UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549







FORM 10-K





(Mark
      One)R
            
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2009OR ̈
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES
      EXCHANGE ACT OF 1934





Commission
file number: 001-34437







KIT
digital, Inc.


(Exact
Name of Registrant as Specified in its Charter)





Delaware
            11-3447894(State or Other Jurisdiction of
              Incorporation or Organization)
            (I.R.S. Employer
              Identification No.)205 Hudson Street, Suite 802
            10013New York, New York
            (Zip code)(Address of principal executive offices)





Registrant’s telephone number,
including area code: (212) 661-4111









Securities
registered pursuant to Section 12(b) of the Act:


TitleofeachClass
            
            NameofeachexchangeonwhichregisteredCommon Stock, par value $0.0001 per share
            
            The NASDAQ Global Market





Securities
registered pursuant to Section 12(g) of the Act:  None









Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  ̈     No R





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act.  Yes  ̈     No R





Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  Yes R     No  ̈





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





Indicate
by check mark 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 the 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.  R





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):





Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈
                (Do
      not check if a smaller reporting company)
              Smaller
      reporting company R





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).  Yes  ̈     No R





The
aggregate market value of the common stock held by non-affiliates of the
registrant was $16,911,000 as of June 30, 2009.





The
number of shares outstanding of the registrant’s common stock as of March 30,
2010 was 17,596,506 shares.








The
following document is incorporated by reference into Part III of this Form
10-K:





Proxy
Statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934 with respect to the 2010 annual meeting of
stockholders.









KIT
digital, Inc.


2009
FORM 10-K ANNUAL REPORT





TABLE
OF CONTENTS





PagePART IItem
      1.
                                      Business
                                      
                                      1Item
      1A.
                                      Risk
      Factors
                                      
                                      12Item
      1B.
                                      Unresolved
      Staff Comments
                                      
                                      19Item
      2.
                                      Properties
                                      
                                      20Item
      3.
                                      Legal
      Proceedings
                                      
                                      20Item
      4.
                                      Reserved
                                      
                                      2021PART IIItem
      5.
                                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                      
                                      21Item
      6.
                                      Selected
      Financial Data
                                      
                                      22Item
      7.
                                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                      
                                      22Item
      7A.
                                      Quantitative
      and Qualitative Disclosures About Market
Risk
                                      
                                      28Item
      8.
                                      Financial
      Statements and Supplementary Data
                                      
                                      29Item
      9.
                                      Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                                      
                                      29Item
      9A(T).
                                      Controls
      and Procedures
                                      
                                      29Item
      9B.
                                      Other
      Information
                                      
                                      30PART IIIItems
      10, 11, 12, 13 and 14
                                      
                                      31PART IVItem
      15.
                                      Exhibits
      and Financial Statement Schedules









SPECIAL
NOTE REGARDING FORWARD-LOOKING INFORMATION





This
report includes and incorporates forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the United States Private Securities Litigation Reform
Act of 1995. All statements, other than statements of historical facts, included
or incorporated in this report regarding our strategy, future operations,
financial position, future revenues, projected costs, prospects, plans and
objectives of management are forward-looking statements. The words
“anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,”
“projects,” “will,” “would” and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. We cannot guarantee that we actually will achieve the
plans, intentions or expectations disclosed in our forward-looking statements
and you should not place undue reliance on our forward-looking statements. There
are a number of important factors that could cause our actual results to differ
materially from those indicated by these forward-looking statements. These
important factors include the factors that we identify in the documents we
incorporate by reference in this report, as well as other information we include
or incorporate by reference in this report.  See “Risk Factors.” You
should read these factors and other cautionary statements made in this report,
and in the documents we incorporate by reference as being applicable to all
related forward-looking statements wherever they appear in this report, and in
the documents incorporated by reference.  Except to the extent
required by U.S. federal securities laws, we do not assume any obligation to
update any forward-looking statements made by us.


ii


PART I





Item 1.Business.





Overview
of Our Business





KIT
digital is a leading, global provider of on-demand, Internet Protocol (IP)-based
video asset management systems (VAMS). KIT VX, the company's end-to-end software
platform, enables enterprise clients to acquire, manage and distribute video
assets across the three screens of today's world: the personal computer, mobile
device, and IPTV-enabled television set. The application of VX ranges from
commercial video distribution to internal corporate deployments, including
corporate communications, human resources, training, security and surveillance.
KIT digital's current client base includes more than 1,000 enterprise customers
across 30+ countries, including The Associated Press, Best Buy, Bristol-Myers
Squibb, Disney-ABC, FedEx, General Motors, Google, Hewlett-Packard, Home Depot,
IMG Worldwide, Intel, News Corp, Telefonica, the U.S. Department of Defense,
Verizon, and Vodafone. Our clients usually enter into long-term contracts, and
our average contract length is approximately 24 months. KIT digital is
headquartered in Prague, and maintains principal offices in Atlanta, Cairo,
Cologne, Dubai, Melbourne (Australia), London, New York, Stockholm and
Toronto.





All
currency amounts are in thousands in this report. Share, per share and other
numerical data are listed without abbreviation.





We
deliver our VX software platform as a subscription service using a
software-as-a-service (SaaS) or on-demand model, while occasionally installing
our software onsite for clients as part of an enterprise license, with
associated maintenance fees. Our software serves corporate customers across a
wide variety of industries, including but not limited to media &
entertainment, telecommunications, retail, consumer/packaged goods,
shipping/logistics, automotive and financial services.





Our software platform deployments are
often complemented by marketing, branding and interface design services, as well
as systems integration services related to digital play-out facilities,
recording and editing suites, and content acquisition. We estimate over 80% of
our current revenues are generated by VX platform-related fees, with the
remainder directly related to professional services. Generally, we invoice
customers on either a monthly or quarterly basis.





KIT VX is used by demanding and
sophisticated corporate clients, and is particularly appropriate for global
corporations that need to centrally and securely ingest and manage video
content, while also being able to allow for content access and publishing in
multiple geographical locations, on multiple device types, and in different
languages and network protocols. This ability to centrally and securely
administer video content but allow for it to be modified and distributed broadly
is sometimes referred to as multi-point publishing, or ‘‘MPP.’’ We believe that
our VX platform has the most advanced MPP capabilities in the
market.





We manage our business across three
major geographical profit and loss centers: (i) Europe, Middle East and Africa
(EMEA), (ii) Asia-Pacific and (iii) the Americas. We estimate, at present
writing, that approximately 60%, 15% and 25% of our current revenues are
generated in EMEA, Asia-Pacific and the Americas, respectively. Our enterprise
clients in each of these regions use our VX platform and related professional
services to extend their audience reach using video and for internal corporate
purposes. Specific customer examples:




·
            Vodafone
      business units throughout Europe have licensed our VX platform to provide
      a host of publishing points that can all be managed centrally. These
      publishing points include fully functional video stores with
      ‘download-to-own’ and ‘video-on-demand’ rental capabilities, web-based
      streaming deployments, user profiling for dynamic recommendation and
      rating of content, native iPhone applications as well as WAP-based video
      portals for 3G-enabled devices.




·
            General
      Motors, based in North America, has licensed our VX platform to deploy a
      widely accessible communication platform to effectively and transparently
      communicate with employees, vendors, the public, investors, journalists
      and other interested parties through live speeches and on-demand archived
      content that can be distributed through embeddable players around the
      web.




·
            The
      Sun (a unit of News Corp.) in the United Kingdom has licensed our VX
      platform to fully integrate video distribution, advertising and content
      solutions capable of serving millions of page views on a monthly
      basis.







·
            Telefónica
      02 has licensed our VX platform to acquire IP-based content at sports
      venues in Central Europe, to edit and distribute related video to online,
      mobile and other IP-enabled points of
delivery.




·
            In
      Asia, Yellow (part of Sensis Corp.) has licensed out the VX platform to
      manage and distribute video geared towards making their core classified
      offering more engaging and functional for the end
  user.




·
            The
      U.S. Department of Defense has licensed our VX platform for internal
      communications purposes and to launch and manage the Pentagon Channel, a
      24x7 video news program designed to keep the 2.6 million members of the
      United States’ Armed Forces informed with in-depth news reports and
      coverage of live events.





We believe the proliferation of
Internet-connected devices, coupled with the accelerating worldwide adoption of
broadband Internet connections and video-capable mobile networks, is fueling
long-term growth in IP-based video content management. Our software-as-a-service
approach was specifically developed to help large corporations manage and
deliver video to both end-users and internal constituents in a cost-effective
manner, with limited uptake and training time. Our VX software platform is
served centrally from hosted computing facilities to our customers’ IP
connections, and delivers high levels of reliability, scalability and security
at a very reasonable cost. In addition to our on-demand software, we address the
needs of our customers at various stages along the IP video value chain — from
the repurposing and monetization of video assets to the deployment of related IP
recording and broadcast facilities — by offering professional services related
to creative interface design, branding strategies, strategic planning, technical
integration and hardware fit-out. Furthermore, those customers lacking
proprietary video content or looking to supplement their existing video content
can access approximately 80 KIT-syndicated channels and tens of thousands of
regularly updated KIT-syndicated videos. We believe our proprietary VX software
platform, combined with our systems integration, creative and content services,
provides us with a sustainable, competitive advantage over other solutions
currently being offered in the marketplace. Our focus on advanced multi-point
publishing capabilities meets the needs of an evolving IP video
marketplace.





We derive our revenues from on-demand
software subscription license fees, software usage fees, upfront license fees
and professional services fees. For the year ended December 31, 2009, we
recorded consolidated revenue of $47,284 as compared to revenue of $23,401 for
the year ended December 31, 2008.





We endeavor to hold leading market
share in the VAMS industry globally, through a strategy led by organic growth
coupled with selective, accretive acquisitions which complement our geographical
footprint and sales vertical segment reach.





Corporate
Information





We were
organized as a corporation under the laws of the State of Delaware in August
1998, and commenced operations in our current line of business in December 2003.
Our principal executive offices are located at 205 Hudson Street, Suite 802, New
York, New York 10013, and our telephone number is +1 (212) 661-4111. Our
international operational headquarters is located in Prague, Czech Republic. We
maintain a corporate website at www.kitd.com and an electronic brochure of our
product offerings can be downloaded at http://kitd.com/brochure.pdf





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, share and per share amounts in the accompanying
financial statements have been adjusted for the reverse stock split for all
periods presented. On August 13, 2009, our common stock began trading on the
NASDAQ Global Market exchange under the ticker symbol “KITD.” Previously, our
ticker symbol was “KDGL”, as quoted on the OTC Bulletin Board.





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.


2





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 over time (see “Employment
and Management Agreements” below), through its affiliate KIT Media, Ltd. In May
2008, we 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. 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. All shares sold to KIT Media were at the
same price and on the same terms as the other investors in this
offering.





In August
2009, we completed the sale of 4,554,000 shares of our common stock at a price
of $7.00 per share in a public offering and concomitant listing on the NASDAQ
Global Market; 4,004,000 shares were sold by us and 550,000 shares were sold by
certain existing, unaffiliated stockholders. The gross proceeds of the common
stock sold by us were $28,028. We did not receive any proceeds from the sale of
shares by the selling stockholders. We issued to the underwriters 44,067
warrants to purchase shares of common stock with an exercise price of $8.40 per
share exercisable for a period of five years and were valued under the
Black-Scholes model as $181. In connection with the public offering, we received
net cash proceeds of approximately $26,090 after underwriting discounts,
commissions and fees, legal fees and expenses, and other fees.





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





Recent
Business Acquisitions





Reality Group Pty. Ltd.
Minority Interest Purchase


On March
6, 2009, we acquired the remaining 49% outstanding share capital that we did not
previously own in subsidiary Reality Group Pty. Ltd., an Australian marketing
communications firm, in consideration of the issuance of 90,073 shares of common
stock for a total purchase price of $631.





Certain Narrowstep Assets
Acquisition


On April
8, 2009, we acquired certain of the operating assets and assumed specified
liabilities of Narrowstep, Inc., a United States and United Kingdom based
internet TV platform company (“Narrowstep”) in exchange for 25,000 shares of
restricted common stock valued at $213.





The FeedRoom
Acquisition


On
October 1, 2009, we acquired The FeedRoom, Inc., a United States company engaged
in online video communications (“FeedRoom”) in exchange for 948,636 shares of
KIT digital common stock (the “Merger Shares”) and an additional 363,636 shares
of our common stock issued in exchange for a $4,000 indirect investment in us by
certain stockholders of FeedRoom immediately prior to the closing of the merger.
The KIT digital common stock was sold to such stockholders at an effective price
of $11.00 per share. The Merger Shares were delivered as follows: (i) 937,398
shares on closing; and (ii) 374,602 shares which will be retained by us for one
year after the closing.


3





Nunet
Acquisition


On
October 1, 2009, we acquired all Nunet AG, a German company engaged in video
management for broadband, IPTV and mobile (“Nunet”) for an aggregate purchase
price of EUR 7,647, consisting of: a cash payment of $8,048 (EUR 5,400) paid at
closing; a convertible promissory note of EUR 1,663 due March 31, 2011; and
another convertible promissory note of EUR 584 due June 30, 2010. These
convertible promissory notes have since been converted into 339,540 shares of
common stock valued at $3,321 and purchased by an independent investor. An
additional $430 (EUR 300) was paid to IMG at closing to cover brokers,
introducing parties, management incentives and other transaction-related costs.
This amount was expensed and is included in merger and acquisition and investor
relations expenses in the consolidated statement of operations and comprehensive
loss.





Recent
Developments





January 2010 Public Offering
of Shares


On
January 26, 2010, we completed an underwritten public offering of 2,980,000
shares of our common stock, pursuant to our shelf registration statement on Form
S-3 (No. 333-162325), which was originally filed and declared effective in
October 2009, and related prospectus supplement dated January 21, 2010. We sold
such shares in the offering at a price of $10.50 per share and received $31,290
in gross proceeds and approximately $28,500 in net proceeds, after deducting
underwriting discounts, commissions, legal fees and other estimated offering
expenses.  The accounting impact of the public offering on our
financial statements will essentially be to increase our total stockholders’
equity by approximately $28,500. On February 23, 2010, we subsequently sold
350,000 additional shares of common stock pursuant to an over-allotment option
granted to underwriters, and received $3,675 in gross proceeds and approximately
$3,000 in net proceeds.  We will utilize the net proceeds of the
offering for potential acquisitions and acquisition-related costs and for
working capital and general corporate purposes.  Additionally, a small
portion of the net proceeds will be used for the repurchase of certain
outstanding warrants issued in prior private placement financings.





Listing on the Prague Stock
Exchange


In
connection with the consolidation of our international operational headquarters
in Prague, Czech Republic, we decided to dual list our shares of common stock on
the Prague Stock Exchange (PSE), the Czech Republic’s main securities market and
the second largest stock exchange in Central and Eastern Europe. On January 25,
2010, our common stock was accepted and began trading on the Main Market of the
PSE.  Our shares trade under the symbol KITD on the PSE, and may be traded
interchangeably between the NASDAQ Global Market and the PSE.





March 2010 Public Offering
of Shares


On March
9, 2010, we completed an underwritten public offering of 1,541,624 shares of our
common stock, pursuant to our shelf registration statement on Form S-3 (No.
333-164655), which was originally filed and declared effective in February 2010,
and related prospectus supplement dated March 4, 2010. We sold such shares in
the offering at a price of $9.73 per share and received $15,000 in gross
proceeds and approximately $13,800 in net proceeds, after deducting underwriting
discounts, commissions, legal fees and other estimated offering expenses. The
impact of the public offering will essentially be to increase our total
stockholders’ equity by approximately $13,800. On March 22, 2010, we
subsequently sold 231,244 additional shares of common stock pursuant to an
over-allotment option granted to under-writers, and received $2,250 in gross
proceeds and approximately $2,000 in net proceeds. We intend to use the net
proceeds from the sale of the shares in the offering primarily to repurchase
outstanding warrants issued in prior private placement financings.





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





Multicast Media Technologies
Acquisition


On March
16, 2010, we executed a definitive agreement to acquire Multicast Media
Technologies, Inc., a United States corporation engaged in live event
broadcasting, internet video and targeted multimedia communications
(“Multicast”), in exchange for 1,312,034 shares of our common stock (the “Merger
Shares”) and approximately $4,750 in cash (the “Cash Consideration”), after
giving effect to adjustments for assumption by KIT digital of existing
indebtedness and other liabilities of Multicast in the amount of approximately
$5,927.  The merger consideration is subject to further adjustment
upwards or downwards to the extent that the closing working capital of Multicast
is greater or less than zero.


4





The
Cash Consideration and Merger Shares were delivered as follows: (i) $4,000 in
cash and 842,500 shares of our stock promptly following the closing; and (ii) a
“holdback amount” of an additional $746 in cash and 469,534 shares of KIT
digital common stock, less any amount used by KIT digital to offset negative
working capital and satisfy indemnity claims as described below, will be
delivered to such stockholders not later than one year after the closing or such
later date as all indemnity claims have been resolved. Of the total “holdback
amount,” $712 in cash and 196,798 Merger Shares will be used to offset any
negative working capital balance of Multicast as of the effective date of the
merger, which amount is to be determined within 30 days following the closing of
the merger. The remaining $34 in cash and 272,736 Merger Shares being held back
by KIT digital will be used to indemnify KIT digital against any breaches of
representations, warranties and covenants by Multicast, as well as against
certain additional specified liabilities.





