UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q/A




x
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934




For
the quarterly period ended March 31, 2008




 ̈
   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT




For the
transition period from ________________ to _______________




000-27763


(Commission
file number)




SITESTAR
CORPORATION


(Exact
name of small business issuer as specified in its charter)




NEVADA
                (State
      or other jurisdiction of
                incorporation
      or organization)
              88-0397234
                (I.R.S.
      Employer Identification No.)




7109
Timberlake Road, Lynchburg, VA  24502


(Address
of principal executive offices)




(434)
239-4272


(Issuer's
telephone number)




N/A


(Former
name, former address and former fiscal year, if changed since last
report)




Check
whether the issuer (1) 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  ̈





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




APPLICABLE
ONLY TO CORPORATE ISSUERS




As of
May 20, 2008, the issuer had 91,326,463 shares of common stock issued and
outstanding.




Transitional
Small Business Disclosure Format (check one):  Yes  ̈
  No x







SITESTAR
CORPORATION




EXPLANATORY
NOTE





This Amendment No. 1 to our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2008 initially filed with the Securities and
Exchange Commission on May 20, 2008 is being filed to reflect restatements
of Sitestar Corporation‘s Consolidated Balance Sheets as of March 31, 2008,
and the related Consolidated Statements of Income and, Cash Flows for the three
months ended March 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. Accordingly, amounts
included in Selected Financial Data, are restated. 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-Q/A do
not reflect any events that have occurred after the 2008 Form 10-Q was
filed.


2




SITESTAR
CORPORATION




Index


Page NumberPART
      I.  FINANCIAL INFORMATIONItem
      1.
                          
                          Financial
      StatementsCondensed
      Consolidated Balance Sheets as of March31,
      2008 (unaudited) and December 31, 2007 (audited)
                          
                          4-5Condensed
      Consolidated Statements of Income for thethree
      months ended March 31, 2008 and 2007 (unaudited)
                          
                          6Condensed
      Consolidated Statements of Cash Flows forthe
      three months ended March 31, 2008 and 2007 (unaudited)
                          
                          7-8Notes
      to unaudited Condensed Consolidated Financial Statements
                          
                          9-26Item
      2.
                          
                          Management's
      Discussion and Analysis
                          
                          27-33Item
      3.
                          
                          Controls
      and Procedures
                          
                          33-36Part
      II.  OTHER INFORMATION
                          
                          36Item
      1.
                          
                          Legal
      Proceedings
                          
                          36Item
      2.
                          
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          
                          36Item
      3.
                          
                          Defaults
      Upon Senior Securities
                          
                          36Item
      4.
                          
                          Submission
      of Matters to a Vote of Security Holders
                          
                          36Item
      5.
                          
                          Other
      Information
                          
                          36Item
      6.
                          
                          Exhibits
                          
                          36-37SIGNATURES
                          
                          37


3





PART
I. FINANCIAL INFORMATION




Item 1.     Financial
Statements




SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


MARCH
31, 2008 AND DECEMBER 31, 2007




ASSETS




2008
                
                
                2007(Unaudited)
                
                
                (Audited)RestatedCURRENT
      ASSETSCash
      and cash equivalents
                
                $
                235,931
                
                
                $
                232,249Accounts
      receivable, net of allowance of $54,548and
      $22,641
                
                
                622,044
                
                
                
                299,863Prepaid
      expenses
                
                
                21,467
                
                
                
                16,529Total
      current assets
                
                
                879,442
                
                
                
                548,641PROPERTY
      AND EQUIPMENT, net
                
                
                227,489
                
                
                
                236,782CUSTOMER
      LIST, net of accumulatedamortization
      of $5,901,699 and $5,237,054
                
                
                4,868,323
                
                
                
                5,480,635GOODWILL,
      net of impairment
                
                
                1,288,559
                
                
                
                1,288,559OTHER
      ASSETS
                
                
                633,502
                
                
                
                677,267TOTAL
      ASSETS
                
                $
                7,897,315
                
                
                $
                8,231,884




See the
accompanying notes to the unaudited condensed consolidated financial
statements.


