UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K/A
 
 Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 
 For the
Fiscal Year Ended December 31, 2008
 
 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 x No
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 nonaffiliates as of June 30,
2008, the last business day of the registrant’s most recently completed second
fiscal quarter, was approximately $7,326,948 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 7, 2009
was approximately 91,326,463.
  
  SITESTAR
CORPORATION
  EXPLANATORY
NOTE
 
 This Amendment No. 2 to our Annual Report on Form 10-K for the year
ended December 31, 2008 initially filed with the Securities and Exchange
Commission on May 18, 2009 is being filed to reflect restatements of
Sitestar Corporation‘s Consolidated Balance Sheets as of December 31, 2008,
and the related Consolidated Statements of Income, Cash Flows, and Stockholders’
Equity for each of the two years in the period ended December 31, 2008 (the
“Financial Statements”). These restatements reflect the effects of adjustments
for the accounting related to various matters detailed in Note 1 to the
Consolidated Financial Statements. These restatements reflect adjustments for
transactions related to corporate income taxes as filed for the year ended
December 31, 2008.  In addition, results for 2008 have been restated
with respect to the accounting for such matters where appropriate. Sitestar
Corporation is also revising the discussion under Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations and
Item 9A, Controls and Procedures in order to reflect the effects of the
restatement. Except with respect to these matters, the Financial Statements in
this Form 10-K/A do not reflect any events that have occurred after the
2008 Form 10-K was filed.
  2
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 None.
  3
  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;
 ·
   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.
 
 The
Company also markets, sells and manufactures computer systems, computer
hardware, computer software, networking services, repair services and toner and
ink cartridge remanufacturing services from the Lynchburg, Virginia
location.
  4
  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.
  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.
  5
  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 30
months.
  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 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.
  6
  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.
 
 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 $1,215,615 as of December 31,
2008.
 
 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 5 monthly installments beginning April
2008.  The purchase price has been subsequently adjusted down to
$36,818.
  7
  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 11 monthly
installments beginning May 2008.  The purchase price has been
subsequently adjusted down 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 6 monthly installments beginning June 2008.
 
 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 60 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 5 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 with the remaining balance due in 12 monthly installments beginning
September 2008.
 
 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 due in 12 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.
  8
  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.
  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 utilizes
the position of Vice President of Marketing and Business Development. Key
initiatives include increasing affiliate relationships and strategic
acquisitions.
  9
  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.
 
 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 NetZero
      and PeoplePC;
 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.
  10
  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.
 
 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.
  11
  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.
 
 Employees
  As of
April 8, 2008, the Company employed twenty full-time individuals.  Of
these, the Company has three in management, one in sales and marketing, three in
administration, and twelve 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
  12
  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.  Neocom's
principal note holders had a senior lien on the property, which has been lifted.
This bank note was payable in monthly principal and interest installments of
approximately $6,400 or $76,800 per annum with the balance due September
2003.  This note has been refinanced into a term loan and has
subsequently been paid in full and converted to a line of credit, which was paid
in full and not renewed when it matured in 2007.  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.
 
 The
Company cancelled the lease of a 2,500 square foot office facility in Mt. Airy,
North Carolina effective October 31, 2005 where it sold computer hardware and
services under the name of Computers by Design and sold Internet services under
the name of Sitestar Advanced Internet Services. The Company also housed
Internet equipment there to serve its customers in the Mt. Airy, North Carolina
area. This facility had an annual rent of $6,000. The facility is located at 327
West Lebanon Street, Mt. Airy, NC 27030. It was leased from Nick Epperson 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 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 $16,688 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.
  13
  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.  This matter
has been settled with a resulting gain of $15,251.
 
 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 will vigorously defend this
claim.  A pre-trial or scheduling conference will be scheduled in the
second quarter of 2009.
 
 ITEM
4.  SUBMISSION OR MATTERS TO A VOTE OF SECURITY HOLDERS
  None
 
 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 March
31, 2007:
  High
                        
                        
                        Low2007For
      the quarter ended March 31, 2007
                        
                        $
                        0.13
                        
                        
                        $
                        0.06For
      the quarter ended June 30, 2007
                        
                        $
                        0.13
                        
                        
                        $
                        0.11For
      the quarter ended September 30, 2007
                        
                        $
                        0.16
                        
                        
                        $
                        0.10For
      the quarter ended December 31, 2007
                        
                        $
                        0.12
                        
                        
                        $
                        0.092008For
      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
                        
                        
                        $
                        0.08
  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 $0.05 on May 7, 2009.
 As of May 7, 2009 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.
  14
  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 our 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 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
 
 The
Company issued 2,050,000 shares of its common stock in connection with the
purchase of NetRover Inc. effective January 1, 2006 as reflected in the Form 8-K
filed with the SEC dated January 6, 2006.  The Company has reacquired
2,000,000 of these shares and they were placed in treasury.  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 as
shares that may be repurchased under the plan represent shares eligible for the
calendar year 2008.  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 maximum amount
available to repurchase under the repurchase plan.
  15
  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
      1 through
                                              October
      31, 2008
                                            
                                            
                                            -
                                            
                                            
                                            
                                            n/a
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            10,000,000Month
      # 2
                                              November
      1 through
                                              November
      30, 2008
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            10,000,000Month # 3
                                              December 1 through
                                              December 31, 2008
                                            
                                            
                                            19,500
                                            
                                            
                                            $
                                            0.06
                                            
                                            
                                            
                                            19,500
                                            
                                            
                                            
                                            9,980,500Total
                                            
                                            
                                            19,500
                                            
                                            
                                            $
                                            0.06
                                            
                                            
                                            
                                            19,500
                                            
                                            
                                            
                                            9,980,500
  On
February 10, 2009 the Company repurchased $5,263,158 shares of common stock at
an average price of $0.1121 per share.
 
 The
following chart provides information regarding purchases of Company equities by
the Company and affiliated purchasers over the last year:
 
 ITEM
6.  SELECT FINANCIAL DATA
  None
 
 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, 2008 and December 31, 2007 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.
  16
  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.
 
 The
Company also markets, sells and manufactures computer systems, computer
hardware, computer software, networking services, repair services and toner and
ink cartridge remanufacturing services from the Lynchburg, Virginia
location.
 
 RESULTS
OF OPERATIONS
  The
following tables show financial data for the years ended December 31, 2008 and
2007.  Operating results for any period are not necessarily indicative of
results for any future period.
 
 For
      the year ended December 31, 2008Corporate
                                        
                                        
                                        Internet
                                        
                                        
                                        TotalRevenue
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,227,438
                                        
                                        
                                        $
                                        10,227,438Cost
      of revenue
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,061,563
                                        
                                        
                                        
                                        3,061,563Gross
      profit
                                        
                                        
                                        -
                                        
                                        
                                        
                                        7,165,875
                                        
                                        
                                        
                                        7,165,875Operating
      expenses
                                        
                                        
                                        106,268
                                        
                                        
                                        
                                        5,701,695
                                        
                                        
                                        
                                        5,807,963Income
      (loss) from operations
                                        
                                        
                                        (106,268
                                        )
                                        
                                        
                                        1,464,180
                                        
                                        
                                        
                                        1,357,912Other
      income (expense)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (128,090
                                        )
                                        
                                        
                                        (128,090
                                        )Income
      before income taxes
                                        
                                        
                                        (106,268
                                        )
                                        
                                        
                                        1,336,090
                                        
                                        
                                        
                                        1,229,822Income
      taxes
                                        
                                        
                                        (82,015)
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (82,015)Net
      income (loss)
                                        
                                        $
                                        (24,253
                                        )
                                        
                                        $
                                        1,336,090
                                        
                                        
                                        $
                                        1,311,837
  For
      the year ended December 31, 2007Corporate
                                    
                                    
                                    Internet
                                    
                                    
                                    TotalRevenue
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    6,567,264
                                    
                                    
                                    $
                                    6,567,264Cost
      of revenue
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,244,184
                                    
                                    
                                    
                                    2,244,184Gross
      profit
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,323,080
                                    
                                    
                                    
                                    4,323,080Operating
      expenses
                                    
                                    
                                    61,812
                                    
                                    
                                    
                                    3,305,098
                                    
                                    
                                    
                                    3,366,910Income
      (loss) from operations
                                    
                                    
                                    (61,812
                                    )
                                    
                                    
                                    1,017,982
                                    
                                    
                                    
