 10-K filed with the SEC
      on April 1, 2008).10.37
                    
                    Securities
      Purchase Agreement, dated as of May 8, 2008, among ROO Group, Inc. d/k/a
      KIT digital and each of the purchasers listed on Exhibit A attached
      thereto (Incorporated by reference to Form 8-K filed with the SEC on May
      8, 2008).10.38
                    
                    Escrow
      Agreement, dated as of May 8, 2008, among ROO Group, Inc. d/b/a KIT
      digital, the purchasers signatory thereto and the escrow agent
      (Incorporated by reference to Form 8-K filed with the SEC on May 8,
      2008).10.39
                    
                    Employment
      Agreement, dated as of March 6, 2009, between KIT digital, Inc. and
      Jonathan Hirst (Incorporated by reference to Form 8-K filed with the SEC
      on March 16, 2009).  42
  21.1
                        
                        Subsidiaries
      of KIT digital, Inc.31.1
                        
                        Certification
      of Chief Executive Officer required by Rule 13(a)-14(a).31.2
                        
                        Certification
      of Chief Financial Officer required by Rule 13(a)-14(a).32.1
                        
                        Certifications
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  43
 SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
  KIT digital,
    Inc.Date: April
      15,
      2009
                    By:
                    /s/
      Kaleil Isaza TuzmanKaleil
      Isaza Tuzman
                      Chairman
      and Chief Executive Officer
                      (principal
      executive officer)By:
                    /s/
      Robin SmythRobin
      Smyth
                      Chief
      Financial Officer and Treasurer
                      (principal
      financial and accounting officer)
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated:
  
 /s/
      Kaleil Isaza Tuzman
                    Kaleil
      Isaza Tuzman
                  
                  Chairman
      and Chief Executive Officer
                    (principal
      executive officer)
                  
                  April
      15,
      2009/s/ Gavin Campion
                    
                    Gavin
      Campion
                  
                  President
      and Director
                  
                  April
      15,
      2009/s/ Robin Smyth
                    
                    Robin
      Smyth
                  
                  Chief
      Financial Officer, Treasurer and Director (principal financial and
      accounting officer)
                  
                  April
      15,
      2009/s/ Kamal El-Tayara
                    Kamal
      El-Tayara
                  
                  Director
                  
                  April
      15,
      2009/s/ Steven G. Felsher
                    Steven G.
      Felsher
                  
                  Director
                  
                  April
      15,
      2009/s/ Daniel Hart
                    Daniel
      Hart
                  
                  Director
                  
                  April
      15,
      2009/s/ Lars Kroijer
                    Lars
      Kroijer
                  
                  Director
                  
                  April
      15,
      2009/s/ Wayne Walker
                    Wayne
      Walker
                  
                  Director
                  
                  April
      15,
      2009
 
 
 44




KIT
digital, Inc. and Subsidiaries
  FORM
10-K
  ITEMS
8 and 15(a) (1) and (2)
  INDEX
OF FINANCIAL STATEMENTS AND SCHEDULES
  The
following financial statements of KIT digital, Inc. and its subsidiaries
required to be included in Items 8 and 15(a)(1) are listed below:
  PageReport
      of independent registered public accounting firm
                        F-2Consolidated
      balance sheets as of December 31, 2008 and December 31,
    2007
                        F-3For
      the periods ended December 31, 2008 and 2007:Consolidated
      statements of operations and comprehensive loss
                        F-4Consolidated
      statements of stockholders' equity
                        F-5Consolidated
      statements of cash flows
                        F-7Notes
      to consolidated financial statements
                        F-9
  The
financial statement schedules of  KIT digital, Inc. and its
subsidiaries to be included in Item 15(a)(2) are omitted because the conditions
requiring their filing do no exist or because the required information is given
in the financial statements, including the notes thereto.
  F-1
  
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of
 KIT
digital, Inc. and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheets of KIT digital, Inc. and
Subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity, and cash
flows for each of the two years in the period then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of KIT digital, Inc. and
Subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the two years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses and
negative cash flows from operations that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also discussed in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
  /s/
      MSPCMSPCCertified
      Public Accountants and Advisors,New
      York, New York
                    A
      Professional CorporationApril
      8, 2009
 
 F-2
 
 KIT DIGITAL, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 (Amounts
in Thousands, Except Share Data)
 Year ended December 31,2008
                                              
                                              
                                              2007Assets:Current
      assets:Cash
      and cash equivalents
                                              
                                              $
                                              5,878
                                              
                                              
                                              $
                                              10,189Accounts
      receivable, net
                                              
                                              
                                              8,331
                                              
                                              
                                              
                                              3,057Inventory,
      net
                                              
                                              
                                              2,130
                                              
                                              
                                              
                                              -Restricted
      cash
                                              
                                              
                                              -
                                              
                                              
                                              
                                              100Other
      current assets
                                              
                                              
                                              1,539
                                              
                                              
                                              
                                              1,288Total
      current assets
                                              
                                              
                                              17,878
                                              
                                              
                                              
                                              14,634Property
      and equipment, net
                                              
                                              
                                              2,928
                                              
                                              
                                              
                                              1,307Deferred
      tax assets
                                              
                                              
                                              64
                                              
                                              
                                              
                                              263Software,
      net
                                              
                                              
                                              2,265
                                              
                                              
                                              
                                              505Customer
      list, net
                                              
                                              
                                              2,988
                                              
                                              
                                              
                                              253Domain
      names, net
                                              
                                              
                                              19
                                              
                                              
                                              
                                              30Goodwill
                                              
                                              
                                              15,167
                                              
                                              
                                              
                                              1,123Total
      assets
                                              
                                              $
                                              41,309
                                              
                                              
                                              $
                                              18,115Liabilities
      and Stockholders' Equity:Current
      liabilities:Bank
      overdraft
                                              
                                              $
                                              1,456
                                              
                                              
                                              $
                                              190Capital
      lease and other obligations
                                              
                                              
                                              395
                                              
                                              
                                              
                                              -Secured
      notes payable
                                              
                                              
                                              966
                                              
                                              
                                              
                                              -Senior
      secured notes payable, net of debt discount of $550
                                              
                                              
                                              950
                                              
                                              
                                              
                                              -Accounts
      payable
                                              
                                              
                                              5,775
                                              
                                              
                                              
                                              3,121Accrued
      expenses
                                              
                                              
                                              2,240
                                              
                                              
                                              
                                              1,616Income
      tax payable
                                              
                                              
                                              160
                                              
                                              
                                              
                                              139Acquisition
      liability - Kamera
                                              
                                              
                                              3,000
                                              
                                              
                                              
                                              -Acquisition
      liability - Visual
                                              
                                              
                                              2,218
                                              
                                              
                                              
                                              -Other
      current liabilities
                                              
                                              
                                              3,818
                                              
                                              
                                              
                                              1,478Total
      current liabilities
                                              
                                              
                                              20,978
                                              
                                              
                                              
                                              6,544Capital
      lease and other obligations, net of current
                                              
                                              
                                              949
                                              
                                              
                                              
                                              292Secured
      notes payable, net of current
                                              
                                              
                                              236
                                              
                                              
                                              
                                              -Acquisition
      liability - Visual, net of current
                                              
                                              
                                              1,075
                                              
                                              
                                              
                                              -Total
      liabilities
                                              
                                              
                                              23,238
                                              
                                              
                                              
                                              6,836Minority
      interest
                                              
                                              
                                              (237
                                              )
                                              
                                              
                                              (76
                                              )Stockholders'
      Equity:Series
      A preferred shares, $0.0001 par value: authorized 10,000,000 shares;
      issued and outstanding 10,000,000
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1Common
      stock, $0.0001 par value: authorized 30,000,000 shares; issued and
      outstanding 4,183,280 and 1,112,459, respectively
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Additional
      paid-in capital
                                              
                                              
                                              101,057
                                              
                                              
                                              
                                              74,824Accumulated
      deficit
                                              
                                              
                                              (82,499
                                              )
                                              
                                              
                                              (63,524
                                              )Accumulated
      other comprehensive (loss) income
                                              
                                              
                                              (250
                                              )
                                              
                                              
                                              54Total
      stockholders' equity
                                              
                                              
                                              18,308
                                              
                                              
                                              
                                              11,355Total
      liabilities and stockholders' equity
                                              
                                              $
                                              41,309
                                              
                                              
                                              $
                                              18,115
  The
Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
  F-3
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 (Amounts
in Thousands, Except Share and Per Share Data)
  Year
      endedDecember 31,2008
                                                    
                                                    
                                                    2007Revenue
                                                    
                                                    $
                                                    23,401
                                                    
                                                    
                                                    $
                                                    13,929Variable
      and direct third party costs:Cost
      of goods and services
                                                    
                                                    
                                                    2,845
                                                    
                                                    
                                                    
                                                    -Hosting,
      delivery and reporting
                                                    
                                                    
                                                    2,024
                                                    
                                                    
                                                    
                                                    2,341Content
      costs
                                                    
                                                    
                                                    2,419
                                                    
                                                    
                                                    
                                                    1,304Direct
      third party creative production costs
                                                    
                                                    
                                                    3,109
                                                    
                                                    
                                                    
                                                    3,242Total
      variable and direct third party costs
                                                    
                                                    
                                                    10,397
                                                    
                                                    
                                                    
                                                    6,887Gross
      profit
                                                    
                                                    
                                                    13,004
                                                    
                                                    
                                                    
                                                    7,042General
      and administrative expenses:Compensation,
      travel and associated costs (including non-cash stock-based compensation
      of $4,869 and $4,748, respectively)
                                                    
                                                    
                                                    20,366
                                                    
                                                    
                                                    
                                                    28,587Legal,
      accounting, audit and other professional service fees
                                                    
                                                    
                                                    1,227
                                                    
                                                    
                                                    
                                                    1,807Office,
      marketing and other corporate costs
                                                    
                                                    
                                                    3,511
                                                    
                                                    
                                                    
                                                    3,988Merger
      and acquisition and investor relations expenses
                                                    
                                                    
                                                    427
                                                    
                                                    
                                                    
                                                    -Depreciation
      and amortization
                                                    
                                                    
                                                    1,771
                                                    
                                                    
                                                    