4





SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS, continued


MARCH
31, 2008 AND DECEMBER 31, 2007




LIABILITIES
AND STOCKHOLDERS’ EQUITY




2008
                    
                    
                    2007(Unaudited)
                    
                    
                    (Audited)RestatedCURRENT
      LIABILITIESAccounts
      payable
                    
                    $
                    94,277
                    
                    
                    $
                    78,713Accrued
      income taxes
                    
                    
                    84,754
                    
                    
                    
                    -Accrued
      expenses
                    
                    
                    163,943
                    
                    
                    
                    138,021Deferred
      revenue
                    
                    
                    1,375,947
                    
                    
                    
                    1,361,606Notes
      payable
                    
                    
                    1,051,996
                    
                    
                    
                    1,268,866Total
      current liabilities
                    
                    
                    2,770,917
                    
                    
                    
                    2,847,206NOTES
      PAYABLE, less current portion
                    
                    
                    1,304,320
                    
                    
                    
                    1,694,836NOTES
      PAYABLE - STOCKHOLDERS, less current portion
                    
                    
                    599,677
                    
                    
                    
                    686,687TOTAL
      LIABILITIES
                    
                    
                    4,674,914
                    
                    
                    
                    5,228,729STOCKHOLDERS'
      EQUITYPreferred
      Stock, $.001 par value, 10,000,000 sharesauthorized,
      0 shares issued and outstanding
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $.001 par value, 300,000,000 sharesauthorized,
      91,326,463 and 91,326,463 shares issued andoutstanding
      on March 31, 2008 December 31,2007 respectively
                    
                    
                    91,326
                    
                    
                    
                    91,326Additional
      paid-in capital
                    
                    
                    13,880,947
                    
                    
                    
                    13,880,947Treasury
      stock, at cost, 2,955,147 common shares on March31,  2008
      and December 31, 2007
                    
                    
                    (63,030
                    )
                    
                    
                    (63,030
                    )Accumulated
      deficit
                    
                    
                    (10,686,842
                    )
                    
                    
                    (10,906,088
                    )Total
      stockholders’ equity
                    
                    
                    3,222,401
                    
                    
                    
                    3,003,155TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                    
                    $
                    7,897,315
                    
                    
                    $
                    8,231,884




See the
accompanying notes to the unaudited condensed consolidated financial
statements.


5





SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007


(UNAUDITED)




2008
                  
                  
                  2007RestatedREVENUE
                  
                  $
                  2,544,545
                  
                  
                  $
                  1,439,981COST
      OF REVENUE
                  
                  
                  825,218
                  
                  
                  
                  391,026GROSS
      PROFIT
                  
                  
                  1,719,327
                  
                  
                  
                  1,048,955OPERATING
      EXPENSES:Selling
      general and administrative expenses
                  
                  
                  1,365,092
                  
                  
                  
                  708,395INCOME
      FROM OPERATIONS
                  
                  
                  354,235
                  
                  
                  
                  340,560OTHER
      INCOME (EXPENSES)
                  
                  
                  (50,235
                  )
                  
                  
                  (31,992
                  )INCOME
      BEFORE INCOME TAXES
                  
                  
                  304,000
                  
                  
                  
                  308,568INCOME
      TAXES
                  
                  
                  (84,754
                  )
                  
                  
                  -NET
      INCOME
                  
                  $
                  219,246
                  
                  
                  $
                  308,568BASIC
      AND DILUTED EARNINGS PER SHARE
                  
                  $
                  0.00
                  
                  
                  $
                  0.00WEIGHTED
      AVERAGE SHARESOUTSTANDING
      - BASIC AND DILUTED
                  
                  
                  91,326,463
                  
                  
                  
                  88,013,305





See the
accompanying notes to the unaudited condensed consolidated financial
statements.


6





SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007


(UNAUDITED)





2008
                
                
                2007RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                219,246
                
                
                $
                308,568Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization expense
                
                
                722,410
                
                
                
                305,855Bad
      debt expense
                
                
                31,907
                
                
                
                2,534(Increase)
      decrease in:Accounts
      receivable
                
                
                (354,088
                )
                
                
                (19,264
                )Prepaid
      expenses
                
                
                (4,938
                )
                
                
                4,949Increase
      (decrease) in:Accounts
      payable
                
                
                15,564
                
                
                
                (52,331
                )Accrued
      expenses
                
                
                25,922
                
                
                
                (152,444
                )Deferred
      revenue
                
                
                14,341
                
                
                
                90,340Accrued
      income taxes
                
                
                84,754
                
                
                
                -Net
      cash provided by operating activities
                
                
                755,118
                
                
                
                488,207CASH
      FLOWS FROM INVESTING ACTIVITIES:Other
      assets held for resale
                