                                    956,170Other
      income (expense)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (166,198
                                    )
      )
                                    
                                    
                                    (166,198
                                    )Income
      before income taxes
                                    
                                    
                                    (61,812
                                    )
                                    
                                    
                                    851,784
                                    
                                    
                                    
                                    789,972Income
      taxes
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Net
      income (loss)
                                    
                                    $
                                    (61,812
                                    )
                                    
                                    $
                                    851,784
                                    
                                    
                                    $
                                    789,972
  17
  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, 2008 and 2007.
  For
      the year ended December 31, 2008Corporate
                                
                                
                                Internet
                                
                                
                                TotalEBITDA
                                
                                $
                                267,994
                                
                                
                                $
                                4,070,172
                                
                                
                                $
                                4,338,166Interest
      expense
                                
                                
                                -
                                
                                
                                
                                (165,154
                                )
                                
                                
                                (165,154
                                )Taxes
                                
                                
                                82,015
                                
                                
                                
                                -
                                
                                
                                
                                82,015Depreciation
                                
                                
                                -
                                
                                
                                
                                (43,570
                                )
                                
                                
                                (43,570
                                )Amortization
                                
                                
                                -
                                
                                
                                
                                (2,899,620
                                )
                                
                                
                                (2,899,620
                                )Net
      income (loss)
                                
                                $
                                350,009
                                
                                
                                $
                                961,828
                                
                                
                                $
                                1,311,837
 
 For
      the year ended December 31, 2007Corporate
                            
                            
                            Internet
                            
                            
                            TotalEBITDA
                            
                            $
                            (61,812
                            )
                            
                            $
                            2,690,974
                            
                            
                            $
                            2,629,162Interest
      expense
                            
                            
                            -
                            
                            
                            
                            (158,734
                            )
                            
                            
                            (158,734
                            )Taxes
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Depreciation
                            
                            
                            -
                            
                            
                            
                            (58,534
                            )
                            
                            
                            (58,534
                            )Amortization
                            
                            
                            -
                            
                            
                            
                            (1,621,922
                            )
                            
                            
                            (1,621,922
                            )Net
      income (loss)
                            
                            $
                            (61,812
                            )
                            
                            $
                            851,784
                            
                            
                            $
                            789,972
 
 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, 2008 and December 31, 2007 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.
  18
  YEAR
ENDED DECEMBER 31, 2008 COMPARED TO DECEMBER 31, 2007
  REVENUE.
 Revenue for the year ended December 31, 2008 increased by $3,660,174 or
55.7% from $6,567,264 for the year ended December 31, 2007 to $10,227,438 for
the same period in 2008.  The increase in Internet sales is attributed to
the acquisition 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. These new
acquisitions, for the year ended December 31, 2008, yielded approximately
$1,435,022 in additional net 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, 2008 increased
by $817,379 or 36.4% from $2,244,184 for the year ended December 31, 2007 to
$3,061,563 for the same period in 2008.  The increase is due primarily
to providing services to recently acquired customers. Telecommunication expenses
increased by $970,415 or 47.8% from $2,030,525 for the year ended December 31,
2007 to $3,000,940 for the same period in 2008.  Cost of revenue as a
percentage of sales decreased 4.3% from 34.2% for the year ended December 31,
2007 to 29.9% for the same period in 2008.  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.
  OPERATING
EXPENSES.    Selling, general and administrative expenses
increased $2,441,053 or 72.5% from $3,366,910 for the year ended December 31,
2007 to $5,807,963 for the same period in 2008.  This is due primarily to
an increase in amortization expense. Amortization expense, including impairment
increased $1,277,698 or 78.8% from $1,621,922 for the year ended December 31,
2007 to $2,899,620 for the same period in 2008. This increase is directly
related to recently acquired customers.  Bad debt expense increased
$1,023,888 or 221.2% from $462,874 for the year ended December 31, 2007 to
$1,486,762 for the same period in 2008. This increase is directly related to
recently acquired customers
 
 INTEREST
EXPENSE. Interest expense for the year ended December 31, 2008 increased by
$6,420 or 4.0% from $158,734 for the year ended December 31, 2007 to $165,154
for the same period in 2008.  This increase was a result of financing
recent acquisitions of customer bases.
 
 INCOME
TAXES.  For the years ended December 31, 2008 and 2007 corporate
income tax expense $84,754 and $0 were accrued.
 
 BALANCE
SHEET.   Net accounts receivable increased $438,961 or 146.4% from
$299,863 on December 31, 2007 to $738,824 on the same date in 2008.  This
increase is substantially due to additions to the customer base from recent
acquisitions. Customer list decreased $1,256,221 or 22.9% from $5,480,635 on
December 31, 2007 to $4,224,414 on December 31, 2008.  This decrease
is substantially due to scheduled amortization.  Deferred tax assets
increased $421,031 from none on December 31, 2007 to $421,031 on December 31,
2008.  This is due to the recognition of tax benefits of prior year
tax losses.  Other assets decreased $93,630 or 13.8% from $677,267 on
December 31, 2007 to $583,637 on December 31, 2008.  This decrease is
substantially due to scheduled amortization of non-compete agreements associated
with acquisitions.  Accounts payable increased by $2,179 or 2.8% from
$78,713 on December 31, 2007 to $80,892 for the same period in
2008.  Accrued income taxes increased $754,777 from none on December
31, 2007 to $754,777 on December 31, 2008.  Accrued expenses decreased
by $43,139 or 31.3% from $138,021 on December 31, 2007 to $94,882 on December
31, 2008.  Deferred revenue increased by $204,009 or 15.0% from $1,361,606
on December 31, 2007 to $1,157,597 on December 31, 2008 representing primarily
new customers that have prepaid for services on December 31, 2008.  Notes
payable, less current portion, decreased $779,221 or 46.0% from $1,694,836 on
December 31, 2007 to $915,615 on December 31, 2008.  This is primarily
result of the payoff of all bank debt leaving only seller notes from
acquisitions.
  19
  LIQUIDITY
AND CAPITAL RESOURCES
  Cash and
cash equivalents totaled $527,553 and $232,249 at December 31, 2008 and at
December 31, 2007, respectively. EBITDA was $4,338,166 for the year ended
December 31, 2008 as compared to $2,629,162 for the year ended December 31,
2007.
 
 2008
                            
                            
                            2007EBITDA
      for the year ended December 31,
                            
                            $
                            4,338,166
                            
                            
                            $
                            2,629,162Interest
      expense
                            
                            
                            (165,154
                            )
                            
                            
                            (158,734
                            )Taxes
                            
                            
                            82,015
                            
                            
                            
                            -Depreciation
                            
                            
                            (43,570
                            )
                            
                            
                            (58,534
                            )Amortization
                            
                            
                            (2,899,620
                            )
                            
                            
                            (1,621,922
                            )Net
      income for the year ended December 31,
                            
                            $
                            1,311,837
                            
                            
                            $
                            789,972
  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 57.2% to 58.7% of
total accounts receivable from December 31, 2007 to December 31, 2008.  The
balance in the 30+ day category decreased from 24.1% to 21.6% of total accounts
receivable from December 31, 2007 to December 31, 2008.  The balance in the
60+ day category increased from 18.7% to 19.7% of total accounts receivable from
December 31, 2007 to December 31, 2008.
  The aging
of accounts receivable as of December 31, 2008 and 2007 is as
shown:
  2008
                              
                              
                              2007Current
                              
                              $
                              433,518
                              
                              
                              
                              58.7
                              %
                              
                              $
                              171,446
                              
                              
                              
                              57.2
                              %30
      +
                              
                              
                              159,585
                              
                              
                              
                              21.6
                              %
                              
                              
                              72,337
                              
                              
                              
                              24.1
                              %60
      +
                              
                              
                              145,721
                              
                              
                              
                              19.7
                              %
                              
                              
                              56,080
                              
                              
                              
                              18.7
                              %90
      +
                              
                              
                              -
                              
                              
                              
                              -
                              %
                              
                              
                              -
                              
                              
                              
                              -
                              %Total
                              
                              $
                              738,824
                              
                              
                              
                              100.0
                              %
                              
                              $
                              299,863
                              
                              
                              
                              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
  20
  ITEM 8.
 FINANCIAL STATEMENTS
 
 INDEX
 PageREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                  
                  22FINANCIAL
      STATEMENTSConsolidated
      Balance Sheets as of December 31, 2008 and 2007
                  
                  23-24Consolidated
      Statements of Income for the Years Ended December 31, 2008 and
      2007
                  
                  25Consolidated
      Statements of Stockholders' Equity for the Years Ended December 31, 2008
      and 2007
                  
                  26Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
                  
                  27-28Notes
      to Consolidated Financial Statements
                  
                  29-50
  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 the accompanying consolidated balance sheets of Sitestar Corporation,
(the “Company”) as of December 31, 2008 and 2007, and the related consolidated
statements of income, stockholders’ equity and cash flows for each of the years
in the two-year period ended December 31, 2008.  The Company’s
management is responsible for the financial statements. Our responsibility is to
express an opinion on these financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the 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 audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sitestar Corporation, as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America.
 