Warrant
Buyback


The Board
of Directors approved the repurchase of certain outstanding warrants with
exercise prices in excess of market price from certain warrant holders which
acquired the warrants in prior private placement financings, including KIT Media
Ltd., an entity controlled by Kaleil Isaza Tuzman, our Chairman and Chief
Executive Officer.  We repurchased, agreed to repurchase, cancelled
and induced exercise of warrants throughout the course of the first quarter
ending March 31, 2010. Warrant repurchases were made in exchange for cash
payments equal to the fair value of the applicable warrants on the date of
repurchase, as determined using a percentage premium over the intrinsic value
(using a 20-day trailing weighted average closing stock price at the time of
warrant repurchase agreement minus the applicable warrant exercise price) of the
warrants. Such repurchase amounts were below the “Black-Scholes-Merton” value of
the warrants. The terms of the warrant repurchase were no more favorable to KIT
Media than to other warrant sellers.





Operations
Strategy





During
2009, we moved our operational headquarters from Dubai, UAE to Prague, Czech
Republic, and  substantially integrated our regional offices and
products units. Operational initiatives in 2009 included: (i) introduction of
inter-departmental invoicing and cost-based accounting, (ii) increased
standardization of client contracts; (iii) standardization of existing
company-wide sales commissions program; (iv) regional expansion and salesforce
development in Europe and Asia; (vv) improvement of behavioral analytics and
report-routing capabilities on the VX platform; (vi) improvement of our both
“on-deck” and “off-deck” mobile publishing and delivery capabilities; and (vii)
enhancement of the VX platform’s closed-network IPTV and hybrid set-top box
capabilities.





Our
Growth Strategy





Our
objective is to enhance our position as the leading provider of on-demand
enterprise software for IP-based video asset management systems. Key elements of
our growth strategy include:





•
            invest
      in sales, marketing and branding to expand upon our leadership in
      on-demand, IP-based video asset management — we estimate that we are the
      largest international provider of software solutions for managing IP video
      content and it is our intention to build our brand to become synonymous
      with ‘‘industrial grade’’ quality, professionalism and customer
      support;


•
            pursue
      new customers and territories — we are aggressively targeting potential
      customers, primarily through our direct sales force and believe that there
      are substantial market opportunities for our solutions in the Americas and
      Europe, as well as the emerging BRIC
markets;


•
            leverage
      existing and new strategic re-selling partnerships with content delivery
      networks (CDNs), content aggregators, systems integration and hardware
      providers, including collaborative sales and marketing efforts and the
      reselling of each other’s products and
services.


•
            increase
      revenue per customer — we seek to increase revenue from each corporate
      customer by increasing their usage of our platform, up-selling additional
      modules of the VX platform, as well as complementary creative and
      technical services;


5


•
            enhance
      our product offering — we intend to further develop our VX software
      platform’s capabilities and features, by investing 5-10% of our gross
      revenues in ongoing research and development;
  and


•
            complete
      accretive acquisitions which expand our client and geographical footprint
      — we intend to continue to pursue selected acquisitions in Asia-Pacific
      and elsewhere that consolidate VAMS market share, expand our geographical
      footprint and customer reach, and further our position as the leading
      provider of enterprise-grade IP-based video management
      solutions;





Products
and Services





Our comprehensive software platform,
KIT VX, is designed to serve as a centralized system for acquiring, managing and
distributing an enterprise client’s IP-based video assets.





Comprehensive IP-based video asset
management solution.Our VX software platform allows our customers to
ingest IP-based video content from multiple origination points such as satellite
capture or IP feeds. Once imported into VX, video content can be managed
including transcoding, storage, metatagging, localization, editing/repurposing,
search optimization, data association, advertising and syndication. Video is
then able to be distributed across the three screens: the computer Internet
browser, mobile device and the IPTV-enabled television set.





Modular VX software platform.Our VX platform is designed to offer an end-to-end solution and is
comprised of eight primary modules. This design enables customers to start with
one or a few modules and easily add more modules over time. Our modules, all of
which leverage our VX platform capabilities of multi-point content ingestion,
management and multi-point publishing/distribution (depicted graphically below),
are outlined below:





KIT
VX Modular Detail










•         Online Browser— delivers and
enables video content display and associated rich metadata within single or
multiple websites. We also offer multiple languages and professional services
allowing for customization.




•         Mobile— transcodes, delivers
and enables video content display and associated rich metadata into the multiple
formats in which video is displayed on over 400 different mobile device
types.


6




•         IPTV— provides IP-middleware
and content delivery, CRM and metadata services to virtually any set-top box, so
that customers can offer content to their customers on the television
set.








Three-Screen Delivery







•         Content Provision— enables
customers access to our library of licensed content from global content
providers such as The Associated Press, Disney-ABC and Reuters.




•         Content Management System—
provides database management, reporting and security.




•         Dashboards— provides
real-time usage statistics and analytics of our customers IP video deployments.




•         Digital Junction— allows
corporate customers an exchange-like capability, by which they can syndicate
their video, based on permission and subscription levels, to other corporate
customers.




•         Integration Services—
implementation of VX-enabled digital play-out facilities, recording and editing
suites and remote content ingestion assets.




•         Creative and Marketing Services— interface design, branding, campaign management, strategic planning and
agency representation.





Highly configurable on-demand
application suite.We deliver our VX software platform as a subscription
service using an SaaS model, eliminating the need for customers to buy, maintain
and upgrade on-premise hardware and software. Our software solution is highly
configurable, allowing customers to tailor their deployment to reflect their
identity, unique business processes and existing forms and templates.
Additionally, our architecture enables us to maintain high levels of
availability, scale easily as we and our customers grow, deploy standard
configurations quickly and provide a safe and secure environment for our
customers’ video assets.





Integration.Our software
suite was designed to work with traditional content management systems and large
enterprise resource planning, or ERP, software systems, including Microsoft,
Oracle and SAP.





Monetization/Implementation.We offer our customers top-grade creative and professional services to
support the successful implementation of their IP-based video strategy,
including creative interface design, branding strategies, strategic planning and
technical integration services.


7




Our
Technology





We have built our VX software platform
on a highly scalable, multi-tenant application written within open frameworks,
including C++ and .NET. We use commercially available hardware and a combination
of proprietary and commercially available software, including technologies
acquired through acquisition, SQL Server and Microsoft Windows, to provide our
solutions. Because new customers are provisioned within this already-existing
infrastructure, we believe we can efficiently scale our software delivery as
both our business and our customers’ business grow.





Our customers access our solutions
through multiple screens: web browsers (without installing any software or
downloading Java applets, Microsoft ActiveX, or .NET controls), on their mobile
handsets, and through IPTV solutions that deliver video to the consumers’
televisions.





We own all of the hardware deployed in
support of our KIT VX software platform. We have multiple redundant co-location
facilities, including Atlanta, Brisbane (Australia), Cologne, Dusseldorf,
London, New York, Prague and Toronto, in addition to our primary location in
Ashburn, Virginia. Our facilities are state-of-the-art and provide
around-the-clock security personnel, video surveillance and biometric access
screening, and are serviced by onsite electrical generators, fire detection and
suppression systems. Our facilities afford us multiple Tier 1 interconnects to
the global Internet. Our multiple co-location facilities provide increased
platform uptime and application availability and redundancy, which are essential
to support the business-critical needs of our customers.





We regularly monitor the performance
and uptime of our VX software platform. We have a highly available, scalable
infrastructure that utilizes load-balanced web server pools, redundant
interconnected networks, switches and firewalls, intrusion detection, replicated
databases, and fault-tolerant storage devices. User and performance data is
backed up on a daily basis and stored in multiple locations to ensure integrity
and restoration capability. Application monitoring includes automated tools that
ensure our VX software platform is running and operating within performance
benchmarks. Since migrating to our own delivery architecture in May 2008, our
platform uptime has been 100% — though there can be no guarantee of perfect
uptime in the future.


8





We
do not have material patents, trademarks or copyrights, but we believe that the
long-term commercial usage of our VX platform and its component parts (dating
back to 1999 for certain key elements) provides us material defensibility around
our core intellectual property. We rely upon confidentiality agreements signed
by our employees, consultants and third parties, and trade secret laws of
general applicability, to safeguard our software and technology.





Customers:





As of
December 31, 2009, we had more than 600 customers. Our standard license
agreement for our enterprise customers runs approximately 24 months and our
average remaining contract life is approximately 18 months. Our professional
services are contracted on a project basis and in some cases on an hourly
basis.





We
provide services to customers in multiple vertical industry segments, including
media and entertainment, telecommunications, automotive, financial services,
retail, consumer/packaged goods and government. Our customer base is not
concentrated in any particular industry. None of our customers accounted for
more than 10% of revenues in the fiscal years ended December 31, 2007 and 2008
or 2009. Set forth below is a representative list of our customers as of
December 31, 2009, grouped by industry, and listed alphabetically:





Automotive:
            General
      Motors, Suzuki


Classifieds/Search:
            AutoTrader,
      Car Sales, Google, Sensis,


Consumer
      Goods:
            Hewlett-Packard,
      Johnson & Johnson, Nestle,
Playtex


Financial:
            Fidelity
      Investments, GE Money, Legg Mason,
Nasdaq


Media:
            The
      Associated Press, Disney-ABC Television, IMG, News
  Corp


Publishing:
            New
      York Post, RCS, The Sun


Retail/Franchising:
            Barnes
      & Nobles, Best Buy, Home Depot, Kmart,
  Tabcorp


Telecommunications:
            AT&T,
      Telefónica 02, Verizon, Vodafone





Sales
& Marketing:





We
primarily sell our software solution directly through our sales force and to a
lesser extent, utilize distribution relationships such as resellers and
affiliate partners. We target providers and users of IP video content through
our:





•           Field
sales force: We have developed a field sales force and currently have
approximately 60 sales personnel in various geographic markets, including 24 in
Europe, Middle East and Africa, 14 in Asia-Pacific and 22 in the Americas
(including both North and South America). Our direct sales force is responsible
for identifying and managing individual sales opportunities in their respective
regions. Certain sales representatives have cross-regional, ‘‘vertical’’
responsibilities as well, meaning they are responsible for identifying global
sales opportunities in a specific industry vertical, such as classifieds, retail
or publishing.


•           Distribution
partners: We maintain relationships with certain resellers and distribution
partners that we believe have complementary efforts in the IP-video marketplace,
and strong existing client bases with in-region sales forces. Currently, we have
deployed formal reselling relationships as follows:





▪
            Global
      Partnerships: Akamai, blinkx


▪
            The
      Americas: Astreya, GoTV, Internap, LatinStock, MRC, Omnitech, Ply Media,
      and RM 160;


▪
            Europe,
      the Middle East and Africa: Can Communicate, Complete TV, DigiSoft,
      Digotel, MGt, Vivocom, VoloVita, and
WRN;


▪
            Asia-Pacific:
      Spotzer, TigerSpike, and WebAlive.





We intend
to aggressively expand our reseller network, with a particular focus on content
delivery networks (CDNs), systems integrators, content aggregators and IP-based
hardware providers.





We focus
our corporate marketing efforts on increasing brand awareness, communicating the
VX software platform advantages, and generating qualified leads for our sales
teams. Our corporate marketing plan is designed to continually elevate awareness
of our brand and generate demand for our software solution. We rely on a number
of vehicles in this area, including tradeshows, advertising, public relations,
webinars, our website and collaborative relationships with complementary
technology vendors.


9





Our
Industry





We
believe we are well positioned to take advantage of the growth within the
Internet Protocol (IP)-based VAMS industry. Our industry’s growth globally is
expected to be driven by:





•
            the
      conversion of analog and traditional digital video formats to IP
      video;


•
            the
      continuing rise in the amount and breadth of IP-based video
      content;


•
            the
      growing consumer demand for IP-based video
  content;


•
            the
      proliferation of broadband Internet
connections;


•
            the
      expansion and evolution of video-capable mobile
  networks;


•
            the
      increase of Internet-connected devices;
and


•
            the
      rapid ‘‘catch-up’’ of emerging markets broadband and mobile network
      access.





Competition





We
believe that few competitors currently provide the range of functionality
provided by our VX software platform, but there are a number of competitors that
provide certain elements of the products and services we offer,
including:


•
            Video
      asset management and enablement;
and


•
            Video-centric
      integration, interface design and creative
  services.





We believe the barriers to entry for
the industry in which we operate include: (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 open Internet, IPTV and
mobile networks, including thePlatform, Irdeto, Benchmark Digital, Dalet,
Brightcove, Kewego, Onstream Media and Ooyala.





Video-centric systems integration,
interface design and creative services.There are myriad broadcast
systems integration companies and interactive marketing agencies globally, many
of which have some expertise in IP-based video systems.





We
believe that we set ourselves apart from our competitors through:


•  The
breadth and depth of the VX suite functionality;


•  Our
integrated online, mobile and IPTV set-top box (‘‘3-screen’’) publishing
capability;


• 
Our global customer and sales footprint, including multicultural and
multilingual customer services and support;


•  Our
advanced multi-point ingestion and multi-point publishing
capabilities;


•  Our
multi-format content syndication and repurposing capabilities; and


•  Our
top-tier creative services and systems integration capabilities.





Research
and Development





Our
research and development personnel are continuously undertaking efforts to
enhance and improve our existing services and create new services in response to
our customers’ needs and market demand for software tools to manage and deliver
IP-video. Accordingly, we have invested, and intend to continue to invest,
significant time and resources in our development activities to establish and
maintain ourselves as a leader in the provision of optimized IP-based video
solutions that address the needs of our customers. As of December 31, 2009, we
had approximately 57 employees on our research and development team. Our
research and development expenses were approximately $4,700 and $2,700 for the
fiscal years ended December 31, 2008 and the December 31, 2009, respectively. As
a practice, we generally do not capitalize research and development, and these
amounts were not capitalized.


10





Employees





As of
March 1, 2010, we had a total of approximately 325 full-time employees and
equivalents. Our future success will depend in part on our ability to attract,
retain and motivate highly qualified technical and management personnel for whom
competition is intense. Our employees are not represented by any collective
bargaining unit. We believe our relations with employees and contractors are
good.





•
            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.





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.


11


Item 1A.  Risk
Factors.





You should carefully consider the
risks and uncertainties described below, as well as other information provided
to you in this report, including information at the beginning of this document
entitled “Special Note Regarding Forward-Looking Information,” and in other
documents that we subsequently file with the SEC that update, supplement or
supersede such information.  The risks and uncertainties described
below are not the only ones facing us.  Additional risks and
uncertainties not presently known to us or which we consider immaterial based on
information currently available to us may also materially adversely affect
us.  If any of the events anticipated by the risks and uncertainties
described occur, our results of operations and financial condition could be
adversely affected, which could result in a decline of our common
stock.





Risks
Related to Our Business





We
have a history of annual net losses which may continue and which may negatively
impact our ability to achieve our business objectives.





For the
year ended December 31, 2009, we had revenue of $47,284 and a net loss available
to common stockholders of $19,942.  There can be no assurance that our
future operations will result in net income. Our failure to increase our
revenues or improve our gross margins will harm our business. We may not be able
to sustain or increase profitability on a quarterly or annual basis in the
future. If our revenues grow more slowly than we anticipate, our gross margins
fail to improve or our operating expenses exceed our expectations, our operating
results will suffer. The prices we charge for our Internet software and services
may decrease, which would reduce our revenues and harm our business. If we are
unable to sell our solutions at acceptable prices relative to our costs, or if
we fail to develop and introduce on a timely basis new products from which we
can derive additional revenues, our financial results will
suffer.




Our
operations have limited histories and therefore we cannot ensure the long-term
successful operation of our business or the execution of our business
plan.





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 corporate client
      satisfaction and high levels of end-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 market compensation rates in the markets in which we
      employ.





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.


12





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 will 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 and sales 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 24 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 and adversely affected.





Our
competitors may 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 IP video content management over the Internet is relatively new and
constantly changing. We expect that competition will 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. 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.




If
we do not successfully develop new software products and solutions, our business
may be harmed.





Our
business and operating results may be harmed if we fail to expand our software
and services suite (either through internal product or capability development
initiatives or through strategic partnerships and acquisitions) in such a way
that achieves widespread market acceptance or that generates significant revenue
and 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 solutions are subject to rapid
change, we may need to 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 and harm our business and operating results.





We
may be subject to legal liability for providing third-party products, services
or content.





We have
certain 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 most
often provide that we will be indemnified against such liabilities, such
indemnification may not be adequate or available. 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 and we maintain errors and omissions insurance, if any potential
claims do result in liability, we could be required to pay damages in excess of
insurance coverage or other penalties, which could harm our business and
operating results.


13





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 network infrastructure may harm our ability to distribute our software to
our customers, as well as our reputation and ability to attract and retain
customers 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 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 customers’ websites or
demand from 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 could harm our business.





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, ISPs (Internet service
providers), online service providers and mobile networks to provide our clients’
end-users access to websites, IPTV and mobile content. Many of these providers
have experienced outages in the past, and could experience outages, delays and
other difficulties due to system failures unrelated to our systems. Any such
outage, delay or difficulty could adversely affect our ability to provide our
software-as-a-service, which would harm our business.





We
depend on various third parties to maintain much of our communications hardware
and computer hardware operations. If the third parties’ hardware and operations
fail, our business will be harmed.





Much of
our communications hardware and computer hardware operations are operated or
safeguarded by third parties. If these providers’ hardware, operations or
security systems fail — particularly if they fail in unison — our reputation and
business may suffer. We do not have complete backup systems for all of these
hardware operations. A problem with, or failure of, our communications hardware
or computer hardware operations could result in interruptions or increases in
response times for 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
license technology from third parties. If we are unable to maintain these
licenses, our operations and financial condition may be negatively
impacted.





We
license technology from third parties, including software that is integrated
with internally developed software and used in our products to perform certain
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, which could negatively
impact our operating results and financial condition.


14


We
depend on content licensed to us by third parties. If we are unable to maintain
these licenses, our operations and financial condition may be negatively
impacted.





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
ABC News, The Associated Press, Fox and Reuters. If third parties do not develop
or offer compelling content to be delivered over the Internet or wireless data
networks, or grant necessary licenses to us or our customers to distribute 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 programming and
content offerings. In some cases, we pay 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 could negatively impact 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.





