UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





For the
Fiscal Year Ended December 31, 2009





SITESTAR
CORPORATION


(Exact
Name of Registrant as Specified in Its Charter)





Commission
file number 000-27763





Nevada
            
            88-0397234(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            
            (I.R.S.
      Employer
              Identification
      No.)7109 Timberlake Rd., Suite 201,
      Lynchburg, VA
            
            24502(Address
      of Principal Executive Offices)
            
            (Zip
      Code)




(434)
239-4272


(Issuer’s
telephone number, including area code)


Securities
registered under Section 12(b) of the Exchange Act: None


Securities
registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 par
value




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


o Yes     x No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section13 or Section 15(d) of the Act.


o Yes     x No





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.  Yes xNo o





Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large
      accelerated filer o
            
            Accelerated
      filer oNon-accelerated
      filer o
            
            Smaller
      reporting company x




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


o Yes    
x No





The
aggregate value of the voting common equity held by non-affiliates as of June
30, 2009, the last business day of the registrant’s most recently completed
second fiscal quarter, was approximately $4,564,429 based on the price at
which the common stock last sold on such day.  This price reflects
inter-dealer prices without retail mark up, mark down, or commissions, and may
not represent actual transactions.





The
number of shares outstanding of Common Stock, $0.001 par value as of May 17,
2010 was approximately 75,298,705.









DOCUMENTS
INCORPORATED BY REFERENCE





None.




2





PART
I




This
Annual Report on Form 10-K contains statements that are forward-looking,
including statements relating to anticipated operating results, growth,
financial resources, the development of new markets, the development and
acceptance of the Company’s business strategy and new applications for Sitestar
Corporation's existing products. Readers are cautioned that, although the
Company believes that its expectations are based on reasonable assumptions,
forward-looking statements involve risks and uncertainties which may affect the
Company's business and prospects, including changes in economic and market
conditions, acceptance of the Company’s products, maintenance of strategic
alliances and other factors discussed elsewhere in this Form 10-K.




ITEM
1.  BUSINESS




Overview




Sitestar
is an Internet Service Provider (ISP) that offers consumer and business-grade
Internet access, wholesale managed modem services for downstream ISPs and Web
hosting.  Sitestar also delivers value-added services including spam,
virus and spyware protection, pop-up ad blocking and web
acceleration.  The Company maintains multiple sites of operation and
provides services to customers throughout the U.S. and Canada.





The
products and services that the Company provides include:




·
   Internet access services;


·
   Web acceleration services;


·
   Web hosting services;




The
Company’s Internet division markets and sells narrow-band (dial-up and ISDN) and
broadband services (DSL, fiber-optic and wireless), and supports these products
utilizing its own infrastructure and affiliations.  Value-added
services include web acceleration, spam and virus filtering, as well as, spyware
protection.





Additionally,
the Company markets and sells web hosting and related services to consumers and
businesses.





Corporate
History




The
Company was incorporated under the name White Dove Systems, Inc. in December
1992 under the laws of the State of Nevada.




Effective
December 15, 1999, the Company consummated the acquisition of Neocom
Microspecialists, Inc. (Neocom) by exchanging 6,782,353 shares of the Company’s
common stock for 100% of the outstanding shares of Neocom. Effective upon the
closing of the acquisition, the Company issued 4,782,353 shares of its common
stock and reserved 2,000,000 shares of common stock to issue on the second
anniversary of the acquisition based on certain contingencies related to
potential unrecorded liabilities.  As of January 2002, the remaining
2,000,000 shares were issued to the former shareholders of Neocom.




3





Neocom
has since changed its name to Sitestar.net, Inc.  Sitestar.net is an
ISP and web development company based in Martinsville, Virginia.
 Sitestar.net provides Internet access and other Internet services to its
customers in the Southern Virginia area.




Effective
November 22, 2000, the Company consummated the acquisition of FRE Enterprises,
Inc., a Virginia corporation (doing business as “Lynchburg.net” and “Computers
by Design”) by exchanging 16,583,980 shares of its common stock for 100% of the
outstanding shares of Lynchburg.net. Effective upon the closing of the
acquisition, the Company issued 12,437,985 shares of its common stock and
reserved 4,145,995 shares of its common stock that the Company had agreed
to issue on the third anniversary of the acquisition based on certain
contingencies related to potential unrecorded and unknown liabilities.  On
the third anniversary, November 22, 2003, there were no contingencies that had
not been satisfied and the shares were issued on that date. The Company used the
market price of its common stock at the acquisition date to determine the
acquisition price of $2,487,597.




Lynchburg.net
is an ISP and web services company.  Computers by Design is a computer
sales and service company. In addition, Computers by Design has a division that
remanufactures ink and toner cartridges under the name of CBD Toner Recharge.
This company is based in Lynchburg, Virginia and provides products and services
to its customers in the central and southwestern part of Virginia, as well as,
nationwide.




On July
1, 2001, the Company acquired 100% of the equity and voting interest of Advanced
Internet Services, Inc., a North Carolina corporation (ADVI).  ADVI is an
Internet and computer Service Provider located in Mt. Airy, North Carolina.
 The purchase price was $965,980, which consisted of $150,000 in cash,
transaction costs of $30,000, 6,021,818 of the Company’s common shares valued at
$301,091 and a non-interest bearing promissory note for $1,199,990 (the present
value was $484,889) payable in 24 quarterly installments of $51,078.  Due
to the non-interest bearing nature of the note, the Company imputed a discount
rate of 36% to calculate the present value of the note.  This discount rate
was an estimate of the Company’s current cost of capital.  This acquisition
included goodwill of $702,642 that was the premium the Company paid to have the
opportunity to generate revenues and earnings in this market.




Effective
October 16, 2002, Sitestar reorganized and the Board named Frank R. Erhartic,
Jr. as the new Chairman and CFO to replace Clinton Sallee and Eric Manlunas, who
both resigned. Mr. Erhartic later entered into a contract with the former
management of Sitestar to buy out their shares of the Company to reduce the
number of shares outstanding by approximately 32.5%.  Mr. Sallee was
retained as a paid consultant for one year.





Effective
December 31, 2002, the Company acquired the Internet assets and Internet
customer list of Digital Data Connections, Inc., a local competitor in
Martinsville, Virginia. This deal consisted of a cash payment of $50,000 and a
promise to pay a certain percentage of revenues generated by their customers for
ten months. The Company also accepted a non-compete agreement restricting
competition in the Company’s existing markets for a period of three
years.





On June
30, 2004 the Company acquired 100% of the Internet-related assets of Virginia
Link Internet and Network Management, Inc., a Virginia corporation and ISP
located in Galax, Virginia and Mt. Airy Networks, LLC, a North Carolina limited
liability company, an ISP located in Mount Airy, North Carolina. The total
purchase price was $226,314, representing the fair value of the assets acquired,
less $50,000 for deferred revenues and less a 10% discount, for a purchase price
of $176,314 which consisted of a non-interest bearing note payable over thirty
months.




4




Effective
August 31, 2004 the Company entered into a Definitive Agreement to sell the
assets of Sitestar Applied Technologies (SAT), the software development division
of the Company. Thomas Albanese, the former manager of the SAT division,
purchased the assets. The new company is subsequently doing business as Servatus
Development, LLC (Servatus). The agreement consisted of Albanese surrendering
1,460,796 shares of the Company’s common stock and the Company receiving a 20%
share in the gross revenues of Servatus over a period of four years and
maintaining the rights to the crisis management software system that was shortly
thereafter completed. The Company provided office space, occupancy costs and
Internet services for one year. The Company has recognized a gain from this
transaction of $8,734 through the fourth quarter of 2008, representing the
excess of the value of the common stock received and the shared revenue over the
recorded basis of the assets sold.





Effective
November 22, 2004, the Company entered into a Definitive Agreement acquiring the
Internet related assets of Exchange Computers, Inc. and Exis.net, Inc. Both are
Virginia corporations. The deal consisted of the acquisition of the dial-up
customers, the related Internet assets and non-compete agreements from the
principal officers of the companies. The total purchase price was $150,000,
representing the fair value of the assets acquired, which consisted of $30,000
in cash at closing and a non-interest bearing promissory note of $120,000 that
was paid over twelve months.





Effective
September 16, 2005, the Company entered into a Definitive Agreement pursuant to
which it acquired the Internet related assets of IDACOMM, an Idaho corporation.
The transaction consisted of the acquisition of the dial-up and certain DSL
customers, the related Internet assets and non-compete agreements from the
company. The total purchase price was $1,698,430, representing the fair value of
the assets acquired, less $112,735 for deferred revenues and less a 10%
discount, for a net purchase price of $1,545,304 which consisted of a down
payment of $250,000 with the balance paid by a non-interest bearing note payable
over 7 months. The transaction was accounted for by the purchase method of
accounting.  Accordingly, the purchase price was allocated to the assets
acquired based on the estimated fair values at the date of acquisition.
 The excess of the purchase price over the estimated fair value of tangible
assets acquired was attributed to the customer list and non-compete agreement,
which were amortized over the estimated three-year life and contractual
three-year life, respectively.  The value of the customer list was
determined by multiplying the current market value per customer times the number
of customers purchased at the time of the acquisition.





Effective
January 1, 2006, with a closing date of January 6, 2006, the Company entered
into a Definitive Agreement acquiring the Common Stock of NetRover Inc., a
Canadian ISP and web services corporation. The Definitive Agreement consisted of
the acquisition of all of the issued and outstanding shares of NetRover Inc.’s
stock and a non-compete agreement of the company. The total purchase price was
$604,535 which represented the fair value of the stock acquired. The transaction
also consisted of a non-interest bearing promissory note of $403,551 paid over
twelve months, amortized over twenty four months with a balloon payment in the
twelfth month and a down payment consisting of 2,000,000 shares of the
Registrant’s common stock at Closing.





Effective
March 16, 2006, the Company entered into a Definitive Agreement pursuant to
which it acquired the Internet related assets of Prolynx, Inc., a Colorado
ISP.  The total purchase price was $90,000 representing the fair value
of the net assets acquired paid in the form of the Company’s assumption of
$90,000 in operating expenses accrued by Prolynx.




5





Effective
July 1, 2006, the Company entered into a Definitive Agreement pursuant to which
it acquired the Internet related assets of First USA, Inc., an Ohio
ISP.  The total purchase price was $725,000 representing the fair
value of the assets acquired which consisted of a $250,000 cash payment at
closing with the balance paid in six equal monthly payments beginning August
2006.





Effective
February 1, 2007, the Company entered into a Definitive Agreement pursuant to
which it acquired the Internet related assets of Magnolia Internet Services, an
Arkansas ISP.  The total purchase price was $113,812 representing the
fair value of the assets acquired which consisted of a $12,000 cash payment at
closing with the balance paid in twelve equal monthly payments beginning March
2007.  The purchase price has subsequently been adjusted down to
$108,470.





Effective
February 28, 2007, the Company entered into a Definitive Agreement pursuant to
which it acquired the Internet related assets of OW Holdings, Inc., an ISP
having customers throughout the Rocky Mountain region and with headquarters in
Wyoming.  The total purchase price was $900,000 representing the fair
value of the assets acquired which consisted of a $600,000 cash payment at
closing and the balance was paid in ninety days. The purchase price has been
adjusted down to $802,452.





Effective
June 21, 2007, the Company entered into a Definitive Agreement pursuant to which
it acquired the Internet related assets of AlaNet Internet Services, Inc., an
Alabama ISP.  The adjusted purchase price was $45,629 representing the
fair value of the assets acquired which consisted of a $4,275 cash payment at
closing with the balance paid in eleven monthly installments beginning July
2007.





Effective
November 1, 2007, the Company entered into an Asset Purchase Agreement pursuant
to which it acquired the Internet related assets of United Systems Access, Inc.
(d/b/a USA Telephone), a corporation with headquarters in Maine.  The
total purchase price was $3,750,000 representing the fair value of the assets
acquired which consisted of a $1,000,000 cash payment at closing with a second
$1,000,000 due in 30 days with the remaining balance due in 36 monthly
installments beginning January 2008.  The remaining installment
balance due on the purchase price was $900,615 as of December 31,
2009.





Effective
March 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of Comcation, Inc. a Pennsylvania
ISP.  The total purchase price was $54,800 representing the fair value
of the assets acquired which consisted of a $9,135 cash payment at closing with
the remaining balance paid in five monthly installments beginning April
2008.  The purchase price has been subsequently adjusted down to
$36,818.





Effective
April 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of N2 the Net, LLC, a Tennessee
Internet Service Provider.  The total purchase price was $43,790
representing the fair value of the assets acquired which consisted of a $3,650
cash payment at closing with the remaining balance paid in eleven monthly
installments beginning May 2008.  The purchase price has been
subsequently adjusted to $45,821.





Effective
May 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of Dial Assurance, Inc., a
Georgia-based wholesale managed modem solution provider.  The total
purchase price was $229,900 representing the fair value of the assets acquired
which consisted of a $100,000 cash payment at closing with the remaining balance
paid in six monthly installments beginning June 2008.




6





Effective
May 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired certain broadband digital subscriber line (DSL) accounts and
related assets of United Systems Access, Inc., (d/b/a USA Telephone), a
corporation with its headquarters in Maine.  The net purchase price
was $297,965 representing the fair value of the assets acquired which consisted
of a $130,000 cash payment at closing with the remaining balance paid in sixty
days from closing. The purchase price has been subsequently adjusted down to
$263,757.





Effective
June 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of AdaNet, an Oklahoma-based
ISP.  The total purchase price was $23,017 representing the fair value
of the assets acquired which consisted of a $3,836 cash payment at closing with
the remaining balance paid in five monthly installments beginning July
2008.  The purchase price has been subsequently adjusted down to
$18,542.





Effective
August 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of Velocity West, Inc., an ISP and
wholesale managed modem solution provider with headquarters in
Texas.  The total purchase price was $360,000 representing the fair
value of the assets acquired which consisted of a $100,000 cash payment at
closing and the remaining balance has been paid.





Effective
November 1, 2008, the Company entered into an Asset Purchase Agreement pursuant
to which it acquired the Internet related assets of ISP Holding Company, LLC
(d/b/a DONOBi Internet Services), an ISP with headquarters in
Washington.  The total purchase price was $475,000 representing the
fair value of the assets acquired which consisted of a $150,000 cash payment at
closing with the remaining balance paid in twelve monthly installments beginning
December 2008.  The purchase price has been subsequently adjusted down
to $447,354.