 As
discussed in Note 1 to the financial statements, the accompanying financial
statements have been restated.
 
 /s/
BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.
 Bagell,
Josephs, Levine & Company, L.L.C.
 Marlton,
NJ 08053
 
 May 13,
2009 (September 15, 2009 as the effects of the restatement discussed in Note
1)
  22
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31, 2008 and 2007
 
 ASSETS
 
 CURRENT
      ASSETS
                    
                    2008
                    
                    
                    2007RestatedCash
      and cash equivalents
                    
                    $
                    527,553
                    
                    
                    $
                    232,249Accounts
      receivable, net of allowances of $26,764 and $22,641
                    
                    
                    738,824
                    
                    
                    
                    299,863Prepaid
      expenses
                    
                    
                    1,227
                    
                    
                    
                    16,529Total
      current assets
                    
                    
                    1,267,604
                    
                    
                    
                    548,641PROPERTY
      AND EQUIPMENT, net
                    
                    
                    225,212
                    
                    
                    
                    236,782CUSTOMER
      LIST, net of accumulated amortization of $7,943,341 and
      $5,237,054
                    
                    
                    4,224,414
                    
                    
                    
                    5,480,635GOODWILL,
      net
                    
                    
                    1,288,559
                    
                    
                    
                    1,288,558DEFERRED
      TAX ASSETS
                    
                    
                    421,031
                    
                    
                    
                    -OTHER
      ASSETS
                    
                    
                    583,637
                    
                    
                    
                    677,267TOTAL
      ASSETS
                    
                    $
                    8,010,457
                    
                    
                    $
                    8,231,883
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  23
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31, 2008 and 2007
 
 LIABILITIES
AND STOCKHOLDERS' EQUITY
 
 CURRENT
      LIABILITIES
                              
                              2008
                              
                              
                              2007RestatedAccounts
      payable
                              
                              $
                              80,892
                              
                              
                              $
                              78,713Accrued
      income taxes
                              
                              
                              339,016
                              
                              
                              
                              -Accrued
      expenses
                              
                              
                              94,882
                              
                              
                              
                              138,021Deferred
      revenue
                              
                              
                              1,157,597
                              
                              
                              
                              1,361,606Notes
      payable, current portion
                              
                              
                              569,372
                              
                              
                              
                              1,268,866Note
      payable - stockholders, current portion
                              
                              
                              -
                              
                              
                              
                              -Total
      current liabilities
                              
                              
                              2,241,759
                              
                              
                              
                              2,847,206NOTES
      PAYABLE, less current portion
                              
                              
                              915,615
                              
                              
                              
                              1,694,836NOTES
      PAYABLE - STOCKHOLDERS, less current portion
                              
                              
                              539,281
                              
                              
                              
                              686,687TOTAL
      LIABILITIES
                              
                              
                              3,696,655
                              
                              
                              
                              5,228,729STOCKHOLDERS'
      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, 91,326,463 and
      91,326,463 shares issued and outstanding
                              
                              
                              91,326
                              
                              
                              
                              91,326Additional
      paid-in capital
                              
                              
                              13,880,947
                              
                              
                              
                              13,880,947Treasury
      Stock, at cost, 8,237,805 and 8,218,305 common shares
                              
                              
                              (64,220
                              )
                              
                              
                              (63,030
                              )Accumulated
      deficit
                              
                              
                              (9,594,251
                              )
                              
                              
                              (10,906,088
                              )Total
      stockholders' equity
                              
                              
                              4,313,802
                              
                              
                              
                              3,003,155TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                              
                              $
                              8,010,457
                              
                              
                              $
                              8,231,884
 
 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, 2008 AND 2007
 
 2008
                            
                            
                            2007RestatedREVENUE
                            
                            $
                            10,227,438
                            
                            
                            $
                            6,567,264COST
      OF REVENUE
                            
                            
                            3,061,563
                            
                            
                            
                            2,244,184GROSS
      PROFIT
                            
                            
                            7,165,875
                            
                            
                            
                            4,323,080OPERATING
      EXPENSESSelling,
      general and administrative expenses
                            
                            
                            5,794,321
                            
                            
                            
                            3,236,860Customer
      list impairment
                            
                            
                            13,642
                            
                            
                            
                            130,050TOTAL
      OPERATING EXPENSES
                            
                            
                            5,807,963
                            
                            
                            
                            3,366,910INCOME
      FROM OPERATIONS
                            
                            
                            1,357,912
                            
                            
                            
                            956,170OTHER
      INCOME (EXPENSES)Gain
      on disposal of assets
                            
                            
                            37,064
                            
                            
                            
                            (7,464
                            )Interest
      expense
                            
                            
                            (165,154
                            )
                            
                            
                            (158,734
                            )TOTAL
      OTHER INCOME (EXPENSES)
                            
                            
                            (128,090
                            )
                            
                            
                            (166,198
                            )INCOME
      BEFORE INCOME TAXES
                            
                            
                            1,229,822
                            
                            
                            
                            789,972INCOME
      TAXES
                            
                            
                            (82,015
                            )
                            
                            
                            -NET
      INCOME
                            
                            $
                            1,311,837
                            
                            
                            $
                            789,972BASIC
      AND DILUTED INCOME PER SHARE
                            
                            $
                            0.01
                            
                            
                            $
                            0.01WEIGHTED
      AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
                            
                            
                            91,326,463
                            
                            
                            
                            87,819,037
  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, 2008 AND 2007
 
 Common Stock
                      
                      
                      AdditionalPaid-in
                      
                      
                      Treasury
                      
                      
                      AccumulatedShares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Stock
                      
                      
                      Deficit
                      
                      
                      TotalRestated
                      
                      
                      RestatedBalance
      at December 31, 2006
                      
                      
                      88,063,305
                      
                      
                      
                      88,063
                      
                      
                      
                      13,651,157
                      
                      
                      
                      (329,977
                      )
                      
                      
                      (11,696,060
                      )
                      
                      
                      1,713,183Repurchase
      of acquisition shares
                      
                      
                      (2,000,000
                      )
                      
                      
                      (2,000
                      )
                      
                      
                      (198,000
                      )
                      
                      
                      200,000
                      
                      
                      
                      
                      
                      
                      
                      -Issuance
      of shares
                      
                      
                      5,263,158
                      
                      
                      
                      5,263
                      
                      
                      
                      427,790
                      
                      
                      
                      66,947
                      
                      
                      
                      
                      
                      
                      
                      500,000Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      789,972
                      
                      
                      
                      789,972Balance
      at December 31, 2007
                      
                      
                      91,326,463
                      
                      
                      $
                      91,326
                      
                      
                      $
                      13,880,947
                      
                      
                      $
                      (63,030
                      )
                      
                      $
                      (10,906,088
                      )
                      
                      $
                      3,003,155Repurchase
      of shares
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,190
                      )
                      
                      
                      
                      
                      
                      
                      (1,190
                      )Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,311,837
                      
                      
                      
                      1,311,837Balance
      at December 31, 2008
                      
                      
                      91,326,463
                      
                      
                      
                      91,326
                      
                      
                      
                      13,880,947
                      
                      
                      
                      (64,220
                      )
                      
                      
                      (9,594,251
                      )
                      
                      
                      4,313,802
  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, 2008 AND 2007
 
 2008
                        
                        
                        2007RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                        
                        $
                        1,311,837
                        
                        
                        $
                        789,972Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization expense
                        
                        
                        2,943,190
                        
                        
                        
                        1,680,456Bad
      debt expense
                        
                        
                        26,765
                        
                        
                        
                        6,947(Increase)
      decrease in accounts receivable
                        
                        
                        (465,725
                        )
                        