We have
not registered patents or copyrights on any of the software or technology we
have developed. We rely upon confidentiality agreements signed by our employees,
consultants and third parties, and trade secret laws of general applicability,
to safeguard our software and technology. 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 harm our
operations and financial condition.





If
we are unable to retain the services of Kaleil Isaza Tuzman or 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 Messrs. Isaza Tuzman or 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, Ltd.,
an entity controlled by Mr. Isaza Tuzman, including the services of Mr. Isaza
Tuzman and other KIT Capital personnel, pursuant to which Mr. Isaza Tuzman
serves as our Chief Executive Officer, for a term of three years scheduled to
expire in January 2011. We have also entered into an employment agreement with
Mr. Campion. If either Mr. Isaza Tuzman or Mr. Campion were to resign or we are
unable to retain either of their services beyond the term of their respective
agreement with us, 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 IP video enablement 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 not have successfully integrated recent acquisitions to realize the full
benefits of the combined business.





Our
acquisitions involve the integration of businesses that have previously operated
separately. The difficulties of combining the operations of these businesses
include:





·
            the
      challenge of effecting technical integration while carrying on the ongoing
      businesses;


·
            the
      necessity of coordinating geographically separate organizations;
      and


15


·
            effective
      integration of personnel with diverse business
  backgrounds.





The
process of completing the integration of these businesses could cause an
interruption of, or loss of momentum in, the activities of our company and the
loss of key personnel. The diversion of management’s attention and any delays or
difficulties encountered in connection with the acquisitions and the integration
of these operations could have an adverse effect on our business, financial
condition or results of operations.




Our
growth strategy depends, in part, on our acquiring businesses, products and
technologies and expanding their existing operations, which we may be unable to
do.





Our
growth strategy is based, in part, on our ability to acquire or invest in
businesses, products and technologies. 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 acceptable to
  us;


·
            complete
      the acquisition(s) in the time frame and within the budget we expect;
      and


·
            improve
      the results of operations of each of the businesses that we buy and
      successfully integrate its operations on an accretive
    basis.





There can
be no assurance that we will be successful in any or all of the factors above.
Our failure to successfully implement our acquisition strategy could have an
adverse effect on other aspects of our business strategy and our business in
general. We may not be able to find appropriate acquisition candidates,
economically acquire those candidates that we identify or integrate acquired
businesses effectively and profitably.





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.





We
may be required to record a significant charge to earnings if our goodwill or
amortizable intangible assets become impaired.





We are
required under U.S. generally accepted accounting principles to test goodwill
for impairment at least annually and to review our amortizable intangible assets
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. We
have recorded and may be required in the future to record additional charges to
earnings if a portion of our goodwill or amortizable intangible assets becomes
impaired. Any such charge would adversely impact our financial
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;


16


·
            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 Common Stock




Our
historic stock price has been volatile and the future market price for our
common stock is likely to continue to be volatile. This may make it difficult
for you to sell our common stock for a positive return on your
investment.





The
public market for our common stock has historically been volatile. Any future
market price for our shares is likely to continue to be volatile. This price
volatility may make it more difficult for you to sell shares when you want at
prices you find attractive. The stock market in general has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of specific 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. As a result, these factors may make it more difficult or impossible for
you to sell our common stock for a positive return on your
investment.





Shares
of common stock issuable pursuant to our stock options and warrants may
adversely affect the market price of our common stock.





As of
March 30, 2010, we had outstanding under our 2004 Stock Option Plan and 2008
Incentive Stock Plan stock options to purchase an aggregate of 870,351 shares of
common stock and certain outstanding warrants to purchase common stock (for
which cash would need to be remitted to us for exercise). The exercise of the
stock options and warrants and the sales of common stock issuable pursuant to
them, would further reduce a stockholder’s percentage voting and ownership
interest in our company.





The stock
options and warrants are likely to be exercised when our common stock is trading
at a price that is higher than the exercise price of these options and
warrants.





The
large number of shares eligible for future sale may adversely affect the market
price of our common stock.




The sale,
or availability for sale, of a substantial number of shares of common stock in
the public market could materially adversely affect the market price of our
common stock and could impair our ability to raise additional capital through
the sale of our equity securities. As of March 30, 2010, there were 17,596,506
shares of our common stock issued and outstanding. Substantially all of these
shares are freely transferable. Our executive officers and directors own (of
record) approximately 2,696,666
shares of common stock, or 15.3% of our voting stock, which would be eligible
for resale, subject to the volume and manner of sale limitations of Rule 144 of
the Securities Act.


17


Our
shares of common stock are traded on more than one exchange and this
may result in price variations.




Our
common stock is listed for trading on the NASDAQ Global Market and the Prague
Stock Exchange. The trading prices of our shares on these two exchanges may
differ due to spreads between functional trading currencies , different trading
hours and other factors, and this may cause confusion to investors seeking to
buy or sell our shares.




We
have provisions in our certificate of incorporation that substantially eliminate
the personal liability of members of our board of directors for violations of
their fiduciary duty of care as a director and that allow us to indemnify our
officers and directors. This could make it very difficult for you to bring any
legal actions against our directors for such violations or could require us to
pay any amounts incurred by our directors in any such actions.




Pursuant
to our certificate of incorporation, members of our board of directors will have
no liability for violations of their fiduciary duty of care as a director,
except in limited circumstances. This means that you may be unable to prevail in
a legal action against our directors even if you believe they have breached
their fiduciary duty of care. In addition, our certificate of incorporation
allows us to indemnify our directors from and against any and all expenses or
liabilities arising from or in connection with their serving in such capacities
with us. This means that if you were able to enforce an action against our
directors or officers, in all likelihood we would be required to pay any
expenses they incurred in defending the lawsuit and any judgment or settlement
they otherwise would be required to pay.




Since
some members of our board of directors are not residents of the United States
and certain of our assets are located outside of the United States, you may not
be able to enforce any U.S. judgment for claims you may bring against such
directors or assets.




Four
members of our board of directors are primary residents of Australia, the Czech
Republic, the United Arab Emirates or the United Kingdom, and a material portion
of our assets and a substantial portion of the assets of these directors are
located outside the United States. As a result, it may be more difficult for you
to enforce a lawsuit within the United States against these non-U.S. residents
than if they were residents of the United States. Also, it may be more difficult
for you to enforce any judgment obtained in the United States against our assets
or the assets of our non-U.S. resident directors located outside the United
States than if these assets were located within the United States. We cannot
assure you that foreign courts would enforce liabilities predicated on U.S.
federal securities laws in original actions commenced in such foreign
jurisdiction, or judgments of U.S. courts obtained in actions based upon the
civil liability provisions of U.S. federal securities laws.





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 currently beneficially own 28.6%
of our common stock. 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 capital stock in the foreseeable future. You should not buy our stock if
you are expecting to receive cash dividends.


18




Item 1B. Unresolved Staff
Comments.





Not
applicable


19




Item 2.Properties.





We are a
global company with our operational headquarters located in Prague, Czech
Republic and principal offices in Atlanta, Buenos Aires, Cairo, Cologne, Dubai,
London, New York, Singapore, Stockholm, and Toronto.  An index of our
present office locations and types is illustrated below:










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.





In
December 2007, two former consultants of ROO Media Corporation (ROO Media)
(currently KIT Media Corporation) sued that entity together with ROO Group, Inc.
(currently KIT digital, Inc.) and its founder and former Vice Chairman and ROO
Media’s former President and Chief Operating Officer 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
ROO Media. Last year, defendants moved to dismiss the complaint and, in March
2009, the court dismissed all of plaintiffs’ claims except their breach of
contract claim on the grounds that it is based on an alleged oral agreement,
which plaintiffs may be able to prove. Defendants have answered the complaint,
denying liability, and the case is now in discovery. We believe that there is no
merit to this suit, and we intend to continue to defend vigorously.





In
November 2007, the Company’s wholly-owned subsidiary, ROO HD, Inc., now known as
KIT HD, Inc. (“KIT HD”), was named as the defendant in a purported class action
lawsuit entitled Julie Vittengl et al. vs. ROO HD, Inc., 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 the Company’s property in constructive trust for plaintiffs and payment of
plaintiffs’ unpaid wages and costs of suit, both in an unspecified dollar
amount.  KIT HD filed its answer to the complaint in January 2008. In
December 2009, plaintiffs served an amended complaint, dropping the class action
allegations and adding the Company as a defendant; otherwise, it is essentially
the same as its predecessor.  In February 2010, KIT HD and the Company
answered the amended complaint, and the case will shortly enter into discovery.
We believe that the suit is without merit, and the Company and KIT HD intend to
defend themselves vigorously.


20





In May
2009, a former employee of Wurld, Plaintiff, filed suit against ten shareholders
of Wurld, Wurld, ROO HD (n/k/a “KIT HD”), and ROO Group, Inc. (n/k/a the
“Company”), in New York Supreme Court, Albany County, New
York.  Plaintiff seeks to hold the ten largest shareholders of Wurld
liable under Business Corporation Law § 630, for $100 in wages that Wurld
allegedly failed to pay Plaintiff.  She further asserts a variety of
claims based on the allegation that KIT HD’s acquisition of certain assets of
Wurld was a fraudulent conveyance, and that KIT HD is the successor to Wurld and
liable for Wurld’s debts.  Based on these allegations, plaintiff seeks
payment of her wages, the (unspecified) fair market value of her shares of stock
in Wurld, rescission of the asset purchase agreement between Wurld and KIT HD,
plus attorney’s fees.  In October 2009, the court dismissed
plaintiff's claims against three shareholder/defendants on the grounds that BCL
§ 630 does not apply to Wurld because it is not a New York corporation, a
decision that plaintiff is appealing.  KIT HD and the Company have
been served and answered, and the case is now in discovery.  We
believe that this lawsuit is without merit, and if necessary the Company intends
to defend itself vigorously.





Item 4. Reserved





PART II





Item 5.  Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.





Common
Stock Information





Our
common stock is traded on the NASDAQ Global Market and the Prague Stock Exchange
under the symbol KITD.  Prior to August 13, 2009, our shares were
quoted on the OTC Bulletin Board under the symbol KDGL (from March 10, 2009 to
August 12, 2009) and KITD (from May 29, 2008 to March 9, 2009, the date of our
1-for-35 reverse stock split).  Prior to May 29, 2008, when our
corporate name was ROO Group, Inc., our trading symbol was RGRP.





The
following table sets forth the range of high and low trading prices of our
common stock for the periods indicated.





Year Ended December 31,Quarter
                
                2008
                
                
                2009
                
                
                2010High
                
                
                Low
                
                
                High
                
                
                Low
                
                
                High
                
                
                LowFirst
                
                $
                8.58
                
                
                $
                2.10
                
                
                $
                9.25
                
                
                $
                5.95
                
                
                $
                13.12
                
                
                $
                9.47Second
                
                
                14.70
                
                
                
                5.25
                
                
                
                9.00
                
                
                
                7.01Third
                
                
                11.20
                
                
                
                6.65
                
                
                
                10.13
                
                
                
                6.75Fourth
                
                
                9.45
                
                
                
                3.85
                
                
                
                11.63
                
                
                
                9.26





The
prices do not reflect retail mark-ups, mark-downs or commissions, and may not
represent actual transactions. Prices prior to May 9, 2009 have been adjusted
from the actual prices to reflect the 1-for-35 reverse stock split which took
place on that date.





The
closing price of our common stock on March 31, 2010, as reported by NASDAQ, was
$12.88 per share.





As of
March 31, 2010, the company had approximately 330 stockholders of record, and a
greater number of beneficial holders for whom shares are held in a "nominee" or
"street" name.


21





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.





Dividend
Policy





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.





Equity
Repurchases





None.





Item
6.Selected
Financial Data.





Not
required as we are a smaller reporting company.





Item 7.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.





The following Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under “Risk Factors” and elsewhere in this report.  The
following discussion should be read in conjunction with our consolidated
financial statements and related notes thereto included elsewhere in this
report.





Overview





We
provide solutions for managing Internet Protocol (IP)-based video assets. Our
comprehensive software platform enables enterprise customers to acquire, manage
and distribute their video assets across the three screens of the computer
Internet browser, the mobile device and set-top box enabled Internet Protocol
Television (IPTV). We generally deliver our software platform over the Internet
as a subscription service using a software-as-a-service or on-demand model,
while occasionally installing our software onsite for clients as part of an
enterprise license. Our software serves corporate customers across a wide
variety of industries, including media & entertainment, telecommunications,
retail, consumer/packaged goods, automotive and financial services. We integrate
our acquisitions into the cross selling of our product range giving each office
the ability to sell our complete end to end solution. Our clients’ use of the VX
platform range from end-consumer focused video distribution to internal
corporate deployments, including corporate communications, human resources,
training, security and surveillance. As of March 31, 2010, our current client
base includes more than 1,000 enterprise customers across 30+ countries,
including The Associated Press, Best Buy, Bristol-Myers Squibb, Disney-ABC,
FedEx, General Motors, Google, Hewlett-Packard, Home Depot, IMG Worldwide,
Intel,, News Corp, Telefonica, the U.S. Department of Defense, Verizon, and
Vodafone. Our clients usually enter into long-term contracts, and our average
contract length is approximately 24 months.





In
addition to our on-demand software, we provide professional and creative
services including marketing services, creative interface design, branding
strategies, strategic planning and technical/systems integration services, and
provide tens of thousands of syndicated videos. We currently provide our
software solutions, professional and creative services internationally through
our operating headquarters in Prague, Czech Republic, and our principal offices
in Atlanta, Cairo, Cologne, Dubai, Melbourne (Australia), London, New York,
Stockholm and Toronto.


22


Our
success is driven primarily by our ability to attract new customers and to
continue to develop our software suite. Our customers are typically large global
corporations that are seeking software management tools for consumer-focused
video distribution or internal corporate video use, including corporate
communications, human resources and training and security/surveillance. Our
revenue model consists of on-demand software subscription license fees, software
usage fees, upfront license fees and professional services fees. We estimate
over 80% of our current revenues are generated by VX platform-related fees, with
the remainder directly related to professional services. Generally, we invoice
customers on either a monthly or quarterly basis.





Set forth
below is a discussion of the financial condition and results of operations of
our company, KIT digital, Inc. and its consolidated subsidiaries, for the years
ended December 31, 2009 and 2008. The consolidated financial statements include
the accounts of all the wholly-owned subsidiaries of KIT digital, Inc. Included
in the consolidation with Kamera Content AB are Kamera Content AB’s 95%-owned
subsidiary Kamera (S) PTE LTD and its 55%-owned subsidiary Swegypt Company for
Telecommunications (S.A.E.).





As a
result of our management’s review of the 2008 financial statements, and in light
of business changes at that time, we modified the categorization of costs in the
Consolidated Statements of Operations. The expense categories as thereby
modified are utilized below in the Results of Operations. These changes were
made on a prospective basis, with previously reported amounts re-categorized to
conform with current presentation. Given that our business may continue to
change, either by reason of acquisition or otherwise, we may modify our
categorization of revenues or costs in future financial statements with the
object being to present most appropriately our results





Critical
Accounting Policies and Estimates





The
policies discussed below are considered by our management to be critical to an
understanding of our financial statements because their application places the
most significant demands on our management’s judgment, with financial reporting
results relying on our estimation about the effect 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 management believes are most critical in portraying our financial
results and in requiring 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.





Revenue
Recognition.  We recognize revenue in accordance with the
accounting standard, which requires that four basic criteria be met before
revenue can be recognized: (i) persuasive evidence that an arrangement exists;
(ii) the price is fixed or determinable; (iii) collectability is reasonably
assured; and (iv) product delivery has occurred or services have been rendered.
We recognize revenue, net of sales taxes assessed by any governmental
authority.  Revenues are derived principally from the delivery of
digital media solutions and professional services. Our revenues include fees
charged for software-as-a-service (“SaaS”), enterprise licenses, software usage,
storage, software set-up/support services, hardware components, content
delivery, content syndication fees, advertising-based monetization and
professional services.  Revenue is recognized when the product and/or
service has been provided to the customer. We may enter into agreements whereby
we guarantee a minimum service level, or a minimum number of impressions,
click-throughs or other criteria on our software platform’s points of
distribution for a specified period. To the extent these guarantees are not met,
we may defer recognition of the corresponding revenue until guaranteed delivery
levels are achieved. For software related multiple-element arrangements, we have
applied the residual method to determine the amount of license revenues to be
recognized. Under the residual method, if fair value exists for undelivered
elements in a multiple-element arrangement, such fair value of the undelivered
elements is deferred with the remaining portion of the arrangement consideration
recognized upon delivery of the software license or services arrangement. We
allocate the fair values of each element of a software related multiple-element
arrangement based upon its fair value as determined by our vendor specific
objective evidence, with any remaining amount allocated to the software
license.


23





Inventories.  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, 2009 and 2008, our reserves for excess and obsolete inventory were $136 and
$157, respectively.





Allowance for Doubtful
Accounts.  We maintain an allowance for doubtful accounts based
on the expected collectability of our accounts receivable, which requires a
considerable amount of judgment in assessing the creditworthiness of customers
and related aging of past due balances. The allowance for doubtful accounts as
of December 31, 2009 and 2008 was $874 and $571, respectively. Charges for bad
debts recorded on the statement of operations were $461 in 2009 and $143 in
2008. 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.





Impairment of Goodwill. We
evaluate the carrying value of our goodwill annually at the end of December and
whenever events or circumstances make it more likely than not that an impairment
may have occurred. Accounting Standards Codification (“ASC”) 350, Goodwill and Other Intangible
Assets, prescribes a two-step method for determining goodwill impairment.
In the first step, we compare the estimated fair value of each reporting unit to
its carrying amount, including goodwill. If the carrying amount of a reporting
unit exceeds the estimated fair value, step two is completed to determine the
amount of the impairment loss. Step two requires the allocation of the estimated
fair value of the reporting unit to the assets, including any unrecognized
intangible assets, and liabilities in a hypothetical purchase price allocation.
Any remaining unallocated fair value represents the implied fair value of
goodwill, which is compared to the corresponding carrying value of goodwill to
compute the goodwill impairment amount. In 2009 and 2008, we did not record any
goodwill impairment charges.