Effective
February 10, 2009, the Company entered into an Asset Purchase Agreement pursuant
to which it acquired the Internet related assets of Pulaski Networks, LLC, a
Virginia Internet Service Provider.  The total purchase price was
$24,907 representing the fair value of the assets acquired which consisted of
applying the amount owed to the Company, by Pulaski Networks for wholesale
dial-up service, to the purchase price.





Sitestar’s
Business Strategy




The
Company’s growth strategy is to expand its business by increasing its customer
base, services and coverage area. The Company uses marketing, acquisitions and
partnerships to accomplish this. Sitestar’s mission is to increase stockholder
value by increasing revenues, minimizing operational costs and increasing
profits, while maintaining superior products and customer service.




Key
elements of Sitestar’s strategy include:





Increasing
the Dial-up Customer Base.  The Company intends to retain its large
regional customer base plus continue to expand its services to a broader
geographic market. The Company attempts to maintain its existing customers by
offering them a high quality service at a reasonable price and value-added
services such as free anti-virus and spam filtering. To address the broader
market potential, the Company has expanded its local coverage areas and has
leased infrastructure from its partners which enables the Company to provide
service to nearly 100% of the people in the United States and
Canada.




7





Increasing
the Broadband Customer Base.  The Company offers broadband within its
regional and national footprint. The Company anticipates that it will enter into
additional partnerships to continue to expand its market footprint. The Company
markets Broadband Internet Access through traditional sales
channels.





Increasing
the Product Offerings.  The Company anticipates that it is will continue to
offer new products and services, as they become available, through its retail
stores and to its existing Internet customer base. The Company views Voice over
Internet Protocol (VoIP), services that allow accepting and originating phone
calls through an Internet connection, to be value-added service for both
business and residential customers, and is one of the primary new product
offerings the Company is currently exploring.





Strategic
Acquisitions. The Company has historically acquired companies, assets and
customer bases and intends to continue to consider and execute similar
opportunities to help grow its business.





Increasing
the Economies of Scale.  As the Company expands, it is committed to
managing costs and maximizing efficiencies. To optimize its operations, the
Company has acquired and leverages the services of wholesale managed modem
providers to reduce costs and consolidate its network infrastructure. Similarly,
the Company has integrated its offices by deploying VoIP services to better
utilize its human resources and provide more efficient customer
service.




Marketing
Channels




The
Company deploys a variety of marketing strategies and tactics to promote its
products and services, including Web advertisement, affiliate and referral
programs. The Company’s portfolio of websites generates new business on a
consistent and daily basis. In addition, the Company sells its products to
customers who visit its retail store locations.  The Company’s indirect
sales channel strategy consists of affiliates such as sales agents, as well as,
companies that market and sell the Company’s services under their own brand. To
date, the Company’s most effective sales lead generation has been through its
customer referral program. To capture greater market share, the Company has
utilized the position of Vice President of Marketing and Business Development.
Key initiatives include increasing affiliate relationships and strategic
acquisitions.





The
Internet services market is extremely competitive and highly fragmented.
 The Company faces competition from numerous types of ISPs,
including other national ISPs, telecommunications providers and cable
companies, and anticipates that competition will only intensify in the future as
the ISP industry becomes more mature through provider consolidation and pricing
commoditization. The Company believes that the primary competitive factors in
the Internet services market include:





o Pricing;




o Quality
and breadth of products and services;




o Ease
of use;




o Personal
customer support and service; and




o Brand
awareness.





The
Company believes that it competes favorably based on these factors, particularly
due to:




o National
brand name;




o Highly
responsive customer support and service;




o High
reliability; and




o
Competitive pricing.




8




The
Company currently competes, or expects to compete, with the following types of
companies:




o
            Local
      and regional ISPs and Computer Companies;o
            National
      Internet Service Providers, such as, AOL, MSN (Microsoft Network) and
      EarthLink;o
            Local,
      regional and national broadband cable providers, such as Comcast and Cox
      Communications;o
            Providers
      of Web hosting, co-location and other Internet-based business
      services;o
            Computer
      hardware and other technology companies that provide Internet connectivity
      with their own or other products, including IBM and
    Microsoft;o
            National
      telecommunication providers, such as Verizon, AT&T and
      Qwest;o
            Regional
      Bell Operating Companies (RBOCs), Competitive Local Exchange Carriers
      (CLECs) and other local telephone companies;o
            Providers
      of free or discount Internet service, including United Online’s and
      NetZero;





o
            Terrestrial
      wireless and satellite providers, such as Clearwire, WildBlue and
      HughesNet; ando
            Non-profit
      or educational ISPs.




The
Company’s primary competitors include large companies that have substantially
greater market presence, brand-name recognition and financial resources than the
Company presently enjoys. Secondary competitors include local or regional ISPs
that may benefit from relationships within a particular community.





The
residential broadband Internet access market is dominated by cable companies,
telecommunications companies and CLECs who respectively offer Internet
connectivity through the use of cable modems or Digital Subscriber Line (DSL)
programs that provide high speed Internet access using the existing copper wire
telephone infrastructure. Other alternative service companies provide Internet
connectivity via wirelesses terrestrial and satellite-based service
technologies. These competitors enjoy the advantage of being able to leverage
their existing relationships with customers to promote high-speed Internet
services. In addition, they provide incentives for customers to purchase
Internet access by offering discounts for bundled service offerings (i.e.,
phone, television, Internet). While the Company is a reseller of broadband
services including DSL and fiber services, its profit margin is influenced by
the aforementioned threats. Thus, should the Company be unable to provide
technologically competitive service in the marketplace or compete with companies
bundling Internet service with their products, its revenues and profit margins
may decline.




Additionally,
a new dial-up Internet access market segment has been created similar to the
discount or “no frills” airlines. These ISPs deliver dial-up Internet access at
substantially discounted rates with complimentary spam and virus protection, but
charge their customers for technical support. Many ISPs have responded in turn
by creating similar service and pricing plans and or reducing the cost of their
traditional service plans to remain competitively viable. Similarly, a second
dial-up market segment has emerged where value-added services including web
acceleration, spyware and pop-up ad protection are delivered at a premium price.
Thus, the Company believes that if it is unable to compete with lower-cost and
premium service providers, its revenues and profit margins may
decline.




To
address these competitive challenges, the Company will continue to distinguish
itself by offering competitively priced and packaged products, value-added
services and proven customer support. The Company also believes that its ability
to respond quickly and adroitly in providing solutions to its customers’
Internet needs will be a key advantage.


9





Government
Regulations




There is
currently only a small body of laws and regulations directly applicable to
access or commerce on the Internet. However, it is possible that a number of
laws and regulations may be repealed, modified or adopted at the international,
federal, state and local levels with respect to the Internet, covering issues
such as user privacy, freedom of expression, pricing, characteristics and
quality of products and services, taxation, advertising, intellectual property
rights, information security and the convergence of traditional
telecommunications services with Internet communications which do, or could
affect the Company.




In
addition, there is substantial uncertainty as to the applicability to the
Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy.  The vast majority of the laws were adopted prior to
the advent of the Internet and, as a result, did not contemplate the unique
issues and environment of the Internet.  Future developments in the law
might decrease the growth of the Internet, impose taxes or other costly
technical requirements, create uncertainty in the market or in some other manner
have an adverse effect on the Internet.  These developments could, in turn,
have a material adverse effect on the Company’s business, prospects, financial
condition and results of operations.





The
Company provides its services through data transmissions over public telephone
lines and other facilities provided by telecommunications companies.  These
transmissions are subject to regulation by the Federal Communications Commission
(FCC), state public utility commissions and foreign governmental authorities.
However, the Company is not subject to direct regulation by the FCC or any other
governmental agency, other than regulations applicable to businesses generally.
Nevertheless, as Internet services and telecommunications services converge or
the services the Company offers expand, there may be increased regulation of its
business, including regulation by agencies having jurisdiction over
telecommunications services.  Additionally, existing telecommunications
regulations affect the Company’s business through regulation of the prices it
pays for transmission services and through regulation of competition in the
telecommunications industry.





The FCC
has ruled that calls to ISPs are jurisdictionally interstate and that ISPs
should not pay access charges applicable to telecommunications carriers.
 Several telecommunications carriers are advocating that the FCC regulate
the Internet in the same manner as other telecommunications services by imposing
access fees on ISPs.  The FCC is examining inter-carrier compensation for
calls to ISPs, which could affect ISPs' costs and consequently substantially
increase the costs of communicating via the Internet.  This increase in
costs could slow the growth of Internet use and thereby decrease the demand for
the Company’s services.




The
Company purchases some components of its broadband services from local carriers
and from other DSL providers that purchase components from local carriers. In
November 1999, the FCC issued a ruling that allowed competitive local phone
companies to “line-share” their broadband DSL services over a phone customer’s
local phone line. The U.S. Court of Appeals changed this decision in May 2002
and in February 2003, the FCC decided to eliminate “line-sharing” over a
three-year phase out. Although the inability to buy these discounted lines could
affect a very small part of the Company’s business, it could cause the growth of
its broadband business to slow if some of its partners, like Covad
Communications Group, Inc., have to pay full-price for their lines.  On the
other-hand, however, this may cause less competition in the Company’s local
markets where it offers broadband services.




10





Employees




As of
April 1, 2010, the Company employed twenty full-time individuals.  Of
these, the Company has three in management, three in administration, and
fourteen technicians.  The Company also employed four part-time
individuals.  Of these, the Company has three technicians and one in
management. The Company’s employees are not unionized and it considers its
relations with its employees to be favorable.





Available
Information




Sitestar
Corporation files annual, quarterly, and current reports and other documents
with the Securities and Exchange Commission (SEC) under the Securities Exchange
Act.  The public may read and copy any materials that the Company files
with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC
maintains an Internet web site that contains reports, proxy and information
statements, and other information regarding issuers, including the Company, that
file electronically with the SEC.  The public can obtain any documents that
the Company files with the SEC at http://www.sec.gov.  The
Company also has available though EDGAR its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Securities Exchange Act as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the
SEC.





ITEM
1A.  RISK FACTORS





Not
required for small business.





ITEM
1B.  UNRESOLVED STAFF COMMENTS





None





ITEM 2.
PROPERTIES




The
Company owns a 12,000 square foot office building in Martinsville, Virginia
located at 29 West Main Street, Martinsville, VA 24112, which was acquired along
with the acquisition of Neocom.  This facility houses a portion of the
Company’s customer service and technical support functions.  Also located
here is equipment needed to service many of its customers.  The
Company leases a 7,200 square feet office facility in Lynchburg, Virginia which
serves as its corporate office.  Here the Company handles the executive,
marketing, corporate accounting functions, customer service, technical support,
and billing and houses Internet equipment. In addition, the Company markets
local Internet service under the Lynchburg.net and SurfWithUs.net brands, sells
computer hardware and services under the name Computers by Design and
remanufactures toner and ink cartridges under the name CBD Toner Recharge at
this location. This facility has an annual rent of $48,000. The facility is
located at 7109 Timberlake Road, Lynchburg, VA 24502, is leased from Frank R.
Erhartic, Jr. a Company Director and Officer and this lease expires on November
1, 2010.




11





The
Company cancelled the lease of a 950 square foot office facility in Virginia
Beach, Virginia effective October 31, 2008 where it sold computer hardware and
services and sold Internet services under the name of Sitestar Exis.net. The
Company also housed Internet equipment there to serve its customers in the
Virginia Beach, Virginia area. This facility had an annual rent of $7,600 and is
located at 333 Office Square Lane, Suite 103, Virginia Beach, VA 23462 and was
leased from Kempsville Commons on a month-to-month lease.  The Company
now out-sources the services to provide service for the customers in this area
and the Company’s other offices provide technical and billing support for those
customers previously provided at this location.





The
Company leases a 2,000 square foot office facility in Chatham, Ontario where it
sells Internet services under the name of NetRover. The Company also houses
Internet equipment there to serve its customers in Canada. This facility has an
annual rent of $18,000 Canadian Dollars (CAD) or approximately $15,898 in United
States Dollars (USD).  The facility is located at 48 Fifth Street,
Chatham, Ontario N7M 4V8 and is leased from Duff Enterprises and this lease
expires in November 2010.





The
Company anticipates that it may require additional space for its ISP operations
as it expands, and it believes that it will be able to obtain suitable space as
needed on commercially reasonable terms.





ITEM 3.
LEGAL PROCEEDINGS





On or
about January 16, 2008, the Company filed a Complaint in the Circuit Court in
the Orange County Superior Court of the State of California against Frederick T.
Manlunas, a former executive and director of the Company, for breach of
contract, specific performance and declaratory relief.





A
complaint has been filed in Belmont County, Ohio by First USA, Inc. alleging a
breach of agreement for the purchase and sale of Internet Service Provider
accounts dated July 1, 2006.  The complaint demands judgment of
approximately $150,000.  The Company has vigorously defended this
claim.  This matter was dismissed by the plaintiff on December 11,
2009.





ITEM
4.  SUBMISSION OR MATTERS TO A VOTE OF SECURITY HOLDERS




Reserved
and omitted.





PART
II




ITEM 5.
 MARKET FOR COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES





MARKET
FOR COMMON EQUITY





Set forth
below are the high and low closing bid prices for the Company’s common stock on
the Over-the-Counter Bulletin Board for each quarterly period commencing January
1, 2008:




12




High
            
            
            Low2008For
      the quarter ended March 31, 2008
            
            $
            0.12
            
            
            $
            0.07For
      the quarter ended June 30, 2008
            
            $
            0.11
            
            
            $
            0.11For
      the quarter ended September 30, 2008
            
            $
            0.09
            
            
            $
            0.08For
      the quarter ended December 31, 2008
            
            $
            0.09
            
            
            $
            0.082009For
      the quarter ended March 31, 2009
            
            $
            0.09
            
            
            $
            0.05For
      the quarter ended June 30, 2009
            
            $
            0.07
            
            
            $
            0.05For
      the quarter ended September 30, 2009
            
            $
            0.07
            
            
            $
            0.05For
      the quarter ended December 31, 2009
            
            $
            0.06
            
            
            $
            0.04




Such
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commissions and may not necessarily represent actual transactions.





RECORD
HOLDERS




The
closing bid price for the Company’s common stock was $0.03 on May 13, 2010.
 As of May 13, 2010 the Company had approximately 120 shareholders of
record. Additional holders of the Company’s Common Stock hold such stock in
street name with various brokerage firms.