                        
                        (136,184
                        )(Increase)
      decrease in prepaid expenses
                        
                        
                        15,302
                        
                        
                        
                        7,147(Increase)
      decrease in deferred income taxes
                        
                        
                        (421,031
                        )
                        
                        
                        -Increase
      (decrease) in accounts payable
                        
                        
                        2,179
                        
                        
                        
                        (27,101
                        )Increase
      (decrease) in accrued expenses
                        
                        
                        711,637
                        
                        
                        
                        (288,194
                        )Increase
      (decrease) in deferred revenue
                        
                        
                        (204,009
                        )
                        
                        
                        772,840Increase
      (decrease) in accrued income taxes
                        
                        
                        (415,761
                        )
                        
                        
                        -Net
      cash provided by operating activities
                        
                        
                        3,504,384
                        
                        
                        
                        2,805,883CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                        
                        
                        (32,000
                        )
                        
                        
                        (21,033
                        )Purchase
      of customer list
                        
                        
                        (1,450,065
                        )
                        
                        
                        (5,280,242
                        )(Purchase)
      sale of assets held for resale
                        
                        
                        296
                        
                        
                        
                        48,833Purchase
      of non-competition agreements
                        
                        
                        (100,000
                        )
                        
                        
                        (390,000
                        )Net
      cash used in investing activities
                        
                        
                        (1,581,769
                        )
                        
                        
                        (5,642,442
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from notes payable - stockholders
                        
                        
                        -
                        
                        
                        
                        23,386Net
      proceeds from notes payable
                        
                        
                        570,803
                        
                        
                        
                        3,411,002Issuance
      of common stock
                        
                        
                        -
                        
                        
                        
                        500,000Purchase
      of treasury stock
                        
                        
                        (1,190
                        )
                        
                        
                        -Repayment
      of notes payable
                        
                        
                        (2,049,518
                        )
                        
                        
                        (796,527
                        )Repayment
      of notes payable – stockholders
                        
                        
                        (147,406
                        )
                        
                        
                        (198,506
                        )Net
      cash provided by (used) in financing activities
                        
                        
                        (1,627,311
                        )
                        
                        
                        2,939,355NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                        
                        
                        295,304
                        
                        
                        
                        102,796CASH
      AND CASH EQUIVALENTS - BEGINNING OF YEAR
                        
                        
                        232,249
                        
                        
                        
                        129,453CASH
      AND CASH EQUIVALENTS - END OF YEAR
                        
                        $
                        527,553
                        
                        
                        $
                        232,249
  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, 2008 AND 2007
 
 SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
  During
the years ended December 31, 2008 and 2007, the Company accrued $339,016 of
income taxes and paid interest expense of $165,000 and $159,000.
  SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
  During
the year ended December 31, 2007 the Company issued 5,263,158 shares of common
stock per a Stock Purchase Agreement dated December 24, 2007 and subsequently
repurchased the shares on February 3, 2009 and placed them in
treasury.
 
 During
the years ended December 31, 2008 and December 31, 2007 the Company recognized
$13,642 and $130,050 as impairment to customer list in addition to scheduled
amortization.
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  28
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 - RESTATED
 
 NOTE 1 –
RESTATEMENT OF FINANCIAL STATEMENTS
 
 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 we did not have
adequately designed procedures to calculate or review the tax
provision.  The effects of the restatement adjustments on Sitestar
Corporation’s originally reported financial position, results of operations, and
cash flows for the years ended December 31, 2008 are summarized
below.
  SITESTAR
CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 December
31, 2008
 
 ASSETS
 
 Previously
                    
                    
                    NetReported
                    
                    
                    Change
                    
                    
                    Restated2008
                    
                    
                    2008
                    
                    
                    2008Total
      current assets
                    
                    $
                    1,267,604
                    
                    
                    $
                    -
                    
                    
                    $
                    1,267,604PROPERTY
      AND EQUIPMENT, net
                    
                    
                    225,212
                    
                    
                    
                    -
                    
                    
                    
                    225,212CUSTOMER
      LIST, net of accumulated amortization of $8,146,728 and
      $7,973,341
                    
                    
                    4,224,414
                    
                    
                    
                    -
                    
                    
                    
                    4,224,414GOODWILL,
      net of impairment
                    
                    
                    1,288,559
                    
                    
                    
                    -
                    
                    
                    
                    1,288,559DEFERRED
      INCOME TAXES
                    
                    
                    421,031
                    
                    
                    
                    -
                    
                    
                    
                    421,031OTHER
      ASSETS
                    
                    
                    583,637
                    
                    
                    
                    -
                    
                    
                    
                    583,637TOTAL
      ASSETS
                    
                    $
                    8,010,457
                    
                    
                    $
                    -
                    
                    
                    $
                    8,010,457
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31, 2008
 
 LIABILITIES
AND STOCKHOLDERS' EQUITY
 
 CURRENT
      LIABILITIES
                          
                          Previously
      Reported
                          
                          
                          Net
                            Change
                          
                          
                          RestatedAccrued
      income taxes
                          
                          $
                          754,777
                          
                          
                          $
                          (415,761
                          )
                          
                          $
                          339,016Total
      current liabilities
                          
                          
                          2,657,520
                          
                          
                          
                          (415,761
                          )
                          
                          
                          2,241,759TOTAL
      LIABILITIES
                          
                          
                          4,112,416
                          
                          
                          
                          (415,761
                          )
                          
                          
                          3,696,655STOCKHOLDERS’
      EQUITYAccumulated
      deficit
                          
                          
                          (10,010,012
                          )
                          
                          
                          415,761
                          
                          
                          
                          (9,594,251
                          )Total
      stockholders' equity
                          
                          
                          3,898,041
                          
                          
                          
                          415,761
                          
                          
                          
                          4,313,802TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                          
                          $
                          8,010,457
                          
                          
                          $
                          -
                          
                          
                          $
                          8,010,457
  29
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 - RESTATED
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF INCOME
 FOR THE
YEAR ENDED DECEMBER 31, 2008
 
 Previously
                      Reported
                    
                    
                    Net
                      Change
                    
                    
                    RestatedREVENUE
                    
                    $
                    10,227,438
                    
                    
                    $
                    -
                    
                    
                    $
                    10,227,438COST
      OF REVENUE
                    
                    
                    3,061,563
                    
                    
                    
                    -
                    
                    
                    
                    3,061,563GROSS
      PROFIT
                    
                    
                    7,165,875
                    
                    
                    
                    -
                    
                    
                    
                    7,165,875OPERATING
      EXPENSE
                    
                    
                    5,807,963
                    
                    
                    
                    -
                    
                    
                    
                    5,807,963INCOME
      FROM OPERATIONS
                    
                    
                    1,357,912
                    
                    
                    
                    -
                    
                    
                    
                    1,357,912OTHER
      INCOME (EXPENSE)
                    
                    
                    (128,090
                    )
                    
                    
                    -
                    
                    
                    
                    (128,090
                    )INCOME
      BEFORE INCOME TAXES
                    
                    
                    1,229,822
                    
                    
                    
                    -
                    
                    
                    
                    1,229,822INCOME
      TAXES
                    
                    
                    333,746
                    
                    
                    
                    (415,761
                    )
                    
                    
                    (82,015
                    )NET
      INCOME
                    
                    $
                    896,076
                    
                    
                    $
                    415,761
                    
                    
                    $
                    1,311,837BASIC
      AND DILUTED INCOME PER SHARE
                    
                    $
                    0.01
                    
                    
                    $
                    -
                    
                    
                    $
                    0.01WEIGHTED
      AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
                    
                    
                    91,326,463
                    
                    
                    
                    -
                    
                    
                    
                    91,326,463
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF CASH FLOWS
 FOR THE
YEAR ENDED DECEMBER 31, 2008
  Previously
                    Reported
                  
                  
                  Net
                    Change
                  
                  
                  RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  896,076
                  
                  
                  $
                  415,761
                  
                  
                  $
                  1,311,837Increase
      (decrease) in accrued income taxes
                  
                  
                  -
                  
                  
                  
                  (415,761
                  )
                  
                  
                  (415,761
                  )Net
      cash provided by operating activities
                  
                  
                  3,504,384
                  
                  
                  
                  (415,761
                  )
                  
                  
                  3,504,384Net
      cash used in investing activities
                  
                  
                  (1,581,769
                  )
                  