As part
of our impairment analysis for each reporting unit, we estimate the fair value
of each unit utilizing the income approach and market approach. The income
approach requires management to estimate a number of factors for each reporting
unit, including projected future operating results, economic projections,
anticipated future cash flows, discount rates, and the allocation of shared
service or corporate items. The market approach was used as a test of
reasonableness of the conclusions reached in the income approach. The market
approach estimates fair value using comparable marketplace fair value data from
within a comparable industry grouping.





We also
compared the sum of the estimated fair values of the reporting units to our
total enterprise value as implied by the market value of our equity securities.
This comparison indicated that, in total, our assumptions and estimates were not
unreasonable.





Long-Lived
Assets.  Long-lived assets, including property, plant and
equipment, and intangible assets with determinable lives, are evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying value of the assets may not be fully recoverable. An impairment is
assessed if the undiscounted expected future cash flows generated from an asset
are less than its carrying amount. Impairment losses are recognized for the
amount by which the carrying value of an asset exceeds its fair value. The
estimated useful lives of all long-lived assets are periodically reviewed and
revised if necessary.


24





Results
of Operations





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.





Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008





Revenue. Consolidated revenue
increased by $23,883 from $23,401 for the year ended December 31, 2008 to
$47,284 for the year ended December 31, 2009, an increase of 102%. 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.





Variable
and Direct Third Party Costs





Cost of Goods and Service.
These costs increased by $12,739 from $2,845 for the year ended December 31,
2008 to $15,584 for the year ended December 31, 2009. These costs represent the
costs of equipment and services for the supply of digital media and IPTV
solutions, services and components. The increase is primarily due to our
re-categorization of expense categories in 2008, and the full year expense in
2009 compared to a partial year expense from the acquisition of KIT digital
Czech in October 2008.





Hosting, Delivery and
Reporting. These costs decreased by $477 from $2,024 for the year ended
December 31, 2008 to $1,547 for the year ended December 31, 2009 a decrease of
24%. These costs decreased primarily due to the full year effect of the
establishment of an internal datacenter during 2008 which reduced our reliance
on third party suppliers as well as the reduction in expense in CDN streaming
and external data storage fees.





Content Costs. Content costs
decreased by $1,041 from $2,419 for the year ended December 31, 2008 to $1,378
for the year ended December 31, 2009, a decrease of 43%. The decrease is
primarily due to the reduction of the use of content in integrated sales
activity and therefore the subsequent reduction in usage and the level of
minimum guarantees paid for content.




Direct Third Party Creative
Production Costs. Direct third party creative production costs increased
by $102 from $3,109 for the year ended December 31, 2008 to $3,211 for the year
ended December 31, 2009.




Selling,
General and Administrative Expenses





Compensation, Travel and Associated
Costs (Including Non-Cash Stock-Based Compensation). These costs
decreased by $4,057 from $20,366 for the year ended December 31, 2008 to $16,309
for the year ended December 31, 2009, a decrease of 20%. The decrease was
primarily due to the continuing cost cutting measures as we integrate the
acquired businesses and some of these costs are included in restructuring and
integration expenses, which is offset in part by increases due to the current
acquisitions in October 2009. The non-cash stock-based compensation expense
decreased by $2,947, from $4,869 for the year ended December 31, 2008 to $1,922
for the year ended December 31, 2009 primarily due to the settlement agreements
of Petty and Smyth in the previous year.





Legal, Accounting, Audit and Other
Professional Services Fees. These expenses decreased by $130 from $1,227
for the year ended December 31, 2008 to $1,097 for the year ended December 31,
2009, a decrease of 11%. These costs decreased primarily due to a decrease in
legal fees as we have moved to a monthly retainer arrangement and the addition
of the merger and acquisitions line item that includes legal and other costs in
2009.





Office, Marketing and Other Corporate
Costs. These expenses increased by $1,620 from $3,511 for the year ended
December 31, 2008 to $5,131 for the year ended December 31, 2009, an increase of
46%. The increase was primarily due to the full year expense of the acquisition
of Kamera in May 2008, KIT digital Czech acquired in October 2008 and the
acquisitions of FeedRoom and Nunet acquired in October 2009.


25





Merger and Acquisition and Investor
Relation Expenses. These expenses increased by $2,079 from $427 for the
year ended December 31, 2008 to $2,506 for the year ended December 31, 2009, an
increase of 487%. The increase is primarily due to the change in treatment of
merger and acquisition expenses which were previously added to the cost of
acquisitions in the previous year pursuant to the new accounting standard on
business combinations effective January 1, 2009 for the
Company.





Depreciation and Amortization.
Depreciation and amortization expense increased 137% or $2,431 from $1,771 for
the year ended December 31, 2008 to $4,202 for the year ended December 31, 2009.
The increase is primarily due to the full year effect of the acquisitions of
Kamera in May 2008, KIT digital Czech in October 2008, and Morpheum in September
2008 and the acquisitions of FeedRoom and Nunet in October 2009.




Restructuring Charges. These
expenses decreased by $519 from $3,068 for the year ended December 31, 2008 to
$2,549 for the year ended December 31, 2009, a decrease of 17%. Restructuring
charges consist of employee termination costs, contract settlements and facility
closing costs. These costs arose from the restructuring of acquisitions during
the year.





Integration Expenses. These
expenses increased by $3,318 from $1,111 for the year ended December 31, 2008 to
$4,429 for the year ended December 31, 2009, an increase of 299%. Integration
expenses consist of IT overlap, recruiting costs, relocation of headquarters,
corporate rebranding activities due to acquisitions and relocations during the
year.





Impairment of Property and
Equipment. Impairment of property and equipment was $229 for the year
ended December 31, 2008. The impairment related to the abandonment of assets due
to the downsizing of our London office.





Impairment of Intangible
Asset. Impairment of intangible asset was $500 for the year ended
December 31, 2009. We determined that customer lists from the acquisition of
Kamera in May 2008 are impaired and therefore recorded a reduction of $500 to
the intangible asset.




Interest Income. Interest
income decreased by $114 from $164 for the year ended December 31, 2008 to $50
for the year ended December 31, 2009, a decrease of 70%. This decrease was
primarily due to fluctuations in the level of our cash and cash equivalents and
the decrease in interest rates.





Interest Expense. Interest
expense increased by $291 from $228 for the year ended December 31, 2008 to $519
for the year ended December 31, 2009, an increase of 128%. This increase was due
to the issuance of $1,500 of a senior secured note in November 2008 subsequently
repaid in August 2009 and the full year addition of debt and capital lease
obligations acquired in the acquisition of KIT digital Czech in October
2008




Amortization of Deferred Financing
Costs and Debt Discount. Amortization of deferred financing costs and
debt discount was $1,175 for the year ended December 31, 2009 and $110, for the
year ended December 31, 2008. These costs result from the issuance of $1,500 of
a senior secured note in November 2008 and interim convertible promissory notes
payable of $3,350 to KIT Media Ltd. and $350 to Granahan McCourt Capital, LLC
during the quarters ended June 30, 2009 and September 30, 2009. The convertible
promissory notes were repaid from the proceeds of the public offering in August
2009 and hence any remaining deferred financing costs or debt discount was
written off.





Derivative expense. Derivative
expense was $6,015 for the year ended December 31, 2009. Under ASC 815-40, the
company recorded an increase in the fair value of warrants containing reset
provisions.





Other Income/(Expense). Other
income/(expense) changed by a net $41. Other income was $31 for the year ended
December 31, 2008 as compared to other expense of $10 for the year
ended December 31, 2009.




Registration Rights Liquidated
Damages. Registration rights liquidated damages were $0 for the year
ended December 31, 2009 and $117 for the year ended December 31,
2008.


26





Net Loss Available to Common
Shareholders. As a result of the factors described above, we reported net
loss available to common shareholders of $19,942 for the year ended December 31,
2009 compared to net loss of $18,975 for the year ended December 31, 2008, a
decrease of $658, or 3%.




Liquidity
and Capital Resources





As of
December 31, 2009, we had cash and cash equivalents of $6,791 and a working
capital deficit of approximately $15,097 which if reduced for the acquisition
liabilities for Visual that can be paid in stock of $1,075 and for the
derivative liability which has a non-cash valuation of $21,314 we have a working
capital surplus of $7,292. Since December 31, 2009 until the date of this report
we have sold 5,102,868 shares of common stock and have received approximately
$52,049 in net proceeds from these sales (see subsequent events). Management
anticipates that it has enough cash reserves and will generate sufficient cash
flows from its operating activities to meet its capital
requirements.





Net cash
used in operating activities was $13,618 for the year ended December 31, 2009
compared to $12,816 for the year ended December 31, 2008, an increase of $802 or
6%.





Net cash
used by investing activities was $9,723 for the year ended December 31, 2009
compared to $11,715 for the year ended December 31, 2008, a decrease in net cash
used in investing activities of $1,992, or 17%. In 2009, this primarily
consisted of net cash paid for the new acquisitions or earn-out payments for
existing acquisitions of $6,998, purchase of assets of $1,078 and purchase of
software of $1,500.





Net cash
provided by financing activities was $24,576 for the year ended December 31,
2009 compared to $20,352 for the year ended December 31, 2008. In 2009, this
primarily consisted of net proceeds of $26,082 from the August 2009 private
placement.




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, 2009 and 2008. We cannot assure you
that future inflation will not have an adverse impact on our operating results
and financial condition.





Recently
Issued Accounting Standards





In
December 2007, the FASB issued a new accounting standard, which establishes
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary, which is sometimes referred to as
minority interest, is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements. Among
other requirements, this standard requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the non-controlling interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. We adopted the
provisions of this new accounting standard on January 1, 2009. We implemented
these changes, which led to changes in the presentation of prior period
results.


27


In May
2009, the FASB issued a new accounting standard on subsequent events, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. This accounting standard establishes: 1) the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements; 2) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements; and 3) the disclosures that an entity should
make about events or transactions that occurred after the balance sheet date.
This accounting standard also requires disclosure of the date through which an
entity has evaluated subsequent events. We adopted the provisions of this
accounting standard on June 30, 2009 and it had not impact on our consolidated
financial position or results of operation.





In June
2009, the FASB issued the accounting standard “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles—a
replacement of FASB Statement No. 162”, which establishes the FASB Accounting
Standards CodificationTM (“Codification”) as the source of authoritative U.S.
Generally Accepted Accounting Principles (GAAP) recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. We adopted the
provisions of this accounting standard for the interim period
ended September 30, 2009. The implementation of this accounting standard
did not have any impact on our consolidated financial position and results of
operations upon adoption.





In April
2009, the FASB also issued new guidelines on the initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination which provides
that an acquirer shall recognize an asset acquired or a liability assumed in a
business combination that arises from a contingency at fair value, at the
acquisition date, if the acquisition-date fair value of that asset or liability
can be determined during the measurement period. New guidance is also provided
in the event that the fair value of an asset acquired or liability assumed
cannot be determined during the measurement period. An acquirer shall also
develop a systematic and rational basis for subsequently measuring and
accounting for assets and liabilities arising from contingencies and also
provides for the disclosure requirements. We adopted the provisions of the new
accounting standards on business combinations on January 1, 2009; acquisitions
after this are accounted for using this standard.





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





In
October 2009, the FASB issued Accounting Standards Update on Certain Revenue
Arrangements That Include Software Elements, which changes the accounting model
for revenue arrangements that include both tangible products and software
elements. Tangible products containing both software and non-software components
that function together to deliver the product’s essential functionality will no
longer be within the scope of Software Revenue Recognition. This update is
effective for fiscal years beginning on or after June 15, 2010 and early
adoption is permitted. We are currently assessing the impact of
adoption of this update.





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 customer revenues with associated customer delivery costs. We
invoice our international customers primarily in U.S. dollars, British pounds,
Australian dollars, Euros, Swedish kronor and Czech koruna.





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.


28





Financial
instruments which potentially subject us to concentrations of credit risk
consist principally of cash and cash equivalents and trade accounts receivable.
We endeavor to place our cash and cash equivalents with high credit quality
institutions to limit credit exposure. We have obtained callable cash collateral
wherever we have identified 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.





Not
applicable.





Item 9A(T).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.





Changes
in Internal Control Over Financial Reporting





During
the quarter ended December 31, 2009, there were no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





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, 2009.  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 conclude that our internal control over financial reporting is effective
based on those criteria as of December 31, 2009.


29





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.


30


PART III





Items
10, 11, 12, 13 and 14.





Part III
(Items 10 through 14) is omitted since we expect to file with the U.S.
Securities and Exchange Commission within 120 days after the close of the fiscal
year ended December 31, 2009, a definitive proxy statement pursuant to
Regulation 14A under the Securities Exchange Act of 1934 which involves the
election of directors.  If for any reason such a statement is not
filed within such a period, this report will be appropriately
amended.


31





PART IV





Item 15.Exhibits and Financial
Statement Schedules.





(a)(1)
and (2):  The response to this portion of Item 15 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.(1)2.2
              
              Stock
      Purchase Agreement dated as of March 11, 2004 by and among the Company and
      the shareholders of Reality Group Pty Ltd.(2)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.(3)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.(4)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.(5)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.(6)2.7
              
              Share
      Purchase Agreement dated October 28, 2005 by and among ROO Broadcasting
      Limited and the Sellers thereto.(6)2.8
              
              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).(7)2.9
              
              Agreement
      and Plan of Merger, dated September 30, 2009, between KIT digital, Inc.,
      KIT Acquisition Corporation, The FeedRoom, Inc. and certain stockholders
      of The FeedRoom, Inc.(34)2.10
              
              Share
      Purchase Agreement, dated October 5, 2009, between International
      Management Group GmbH and KIT digital, Inc. for the acquisition of Nunet
      AG.(35)3.1
              
              Certificate
      of Incorporation of Virilitec Industries, Inc.(8)3.2
              
              Certificate
      of Amendment of Certificate of Incorporation of Virilitec Industries, Inc.
      filed with the State of Delaware on October 31,
2003.(9)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.(9)3.4
              
              Certificate
      of Designation, Powers, Preferences and Rights of Series A Preferred
      Stock, filed with the State of Delaware on March 9,
    2005.(10)


32





3.5
                
                Certificate
      of Designation, Powers, Preferences and Rights of Series A Preferred
      Stock, filed with the State of Delaware on March 9,
    2005.(10)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.(11)3.7
                
                Certificate
      of Amendment to Amended Certificate of Incorporation, effective as of
      October 3, 2005.(11)3.8
                
                Certificate
      of Amendment to the Certificate of Incorporation filed with the Delaware
      Secretary of State on May 19, 2008.(12)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.(33)3.10
                
                By-laws(8)3.11
                
                Amendment
      to By-laws.(13)4.1
                
                Stock
      Purchase Warrant issued to AJW Offshore, Ltd., dated September 10,
      2004.(14)4.2
                
                Stock
      Purchase Warrant issued to AJW Qualified Partners, LLC, dated September
      10, 2004.(14)4.3
                
                Stock
      Purchase Warrant issued to AJW Partners, LLC, dated September 10,
      2004.(14)4.4
                
                Stock
      Purchase Warrant issued to New Millennium Capital Partners II, LLC, dated
      September 10, 2004.(14)4.5
                
                Stock
      Purchase Warrant issued to AJW Offshore, Ltd., dated November 23,
      2004.(15)10.1
                
                Employment
      Agreement with Robert Petty, dated April 1, 2004.(16)10.2
                
                Employment
      Agreement with Robin Smyth, dated April 1, 2004.(16)10.3
                
                Employment
      Agreement with Robert Petty, dated November 1, 2004.(9)10.4
                
                Employment
      Agreement with Robin Smyth, dated November 1, 2004.(9)10.5
                
                Sublease
      dated April 1, 2005.(17)10.6
                
                AT&T
      Intelligent Content Distribution Service Agreement, dated August 16,
      2001.(9)10.7
                
                Network
      Services Agreement with Speedera Networks, Inc. dated June 1,
      2004.(9)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.(14)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.(18)10.10
                
                Note
      Purchase Agreement, made as of May 18, 2005, by and between ROO Group,
      Inc. and Robert
Petty.(19)


33





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.(20)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.(21)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.(21)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.(22)10.15
                                                                            
                                                                            Common
      Stock Purchase Agreement dated August 19, 2005 among ROO Group, Inc. and
      the purchasers listed on Exhibit A thereto.(23)10.16
                                                                            
                                                                            Registration
      Rights Agreement dated August 19, 2005 among ROO Group, Inc. and the
      purchasers listed on Schedule 1 thereto.(23)10.17
                                                                            
                                                                            Escrow
      Agreement dated August 19, 2005 among ROO Group, Inc., the purchasers
      signatory thereto and the escrow agent.(23)10.18
                                                                            
                                                                            Common
      Stock Purchase Agreement dated October 20, 2005 among ROO Group, Inc. and
      the purchasers listed on Exhibit A thereto.(24)10.19
                                                                            
                                                                            Registration
      Rights Agreement dated October 20, 2005 among ROO Group, Inc. and the
      purchasers listed on Schedule 1 thereto.(24)10.20
                                                                            
                                                                            Escrow
      Agreement dated October 20, 2005 among ROO Group, Inc., the purchasers
      signatory thereto and the escrow agent.(24)10.21
                                                                            
                                                                            Common
      Stock Purchase Agreement dated December 28, 2005 among ROO Group, Inc. and
      the purchasers listed on Exhibit A thereto.(25)10.22
                                                                            
                                                                            Escrow
      Agreement dated December 28, 2005 among ROO Group, Inc., the purchasers
      signatory thereto and the escrow agent.(25)10.23
                                                                            