                                                    2,236Restructuring
      charges
                                                    
                                                    
                                                    3,068
                                                    
                                                    
                                                    
                                                    -Other
      non-recurring charges
                                                    
                                                    
                                                    1,111
                                                    
                                                    
                                                    
                                                    -Settlement
      of MyVideoDaily agreement
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    500Impairment
      of property and equipment
                                                    
                                                    
                                                    229
                                                    
                                                    
                                                    
                                                    788Impairment
      of intangible assets
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    3,124Impairment
      of goodwill
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    250Total
      general and administrative expenses
                                                    
                                                    
                                                    31,710
                                                    
                                                    
                                                    
                                                    41,280Loss
      from operations
                                                    
                                                    
                                                    (18,706
                                                    )
                                                    
                                                    
                                                    (34,238
                                                    )Interest
      income
                                                    
                                                    
                                                    164
                                                    
                                                    
                                                    
                                                    725Interest
      expense
                                                    
                                                    
                                                    (228
                                                    )
                                                    
                                                    
                                                    (70
                                                    )Amortization
      of deferred financing costs and debt discount
                                                    
                                                    
                                                    (110
                                                    )
                                                    
                                                    
                                                    -Other
      income (expense)
                                                    
                                                    
                                                    31
                                                    
                                                    
                                                    
                                                    (51
                                                    )Registration
      rights liquidated damages
                                                    
                                                    
                                                    (117
                                                    )
                                                    
                                                    
                                                    (792
                                                    )Net
      loss before income taxes
                                                    
                                                    
                                                    (18,966
                                                    )
                                                    
                                                    
                                                    (34,426
                                                    )Income
      tax expense
                                                    
                                                    
                                                    (116
                                                    )
                                                    
                                                    
                                                    (125
                                                    )Net
      loss before minority interest
                                                    
                                                    
                                                    (19,082
                                                    )
                                                    
                                                    
                                                    (34,551
                                                    )Minority
      interest
                                                    
                                                    
                                                    107
                                                    
                                                    
                                                    
                                                    (13
                                                    )Net
      loss available to common shareholders
                                                    
                                                    $
                                                    (18,975
                                                    )
                                                    
                                                    $
                                                    (34,564
                                                    )Basic
      and diluted net loss per common share
                                                    
                                                    $
                                                    (7.55
                                                    )
                                                    
                                                    $
                                                    (34.69
                                                    )Basic
      and diluted weighted average common shares outstanding
                                                    
                                                    
                                                    2,512,415
                                                    
                                                    
                                                    
                                                    996,267Comprehensive
      loss:Net
      loss
                                                    
                                                    $
                                                    (18,975
                                                    )
                                                    
                                                    $
                                                    (34,564
                                                    )Foreign
      currency translation
                                                    
                                                    
                                                    (304
                                                    )
                                                    
                                                    
                                                    46Comprehensive
      loss
                                                    
                                                    $
                                                    (19,279
                                                    )
                                                    
                                                    $
                                                    (34,518
                                                    )
 
 The
Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
  F-4
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 (Amounts in Thousands, Except Share
Data)
 Series
      A
                                                Preferred
      Shares
                                              
                                              
                                              Series
      A Preferred
                                                Shares
                                                Par
      Value
                                              
                                              
                                              Common
                                                Stock
                                              
                                              
                                              Common
                                                Stock
                                                Par
      ValueBalance
      - January 1, 2007
                                              
                                              
                                              10,000,000
                                              
                                              
                                              $
                                              1
                                              
                                              
                                              
                                              744,995
                                              
                                              
                                              $
                                              —Issuance
      of stock in private placements
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              285,714
                                              
                                              
                                              
                                              —Stock-based
      compensation
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Issuance
      of stock for News Corp.
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              57,143
                                              
                                              
                                              
                                              —Issuance
      of stock for MyVideoDaily acquisition
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2,639
                                              
                                              
                                              
                                              —Return
      and cancellation of stock for MyVideoDaily acquisition
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (2,639
                                              )
                                              
                                              
                                              —Issuance
      of stock upon conversion of warrants
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              286
                                              
                                              
                                              
                                              —Issuance
      of stock upon cashless conversion of warrants
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              5,592
                                              
                                              
                                              
                                              —Issuance
      of stock into escrow related to Wurld Media
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              18,729
                                              
                                              
                                              
                                              —Foreign
      currency translation adjustment
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Net
      loss
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Balance
      - December 31, 2007
                                              
                                              
                                              10,000,000
                                              
                                              
                                              $
                                              1
                                              
                                              
                                              
                                              1,112,459
                                              
                                              
                                              $
                                              —Issue
      of stock in private placement
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2,142,857
                                              
                                              
                                              
                                              —Issue
      of stock in placement to KIT Media
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              892,857
                                              
                                              
                                              
                                              —Conversion
      of preferred stock to common stock
                                              
                                              
                                              (10,000,000
                                              )
                                              
                                              
                                              (1
                                              )
                                              
                                              
                                              11,429
                                              
                                              
                                              
                                              —Issue
      of warrants for private placement
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Issue
      of stock for exercise of stock options
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              7,821
                                              
                                              
                                              
                                              —Issue
      of stock in Asset Acquisition
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              13,714
                                              
                                              
                                              
                                              —Issue
      of warrants with short term debt
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Issue
      of stock for services
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2,143
                                              
                                              
                                              
                                              —Stock-based
      compensation
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Foreign
      currency translation adjustment
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Net
      loss
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Balance
      - December 31, 2008
                                              
                                              
                                              —
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              
                                              4,183,280
                                              
                                              
                                              $
                                              —
  The
Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
 
 F-5
 
 KIT DIGITAL, INC. AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 (Amounts
in Thousands, Except Share Data)
  Additional
                                      Paid-in
                                      Capital
                                    
                                    
                                    Accumulated
                                      (Deficit)
                                    
                                    
                                    Accumulated
      Other
                                      Comprehensive
                                      Income
                                      (Loss)
                                    
                                    
                                    Total
                                      Shareholders’
                                      EquityBalance
      - January 1, 2007
                                    
                                    $
                                    44,741
                                    
                                    
                                    $
                                    (28,960
                                    )
                                    
                                    $
                                    8
                                    
                                    
                                    $
                                    15,790Issuance
      of stock in private placements
                                    
                                    
                                    23,875
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    23,875Stock-based
      compensation
                                    
                                    
                                    4,748
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    4,748Issuance
      of stock for News Corp
                                    
                                    
                                    340
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    340Issuance
      of stock for MyVideoDaily acquisition
                                    
                                    
                                    250
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    250Return
      and cancellation of stock for MyVideoDaily acquisition
                                    
                                    
                                    (250
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (250
                                    )Issuance
      of stock upon conversion of warrants
                                    
                                    
                                    12
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    12Issuance
      of stock upon cashless conversion of warrants
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Issuance
      of stock into escrow related to Wurld Media
                                    
                                    
                                    1,108
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,108Foreign
      currency translation adjustment
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    46
                                    
                                    
                                    
                                    46Net
      loss
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (34,564
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (34,564
                                    )Balance
      - December 31, 2007
                                    
                                    $
                                    74,824
                                    
                                    
                                    $
                                    (63,524
                                    )
                                    
                                    $
                                    54
                                    
                                    
                                    $
                                    11,355Issue
      of stock in private placement
                                    
                                    
                                    14,680
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    14,680Issue
      of stock in placement to KIT Media
                                    
                                    
                                    5,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    5,000Conversion
      of preferred stock to common stock
                                    
                                    
                                    1
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Issue
      of warrants for private placement
                                    
                                    
                                    1,038
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,038Issue
      of stock for exercise of stock options
                                    
                                    
                                    22
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    22Issue
      of stock in Asset Acquisition
                                    
                                    
                                    106
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    106Issue
      of warrants with short term debt
                                    
                                    
                                    642
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    642Issue
      of stock for services
                                    
                                    
                                    11
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    11Stock-based
      compensation
                                    
                                    
                                    4,733
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    4,733Foreign
      currency translation adjustment
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (304
                                    )
                                    
                                    
                                    (304
                                    )Net
      loss
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (18,975
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (18,975
                                    )Balance
      - December 31, 2008
                                    
                                    $
                                    101,057
                                    
                                    
                                    $
                                    (82,499
                                    )
                                    
                                    $
                                    (250
                                    )
                                    
                                    $
                                    18,308
  The
Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
  F-6
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Amounts
in Thousands)
  Years
      ended December 31,2008
                                          
                                          
                                          2007Operating
      Activities:Net
      loss
                                          
                                          $
                                          (18,975
                                          )
                                          
                                          $
                                          (34,564
                                          )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Provision
      for doubtful accounts
                                          
                                          
                                          143
                                          
                                          
                                          
                                          120Depreciation
                                          
                                          
                                          729
                                          
                                          
                                          
                                          902Amortization
      of intangible assets
                                          
                                          
                                          1,042
                                          
                                          
                                          
                                          1,334Amortization
      of deferred financing costs
                                          
                                          
                                          18Amortization
      of debt discount
                                          
                                          
                                          92Impairment
      of property and equipment
                                          
                                          
                                          229
                                          
                                          
                                          
                                          788Impairment
      of goodwill and intangible assets
                                          
                                          
                                          —
                                          
                                          
                                          
                                          3,374Non-cash
      stock-based compensation
                                          
                                          
                                          4,733
                                          
                                          
                                          
                                          4,748Issuance
      of warrants for settlement of separation agreements
                                          
                                          
                                          1,038
                                          
                                          
                                          
                                          —Non-cash
      stock for services
                                          
                                          
                                          11
                                          
                                          
                                          
                                          —Non-cash
      issuance of shares for News Corporation agreement
                                          
                                          
                                          —
                                          
                                          
                                          
                                          340Minority
      interest in subsidiaries
                                          
                                          
                                          (107
                                          )
                                          
                                          
                                          13Changes
      in assets and liabilities:Accounts
      receivable
                                          
                                          
                                          (2,133
                                          )
                                          
                                          
                                          231Inventories
                                          
                                          
                                          (738
                                          )
                                          
                                          
                                          —Other
      assets
                                          
                                          
                                          585
                                          
                                          
                                          