                
                292
                
                
                
                11,609Purchase
      of property and equipment
                
                
                -
                
                
                
                (21,033
                )Purchase
      of non-compete
                
                
                (5,000
                )
                
                
                (35,000
                )Purchase
      of customer list
                
                
                (52,333
                )
                
                
                (966,143
                )Net
      cash (used in) investing activities
                
                
                (57,041
                )
                
                
                (1,010,567
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from notes payable
                
                
                27,683
                
                
                
                976,196Repayment
      of notes payable – stockholders
                
                
                (87,010
                )
                
                
                (46,861
                )Repayment
      of notes payable
                
                
                (635,068
                )
                
                
                (304,440
                )Net
      cash provided by (used in) financing activities
                
                
                (694,395
                )
                
                
                624,895NET
      INCREASE IN CASH AND CASH  EQUIVALENTS
                
                
                3,682
                
                
                
                102,535CASH
      AND CASH EQUIVALENTS –BEGINNING OF  PERIOD
                
                
                232,249
                
                
                
                129,453CASH
      AND CASH EQUIVALENTS -END OF  PERIOD
                
                $
                235,931
                
                
                $
                231,988




See
the accompanying notes to the unaudited condensed consolidated financial
statements.


7




SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (continued)


(UNAUDITED)




SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:




During
the three months ended March 31, 2008, the Company accrued income taxes of
$84,754 and paid interest expense of approximately $72,000 and $35,000,
respectively.




NON-CASH
INVESTING AND FINANCING TRANSACTIONS:




During
the three months ended March 31, 2008, the Company issued no shares of common
stock.


8





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  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 for the periods ended March
31, 2008, results of operations and cash flows for the three months ended
March 31, 2008 are summarized below.





SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


MARCH 31,
2008





ASSETS





CURRENT
      ASSETS
                      
                      Previously
                        Reported
                      
                      
                      Net
                        Change
                      
                      
                      RestatedTotal
      current assets
                      
                      $
                      879,442
                      
                      
                      $
                      
                      
                      
                      $
                      879,442PROPERTY
      AND EQUIPMENT, net
                      
                      
                      227,489
                      
                      
                      
                      
                      
                      
                      
                      227,489CUSTOMER
      LIST, net of accumulated amortization of  $6,603,388 and
      $5,237,054
                      
                      
                      4,868,323
                      
                      
                      
                      
                      
                      
                      
                      4,868,323GOODWILL,
      net of impairment
                      
                      
                      1,288,559
                      
                      
                      
                      
                      
                      
                      
                      1,288,559DEFERRED
      TAX ASSET
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -OTHER
      ASSETS
                      
                      
                      633,502
                      
                      
                      
                      
                      
                      
                      
                      633,502TOTAL
      ASSETS
                      
                      $
                      7,897,315
                      
                      
                      $
                      
                      
                      
                      $
                      7,897,315


9


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE 1 –
RESTATEMENT OF FINANCIAL STATEMENTS, continued





SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


MARCH 31,
2008





LIABILITIES
AND STOCKHOLDERS' EQUITY





CURRENT
      LIABILITIES
                      
                      Previously
                        Reported
                      
                      
                      Net
                        Change
                      
                      
                      RestatedAccrued
      income taxes
                      
                      $
                      -
                      
                      
                      $
                      84,754
                      
                      
                      $
                      84,754Total
      current liabilities
                      
                      
                      2,686,163
                      
                      
                      
                      84,754
                      
                      
                      
                      2,770,917TOTAL
      LIABILITIES
                      
                      
                      4,590,160
                      
                      
                      
                      84,754
                      
                      
                      
                      4,674,914STOCKHOLDERS’
      EQUITYAccumulated
      deficit
                      
                      
                      (10,602,088
                      )
                      
                      
                      (84,754
                      )
                      
                      
                      (10,686,842
                      )Total
      stockholders' equity
                      
                      
                      3,307,155
                      
                      
                      
                      (84,754
                      )
                      
                      
                      3,222,401TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                      
                      $
                      7,897,315
                      
                      
                      $
                      -
                      
                      
                      $
                      7,897,315


10





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE 1 –
RESTATEMENT OF FINANCIAL STATEMENTS, continued





SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF INCOME


FOR THE
THREE MONTHS ENDED MARCH 31, 2008





Previously
                    Reported
                  
                  
                  Net
                    Change
                  
                  
                  RestatedREVENUE
                  
                  $
                  2,544,545
                  
                  
                  $
                  -
                  
                  
                  $
                  2,544,545COST
      OF REVENUE
                  
                  
                  825,218
                  
                  
                  