                                                                            Registration
      Rights Agreement dated December 28, 2005 among ROO Group, Inc. and the
      purchasers listed on Schedule 1 thereto.(25)10.24
                                                                            
                                                                            Securities
      Purchase Agreement dated August 18, 2006 among ROO Group, Inc. and the
      purchasers listed on Exhibit A thereto.(26)10.25
                                                                            
                                                                            Escrow
      Agreement dated August 18, 2006 among ROO Group, Inc., the purchasers
      signatory thereto and the escrow agent.(26)10.26
                                                                            
                                                                            Securities
      Purchase Agreement dated November 14, 2006 among ROO Group, Inc. and the
      Purchasers listed on Exhibit A thereto.(27)10.27
                                                                            
                                                                            Escrow
      Agreement dated November 14, 2006 among ROO Group, Inc., the purchasers
      signatory thereto.(27)10.28
                                                                            
                                                                            Securities
      Purchase Agreement, dated May 4, 2007, among ROO Group, Inc., the
      purchasers signatory
thereto.(28)


34





10.29
                                                                
                                                                Escrow
      Agreement, dated May 4, 2007, among ROO Group, Inc., the purchasers
      signatory.(28)10.30
                                                                
                                                                Asset
      Purchase Agreement, dated July 12, 2007, by and among ROO HD, Inc., Wurld
      Media, Inc., Gregory Kerber, and Kirk Feathers.(29)10.31
                                                                
                                                                Agreement,
      dated January 25, 2007, by and among ROO Group, Inc. and News
      Corporation.(30)10.32
                                                                
                                                                Securities
      Purchase Agreement dated May 8, 2008 among ROO Group, Inc., the purchasers
      signatory thereto.(31)10.33
                                                                
                                                                Stockholders
      Agreement, dated September 30, 2009, by and among KIT digital, Inc.,
      Kaleil Isaza Tuzman and certain stockholders of The FeedRoom,
      Inc.(34)10.34
                                                                
                                                                Form
      of Convertible Promissory Note (Purchase) made by KIT digital, Inc. to
      International Management Group GmbH in the principal amount of EUR
      1,662,500.(35)10.35
                                                                
                                                                Convertible
      Promissory Note (Indemnity) made by KIT digital, Inc. to International
      Management Group GmbH in the principal amount of EUR
      58,250.(35)21.1
                                                                
                                                                Subsidiaries
      of the Company.(32)*23.1
                                                                
                                                                Consent
      of Grant Thornton LLP, independent registered public accounting
      firm.*31.1
                                                                
                                                                Certification
      of the Chairman and Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*31.2
                                                                
                                                                Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*32.1
                                                                
                                                                Certification
      of the Chairman and Chief Executive Officer pursuant to 18
      U.S.C.  Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.*32.2
                                                                
                                                                Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.







*
            Filed
      herewith.





(1)
            Incorporated
      by reference to Form 8-K, filed with the U.S. Securities and Exchange
      Commission (the “SEC”) on December 18,
2003.





(2)
            Incorporated
      by reference to Form 8-K, filed with the SEC on May 17,
    2004.





(3)
            Incorporated
      by reference to Form 8-K, filed with the SEC on June 16,
    2004.





(4)
            Incorporated
      by reference to Form 8-K, filed with the SEC on September 22,
      2004.





(5)
            Incorporated
      by reference to Form 8-K/A, filed with the SEC on November 5,
      2004.





(6)
            Incorporated
      by reference to Form 8-K/A, filed with the SEC on November 2,
      2005.





(7)
            Incorporated
      by reference to Form 8-K, filed with the SEC on October 9,
      2008.


35





(8)
            Incorporated
      by reference to Form 10-SB (File No. 000-25659), filed with the SEC on
      March 29, 1999.





(9)
            Incorporated
      by reference to Form SB-2 (File No. 333,120605), filed with the SEC on
      November 18, 2004.





(10)
            Incorporated
      by reference to Form 8-K, filed with the SEC on March 14,
      2005.





(11)
            Incorporated
      by reference to Form 8-K, filed with the SEC on October 4,
      2005.





(12)
            Incorporated
      by reference to Form 8-K, filed with the SEC on June 2,
    2008.





(13)
            Incorporated
      by reference to Form 8-K, filed with the SEC on June 1,
    2009.





(14)
            Incorporated
      by reference to Form 8-K, filed with the SEC on September 16,
      2004.





(15)
            Incorporated
      by reference to Form 8-K, filed with the SEC on November 30,
      2004.





(16)
            Incorporated
      by reference to Form 10-QSB, filed with the SEC on August 16,
      2004.





(17)
            Incorporated
      by reference to Form 8-K, filed with the SEC on June 13,
    2005.





(18)
            Incorporated
      by reference to Form 8-K, filed with the SEC on May 12,
    2005.





(19)
            Incorporated
      by reference to Form 8-K, filed with the SEC on May 24,
    2005.





(20)
            Incorporated
      by reference to Form 8-K, filed with the SEC on July 22,
    2005.





(21)
            Incorporated
      by reference to Form 8-K, filed with the SEC on July 23,
    2005.





(22)
            Incorporated
      by reference to Form 8-K, filed with the SEC on August 24,
      2005.





(23)
            Incorporated
      by reference to Form 8-K, filed with the SEC on August 25,
      2005.





(24)
            Incorporated
      by reference to Form 8-K, filed with the SEC on October 26,
      2005.





(25)
            Incorporated
      by reference to Form 8-K, filed with the SEC on December 30,
      2005.





(26)
            Incorporated
      by reference to Form 8-K, filed with the SEC on August 24,
      2006.





(27)
            Incorporated
      by reference to Form 8-K, filed with the SEC on November 20,
      2006.





(28)
            Incorporated
      by reference to Form 8-K, filed with the SEC on May 10,
    2007.





(29)
            Incorporated
      by reference to Form 8-K, filed with the SEC on July 18,
    2007.





(30)
            Incorporated
      by reference to Form 8-K/A, filed with the SEC on March 14,
      2005.





(31)
            Incorporated
      by reference to Form 8-K, filed with the SEC on May 8,
    2008.





(32)
            Incorporated
      by reference to 2008 Form 10-K, filed with the SEC on April 15,
      2009.





(33)
            Incorporated
      by reference to Form 8-K, filed with the SEC on March 16,
      2009.





(34)
            Incorporated
      by reference to Form 8-K, filed with the SEC on October 6,
      2009.


36





(35)
            Incorporated
      by reference to Form 8-K, filed with the SEC on October 9,
      2006.


37


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.




Date:  April
      2, 2010
              KIT
      DIGITAL, INC.By:
              /s/ Kaleil Isaza
      TuzmanKaleil
      Isaza Tuzman
                Chairman
      and Chief Executive Officer
                (Principal
      Executive Officer)




By:
              /s/ Robin
      SmythRobin
      Smyth
                Chief
      Financial Officer
                (Principal
      Financial and Accounting
Officer)




As of
March 31, 2010, the company had approximately 330 stockholders of record, and a
greater number of beneficial holders for whom shares are held in a "nominee" or
"street" name.


Name
                                              
                                              Title
                                              
                                              DateChairman
      and Chief Executive Officer/s/ Kaleil
      Isaza Tuzman
                                              
                                              (Principal
      Executive Officer)
                                              
                                              April
      2, 2010Kaleil
      Isaza Tuzman/s/
      Gavin
      Campion
                                              
                                              President
      and Director
                                              
                                              April
      2, 2010Gavin
      CampionChief
      Financial Officer and Director/s/ Robin
      Smyth
                                              
                                              (Principal
      Financial and Accounting Officer)
                                              
                                              April
      2, 2010Robin
      Smyth/s/ Kamal
      El-Tayara
                                              
                                              Director
                                              
                                              April
      2, 2010Kamal
      El-Tayara/s/  Steven
      G. Felsher
                                              
                                              Director
                                              
                                              April
      2, 2010Steven
      G. Felsher/s/
      Daniel Hart
                                              
                                              Director
                                              
                                              April
      2, 2010Daniel
      Hart/s/ Lars
      Kroijer
                                              
                                              Director
                                              
                                              April
      2, 2010Lars
      Kroijer/s/ Wayne
      Walker
                                              
                                              Director
                                              
                                              April
      2, 2010Wayne
      Walker
  38


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, 2009 and December 31,
    2008
              F-4For
      the periods ended December 31, 2009 and 2008:Consolidated
      statements of operations and comprehensive loss
              F-5Consolidated
      statements of stockholders' equity
              F-6Consolidated
      statements of cash flows
              F-8Notes
      to consolidated financial statements
              F-10





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, 2009, and the related consolidated statements of
operations and comprehensive loss, stockholders’ equity and cash flows for the
year then ended.  These financial statements are the responsibility of
the Company’s management.  Our responsibility is to express an opinion
on these financial statements based on our audit.
 
 We
conducted our audit 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 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 financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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, 2009, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
 
 As
discussed in the notes to the consolidated financial  statements, the
Company changed its method of accounting for certain warrants effective January
1, 2009 pursuant to new accounting standard on “Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock”. In
addition, the Company changed its method of accounting for business combinations
effective January 1, 2009 pursuant to new accounting standard on “Business
Combinations”.
 
 
 New York,
New York
 April 2,
2010
 F-2




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 sheet of KIT digital, Inc. and
Subsidiaries as of December 31, 2008, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity, and cash
flows for the year 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
audit.
 
 We
conducted our audit 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 audit provides 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 the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
 
  /s/
      MSPCCertified
      Public Accountants and Advisors,New
      York, New York
              A
      Professional CorporationApril
      8, 2009


F-3


KIT DIGITAL, INC. AND
SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Amounts
in Thousands, Except Share Data)


December 31,2009
                
                
                2008Assets:Current
      assets:Cash
      and cash equivalents
                
                $
                6,791
                
                
                $
                5,878Investment
                
                
                217
                
                
                
                -Accounts
      receivable, net
                
                
                17,258
                
                
                
                8,331Unbilled
      revenue
                
                
                2,960
                
                
                
                -Inventory,
      net
                
                
                708
                
                
                
                2,130Other
      current assets
                
                
                2,205
                
                
                
                1,539Total
      current assets
                
                
                30,139
                
                
                
                17,878Property
      and equipment, net
                
                
                5,697
                
                
                
                2,928Software,
      net
                
                
                3,436
                
                
                
                2,265Customer
      list, net
                
                
                4,650
                
                
                
                2,988Goodwill
                
                
                36,492
                
                
                
                15,167Other
      assets
                
                
                -
                
                
                
                83Total
      assets
                
                $
                80,414
                
                
                $
                41,309Liabilities
      and Stockholders' Equity:Current
      liabilities:Bank
      overdraft
                
                $
                1,623
                
                
                $
                1,456Capital
      lease and other obligations
                
                
                1,218
                
                
                
                395Secured
      loans payable
                
                
                1,321
                
                
                
                966Senior
      secured notes payable, net of debt discount
                
                
                -
                
                
                
                950Accounts
      payable
                
                
                6,647
                
                
                
                5,775Accrued
      expenses
                
                
                8,501
                
                
                
                2,240Income
      tax payable
                
                
                312
                
                
                
                160Deferred
      tax liability
                
                
                580
                
                
                
                -Acquisition
      liability – Kamera
                
                
                -
                
                
                
                3,000Acquisition
      liability – Visual
                
                
                1,075
                
                
                
                2,218Derivative
      liability
                
                
                21,314
                
                
                
                -Other
      current liabilities
                
                
                3,455
                
                
                
                3,818Total
      current liabilities
                
                
                46,046
                
                
                
                20,978Capital
      lease and other obligations, net of current
                
                
                377
                
                
                
                949Secured
      loans payable, net of current
                
                
                -
                
                
                
                236Acquisition
      liability - Visual, net of current
                
                
                -
                
                
                
                1,075Total
      liabilities
                
                
                46,423
                
                
                
                23,238Stockholders'
      Equity:Common
      stock, $0.0001 par value: authorized 30,000,000 shares; issued and
      outstanding 10,844,853 and 4,183,280, respectively
                
                
                1
                
                
                
                -Additional
      paid-in capital
                
                
                128,263
                
                
                
                101,057Accumulated
      deficit
                
                
                (93,943
                )
                
                
                (82,499
                )Accumulated
      other comprehensive loss
                
                
                (330
                )
                
                
                (250
                )Total
      stockholders' equity
                
                
                33,991
                
                
                
                18,308Non-controlling
      interest
                
                
                -
                
                
                
                (237
                )Total
      equity
                
                
                33,991
                
                
                
                18,071Total
      liabilities and stockholders' equity
                
                $
                80,414
                
                
                $
                41,309





The
accompanying notes are an integral part of these consolidated financial
statements.


F-4




KIT DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


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




Year ended
                  December 31,2009
                
                
                2008Revenue
                
                $
                47,284
                
                
                $
                23,401Variable
      and direct third party costs:Cost
      of goods and services
                
                
                15,584
                
                
                
                2,845Hosting,
      delivery and reporting
                
                
                1,547
                
                
                
                2,024Content
      costs
                
                
                1,378
                
                
                
                2,419Direct
      third party creative production costs
                
                
                3,211
                
                
                
                3,109Total
      variable and direct third party costs
                
                
                21,720
                
                
                
                10,397Gross
      profit
                
                
                25,564
                
                
                
                13,004Selling,
      general and administrative expenses:Compensation,
      travel and associated costs (including non-cash stock-based compensation
      of $1,922 and $4,869, respectively)
                
                
                16,309
                
                
                
                20,366Legal,
      accounting, audit and other professional service fees
                
                
                1,097
                
                
                
                1,227Office,
      marketing and other corporate costs
                
                
                5,131
                
                
                
                3,511Merger
      and acquisition and investor relations expenses
                
                
                2,506
                
                
                
                427Depreciation
      and amortization
                
                
                4,202
                
                
                
                1,771Restructuring
      charges
                
                
                2,549
                
                
                
                3,068Integration
      expenses
                
                
                4,429
                
                
                
                1,111Impairment
      of property and equipment
                
                
                -
                
                
                
                229Impairment
      of intangible assets
                
                
                500
                
                
                
                -Total
      selling, general and administrative expenses
                
                
                36,723
                
                
                
                31,710Loss
      from operations
                
                
                (11,159
                )
                
                
                (18,706
                )Interest
      income
                
                
                50
                
                
                
                164Interest
      expense
                
                
                (519
                )
                
                
                (228
                )Amortization
      of deferred financing costs and debt discount
                
                
                (1,175
                )
                
                
                (110
                )Derivative
      expense
                
                
                (6,015
                )
                
                
                -Other
      income (expense), net
                
                
                (10
                )
                
                
                31Registration
      rights liquidated damages
                
                
                -
                
                
                
                (117
                )Net
      loss before income taxes
                
                
                (18,828
                )
                
                
                (18,966
                )Income
      tax expense
                
                
                (1,114
                )
                
                
                (116
                )Net
      loss before non-controlling interest
                
                
                (19,942
                )
                
                
                (19,082
                )Non-controlling
      interest
                
                
                -
                
                
                
                107Net
      loss available to common shareholders
                
                $
                (19,942
                )
                
                $
                (18,975
                )Basic
      and diluted net loss per common share
                
                $
                (3.03
                )
                
                $
                (7.55
                )Basic
      and diluted weighted average common shares outstanding
                
                
                6,573,970
                
                
                
                2,512,415Comprehensive
      loss:Net
      loss
                
                $
                (19,942
                )
                
                $
                (18,975
                )Foreign
      currency translation
                
                
                (97
                )
                
                
                (304
                )Change
      in unrealized gain on investments, net
                
                
                17
                
                
                
                -Comprehensive
      loss
                
                $
                (20,022
                )
                
                $
                (19,279
                )





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)





Series
      A
                                        Preferred
                                        Shares
                                      
                                      
                                      Series
      A
                                        Preferred
                                        Shares
                                        Par
                                        Value
                                      
                                      
                                      Common
                                        Stock
                                      
                                      
                                      Common
                                        Stock
                                        Par
                                        ValueBalance
      - January 1, 2008
                                      
                                      
                                      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
                                      
                                      
                                      $
                                      —Cumulative
      adjustment for derivative liabilities
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Balance
      – January 1, 2009
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      4,183,280
                                      
                                      
                                      
                                      —Issue
      of stock in public offering
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      4,004,000
                                      
                                      
                                      
                                      1Issue
      of stock for repayment of loans
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      34,733
                                      
                                      
                                      
                                      —Issue
      of stock for exercise of stock options
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      14,057
                                      
                                      
                                      
                                      —Issue
      of stock for exercise of warrants
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      148,847
                                      
                                      
                                      
                                      —Issue
      of stock for acquisitions
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2,411,357
                                      
                                      
                                      
                                      —Acquisition
      of non-controlling interest
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Debt
      discount on notes
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Issue
      of stock for compensation
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      35,376
                                      
                                      
                                      
                                      —Issue
      of stock for services
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      9,235
                                      
                                      
                                      
                                      —Round
      up due to the 1 for 35 reverse split
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      3,968
                                      
                                      
                                      
                                      —Stock-based
      compensation
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Foreign
      currency translation adjustment
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Fair
      market value adjustment for available for sale securities
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Net
      loss
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Balance
      - December 31, 2009
                                      
                                      
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      
                                      10,844,853
                                      
                                      
                                      $
                                      1





The
accompanying notes are an integral part of these consolidated financial
statements.