                                          (137
                                          )Accounts
      payable
                                          
                                          
                                          (512
                                          )
                                          
                                          
                                          1,348Accrued
      expenses
                                          
                                          
                                          310
                                          
                                          
                                          
                                          613Income
      tax payable
                                          
                                          
                                          171
                                          
                                          
                                          
                                          (34
                                          )Other
      liabilities
                                          
                                          
                                          548
                                          
                                          
                                          
                                          139Total
      adjustments
                                          
                                          
                                          6,159
                                          
                                          
                                          
                                          13,779Net
      Cash Used By Operating Activities - Forward
                                          
                                          
                                          (12,816
                                          )
                                          
                                          
                                          (20,785
                                          )Investing
      Activities:Investment
      in restricted cash
                                          
                                          
                                          100
                                          
                                          
                                          
                                          (100
                                          )Cash
      paid in acquisition of Visual
                                          
                                          
                                          (1,311
                                          )
                                          
                                          
                                          —Cash
      received in acquisition of Visual
                                          
                                          
                                          110
                                          
                                          
                                          
                                          —Cash
      paid in acquisition of Kamera
                                          
                                          
                                          (4,634
                                          )
                                          
                                          
                                          —Cash
      received in acquisition of Kamera
                                          
                                          
                                          271
                                          
                                          
                                          
                                          —Cash
      paid for completion of acquisition of Sputnik
                                          
                                          
                                          (4,656
                                          )
                                          
                                          
                                          —Cash
      paid in acquisition of Morpheum
                                          
                                          
                                          (790
                                          )
                                          
                                          
                                          —Cash
      received in acquisition of Morpheum
                                          
                                          
                                          141
                                          
                                          
                                          
                                          —Cash
      paid for assets acquired from Juzou
                                          
                                          
                                          (19
                                          )
                                          
                                          
                                          —Cash
      paid in MyVideoDaily acquisition
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (250
                                          )Cash
      paid for assets acquired from Wurld Media
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (3,174
                                          )Proceeds
      from sale of equipment
                                          
                                          
                                          33
                                          
                                          
                                          
                                          —Capitalization
      of content
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (89
                                          )Purchase
      of equipment
                                          
                                          
                                          (960
                                          )
                                          
                                          
                                          (729
                                          )Net
      Cash Used By Investing Activities - Forward
                                          
                                          $
                                          (11,715
                                          )
                                          
                                          $
                                          (4,342
                                          )
  The
Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
  F-7
   KIT
DIGITAL, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Amounts
in Thousands)
  Years
      ended December 31,2008
                                      
                                      
                                      2007Net
      Cash Used By Operating Activities - Forwarded
                                      
                                      $
                                      (12,816
                                      )
                                      
                                      $
                                      (20,785
                                      )Net
      Cash Used By Investing Activities - Forwarded
                                      
                                      
                                      (11,715
                                      )
                                      
                                      
                                      (4,342
                                      )Financing
      Activities:Proceeds
      from private placements, net
                                      
                                      
                                      14,680
                                      
                                      
                                      
                                      23,875Proceeds
      from private placement to KIT Media
                                      
                                      
                                      5,000
                                      
                                      
                                      
                                      —Bank
      overdraft and other obligations
                                      
                                      
                                      (89
                                      )
                                      
                                      
                                      (372
                                      )Proceeds
      from exercise of stock options
                                      
                                      
                                      22
                                      
                                      
                                      
                                      —Proceeds
      from issuance of Secured Notes
                                      
                                      
                                      (322
                                      )
                                      
                                      
                                      —Proceeds
      from issuance of Senior Secured Note
                                      
                                      
                                      1,500
                                      
                                      
                                      
                                      —Proceeds
      from exercise of warrants
                                      
                                      
                                      —
                                      
                                      
                                      
                                      12Payments
      on capital leases
                                      
                                      
                                      (259
                                      )
                                      
                                      
                                      (170
                                      )Net
      Cash Provided By Financing Activities
                                      
                                      
                                      20,352
                                      
                                      
                                      
                                      23,345Effect
      of Exchange Rate Changes on Cash and Cash Equivalents
                                      
                                      
                                      (312
                                      )
                                      
                                      
                                      34Net
      Decrease in Cash and Cash Equivalents
                                      
                                      
                                      (4,311
                                      )
                                      
                                      
                                      (1,748
                                      )Cash
      and Cash Equivalents - Beginning of Year
                                      
                                      
                                      10,189
                                      
                                      
                                      
                                      11,937Cash
      and Cash Equivalents - End of Year
                                      
                                      $
                                      5,878
                                      
                                      
                                      $
                                      10,189Supplemental
      Disclosures of Cash Flow Information:Cash
      paid during the years for:Income
      taxes
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —Interest
                                      
                                      $
                                      251
                                      
                                      
                                      $
                                      50
  Supplemental
Disclosure of Non-Cash Investing and Financing Activities:
 
 During
the years ended December 31, 2007 and 2008, the Company acquired equipment under
capital lease obligations of $184 and $0, respectively.
  The
Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
  F-8
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (1)
Basis of Presentation
  KIT
digital, Inc. ("we," "us," "our," the "Company" or "KIT digital"), through our
operating subsidiaries, provide enterprise clients and end-to-end technology
platform for managing IP-based video assets for consumption across the computer
internet browser, mobile device and television set via IPTV. We offer creative
interface design, branding, strategic planning and technical integration
professional services to complement our platform. Our business is divided into
two segments: Digital Media Solutions and Agency Services. Digital Media
Solutions includes the delivery of solutions that include software, hardware,
services and components. Digital Media Solutions also provide services including
content delivery, online and mobile property development and management, and
advertising-based monetization. Agency Services include direct marketing,
incentive programs, internal communications, customer relationship management,
sales promotion, creative production, sponsorships, online marketing, media
planning, media buying and packaging.
  (2)
Summary of Significant Accounting Policies
 
 Principles of
Consolidation - Our consolidated financial statements include the
accounts of KIT digital, Inc., its wholly-owned subsidiary KIT Media
Corporation, (“KIT Media Corp”) its wholly-owned subsidiary Bickhams Media, Inc.
(“Bickhams”), its 51% subsidiary Reality Group Pty. Ltd (“Reality Group”), its
wholly-owned subsidiary Kamera Content AB (“Kamera”) (included as of the
acquisition date of May 19, 2008), its wholly-owned subsidiary KIT digital FZ
LLC and its wholly-owned subsidiary KIT HD, Inc. Included in the consolidation
with KIT Media Corp are KIT Media Corp’s wholly-owned subsidiary KIT digital
Pty. Ltd. (formerly ROO Media (Australia) Pty Ltd.) and KIT digital Pty Ltd.’s
wholly-owned subsidiary Undercover Media Pty. Ltd., its wholly-owned subsidiary
KIT digital Limited (formerly ROO Media Europe Limited), its wholly-owned
subsidiary KIT Broadcasting Limited (fomerly ROO Broadcasting Limited), its
wholly-owned subsidiary Sputnik Agency Pty. Ltd. (formerly Factory212 Pty.
Ltd.),  its wholly-owned subsidiary KIT TV Pty Ltd. (fomerly ROO
TV Pty Ltd.) and its wholly owned subsidiary Morpheum Internet Services Pty Ltd
(included as of the date of acquisition of September 2, 2008). Included in
the consolidation with Bickhams is Bickhams’ wholly-owned subsidiary
VideoDome.com Networks, Inc. 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). Included in the consolidation
with KIT digital FZ LLC is its wholly-owned subsidiary Visual Connection, a.s.
and Visual’s wholly owned subsidiaries Visual Media Services a.s. and Visual
Connection, spol. s.r.o. (included as of the acquisition date of October 5,
2008).
 
 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.
  Foreign Currency
Translation - Assets and liabilities of KIT digital’s foreign
subsidiaries are translated at current exchange rates and related revenues and
expenses are translated at average exchange rates in effect during the periods.
Resulting translation adjustments are recorded as a component of accumulated
comprehensive income (loss) in stockholders' equity.
 
 Fair value of
Financial Instruments - 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). No
Level 2 or Level 3 inputs were used to record assets or liabilities at fair
value.
  Risk
Concentrations - Financial instruments which potentially subject us to
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable. We place our cash and cash equivalents with high
credit quality institutions to limit credit exposure, and from time to time,
obtain collateral for our accounts where we deem prudent and is feasible. We
believe no significant concentration of credit risk exists with respect to these
investments. The amount of cash beyond insured amounts as of December 31, 2008
and 2007, was $5,634 and $10,084, respectively.
  F-9
 
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (2)
Summary of Significant Accounting Policies (Continued)
 
 Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
nature of our customers who are dispersed across many industries and geographic
regions. The allowance for doubtful accounts as of December 31, 2008 and 2007
was $571 and $282, respectively. As of December 31, 2008, no customers made up
more than 10% of our trade accounts receivable. As of December 31, 2007, one
customer accounted for approximately 12% of our trade accounts receivable. We
routinely assess the financial strength of customers and, based upon factors
concerning credit risk, we establish an allowance for doubtful accounts.
Management believes that accounts receivable credit risk exposure beyond such
allowance is limited.
 
 Impairment of
Long-Lived Assets - We review our long-lived assets and identifiable
intangibles for impairment at least annually and whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When such factors and circumstances exist, we compare the projected
undiscounted future cash flows associated with the future use and disposal of
the related asset or group of assets to their respective carrying amounts.
Impairment, if any, is measured as the excess of the carrying amount over the
fair value based on market value (when available) or discounted expected cash
flows of those assets, and is recorded in the period in which the determination
is made.
 
 Cash and Cash
Equivalents - We consider all highly liquid investments with original
maturities of ninety days or less when purchased to be cash and cash
equivalents. As of December 31, 2008, the Company had $3,001 of cash equivalents
in an account that pays interest at LIBOR plus 150 basis points. This account is
guaranteed and backed by liquid collateral instruments, and can be redeemed with
14 days written notice.
 
 Restricted
Cash - As of December 31, 2007, we pledged approximately $100 as
collateral for a standby letter of credit that guaranteed our obligation related
to a real estate lease agreement. In 2008, we were released from our real estate
lease agreement and our $100 was returned to us.
 