EQUITY
COMPENSATION PLANS





The
Company does not have any plans under which options, warrants or other rights to
subscribe for or acquire shares of the Company’s common stock may be granted and
there are outstanding no options, warrants or other rights to subscribe for or
acquire shares of Company common stock. From time to time, the Board of
Directors may grant shares of the Company’s common stock to its officers,
employees and contractors in lieu of salary, fees or as a bonus. The Board of
Directors made no grants during fiscal years 2009 and 2008.





DIVIDENDS




The
Company has never declared or paid any cash dividends on its common stock.
 The Company currently intends to retain all available funds for use in its
business and therefore does not anticipate paying any cash dividends in the
foreseeable future. Any future determination relating to dividend policy will be
made at the discretion of the Board of Directors and will depend on a number of
factors, including the future earnings, capital requirements, financial
condition and future prospects and such other factors, as the Board of Directors
may deem relevant.




RECENT
SALES OF UNREGISTERED SECURITIES





On
December 24, 2007, the Company issued 5,263,158 shares of its common stock in
connection with a Stock Purchase Agreement as reflected in the Form 8-K filed
with the SEC dated December 24, 2007.  The Company reacquired the
5,263,158 shares on February 3, 2009 and placed them in treasury.





PURCHASES
OF EQUITY SECURITIES BY THE COMPANY AND AFFILIATED PURCHASERS





On
October 22, 2008 the Board of Directors of the Company Financial authorized a
stock repurchase program which calls for the repurchase of up to 10,000,000
shares of its common stock.   The shares reported in the table
below as shares that may be repurchased under the plan represent shares eligible
for the calendar year 2008 and 2009.




13




The
repurchases are to be made from time to time in the open market as conditions
allow and will be structured to comply with Commission Rule
10b-18.  Management reports monthly to the Board of Directors on the
status of the repurchase program.  The Board of Directors has reserved
the right to suspend, terminate, modify or cancel this repurchase program at any
time for any reason. The following table lists shares repurchased during the
quarter ended December 31, 2008 and the calendar year 2009 and the maximum
amount available to repurchase under the repurchase plan.





The
following chart provides information regarding purchases of Company equities by
the Company and affiliated purchasers over the last year:




Period
              
              Total
      Number of
                Shares
      Purchased
              
              
              Average
      Price Paid
                Per
      Share ($)
              
              
              Total
      Number of
                Shares
      Purchased as
                Part
      of Publicly
                Announced
      Plans or
                Programs
              
              
              Maximum
      Number
                of
      Shares That May
                Yet
      Be Purchased
                Under
      the Plans or
                ProgramsMonth
      # 1
                October
      2008
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,000,000Month
      # 2
                November
      30, 2008
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,000,000Month
      # 3
                December
      31, 2008
              
              
              19,500
              
              
              $
              0.06
              
              
              
              19,500
              
              
              
              9,980,500Total
      2008
              
              
              19,500
              
              
              $
              0.06
              
              
              
              19,500
              
              
              
              9,980,500Month
      # 4
                January
      31, 2009
              
              
              25,000
              
              
              
              0.06
              
              
              
              25,000
              
              
              
              9,955,500Month
      # 5
                February
      28, 2009
              
              
              5,263,158
              
              
              
              0.1121
              
              
              
              5,263,158
              
              
              
              4,692,342Month
      # 6
                March
      31, 2009
              
              
              34,000
              
              
              
              0.051
              
              
              
              34,000
              
              
              
              4,658,342Month
      # 7
                April
      30, 2009
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,658,342Month
      # 8
                May
      31, 2009
              
              
              7,000
              
              
              
              0.051
              
              
              
              7,000
              
              
              
              4,651,342Month
      # 9
                June
      30, 2009
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,651,342Month
      # 10
                July
      31, 2009
              
              
              10,000
              
              
              
              0.05
              
              
              
              10,000
              
              
              
              4,641,342Month
      # 11
                August
      31, 2009
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,461,342Month
      # 12
                September
      30, 2009
              
              
              1,460,795
              
              
              
              0.05
              
              
              
              1,460,795
              
              
              
              3,180,547Month
      # 13
                October
      31, 2009
              
              
              39,000
              
              
              
              0.05
              
              
              
              39,000
              
              
              
              3,141,547Month
      # 14
                November
      30, 2009
              
              
              30,000
              
              
              
              0.043
              
              
              
              30,000
              
              
              
              3,111,547Month
      # 15
                December
      31, 2009
              
              
              20,000
              
              
              
              0.048
              
              
              
              20,000
              
              
              
              3,091,547Total
      2009
              
              
              6,888,953
              
              
              
              0.097
              
              
              
              6,888,953
              
              
              
              3,091,547Totals
              
              
              6,908,453
              
              
              
              0.097
              
              
              
              6,908,453
              
              
              
              3,091,547




14




ITEM
6.  SELECT FINANCIAL DATA





GENERAL




The
following discussion and analysis should be read in conjunction with the
Company’s consolidated financial statements and related footnotes for the year
ended December 31, 2009 and December 31, 2008 included in this Annual Report on
Form 10-K. The discussion of results, causes and trends should not be construed
to imply any conclusion that such results or trends will necessarily continue in
the future.





Overview




Sitestar
is an Internet Service Provider (ISP) that offers consumer and business-grade
Internet access, wholesale managed modem services for downstream ISPs and Web
hosting.  Sitestar also delivers value-added services including spam,
virus and spyware protection, pop-up ad blocking and web
acceleration.  The Company maintains multiple sites of operation and
provides services to customers throughout the U.S. and Canada.




The
products and services that the Company provides include:




·
   Internet access services;




·
   Web acceleration services;




·
   Web hosting services;




·
   End-to-end e-commerce solutions;




·
   Toner and ink cartridge remanufacturing services.




The
Company’s Internet division markets and sells narrow-band (dial-up and ISDN) and
broadband services (DSL, fiber-optic, satellite, cable and wireless), and
supports these products utilizing its own infrastructure and
affiliations.  Value-added services include web acceleration, spam and
virus filtering, as well as, spyware protection.





Additionally,
the Company markets and sells web hosting and related services to consumers and
businesses.





RESULTS
OF OPERATIONS




The
following tables show financial data for the years ended December 31, 2009 and
2008.  Operating results for any period are not necessarily indicative of
results for any future period.




15




For
      the year ended December 31, 2009Corporate
            
            
            Internet
            
            
            TotalRevenue
            
            $
            -
            
            
            $
            7,692,908
            
            
            $
            7,692,908Cost
      of revenue
            
            
            -
            
            
            
            2,945,566
            
            
            
            2,945,566Gross
      profit
            
            
            -
            
            
            
            4,747,342
            
            
            
            4,747,342Operating
      expenses
            
            
            147,700
            
            
            
            4,161,928
            
            
            
            4,309,628Income
      (loss) from operations
            
            
            (147,700
            )
            
            
            585,414
            
            
            
            437,714Other
      income (expense)
            
            
            -
            
            
            
            (87,127
            )
            
            
            (87,127
            )Income
      (loss) before income taxes
            
            
            (147,700
            )
            
            
            498,287
            
            
            
            350,587Income
      taxes expense (benefit)
            
            
            -
            
            
            
            270,590
            
            
            
            270,590Net
      income (loss)
            
            $
            (147,700
            )
            
            $
            227,697
            
            
            $
            79,997




For
      the year ended December 31, 2008Corporate
            
            
            Internet
            
            
            TotalRevenue
            
            $
            -
            
            
            $
            8,785,559
            
            
            $
            8,785,559Cost
      of revenue
            
            
            -
            
            
            
            3,061,563
            
            
            
            3,061,563Gross
      profit
            
            
            -
            
            
            
            5,723,996
            
            
            
            5,723,996Operating
      expenses
            
            
            106,268
            
            
            
            4,451,613
            
            
            
            4,557,881Income
      (loss) from operations
            
            
            (106,268
            )
            
            
            1,272,383
            
            
            
            1,166,115Other
      income (expense)
            
            
            -
            
            
            
            (128,090
            )
            
            
            (128,090
            )Income
      (loss) before income taxes
            
            
            (106,268
            )
            
            
            1,144,293
            
            
            
            1,038,025Income
      taxes expense (benefit)
            
            
            (158,734
            )
            
            
            -
            
            
            
            (158,734
            )Net
      income (loss)
            
            $
            52,466
            
            
            $
            1,144,293
            
            
            $
            1,196,759




EBITDA
(Earnings Before Interest, Taxes, Depreciation and Amortization) consists of
revenue less cost of revenue and operating expense.  EBITDA is provided
because it is a measure commonly used by investors to analyze and compare
companies on the basis of operating performance. EBITDA is presented to enhance
an understanding of the Company’s operating results and is not intended to
represent cash flows or results of operations in accordance with Generally
Accepted Accounting Principals (GAAP) for the periods indicated. EBITDA is not a
measurement under GAAP and is not necessarily comparable with similarly titled
measures for other companies. See the Liquidity and Capital Resource section for
further discussion of cash generated from operations.





The
following tables show a reconciliation of EBITDA to the GAAP presentation of net
income for the years ended December 31, 2009 and 2008.




For
      the year ended December 31, 2009Corporate
            
            
            Internet
            
            
            TotalEBITDA
            
            $
            (147,700
            )
            
            $
            3,051,413
            
            
            $
            2,903,713Interest
      expense
            
            
            -
            
            
            
            (79,609
            )
            
            
            (79,609
            )Income
      tax expense
            
            
            -
            
            
            
            (270,590
            )
            
            
            (270,590
            )Depreciation
            
            
            -
            
            
            
            (34,497
            )
            
            
            (34,497
            )Amortization
            
            
            -
            
            
            
            (2,439,020
            )
            
            
            (2,439,020
            )Net
      income (loss)
            
            $
            (147,700
            )
            
            $
            227,697
            
            
            $
            79,997




16




For
      the year ended December 31, 2008Corporate
            
            
            Internet
            
            
            TotalEBITDA
            
            $
            (106,268
            )
            
            $
            4,252,637
            
            
            $
            4,146,369Interest
      expense
            
            
            -
            
            
            
            (165,154
            )
            
            
            (165,154
            )Taxes
            
            
            158,734
            
            
            
            -
            
            
            
            158,734Depreciation
            
            
            -
            
            
            
            (43,570
            )
            
            
            (43,570
            )Amortization
            
            
            -
            
            
            
            (2,899,620
            )
            
            
            (2,899,620
            )Net
      income (loss)
            
            $
            52,466
            
            
            $
            1,144,293
            
            
            $
            1,196,759





ITEM 7.
 MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATIONS




GENERAL




The
following discussion and analysis should be read in conjunction with the
Company’s consolidated financial statements and related footnotes for the year
ended December 31, 2009 and December 31, 2008 included in this Annual Report on
Form 10-K. The discussion of results, causes and trends should not be construed
to imply any conclusion that such results or trends will necessarily continue in
the future.




YEAR
ENDED DECEMBER 31, 2009 COMPARED TO DECEMBER 31, 2008





RESTATEMENT
OF FINANCIAL STATEMENTS.





The
Company is restating earnings for the years ended December 31, 2008 to reflect
the proper revenue recognition of processing charges and late fees for customers
cut off from internet service because the collectability of those charges is not
reasonably assured.  The restatements had no effect on 2009 revenues,
operating income, pre-tax income, net income or cash-flows.  The
correction of the errors reduced 2008 net income by $115,078. The corrections
increased beginning of 2008 accumulated deficit by $185,971.





REVENUE.
 Revenue for the year ended December 31, 2009 decreased by $1,092,651 or
12.4% from $8,785,559 for the year ended December 31, 2008 to $7,692,908 for the
same period in 2009.  The decrease in Internet sales is attributed to the
lack of acquisitions of Internet access and web hosting customers of ISPs.
Although the Company continues to sign up new customers, competition from
ubiquitous nationwide telecommunications and cable providers threatens
significant and sustainable organic growth.  To insure continued strength
in revenues, the Company has acquired and plans to continue to acquire the
assets of additional ISPs, folding them into its operations to provide future
revenues. The Company also plans to market more aggressively on a national level
utilizing scalable tactics and targeting a much larger Internet customer
base.




COST OF
REVENUE.  Costs of revenue for the year ended December 31, 2009 decreased
by $115,997 or 3.8% from $3,061,563 for the year ended December 31, 2008 to
$2,945,566 for the same period in 2009.  The decrease is due primarily
to lower volume of revenue. Cost of revenue as a percentage of sales increased
3.4% from 34.8% for the year ended December 31, 2008 to 38.2% for the same
period in 2009 resulting primarily from more costly forms of broadband
service.  The Company is continuing to attempt to negotiate more
favorable contracts with telecommunication vendors and making the network
capacity more efficient. The Company expects to continue creating these
efficiencies through wholesale businesses recently acquired.




17





OPERATING
EXPENSES.    Selling, general and administrative expenses
decreased $252,207 or 5.6% from $4,544,239 for the year ended December 31, 2008
to $4,292,032 for the same period in 2009. This is due primarily to a decrease
in amortization and bad debt expenses. Amortization expense, including
impairment decreased $460,600 or 15.9% from $2,899,620 for the year ended
December 31, 2008 to $2,439,020 for the same period in 2009. Wages decreased
$70,194 or 10.2% from $691,393 for the year ended December 31, 2008 to $621,199
for the same period in 2009. Partially offsetting this, bad debt expense
increased $309,639 or 130.8% from $236,680 for the year ended December 31, 2008
to $546,319 for the same period in 2009.





INTEREST
EXPENSE. Interest expense for the year ended December 31, 2009 decreased by
$85,545 or 51.8% from $165,154 for the year ended December 31, 2008 to $79,609
for the same period in 2009.  This decrease was a result of the
satisfaction of debt from financing recent acquisitions of customer
bases.





INCOME
TAXES.  For the years ended December 31, 2009 and 2008 corporate
income tax expense (benefit) of $270,590 and $(158,734) were
accrued.