F-6


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, 2008
                
                $
                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
                )
                
                $
                18,308Cumulative
      adjustment for derivative liabilities
                
                
                (24,235
                )
                
                
                8,498
                
                
                
                —
                
                
                
                (15,737
                )Balance
      – January 1, 2009
                
                
                76,822
                
                
                
                (74,001
                )
                
                
                (250
                )
                
                
                2,571Issue
      of stock in public offering
                
                
                26,081
                
                
                
                —
                
                
                
                —
                
                
                
                26,082Issue
      of stock for repayment of loans
                
                
                301
                
                
                
                
                
                
                
                
                
                
                
                301Issue
      of stock for exercise of stock options
                
                
                39
                
                
                
                —
                
                
                
                —
                
                
                
                39Issue
      of stock for exercise of warrants
                
                
                1,220
                
                
                
                —
                
                
                
                —
                
                
                
                1,220Issue
      of stock for acquisitions
                
                
                22,281
                
                
                
                —
                
                
                
                —
                
                
                
                22,281Acquisition
      of non-controlling interest
                
                
                (867
                )
                
                
                —
                
                
                
                —
                
                
                
                (867
                )Debt
      discount on notes
                
                
                517
                
                
                
                —
                
                
                
                —
                
                
                
                517Issue
      of stock for compensation
                
                
                261
                
                
                
                —
                
                
                
                —
                
                
                
                261Issue
      of stock for services
                
                
                90
                
                
                
                —
                
                
                
                —
                
                
                
                90Round
      up due to the 1 for 35 reverse split
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Stock-based
      compensation
                
                
                1,518
                
                
                
                —
                
                
                
                —
                
                
                
                1,518Foreign
      currency translation adjustment
                
                
                —
                
                
                
                —
                
                
                
                (97
                )
                
                
                (97
                )Fair
      market value adjustment for available for sale securities
                
                
                —
                
                
                
                —
                
                
                
                17
                
                
                
                17Net
      loss
                
                
                —
                
                
                
                (19,942
                )
                
                
                —
                
                
                
                (19,942
                )Balance
      - December 31, 2009
                
                $
                128,263
                
                
                $
                (93,943
                )
                
                $
                (330
                )
                
                $
                33,991





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 31,2009
                
                
                2008Operating
      activities:Net
      loss
                
                $
                (19,942
                )
                
                $
                (18,975
                )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Provision
      for doubtful accounts
                
                
                461
                
                
                
                143Depreciation
      and amortization
                
                
                1,847
                
                
                
                729Amortization
      of intangible assets
                
                
                2,355
                
                
                
                1,042Amortization
      of deferred financing costs
                
                
                108
                
                
                
                18Amortization
      of debt discount
                
                
                1,067
                
                
                
                92Impairment
      of property and equipment
                
                
                —
                
                
                
                229Impairment
      of intangible assets
                
                
                500
                
                
                
                —Derivative
      expense
                
                
                6,015
                
                
                
                —Non-cash
      stock-based compensation
                
                
                1,922
                
                
                
                4,733Issuance
      of warrants for settlement of separation agreements
                
                
                -
                
                
                
                1,038Non-cash
      stock for services
                
                
                90
                
                
                
                11Gain
      on bargain purchase
                
                
                (26
                )
                
                
                —Non-controlling
      interest in subsidiaries
                
                
                —
                
                
                
                (107
                )Changes
      in assets and liabilities:Accounts
      receivable
                
                
                (7,002
                )
                
                
                (2,133
                )Unbilled
      revenue
                
                
                (2,960
                )
                
                
                —Inventories
                
                
                1,475
                
                
                
                (738
                )Other
      assets
                
                
                117
                
                
                
                585Accounts
      payable
                
                
                (481
                )
                
                
                (512
                )Accrued
      expenses
                
                
                1,770
                
                
                
                310Income
      tax payable
                
                
                103
                
                
                
                171Other
      liabilities
                
                
                (1,037
                )
                
                
                548Total
      adjustments
                
                
                6,324
                
                
                
                6,159Net
      cash used by operating activities – forward
                
                
                (13,618
                )
                
                
                (12,816
                )Investing
      activities:Release
      of restricted cash
                
                
                —
                
                
                
                100Cash
      paid into investment
                
                
                (200
                )
                
                
                —Cash
      received in acquisition of FeedRoom, net
                
                
                1,014
                
                
                
                —Cash
      paid in acquisition of Nunet, net
                
                
                (5,961
                )
                
                
                —Cash
      received in acquisition of Narrowstep
                
                
                279
                
                
                
                —Cash
      paid in acquisition of Visual, net
                
                
                (480
                )
                
                
                (1,201
                )Cash
      paid in acquisition of Kamera, net
                
                
                (1,700
                )
                
                
                (4,363
                )Cash
      paid for completion of acquisition of Sputnik
                
                
                —
                
                
                
                (4,656
                )Cash
      paid in acquisition of Morpheum, net
                
                
                —
                
                
                
                (649
                )Cash
      paid for assets acquired from Juzou
                
                
                (150
                )
                
                
                (19
                )Purchase
      of software
                
                
                (1,500
                )
                
                
                —Proceeds
      from sale of equipment and domain name
                
                
                53
                
                
                
                33Purchase
      of equipment
                
                
                (1,078
                )
                
                
                (960
                )Net
      cash used by investing activities – forward
                
                $
                (9,723
                )
                
                $
                (11,715
                )





The
accompanying notes are an integral part of these consolidated Financial
Statements.


F-8


KIT DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amounts
in Thousands)




Years ended December 31,2009
                  
                  
                  2008Net
      cash used by operating activities – forwarded
                  
                  $
                  (13,618
                  )
                  
                  $
                  (12,816
                  )Net
      cash used by investing activities – forwarded
                  
                  
                  (9,723
                  )
                  
                  
                  (11,715
                  )Financing
      activities:Proceeds
      from public offering, net
                  
                  
                  26,082
                  
                  
                  
                  —Proceeds
      from private placements, net
                  
                  
                  —
                  
                  
                  
                  14,680Proceeds
      from private placement to KIT Media
                  
                  
                  —
                  
                  
                  
                  5,000Bank
      overdraft and other obligations
                  
                  
                  94
                  
                  
                  
                  (89
                  )Proceeds
      from exercise of stock options
                  
                  
                  39
                  
                  
                  
                  22Proceeds
      from issuance of secured loans
                  
                  
                  796
                  
                  
                  
                  —Payments
      of secured loans
                  
                  
                  (713
                  )
                  
                  
                  (322
                  )Proceeds
      from issuance of senior secured note
                  
                  
                  —
                  
                  
                  
                  1,500Payments
      of senior secured note
                  
                  
                  (1,500
                  )
                  
                  
                  —Proceeds
      from exercise of warrants
                  
                  
                  783
                  
                  
                  
                  —Payments
      on capital leases
                  
                  
                  (1,005
                  )
                  
                  
                  (259
                  )Net
      cash provided by financing activities
                  
                  
                  24,576
                  
                  
                  
                  20,352Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  (322
                  )
                  
                  
                  (312
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  913
                  
                  
                  
                  (4,311
                  )Cash
      and cash equivalents - beginning of year
                  
                  
                  5,878
                  
                  
                  
                  10,189Cash
      and cash equivalents - end of year
                  
                  $
                  6,791
                  
                  
                  $
                  5,878Supplemental
      disclosures of cash flow information:Cash
      paid during the years for:Income
      taxes
                  
                  $
                  80
                  
                  
                  $
                  —Interest
                  
                  $
                  519
                  
                  
                  $
                  251Common
      stock issued in connection with acquisitions
                  
                  
                  2,411,357
                  
                  
                  
                  13,714





The
accompanying notes are an integral part of these sonsolidated financial
statements.


F-9




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





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 for all periods
presented in the accompanying financial statements have been adjusted for the
reverse stock split.  On August 13, 2009, our common stock began
trading on the NASDAQ Global Market exchange under the ticker symbol “KITD.”
Previously, our ticker symbol was “KDGL”, as quoted on the OTC Bulletin
Board. On January 25, 2010, our common stock was accepted and began trading on
the Main Market of the Prague Stock Exchange under the symbol KITD and may be
traded interchangeably between the NASDAQ Global Market and the Prague Stock
Exchange.





(2)
Summary of Significant Accounting Policies





Principles of
Consolidation - Our consolidated financial statements include the
accounts of KIT digital, Inc., and all its wholly-owned and majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.





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. Management makes estimates and assumptions
for, but not limited to, allowance for doubtful accounts, revenue recognition,
purchase price allocation, inventory reserves, tax assets and liabilities,
depreciation and amortization lives, stock-based compensation, fair value of
derivative liabilities, impairment of tangible and intangible assets and other
contingencies.





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


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)





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





The
assets and liabilities that are measured at fair value on a recurring basis and
are categorized using the fair value hierarchy are Investments and Derivative
Liabilities. Investments are measured using active quoted market prices (Level
1). See Note 5 for fair value hierarchy on the Derivative
Liabilities.





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 held in foreign currencies as of December 31, 2009
was $2,272. The amount of cash in excess of FDIC insured amounts as of December
31, 2009 and 2008, was $6,541 and $5,634, respectively.





Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
nature of our customers who are dispersed across many industries and geographic
regions. As of December 31, 2009, three customers accounted for approximately
39.6% of our trade accounts receivable. As of December 31, 2008, no customers
made up more than 10% 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.





Goodwill -
We evaluate the carrying value of our goodwill annually at the end of December
and whenever events or circumstances make it more likely than not that an
impairment may have occurred. Accounting standard on Goodwill and Other
Intangible Assets, prescribes a two-step method for determining goodwill
impairment. In the first step, we compare the estimated fair value of each
reporting unit to its carrying amount, including goodwill. If the carrying
amount of a reporting unit exceeds the estimated fair value, step two is
completed to determine the amount of the impairment loss. Step two requires the
allocation of the estimated fair value of the reporting unit to the assets,
including any unrecognized intangible assets, and liabilities in a hypothetical
purchase price allocation. Any remaining unallocated fair value represents the
implied fair value of goodwill, which is compared to the corresponding carrying
value of goodwill to compute the goodwill impairment amount. In 2009 and 2008,
we did not record any goodwill impairment charges.





As part
of our impairment analysis for each reporting unit, we estimate the fair value
of each unit utilizing the income approach and market approach. The income
approach requires management to estimate a number of factors for each reporting
unit, including projected future operating results, economic projections,
anticipated future cash flows, discount rates, and the allocation of shared
service or corporate items. The market approach was used as a test of
reasonableness of the conclusions reached in the income approach. The market
approach estimates fair value using comparable marketplace fair value data from
within a comparable industry grouping.





We also
compared the sum of the estimated fair values of the reporting units to our
total enterprise value as implied by the market value of our equity securities.
This comparison indicated that, in total, our assumptions and estimates were not
unreasonable.


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)





Long-Lived Assets
– Long-lived assets, including property, plant and equipment, and
intangible assets with determinable lives, are evaluated for impairment whenever
events or changes in circumstances indicate that the carrying value of the
assets may not be fully recoverable. An impairment is assessed if the
undiscounted expected future cash flows generated from an asset are less than
its carrying amount. Impairment losses are recognized for the amount by which
the carrying value of an asset exceeds its fair value. The estimated useful
lives of all long-lived assets are periodically reviewed and revised, if
necessary.





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, 2009 and 2008, the Company had $2,032 and
$3,001, respectively, 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.





Accounts
Receivable - Trade accounts receivable are stated net of allowances for
doubtful accounts. Specific customer provisions are made when a review of
significant outstanding amounts, customer creditworthiness and current economic
trends, indicates that collection is doubtful. In addition, provisions are made
at differing amounts, based upon the balance and age of the receivable and the
Company’s historical collection experience. Trade accounts are charged off
against the allowance for doubtful accounts or expense when it is probable the
accounts will not be recovered. The allowance for doubtful accounts as of
December 31, 2009 and 2008 was $874 and $571, respectively.





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. As of December
31, 2009 and 2008, our reserves for excess and obsolete inventory were $136 and
$157, respectively.





Property and
Equipment - Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided for using the straight-line and declining
balance methods of accounting over the estimated useful lives of the assets
which range from one year to twenty years. Leasehold improvements are amortized
over the shorter of its useful life or lease term. 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
- We account for income taxes under the asset and liability method, which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial statements and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.





We record
net deferred tax assets to the extent we believe these assets will more likely
than not be realized. In making such determination, we consider all available
positive and negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax planning strategies
and recent financial operations. In the event we were to determine that we would
be able to realize our deferred income tax assets in the future in excess of
their net recorded amount, we would make an adjustment to the valuation
allowance which would reduce the provision for income taxes.


F-12




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)





Derivative
Financial Instruments - Upon the adoption of a new standard effective
January 1, 2009, certain of our financial instruments with “down-round”
protection features are no longer considered indexed to our Company’s stock for
purposes of determining whether they meet the first part of the scope exception.
As such, these instruments no longer meet the conditions to obtain equity
classification and are required to be carried as derivative liabilities, at fair
value with changes in fair value reflected as income (expense). The fair value
of the warrants issued was $15,736 and $21,314 on January 1, 2009 and December
31, 2009, respectively. See Note 5, “Derivative Liabilities” for further
information.





Revenue
Recognition - We recognize revenue in accordance with the accounting
standard, which requires that four basic criteria be met before revenue can be
recognized: (i) persuasive evidence that an arrangement exists; (ii) the price
is fixed or determinable; (iii) collectability is reasonably assured; and (iv)
product delivery has occurred or services have been rendered. We recognize
revenue, net of sales taxes assessed by any governmental
authority.  Revenues are derived principally from the delivery of
digital media solutions and professional services. Our revenues include fees
charged for software-as-a-service (“SaaS”), enterprise licenses, software usage,
storage, software set-up/support services, hardware components, content
delivery, content syndication fees, advertising-based monetization and
professional services.  Revenue is recognized when the product and/or
service has been provided to the customer. We may enter into agreements whereby
we guarantee a minimum service level, or a minimum number of impressions,
click-throughs or other criteria on our software platform’s points of
distribution for a specified period. To the extent these guarantees are not met,
we may defer recognition of the corresponding revenue until guaranteed delivery
levels are achieved. For software related multiple-element arrangements, we have
applied the residual method to determine the amount of license revenues to be
recognized. Under the residual method, if fair value exists for undelivered
elements in a multiple-element arrangement, such fair value of the undelivered
elements is deferred with the remaining portion of the arrangement consideration
recognized upon delivery of the software license or services arrangement. We
allocate the fair values of each element of a software related multiple-element
arrangement based upon its fair value as determined by our vendor specific
objective evidence, with any remaining amount allocated to the software
license.





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





Stock-Based
Compensation - We 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 requisite service periods. Our
share-based awards include stock options, warrants and restricted stock awards.
We use the Black-Scholes-Merton option-pricing model (“Black-Scholes”) to
measure fair value of these share-based awards. The Black-Scholes model requires
us to make significant judgments regarding the assumptions used within the
model, the most significant of which are the expected stock price volatility,
the expected life of the option award, the risk-free rate of return and
dividends during the expected term.


F-13


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 Income (Loss)
Per Share - We compute net income (loss) per common share under
the provisions of the accounting standard which establishes standards for
computing and presenting earnings per share. It requires us to report both basic
net (loss) income per share, which is based on the weighted average number of
common shares outstanding during the period, and diluted net (loss) income per
share, which is based on the weighted average number of common shares
outstanding plus all potentially dilutive common shares outstanding. All
equivalent shares underlying options and warrants were excluded from the
calculation of diluted loss per share because we had net losses for all periods
presented and therefore equivalent shares would have an anti-dilutive
effect.





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





Recent Accounting
Pronouncements –    In December 2007, the FASB issued a new
accounting standard, which establishes accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary, which
is sometimes referred to as minority interest, is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. Among other requirements, this standard requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the
non-controlling interest. We adopted the provisions of this new accounting
standard on January 1, 2009. We implemented these changes, which led to changes
in the presentation of prior period results.





In May
2009, the FASB issued a new accounting standard on subsequent events, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. This accounting standard establishes: 1) the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements; 2) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements; and 3) the disclosures that an entity should
make about events or transactions that occurred after the balance sheet date.
This accounting standard also requires disclosure of the date through which an
entity has evaluated subsequent events. We adopted the provisions of this
accounting standard on June 30, 2009 and it had not impact on our consolidated
financial position or results of operation.


F-14


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)





In June
2009, the FASB issued the accounting standard “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles—a
replacement of FASB Statement No. 162”, which establishes the FASB Accounting
Standards CodificationTM (“Codification”) as the source of authoritative U.S.
Generally Accepted Accounting Principles (GAAP) recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. We adopted the
provisions of this accounting standard for the interim period
ended September 30, 2009. The implementation of this accounting standard
did not have any impact on our consolidated financial position and results of
operations upon adoption.





In April
2009, the FASB also issued new guidelines on the initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination which provides
that an acquirer shall recognize an asset acquired or a liability assumed in a
business combination that arises from a contingency at fair value, at the
acquisition date, if the acquisition-date fair value of that asset or liability
can be determined during the measurement period. New guidance is also provided
in the event that the fair value of an asset acquired or liability assumed
cannot be determined during the measurement period. An acquirer shall also
develop a systematic and rational basis for subsequently measuring and
accounting for assets and liabilities arising from contingencies and also
provides for the disclosure requirements. We adopted the provisions of the new
accounting standards on business combinations on January 1, 2009; acquisitions
after this are accounted for using this standard.





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





In
October 2009, the FASB issued Accounting Standards Update on Certain Revenue
Arrangements That Include Software Elements, which changes the accounting model
for revenue arrangements that include both tangible products and software
elements. Tangible products containing both software and non-software components
that function together to deliver the product’s essential functionality will no
longer be within the scope of Software Revenue Recognition. This update is
effective for fiscal years beginning on or after June 15, 2010 and early
adoption is permitted. We are currently assessing the impact of
adoption of this update.


F-15


KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(3)
Acquisitions





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.





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-16


KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(3)
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.





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.





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.


F-17




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(3)
Acquisitions (Continued)





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.





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.


F-18





KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(3)
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.