 Property and
Equipment - Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided for using the straight-line and declining
balance methods of accounting over the estimated useful lives of the assets [See
Note 6].
 
 Routine
maintenance and repair costs are charged to expense as incurred and renewals and
improvements that extend the useful life of the assets are capitalized. Upon
sale or retirement, the cost and related accumulated depreciation are eliminated
from the respective accounts and any resulting gain or loss is reported in the
statement of operations.
 
 Income Taxes
- Pursuant to SFAS No. 109, "Accounting for Income Taxes," income tax
expense [or benefit] for the year is the sum of deferred tax expense [or
benefit] and income taxes currently payable [or refundable]. Deferred tax
expense [or benefit] is the change during the year in a company's deferred tax
liabilities and assets. Deferred tax liabilities and assets are determined based
on differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
 
 Intangible Assets
- Amortizable intangible assets of the Company are recorded at cost less
accumulated amortization. Amortization is computed using the straight-line
method over the estimated useful lives of the assets, with periods of up to five
years. Goodwill is reviewed for impairment at least annually and all other
intangible assets are reviewed for impairment if events or circumstances
indicate that carrying amounts may not be recoverable [See Note 7].
 
  Inventory- Inventories are valued at the lower
of cost (first-in, first-out method) or market and are comprised of finished
goods. On a quarterly basis, we review inventory quantities on hand and analyze
the provision for excess and obsolete inventory based primarily on product age
in inventory and our estimated sales forecast, which is based on sales history
and anticipated future demand. Our estimates of future product demand may not be
accurate and we may understate or overstate the provision required for excess
and obsolete inventory. Accordingly, any significant unanticipated changes in
demand could have a significant impact on the value of our inventory and results
of operations.  As of December 31, 2008 our reserve for excess and
obsolete inventory was $157.
  Research and
Development - Costs incurred in research and development are expensed as
incurred. Software development costs are required to be capitalized when a
product’s technological feasibility has been established through the date the
product is available for general release to customers. The Company does not
capitalize any software development costs, as technological feasibility is
generally not established until a working model is completed, at which time
substantially all development is complete.
  F-10
 
 KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
 
 (2)
Summary of Significant Accounting Policies (Continued)
 
 Revenue
Recognition - We recognize revenue in accordance with the following
authoritative literature: AICPA Statement of Position ("SOP") No. 97-2,
"Software Revenue Recognition" and Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition in Financial
Statements", which requires that four basic criteria be met before revenue can
be recognized: (i) persuasive evidence that an arrangement exists; (ii) the
price is fixed or determinable; (iii) collectability is reasonably assured; and
(iv) product delivery has occurred or services have been rendered. We recognize
revenue, net of sales taxes assessed by any governmental
authority.  Revenues are derived principally from professional
services, digital media management, advertising and delivery of digital media
solutions.  Revenue is recognized when the product and/or service has
been provided to the customer. We may enter into agreements whereby we guarantee
a minimum number of advertising impressions, click-throughs or other criteria on
our websites or products for a specified period. To the extent these guarantees
are not met, we may defer recognition of the corresponding revenue until
guaranteed delivery levels are achieved.
 
 Stock-Based
Compensation - On January 1, 2006, the Company adopted SFAS No. 123R,
“Share-Based Payment.” Among other items, SFAS 123R requires companies to record
compensation expense for share-based awards issued to employees and directors in
exchange for services provided. The amount of the compensation expense is based
on the estimated fair value of the awards on their grant dates and is recognized
over the required service periods. 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 years ended
December 31, 2008 and 2007, the Company recognized $4,869 and $4,748,
respectively, of stock-based compensation expense in the consolidated statements
of operations. Included in the 2008 amount of $4,869, is $136 for director’s
fees for 2008 in which options have been issued in 2009 and is included in
accrued expenses as of December 31, 2008.
 
 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 400,000
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 101,158 stock options in the
2004 Stock Option Plan were surrendered, of which a total of 49,023 stock
options were cancelled or expired and a total of 52,134 stock options were
forfeited. These were exchanged for a total of 38,158 stock options under the
2008 Incentive Stock Plan.
 
 Under the
2004 Stock Option Plan, the Company granted options with an exercise price of
$6.11 to $9.80 to purchase 80,000 shares of its common stock during the year
ended December 31, 2008. During the year ended December 31, 2008, a total of
45,331 stock options vested, a total of 100,813 stock options were cancelled or
expired, a total of 82,918 stock options were forfeited, and 45,278 stock
options were unvested as of December 31, 2008. A total of 81,429 stock options
were outstanding under this plan on December 31, 2008.
 
 Under the
2008 Incentive Stock Plan, the Company granted options with exercise prices
ranging from $2.80 to $10.50 to purchase 509,036 shares of its common stock
during the year ended December 31, 2008. During the year ended December 31,
2008, a total of 143,038 stock options vested, 7,612 stock options were
exercised, 81,240 stock options were cancelled, expired or forfeited with
325,174 stock options unvested as of December 31, 2008. A total of 420,184 stock
options were outstanding under this plan on December 31, 2008.
 
 Also
included in non-cash compensation are warrants to purchase 34,286 shares of
common stock with an exercise price of $4.655 issued to Robin Smyth, the
Company’s Chief Financial Officer, on March 30, 2008 that vest over 36 months
from the issue date. During the year ended December 31, 2008, a total of 8,571
warrants vested with 25,715 warrants unvested as of December 31,
2008.
 
 On August
11, 2008, the Company’s Board of Directors approved an amendment to the
Company’s 2008 Incentive Stock Plan increasing the number of shares of common
stock reserved for issuance under the plan by 457,143 shares, to a new total of
857,143 shares.  The amendment to the 2008 Incentive Stock Plan was
subsequently approved by holders of a majority of the Company’s common
stock.
  F-11
 
 KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
 
 (2)
Summary of Significant Accounting Policies (Continued)
 
 Net Loss Per
Share - We compute net loss income per common share under the provisions
of SFAS No. 128, "Earnings per Share," which establishes standards for computing
and presenting earnings per share. SFAS No. 128 requires us to report both basic
net (loss) income per share, which is based on the weighted average number of
common shares outstanding during the period, and diluted net (loss) income per
share, which is based on the weighted average number of common shares
outstanding plus all potentially dilutive common shares outstanding. All
equivalent shares underlying options, warrants, and convertible Series A
Preferred Stock were excluded from the calculation of diluted loss per share
because we had net losses for all years presented and therefore equivalent
shares would have an anti-dilutive effect.
 
 Reclassification
- Certain prior period amounts have been reclassified to conform to the
current presentation.
 
 Recent
Accounting Pronouncements –In December 2007, the
Financial Accounting Standards Board (“FASB”) issued SFAS No. 141
(revised 2007), “Business Combinations”, and SFAS No. 160, “Accounting
and Reporting of Non-controlling Interest in Consolidated Financial Statements,
an amendment of ARB 51”, which will change the accounting for and reporting of
business combination transactions and non-controlling interests in consolidated
financial statements. The provisions of SFAS 141R and SFAS 160 were
effective for the Company on January 1, 2009. SFAS 141R had no impact on
previously recorded acquisitions. SFAS 160 requires changes in classification
and presentation of minority interests in the consolidated balance sheets,
statements of operations and stockholders’ equity.
 
 In February 2008, the FASB issued FASB
Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB
Statement No. 157”, which delays the effective date of SFAS No. 157,
“Fair Value Measurements” for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually) for fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years for items within the scope of this FSP. The adoption of FSP FAS 157-2 is
not expected to have a material impact on the Company’s consolidated financial
position, cash flows, or results of operations
 
 In April 2008, the FASB issued FSP No.
FAS 142-3, “Determination of the Useful Life of Intangible Assets”, to improve
the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141R. The provisions of FSP FAS 142-3 were
effective for the Company on January 1, 2009 and are not expected to have a
material impact on the Company’s consolidated financial position, cash flows, or
results of operations.
 
 In May 2008, the FASB issued FSP
Accounting Principles Board Opinion (“APB”) No. 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)”, which requires the issuer of certain
convertible debt instruments that may be settled in cash (or other assets) on
conversion to separately account for the liability (debt) and equity (conversion
option) components of the instrument in a manner that reflects the issuer’s
nonconvertible debt borrowing rate. FSP APB 14-1 became effective for the
Company on January 1, 2009 and requires retroactive application.The Company is currently
evaluating the impact of adopting FSP 14-1 on the Company’s consolidated
financial position, cash flows and results of operations.
 
 In November 2008, the FASB ratified the
consensus reached by the Emerging Issues Task Force (“EITF”) on Issue EITF
No. 08-6, “Equity Method Investment Accounting Considerations”, which
clarifies the accounting for certain transactions and impairment considerations
involving equity method investments. The prospective provisions of EITF 08-6
were effective for the Company on January 1, 2009. The adoption of EITF
08-6 is not expected to have a material impact on the Company’s consolidated
financial position, cash flows, or results of operations.
 
 The Company adopted
SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities—Including an Amendment of FASB Statement No. 115” as
of January 1, 2008. SFAS 159 permits entities to elect to measure many
financial instruments and certain other items at fair value. The Company did not
elect the fair value option for any assets or liabilities, which were not
previously carried at fair value. Accordingly, the adoption of SFAS 159 had
no impact on the Company’s consolidated financial
statements.
  F-12
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
 
 (3)
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. 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
  (4)
Acquisitions
 
 On
January 22, 2007, we entered into an Asset Purchase Agreement (the "APA") with
RJM Price & Company, Inc. (“RJM”) and Robertson Price. Pursuant to the APA,
we acquired all of the properties, rights and assets constituting the business
of RJM, which operates under the name MyVideoDaily (“MVD”). The APA provided for
consideration of up to an aggregate of $1,350, of which $250 was paid upon the
execution of the APA. The APA included milestone payments, which provided
certain defined targets and conditions to be met. Pursuant to the terms of the
APA, we also entered into an employment agreement with Mr. Price. On May 17,
2007, RJM was issued 2,639 shares of our common stock valued at $250, for
achieving the first quarter milestone.
 