                  -
                  
                  
                  
                  825,218GROSS
      PROFIT
                  
                  
                  1,719,327
                  
                  
                  
                  -
                  
                  
                  
                  1,719,327OPERATING
      EXPENSE
                  
                  
                  1,365,092
                  
                  
                  
                  -
                  
                  
                  
                  1,365,092INCOME
      FROM OPERATIONS
                  
                  
                  354,235
                  
                  
                  
                  -
                  
                  
                  
                  354,235OTHER
      INCOME (EXPENSE)
                  
                  
                  (50,235
                  )
                  
                  
                  -
                  
                  
                  
                  (50,235
                  )INCOME
      BEFORE INCOME TAXES
                  
                  
                  304,000
                  
                  
                  
                  -
                  
                  
                  
                  304,000INCOME
      TAXES
                  
                  
                  -
                  
                  
                  
                  (84,754
                  )
                  
                  
                  (84,754
                  )NET
      INCOME
                  
                  $
                  304,000
                  
                  
                  $
                  (84,754
                  )
                  
                  $
                  219,246BASIC
      AND DILUTED INCOME PER SHARE
                  
                  $
                  0.00
                  
                  
                  $
                  -
                  
                  
                  $
                  0.00WEIGHTED
      AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
                  
                  
                  91,326,463
                  
                  
                  
                  -
                  
                  
                  
                  91,326,463


11


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE 1 –
RESTATEMENT OF FINANCIAL STATEMENTS, continued





SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CASH FLOWS


FOR THE
THREE MONTHS ENDED MARCH 31, 2008





Previously
                              Reported
                            
                            
                            Net
                              Change
                            
                            
                            RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                            
                            $
                            304,000
                            
                            
                            $
                            84,754
                            
                            
                            $
                            219,246Increase
      (decrease) in accrued income taxes
                            
                            
                            -
                            
                            
                            
                            84,754
                            
                            
                            
                            84,754Net
      cash provided by operating activities
                            
                            
                            755,118
                            
                            
                            
                            -
                            
                            
                            
                            755,118Net
      cash used in investing activities
                            
                            
                            (57,041
                            )
                            
                            
                            -
                            
                            
                            
                            (57,041
                            )Net
      cash used in financing activities
                            
                            
                            (694,395
                            )
                            
                            
                            -
                            
                            
                            
                            (694,395
                            )NET
      INCREASE IN CAHS AND CASH EQUIVALENTS
                            
                            
                            3,682
                            
                            
                            
                            -
                            
                            
                            
                            3,682CASH
      AND CASH EQUIVALENTS – BEGINNING OF YEAR
                            
                            
                            232,249
                            
                            
                            
                            
                            
                            
                            
                            232,249CASH
      AND CASH EQUIVALENTS – END OF YEAR
                            
                            $
                            235,931
                            
                            
                            $
                            -
                            
                            
                            $
                            235,931





NOTE
2 – BASIS OF PRESENTATION




The
unaudited condensed consolidated financial statements have been prepared by
Sitestar Corporation (the “Company” or “Sitestar”), pursuant to the rules and
regulations of the Securities and Exchange Commission. The information furnished
herein reflects all adjustments (consisting of normal recurring accruals and
adjustments), which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. These financial
statements should be read in conjunction with the audited consolidated financial
statements and footnotes for the year ended December 31, 2007 included in the
Company’s Annual Report on Form 10-KSB.  The results for the three months
ended March 31, 2008 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2008.


12





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE
3 – EARNINGS PER SHARE




The
Financial Accounting Standards (FAS) No. 128, "Accounting for Earnings Per
Share" requires dual presentation of basic and diluted earnings per share on the
face of the statements of income and requires a reconciliation of the numerators
and denominators of the basic and diluted earnings per share calculation. Basic
earnings per share are calculated based on the weighted average number of shares
of common stock outstanding during each period. Diluted income per share is
computed using weighted average shares outstanding adjusted to reflect the
dilutive effect of all potential common shares that were outstanding during the
period.