                  
                  -
                  
                  
                  
                  (1,581,769
                  )Net
      cash used in financing activities
                  
                  
                  (1,627,311
                  )
                  
                  
                  -
                  
                  
                  
                  (1,627,311
                  )NET
      INCREASE IN CAHS AND CASH EQUIVALENTS
                  
                  
                  295,304
                  
                  
                  
                  -
                  
                  
                  
                  295,304CASH
      AND CASH EQUIVALENTS – BEGINNING OF YEAR
                  
                  
                  232,249
                  
                  
                  
                  
                  
                  
                  
                  232,249CASH
      AND CASH EQUIVALENTS – END OF YEAR
                  
                  $
                  527,553
                  
                  
                  $
                  -
                  
                  
                  $
                  527,553
  30
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 - RESTATED
 
 NOTE 2 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
  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
 The
Company’s Management’s Discussion and Analysis of Financial Condition and
Results of Operations section discusses its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America as promulgated by the Public Company
Accounting Oversight Board. 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.
  31
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 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, 2008 and 2007, bad debt expense was $1,486,762 and
$462,874. As of December 31, 2008 and 2007, accounts receivable consists of the
following:
  2008
                                  
                                  
                                  2007Gross
      accounts receivable
                                  
                                  $
                                  765,588
                                  
                                  
                                  $
                                  322,504Less
      allowance for doubtful accounts
                                  
                                  
                                  (26,764
                                  )
                                  
                                  
                                  (22,641
                                  )$
                                  738,824
                                  
                                  
                                  $
                                  299,863
 
 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 90 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 3 to 7 years for
equipment and 39 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 Statement of Financial Accounting Standard (SFAS) No. 144,
“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.
  32
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 - RESTATED
 
 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 sale
of the assets associated with Sitestar Applied Technologies does not fall under
the reporting requirements of SFAS No. 144. 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.
  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 $2,706,287 and
$1,520,839 for the years ended December 31, 2008 and
2007.  Amortization of customer lists for the years ended December 31,
2009, 2010 and 2011 is expected to be $2,235,247, $1,736,166 and $253,001,
respectively.  In accordance with SFAS No. 142, amortization of goodwill
ceased effective January 1, 2002.  For the year ended December 31, 2008
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, 2008 and 2007 at $70,443 and
$70,739.
  33
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 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 recognizes revenue related to software licenses and software maintenance
in compliance with the American Institute of Certified Public Accountants
(AICPA) Statement of Position No. 97-2, “Software Revenue Recognition.” Product
revenue is recognized when the Company delivers the product to the customer and
the Company believes that collecting the revenue is probable.  The Company
usually has agreements with its customers to deliver the requested product for a
fixed price.  Any insignificant post-contract support (PCS) obligations are
accrued for at the time of the sale. PCS that is bundled with an initial
licensing fee and is for one year or less is recognized at the time of the
initial licensing, if collecting the resulting receivable is probable. The
estimated cost to the Company to provide such services is minimal and
historically, the enhancements offered during the PCS period have been minimal.
The Company sells PCS under a separate agreement.  The agreements are for
one to two years with a fixed number of hours of service for each month of the
contract.  The contract stipulates a fixed monthly payment, non-refundable,
due each month and any service hours incurred above the contractual amount are
billed as incurred.  Revenue is recognized under these agreements ratably
over the term of the agreement.  Revenue for services rendered in excess of
the fixed monthly hours contained in the contracts are recognized as revenue as
incurred.
  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, 2008 and 2007 were
approximately $38,000 and $57,000, respectively.
 
 Income
Taxes
 The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for 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
 In
accordance with SFAS No. 128, “Earnings 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:
  34
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 2008
                                      
                                      
                                      2007Net
      income available to common shareholders
                                      
                                      $
                                      1,311,837
                                      
                                      
                                      $
                                      789,972Weighted
      average number of common shares
                                      
                                      
                                      91,326,463
                                      
                                      
                                      
                                      87,819,037Basic
      and diluted income per share
                                      
                                      $
                                      .01
                                      
                                      
                                      $
                                      .01
 
 Comprehensive
Income
 SFAS No.
130, “Reporting Comprehensive Income,” establishes standards for the reporting
and display of comprehensive income and its components in the financial
statements.  As of and for the years ended December 31, 2008 and 2007, 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.
 
 Recently Issued Accounting
Pronouncements
 
 In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities (FAS 159).
FAS 159 permits companies to choose to measure, on an
instrument-by-instrument basis, financial instruments and certain other items at
fair value that are not currently required to be measured at fair value. The
Company currently is evaluating whether to elect the option provided for in this
standard.
 
 In
December 2007, the FASB issued FASB Statement No. 141, Business Combinations
(FAS 141).  This Statement establishes principles and requirements for
how the acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree, recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase, determines what
information to disclose. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  The Company may not apply it before that date. The Company is
currently evaluating the effect of the adoption of FAS No. 141, but
believes it will not have a material impact on its financial position or on the
results of operations.
  In
December 2007, the FASB issued FASB Statement No. 160, Non-controlling Interests
in Consolidated Financial Statements (FAS 160).  This Statement
establishes accounting and reporting standards that require the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position. This Statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15,
2008.  The Company is currently evaluating the effect the adoption of
FAS No. 141, but believes it will not have a material impact on its
financial position or on the results of operations.
  In March
2008, the FASB issued FASB No. 161, Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133.  FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
does not provide adequate information about how derivative and hedging
activities affect an entity’s financial position, financial performance and cash
flows. Accordingly, this Statement requires enhanced disclosures about an
entity’s derivative and hedging activities and thereby improves the transparency
of financial reporting. This Statement is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008.  The Company is currently evaluating the effect the adoption of
FASB No. 161, but believes it will not have a material impact on its
financial position or on the results of operations
  35
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 In May
2008, the FASB issued FASB Statement No. 162, The Hierarchy of Generally
Accepted Accounting Principles.  This Statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with GAAP in the United States (the GAAP
hierarchy).  The Board concluded that the GAAP hierarchy should reside
in the accounting literature established by the FASB and is issuing this
Statement to achieve that result.  This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. The Company is currently evaluating
the effect the adoption of FASB No. 162, but believes it will not have a
material impact on its financial position or on the results of
operations.
  In May
2008, the FASB issued FASB Statement No. 163, Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60.  This
Statement clarifies how Statement 60 applies to financial guarantee insurance
contracts, including the recognition and measurement to be used to account for
premium revenue and claim liabilities. These clarifications will increase
comparability in financial reporting of financial guarantee insurance contracts
by insurance enterprises. This Statement requires expanded disclosures about
financial guarantee insurance contracts. This Statement is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and all interim periods within those fiscal years.  The Company is
currently evaluating the effect the adoption of FASB No. 163, but believes
it will not have a material impact on its financial position or on the results
of operations.
  NOTE 3 –
ACQUISITIONS
  Magnolia Internet
Services
 Effective
February 1, 2007, the Company entered into a Definitive Agreement pursuant to
which it acquired the Internet related assets of Magnolia Internet Services,
Inc., 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 and the balance was paid in eleven equal monthly
payments beginning March 2007.
 
 The
definitive agreement states that in the event that actual annualized revenue
differs more than three percent from estimates used at closing, the purchase
price will be adjusted accordingly.  The purchase price has been
adjusted down to $108,470 as of March 30, 2007.
 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
                          
                          $
                          93,992Non-compete
      agreement
                          
                          
                          10,000Equipment
                          
                          
                          10,000Deferred
      revenue
                          
                          
                          (5,522
                          )Purchase
      price
                          
                          $
                          108,470
 
 Because
the acquisition of Magnolia Internet Services was consummated on February 1,
2007, there are limited results of operations of this company for the years
ended December 31, 2007 included in the accompanying December 31, 2008 and 2007
consolidated financial statements.  The following table presents the
unaudited pro forma condensed statement of operations for the year ended
December 31, 2007 and reflects the results of operations of the Company as if
the acquisition of Magnolia Internet Services had been effective January 1,
2007.
  36
 SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 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.
 
 2007Net
      sales
                      
                      $
                      6,578,433Gross
      profit
                      
                      $
                      4,334,189Selling,
      general and administrative expenses
                      
                      $
                      3,372,699Net
      income
                      
                      $
                      795,292Basic
      income per share
                      
                      $
                      0.01
 
 OW Holdings,
Inc.
 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 headquartered 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 as of May 31, 2007.  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.
 