 On
October 18, 2007, we entered into a settlement agreement with RJM and Robertson
Price, resolving all payment and other obligations among the parties arising out
of the APA dated as of January 22, 2007. Pursuant to the agreement, KIT digital
paid RJM $500 on October 23, 2007, and RJM delivered to KIT digital 2,639 shares
of KIT digital common stock, which had been previously issued by KIT digital.
These shares have been canceled and the value recorded on May 17, 2007 has been
reversed. This agreement is the full and final settlement of any outstanding
items or amounts related to the APA. The $250 paid upon execution of the APA was
recorded as goodwill. The $500 paid upon the execution of the settlement
agreement was recorded as settlement of MVD agreement in the Statement of
Operations. As of December 31, 2007, the goodwill of $250 was impaired and
recorded as impairment of goodwill expense in the Statement of Operations (See
Note 8).
 
 On
February 16, 2007, Wurld Media, Inc. ("Wurld Media") issued a promissory note to
the Company in the principal amount of $1,500. Pursuant to the promissory note
the Company advanced to Wurld Media the sum of $800, and in its sole discretion
may make additional advances of up to, but not exceeding $1,500. The promissory
note accrues interest at the annual rate of 8% and in the event of a default
will accrue interest at the annual rate of 10%. The promissory note is secured
by all of the assets of Wurld Media. The promissory note is due and payable upon
the earlier of (i) the closing of the acquisition of the assets of Wurld Media,
in which event, the loan amount will be credited against the purchase price of
the assets or (ii) November 26, 2007. This promissory note has been paid in full
and is included in the assets of Wurld Media acquired. The loan made to Wurld
Media was recorded as a component of “Investment in assets acquired from Wurld
Media” on the Statement of Cash Flows.
 
 On June
15, 2007, Gregory Kerber issued a promissory note to the Company in the
principal amount of $400. Pursuant to the promissory note, the Company advanced
to Mr. Kerber the sum of $394. The promissory note accrues interest at the rate
of 8% and in the event of a default will accrue interest at the rate of 10%. The
promissory note is secured by certain of his shares in Wurld Media. The
promissory note is due and payable upon demand by the Company. This promissory
note has been paid in full and is included in the assets of Wurld Media
acquired. The loan made to Mr. Kerber was recorded as a component of “Investment
in assets acquired from Wurld Media” on the Statement of Cash
Flows.
  F-13
 
 KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
 
 (4)
Acquisitions (Continued)
 
 On July
12, 2007, KIT HD, Inc. (“KIT HD”), a wholly-owned subsidiary of KIT digital,
entered into an asset purchase agreement with Wurld Media, Gregory Kerber and
Kirk Feathers. Wurld Media specializes in the peer-to-peer distribution of
music, movies, games, TV shows and other audio, video, and audio/video content.
  The acquisition was completed and closed on July 17, 2007. The assets
acquired by KIT HD, pursuant to the agreement, included: (i) certain fixed
assets, equipment, fixtures, and leasehold improvements located at Wurld Media’s
office in Saratoga Springs, New York; (ii) certain intellectual property of
Wurld Media; (iii) the customer logs, location files and records of Wurld Media,
and (iv) all claims, entitlements, rebates, refunds, settlements, awards or
other rights related to the assets acquired by KIT HD. The consideration for the
assets acquired by KIT HD was an aggregate of $4,320, consisting of $3,174 in
cash, $38 in accrued liabilities related to the purchase and the issuance of
18,729 shares of our common stock valued on July 17, 2007 at $59.15 per share or
$1,108. The total purchase consideration was allocated to the assets acquired at
their estimated fair values as of the date of acquisition, as determined by
management, as $3,180 of software and $1,140 of fixed assets.
 
 At
the end of December 2007, we decided to abandon the development and assets of
the peer-to-peer business that we acquired in the asset purchase agreement with
Wurld Media (See Note 8).
 
 Sputnik
Acquisition
 
 On May
14, 2008, the Company finalized its purchase of the original 51% ownership in
Sputnik Agency Pty. Ltd. (“Sputnik”) and acquired the remaining 49% of that
entity, for consideration paid of $4,563. A total of $3,530 was paid in cash to
the sellers, $751 was applied against outstanding loans by the Company’s
51%-owned subsidiary Reality Group to Sputnik’s selling shareholders, and $282
was deposited in escrow against certain potential liabilities. In November 2008,
the escrow was released to Sputnik’s selling shareholders. Therefore, the
aggregate cost of the acquisition was $4,656, which includes $93 in legal costs
related to the acquisition.
 
 Sputnik’s
sellers and certain of its employees entered into employment agreements
providing, among other things, for their continued employment with Sputnik and
/or Reality Group and certain restrictive covenants.
 
 
 Kamera
Acquisition
 
 On May 19
2008, we acquired 100% of Kamera, a Stockholm, Sweden-based company in the
business of managing, developing and syndicating video content for mobile and
online distribution. Through its proprietary software, transcoding and content
distribution protocols, Kamera enabled corporate clients such as Associated
Press, ABC News, Vodafone, MSN, Orange, Telefonica, O2, Hutchinson and China
Mobile to deliver IP video channels to their customers over mobile and online
networks.
  On
closing, we paid $4,500 less certain amounts previously owing to us by Kamera,
to the shareholders of Kamera. Pursuant to the terms of the transaction, we paid
an additional $1,500 in consideration in March 2009, and the Kamera shareholders
may be entitled to up to an additional $4,500 of consideration payable in 2009
and 2010, subject to the achievement of certain performance tests. The
contingent consideration is payable in our publicly traded shares, valued at
current market prices or cash, as we determine. The performance criteria relate
to retention of staff and clients, and the maintenance and growth of client
revenue and our mobile revenue over the two years ending March 31,
2010.
 
 The
aggregate cost of the acquisition of Kamera was $7,634. This is comprised of the
$4,500 paid at closing, $1,500 accrued for the consideration payable six months
from the Completion Date and paid in March 2009 and $1,500 accrued for the
consideration payable 13 months from Completion Date and are included in the
Balance Sheet in “Acquisition liability - Kamera”, and $134 in legal costs
related to the acquisition. 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.
  F-14
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
 
 (4)
Acquisitions (Continued)
 
 The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (May 19, 2008).
 
 Current
      assets
                                    
                                    $
                                    1,214Property
      and equipment
                                    
                                    
                                    156Intangible
      assets - developed software
                                    
                                    
                                    1,000Intangible
      assets - customer list
                                    
                                    
                                    1,500Goodwill
                                    
                                    
                                    5,111Total
      assets acquired
                                    
                                    
                                    8,981Current
      liabilities
                                    
                                    
                                    1,347Total
      liabilities assumed
                                    
                                    
                                    1,347Net assets acquired
                                    
                                    $
                                    7,634
 
 The
results of operations of Kamera for the period from May 19, 2008 to December 31,
2008 have been included in the Consolidated Statements of
Operations.
 
 Morpheum
Acquisition
 
 On August
31, 2008, we acquired 100% of Morpheum Internet Services Pty. Ltd. (“Morpheum”)
, a Melbourne, Australia-based company, for consideration paid at closing of
$734, plus $56 in legal and consulting costs related to the acquisition for an
aggregate cost of $790.. Morpheum was one of Asia’s leading providers of
web-based content management systems (“CMS”). Morpheum’s software, LanternCMS,
has become integrated into the Company’s VX software platform. The Company has
allocated the aggregate cost of the acquisition to Morpheum’s net tangible and
identifiable intangible assets based on their estimated fair
values.
  F-15
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
 
 (4)
Acquisitions (Continued)
 
 The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (August 31, 2008).
  
 Current
      assets
                                
                                $
                                416Property
      and equipment
                                
                                
                                116Intangible
      assets - developed software
                                
                                
                                1,122Total
      assets acquired
                                
                                
                                1,654Current
      liabilities
                                
                                
                                864Total
      liabilities assumed
                                
                                
                                864Net assets acquired
                                
                                $
                                790
 
 The
results of operations of Morpheum for the period from September 1, 2008 to
December 31, 2008 have been included in the Consolidated Statements of
Operations.
 
 Visual
Connection Acquisition
 
 On
October 5, 2008, through our wholly-owned subsidiary, KIT digital FZ-LLC (
“KIT”), we acquired 100% of Visual Connection, a.s., a Prague, Czech
Republic-based  company (“Visual”) specializing in the supply and
delivery of comprehensive IPTV solutions which link software expertise with
hardware configuration, integration capabilities and 24/7 customer service.
Visual 200+ clients included television and radio stations, graphics publishers,
audiovisual production and post production houses, state and federal government
administration, education companies, telcos and healthcare
providers.
 
 Taking
into account certain adjustments made to the original Visual Share Purchase
Agreement  mutually agreed to on March 31, 2009, the purchase price of
Visual consisted of:
 
 (a)
                  $1,180
      in cash, after certain adjustments were made for negative working
      capital;(b)
                  $1,500
      in shares of our common stock for a total of 163,043 shares, issued by
      April 15, 2009, restricted for sale for [12] months
      thereafter;
 (c)             
an earn-out of $3,225 in a combination of shares of our common stock (determined
based on the the higher of (i) the 20-day trailing weighted average closing
price per share prior to the respective payment date, or (ii) a price “floor” of
$7.70 per share), payable in three equal installments of $1,075, (i) 12 months
after closing, (iii) 18 months after closing, and (iii) 24 months after closing,
subject in each case to targeted levels of the Company’s net revenues and
EBITDA. and the retention of key personnel ;
 
 (d)            
additional earn-out of $2,100 of shares of our common stock (determined based on
the the higher of (i) the 20-day trailing weighted average closing price per
share prior to the respective payment date, or (ii) a price “floor” of $7.70 per
share), for  achieving certain other net revenues and EBITDA targets
over the period of 24 months from closing.
 