BALANCE
SHEET.   Net accounts receivable increased $94,717 or 26.2% from
$361,056 on December 31, 2008 to $455,773 on the same date in
2009.  Customer list decreased $2,206,039 or 52.2% from $4,224,414 on
December 31, 2008 to $2,018,375 on December 31, 2009.  This decrease
is substantially due to scheduled amortization.  Deferred tax assets
increased $339,830 from $421,031 on December 31, 2008 to $760,861 on December
31, 2009.  This is due to the recognition of tax benefits of timing
differences of certain tax deductions.  Other assets decreased $87,323
or 15.0% from $583,637 on December 31, 2008 to $496,314 on December 31,
2009.  This decrease is substantially due to recognizing a receivable
from an insurance claim offset by scheduled amortization of non-compete
agreements associated with acquisitions.  Accounts payable increased
by $50,706 or 62.7% from $80,892 on December 31, 2008 to $131,598 for the same
period in 2009.  This resulted from a disputed telecommunications
invoice which was resolved in the first quarter of 2010.  Accrued
income taxes increased $152,518 from $262,297 on December 31, 2008 to $414,815
on December 31, 2009.  Accrued expenses decreased by $65,830 or 69.4%
from $94,882 on December 31, 2008 to $29,052 on December 31, 2009.
 Deferred revenue decreased by $296,362 or 25.6% from $1,157,597 on
December 31, 2008 to $861,235 on December 31, 2009 representing corresponding
reduced revenue from which customers have prepaid services on December 31,
2009.  Notes payable decreased $554,000.  This is primarily result of
the payoff of all bank debt leaving only seller notes from
acquisitions.




LIQUIDITY
AND CAPITAL RESOURCES




Cash and
cash equivalents totaled $1,090,807 and $527,553 at December 31, 2009 and 2008,
respectively. EBITDA was $2,903,713 for the year ended December 31, 2009 as
compared to $4,146,369 for the year ended December 31, 2008.





2009
            
            
            2008EBITDA
      for the year ended December 31,
            
            $
            2,903,713
            
            
            $
            4,146,369Interest
      expense
            
            
            (79,609
            )
            
            
            (165,154
            )Tax
      benefits (expense)
            
            
            (270,590
            )
            
            
            158,734Depreciation
            
            
            (34,497
            )
            
            
            (43,570
            )Amortization
            
            
            (2,439,020
            )
            
            
            (2,899,620
            )Net
      income for the year ended December 31,
            
            $
            79,997
            
            
            $
            1,196,759




18





Sales of
Internet services which are not automatically processed via credit card or bank
account drafts have been the company’s highest exposure to collection
risk.  To help offset this exposure, the Company has added a late
payment fee to encourage timely payment by customers. Another effort to improve
customer collections was the implementation of a uniform manual invoice
processing fee, which has also helped to accelerate collections procedures.
These steps and more aggressive collection efforts have shifted accounts
receivable to a more current status which is easier to collect. The accounts
receivable balance in the Current category increased from 15.0% to 76.0% of
total accounts receivable from December 31, 2008 to December 31, 2009.  The
balance in the 30+ day category decreased from 44.0% to 13.0% of total accounts
receivable from December 31, 2008 to December 31, 2009.  The balance in the
60+ day category decreased from 40.0% to 11.0% of total accounts receivable from
December 31, 2008 to December 31, 2009.




The aging
of accounts receivable as of December 31, 2009 and 2008 is as
shown:




2009
            
            
            2008Current
            
            $
            347,752
            
            
            
            76.0
            %
            
            $
            55,750
            
            
            
            15.0
            %30
      +
            
            
            59,482
            
            
            
            13.0
            %
            
            
            159,585
            
            
            
            44.0
            %60
      +
            
            
            48,539
            
            
            
            11.0
            %
            
            
            145,721
            
            
            
            40.0
            %90
      +
            
            
            -
            
            
            
            -
            %
            
            
            -
            
            
            
            -
            %Total
            
            $
            455,773
            
            
            
            100.0
            %
            
            $
            361,056
            
            
            
            100.0
            %





Forward-looking
statements




This
report contains certain 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.  Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the Company’s ability to expand its customer base, make strategic
acquisitions, general market conditions, competition and pricing.  Although
the Company believes the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
contained in the report will prove to be accurate.





ITEM
7A.  QUANTATITIVE AND QUALITATIVE DIACLOSURES ABOUT MARKET
RISK.





None




19





ITEM 8.
 FINANCIAL STATEMENTS





INDEX


PageREPORTS
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
            
            
            21-22FINANCIAL
      STATEMENTSConsolidated
      Balance Sheets as of December 31, 2009 and 2008
            
            
            23-24Consolidated
      Statements of Income for the Years Ended December 31, 2009 and
      2008
            
            
            25Consolidated
      Statements of Stockholders' Equity for the Years Ended December 31, 2009
      and 2008
            
            
            26Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009 and
      2008
            
            
            27-28Notes
      to Consolidated Financial Statements
            
            
            29-46




20





Report of
Independent Registered Public Accounting Firm





To the
Board of Directors and Shareholders


SiteStar
Corporation


Lynchburg,
VA  24502-2334





We have
audited the accompanying consolidated balance sheet of SiteStar Corporation as
of December 31, 2009, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year ended December 31,
2009.  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.  The consolidated
financial statements of SiteStar Corporation as of December 31, 2008, and for
the year then ended (before they were restated for the matter discussed in Note
2 to the financial statements,) were audited by other auditors whose report,
dated May 13, 2009, (September 15, 2009, as the effects of the restatement
discussed in Note 1), expressed an unqualified opinion on those
statements.





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.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
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 SiteStar Corporation as of
December 31, 2009, and the results of its operations and its cash flows for the
year ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles.





As
discussed above, the consolidated financial statements of SiteStar Corporation
as of December 31, 2008, and for the year then ended were audited by other
auditors.  As described in Note 2, these financial statements have
been restated.  We audited the adjustments described in Note 2 that
were applied to restate the 2008 financial statements. In our opinion, such
adjustments are appropriate and have been properly applied.  However,
we were not engaged to audit, review, or apply any procedures to the 2008
financial statements of the Company other than with respect to such adjustments
and, accordingly, we do not express an opinion or any other form of assurance on
the 2008 financial statements taken as a whole.





/s/
Santora CPA Group


Newark,
DE 19713-4309





May 17,
2010




21




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Stockholders


Sitestar
Corporation


7109
Timberlake Road, Suite 201


Lynchburg,
VA 24502





We have
audited before the effects of the adjustments for the correction of the error
described in Note 2, the consolidated balance sheet of Sitestar Corporation,
(the “Company”) as of December 31, 2008 and the related consolidated statements
of income, stockholders’ equity and cash flows for the year then ended. The 2008
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, except for the error described in Note 2, the 2008 consolidated
financial statements present fairly, in all material respects, the financial
position of Sitestar Corporation, as of December 31, 2008, and the results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America.





We were
not engaged to audit, review, or apply any procedures to the adjustments for the
correction of the error described in Note 2 and, accordingly, we do not express
an opinion or any other form of assurance about whether such adjustments are
appropriate and have been properly applied. Those adjustments were audited by
the Santora CPA Group.





As
discussed in Note 1 to the financial statements, the accompanying financial
statements have been restated.





Is!BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.


Bagell,
Josephs, Levine & Company, L.L.C.


Mariton,
NJ 08053





May 13,
2009 (September 15,2009 as to the effects of the restatement discussed in Note
1)




22




SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


DECEMBER
31, 2009 and 2008





ASSETS





2009
            
            
            2008RestatedCURRENT
      ASSETSCash
      and cash equivalents
            
            $
            1,090,807
            
            
            $
            527,553Accounts
      receivable, net of allowances of $14,316 and $26,764
            
            
            455,773
            
            
            
            361,056Prepaid
      expenses
            
            
            1,430
            
            
            
            1,227Total
      current assets
            
            
            1,548,010
            
            
            
            889,836PROPERTY
      AND EQUIPMENT, net
            
            
            193,715
            
            
            
            225,212CUSTOMER
      LIST, net of accumulated amortization of $10,216,778 and
      $7,943,341
            
            
            2,018,375
            
            
            
            4,224,414GOODWILL,
      net
            
            
            1,288,559
            
            
            
            1,288,559DEFERRED
      TAX ASSETS
            
            
            760,861
            
            
            
            421,031OTHER
      ASSETS
            
            
            496,314
            
            
            
            583,637TOTAL
      ASSETS
            
            $
            6,305,834
            
            
            $
            7,632,689





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




23




SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


DECEMBER
31, 2009 and 2008





LIABILITIES
AND STOCKHOLDERS' EQUITY





2009
            
            
            2008CURRENT
      LIABILITIES
            
            
            
            
            RestatedAccounts
      payable
            
            $
            131,598
            
            
            $
            80,892Accrued
      income taxes
            
            
            414,815
            
            
            
            262,297Accrued
      expenses
            
            
            29,052
            
            
            
            94,882Deferred
      revenue
            
            
            861,235
            
            
            
            1,157,597Notes
      payable, current portion
            
            
            900,615
            
            
            
            569,372Note
      payable - stockholders, current portion
            
            
            -
            
            
            
            -Total
      current liabilities
            
            
            2,337,315
            
            
            
            2,165,040NOTES
      PAYABLE, less current portion
            
            
            -
            
            
            
            915,615NOTES
      PAYABLE - STOCKHOLDERS, less current portion
            
            
            547,245
            
            
            
            539,281TOTAL
      LIABILITIES
            
            
            2,884,560
            
            
            
            3,619,936STOCKHOLDERS'
      EQUITYPreferred
      Stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and
      outstanding
            
            
            -
            
            
            
            -Common
      Stock, $0.001 par value, 300,000,000 shares authorized and 91,326,463
      shares issued in 2009 and 2008, and 76,199,705 and 83,088,658 shares
      outstanding in 2009 and 2008.
            
            
            91,326
            
            
            
            91,326Additional
      paid-in capital
            
            
            13,880,947
            
            
            
            13,880,947Treasury
      Stock, at cost, 15,126,758 and 8,237,805 common shares
            
            
            (735,696
            )
            
            
            (64,220
            )Accumulated
      deficit
            
            
            (9,815,303
            )
            
            
            (9,895,300
            )Total
      stockholders' equity
            
            
            3,421,274
            
            
            
            4,012,753TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            6,305,834
            
            
            $
            7,632,689





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




24




SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





2009
            
            
            2008RestatedREVENUE
            
            $
            7,692,908
            
            
            $
            8,785,559COST
      OF REVENUE
            
            
            2,945,566
            
            
            
            3,061,563GROSS
      PROFIT
            
            
            4,747,342
            
            
            
            5,723,996OPERATING
      EXPENSESSelling,
      general and administrative expenses
            
            
            4,292,032
            
            
            
            4,544,239Customer
      list impairment
            
            
            17,596
            
            
            
            13,642TOTAL
      OPERATING EXPENSES
            
            
            4,309,628
            
            
            
            4,557,881INCOME
      FROM OPERATIONS
            
            
            437,714
            
            
            
            1,166,115OTHER
      INCOME (EXPENSES)Gain
      (loss) on disposal of assets
            
            
            (7,518
            )
            
            
            37,064Interest
      expense
            
            
            (79,609
            )
            
            
            (165,154
            )TOTAL
      OTHER INCOME (EXPENSES)
            
            
            (87,127
            )
            
            
            (128,090
            )INCOME
      BEFORE INCOME TAXES
            
            
            350,587
            
            
            
            1,038,025INCOME
      TAX (BENEFIT) EXPENSE
            
            
            270,590
            
            
            
            (158,734
            )NET
      INCOME
            
            $
            79,997
            
            
            $
            1,196,759BASIC
      AND DILUTED INCOME PER SHARE
            
            $
            0.00
            
            
            $
            0.01WEIGHTED
      AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
            
            
            76,199,705
            
            
            
            83,088,658




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




25




SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





AdditionalCommon
      Stock
            
            
            Paid-in
            
            
            Treasury
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Capital
            
            
            Stock
            
            
            Deficit
            
            
            TotalBalance
      at December 31, 2007, as previously reported
            
            
            91,326,463
            
            
            $
            91,326
            
            
            $
            13,880,947
            
            
            $
            (63,030
            )
            
            $
            (10,906,088
            )
            
            $
            3,003,155Adjustment
            
            
            (8,218,305)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (185,971
            )
            
            
            (185,971
            )Balance
      at December 31, 2007, as restated
            
            
            83,108,158
            
            
            $
            91,326
            
            
            $
            13,880,947
            
            
            $
            (63,030
            )
            
            
            (11,092,059
            )
            
            
            2,817,184Repurchase
      of shares
            
            
            (19,500)
            
            
            
            
            
            
            
            
            
            
            
            (1,190
            )
            
            
            
            
            
            
            (1,190
            )Net
      income, as restated
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,196,759
            
            
            
            1,196,759Balance
      at December 31, 2008
            
            
            83,088,658
            
            
            
            91,326
            
            
            
            13,880,947
            
            
            
            (64,220
            )
            
            
            (9,895,300
            )
            
            
            4,012,753Repurchase
      of shares
            
            
            (6,888,953)
            
            
            
            
            
            
            
            
            
            
            
            (671,476)
            
            
            
            
            
            
            
            (671,476
            )Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            79,997
            
            
            
            79,997Balance
      at December 31, 2009
            
            
            76,199,705
            
            
            $
            91,326
            
            
            $
            13,880,947
            
            
            $
            (735,696
            )
            
            $
            (9,815,303
            )
            
            $
            3,421,274




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




26




SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





2009
            
            
            2008RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            79,997
            
            
            $
            1,196,759Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization expense
            
            
            2,473,517
            
            
            
            2,943,190Allowance
      for doubtful accounts
            
            
            (35,089
            )
            
            
            26,765(Increase)
      decrease in accounts receivable
            
            
            (161,369
            )
            
            
            (273,928
            )(Increase)
      decrease in prepaid expenses
            
            
            (202
            )
            
            
            15,302(Increase)
      decrease in deferred income taxes
            
            
            (339,830
            )
            
            
            (421,031
            )Increase
      (decrease) in accounts payable
            
            
            50,706
            
            
            
            2,179Increase
      (decrease) in accrued expenses
            
            
            (65,829
            )
            
            
            711,637Increase
      (decrease) in deferred revenue
            
            
            (296,362
            )
            
            
            (204,009
            )Increase
      (decrease) in accrued income taxes
            
            
            152,518
            
            
            
            (492,480
            )Net
      cash provided by operating activities
            
            
            1,858,057
            
            
            
            3,504,384CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
            
            
            (3,000
            )
            
            
            (32,000
            )Purchase
      of customer list
            
            
            (67,398
            )
            
            
            (1,450,065
            )(Purchase)
      sale of assets held for resale
            
            
            24,479
            
            
            
            296Purchase
      of non-competition agreements
            
            
            (1,000
            )
            
            
            (100,000
            )Net
      cash used in investing activities
            
            
            (46,919
            )
            
            
            (1,581,769
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from notes payable - stockholders
            
            
            62,949
            
            
            
            -Net
      proceeds from notes payable
            
            
            -
            
            
            
            570,803Purchase
      of treasury stock
            
            
            (671,476
            )
            
            
            (1,190
            )Repayment
      of notes payable
            
            
            (584,372
            )
            
            
            (2,049,518
            )Repayment
      of notes payable – stockholders
            
            
            (54,984
            )
            
            
            (147,406
            )Net
      cash used in financing activities
            
            
            (1,247,885
            )
            
            
            (1,627,311
            )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            563,254
            
            
            
            295,304CASH
      AND CASH EQUIVALENTS - BEGINNING OF YEAR
            
            
            527,553
            
            
            
            232,249CASH
      AND CASH EQUIVALENTS - END OF YEAR
            
            $
            1,090,807
            
            
            $
            527,553




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




27




SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:




During
the years ended December 31, 2009 and 2008, the Company paid $488,018 and
$0 of income taxes and paid interest expense of $80,000 and
$165,000.




SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:




None.





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




28




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES





Subsequent
to the issuance of the 2008 financial statements, Sitestar Corporation
determined that the income tax provision should have been included in the
financial statements and adopted the recommendation of the Board of Directors
and determined that previously reported results should be
restated.  The restatement resulted from a material weakness in
internal control over financial reporting, namely, that the Company did not have
adequately designed procedures to calculate or review the tax
provision.





Organization and Line of
Business




Sitestar
Corporation (formerly White Dove Systems, Inc., Interfoods Consolidated, Inc.,
was known as Holland American International Specialties (HAIS)), (the Company),
began operations on June 1, 1997, under a partnership agreement, and was
incorporated in Nevada on November 4, 1997.  On July 26, 1999, the Company
restated its Articles of Incorporation to change the name of the Company to
“Sitestar Corporation.” The Company was in the International specialty foods
distribution business.  In 1999, through the acquisition of two Internet
Service Providers, the Company changed from a food distribution company to an
Internet holding company.  The Company services customers throughout the
U.S. and Canada with multiple sites of operation.  Sitestar is
headquartered in Lynchburg, Virginia.





Principles of
Consolidation




The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries including:  Sitestar.net, Inc.
(formerly know as Neocom Microspecialists, Inc.), FRE Enterprises, Inc.,
Advanced Internet Services, Inc. and NetRover Inc.  All intercompany
accounts and transactions have been eliminated.





Use of
Estimates




In
accordance with Generally Accepted Accounting Principals the preparation of
these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the
reporting period.





On an
ongoing basis, management evaluates its estimates and judgments, including those
related to revenue recognition, accrued expenses, financing operations, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions and conditions. The most significant
accounting estimates inherent in the preparation of the Company’s financial
statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources. These
accounting policies are described at relevant sections in this discussion and
analysis and in the consolidated financial statements included in this
report.





Fair Value of Financial
Instruments




For
certain of the Company's assets and liabilities, including cash, accounts
receivable, accounts payable, accrued expenses and deferred revenue, the
carrying amounts approximate fair value due to their short maturities.  The
amounts shown for notes payable also approximate fair value because current
interest rates and terms offered to the Company for similar debt are
substantially the same.




29





SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





Cash and Cash
Equivalents




For
purposes of the statements of cash flows, the Company defines cash equivalents
as all highly liquid instruments purchased with a maturity of three months or
less.





Concentration of Credit
Risk




Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist of cash and accounts receivable.  The Company places its cash
with high quality financial institutions and, at times, may exceed the FDIC
$250,000 insurance limit.  The Company extends credit based on an
evaluation of the customers’ financial condition, generally without collateral.
 Exposure to losses on receivables is principally dependent on each
customer's financial condition.  The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.





Accounts
Receivable




The
Company grants credit in the form of unsecured accounts receivable to its
customers.  The estimate of the allowance for doubtful accounts, which is
charged off to bad debt expense, is based on management’s assessment of current
economic conditions and historical collection experience with each customer.
Specific customer receivables are considered past due when they are outstanding
beyond their contractual terms and are charged off to the allowance for doubtful
accounts when determined uncollectible.




For the
years ended December 31, 2009 and 2008, bad debt expense was $546,319 and
$236,680. As of December 31, 2009 and 2008, accounts receivable consists of the
following:




2009
            
            
            2008Gross
      accounts receivable
            
            $
            470,089
            
            
            $
            387,820Less
      allowance for doubtful accounts
            
            
            (14,316
            )
            
            
            (26,764
            )$
            455,773
            
            
            $
            361,056





Sales of
Internet services, which are not automatically processed via credit card or bank
account drafts, have been the company’s highest exposure to collection risk.
 To help offset this exposure, the company has added a late payment fee to
encourage timely payments by customers. Another effort to improve customer
collections was the implementation of a uniform manual invoice processing fee,
which has also helped to accelerate collections process. Accounts over ninety
days past due are no longer included in accounts receivable and are turned over
to a collection agency.





Property and
Equipment




Property
and equipment are stated at cost.  Depreciation is computed using the
declining balance method based on estimated useful lives from three to seven
years for equipment and thirty nine years for buildings.  Expenditures for
maintenance and repairs are charged to operations as incurred while renewals and
betterments are capitalized. Gains and losses on disposals are included in the
results of operations.




Impairment of Long-Lived
Assets




In
accordance with Generally Accepted Accounting Principals (GAAP), “Accounting for
the Impairment or Disposal of Long-Lived Assets,” long-lived assets to be held
and used are analyzed for impairment whenever events or changes in circumstances
indicate that the related carrying amounts may not be recoverable.




30




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





The
Company evaluates at each balance sheet date whether events and circumstances
have occurred that indicate possible impairment.  If there are indications
of impairment, the Company uses future undiscounted cash flows of the related
asset or asset grouping over the remaining life in measuring whether the assets
are recoverable.  In the event such cash flows are not expected to be
sufficient to recover the recorded asset values, the assets are written down to
their estimated fair value.  Long-lived assets to be disposed are reported
at the lower of carrying amount or fair value of the asset less cost to
sell.





The
Company maintained a financial interest in the operations of Servatus
Development, LLC, the purchasing entity, and in addition, still maintains
programming services for its customers. Per the Definitive Agreement to sell the
assets, the Company is entitled to 20% of the gross revenue of Servatus for the
first four years of operations. Also per the Definitive Agreement, the Company
maintains the rights to the crisis management software developed by Sitestar
Applied Technologies.  The Company received $0 and $8,734 during the
years ended December 31, 2009 and 2008.




Intangible
Assets




The
Company continually monitors its intangible assets to determine whether any
impairment has occurred.  In making such determination with respect to
these assets, the Company evaluates the performance, on an undiscounted cash
flow basis, of the intangible assets or group of assets.





Should
impairment be identified, a loss would be reported to the extent that the
carrying value of the related intangible asset exceeds its fair value using the
discounted cash flow method.





The
Company's customer lists are being amortized over three years.
 Amortization expense for the customer lists was $2,273,437 and
$2,706,287 for the years ended December 31, 2009 and 2008.  The
Company's customer lists are being amortized over three years.
 Amortization of customer lists for the years ended December 31, 2010, 2011
and 2012 is expected to be $1,694,310, $324,065 and $0, respectively.
Amortization expense for the non-competition agreement was $165,583 and
$179,692 for the years ended December 31, 2009 and 2008. In accordance with
GAAP, amortization of goodwill ceased effective January 1, 2002.
 Amortization of non-competition for the years ended December 31, 2010,
2011 and 2012 is expected to be $133,250, $15,361 and $0,
respectively.  For the year ended December 31, 2009 there was no
impairment of goodwill.





Inventory




Inventory
consists principally of products purchased for resale and are maintained at the
lower of cost (first in - first out basis) or market. Due to the slow moving
nature of inventory management has reclassified it on the balance sheets from
current assets to other assets held for resale. The retail operations of
Sitestar Corporation, Computers by Design has changed the focus of generating
revenue from building new equipment to providing professional services,
repairing and maintaining customer systems. This shift in direction,
precipitated by eroding profit margins resulting from intense competition, has
slowed inventory turns of hardware used in building equipment for resale. While
inventory maintains a marketable value, it is integrated into sales at a reduced
rate as repairs to equipment as opposed to becoming a component in a constructed
system. Consumers will reasonably continue to use the technology level of
equipment represented by Sitestar inventory, and therefore, will continue for
the near future to be required components in the repair and maintenance of their
systems. It is for these reasons that inventory was reclassified from current
assets to other assets held for resale to more properly reflect its use.
Inventory was valued on December 31, 2009 and 2008 at $70,819 and
$70,443.




31




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





Deferred
Revenue




Deferred
revenue represents collections from customers in advance for services not yet
performed and are recognized as revenue in the period service is
provided.




Revenue
Recognition





The
Company sells Internet services under annual and monthly contracts.  Under
the annual contracts, the subscriber pays a one-time annual fee, which is
recognized as revenue ratably over the life of the contract. Under the monthly
contracts, the subscriber is billed monthly and revenue is recognized for the
period the service relates.  Sales of computer hardware are recognized
as revenue upon delivery and acceptance of the product by the customer. Sales
are adjusted for any returns or allowances.




Advertising and Marketing
Costs




The
Company expenses costs of advertising and marketing as they are incurred.
 These expenses for the years ended December 31, 2009 and 2008 were
approximately $36,000 and $38,000, respectively.





Income
Taxes




Deferred
taxes are provided on the liability method, whereby deferred tax assets are
recognized for deductible temporary differences and deferred tax liabilities are
recognized for taxable temporary differences.  Temporary differences are
the differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will be realized.  Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.




Income Per
Share




The basic
income per common share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding.
 Diluted income per common share is computed similar to basic income per
common share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
The Company has no potentially dilutive securities.  The following
table represents the calculations of basic and diluted income per
share:





2009
            
            
            2008Net
      income available to common shareholders
            
            $
            79,997
            
            
            $
            1,196,759Weighted
      average number of common shares
            
            
            76,199,705
            
            
            
            83,088,658Basic
      and diluted income per share
            
            $
            .00
            
            
            $
            .01





Comprehensive
Income




As of and
for the years ended December 31, 2009 and 2008, the Company had no items that
represent other comprehensive income and therefore, has not included a schedule
of comprehensive income in the consolidated financial statements.





32




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





Recently Issued Accounting
Pronouncements





In April
2008, the FASB issued FASB ASC 350-30, Determination of the Useful Life of
Intangible Assets. FASB ASC 350-30 amends the factors an entity should consider
in developing renewal or extension assumptions used in determining the useful
life of recognized intangible assets under SFAS 142, Goodwill and Other
Intangible Assets, and adds certain disclosures for an entity’s accounting
policy of the treatment of the costs, period of extension, and total costs
incurred.  FASB ASC 350-30must be applied prospectively to intangible
assets acquired after January 1, 2009.  The Company’s adoption of FASB
ASC 350-30 did not have a material impact on the Company’s consolidated
financial statements.




In April
2009, the FASB issued FASB ASC 320-10, Recognition and Presentation of
Other-Than-Temporary Impairments. FASB ASC 320-10 amends the
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments in the financial statements. The most
significant change FASB ASC 320-10 brings is a revision to the amount of
other-than-temporary loss of a debt security recorded in earnings. FASB ASC
320-10 is effective for interim and annual reporting periods ending after June
15, 2009 The Company’s adoption of FASB ASC 320-10 did not have a material
impact on the Company’s consolidated financial statements.




In April
2009, the FASB issued FASB ASC 820-10, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly. FASB ASC 820-10 provides
additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased. FASB ASC
820-10 also includes guidance on identifying circumstances that indicate a
transaction is not orderly. This FSP emphasizes that even if there has been a
significant decrease in the volume and level of activity for the asset or
liability and regardless of the valuation technique(s) used, the objective of a
fair value measurement remains the same.





Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction (that is, not a forced liquidation or
distressed sale) between market participants at the measurement date under
current market conditions. FASB ASC 820-10 is effective for interim and annual
reporting periods ending after June 15, 2009, and is applied prospectively. The
Company’s adoption of FASB ASC 820-10 did not have a material impact on the
Company’s consolidated financial statements.





In April
2009, the FASB issued FASB ASC 825-10, Interim Disclosures about Fair Value of
Financial Instruments. FASB ASC 825-10 amends FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. FASB ASC
825-10 also amends APB Opinion No. 28, Interim Financial Reporting, to require
those disclosures in summarized financial information at interim reporting
periods FASB ASC 825-10 is effective for interim and annual reporting periods
ending after June 15, 2009. The Company’s adoption of issued FASB ASC 825-10 did
not have a material impact on the Company’s consolidated financial
statements.





33




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008




In June
2009, the Financial Accounting Standards Board (“FASB”) issued FASB ASC 105-10,
The FASB Accounting Standards Codification and Hierarchy of Generally Accepted
Accounting Principles, a replacement of FASB Statement No. 162. FASB ASC 105-10
establishes the FASB Standards Accounting Codification (“Codification”) as the
source of authoritative GAAP recognized by the FASB to be applied to
nongovernmental entities. The only other source of authoritative GAAP is the
rules and interpretive releases of the SEC which only apply to SEC registrants.
The Codification will supersede all the existing non-SEC accounting and
reporting standards upon its effective date. Since the issuance of the
Codification is not intended to change or alter existing GAAP, adoption of this
statement will not have an impact on the Company’s financial position or results
of operations, but will change the way in which GAAP is referenced in the
Company’s financial statements. FASB ASC 105-10  is effective for
interim and annual reporting periods ending after September 15,
2009.





In May
2009, the FASB issued FASB ASC 855-10, Subsequent Events, which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued or are
available to be issued. The Company adopted FASB ASC 855-10 effective
April 1, 2009 and has evaluated subsequent events after the balance sheet
date of September 30, 2009 through the date the financial statements were
issued.