2008
                            
                            
                            2007Net
      income available to common shareholders
                            
                            $
                            219,246
                            
                            
                            $
                            308,568Weighted
      average number of common shares
                            
                            
                            91,326,463
                            
                            
                            
                            88,013,305Basic
      and diluted income per share
                            
                            $
                            .00
                            
                            
                            $
                            .00




NOTE
4 – COMMON STOCK





During
the three months ended March 31, 2008, the Company issued no shares of common
stock.





NOTE
5 – SEGMENT INFORMATION


The
Company has two business units that have been aggregated into two reportable
segments: Corporate and Internet.





The
Corporate group is the holding company and oversees the operation of the other
business units. The Corporate group also arranges financing for the entire
organization. The Company’s Internet group consists of multiple sites of
operation and services 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 three months ended March 31, 2008 and
2007:


13





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE
5 – SEGMENT INFORMATION, continued







March31, 2008Corporate
                
                
                Internet
                
                
                ConsolidatedRevenue
                
                $
                -
                
                
                $
                2,544,545
                
                
                $
                2,544,545Operating
      Income (loss)
                
                $
                (43,416
                )
                
                $
                397,651
                
                
                $
                354,235Depreciation
      and amortization
                
                $
                -
                
                
                $
                722,410
                
                
                $
                722,410Interest
      expense
                
                $
                -
                
                
                $
                71,686
                
                
                $
                71,686Intangible
      assets
                
                $
                -
                
                
                $
                6,519,938
                
                
                $
                6,519,938Total
      assets
                
                $
                -
                
                
                $
                7,897,316
                
                
                $
                7,897,316




March31, 2007Corporate
                                          
                                          
                                          Internet
                                          
                                          
                                          ConsolidatedRevenue
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          1,439,981
                                          
                                          
                                          $
                                          1,439,981Operating
      Income (loss)
                                          
                                          $
                                          (3,479
                                          )
                                          
                                          $
                                          344,039
                                          
                                          
                                          $
                                          340,560Depreciation
      and amortization
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          305,855
                                          
                                          
                                          $
                                          305,855Interest
      expense
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          35,469
                                          
                                          
                                          $
                                          35,469Intangible
      assets
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          3,837,442
                                          
                                          
                                          $
                                          3,837,442Total
      assets
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          4,864,042
                                          
                                          
                                          $
                                          4,864,042





NOTE
6 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS





In
February 2006, the FASB issued FAS No. 155, “Accounting for Certain
Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and
140.” FAS No. 155 resolves issues addressed in FAS No. 133
Implementation Issue No. D1, “Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets,” and permits fair value remeasurement
for any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation, clarifies which interest-only strips and
principal-only strips are not subject to the requirements of FAS No. 133,
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation,
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives and amends FAS





No. 140
to eliminate the prohibition on a qualifying special-purpose entity from holding
a derivative financial instrument that pertains to a beneficial interest other
than another derivative financial instrument. FAS No. 155 is effective for
all financial instruments acquired or issued after the beginning of the first
fiscal year that begins after September 15, 2006. The Company believes it
will not have a material impact on its financial position or results of
operations.


14





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE
6 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS, Continued





In
March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140.” FAS No. 156
requires an entity to recognize a servicing asset or liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract under a transfer of the servicer’s financial assets that
meets the requirements for sale accounting, a transfer of the servicer’s
financial assets to a qualified special-purpose entity in a guaranteed mortgage
securitization in which the transferor retains all of the resulting securities
and classifies them as either available-for-sale or trading securities in
accordance with FAS No. 115, “Accounting for Certain Investments in Debt
and Equity Securities” and an acquisition or assumption of an obligation to
service a financial asset that does not relate to financial assets of the
servicer or its consolidated affiliates.





Additionally,
FAS No. 156 requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, permits an entity
to choose either the use of an amortization or fair value method for subsequent
measurements, permits at initial adoption a one-time reclassification of
available-for-sale securities to trading securities by entities with recognized
servicing rights and requires separate presentation of servicing assets and
liabilities subsequently measured at fair value and additional disclosures for
all separately recognized servicing assets and liabilities. FAS No. 156 is
effective for transactions entered into after the beginning of the first fiscal
year that begins after September 15, 2006. The Company believes it will not
have a material impact on its financial position or on the results of
operations.





In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” which
provides a definition of fair value, establishes a framework for measuring fair
value and requires expanded disclosures about fair value
measurements.  SFAS No. 157 is effective for the financial statements
issued for the fiscal years beginning after November 15, 2007 and the interim
periods within those fiscal years.  The provisions of SFAS No. 157
should be applied prospectively.  Management is assessing the
potential impact on the Company’s financial condition and results of
operations.