 KIT  retains
the right to substitute payments in cash for all potential issuances
of  common stock described above, irrespective of the trading price of
our common stock.
  F-16
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
 
 (4)
Acquisitions (Continued)
 
 The
aggregate cost of the acquisition of Visual was $4,286. This is comprised of the
$1,000 paid in November 2008 of the initial purchase price of $2,500 less
negative working capital of $1,320 or $1,180. The remaining $180 of the initial
purchase price is included in the Balance Sheet in “Acquisition liability –
Visual”. Additionally, the cost includes $1,500 for the payable six months after
closing, $538 (50% of the amount) for the minimum payable for 12 months after
closing, $1,075 (50% of the amount) total for the minimum payable for 18 and 24
months after closing, and $311 in legal and consulting costs related to the
acquisition. From the above, $2,218 is included in the Balance Sheet in
“Acquisition liability - Visual” and $1,075 is in the Balance Sheet in
“Acquisition liability – Visual, net of current”.  The Company has not
recorded the contingent liability of $1,613 in consideration that is payable 12,
18 and 24 months from closing as it is not certain that the performance criteria
will be met. The Company has allocated the aggregate cost of the acquisition to
Visual’s net tangible and identifiable intangible assets based on their
estimated fair values. The excess of the aggregate cost of the acquisition over
the net estimated fair value of the tangible and identifiable intangible assets
and liabilities assumed was recorded to goodwill.
 
 The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (August 31, 2008).
 
 Current
      assets
                                    
                                    $
                                    4,287Property
      and equipment
                                    
                                    
                                    1,609Intangible
      assets - customer list
                                    
                                    
                                    1,000Goodwill
                                    
                                    
                                    5,131Total
      assets acquired
                                    
                                    
                                    12,027Current
      liabilities
                                    
                                    
                                    4,317Capital
      leases and notes payable
                                    
                                    
                                    3,106Total
      liabilities assumed
                                    
                                    
                                    7,423Net assets acquired
                                    
                                    $
                                    4,604
 
 The
results of operations of Visual for the period from October 1, 2008 to December
31, 2008 have been included in the Consolidated Statements of
Operations.
 
 Juzou
Acquisition
 
 In
November 2008, we purchased specified assets of Extreme Mobile Services Limited
(also known as Juzou), a company formed under the laws of the United
Kingdom.  Juzou’s business involves content management and web
services with live streaming capabilities.  Under an Asset Purchase
Agreement, dated November 15, 2008, we acquired the Juzou trademark and system
and ongoing client and other operating contracts.  The total purchase
price of the assets was $800, payable in shares of our common stock based on
meeting specified financial and operating targets over the ensuing two-year
period.  At closing, we issued 13,715 shares of our common stock to
Juzou valued at  $120 against the total purchase price.
  F-17
 
 KIT DIGITAL, INC. AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (5)
Related Party Transactions
 
 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 accrued at the rate of 8% per annum. The
promissory note was due on June 30, 2008 and was secured by all the assets of
Reality Group. In addition, two shareholders of Reality Group 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 notes 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 accrued at the rate of 8% per annum. The promissory note was due on May 11,
2008. These notes eliminated in consolidation. As part of the Sputnik
acquisition, these notes were extinguished as of May 12, 2008.
 
 In
December 2007, we entered into an agreement with KIT Capital, a
company  beneficially controlled and led by Kaleil Isaza Tuzman, our
Chairman and Chief Executive Officer, under which KIT Capital has provided us
managerial services. The total amount paid to KIT Capital and included in our
results of operations in the years ended December 31, 2008 and 2007 were $573
and $69, respectively.
 
 In May
2008, KIT Media, Ltd., an affiliate of KIT Capital, bought 1,008,572 shares of
our common stock for $7,060 in the May 2008 Financing which included 1,008,572
warrants to purchase one share of common stock. The Company’s Chief Executive
Officer, Kaleil Isaza Tuzman, holds a controlling interest in KIT
Media.
 
 On
December 31, 2008, the Company completed the investment for $5,000 with KIT
Capital as defined under the Executive Management Agreement for the issue of
892,858 shares of common stock at $5.60 per share. In addition we issued to KIT
Capital a warrant to purchase 580,358 shares of our common stock (representing
65% warrant coverage on KIT Capital’s investment, as compared to 100% warrant
coverage in the May 2008 financing transaction), for a term of five years
commencing on December 31, 2008, at an exercise price of $11.90 per share,
subject to the occurrence of certain events that could potentially reduce the
exercise price to $5.60 per share.
 
 During
2008, 60,000 stock options were granted to KIT Capital pursuant to the Executive
Management Agreement, dated as of December 18, 2007, with an exercise price of
$6.11 per share and an expiration date of January 9, 2013. An additional 20,000
stock options were granted to KIT Capital with an exercise price of $9.80 share
and an expiration date of June 21, 2013.
 
 
 (6) Property and
Equipment
 
 Property
and equipment at December 31, 2008 consists of the following:
 
 
 Office
                        
                        
                        MotorEquipment
                        
                        
                        Vehicles
                        
                        
                        Computer
                        
                        
                        Leasehold
                        
                        
                        Furniture
      and
                        
                        
                        OfficeCapital
      Lease
                        
                        
                        Capital
      Lease
                        
                        
                        Software
                        
                        
                        Improvements
                        
                        
                        Fixtures
                        
                        
                        Equipment
                        
                        
                        TotalCost
                        
                        $
                        611
                        
                        
                        $
                        544
                        
                        
                        $
                        249
                        
                        
                        $
                        553
                        
                        
                        $
                        311
                        
                        
                        $
                        2,009
                        
                        
                        $
                        4,277Accumulated
      Depreciation
                        
                        
                        (82
                        )
                        
                        
                        (54
                        )
                        
                        
                        (123
                        )
                        
                        
                        (255
                        )
                        
                        
                        (183
                        )
                        
                        
                        (652
                        )
                        
                        
                        (1,349
                        )Net
                        
                        $
                        529
                        
                        
                        $
                        490
                        
                        
                        $
                        126
                        
                        
                        $
                        298
                        
                        
                        $
                        128
                        
                        
                        $
                        1,357
                        
                        
                        $
                        2,928Estimated
      useful life
                        
                        2 -
      10 years
                        
                        
                        3 -
      5 years
                        
                        
                        2 -
      4 years
                        
                        
                        1
      -20 years
                        
                        
                        3 -
      10 years
                        
                        
                        2
      -10 years
 
  Depreciation
expense amounted to $729 and $902 for the years ended December 31, 2008 and
2007, respectively.
  F-18
 
  KIT DIGITAL, INC. AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (7)
Goodwill and Intangible Assets
 
 As of
December 31, 2008, goodwill is $15,167 and is comprised of the
following;
 ·
                $1,033
      from the acquisition of Reality Group,·
                $90
      related to the acquisition of 24% of KIT digital Limited, which was owned
      by a third party,·
                $3,802
      from the acquisition of Sputnik,·
                $5,111
      from the acquisition of Kamera, and·
                $5,131
      from the acquisition of Visual.
     
 At
December 31, 2008 intangible assets include the following:
 
 Customer List
                                          
                                          
                                          Software
                                          
                                          
                                          Domain NameCost
                                          
                                          $
                                          4,231
                                          
                                          
                                          $
                                          3,546
                                          
                                          
                                          $
                                          54Less
      Amortization
                                          
                                          
                                          (1,243
                                          )
                                          
                                          
                                          (1,281
                                          )
                                          
                                          
                                          (35
                                          )Totals
                                          
                                          $
                                          2,988
                                          
                                          
                                          $
                                          2,265
                                          
                                          
                                          $
                                          19Estimated
      future annual amortization expense as of December 31, 2008 is as
      followsCustomer List
                                          
                                          
                                          Software
                                          
                                          
                                          Domain Name2009
                                          
                                          $
                                          894
                                          
                                          
                                          $
                                          672
                                          
                                          
                                          $
                                          112010
                                          
                                          
                                          874
                                          
                                          
                                          
                                          459
                                          
                                          
                                          
                                          82011
                                          
                                          
                                          825
                                          
                                          
                                          
                                          445
                                          
                                          
                                          
                                          -2012
                                          
                                          
                                          395
                                          
                                          
                                          
                                          445
                                          
                                          
                                          
                                          -2013
                                          
                                          
                                          -
                                          
                                          
                                          
                                          244
                                          
                                          
                                          
                                          -Thereafter
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Totals
                                          
                                          $
                                          2,988
                                          
                                          
                                          $
                                          2,265
                                          
                                          
                                          $
                                          19
 
 
 The
values attributed to customer lists comes from the following acquisitions: $650
from Reality Group, $1,081 from Sputnik, $1,500 from Kamera and $1,000 from
Visual, and are being amortized over four year periods on a straight line basis.
The values attributed to software comes from the following acquisitions: $1,320
from VideoDome, $1,000 from Kamera, $1,122 from Morpheum and $104 from Juzou,
and is being amortized over 5 year periods on a straight line basis. The Company
purchased the domain name www.roo.com in
November 2005 and it is being amortized over a five year period on a straight
line basis.
  F-19
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (8)
Senior Secured Notes Payable
 
 In
November 2008, we received $1,500 in gross proceeds from the issuance of a
non-convertible note to Genesis Merchant Partners, LP. Interest is payable
monthly in arrears at 14.5% and matures on December 31, 2009.  The
principal is repayable in monthly installments of $75 beginning in May 2009,
with the remainder of the principal due at maturity.  The note is
secured by the company’s property, including accounts receivable and inventory,
but excludes any security interests in Visual and Reality Group or assets of
these subsidiaries.  In conjunction with the borrowing, we issued to
Genesis Merchant Partners, LP a warrant entitling it to purchase, for $11.90 per
share, 139,286 shares of our common stock through October 31, 2013. A debt
discount of $642 was recorded related to this debt and is being amortized over
fourteen months which is the life of the note.
  (9) Income Taxes
 
 The Company’s expected global income tax
benefit computed at the statutory rate for each taxing authority on the pre-tax
loss amounted to approximately $99,128 in 2008 and $84,178 in 2007. Such
benefits were not recognized in the accompanying financial statements due to KIT
digital’s history of past operating losses, and consequently valuation
allowances were recorded for all of KIT digital’s deferred tax assets at
December 31, 2008 and 2007.
 