In
October 2009, the FASB issued Accounting Standards Update 2009-13, “Revenue
Recognition (Topic 605)”. This Update provides amendments to the criteria in
Subtopic 605-24 for separating consideration in multiple-deliverable revenue
arrangements. It establishes a hierarchy of selling prices to determine the
selling price of each specific deliverable which includes vendor-specific
objective evidence (if available), third-party evidence (if vendor-specific
evidence is not available), or estimated selling price if neither of the first
two are available. This Update also eliminates the residual method for
allocating revenue between the elements of an arrangement and requires that
arrangement consideration be allocated at the inception of the arrangement.
Finally, this Update expands the disclosure requirements regarding a vendor’s
multiple-deliverable revenue arrangements. This Update is effective for fiscal
years beginning on or after June 15, 2010. We do not anticipate any
material impact from this Update.





NOTE 2
-RESTATEMENT OF FINANCIAL STATEMENTS





The
Company is restating earnings for the years ended December 31, 2008 to reflect
the proper revenue recognition of processing charges and late fees for customers
cut off from internet service because the collectability of those charges is not
reasonably assured.  In addition, the Company will institute ongoing
monitoring that constantly occurs in the ordinary course of
operations.





The
restatements had no effect on 2009 revenues, operating income, pre-tax income,
net income or cash-flows. The Company intends to amend the Company's tax
returns.





During
the audit of the Company’s financial statement for the year-ended December 31,
2009, Management of the Company was first advised by the Company’s independent
registered public accounting firm, that an error existed in its revenue
recognition of late and billing fees.




34




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





Management
performed a detailed reconciliation of revenue and related accounts beginning in
2007 in order to quantify the potential balance adjustments. The Company’s
Management upon being advised by its Independent Auditor of the calculation
issue, as part of its Sarbanes Oxley policy regarding internal controls
regarding financial reporting, immediately reported this issue to the Board of
Directors which promptly initiated and conducted its review.




Management
and the Board of Directors reviewed management’s findings and the Board of
Directors concluded that restating the consolidated financial statements for the
years ended December 31, 2008 is required. The Company is restating for errors
identified in its revenue accounts pertaining to the recognition of processing
and late fees and, the related trade accounts receivable and bad
debts.   The effects of these restatements are included in this
Annual Report on Form 10-K for the fiscal year ended December 31,
2009.





The
correction of the errors noted above reduced 2008 net income by $115,078. The
corrections noted increased beginning of 2008 accumulated deficit by
$185,971.





The
following is a summary of the effects of these changes on the Company’s
consolidated balance sheets as of December 31, 2008, as well as the effect of
these changes on the Company’s consolidated statements of income and cash
flows:





Consolidated Balance SheetsFor the Year Ended December 31, 2008
            
            As Previously
              Reported
            
            
            Adjustments
            
            
            As RestatedAccounts
      receivable
            
            
            738,824
            
            
            
            (377,768
            )
            
            
            361,056Total
      Assets
            
            
            8,010,457
            
            
            
            (377,768
            )
            
            
            7,632,689Accrued
      Income Taxes
            
            
            339,016
            
            
            
            (76,719)
            
            
            
            262,297Total
      Liabilities
            
            
            3,696,655
            
            
            
            (76,719)
            
            
            
            3,619,936Accumulated
      deficit
            
            
            (9,594,251)
            
            
            
            (301,049)
            
            
            
            (9,895,300)Total
      Stockholder's Equity
            
            
            4,313,802
            
            
            
            (301,067
            )
            
            
            4,012,735Total
      Liabilities and Shareholder's Equity
            
            
            8,010,457
            
            
            
            (377,768
            )
            
            
            7,632,689







Consolidated Statements of IncomeFor the Year Ended December 31, 2008
            
            As Previously
              Reported
            
            
            Adjustments
            
            
            As RestatedRevenue
            
            
            10,227,438
            
            
            
            (1,441,879)
            
            
            
            8,785,559Selling,
      general and administrative expenses
            
            
            5,794,321
            
            
            
            (1,250,082
            )
            
            
            4,544,239Income
      tax benefit
            
            
            82,015
            
            
            
            76,719
            
            
            
            158,734Net
      income
            
            
            1,311,837
            
            
            
            (115,078
            )
            
            
            1,196,759Basic
      and diluted income per share
            
            
            .01
            
            
            
            -
            
            
            
            .01





35





SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





Consolidated Statement of Cash FlowsFor the Year Ended December 31, 2008
            
            As Previously
              Reported
            
            
            Adjustments
            
            
            As RestatedNet
      income
            
            
            1,311,837
            
            
            
            (115,078
            )
            
            
            1,196,759Accounts
      receivable
            
            
            (465,725
            )
            
            
            191,797
            
            
            
            (273,928)Accrued
      income taxes
            
            
            (415,761
            )
            
            
            (76,719
            )
            
            
            (492,480)





NOTE 3 –
ACQUISITIONS





Comcation,
Inc.




Effective
March 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of Comcation, Inc., a Pennsylvania
ISP.  The total purchase price was $38,500 representing the fair value
of the assets acquired which consisted of a $9,135 cash payment at closing with
the remaining balance paid in 5 monthly installments beginning April
2008.  The purchase price has been subsequently adjusted to
$46,708.





The
following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.  Sitestar has assessed
the valuations of certain intangible assets as represented below.





Customer
      list
            
            $
            62,223Non-compete
      agreement
            
            
            5,000Accounts
      receivable
            
            
            2,343Deferred
      revenue
            
            
            (22,858
            )Purchase
      price
            
            $
            46,708





Because
the acquisition of Comcation was consummated effective March 1, 2008, there are
limited results of operations of Comcation in the consolidated financial
statements for the twelve months ended December 31, 2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2008 and reflects the
results of operations of the Company as if the acquisition of Comcation had been
effective January 1, 2008.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.





Net
      sales
            
            $
            8,785,559Gross
      profit
            
            $
            7,177,844Selling,
      general and administrative expenses
            
            $
            5,813,390Net
      income
            
            $
            1,318,379Basic
      income per share
            
            $
            0.01





36




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





N2 the Net,
LLC




Effective
April 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of N2 the Net, LLC, a Tennessee
ISP.  The total purchase price was $48,156 representing the fair value
of the assets acquired which consisted of a $3,650 cash payment at closing with
the remaining balance paid in eleven monthly installments beginning May
2008.  The purchase price has been subsequently adjusted down to
$45,821.





The
following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.  Sitestar has assessed
the valuations of certain intangible assets as represented below.





Customer
      list
            
            $
            40,512Non-compete
      agreement
            
            
            5,000Accounts
      receivable
            
            
            2,328Equipment
            
            
            10,000Deferred
      revenue
            
            
            (12,019
            )Purchase
      price
            
            $
            45,821





Because
the acquisition of N2 the Net was consummated effective April 1, 2008, there are
limited results of operations of N2 the Net in the consolidated financial
statements for the twelve months ended December 31, 2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2008 and reflects the
results of operations of the Company as if the acquisition of N2 the Net had
been effective January 1, 2008.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.





Net
      sales
            
            $
            8,785,559Gross
      profit
            
            $
            7,183,741Selling,
      general and administrative expenses
            
            $
            5,816,869Net
      income
            
            $
            1,320,580Basic
      income per share
            
            $
            0.01





Dial Assurance,
Inc.




Effective
May 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of Dial Assurance, Inc., a
Georgia-based wholesale managed modem solution provider.  The total
purchase price was $229,900 representing the fair value of the assets acquired
which consisted of a $100,000 cash payment at closing with the remaining balance
paid in six monthly installments beginning June 2008.





37




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008




The
following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.  Sitestar has assessed
the valuations of certain intangible assets as represented below.


Customer
      list
            
            $
            250,000Non-compete
      agreement
            
            
            5,000Deferred
      revenue
            
            
            (25,100
            )Purchase
      price
            
            $
            229,900





Because
the acquisition of Dial Assurance was consummated effective May 1, 2008, there
are limited results of operations of Dial Assurance in the consolidated
financial statements for the twelve months ended December 31, 2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2008 and reflects the
results of operations of the Company as if the acquisition of Dial Assurance had
been effective January 1, 2008.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.





Net
      sales
            
            $
            8,785,559Gross
      profit
            
            $
            7,212,996Selling,
      general and administrative expenses
            
            $
            5,830,288Net
      income
            
            $
            1,336,633Basic
      income per share
            
            $
            0.01





United Systems Access,
Inc.




Effective
May 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired certain broadband digital subscriber line (DSL) accounts and
related assets of United Systems Access, Inc., (d/b/a USA Telephone), a
corporation with its headquarters in Maine.  The net purchase price
was $297,965 representing the fair value of the assets acquired which consisted
of a $130,000 cash payment at closing with the remaining balance paid in sixty
days from closing. The purchase price has been subsequently adjusted down to
$263,757.





The
following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.  Sitestar has assessed
the valuations of certain intangible assets as represented below.





Customer
      list
            
            $
            277,965Non-compete
      agreement
            
            
            50,000Deferred
      revenue
            
            
            (64,208
            )Purchase
      price
            
            $
            263,757





Because
the acquisition of United Systems Access, Inc was consummated effective May
1, 2008, there are limited results of operations of USA Telephone in the
consolidated financial statements for the twelve months ended December 31,
2008.





38




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2008 and reflects the
results of operations of the Company as if the acquisition of USA Telephone had
been effective January 1, 2008.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.





2008Net
      sales
            
            $
            8,785,559Gross
      profit
            
            $
            7,280,880Selling,
      general and administrative expenses
            
            $
            5,876,222Net
      income
            
            $
            1,358,583Basic
      income per share
            
            $
            0.01





AdaNet




Effective
June 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of AdaNet, an Oklahoma-based
ISP.  The total purchase price was $20,667 representing the fair value
of the assets acquired which consisted of a $3,836 cash payment at closing with
the remaining balance due in five monthly installments beginning July
2008.  The purchase price has been subsequently adjusted down to
$18,542.





The
following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.  Sitestar has assessed
the valuations of certain intangible assets as represented below.





Customer
      list
            
            $
            15,428Non-compete
      agreement
            
            
            5,000Accounts
      receivable
            
            
            164Equipment
            
            
            2,000Deferred
      revenue
            
            
            (4,050
            )Purchase
      price
            
            $
            18,542





Because
the acquisition of AdaNet was consummated effective June 1, 2008, there are
limited results of operations of AdaNet in the consolidated financial statements
for the twelve months ended December 31, 2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2008 and reflects the
results of operations of the Company as if the acquisition of AdaNet had been
effective January 1, 2008.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.





39




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





Net
      sales
            
            $
            8,785,559Gross
      profit
            
            $
            7,176,416Selling,
      general and administrative expenses
            
            $
            5,815,366Net
      income
            
            $
            1,314,975Basic
      income per share
            
            $
            0.01





Velocity West,
Inc.




Effective
August 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of Velocity West, Inc., an ISP and
wholesale managed modem solution provider with headquarters in
Texas.  The total purchase price was $360,000 representing the fair
value of the assets acquired which consisted of a $100,000 cash payment at
closing with the remaining balance was paid in full during 2008.





The
following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.  Sitestar has assessed
the valuations of certain intangible assets as represented below.





Customer
      list
            
            $
            380,000Non-compete
      agreement
            
            
            10,000Equipment
            
            
            20,000Deferred
      revenue
            
            
            (50,000
            )Purchase
      price
            
            $
            360,000





Because
the acquisition of Velocity West was consummated effective August 1, 2008, there
are limited results of operations of Velocity West in the consolidated financial
statements for the twelve months ended December 31, 2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2008 and reflects the
results of operations of the Company as if the acquisition of Velocity West had
been effective January 1, 2008.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.





Net
      sales
            
            $
            8,785,559Gross
      profit
            
            $
            7,420,236Selling,
      general and administrative expenses
            
            $
            5,891,477Net
      income
            
            $
            1,482,684Basic
      income per share
            
            $
            0.01





ISP Holding Company,
LLC




Effective
November 1, 2008, the Company entered into an Asset Purchase Agreement pursuant
to which it acquired the Internet related assets of ISP Holding Company, LLC
(d/b/a DONOBi), an ISP with headquarters in Washington.  The total
purchase price was $475,000 representing the fair value of the assets acquired
which consisted of a $150,000 cash payment at closing with the remaining balance
paid in twelve monthly installments beginning December 2008.




40




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008




The
following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.  Sitestar has assessed
the valuations of certain intangible assets as represented below.





Customer
      list
            
            $
            530,000Non-compete
      agreement
            
            
            20,000Deferred
      revenue
            
            
            (75,000
            )Purchase
      price
            
            $
            475,000





Because
the acquisition of DONOBi Internet Services was consummated effective November
1, 2008, there are limited results of operations of DONOBi in the consolidated
financial statements for the twelve months ended December 31, 2008.





The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2008 and reflects the
results of operations of the Company as if the acquisition of DONOBi had been
effective January 1, 2008.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.





Net
      sales
            
            $
            8,785,559Gross
      profit
            
            $
            7,705,959Selling,
      general and administrative expenses
            
            $
            6,038,563Net
      income
            
            $
            1,593,341Basic
      income per share
            
            $
            0.02





Pulaski Networks,
LLC




Effective
February 10, 2009, the Company entered into an Asset Purchase Agreement pursuant
to which it acquired the Internet related assets of Pulaski Networks, LLC, a
Virginia-based ISP.  The total purchase price was $24,907 representing
the fair value of the assets acquired which consisted of applying the amount
owed to the Company by Pulaski Networks for wholesale dial-up service to the
purchase price.





The
following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.  Sitestar has assessed
the valuations of certain intangible assets as represented below.





Equipment
            
            $
            3,000Customer
      list
            
            
            62,907Non-compete
      agreement
            
            
            1,000Deferred
      revenue
            
            
            (42,000
            )Purchase
      price
            
            $
            24,907





Because
the acquisition of Pulaski Networks was consummated effective February 10, 2009,
there are limited results of operations of Pulaski Networks in the consolidated
financial statements for the twelve months ended December 31, 2009.





41




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2009 and reflects the
results of operations of the Company as if the acquisition of Pulaski Networks
had been effective January 1, 2009.  The pro forma amounts are not
necessarily indicative of the combined results of operations had the
acquisitions been effective as of that date, or of the anticipated results of
operations, due to cost reductions and operating efficiencies that are expected
as a result of the acquisitions.





Net
      sales
            
            $
            7,692,908Gross
      profit
            
            $
            4,832,066Selling,
      general and administrative expenses
            
            $
            4,371,419Net
      income
            
            $
            102,930Basic
      income per share
            
            $
            0.00





NOTE 4 -
SALE OF ASSETS





Sitestar Applied
Technologies, Inc.




