If my daughter was not in Martial Arts at the age of 5, I probably would not have let her watch it at that age. However, it was good for her to see the things she was learning in action. On that note last weekend at the age of 10 she obtained her Black Belt.
I don't think kids should just sit and watch fighting though... but then again it is not much worse than what they see on TV and even Cartoons. Remember Teenage Mutant Ninja Turtles, Power Rangers, He-Man, even Coyote and Roadrunner...all had violent natures. It is up to the parent to explain to the kids that fighting is not acceptable except for in extreme circumstances.
JB