  Deferred tax attributes resulting from
differences between financial accounting amounts and tax bases of assets and
liabilities at December 31, 2008 and 2007 are as
follows:
  2008
                                          
                                          
                                          2007Current
    AssetsNon-Cash
      Compensation
                                          
                                          $
                                          5,922
                                          
                                          
                                          $
                                          4,748Subtotal
                                          
                                          
                                          5,922
                                          
                                          
                                          
                                          4,748Valuation
      allowance
                                          
                                          
                                          (5,922
                                          )
                                          
                                          
                                          (4,748
                                          )Current deferred tax
      asset
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          —Non-current
      assetsNet operating loss
      carryforward
                                          
                                          $
                                          99,128
                                          
                                          
                                          $
                                          84,178Valuation
      allowance
                                          
                                          
                                          (99,128
                                          )
                                          
                                          
                                          (84,178
                                          )Non-current deferred tax
      asset
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          —
 
 The valuation allowance increased by
$14,950 and $23,569 for the years ended December 31, 2008 and 2007,
respectively. As of December 31, 2008, KIT digital has federal net
operating loss carryforwards of approximately $99,128 that will be available to
offset future taxable income, if any, through December 2028. The utilization of
KIT digital’s net operating losses may be subject to substantial limitations due
to various tax law provisions in different jurisdictions. Such limitation may
result in the expiration of the net operating loss carry forwards before their
utilization. KIT digital has established a 100% valuation allowance for all of
its deferred tax assets due to uncertainty as to their future
realization.
 
 As a matter of course, the Company can
be audited by federal and state authorities. At this time, there are no audits
identified or in process from any taxing authority.  In June 2006, the
FASB issued FIN No. 48,“Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109”. FIN 48 clarifies the accounting
for uncertainties in income taxes recognized in a company’s financial statements
in accordance with Statement 109 and prescribes a recognition threshold and
measurement attributes for financial disclosure of tax positions taken or
expected to be taken on a tax return. Additionally, FIN 48 provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, and disclosure and transition.
  F-20
   KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (10)
Commitments and Contingencies
 
 Leases - The Company is a
party to a number of non-cancelable lease agreements primarily involving office
premises, motor vehicles and computer equipment. Included in capital leases are
equipment and motor vehicle leases which are generally for three to five year
periods. Included in operating leases are office premises in Dubai, Prague,
Melbourne, Toronto, New York, London, and Stockholm and equipment which are
generally for two to five year periods.
 
 The
following is a schedule of future minimum payments under capital leases and
operating leases as of December 31, 2008.
  Year
                                            
                                            Capital
      leases
                                            
                                            
                                            Operating
      leases
                                            
                                            
                                            Total2009
                                            
                                            $
                                            559
                                            
                                            
                                            $
                                            1,292
                                            
                                            
                                            $
                                            1,8512010
                                            
                                            
                                            459
                                            
                                            
                                            
                                            847
                                            
                                            
                                            
                                            1,3062011
                                            
                                            
                                            332
                                            
                                            
                                            
                                            505
                                            
                                            
                                            
                                            8372012
                                            
                                            
                                            171
                                            
                                            
                                            
                                            86
                                            
                                            
                                            
                                            2572013
                                            
                                            
                                            42
                                            
                                            
                                            
                                            43
                                            
                                            
                                            
                                            85Thereafter
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Total
      Minimum Lease Payments
                                            
                                            
                                            1,563
                                            
                                            
                                            $
                                            2,773
                                            
                                            
                                            $
                                            4,336Less
      Amount Representing Interest
                                            
                                            
                                            (219
                                            )Total Obligations Under Capital
      Leases
                                            
                                            $
                                            1,344
  Rent
expense amounted to $1,156 and $1,170 for the years ended December 31, 2008 and
2007, respectively.
  F-21
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (10)
Commitments and Contingencies (continued)
  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, and two other KIT Capital employees as Head of Communications
and as Corporate Development Manager of the Company, respectively. The
Management Agreement provided for an aggregate compensation for KIT Capital as
follows: (i) $51 monthly (which has been subsequently adjusted downwards to $42
monthly effective November 1, 2008), which includes the cost of at least three
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 or exceeds $6,000, and (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, and (ii) the previous month’s monthly installment of base compensation
multiplied by twelve.
 
 Litigation - In November
2007, our wholly-owned subsidiary, KIT HD, Inc. (“KIT HD”), was named as the
defendant in a purported class action lawsuit entitled Julie Vittengl et al. vs.
KIT HD, in New York Supreme Court, Saratoga County, New York.  The
suit, brought by four former employees of Wurld Media, Inc. (“Wurld”),
purportedly on behalf of themselves and “others similarly situated,” claims that
KIT HD’s acquisition of certain assets of Wurld was a fraudulent conveyance and
that KIT 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.  KIT 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 we
intend to defend ourself vigorously should the case become active.
 
 In
December 2007, Rick Gell and Todd Pavlin, two former consultants of KIT Media
Corporation (“KIT Media Corp”) sued that entity together with KIT digital, Inc.
and its former Vice-Chairman Robert Petty and KIT Media Corp’s former President
and Chief Operating Officer Steve Quinn in New York Supreme Court, New York
County, New York, alleging breach of an oral employment agreement, fraudulent
inducement and other claims relating to the plaintiffs’ employment at KIT Media
Corp.  Last year, defendants moved to dismiss the complaint, and in
March 2009 the court dismissed all of plaintiffs’ claims save their breach of
contract claim on the grounds that it is based on an alleged oral agreement,
which plaintiffs may be able to prove. We believe that there is no merit to this
suit, and we intend to continue to defend ourself vigorously.
  (11) 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 11,429 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 11,429
shares of common stock.
  F-22
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (12) Stock
Issuances
 
 On January 25, 2007, we entered into an agreement with News
Corporation (“News Corp”). The Agreement provides for the issuance of 57,143
shares of our common stock upon execution of the Agreement, which were to be
held in escrow and released to News Corp on January 1, 2008, if the average
monthly revenues from News Corp and its affiliates for the three month period
ended December 31, 2007 is not less than the revenue from News Corp and its
affiliates for the one month period ending December 31, 2006 (the “Revenue
Target”). On February 7, 2008, we released the 57,143 shares of our common stock
to News Corp for meeting the Revenue Target. The shares were valued at $5.95 per
share or $340, and that amount was recorded as sales and marketing expense for
the year ended December 31, 2007.
 
 We also
agreed to issue an additional 57,143 shares of our common stock to News Corp if
within three years of the date of the Agreement the average monthly revenue from
News Corp and its affiliates for any consecutive three month period equals at
least six times the Revenue Target. Further, we agreed that if the foregoing is
not timely achieved, we shall issue to News Corp warrants to purchase 57,143
shares of our common stock which shall be exercisable for a term of two years
from the date of issuance at a price of $94.50. The exercise price of the
warrants will be subject to customary anti-dilution protection for stock splits,
recapitalizations, stock dividends and the like.
  We have
granted News Corp piggy-back registration rights in connection with the shares
issuable pursuant to the Agreement.
 
 On May 4, 2007, we entered into a securities purchase
agreement pursuant to which the Company sold an aggregate of 285,715 shares of
our common stock and warrants to purchase an additional 85,714 shares of our
common stock to accredited investors resulting in gross proceeds of $25,000. The
offering closed on May 10, 2007. The unit price of the common stock and
corresponding warrant was $87.50. The warrants have an exercise price of $157.50
per share and a term of five years. The warrants were valued under the
Black-Scholes method as $5,117. At any time at which the market price of our
Common Stock exceeds 210.00 for 10 trading days during any 20 consecutive
trading days, we may elect to call the warrants, provided that, the shares
underlying such warrants are registered pursuant to a registration statement. We
agreed to prepare and file a registration statement with the Securities and
Exchange Commission registering the resale of the shares of common stock sold in
the private placement on or prior to 30 days following the closing date. If the
registration statement is not filed within such time, the Company must pay
liquidated damages to the investors equal to 1% of the dollar amount of their
investment for each calendar month or portion thereof that the registration
statement is not filed, up to a maximum of 10%. The registration statement was
filed on June 11, 2007. Also, if the registration statement is not declared
effective within 120 days following the closing date, the Company must pay
liquidated damages to the investors equal to 1% of the dollar amount of their
investment for each calendar month or portion thereof that the registration
statement is declared effective, up to a maximum of 10%, which increases to 18%
if the registration statement is not declared effective within two years
following the closing date. The registration statement was declared effective on
August 14, 2007. Merriman Curhan Ford & Co. and Brimberg & Co.,
registered broker-dealers, acted as placement agents for the sale of the
Company’s common stock. In connection with the May 2007 Financing, we received
net proceeds of $23,875 after payment of placement agent fees of $1,000, legal
fees and expenses of $120, and escrow agent fees of $5.
 
 In 2007,
the Company failed to fulfill its obligations to keep the registration
statements effective related to the August 23, 2005, October 20, 2005, December
28, 2005, August 18, 2006, and November 14 ,2006 private placements and owes
approximately $863 in liquidated damages to these investors. This amount has
been accrued and is included in accrued expenses and registration rights
liquidated damages.
  F-23
 
 KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (12) Stock
Issuances (continued)
 
 On May 8,
2008, the Company entered into a Securities Purchase Agreement pursuant to which
it sold 2,142,858 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 offering closed on May 8, 2008. The units were sold at a price of $7.00 per
unit for aggregate gross proceeds of $15,000. The warrants have an exercise
price of $11.90 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, Ltd. (“KIT Media”), an affiliate of
KIT Capital, was the largest investor in the May 2008 Financing, investing
$7,060 for a total of 1,008,572 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 was not filed within such time, the Company
was 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 was 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 was
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.
Upon the Company’s request, KIT Media has allowed that the 1,008,572 shares of
common stock and the 1,008,572 shares underlying warrants purchased by KIT Media
in the May 2008 Financing be left unregistered to date. The Company failed to
fulfill its obligations to file and have the registration statement made
effective in the required time periods and owes approximately $117 in liquidated
damages to the investors. This amount has been accrued and is included in
accrued expenses and registration rights liquidated damages on the balance sheet
and statement of operations, respectively.
 
 Merriman
Curhan Ford & Co. and Brimberg & Co., registered broker-dealers, acted
as placement agents for the May 2008 Financing.   In connection
with the May 2008 Financing, the Company paid the placement agents a cash fee of
an aggregate $155. In addition, the Company issued to the placement agents
23,536 and 12,071 warrants to purchase shares of common stock with an exercise
price of $0.35 and $11.90 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 2008 Financing, the Company received
net proceeds of $14,680 after payment of placement agents’ fees of $155, legal
fees and expenses of $160 and escrow agent fees of $5.
 