 Accounts
      receivable
                        
                        $
                        (2,098
                        )Customer
      list
                        
                        
                        870,680Non-compete
      agreement
                        
                        
                        25,000Equipment
                        
                        
                        10,000Deferred
      revenue
                        
                        
                        (101,130
                        )Purchase
      price
                        
                        $
                        802,452
 
 Because
the acquisition of OW Holdings, Inc. was consummated on February 28, 2007, there
are limited results of operations of this company for the year ended December
31, 2007 included in the accompanying December 31, 2008 and 2007 consolidated
financial statements.
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the year ended December 31, 2007 and reflects the results of
operations of the Company as if the acquisition of OW Holdings had been
effective January 1, 2007.  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.
 
 2007Net
      sales
                      
                      $
                      6,755,755Gross
      profit
                      
                      $
                      4,448,279Selling,
      general and administrative expenses
                      
                      $
                      3,443,252Net
      income
                      
                      $
                      838,829Basic
      income per share
                      
                      $
                      0.01
  37
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 AlaNet Internet
Services
 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 acquisition augments the Company's Internet presence
in the deep-south region. The total purchase price was $51,306 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.  The purchase price has been adjusted down to
$47,800.
 
 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.
 
 Accounts
      receivable
                        
                        $
                        3,880Customer
      list
                        
                        
                        58,549Non-compete
      agreement
                        
                        
                        5,000Deferred
      revenue
                        
                        
                        (21,800
                        )Purchase
      price
                        
                        $
                        45,629
 
 Because
the acquisition of AlaNet Internet Services was consummated on June 21, 2007,
there are limited results of operations of this company for the years ended
December 31, 2007 included in the accompanying December 31, 2008 and 2007
consolidated financial statements.  The following table presents the
unaudited pro forma condensed statement of operations for the years ended
December 31, 2007 and reflects the results of operations of the Company as if
the acquisition of AlaNet had been effective January 1, 2007.  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.
 
 2007Net
      sales
                      
                      $
                      6,612,643Gross
      profit
                      
                      $
                      4,356,581Selling,
      general and administrative expenses
                      
                      $
                      3,387,871Net
      income
                      
                      $
                      801,940Basic
      income per share
                      
                      $
                      0.01
  38
 
 SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 United Systems Access,
Inc.
 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 in 30 days with the remaining balance due in 36 monthly installments
beginning January 2008. Net post closing collections on account and vendor
payments of $425,659 by USA Telephone reduced the remaining balance of the
purchase price to $1,574,341.
 
 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
                      
                      $
                      4,292,656Non-compete
      agreement
                      
                      
                      350,000Deferred
      revenue
                      
                      
                      (892,656
                      )Purchase
      price
                      
                      $
                      3,750,000
 
 Because
the acquisition of USA Telephone was consummated effective November 1, 2007,
there are limited results of operations of this company for years ended December
31, 2007 included in the accompanying December 31, 2008 and December 31, 2007
consolidated financial statements.
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the years ended December 31, 2007 and reflects the results of
operations of the Company as if the acquisition of USA Telephone had been
effective January 1, 2007.  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.
 
 2007Net
      sales
                    
                    $
                    10,307,331Gross
      profit
                    
                    $
                    7,082,904Selling,
      general and administrative expenses
                    
                    $
                    5,277,493Net
      income
                    
                    $
                    1,552,458Basic
      income per share
                    
                    $
                    0.02
 
 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
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.
  39
  SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 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 and 2007.
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2007 and reflects the
results of operations of the Company as if the acquisition of Comcation had been
effective March 1, 2007.  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.
 
 2007Net
      sales
                    
                    $
                    6,660,841Gross
      profit
                    
                    $
                    4,393,942Selling,
      general and administrative expenses
                    
                    $
                    3,437,240Net
      income
                    
                    $
                    788,220Basic
      income per share
                    
                    $
                    0.01
 
 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 11 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 Comcation in the consolidated financial
statements for the twelve months ended December 31, 2007 and 2008.
  40
  SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2007 and reflects the
results of operations of the Company as if the acquisition of N2 the Net had
been effective April 1, 2007.  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.
 
 2007Net
      sales
                      
                      $
                      6,687,100Gross
      profit
                      
                      $
                      4,392,932Selling,
      general and administrative expenses
                      
                      $
                      3,411,033Net
      income
                      
                      $
                      813,583Basic
      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 6 monthly installments beginning June 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, 2007 and
2008.
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2007 and reflects the
results of operations of the Company as if the acquisition of Dial Assurance had
been effective May 1, 2007.  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.
 
 2007Net
      sales
                      
                      $
                      6,735,367Gross
      profit
                      
                      $
                      4,457,744Selling,
      general and administrative expenses
                      
                      $
                      3,394,492Net
      income
                      
                      $
                      895,010Basic
      income per share
                      
                      $
                      0.01
 
 41
 SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 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 60 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  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, 2007 and 2008.
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2007 and reflects the
results of operations of the Company as if the acquisition of USA Telephone had
been effective May 1, 2007.  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.
 
 2007Net
      sales
                        
                        $
                        7,006,866Gross
      profit
                        
                        $
                        4,686,156Selling,
      general and administrative expenses
                        
                        $
                        3,497,071Net
      income
                        
                        $
                        1,022,887Basic
      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 5 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.
  42
  SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 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, 2007 and 2008.
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2007 and reflects the
results of operations of the Company as if the acquisition of AdaNet had been
effective June 1, 2007.  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.
 
 2007Net
      sales
                        
                        $
                        6,595,744Gross
      profit
                        
                        $
                        4,347,045Selling,
      general and administrative expenses
                        
                        $
                        3,377,211Net
      income
                        
                        $
                        802,873Basic
      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 due in 12 monthly installments beginning
September 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 and
2007.
  43
  SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2007 and reflects the
results of operations of the Company as if the acquisition of Velocity West had
been effective August 1, 2007.  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.
 
 2007Net
      sales
                        
                        $
                        6,804,238Gross
      profit
                        
                        $
                        4,525,501Selling,
      general and administrative expenses
                        
                        $
                        3,430,786Net
      income
                        
                        $
                        919,896Basic
      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
due in 12 monthly installments beginning December 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 and
2007.
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the twelve months ended December 31, 2007 and reflects the
results of operations of the Company as if the acquisition of DONOBi had been
effective November 1, 2007.  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.
 
 2007Net
      sales
                        
                        $
                        6,769,137Gross
      profit
                        
                        $
                        4,507,343Selling,
      general and administrative expenses
                        
                        $
                        3,416,698Net
      income
                        
                        $
                        922,095Basic
      income per share
                        
                        $
                        0.01
  44
  SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 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 no results of operations of ISP Holding Company in the consolidated
financial statements for the twelve months ended December 31, 2008 and
2007.
 
 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 in the
current reporting period, 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, 2008 and December 31, 2007 consisted
of the following:
  2008
                          
                          
                          2007Land
                          
                          $
                          10,000
                          
                          
                          $
                          10,000Building
                          
                          
                          213,366
                          
                          
                          
                          213,366Automobile
                          
                          
                          9,500
                          
                          
                          
                          9,500Computer
      equipment
                          
                          
                          1,161,061
                          
                          
                          
                          1,129,061Furniture
      and fixtures
                          
                          
                          59,862
                          
                          
                          
                          59,8621,453,789
                          
                          
                          
                          1,421,789Less
      accumulated depreciation
                          
                          
                          (1,228,577
                          )
                          
                          
                          (1,185,007
                          )$
                          225,212
                          
                          
                          $
                          236,782
 
 Depreciation
expense was $43,570 and $58,534 for the years ended December 31, 2008 and 2007,
respectively.
  45
  SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 NOTE 6 -
NOTES PAYABLE
 
 Notes
payable at December 31, 2008 and 2007 consist of the following:
  2008
                          
                          
                          2007Bank
      note payable in monthly interest and principal payments of $1,784.
      Interest is payable prime plus 4.5%, (9.75% as of December 31, 2007).
       The note is guaranteed by a stockholder of the Company and secured
      by a deed of trust against personal residences of three stockholders.
       Also, the bank had a blanket lien against all other current and
      future assets of Sitestar.net.
                          