In
September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans”, which amends SFAS No. 87
“Employer’s Accounting for Pensions” (SFAS No. 87), SFAS No. 88 “Employers’
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits” (SFAS No. 88), SFAS No. 106 “Employers’ Accounting for
Postretirement Benefits Other Than Pensions” (SFAS No. 106), and SFAS No. 132R
“Employers’ Disclosures about Pensions and Other Postretirement Benefits
(revised 2003)” (SFAS No. 132R).


15




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE
6 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS, Continued





This
Statement requires companies to recognize an asset or liability for the
over-funded or under-funded status of their benefit plans in their financial
statements.  SFAS No. 158 also requires the measurement date for plan
assets and liabilities to coincide with the sponsor’s year end.  The
standard provides two transition alternatives related to the change in
measurement date provisions.  The recognition of an asset and
liability related to the funded status provision is effective for fiscal year
ending after December 15, 2006 and the change in measurement date provisions is
effective for the fiscal years ending after December 15, 2008.  The
Company is currently evaluating the effect of the adoption of FAS No. 158,
but believes it will not have a material impact on its financial position or on
the results of operations.





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 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.


16





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE
7 – 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 Internet Service Provider (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 to be 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 September 30, 2007.  Because the
acquisition of Magnolia Internet Services was consummated on February 1, 2007,
there are limited results of operations of this company for the three months
ended March 31, 2007 included in the accompanying March 31, 2008 and 2007
consolidated financial statements.





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





The
following table presents the unaudited pro forma condensed statement of
operations for the three months ended March 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.  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
                  
                  $
                  1,469,629Gross
      profit
                  
                  $
                  1,069,014Selling,
      general and administrative expenses
                  
                  $
                  724,298Net
      income
                  
                  $
                  312,724Basic
      income per share
                  
                  $
                  0.00


17





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE
7 – ACQUISITIONS, continued





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. 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 which was paid in ninety
days. The purchase price has been adjusted down to $802,452.  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 three months ended
March 31, 2007 included in the accompanying March 31, 2008 and 2007 consolidated
financial statements.





The
following table presents the unaudited pro forma condensed statement of
operations for the three months ended March 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
                  
                  $
                  1,710,942Gross
      profit
                  
                  $
                  1,235,309Selling,
      general and administrative expenses
                  
                  $
                  824,830Net
      income
                  
                  $
                  378,487Basic
      income per share
                  
                  $
                  0.00





18





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE
7 – ACQUISITIONS, continued





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 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 to be paid in eleven monthly installments beginning
July 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
                  
                  
                  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 no results of operations of this company for the three months ended
March 31, 2007 included in the accompanying March 31, 2008 and 2007 consolidated
financial statements.





The
following table presents the unaudited pro forma condensed statement of
operations for the three months ended March 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
                  
                  $
                  1,463,483Gross
      profit
                  
                  $
                  1,065,112Selling,
      general and administrative expenses
                  
                  $
                  719,129Net
      income
                  
                  $
                  313,535Basic
      income per share
                  
                  $
                  0.00


19





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE
7 – ACQUISITIONS, continued





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 $684,385 by USA Telephone was
offset against the balance due USA Telephone on the purchase note.





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 no results of operations of this company for period ended March 31,
2007 and included in the accompanying March 31, 2008 and 2007 consolidated
financial statements.





The
following table presents the unaudited pro forma condensed statement of
operations for the three months ended March 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
                  
                  $
                  2,746,814Gross
      profit
                  
                  $
                  1,937,351Selling,
      general and administrative expenses
                  
                  $
                  1,180,851Net
      income
                  
                  $
                  670,499Basic
      income per share
                  
                  $
                  0.01


20




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE
7 – ACQUISITIONS, continued





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 due in 5 monthly installments beginning April
2008.  The purchase price has been subsequently adjusted down to
$36,818.





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
                      
                      
                      52,333Non-compete
      agreement
                      
                      
                      5,000Accounts
      receivable
                      
                      
                      2,343Deferred
      revenue
                      
                      
                      (22,858
                      )Purchase
      price
                      
                      $
                      36,818





Because
the acquisition of Comcation was consummated effective March 1, 2008, there are
no results of operations of Comcation for periods ended March 31, 2007 and
included in the accompanying March 31, 2008 and 2007 consolidated financial
statements.