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-19




KIT DIGITAL, INC. AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(3)
Acquisitions (Continued)





On March
6, 2009, we acquired the remaining 49% outstanding share capital that we did not
previously own in subsidiary Reality Group Pty. Ltd., an Australian marketing
communications firm, in consideration of the issuance of 90,073 shares of common
stock for a total purchase price of $631 which is recorded as a reduction to
additional paid-in capital. The remaining balance of the non-controlling
interest of $237 is recorded as part of the acquisition and recorded as
additional paid-in capital.





On April 8, 2009, we
acquired certain of the operating assets and assumed specified
liabilities of Narrowstep, Inc., a United States and United Kingdom based
internet TV platform company (“Narrowstep”) in exchange for 25,000 shares of
restricted common stock valued at $213. The acquisition included a transition
of customer relationships to us and expanded our client delivery capabilities,
particularly in live-streaming and long-form delivery. The Company has allocated
the aggregate cost of the acquisition to net tangible and identifiable
intangible assets based on their estimated fair values.





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





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





A gain on
bargain purchase of $26 was recorded to other income in the year ended December
31, 2009 in the consolidated statements of operations and comprehensive
loss.





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, which has subsequently been amended in August 2009 to
$570.  At closing, we issued 13,715 shares of our common stock to
Juzou valued at $120 against the total purchase price of which $104 was
recorded as software. In September 2009, we paid $150 in cash and issued 10,559
shares valued at $90, which was recorded as software. In December 2009, we
issued 7,165 shares valued at $70 for the consideration 12 months from closing,
which was recorded as software. We have not recorded the contingent liability of
$140 in consideration that is payable 18 and 24 months from closing as it is not
certain that the performance criteria will be met.


F-20




KIT DIGITAL, INC. AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(3)
Acquisitions (Continued)





On
October 1, 2009, we acquired The FeedRoom, Inc., a United States company engaged
in online video communications (“FeedRoom”) in exchange for 948,636 shares of
KIT digital common stock (the “Merger Shares”) and an additional 363,636 shares
of our common stock issued in exchange for a $4,000 indirect investment in us by
certain stockholders of FeedRoom immediately prior to the closing of the merger.
The KIT digital common stock was issued to such stockholders at an effective
price of $11.00 per share. This acquisition expands our client base in North
America and enhances our IP video platform through the integration of key
features of FeedRoom’s software. The Merger Shares were delivered as follows:
(i) 937,398 shares on closing; and (ii) 374,602 shares which will be retained by
us for one year after the closing. The Company has allocated the aggregate cost
of the acquisition to FeedRoom’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 (October 1, 2009).





Current
      assets
                  
                  $
                  1,832Property
      and equipment
                  
                  
                  1,166Intangible
      assets – developed software
                  
                  
                  200Intangible
      assets - customer list
                  
                  
                  1,600Goodwill
                  
                  
                  11,075Total
      assets acquired
                  
                  
                  15,873Current
      liabilities
                  
                  
                  2,228Net assets acquired
                  
                  $
                  13,645





The
results of operations of FeedRoom for the period from October 1, 2009 to
December 31, 2009 have been included in the consolidated statements of
operations and comprehensive loss.


F-21




KIT DIGITAL, INC. AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(3)
Acquisitions (Continued)





On
October 1, 2009, we acquired all Nunet AG, a German company engaged in video
management for broadband, IPTV and mobile (“Nunet”) for an aggregate purchase
price of EUR 7,647, consisting of: a cash payment of $8,048 (EUR 5,400) paid at
closing; a convertible promissory note of EUR 1,663 due March 31, 2011; and
another convertible promissory note of EUR 584 due June 30, 2010. These
convertible promissory notes have since been converted into 339,540 shares of
common stock valued at $3,321 and purchased by an independent investor. This
acquisition expands our client base with major international mobile network
operators and enhances our platform with mobile capabilities. An additional $430
(EUR 300) was paid to IMG at closing to cover brokers, introducing parties,
management incentives and other transaction-related costs. This amount was
expensed and is included in merger and acquisition and investor relations
expenses in the consolidated statement of operations and comprehensive loss. The
Company has allocated the aggregate cost of the acquisition to Nunet’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 (October 1, 2009).





Current
      assets
                  
                  $
                  2,167Property
      and equipment
                  
                  
                  1,917Intangible
      assets – developed software
                  
                  
                  439Intangible
      assets - customer list
                  
                  
                  1,316Goodwill
                  
                  
                  8,859Total
      assets acquired
                  
                  
                  14,698Current
      liabilities
                  
                  
                  2,049Capital
      leases
                  
                  
                  1,124Total
      liabilities assumed
                  
                  
                  3,173Net assets acquired
                  
                  $
                  11,525





The
results of operations of Nunet for the period from October 1, 2009 to December
31, 2009 have been included in the consolidated statements of operations and
comprehensive loss.


F-22




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(4) Acquisition Liabilities





On March
9, 2009, we issued 300,539 shares of our common stock in satisfaction of a
$1,500 acquisition liability incurred in connection with the acquisition of
Kamera Content AB (“Kamera”) in 2008, which is included in goodwill. In
September 2009, we recorded an additional liability of $1,083 as a result of an
amendment to the underling share purchase agreement for full and final
settlement of all future/potential earn-out payments. This has been recorded as
additional goodwill in the consolidated balance sheet. In October 2009, we paid
$1,700 and 110,805 shares valued at $883 to settle this liability.





In
January 2009, we paid $180 in cash to the former shareholders of Visual
Connection a.s. (“Visual”), pursuant to the Visual Share Purchase Agreement
dated October 5, 2008 (“Visual SPA”). In March 2009, we issued 163,044 shares of
our common stock to the former shareholders of Visual, pursuant to the Visual
SPA, in satisfaction of a $1,500 earn out liability, which is included in
goodwill. In September 2009, we issued 52,632 shares valued at $430 and $300 in
cash to the former shareholders of Visual pursuant to an amendment to the Visual
SPA and in satisfaction of the earn-out 12 months after closing and is included
in goodwill. The liability included in the consolidated balance sheet in
“Acquisition liability – Visual” is $1,075 as of December 31, 2009. We have not
recorded the contingent liability of $1,075 in consideration that is payable 18
and 24 months from closing as it is not certain that the performance criteria
will be met.





(5)
Derivative Liabilities





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





Durint
the third quarter, we identified certain errors in the fair valuation of
derivative liabilities related to prior interim periods in fiscal year 2009.
These errors were corrected and disclosed in the consolidated financial
statements for three and nine months ended September 30, 2009. We have recorded
necessary adjustments in the consolidated financial statements for the year
ended December 31, 2009.




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


F-23


KIT DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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


(Unaudited)





(5)
Derivative Liabilities (continued)





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





The
following tables summarize the components of derivative liabilities as of
December 31, 2009 and the re-measurement date, January 1, 2009:


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





Fair
value hierarchy:





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


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


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





The
effects on our expense associated with changes in the fair values of our
derivative financial instruments for the year ended December 31, 2009 was
$6,015.


F-24





KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(6)
Related Party Transactions





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 year ended December 31, 2009 and 2008 were $508 and
$573, respectively.





On May 1,
2009, we issued a convertible interim promissory note up to a maximum of $5,000
to KIT Media, Ltd. of which we received gross proceeds of $2,250 in the quarter
ended June 30, 2009 and $1,100 in the quarter ended September 30, 2009. Interest
is payable monthly in arrears at 8% and matures on April 30, 2010. Interest
of $51 was calculated and paid during 2009. A debt discount of $442 was recorded
related to this debt and was amortized through the repayment date of August
18, 2009. As of August 18, 2009, these notes were repaid from the proceeds of
the public offering.





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





In 2009,
the Company recorded revenues of approximately $120 from affiliated companies in
which senior executives have a shareholding interest. In 2009, the Company has
also recorded variable and direct third party costs amounting to approx $200
from such affiliates.





(7)
Property and Equipment





Property
and equipment consisted of the following:





December 31,
                            
                            
                            EstimatedUseful2009
                            
                            
                            2008
                            
                            
                            Lives in YearsOffice
      equipment capital lease
                            
                            $
                            1,183
                            
                            
                            $
                            611
                            
                            
                            1-
      5Motor
      vehicles capital lease
                            
                            
                            625
                            
                            
                            
                            544
                            
                            
                            3 -
      5Computer
      software
                            
                            
                            806
                            
                            
                            
                            249
                            
                            
                            1 -
      4Leasehold
      improvements
                            
                            
                            1,114
                            
                            
                            
                            553
                            
                            
                            1 -
      5Furniture
      and fixtures
                            
                            
                            1,022
                            
                            
                            
                            311
                            
                            
                            2
      -10Office
      equipment
                            
                            
                            4,696
                            
                            
                            
                            2,009
                            
                            
                            1
      -59,446
                            
                            
                            
                            4,277Accumulated
      depreciation and amortization
                            
                            
                            (3,749
                            )
                            
                            
                            (1,349
                            )$
                            5,697
                            
                            
                            $
                            2,928





Depreciation
and amortization expense amounted to $1,847 and $729 for the years ended
December 31, 2009 and 2008, respectively.


F-25


KIT DIGITAL, INC. AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(8)
Goodwill and Other Intangible Assets





The changes in
the carrying amount of goodwill as of December 31, 2009 and 2008, respectively
are as follows:





GoodwillBalance
      as of January 1 2008
                  
                  $
                  1,123Acquisitions
                  
                  
                  14,044Balance
      as of December 31, 2008
                  
                  
                  15,167Acquisitions
                  
                  
                  21,325Balance
      as of December 31, 2009
                  
                  $
                  36,492





Intangible
assets include the following:





December 31, 2009Weighted
                                        Average
                                        Remaining
                                        Amortization
                                        Period
                                        (Years)
                                      
                                      Gross Carrying Amount
                                      
                                      Accumulated
                                        Amortization
                                      
                                      Net
                                        Carrying
                                        AmountIntangible
      assets with determinable lives:Software
                                      
                                      3.25
                                      
                                      
                                      $
                                      5,995
                                      
                                      
                                      $
                                      (2,559
                                      )
                                      
                                      $
                                      3,436Customer
      list
                                      
                                      4.5
                                      
                                      
                                      
                                      6,960
                                      
                                      
                                      
                                      (2,310
                                      )
                                      
                                      
                                      4,650Domain
      name
                                      
                                      
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Total
                                      
                                      
                                      
                                      
                                      $
                                      13,455
                                      
                                      
                                      $
                                      (5,369
                                      )
                                      
                                      $
                                      8,086December 31, 2008Gross Carrying Amount
                                      
                                      Accumulated
                                        Amortization
                                      
                                      Net
                                        Carrying
                                        AmountIntangible
      assets with determinable lives:Software
                                      
                                      
                                      
                                      
                                      $
                                      3,546
                                      
                                      
                                      $
                                      (1,281
                                      )
                                      
                                      $
                                      2,265Customer
      list
                                      
                                      
                                      
                                      
                                      
                                      4,231
                                      
                                      
                                      
                                      (1,243
                                      )
                                      
                                      
                                      2,988Domain
      name
                                      
                                      
                                      
                                      
                                      
                                      54
                                      
                                      
                                      
                                      (35
                                      )
                                      
                                      
                                      19Total
                                      
                                      
                                      
                                      
                                      $
                                      7,831
                                      
                                      
                                      $
                                      (2,559
                                      )
                                      
                                      $
                                      5,272





Estimated
      future annual amortization expense as of December 31, 2009 is as
      followsCustomer
                    List
                  
                  
                  Software2010
                  
                  $
                  1,224
                  
                  
                  $
                  1,3972011
                  
                  
                  1,174
                  
                  
                  
                  8212012
                  
                  
                  876
                  
                  
                  
                  6332013
                  
                  
                  508
                  
                  
                  
                  4322014
                  
                  
                  482
                  
                  
                  
                  154Thereafter
                  
                  
                  387
                  
                  
                  
                  -Totals
                  
                  $
                  4,650
                  
                  
                  $
                  3,436


F-26




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(8)
Impairment of Intangible Asset





As of
December 31, 2009, we determined that customer lists from the acquisition of
Kamera in May 2008 are impaired. We evaluated the ongoing value of these assets
and based on this evaluation, we determined that customer lists with a carrying
amount of $891 was impaired and therefore recorded a reduction of $500; this is
recorded as loss on impairment of intangible assets in the consolidated
statement of operations and comprehensive loss.





(9)
Notes Payable





On May 1,
2009, we issued a convertible interim promissory note up to a maximum of $5,000
to KIT Media, Ltd. of which we received gross proceeds of $2,250 in the quarter
ended June 30, 2009 and $1,100 in the quarter ended September 30, 2009. Interest
was payable monthly in arrears at 8%. Interest of $51 was calculated
through repayment and paid during 2009. A debt discount of $442 was recorded
related to this debt and was amortized through the repayment date of August
18, 2009. As of August 18, 2009, these notes were repaid from the proceeds of
the public offering.





On April
8, 2009, we received gross proceeds of $350 related to the issuance of a
convertible note to Granahan McCourt Capital, LLC. The note was interest
free.  The principal was due at maturity. A debt discount of $75 was
recorded related to this debt and was amortized through June 30, 2009. As of
August 18, 2009, these notes were repaid from the proceeds of the public
offering.





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. On August 18, 2009, we repaid the
entire principal balance of the non-convertible note of $1,275 owed to Genesis
Merchant Partners, LP and wrote off the unamortized amount of debt discount as
of that date.


F-27





KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(10) Income Taxes





The
Company accounts for its income taxes in accordance with ASC
740-10.  Under ASC 740-10, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their tax bases.  ASC 740-10 also requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not that some or all
of the deferred tax assets will not be realized based on all available positive
and negative evidence.





Income
(loss) before income tax consisted of the following:


2009United
      States Operations
                    
                    $
                    (13,087
                    )Foreign
      Operations
                    
                    
                    (5,741
                    )Total
                    
                    $
                    (18,828
                    )





The
components of the income tax expense (benefit) for the year ended December
31, 2009 are as follows:





Current
      Taxes:Federal
                                
                                $
                                -State
                                
                                
                                140Foreign
                                
                                
                                157Total
      current tax expense
                                
                                
                                297Deferred
      Taxes:Federal
                                
                                
                                -State
                                
                                
                                -Foreign
                                
                                
                                817Total
      deferred tax expense (benefit)
                                
                                
                                817Provision
      for (benefit from) income taxes
                                
                                $
                                1,114





The
following table is a reconciliation from our income tax provision (benefit)
based on the U.S. Federal statutory income tax rate to the income tax expense
(benefit) reported for financial statement purposes:





2009U.S.
      Statutory Rate
                  
                  
                  34.00
                  %State
      and Local Taxes, net of federal benefit
                  
                  
                  2.44
                  %Foreign
      Rate Different Than Statutory
                  
                  
                  (4.46
                  )%Permanent
      Differences
                  
                  
                  (15.68
                  )%Change
      in Valuation Allowance
                  
                  
                  (22.21
                  )%(5.91
                  )%


F-28




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(10)
Income Taxes (continued)





The Tax
effects of temporary differences and net operating loss carry forwards that give
rise to deferred tax assets and liabilities are as follows:


2009
                            
                            
                            2008Deferred
      Tax Assets:Stock
      Option Compensation
                            
                            $
                            2,248
                            
                            
                            $
                            1,922Compensation
                            
                            
                            141
                            
                            
                            
                            133Allowances
      for Doubtful Accounts
                            
                            
                            101
                            
                            
                            
                            97Depreciation
      and Amortization
                            
                            
                            125
                            
                            
                            
                            239Net
      Operating Losses
                            
                            
                            56,331
                            
                            
                            
                            26,542Restructuring
      Costs
                            
                            
                            257
                            
                            
                            
                            -Other
                            
                            
                            -
                            
                            
                            
                            50Total
      Deferred Tax Assets
                            
                            
                            59,203
                            
                            
                            
                            28,983Deferred
      Tax Liabilities:Intangible
      and Fixed Assets
                            
                            
                            (2,126
                            )
                            
                            
                            (1,391
                            )Valuation
      Allowance
                            
                            
                            (57,657
                            )
                            
                            
                            (28,983
                            )Net
      Deferred Tax Asset (Liability)
                            
                            
                            (580
                            )
                            
                            
                            -





As of
December 31, 2009, the Company had approximately $119,600 of Federal, $220,000
of State and Local, and $11,900 of Foreign net operating losses
(NOLs).  The Federal and State NOLs are available to offset future
taxable income through 2029 and expire from 2019 to 2029.  These
Federal and State amounts include NOLs resulting from the acquisitions of
Videdome (approximately $2,250) and Feedroom (approximately
$60,200).  The foreign NOLs have no expiration.





The
Company has not recognized a deferred asset for the NOLs at December 31, 2009
and expects to continue to provide a full valuation allowance until, or unless,
it can sustain a level of profitability that demonstrates its ability to utilize
these assets.





Additionally
the Federal and State utilization of the above NOLs, in accordance with Section
382 of the Internal Revenue Service code, could be limited or expire before
utilization due to stock ownership changes that may have occurred in the past or
in the future.  In certain foreign jurisdictions, the utilization of
the NOLs may also be limited.





During
2009, our valuation allowance increased by $30,065 from $27,592 in 2008 to
$57,657 in 2009 respectfully.  We will continue to maintain the
valuation allowance until sufficient positive evidence exists to support a full
or partial reversal.





The
Company adopted the authoritative guidance on accounting for uncertainty in
income taxes on January 1, 2007.  There were no unrecognized tax
benefits as of the date of our adoption of this guidance and as of December 31,
2009.  The adoption of this guidance did not have a material effect on
our consolidated financial statements.





The
Company's policy is to account for recognized accrued interest and penalties
relating to unrecognized tax positions in income expense.  During the
year ended December 31, 2009 no amounts were recognized.





As a
matter of course, the Company can be audited by federal, state and foreign tax
authorities.  No audits are currently in process.