                          
                          -
                          
                          
                          
                          58,242Bank
      line of credit issued on April 12, 2007 with a principal limit of
      $300,000.  Interest is payable at an annual rate of prime plus
      .25% (7.50% as of December 31, 2007).  The note is secured by a
      deed of trust on the Company’s building and is personally guaranteed by
      officers and directors of the Company.  Since April 2008 the
      principal balance has been zero.
                          
                          
                          -
                          
                          
                          
                          300,000Non-interest
      bearing amount due on acquisition of AlaNet Internet Services paid in
      eleven monthly installments of $4,276 through April 2008.
                          
                          
                          -
                          
                          
                          
                          20,807Non-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.
                          
                          
                          257,451Bank
      note payable in twelve monthly interest and principal payments of $30,650.
      Interest is payable at an annual rate of 9.25%.   The note
      is guaranteed by stockholders of the Company and secured by shares of
      Company stock owned by the stockholders.
                          
                          
                          -
                          
                          
                          
                          322,048Bank
      note payable in twenty four monthly interest and principal payments of
      $21,167. Interest is payable at an annual rate of
      8.5%.   The note is guaranteed by stockholders of the
      Company and secured by shares of Company stock owned by the
      stockholders.
                          
                          
                          -
                          
                          
                          
                          438,264Bank
      bridge note payable on February 1, 2008. Interest is payable at an annual
      rate of 8.5%.  The note was refinanced on February 21, 2008 at
      an annual interest rate of 8.5% and is payable in twelve payments of
      $21,760 and is personally guaranteed by stockholders of the Company and
      secured by real estate owned by stockholders of the
    Company.
                          
                          
                          -
                          
                          
                          
                          250,000Non-interest
      bearing amount due on acquisition of USA Telephone payable in thirty six
      monthly installments starting January 2008.
                          
                          
                          1,215,615
                          
                          
                          
                          1,574,3411,484,987
                          
                          
                          
                          2,963,702Less
      current portion
                          
                          
                          (569,372
                          )
                          
                          
                          (1,268,866
                          )Long-term
      portion
                          
                          $
                          915,615
                          
                          
                          $
                          1,694,836
  46
  SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 - RESTATED
 
 The
future principal maturities of these notes are as follows:
  Year
      ending December 31, 2009
                        
                        $
                        569,372Year
      ending December 31, 2010
                        
                        
                        300,000Year
      ending December 31, 2011
                        
                        
                        300,000Year
      ending December 31, 2012
                        
                        
                        300,000Year
      ending December 31, 2013
                        
                        
                        15,615Thereafter
                        
                        
                        -Total
                        
                        $
                        1,484,987
 
 NOTE 7 -
NOTES PAYABLE - STOCKHOLDERS
 
 Notes
payable - stockholders at December 31, 2008 and 2007 consist of the
following:
  2008
                        
                        
                        2007Note
      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, 2010.
                        
                        $
                        379,711
                        
                        
                        $
                        527,117Note
      payable to stockholder. The note is payable on January 1, 2010 and bears
      interest at an annual rate of 8.0%.
                        
                        
                        104,585
                        
                        
                        
                        104,585Note
      payable to stockholder. The note is payable on January 1, 2010 and bears
      interest at an annual rate of 8.0%.
                        
                        
                        54,985
                        
                        
                        
                        54,985Less
      current portion
                        
                        
                        -
                        
                        
                        
                        -Long-term
      portion
                        
                        $
                        539,281
                        
                        
                        $
                        686,687
 
 The
future principal maturities of these notes are as follows:
  Year
      ending December 31, 2009
                        
                        $
                        -Year
      ending December 31, 2010
                        
                        
                        539,281Year
      ending December 31, 2011
                        
                        
                        -Year
      ending December 31, 2012
                        
                        
                        -Year
      ending December 31, 2013
                        
                        
                        -Total
                        
                        $
                        539,281
  47
  SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 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, 2008 and 2007 was $71,279 and $77,175, respectively.  Future
minimum lease payments under operating leases with initial or remaining terms of
one year or more are as follows:
 
 Year
      ended December 31,2009
                        
                        $
                        64,6882010
                        
                        
                        59,297Total
                        
                        $
                        123,985
 
 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.  This matter
has been settled with a resulting gain of $15,252.
 
 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 will vigorously defend this
claim.  A pre-trial or scheduling conference will be scheduled in the
second quarter of 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, 2008, the Company's Board of Directors
has not issued any Preferred Stock.
 
 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.
 
 NOTE 10 -
INCOME TAXES
 
 The
provision for federal and state income taxes for the years ended December 31,
2008 and 2007 included the following:
  48
  SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 2008
                                
                                
                                2007Current
      provision:Federal
                                
                                $
                                288,164
                                
                                
                                $State
                                
                                
                                50,852
                                
                                
                                
                                -Deferred
      provision:Federal
                                
                                
                                (357,876
                                )
                                
                                
                                422,093State
                                
                                
                                (63,155
                                )
                                
                                
                                74,487Valuation
      allowance
                                
                                
                                -
                                
                                
                                
                                (496,580
                                )Total
      income tax provision
                                
                                $
                                (82,015
                                )
                                
                                $
                                -
 
 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, 2008 and
2007 are as follows:
 
 2008
                          
                          
                          2007Accounts
      receivable
                          
                          $
                          19,762
                          
                          
                          
                          9,056Amortization
      of Intangible assets
                          
                          
                          2,953,689
                          
                          
                          $
                          2,177,997Loss
      carry-forward
                          
                          
                          -
                          
                          
                          
                          365,367Less
      valuation allowance
                          
                          
                          2,552,420
                          
                          
                          
                          2,552,420Deferred
      tax asset
                          
                          $
                          421,031
                          
                          
                          $
                          -
 
 At
December 31, 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.Loss carryforwards are set
to begin expiring in 2021 for both federal and state purposes.
 
 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, 2008 and 2007, the
Company paid this stockholder $48,000 and $48,300, respectively, for rent on
this office building.
 
 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, 2008 and
2007:
  49
  SITESTAR
CORPORATION AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007 – RESTATED
 
 December
      31, 2008Corporate
                        
                        
                        Internet
                        
                        
                        ConsolidatedRevenue
                        
                        $
                        -
                        
                        
                        $
                        10,227,438
                        
                        
                        $
                        10,227,438Operating
      income (loss)
                        
                        $
                        (106,268
                        )
                        
                        $
                        1,464,180
                        
                        
                        $
                        1,357,912Depreciation
      and amortization
                        
                        $
                        -
                        
                        
                        $
                        2,943,190
                        
                        
                        $
                        2,943,190Interest
      expense
                        
                        $
                        -
                        
                        
                        $
                        (165,154
                        )
                        
                        $
                        (165,154
                        )Goodwill
                        
                        $
                        -
                        
                        
                        $
                        1,288,559
                        
                        
                        $
                        1,288,559Identifiable
      assets
                        
                        $
                        -
                        
                        
                        $
                        8,010,457
                        
                        
                        $
                        8,010,457
  December
      31, 2007Corporate
                        
                        
                        Internet
                        
                        
                        ConsolidatedRevenue
                        
                        $
                        -
                        
                        
                        $
                        6,567,264
                        
                        
                        $
                        6,567,264Operating
      income (loss)
                        
                        $
                        (61,812
                        )
                        
                        $
                        1,017,982
                        
                        
                        $
                        956,170Depreciation
      and amortization
                        
                        $
                        -
                        
                        
                        $
                        1,680,456
                        
                        
                        $
                        1,680,456Interest
      expense
                        
                        $
                        -
                        
                        
                        $
                        (158,734
                        )
                        
                        $
                        (158,734
                        )Goodwill
                        
                        $
                        -
                        
                        
                        $
                        1,288,559
                        
                        
                        $
                        1,288,559Identifiable
      assets
                        
                        $
                        -
                        
                        
                        $
                        8,231,883
                        
                        
                        $
                        8,231,883
 
 NOTE 13 -
SUBSEQUENT EVENTS
 
 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.
 
 ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
 
 None
  50
  ITEM 9A.
 CONTROLS AND PROCEDURES
 
 We
identified a material weakness in our internal control over financial reporting
with respect to accounting for the income tax provision, namely, that we did not
have adequately designed procedures to calculate or review the tax provision.
Solely as a result of this material weakness, we concluded that our disclosure
controls and procedures were not effective as of December 31, 2008.
 
