Summary of KIT DIGITAL, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in Thousands, Except Share and Per Share Data)

Overview

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

Set forth below is a discussion of the financial condition and results of operations of KIT digital, Inc. and its consolidated subsidiaries (collectively, "we," "us," or "our"), for the three months ended March 31, 2009 and 2008. The following discussion should be read in conjunction with the information set forth in the consolidated financial statements and the related notes thereto appearing elsewhere in this report.

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

Results of Operations - Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Revenue. Consolidated revenue increased by $6,122 from $3,502 for the three months ended March 31, 2008 to $9,624 for the three months ended March 31, 2009, an increase of 175%.

Digital Media segment revenue increased by $6,455 from $2,373 for the three months ended March 31, 2008 to $8,828 for the three months ended March 31, 2009, an increase of 272%. The increase was principally due to an increase in customers, increased spending by existing customers, and revenue from the acquired companies not included in prior period results.

Professional Services segment revenue decreased by $333 from $1,129 for the three months ended March 31, 2008 to $796 for the three months ended March 31, 2009, a decrease of 29%. The decrease was primarily from the decreases in spending by existing clients.

Variable and Direct Third Party Costs

Cost of Goods and Services. Cost of goods and services of $3,478 represents the costs by KIT digital Czech for the supply of IPTV solutions, services and components; no such expenses were incurred prior to the acquisition of KIT digital Czech in October 2008.

Hosting, Delivery and Reporting. These costs decreased by $233 from $515 for the three months ended March 31, 2008 to $282 for the three months ended March 31, 2009, a decrease of 45%. These costs decreased primarily due to the establishment of an internal datacenter which reduced our reliance on third party suppliers.

Content Costs. Content costs increased by $277 from $184 for the three months ended March 31, 2008 to $461 for the three months ended March 31, 2009, an increase of 151%. The increase is primarily due to the inclusion of costs from Kamera (acquired May 2008) not included in prior period results.

Direct Third Party Creative Production Costs. Direct third party creative production costs increased by $52 from $753 for the three months ended March 31, 2008 to $805 for the three months ended March 31, 2009, an increase of 7% attributable to higher costs in the Professional Services segment.

General and Administrative Expenses

Compensation, Travel and Associated Costs (Exclusive of Non-Cash Stock-Based Compensation). These costs decreased by $910 from $4,323 for the three months ended March 31, 2008 to $3,413 for the three months ended March 31, 2009, a decrease of 21%. The decrease was primarily due to the broad cost cutting measures begun in the first quarter of 2008 which included a reduction in headcount and salary levels offset in part by increases due to our business acquisitions.

Non-Cash Stock-Based Compensation. Non-cash stock-based compensation expense decreased 93% by $3,721, from $4,001 for the three months ended March 31, 2008 to $280 for the three months ended March 31, 2009.

Legal, Accounting, Audit and Other Professional Services Fees. These expenses decreased by $75 from $345 for the three months ended March 31, 2008 to $270 for the three months ended March 31, 2009, a decrease of 22%, primarily due to lower legal fees.

Office, Marketing and Other Corporate Costs. These expenses decreased by $121 from $838 for the three months ended March 31, 2008 to $717 for the three months ended March 31, 2009, a decrease of 14%. The decrease was primarily due to the broad cost cutting measures begun in the first quarter of 2008 and includes a reduction in marketing related expenses.

Merger and Acquisition and Investor Relation Expenses. Merger and acquisition and certain investor relation expenses were $378 for the three months ended March 31, 2009. There were no such expenses in the three months ended March 31, 2008.

Depreciation and Amortization. Depreciation and amortization expense increased 179% by $438 from $245 for the three months ended March 31, 2008 to $683 for the three months ended March 31, 2009. These costs have increased primarily due to the increases related to the acquisitions of KIT digital Czech in October 2008 and Kamera in May 2008.

Restructuring Charges. Restructuring charges decreased 96% by $2,626, from $2,745 for the three months ended March 31, 2008 to $119 for the three months ended March 31, 2009.

Other Non-Recurring Charges. Other non-recurring charges increased 81% by $109 from $135 for the three months ended March 31, 2008 to $244 for the three months ended March 31, 2009. These charges have increased primarily due to the migration of certain technical and operational functions from Toronto and Stockholm offices to our Prague office.

Impairment of Property and Equipment. Impairment of property and equipment was $229 for the three months ended March 31, 2008. In 2008, the impairment related to the abandonment of assets due to the downsizing of our London office.