Effective
August 31, 2004, the Company entered into a Definitive Agreement selling the
assets of Sitestar Applied Technologies (SAT), the software development division
of Sitestar.  Thomas Albanese, the former manager of the SAT division,
purchased the assets.  The new company is now doing business as Servatus
Development, LLC (Servatus).  The agreement consists of Albanese
surrendering 1,460,796 shares of Sitestar stock and Sitestar receiving
a 20% share in the gross revenues of Servatus over a period of four
years and maintaining the rights to the crisis management system.  Sitestar
provided office space, occupancy costs, and Internet services for one year.
 The Company recognized a gain from this transaction of $8,734 for the year
ended December 31, 2008, representing the excess of the shared revenue received
over the recorded basis of the assets sold.





NOTE 5 -
PROPERTY AND EQUIPMENT





The cost
of property and equipment at December 31, 2009 and December 31, 2008 consisted
of the following:




2009
            
            
            2008Land
            
            $
            10,000
            
            
            $
            10,000Building
            
            
            213,366
            
            
            
            213,366Automobile
            
            
            9,500
            
            
            
            9,500Computer
      equipment
            
            
            1,164,061
            
            
            
            1,161,061Furniture
      and fixtures
            
            
            59,862
            
            
            
            59,8621,453,789
            
            
            
            1,453,789Less
      accumulated depreciation
            
            
            (1,263,074
            )
            
            
            (1,228,577
            )$
            193,715
            
            
            $
            225,212





Depreciation
expense was $34,497 and $43,570 for the years ended December 31, 2009 and 2008,
respectively.





42




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





NOTE
6 NOTES PAYABLE





Notes
payable at December 31, 2009 and 2008 consist of the following:




2009
            
            
            2008Non-interest
      bearing amount paid on acquisition of N2 the Net payable in eleven monthly
      installments of $4,046 through March 2009.
            
            
            -
            
            
            
            11,921Non-interest
      bearing amount paid on acquisition of Donobi payable in twelve monthly
      installments of $27,083 through November 2009.
            
            
            -
            
            
            
            257,451Non-interest
      bearing amount due on acquisition of USA Telephone payable in thirty six
      monthly installments starting January 2008.
            
            
            900,615
            
            
            
            1,215,615900,615
            
            
            
            1,484,987Less
      current portion
            
            
            -
            
            
            
            (569,372
            )Long-term
      portion
            
            $
            900,615
            
            
            $
            915,615





The
future principal maturities of these notes are as follows:




Year
      ending December 31, 2010
            
            $
            900,615Year
      ending December 31, 2011
            
            
            -Year
      ending December 31, 2012
            
            
            -Year
      ending December 31, 2013
            
            
            -Year
      ending December 31, 2014
            
            
            -Thereafter
            
            
            -Total
            
            $
            900,615





NOTE 7
NOTES PAYABLE - STOCKHOLDERS





Notes
payable - stockholders at December 31, 2009 and 2008 consist of the
following:




2009
            
            
            2008Note
      payable to officer and stockholder on a line of credit of $750,000 at an
      annual interest rate of 10% interest.  The accrued interest and
      principal are due on January 1, 2014.
            
            $
            424,930
            
            
            $
            379,711Note
      payable to stockholder. The note is payable on January 1, 2014 and bears
      interest at an annual rate of 8.0%.
            
            
            122,315
            
            
            
            104,585Note
      payable to stockholder. The note is payable on January 1, 2010 and bears
      interest at an annual rate of 8.0%.
            
            
            -
            
            
            
            54,985Less
      current portion
            
            
            -
            
            
            
            -Long-term
      portion
            
            $
            547,245
            
            
            $
            539,281





43




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





The
future principal maturities of these notes are as follows:




Year
      ending December 31, 2010
            
            $
            -Year
      ending December 31, 2011
            
            
            -Year
      ending December 31, 2012
            
            
            -Year
      ending December 31, 2013
            
            
            -Year
      ending December 31, 2014
            
            
            547,245Total
            
            $
            547,245





NOTE 8
COMMITMENTS AND CONTINGENCIES





Leases





The
Company leases certain facilities for its corporate offices and retail stores
under non-cancelable operating leases. Total rent expense for the years ended
December 31, 2009 and 2008 was $65,979 and $71,279, respectively.  Related
party rent expense for each year is $48,000.  Future minimum lease
payments under operating leases with initial or remaining terms of one year or
more are as follows:





Year
      ended December 31,2010
            
            $
            64,6882011
            
            
            48,000Total
            
            $
            112,688





Litigation





On or
about January 16, 2008, the Company filed a Complaint in the Circuit Court in
the Orange County Superior Court of the State of California against Frederick T.
Manlunas, a former executive and director of the Company, for breach of
contract, specific performance and declaratory relief.





A
complaint has been filed in Belmont County, Ohio by First USA, Inc. alleging a
breach of agreement for the purchase and sale of Internet Service Provider
accounts dated July 1, 2006.  The complaint demands judgment of
approximately $150,000.  The Company has vigorously defended this
claim.  This matter was dismissed by the plaintiff on December 11,
2009.





NOTE 9
STOCKHOLDERS' EQUITY





Classes of
Shares




The
Company's Articles of Incorporation authorize 310,000,000 shares, consisting of
10,000,000 shares of preferred stock, which have a par value of $0.001 per share
and 300,000,000 shares of common stock, which have a par value of
$0.001.




Preferred
Stock




Preferred
stock, any series, shall have the powers, preferences, rights, qualifications,
limitations and restrictions as fixed by the Company's Board of Directors in its
sole discretion.  As of December 31, 2009, the Company's Board of Directors
has not issued any Preferred Stock.




44


SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





Common
Stock




During
the year ended December 31, 2007 the Company issued 5,263,158 shares of common
stock in connection with an Asset Purchase Agreement and subsequently
repurchased the shares on February 3, 2009 and placed them in
treasury.  1,625,795 additional shares were repurchased by the Company
and placed in treasury during the year ended December 31, 2009.





NOTE 10
INCOME TAXES





The
provision for federal and state income taxes for the years ended December 31,
2009 and 2008 included the following:




2009
            
            
            2008Current
      provision:Federal
            
            $
            518,832
            
            
            $
            492,800State
            
            
            91,558
            
            
            
            86,965Deferred
      provision:Federal
            
            
            (288,856
            )
            
            
            (357,876
            )State
            
            
            (50,944
            )
            
            
            (63,155
            )Valuation
      allowance
            
            
            -
            
            
            
            -Total
      income tax provision
            
            $
            270,590
            
            
            $
            (158,734
            )





Deferred
tax assets and liabilities reflect the net effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.  Significant components
of the Company's deferred tax assets and liabilities at December 31, 2009 and
2008 are as follows:




2009
            
            
            2008Accounts
      receivable
            
            $
            14,695
            
            
            
            19,762Amortization
      of Intangible assets
            
            
            3,298,586
            
            
            $
            2,953,689Less
      valuation allowance
            
            
            2,552,420
            
            
            
            2,552,420Deferred
      tax asset
            
            $
            760,861
            
            
            $
            421,031





At
December 31, 2009 and 2008, the Company has provided a valuation allowance for
the deferred tax asset since management has not been able to determine that the
realization of that asset is more likely than not.  Net operating loss
carry forwards was entirely applied as of the year ended December 31,
2008.





NOTE 11
RELATED PARTY TRANSACTIONS





The
Company leases its office building in Lynchburg, Virginia from a stockholder of
the Company on a three year term basis.  The date for renewal of the lease
is November 1, 2010.  For the years ended December 31, 2009 and 2008, the
Company paid this stockholder $48,000 and $48,000, respectively, for rent on
this office building.





45




SITESTAR
CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





NOTE 12 -
SEGMENT INFORMATION





The
Company has two business units with separate management and reporting
infrastructures that offer different products and services.  The business
units have been aggregated into two reportable segments: Corporate and Internet.
 The Corporate group is the holding company which oversees the operating of
the Internet group and arranges financing.  The Internet group provides
Internet access to customers throughout the U.S. and Canada. The Company
evaluates the performance of its operating segments based on income from
operations, before income taxes, accounting changes, non-recurring items, and
interest income and expense





Summarized
financial information concerning the Company's reportable segments is shown in
the following table for the years ended December 31, 2009 and 2008:





December
      31, 2009Corporate
            
            
            Internet
            
            
            ConsolidatedRevenue
            
            $
            -
            
            
            $
            7,692,908
            
            
            $
            7,692,908Operating
      income (loss)
            
            $
            (147,700
            )
            
            $
            585,414
            
            
            $
            437,714Depreciation
      and amortization
            
            $
            -
            
            
            $
            2,473,517
            
            
            $
            2,473,517Interest
      expense
            
            $
            -
            
            
            $
            (79,609
            )
            
            $
            (79,609
            )Goodwill
            
            $
            -
            
            
            $
            1,288,559
            
            
            $
            1,288,559Identifiable
      assets
            
            $
            -
            
            
            $
            6,505,929
            
            
            $
            6,305,834





December
      31, 2008Corporate
            
            
            Internet
            
            
            ConsolidatedRevenue
            
            $
            -
            
            
            $
            8,785,559
            
            
            $
            8,785,559Operating
      income (loss)
            
            $
            (106,268
            )
            
            $
            1,272,383
            
            
            $
            1,166,115Depreciation
      and amortization
            
            $
            -
            
            
            $
            2,943,190
            
            
            $
            2,943,190Interest
      expense
            
            $
            -
            
            
            $
            (165,154
            )
            
            $
            (165,154
            )Goodwill
            
            $
            -
            
            
            $
            1,288,559
            
            
            $
            1,288,559Identifiable
      assets
            
            $
            -
            
            
            $
            7,632,689
            
            
            $
            7,632,689





NOTE 13 -
SUBSEQUENT EVENTS





Management
has evaluated all events through May 17, 2010, the date the financial
statements were available to be issued.





ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES





None





46





ITEM 9A.
 CONTROLS AND PROCEDURES





The
Company was notified by Santora CPA Group that they had identified a material
weakness in the Company’s internal control over financial reporting with respect
to the recognition of processing charges and late fees for customers cut off
from internet service because of the collectability of those charges is not
reasonably assured, namely, that the Company did not have adequately designed
procedures to calculate or review the processing charges and late fees for
customers.





The
Company was notified by Santora CPA Group that they had identified a material
weakness in the Company’s internal control over financial reporting with respect
to ongoing monitoring does not always occur in the ordinary course of
operations, namely, that the Company's financial accounting and reporting
functions are not properly segregated and no monitoring system consistently
exists to mitigate the risk of financial statement error.





Based on
the results of these material weaknesses, the Company concluded that the
Company’s disclosure controls and procedures were not effective as of December
31, 2009.





As of May
3, 2010, we began evaluating the processing charges and late fees for customers
and remediated the related internal control weakness. The Company has evaluated
the effectiveness of its disclosure controls and procedures and internal
controls over financial reporting as of December 31, 2009, including the
remedial actions discussed above.





This
evaluation was carried out under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer.  Based on this evaluation, these officers have
concluded that our disclosure controls and procedures are
effective.  Except for the aforementioned controls and procedures for
processing charges and late fees for customers, there were no significant
changes to our internal controls during the last fiscal quarter ended December
31, 2009.





Disclosure
controls and procedures and internal controls over financial reporting are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.





Management’s
Report on Internal Control over Financial Reporting





Company
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally
accepted accounting principles. As required by Rule 13a-15 under the Exchange
Act, as of the end of the period covered by this report, we carried out an
evaluation under the supervision and with the participation of our management,
of the effectiveness of the design and operation of our disclosure controls and
procedures.





47





In
designing and evaluating our disclosure controls and procedures, we and our
management recognize that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily was required to apply
its judgment in evaluating and implementing possible controls and
procedures.  The effectiveness of our disclosure controls and
procedures and our internal control over financial reporting is subject to
various inherent limitations, including cost limitations, judgments used in
decision making, assumptions about the likelihood of future events, the
soundness of our systems, the possibility of human error, and the risk of
fraud.  Moreover, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions and the risk that the degree of compliance with
policies or procedures may deteriorate over time.  Because of these
limitations, there can be no assurance that any system of disclosure controls
and procedures or internal control over financial reporting will be successful
in preventing all errors or fraud or in making all material information known in
a timely manner to the appropriate levels of management.





Inherent
Limitations of the Effectiveness of Internal Control.





A control
deficiency exists when the design or operation of a control does not allow
management or employees, in the ordinary course of performing their assigned
functions, to prevent or detect misstatements on a timely basis.  A
significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the Company’s ability to initiate,
authorize, record, process, or report external financial data reliably in
accordance with GAAP, such that there is a more than remote likelihood that a
misstatement of the Company’s annual or interim financial statements that is
more than inconsequential will not be prevented or detected.





ITEM 9B.
 OTHER INFORMATION





None





PART
III





ITEM10. 
DIRECTORS, EXECUTIVE OFFICERS, PROMOTER AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT





The
following table sets forth the name, age and position with the Company of each
officer and director as of the date of this Report.





Our
current directors, executive officers and key employees are as
follows:




Name
            
            Age
            
            Position
            
            Director
      sinceFrank
      R. Erhartic, Jr.
            
            41
            
            President,
      CEO, Director
            
            October
      2001Julia
      E. Erhartic
            
            42
            
            Secretary,
      Director
            
            October
      2001Daniel
      Judd
            
            53
            
            CFO,
      Director
            
            June
      2004




48





Frank
Erhartic, Jr., 41, Mr. Erhartic guides Sitestar’s long-term market strategies
and investments, oversees all product research and development and leads the
company’s day-to-day operations.  An entrepreneur, Mr. Erhartic founded
Computers by Design, a Sitestar subsidiary, in 1985 as a software development
and computer services company while pursuing his high school diploma and later
created a toner remanufacturing division called CBD Toner
Recharge.  In 1996, Mr. Erhartic started Lynchburg.net an Internet
Service Provider which was acquired by Sitestar in 2000.  He was named
President and CEO in 2002, and has led the growth of the Company’s customer base
through as series of acquisitions.  Mr. Erhartic has MCSE, Novell Netware
and A+ certifications and is a graduate of Virginia Tech with degrees in both
Management and Finance.