 On
December 31, 2008, the Company completed the investment for $5,000 with KIT
Capital as defined under the Executive Management Agreement for the issue of
892,858 shares of common stock at $5.60 per share. In addition we issued to KIT
Capital a warrant to purchase 580,358 shares of our common stock (representing
65% warrant coverage on KIT Capital’s investment, as compared to 100% warrant
coverage in the May 2008 financing transaction), for a term of five years
commencing on December 31, 2008, at an exercise price of $11.90 per share,
subject to the occurrence of certain events that could potentially reduce the
exercise price to $5.60 per share.
  F-24
   KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (13)
Stock Option Plans
 
 Under
SFAS No. 123(R) the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
  Year
      Ended December 31, 2008
                            
                            
                            Year
      Ended December 31, 2007Expected
      life (in years)
                            
                            5.00
                            
                            
                            
                            4.78Risk-free
      interest rate
                            
                            2.84%
                            
                            
                            
                            4.54%Volatility
                            
                            155.51%
                            
                            
                            
                            89%Dividend
      yield
                            
                            
                            0
                            
                            
                            
                            0
  A summary
of the status of stock option awards and changes during the years ended December
31, 2007 and December 31, 2008 are presented below:
 
 Shares
                                                      
                                                      
                                                      Weighted
                                                        Average
                                                        Exercise
                                                        Price
                                                      Weighted
                                                        Average
                                                        Remaining
                                                        Contractual
                                                        Life
      (Years)
                                                      
                                                      
                                                      Intrinsic
                                                        ValueOutstanding
      at January 1, 2007
                                                      
                                                      
                                                      161,367
                                                      
                                                      $
                                                      78.75Granted
                                                      
                                                      
                                                      117,429
                                                      
                                                      
                                                      131.95Exercised
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —Cancelled,
      expired, or forfeited
                                                      
                                                      
                                                      (93,636
                                                      )
                                                      
                                                      79.80Outstanding
      at December 31, 2007
                                                      
                                                      
                                                      185,160
                                                      
                                                      
                                                      112.00Granted
                                                      
                                                      
                                                      589,036
                                                      
                                                      
                                                      6.30Exercised
                                                      
                                                      
                                                      (7,612
                                                      )
                                                      
                                                      2.80Cancelled,
      expired, or forfeited
                                                      
                                                      
                                                      (264,971
                                                      )
                                                      
                                                      2.80Outstanding
      at December 31, 2008
                                                      
                                                      
                                                      501,613
                                                      
                                                      
                                                      5.25
                                                      7.00
                                                      
                                                      $
                                                      0Exercisable
      at December 31, 2008
                                                      
                                                      
                                                      129,732
                                                      
                                                      
                                                      4.90
                                                      4.90
                                                      
                                                      
                                                      0
 
 The
weighted-average grant-date fair value of option awards granted during the years
ended December 31, 2008 and 2007 was $6.30 and $78.75, respectively. There were
266,408 options exercised from January 1, 2008 through December 31,
2008.
  F-25
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (14)
Restructuring Charges
 
 The
Company recorded restructuring charges of $3,068 in the year ended December 31,
2008. This amount is comprised of employee termination costs related to the
reorganization of the Company of $2,794, contract settlement and facility
closing costs of $274 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 of $2,794 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 received cash settlements of $675
and $275, respectively, as well as fully-vested warrants to purchase an
aggregate of 200,000 and 47,143 shares, respectively, of the Company’s common
stock, at a strike price equal to the three-day trailing weighted average
closing price per share of $4.655 as of March 31, 2008. 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, within nine 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 three years based on ongoing service to the Company. As
part of their respective settlements, Messrs. Petty and Smyth agreed to vote
their shares of Series A Preferred Stock according to the Company’s designation,
involving the elimination of these shares. Included in the $2,397 are cash
payments of $1,150 and $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.
 
 (15)
Other Non-Recurring Charges
 The
Company has recorded other non-recurring charges of $1,111 in the year ended
December 31, 2008. This amount is comprised of $480 related to the redundancy in
staff and consultants during reorganization for the transition of technology
infrastructure due to the centralizing of resources in Toronto and Prague and
recruiting costs of $295 related to the reorganization of the Company including
the centralizing of resources in Toronto and relocation of the corporate
headquarters. Also included is $100 in relocation costs related to the
reorganization including the move of the corporate headquarters,  $82
for the corporate rebranding related to the reorganization, $117 in other prior
year non-recurring charges and $37 in non-recurring advisory fees.
 
 (16)
Impairment of Assets
 At the
end of December 2007, we decided to abandon the development and assets of the
peer-to-peer business that we acquired in the Asset Purchase Agreement with
Wurld Media, which was comprised of software and property and equipment.
Accordingly, we evaluated the ongoing value of these assets. Based on this
evaluation, we determined that software with a carrying amount of $2,783 was
impaired; this is recorded as loss on impairment of intangible assets in the
Statement of Operations. Based on this evaluation, we also determined that
property and equipment with a carrying amount of $855 was impaired and we wrote
it down by $788; this amount was recorded as loss on impairment of property and
equipment in the Statement of Operations. Subsequent to December 31, 2007, $33
of this property and equipment was sold to a third party for book value, and no
gain or loss was recorded on the sale.
 
 At the
end of 2007, we determined that goodwill recorded when we acquired the
properties, rights and assets pursuant to the Asset Purchase Agreement with MVD
was impaired. We evaluated the goodwill for impairment by comparing the
estimated fair value, which was based on the present value of estimated future
cash flows to be generated to the carrying amount of $250. The estimated future
cash flows were determined to be negligible based on actual results in 2007.
Based on this evaluation, we determined that goodwill was impaired and we
recorded $250 as a loss on impairment of goodwill in the Statement of
Operations.
 
 At the
end of November 2007, we decided to stop the production of content and terminate
the content production department. We have and will continue to license content
from outside sources. Accordingly, we evaluated the ongoing value of the content
recorded as an asset. Based on this evaluation, we determined that content with
a carrying amount of $255 was impaired; this amount was recorded as impairment
of intangible assets in the Statement of Operations.
 
 In
November 2007, it was mutually agreed to terminate the agreement between Reality
Group and Coeee Melbourne Pty Ltd. (“Cooee”) and settle the remaining payments
in the agreement due to the loss of the customers acquired from Cooee.
Accordingly, we evaluated the ongoing value of these assets. Based on this
evaluation, we determined that customer lists with a gross carrying amount of
$220 and a net carrying amount of $86 was impaired; this is recorded as
impairment of intangible assets in the Statement of Operations.
 
 In March
2008, the Company decided to downsize the office in London and move to another
location to reduce costs. This includes removing and abandoning the leasehold
improvements and furniture and fixtures in the former London office. Due to its
office relocation, the Company recorded an impairment charge for certain
property and equipment which totaled $229 during the year ended December 31,
2008. This amount was recorded as a loss on impairment of property and equipment
in the Statement of Operations.
  F-26
  KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (17)
Segment Reporting
 
 We derive
our revenue from two operating segments. These operating segments are presented
on a worldwide basis and include: Digital Media Solutions and Agency
Services.
  Digital Media Solutions includes
comprehensive delivery of solutions that include software, hardware, services
and components.  WithinDigital Media Solutions,wedesign, deliver and integrate systems
for professional production, processing, distribution and archiving of
audiovisual materials.Digital Media Solutions also provides services
including content delivery, online and mobile property development and
management, 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 Solutions 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.
 
 Twelve
      months endedDecember
      31,2008
                                        
                                        
                                        2007Revenue:Digital
      Media Solutions
                                        
                                        $
                                        18,107
                                        
                                        
                                        $
                                        9,525Agency
      Services
                                        
                                        
                                        5,294
                                        
                                        
                                        
                                        4,404Total
      revenue
                                        
                                        $
                                        23,401
                                        
                                        
                                        $
                                        13,929Operating
      (loss) income:Digital
      Media Solutions
                                        
                                        $
                                        (7,150
                                        )
                                        
                                        $
                                        (21,920
                                        )Agency
      Services
                                        
                                        
                                        219
                                        
                                        
                                        
                                        (57
                                        )Corporate
                                        
                                        
                                        (11,775
                                        )
                                        
                                        
                                        (12,261
                                        )Total
      operating loss
                                        
                                        $
                                        (18,706
                                        )
                                        
                                        $
                                        (34,238
                                        )December
      31,
                                        
                                        December
      31,2008
                                        
                                        
                                        2007Assets:Digital
      Media Solutions
                                        
                                        $
                                        15,901
                                        
                                        
                                        $
                                        5,049Agency
      Services
                                        
                                        
                                        836
                                        
                                        
                                        
                                        1,887Corporate
                                        
                                        
                                        24,572
                                        
                                        
                                        
                                        11,179Total
      assets
                                        
                                        $
                                        41,309
                                        
                                        
                                        $
                                        18,115
 
 F-27
   KIT
DIGITAL, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts
in Thousands, Except Share and Per Share Data)
  (18)
Subsequent Events
 
 On March
6, 2009, we filed a certificate of amendment of our certificate of incorporation
to (i) effect a 1-for-35 reverse stock split of our common stock; (ii) decrease
the total number of shares of common stock authorized to be issued from
500,000,000 shares to 30,000,000 shares; and (iii) eliminate the authorization
of a class of preferred stock.  The changes made by the certificate of
amendment were effective on March 9, 2009 and per share amounts in the
accompanying financial statements have been adjusted for the
split.  As a result of the reverse stock split, we have 4,586,700
outstanding shares of common stock as of April 10, 2009, including recent
issuances related to our purchase of the remaining minority interest in Reality
Group Pty. Ltd. and the scheduled earn-out from our June 2008 acquisition of
Kamera Content AB.  Effective March 9, 2009, our ticker symbol on the
OTC Bulletin Board was changed to “KDGL” from “KITD.”
  On March
6 2009, we acquired the remaining 49% outstanding share capital that we did not
previously own in Reality Group Pty. Ltd., a Australian company, in
consideration of issuing the sellers 90,073 shares of our common stock for a
purchase price of $631.  Reality Group is an advertising agency
offering clients a full range of traditional advertising services including
media buying and planning, creative development, and packaging.
   F-28