Interest Income. Interest income decreased by $60 from $61 for the three months ended March 31, 2008 to $1 for the three months ended March 31, 2009, a decrease of 98%. This decrease was primarily due to a decrease in our cash and cash equivalents related to the timing of the proceeds from private placements.

Interest Expense. Interest expense increased by $125 from $14 for the three months ended March 31, 2008 to $139 for the three months ended March 31, 2009. This increase was due to the issuance of $1,500 of a senior secured note in November 2008 and the addition of debt and capital lease obligations acquired in the acquisition of Visual in October 2008

Amortization of Deferred Financing Costs. Amortization of deferred financing costs were $164 for the three months ended March 31, 2009. These costs result from the issuance of $1,500 of a senior secured note in November 2008.

Derivative income. Derivative income was $1,950 for the three months ended March 31, 2009. Under EITF 07-05 and FAS 133, the company recorded a reduction in the fair value of warrants containing reset provisions in the three months ended March 31, 2009.

Other Income/(Expense). Other income increased by $7. Other income was $22 for the three months ended March 31, 2008 as compared to other income of $29 for the three months ended March 31, 2009.

Net (Loss) Income. As a result of the factors described above, we reported net income of $168 for the three months ended March 31, 2009 compared to net loss of ($10,743) for the three months ended March 31, 2008, an improvement of $10,911, or 102%.

Liquidity and Capital Resources

As of March 31, 2009, we had cash and cash equivalents of $2,525 and a working capital deficit of approximately $6,779, which if reduced for the acquisition liabilities for Kamera and Visual that can be paid in stock of $2,575 and the Derivative liability which is a non-cash valuation of $3,720, becomes a working capital deficit of $484. Management anticipates that going-forward, KIT digital will generate sufficient cash flows from its operating activities to meet its capital requirements. However, the Company may choose to raise equity capital from time to time to support general working capital needs, certain capital expenditures or potential acquisitions. KIT Media, Ltd., an entity controlled by Kaleil Isaza Tuzman, KIT digital's Chairman and Chief Executive Officer, has made advances to the Company and participated in such financings in the past, at competitive market levels, and may do so in the future.

Net cash used in operating activities was $1,162 for the three months ended March 31, 2009, compared to $4,818 for the three months ended March 31, 2008, a decrease of $3,656, or 76%. The decrease in net cash used in operating activities is primarily related to an increase in revenues from clients, and the reduction in general and administrative costs.

Net cash used by investing activities was $1,892 for the three months ended March 31, 2009, compared to net cash provided by investing activities of $107 for the three months ended March 31, 2008, an increase in net cash used in investing activities of $1,999. In 2009, this primarily consisted of cash paid into an investment of $200, cash paid in acquisition of Visual and purchase of property and equipment of $1,512 which is mainly a purchase of software. In 2008, this primarily consisted of the release of restricted cash of $100, proceeds from sale of equipment of $33 and purchase of assets of $26.

Net cash used by financing activities was $170 for the three months ended March 31, 2009, compared net cash provided by financing activities of $61 for the three months ended March 31, 2008. In 2009, this primarily consisted of $25 in proceeds from exercise of stock options, payments of Secured Notes of $67 and payment of capital leases of $126. In 2008, this primarily consisted of a decrease of bank overdraft of $89 and payment of capital leases of $28.

Off-Balance Sheet Arrangements

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

Impact of Inflation

We believe that inflation has not had a material impact on our results of operations for the three months ended March 31, 2009 and 2008. We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.

Critical Accounting Policies and Estimates

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

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

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

Inventories. We value inventories at the lower of cost (first-in, first-out method) or market and are comprised of finished goods. On a quarterly basis, we review inventory quantities on hand and analyze the provision for excess and obsolete inventory based primarily on product age in inventory and our estimated sales forecast, which is based on sales history and anticipated future demand. Our estimates of future product demand may not be accurate and we may understate or overstate the provision required for excess and obsolete inventory. Accordingly, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and results of operations. As of March 31, 2009, our reserve for excess and obsolete inventory was $120.

Cash and Cash Equivalents. We consider all highly liquid investments with original maturities of ninety days or less when purchased to be cash and cash equivalents.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from our customers not making their required payments. Based on historical information, we believe that our allowance is adequate. Changes in general economic, business and market conditions could result in an impairment in the ability of our customers to make their required payments, which would have an adverse effect on cash flows and our results of operations. The allowance for doubtful accounts is reviewed monthly and changes to the allowance are updated based on actual collection experience. We use a combination of the specific identification method and analysis of the aging of accounts receivable to establish an allowance for losses on accounts receivable. The allowance for doubtful accounts as of March 31, 2009 was $514.

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

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

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