A list of
open years by major jurisdictions follows:





Jurisdiction
                              
                              Tax YearsUnited
      States
                              
                              1999
      to 2009New
      York State
                              
                              1999
      to 2009New
      York City
                              
                              1999
      to 2009Australia
                              
                              2004
      to 2009Germany
                              
                              2005
      to 2009United
      Kingdom
                              
                              2007
      to
2009


F-29




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(11)
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, equipment and motor
vehicle leases 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, 2009.




Year
                  
                  Capital
                    leases
                  
                  
                  Operating
                    leases
                  
                  
                  Total2010
                  
                  $
                  912
                  
                  
                  $
                  2,193
                  
                  
                  $
                  3,1052011
                  
                  
                  680
                  
                  
                  
                  796
                  
                  
                  
                  1,4762012
                  
                  
                  171
                  
                  
                  
                  150
                  
                  
                  
                  3212013
                  
                  
                  25
                  
                  
                  
                  84
                  
                  
                  
                  1092014
                  
                  
                  -
                  
                  
                  
                  24
                  
                  
                  
                  24Thereafter
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      Minimum Lease Payments
                  
                  
                  1,788
                  
                  
                  $
                  3,247
                  
                  
                  $
                  5,035Less
      Amount Representing Interest
                  
                  
                  (193
                  )Total Obligations Under Capital
      Leases
                  
                  $
                  1,595





Rent
expense amounted to $1,694 and $1,156 for the years ended December 31, 2009 and
2008, respectively.


F-30




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(11)
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. The Management Agreement
provided for an aggregate compensation for KIT Capital as follows: (i) $51
monthly (which has been subsequently adjusted downwards at various dates based
on the headcount), 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 December
2007, two former consultants of ROO Media Corporation (ROO Media) (currently KIT
Media Corporation) sued that entity together with ROO Group, Inc. (currently KIT
digital, Inc.) and its founder and former Vice Chairman and ROO Media’s former
President and Chief Operating Officer 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 ROO Media.
Last year, defendants moved to dismiss the complaint and, in March 2009, the
court dismissed all of plaintiffs’ claims except their breach of contract claim
on the grounds that it is based on an alleged oral agreement, which plaintiffs
may be able to prove. Defendants have answered the complaint, denying liability,
and the case is now in discovery. We believe that there is no merit to this
suit, and we intend to continue to defend vigorously.





In
November 2007, the Company’s wholly-owned subsidiary, ROO HD, Inc., now known as
KIT HD, Inc. (“KIT HD”), was named as the defendant in a purported class action
lawsuit entitled Julie Vittengl et al. vs. ROO HD, Inc., 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 the Company’s property in constructive trust for plaintiffs and payment of
plaintiffs’ unpaid wages and costs of suit, both in an unspecified dollar
amount.  KIT HD filed its answer to the complaint in January 2008. In
December 2009, plaintiffs served an amended complaint, dropping the class action
allegations and adding the Company as a defendant; otherwise, it is essentially
the same as its predecessor.  Earlier this month, KIT HD and the
Company answered the amended complaint, and the case will shortly enter into
discovery. We believe that the suit is without merit, and the Company and KIT HD
intend to defend themselves vigorously.





In May
2009, a former employee of Wurld, Plaintiff, filed suit against ten shareholders
of Wurld, Wurld, ROO HD (n/k/a “KIT HD”), and ROO Group, Inc. (n/k/a the
“Company”), in New York Supreme Court, Albany County, New
York.  Plaintiff, a former employee of Wurld, seeks to hold the ten
largest shareholders of Wurld liable under Business Corporation Law § 630, for
$100 in wages that Wurld allegedly failed to pay Plaintiff.  She
further asserts a variety of claims based on the allegation that KIT HD’s
acquisition of certain assets of Wurld was a fraudulent conveyance, and that KIT
HD is the successor to Wurld and liable for Wurld’s debts.  Based on
these allegations, plaintiff seeks payment of her wages, the (unspecified) fair
market value of her shares of stock in Wurld, rescission of the asset purchase
agreement between Wurld and KIT HD, plus attorney’s fees.  In October
2009, the court dismissed plaintiff's claims against three
shareholder/defendants on the grounds that BCL § 630 does not apply to Wurld
because it is not a New York corporation, a decision that plaintiff is
appealing.  KIT HD and the Company have been served and answered, and
the case is now in discovery.  We believe that this lawsuit is without
merit, and if necessary the Company intends to defend itself
vigorously.


F-31




KIT DIGITAL, INC. AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(12) Stock
Issuances





During
the quarter ended March 31, 2009, we issued 562,476 shares of common stock. Of
this amount we issued 8,820 shares from the exercise of stock options and
received $25 in gross proceeds. In addition, we issued 90,073 shares for the
acquisition of Reality, 300,539 shares for an earn-out payment for Kamera
acquisition and 163,044 shares for an earn-out payment for Visual
acquisition.





During
the quarter ended June 30, 2009, we issued 65,623 shares of common stock. Of
this amount, we issued 748 shares from the exercise of stock options and
received $2 in gross proceeds. In addition, we issued 25,000 shares for the
asset purchase agreement with Narrowstep, 34,733 shares for the repayment of
loans of $302 and 5,142 shares for services valued at $41.





During
the quarter ended September 30, 2009, we issued 4,080,244 shares of common
stock. Of this amount, we issued 4,004,000 shares in the public offering in
August 2009, 52,632 shares for an earn-out payment for Visual acquisition,
10,559 shares for an earn-out payment for Juzou asset acquisition, 8,960 shares
for exercise of cashless warrants and 4,093 shares for services valued at
$49.





In August
2009, we completed the sale of 4,554,000 shares of our common stock at a price
of $7.00 per share in a public offering, 4,004,000 shares were sold by us and
550,000 shares were sold by certain existing, unaffiliated stockholders. The
gross proceeds of the common stock sold by us were $28,028. We did not receive
any proceeds from the sale of shares by the selling stockholders. We issued to
the underwriters 44,067 warrants to purchase shares of common stock with an
exercise price of $8.40 per share exercisable for a period of five years and
were valued under the Black-Scholes model as $181. In connection with the public
offering, we received net cash proceeds of approximately $26,081 after
underwriting discounts, commissions and fees, legal fees and expenses, and other
fees.





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





During
the quarter ended December 31, 2009, we issued 1,953,230 shares of common stock.
Of this amount, we issued 1,312,000 shares for the acquisition of FeedRoom,
339,540 shares for the acquisition of Nunet, 110,805 shares for an earn-out
payment for Kamera acquisition, 7,165 shares for an earn-out payment for Juzou
asset acquisition, 139,987 shares for exercise of warrants with proceeds of
$783, 4,489 shares for the exercise of options with proceeds of $13, 35,376
shares for compensation valued at $261 and 3,968 shares for the round up due to
the 1 for 35 reverse split.





As of
December 31, 2009, the outstanding warrants (excluding the warrants included in
the derivative liability of 4,794,400 and stock-based compensation of 34,286)
are 510,639 with a weighted average exercise price of $51.36 and a weighted
average remaining term of 2.7 years.


F-32




KIT DIGITAL, INC. AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(13)
Stock-Based Compensation





On March
17, 2008, the Board of Directors adopted an incentive compensation plan (the
“2008 Incentive Stock Plan”). The 2008 Incentive Stock Plan currently has
reserved 857,143 shares of common stock for issuance. 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. The 2004 Stock Option
Plan has reserved 342,858 shares of common stock for issuance.





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





For the
years ended December 31, 2009 and 2008, the Company recognized $1,922 and
$4,869, respectively, of non-cash stock-based compensation expense in the
consolidated statements of operations. Included in the 2009 amount of $1,922, is
$261 of stock issued for compensation, $261 for a 2009 bonus accrued for which
stock is to be issued in 2010 and $18 for director’s compensation accrued and to
be paid in stock in 2010. Included in the 2008 amount of $4,869, is $136 for
director’s fees for 2008 in which options have been issued in 2009 with
immediate vesingt with immediate vesting and is included in accrued expenses as
of December 31, 2008. Also included in non-cash stock-based compensation are
warrants to purchase 34,286 shares of common stock with an exercise price of
$4.655 issued on March 30, 2008, that vest over three years from the issue date.
During the year ended December 31, 2009, a total of 11,428 these warrants vested
with 20,000 vested and 14,286 unvested as of December 31, 2009. The intrinsic
value as of December 31, 2010 of these outstanding warrants and exercisable
warrants are $218 and $127, respectively.





As of
December 31, 2009, there was approximately $2,989 of total unrecognized
compensation cost related to unvested share-based compensation grants, which is
expected to be amortized over a weighted-average period of 3.1
years.





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


Year Ended
                  December
                  31, 2009
                
                
                Year
                  Ended
                  December
                  31, 2008Expected
      life (in years)
                
                3.75
                
                
                
                5.00Risk-free
      interest rate
                
                2.87
                %
                
                
                2.84
                %Volatility
                
                76.96
                %
                
                
                155.51
                %Dividend
      yield
                
                
                0
                
                
                
                0


F-33




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(13)
Stock-Based Compensation (continued)





A summary
of the status of stock option awards and changes during the years ended December
31, 2008 and December 31, 2009 are presented below:





Shares
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price
                          
                          
                          Weighted
                            Average
                            Remaining
                            Contractual
                            Life (Years)
                          
                          
                          Intrinsic
                            ValueOutstanding
      at January 1, 2008
                          
                          
                          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
                          
                          
                          
                          5.25Granted
                          
                          
                          494,964
                          
                          
                          
                          7.74Exercised
                          
                          
                          (14,054
                          )
                          
                          
                          2.80Cancelled,
      expired, or forfeited
                          
                          
                          (104,550
                          )
                          
                          
                          8.65Outstanding
      at December 31, 2009
                          
                          
                          877,973
                          
                          
                          
                          7.14
                          
                          
                          
                          4.03
                          
                          
                          $
                          3,391Exercisable
      at December 31, 2009
                          
                          
                          368,735
                          
                          
                          
                          6.56
                          
                          
                          
                          3.82
                          
                          
                          $
                          1,637





The
weighted-average grant-date fair value of option awards granted during the years
ended December 31, 2009 and 2008 was $4.41 and $6.30,
respectively.


F-34




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(14)
Software license agreement





In the
first quarter of 2009, we sold a non-exclusive, perpetual, non-transferable,
non-assignable and non-sublicenseable, worldwide license to use our technology
for the sole purpose of providing online video services to this non-related
party’s customers for a license fee of $1,500. We also are charging an annual
maintenance fee of 18% of the license fee. The license fee was recorded as
revenue in the consolidated statement of operations and comprehensive loss. The
maintenance fee is being recognized in revenue on a monthly basis. In the first
quarter of 2009, we purchased a non-exclusive, perpetual, non-transferable,
non-assignable and non-sublicenseable, license to use the software from this
same non-related party to power search and related videos within our VX
Application and player of our owned and licensed video content or our customer’s
video content for a license fee of $1,500 and an annual support and maintenance
fee of $270. The license fee was recorded in the balance sheet in “Software,
net” and is being amortized over two years. The annual support and maintenance
fee is being expensed on a monthly basis.





(15)
Restructuring Charges





The
Company recorded restructuring charges of $2,549 in the year ended December 31,
2009. This amount is comprised of employee termination costs related to the
reorganization of the Company of $708 and facility closing costs of $1,841
related to the closing of one of the Melbourne, Australia offices, one of the
Dubai, UAE offices, one of the New York, NY offices, the Westborough, MA office,
the Larkspur, CA office, and the Bellevue, WA office. As of December 31, 2009,
we accrued $829 of facility closing costs and is included in accrued liabilities
in the consolidated balance sheets.





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 are $2,397 related to the settlement of separation
agreements.





(16)
Integration Expenses





The
Company has recorded integration expenses of $4,430 in the year ended December
31, 2009 related to the redundancy in staff and consultants during
reorganization, corporate rebranding related to the reorganization, integration
of acquired companies and assets.





The
Company has recorded integration expenses of $1,111 in the year ended Decemeber
31, 2008 related to the redundancy in staff and consultants for the transition
of technology infrastructure during reorganization due to the centralizing of
resources in Toronto, recruiting costs for the centralizing of resources in
Toronto, and corporate rebranding related to the
reorganization.


F-35




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(17) Segment
Reporting





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





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


Year endedDecember 31,2009
                      
                      
                      2008Revenue:EMEA
                      
                      $
                      33,106
                      
                      
                      $
                      10,580AsiaPac
                      
                      
                      10,501
                      
                      
                      
                      10,928Americas
                      
                      
                      3,677
                      
                      
                      
                      1,893Total
      revenue
                      
                      $
                      47,284
                      
                      
                      $
                      23,401December
      31,2009Assets:EMEA
                      
                      $
                      21,887AsiaPac
                      
                      
                      3,743Americas
                      
                      
                      4,447Corporate
                      
                      
                      50,337Total
      assets
                      
                      $
                      80,414


F-36




KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(18)
Subsequent Events





On
January 26, 2010, we completed an underwritten public offering of 2,980,000
shares of our common stock, pursuant to our shelf registration statement on Form
S-3 (No. 333-162325), which was originally filed and declared effective in
October 2009, and related prospectus supplement dated January 21,
2010.  We sold such shares in the offering at a price of $10.50 per
share and received $31,290 in gross proceeds and approximately $28,500 in net
proceeds, after deducting underwriting discounts, commissions, legal fees and
other estimated offering expenses.  The impact of the public offering
will essentially be to increase our total stockholders’ equity by approximately
$28,500.  As part of the offering, we granted the underwriters an
over-allotment option to purchase an additional 447,000 shares of common stock
at the same price per share through February 20, 2010.  We
subsequently sold 350,000 additional shares of common stock pursuant to the
over-allotment option on February 23, 2010, and received $3,675 in gross
proceeds and approximately $3,000 in net proceeds.  We will utilize
the net proceeds of the offering for potential acquisitions and
acquisition-related costs and for working capital and general corporate
purposes.  Additionally, a small portion of the net proceeds will be
used for the repurchase of certain outstanding warrants issued in prior private
placement financings.





In
connection with the consolidation of our international operational headquarters
in Prague, Czech Republic, we decided to dual list our shares of common stock on
the Prague Stock Exchange, the Czech Republic’s main securities market and the
second largest stock exchange in Central and Eastern Europe. On January 25,
2010, our common stock was accepted and began trading on the Main Market of the
Prague Stock Exchange.  Our shares trade under the symbol KITD on the
Prague Stock Exchange, and may be traded interchangeably between the NASDAQ
Global Market and the Prague Stock Exchange.





On March
9, 2010, we completed an underwritten public offering of 1,541,624 shares of our
common stock, pursuant to our shelf registration statement on Form S-3 (No.
333-164655), which was originally filed and declared effective in February 2010,
and related prospectus supplement dated March 4, 2010.  We sold such
shares in the offering at a price of $9.73 per share and received $15,000 in
gross proceeds and approximately $13,800 in net proceeds, after deducting
underwriting discounts, commissions, legal fees and other estimated offering
expenses. The impact of the public offering will essentially be to increase our
total stockholders’ equity by approximately $13,800. As part of the offering, we
granted the underwriters an over-allotment option to purchase an additional
231,244 shares of common stock at the same price per share through April 3,
2010. We subsequently sold 231,244 additional shares of common stock pursuant to
the over-allotment option on March 22, 2010, and received $2,250 in gross
proceeds and approximately $2,000 in net proceeds. We intend to use the net
proceeds from the sale of the shares in the offering to repurchase outstanding
warrants issued in prior private placement financings from certain warrant
holders and, if there are residual proceeds, for acquisitions, working capital
and general corporate purposes.





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





The Board
of Directors approved the repurchase of certain outstanding warrants with
exercise prices in excess of market price from certain warrant holders which
acquired the warrants in prior private placement financings, including KIT Media
Ltd., an entity controlled by Kaleil Isaza Tuzman, our Chairman and Chief
Executive Officer.  We repurchased and cancelled the warrants on March
31, 2010, in exchange for cash payments equal to the fair value of the
applicable warrants on the date of repurchase, as determined using a percentage
premium over the intrinsic value (using a 20-day trailing average closing stock
price at the time of warrant repurchase agreement minus the applicable warrant
exercise price) of the warrants. Such repurchase amounts were below
the “Black-Scholes-Merton” value of the warrants. The terms
of the warrant repurchase were no more favorable to KIT Media than to other
warrant sellers.


F-37





KIT
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





(18)
Subsequent Events (continued)





In March,
we acquired Multicast Media Technologies, Inc., corporation United States
Company engaged in live event broadcasting, internet video and targeted
multimedia communications (“Multicast”), in exchange for 2,379,714 shares of our
common stock and approximately $4,750 in cash (the “Cash Consideration”). The
share consideration issuable to Multicast stockholders was reduced to 1,312,034
shares of KIT digital common stock (the “Merger Shares”), after giving effect to
adjustments for assumption by KIT digital of existing indebtedness and other
liabilities of Multicast in the amount of approximately $5,927.  The
merger consideration is subject to adjustment upwards or downwards to the extent
that the closing working capital of Multicast is greater or less than
zero.





The Cash
Consideration and Merger Shares were delivered as follows: (i) $4,000 in cash
and 842,500 shares of our stock promptly following the closing; and (ii) a
“holdback amount” of an additional $746 in cash and 469,534 shares of KIT
digital common stock, less any amount used by KIT digital to offset negative
working capital and satisfy indemnity claims as described below, will be
delivered to such stockholders not later than one year after the closing or such
later date as all indeminty claims have been resolved. Of the total “holdback
amount,” $712 in cash and 196,798 Merger Shares will be used to offset any
negative working capital balance of Multicast as of the effective date of the
merger, which amount is to be determined within 30 days following the closing of
the merger. The remaining $34 in cash and 272,736 Merger Shares being held back
by KIT digital will be used to indemnify KIT digital against any breaches of
representations, warranties and covenants by Multicast, as well as against
certain additional specified liabilities.


F-38