Julia
Erhartic, 42, Ms. Erhartic graduated from Virginia Tech in 1990 with a major in
Psychology and a minor in Communications Studies with an emphasis in Public
Relations. Ms. Erhartic was the store manager of Computers by Design from 1991
through 1996. While also the Vice President of Computers by Design, she helped
co-found the Internet division of Lynchburg.net in 1996 and then shifted her
focus to public relations, accounting and customer service issues.





Mr. and
Mrs. Erhartic are related by marriage.  None of the other executive
officers or key employees is related to any other of our directors, executive
officers or key employees.





Dan Judd,
53, Mr. Judd has over thirty years of experience in accounting and
management, he oversees financial reporting, planning, mergers and acquisitions,
and finance support for all business operations.  Before joining Sitestar
in 2003, Mr. Judd ran his own accounting firm, Judd Enterprises, Inc.,
specializing in both taxes and accounting.  He also held management
positions in manufacturing and wholesale companies.  Mr. Judd is a
Certified Public Accountant and holds a Bachelor of Science degree in Commerce
from the University of Virginia.





TERM OF
DIRECTORS:





Director
            
            Expiration
      of termFrank
      R. Erhartic, Jr.
            
            December
      31, 2010Julia
      Erhartic
            
            December
      31, 2010Dan
      Judd
            
            December
      31, 2010




Section
16(a) Beneficial Ownership Reporting Compliance Pursuant to Section 16 (a) of
the Securities Exchange Act of 1934, and the rules issued there under, our
directors and executive officers are required to file with the Securities and
Exchange Commission and the National Association of Securities Dealers, Inc.
ownership and changes in ownership of common stock and other equity securities
of the Company. Copies of such reports are required to be furnished to us.
 Based solely on a review of the copies of such reports furnished to us, or
written representations that no other reports were required, we believe that,
during our fiscal year ended December 31, 2009 all of our executive officers and
directors complied with the requirements of
Section 16 (a).





The
Company has adopted a code of ethics and is available on the Company’s website
www.sitestar.com
under Investor Relations.





49





ITEM 11.
 EXECUTIVE COMPENSATION





The
following table sets forth the annual compensation paid to our executive
officers for the two fiscal years ended December 31st.





SUMMARY
COMPENSATION TABLE





Name and
              Principal
              Position
            
            Year
            
            Salary
              ($)
            
            
            Bonus
              ($)
            
            
            Stock
              Awards
              ($)
            
            
            Option
              Awards
              ($)
            
            
            Non-
              Equity
              Incentive
              Plan
              Compen-
              sation ($)
            
            
            Change in
              Pension
              Value and
              Non-
              qualified
              Deferred
              Compen-
              sation
              Earnings
              ($)
            
            
            All Other
              Compen-
              sation ($)
            
            
            Total ($)Frank
      R, Erhartic, Jr., Principal Executive Officer (PEO)
            
            2009
            
            
            97,885
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            97,8852008
            
            
            97,885
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            97,885Daniel
      Judd,
              Principal
      Financial Officer (PFO)
            
            2009
            
            
            45,200
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            45,2002008
            
            
            45,200
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            45,200Julie
      E. Erhartic, (Officer)
            
            2009
            
            
            13,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,0002008
            
            
            13,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,000





50




Frank R.
Erhartic, Jr., President, CEO and Director, earned a salary of $97,885 and
$97,885 for the years ended December 31, 2009 and 2008,
respectively.  He received no other compensation.  Daniel
Judd, CFO and Director earned a salary of $45,200 and $45,200 for the years
ended December 31, 2009 and 2008, respectively.  He received no other
compensation.  Julia E. Erhartic, Secretary and Director, earned a
salary of $13,000 and $13,000 for the years ended December 31, 2009 and 2008,
respectively.  She received no other compensation.





GRANTS OF
PLAN-BASED AWARDS




Estimated Future Payouts
              Under Non-Equity Incentive
              Plan Awards
            
            Estimated Future Payouts
              Under Equity Incentive
              PlanAwards
            
            All Other
              StockAwards:
              Number ofShares
            
            All other
              OptionAwards:
              Number of
              SecuritiesUnder-
            
            Exerciseof BasePrice ofOptionName
            
            GrantDate
            
            Threshold
              ($)
            
            Target
              ($)
            
            Maximum
              ($)
            
            Threshold
              ($)
            
            Target
              ($)
            
            Maximum
              (#)
            
            Of Stock or
              Units (#)
            
            Lying
              Options (#)
            
            Awards
              ($/Sh)PEO
            
            N/APFO
            
            N/AOfficer
            
            N/A





There
were no Equity Incentive Plans, Non-Equity Incentive Plans or Stock Awards for
the years ended December 31, 2009 and 2008.





OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END





Option Awards
            
            
            Stock AwardsName
            
            Number of
              securities
              Underlying
              Unexercised
              Options
              (#)
              Exercisable
            
            
            Number of
              securities
              Underlying
              Unexercised
              Options (#)
              Unexercisable
            
            
            Equity
              Incentive
              Plan
              Awards:
              Number of
              Securities
              Underlying
              Unexercised
              Unearned
              Options (#)
            
            
            Option
              Exercise
              Price
              ($)
            
            
            Option
              Expiration
              Date
            
            
            Number
              of
              Shares
              of Units
              of
              Stock
              that
              have
              not
              vested
              (#)
            
            
            Market
              Value of
              Shares or
              Units of
              Stock that
              have not
              vested ($)
            
            
            Equity
              Incentive
              Plan
              Awards:
              Number
              of
              Unearned
              Shares,
              Units or
              other
              rights that
              have not
              vested (#)
            
            
            Equity
              Incentive
              Plan
              Awards
              Market
              or Payout
              Value of
              Unearned
              Shares,
              Units of
              other
              rights
              that have
              not
              vested
              ($)PEO
            
            
            N/APFO
            
            
            N/AOfficer
            
            
            N/A





51




There
were no Equity Incentive Plans, Non-Equity Incentive Plans or Stock Awards for
the years ended December 31, 2009 and 2008.





DIRECTOR
COMPENSATION





Name
            
            Fees
              Earned or
              Paid in
              Cash ($)
            
            
            Stock
              Awards ($)
            
            
            Option
              Awards
              ($)
            
            
            Non-Equity
              Incentive Plan
              Compensation
              ($)
            
            
            Change in
              Pension Value
              and
              Nonqualified
              Deferred
              Compensation
              Earnings ($)
            
            
            All Other
              Compensation
              ($)
            
            
            Total
              ($)Frank
      R, Erhartic, Jr., Director
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            0.00Daniel
      Judd, Director
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            0.00Julie
      E. Erhartic, Director
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            0.00





There
were no Director compensation other than salary for the years ended December 31,
2009 and 2008.





ITEM 12.
 SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDERS MATTERS





The
following table sets forth certain information as of May 14, 2010 regarding
the record and beneficial ownership of our common stock by: (i) any individual
or group (as that term is defined in the federal securities laws) of affiliated
individuals or entities who is known by us to be the beneficial owner of more
than five percent of the outstanding shares of our common stock; (ii) each of
our executive officers and directors; and (iii) our executive officers and
directors as a group.





Name and Address of
              Beneficial Owner
            
            Number of
              Shares
              Beneficially
              Owned (1)
            
            
            Percent
              Of Class (2)Frank
      and Julie Erhartic
              7109
      Timberlake Road
              Lynchburg,
      VA 24502
            
            
            24,583,980
            
            
            
            32.68
            %Daniel
      A. Judd
              7109
      Timberlake Road
              Lynchburg,
      VA 24502
            
            
            133,865
            
            
            
            00.17
            %All
      directors and officers
              As
      a group (3 persons)
            
            
            24,717,845
            
            
            
            32.85
            %





(1)
Except as otherwise indicated, we believe that the beneficial owners of our
common stock listed above, based on information furnished by such owners, have
sole investment and voting power with respect to such shares, subject to
community property laws where applicable.





(2)
Percent of class is based on 75,298,705 shares of common stock outstanding as of
May 14, 2010.




52




ITEM 13.
 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





The
Company leases its corporate headquarters located at 7109 Timberlake Road, Suite
201, Lynchburg, VA 24502 from Frank R. Erhartic, Jr., a stockholder of the
Company pursuant to a lease agreement entered into on November 23, 2003.
Pursuant to the lease agreement, the Company pays Mr. Erhartic rent in the
amount of $48,000 per year. The lease agreement expires on November 1,
2010.





ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES





Fees to
Independent Registered Public Accountants for Fiscal 2009 and 2008





Audit
Fees. Fees billed to the Company by Bagell, Josephs, Levine & Co.,
L.L.C. for audit services rendered by Bagell, Josephs, Levine &
Co., L.L.C. for the audit of the Company’s annual financial statements for
the 2009 and 2008 years, for the review of those financial statements included
in the Company’s Quarterly Reports on Form 10-Q during such years, and for
services that are normally provided by Bagell, Josephs, Levine & Co.,
L.L.C. in connection with statutory and regulatory filings or engagements,
totaled $57,500 and $52,000, respectively.  Fees billed to the Company by
Friedman, LLP, for audit services rendered by Freidman, LLP, for
the audit of the Company’s annual financial statements for the 2009 year, and
for services that are normally provided by Friedman, LLP, in connection
with statutory and regulatory filings or engagements, totaled $15,000. 
Fees billed to the Company by Santora CPA Group for audit services
rendered by Santora CPA Group, for the audit of the Company’s
annual financial statements for the 2009 year, and for services that are
normally provided by Santora CPA Group, in connection with statutory and
regulatory filings or engagements, totaled $37,500.




Tax Fees.
No fees were billed to the Company during 2009 and 2008 for professional
services rendered for tax compliance, tax advice or tax
planning.




All Other
Fees. There were no additional fees billed to the Company by any
auditor during 2009 or 2008 for products and services, other than services
reported in the two preceding paragraphs.





All of
the services described in the preceding paragraphs were approved by the Board of
Directors pursuant to applicable regulations.





AUDIT
COMMITTEE





The
Company does not have an audit committee.





53




PART
IV





ITEM 15.
 EXHIBITS, FINANCIAL STATEMENT SCHEDULES.





(1) The
following exhibits are filed as part of this Annual Report on Form 10-K or are
incorporated herein by reference:




Exhibit
            
            Description
            
            Filed3.1(i)
            
            Articles
      of Incorporation of the Registrant (December 17, 1992)
            
            a3.1(ii)
            
            Amended
      Articles of Incorporation (July 29, 1998)
            
            a3.1(iii)
            
            Amended
      Articles of Incorporation (October 26, 1998)
            
            a3.1(iv)
            
            Amended
      Articles of Incorporation (July 14, 1999)
            
            a3.1(v)
            
            Amended
      Articles of Incorporation (July 28, 1999)
            
            a3.2(i)
            
            By-laws
      of the Registrant (December 17, 1992)
            
            a4.2
            
            Convertible
      Debenture Purchase Agreement dated as of May 11, 2000 between the
      investors named therein and the Registrant
            
            c4.3
            
            12%
      Convertible Debenture due May 11, 2001 made by the Registrant in favor of
      New Millenium Capital Partners II, L.L.C.
            
            c4.4
            
            12%
      Convertible Debenture due May 11, 2001 made by the Registrant in favor of
      AJW Partners, L.L.C.
            
            c4.5
            
            Stock
      Purchase Warrant dated as of May 11, 2000 issued by Registrant to New
      Millenium Capital Partners, L.L.C.
            
            c4.6
            
            Stock
      Purchase Warrant dated as of May 11, 2000 issued by Registrant to AJW
      Partners, L.L.C
            
            c4.7
            
            Registration
      Rights Agreement dated as of May 11, 2000 by and between the Registrant
      and the investors named therein.
            
            c10.1
            
            Lease
      for Corporate Office
            
            b10.13
            
            Statement
      of changes in beneficial ownership of securities.
            
            k10.14
            
            Definitive
      Purchase Agreement to acquire certain assets of Idacomm, Inc, effective
      September 16, 2005.
            
            l10.15
            
            Definitive
      Purchase Agreement to acquire  Inc, effective January 1,
      2006
            
            m10.16
            
            Amendment
      to report audited financial statements for Definitive Purchase Agreement
      to acquire  Inc.
            
            n10.17
            
            Definitive
      Purchase Agreement to acquire certain assets of First USA, Inc, effective
      July 1, 2006.
            
            o10.18
            
            Definitive
      Purchase Agreement to acquire certain assets of OW Holdings, Inc,
      effective February 28, 2007.
            
            p





54




SCHEDULE
      21. LIST OF SUBSIDIARIES
              
              Sitestar.net,
      Inc.
              FRE
      Enterprises, Inc.
              Advanced
      Internet Services, Inc.
              NetRover
      Inc.31.1
            
            Certification
      of Chief Executive Officer Pursuant to the Securities Exchange Act of
      1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of
              2002.31.2
            
            Certification
      of Chief Financial Officer Pursuant to the Securities Exchange Act of
      1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of
              2002.
            
            q32.1
            
            Certification
      Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
            
            q





a  Filed
as an exhibit to the Registrant's Form-10SB, as amended, initially filed with
the Securities and Exchange Commission on October 22, 1999 and incorporated
herein by reference.





b  Filed
as an exhibit to the Registrant's Form-10SB filed with the Securities and
Exchange Commission on October 28, 2006 and incorporated herein by
reference.





c  Filed
as an exhibit to the Registrant's SB-2 Registration Statement, File No.
333-39660, filed on June 20, 2000 and incorporated herein by
reference.





k   Filed
as an exhibit to Registrant’s Form SC 13G/A filed with the Securities and
Exchange Commission on February 9, 2005





l   Filed
as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange
Commission on September 16, 2005





m   Filed
as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange
Commission on January 1, 2006





n   Filed
as an exhibit to Registrant’s Form 8-K/A filed with the Securities and Exchange
Commission on March 22, 2006





o   Filed
as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange
Commission on July 6, 2006





p   Filed
as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange
Commission on March 2, 2007





q   Filed
herewith





55




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.




Signature
            
            Title
            
            Date/s/
      Frank Erhartic, Jr.
            
            President,
      Chief Executive
            
            May
      17, 2010Frank
      Erhartic, Jr.
            
            Officer,
      Director
              (Principal
      Executive Officer)





/s/
      Daniel A. Judd
            
            Chief
      Financial Officer
            
            May
      17, 2010Daniel
      A. Judd
            
            (Principal
      Financial Officer,
              Principal
      Accounting Officer)





/s/
      Julie Erhartic
            
            Secretary,
      Director
            
            May
      17, 2010Julie
      Erhartic




56