 As of May
14, 2009, we began evaluating the tax provision and remediated the related
internal control weakness. We have evaluated the effectiveness of our disclosure
controls and procedures and internal controls over financial reporting as of
December 31, 2008, 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 income tax controls and
procedures, there were no significant changes to our internal controls during
the last fiscal quarter ended December 31, 2008.
 
 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
 
 Our
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.
  51
  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.
 
 Based on
our assessment, management has concluded that our internal control over
financial reporting was ineffective as of the end of the fiscal year to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles as a result of the
material weaknesses in internal control as described and defined below. We
reviewed the results of management’s assessment with the Audit Committee of our
Board of Directors. In addition, on a quarterly basis we will evaluate any
changes to our internal control over financial reporting to determine if a
material changed occurred.
 
 Material
Weaknesses in Internal Controls
 
 Bagell,
Josephs, Levine & Company, L.L.C. (“Bagell”) our independent registered
public accounting firm, has provided us with an unqualified report on our
consolidated financial statements for the fiscal year ended December 31,
2008. However, during the conduct of our audit for the year ended December
31, 2008 Bagell identified a material weakness in the calculation of the tax
provision and have advised our board of directors that the following material
weakness existed at December 31, 2008. As defined by the Public Company
Accounting Oversight Board Auditing Standard No. 5, a material weakness is a
deficiency or a combination of deficiencies in internal control over financial
reporting such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis.
 
 The
material weakness exists in the internal control over financial reporting with
respect to accounting for the income tax provision, namely, that we did not have
adequately designed procedures to calculate or review the tax provision. Solely
as a result of this material weakness, we concluded that our disclosure controls
and procedures were not effective as of December 31, 2008.
  52
  While
this material weakness did not have an effect on our reported results, it
nevertheless constituted a deficiency in our controls. In light of this material
weakness and the requirements enacted by the Sarbanes-Oxley act of 2002, and the
related rules and regulations adopted by the SEC, our Chief Executive Officer
and Chief Accounting Officer concluded that, as of December 31, 2008, our
controls and procedures needed improvement and were not effective at a
reasonable assurance level. Despite this deficiency in our internal controls,
management believes that there were no material inaccuracies or omissions of
material fact in this annual report.
 
 Since the
discovery of the material weaknesses in the tax provision we began evaluating
the tax provision and remediated the related internal control weakness. We have
evaluated our disclosure controls and procedures as currently in effect,
including the remedial actions discussed above, and we have concluded that, as
of this date, our disclosure controls and procedures are effective.
 
 We have
discussed our corrective actions and future plans with our board of directors
and Bagell as of the date of this annual report, and believe the planned actions
should serve to correct the above listed material weaknesses in our internal
controls. However, we cannot provide assurance that either we or our independent
auditors will not in the future identify further material weaknesses or
significant deficiencies in our internal control over financial reporting that
we have not discovered to date.
 
 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.
  53
  Our
current directors, executive officers and key employees are as
follows:
  Name
                        
                        Age
                        
                        Position
                        
                        Director
      sinceFrank
      R. Erhartic, Jr.
                        
                        40
                        
                        President,
      CEO, Director
                        
                        October
      2001Julia
      E. Erhartic
                        
                        41
                        
                        Secretary,
      Director
                        
                        October
      2001Daniel
      Judd
                        
                        52
                        
                        CFO,
      Director
                        
                        June
      2004
 
 Frank
Erhartic, Jr., 40, 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, 41, 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,
52, 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, 2009Julia
      Erhartic
                      
                      December
      31, 2009Dan
      Judd
                      
                      December
      31, 2009
  54
  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, 2008 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.
 
 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)
                                                    
                                                    2008
                                                    
                                                    
                                                    97,885
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    97,8852007
                                                    
                                                    
                                                    72,500
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    72,500Daniel
      Judd,
                                                      Principal
      Financial Officer (PFO)
                                                    
                                                    2008
                                                    
                                                    
                                                    45,200
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    45,2002007
                                                    
                                                    
                                                    45,200
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    45,200Julie
      E. Erhartic, (Officer)
                                                    
                                                    2008
                                                    
                                                    
                                                    13,000
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    13,0002007
                                                    
                                                    
                                                    13,000
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    13,000
 
 Frank R.
Erhartic, Jr., President, CEO and Director, earned a salary of $97,885 and
$72,500 for the years ended December 31, 2008 and 2007,
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, 2008 and 2007, respectively.  He received no other
compensation.  Julie E. Erhartic, Secretary and Director, earned a
salary of $13,000 and $13,000 for the years ended December 31, 2008 and 2007,
respectively.  She received no other compensation.
  55
  GRANTS OF
PLAN-BASED AWARDS
 
 Estimated Future Payouts
                            Under Non-Equity Incentive
                            Plan Awards
                          
                          
                          Estimated Future Payouts
                            Under Equity Incentive Plan
                            Awards
                          
                          
                          All Other
                            Stock
                            Awards:
                            Number of
                            Shares
                          
                          
                          All other
                            Option
                            Awards:
                            Number of
                            Securities
                            Under-
                          
                          
                          Exercise
                            of Base
                            Price of
                            OptionName
                          
                          Grant
                            Date
                          
                          
                          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, 2008 and 2007.
 
 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
  56
  There
were no Equity Incentive Plans, Non-Equity Incentive Plans or Stock Awards for
the years ended December 31, 2008 and 2007.
 
 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,
2008 and 2007.
 
 ITEM 12.
 SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
 
 The
following table sets forth certain information as of April 8, 2009 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
                          
                          
                          
                          26.92
                          %Daniel
      A. Judd
                            7109
      Timberlake Road
                            Lynchburg,
      VA 24502
                          
                          
                          133,865
                          
                          
                          
                          00.15
                          %All
      directors and officers
                            As
      a group (3 persons)
                          
                          
                          24,717,845
                          
                          
                          
                          27.07
                          %
 
 (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 91,326,463 shares of common stock outstanding as of
April 7, 2009.
  57
  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
 
 BAGELL,
JOSEPHS, LEVINE & COMPANY, L.L.C.
 
 On
January 19, 2009, the Company retained Bagell, Josephs, Levine & Company,
L.L.C. as the Company's independent auditor and to examine the financial
statements of the Company for the fiscal year ending December 31, 2008. Bagell,
Josephs, Levine & Company, L.L.C. performed the services listed below and
was paid the fees listed below for the fiscal year ended December 31,
2008.
 
 Audit
Fees
 
 Bagell,
Josephs, Levine & Company, L.L.C. will be paid aggregate fees of
approximately $52,000 for the fiscal year ended December 31, 2008 for
professional services rendered for the audit of the Company's annual financial
statements and for the reviews of the financial statements included in the
Company's quarterly reports on Form 10-Q during the fiscal year ended December
31, 2009.
 
 Audit
Related Fees
 
 The
following table presents the aggregate fees paid or to be paid by the Company
for professional services rendered by Bagell, Josephs, Levine & Company, LLC
2008 and 2007:
  2008
                          
                          
                          2007Audit
      Fees
                          
                          $
                          52,000
                          
                          
                          $
                          53,000Audit
      Related Fees
                          
                          
                          -Tax
      Fees
                          
                          
                          -Total
                          
                          $
                          52,000
                          
                          
                          $
                          53,000
 
 All Other
Fees
 
 Bagell,
Josephs, Levine & Company, L.L.C. is engaged for aggregate fees of
approximately $52,000 for the fiscal year ended December 31, 2008 and for the
first three quarters of 2009 for assurance and related services reasonably
related to the performance of the audit or review of the Company's financial
statements.
  58
  All Other
Fees
 
 Bagell,
Josephs, Levine & Company, L.L.C. was not paid any other fees for
professional services during the fiscal years ended December 31, 2008 and
December 31, 2007.
 
 AUDIT
COMMITTEE
 
 The
Company does not have an audit committee.
 
 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
  59
  
 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
  60
  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
                  
                  October
      8, 2009Frank
      Erhartic, Jr.
                  
                  Officer,
      Director
                    (Principal
      Executive Officer)
 
 /s/
      Daniel A. Judd
                  
                  Chief
      Financial Officer
                  
                  October
      8, 2009Daniel
      A. Judd
                  
                  (Principal
      Financial Officer,
                    Principal
      Accounting Officer)
 
 /s/
      Julie Erhartic
                  
                  Secretary,
      Director
                  
                  October
      8, 2009Julie
      Erhartic
  61