The
following table presents the unaudited pro forma condensed statement of
operations for the three months ended March 31, 2007 and reflects the results of
operations of the Company as if the acquisition of Comcation 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
                  
                  $
                  1,451,570Gross
      profit
                  
                  $
                  1,056,932Selling,
      general and administrative expenses
                  
                  $
                  745,287Net
      income
                  
                  $
                  279,653Basic
      income per share
                  
                  $
                  0.00




21




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE
7 – ACQUISITIONS, continued





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 due 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
no results of operations of this company for periods ended March 31, 2007 and
March 31, 2008.





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
due in 6 monthly installments beginning June 2008.




22




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE
8 — PROVISION FOR 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.





The
provision for federal and state income taxes for the three months ended March
31, 2008 and 2007 included the following:





2008
                      
                      
                      2007Current
      provision:Federal
                      
                      $
                      72,041
                      
                      
                      $
                      -State
                      
                      
                      12,713
                      
                      
                      
                      -Deferred
      provision:Federal
                      
                      
                      -
                      
                      
                      
                      105,523State
                      
                      
                      -
                      
                      
                      
                      18,622Valuation
      allowance
                      
                      
                      -
                      
                      
                      
                      (124,145
                      )Total
      income tax provision
                      
                      $
                      11,277
                      
                      
                      $
                      -





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 March 31, 2008 December
31, 2007 are as follows:





2008
                    
                    
                    2007Accounts
      receivable
                    
                    $
                    21,819
                    
                    
                    
                    9,056Amortization
      of Intangible assets
                    
                    
                    2,450,795
                    
                    
                    $
                    2,177,997Loss
      carry-forward
                    
                    
                    79,806
                    
                    
                    
                    365,367Less
      valuation allowance
                    
                    
                    2,552,420
                    
                    
                    
                    2,552,420Deferred
      tax asset
                    
                    $
                    -
                    
                    
                    $
                    -





At March
31, 2008 and December 31, 2007, 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 of $285,561 was applied for the year ended December 31,
2007.  Loss carry forwards are set to begin expiring in 2021 for both
federal and state purposes.




23




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
9 – 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 was $713,118 and $291,105 for the three months
ended March 31, 2008 and 2007.





NOTE
10 – 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.




24




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
11 - NOTES PAYABLE





Notes
payable at March 31, 2008 and December 31, 2007 consist of the
following:


2007
                
                
                2007Bank
      note payable in monthly interest and principal payments of $1,784.
      Interest is payable prime plus 4.5%, (9.75% and 9.75% as of March 31, 2008
      and December 31, 2007 respectively).  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 has a blanket lien
      against all other current and future assets of
    Sitestar.net.
                
                
                54,342
                
                
                
                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% (5.50% as of March 31, 2008 and 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.  In April 2008 the principal balance was
      zero.
                
                
                100,000
                
                
                
                300,000Non-interest
      bearing amount due on acquisition of AlaNet Internet Services payable in
      eleven monthly installments of $4,276 through April 2008.
                
                
                8,436
                
                
                
                20,807Bank
      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.
                
                
                236,894
                
                
                
                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.
                
                
                383,691
                
                
                
                438,264




25




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
11 - NOTES PAYABLE, continued





Bank
      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.
                  
                  
                  229,656
                  
                  
                  
                  250,000Non-interest
      bearing amount due on acquisition of USA Telephone payable in thirty six
      monthly installments starting January 2008.
                  
                  
                  1,315,615
                  
                  
                  
                  1,574.341Less
      current portion
                  
                  
                  (1,051,996
                  )
                  
                  
                  (1,268,866
                  )Long-term
      portion
                  
                  $
                  1,304,321
                  
                  
                  $
                  1,694,836





The
future principal maturities of these notes are as follows:




Twelve
      months ending March 31, 2009
                    
                    $
                    1,051,996Twelve
      months ending March 31, 2010
                    
                    
                    172,955Twelve
      months ending March 31, 2011
                    
                    
                    15,751Twelve
      months ending March 31, 2012
                    
                    
                    73,907Twelve
      months ending March 31, 2013
                    
                    
                    1,041,708Thereafter
                    
                    
                    -Total
                    
                    $
                    2,356,317





26





Item
2.     Management's Discussion and Analysis of Financial
Condition and Results 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, 2007 included in the Annual Report on Form 10-KSB.  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





The
Company is a national Internet Service Provider and computer services company
offering a broad range of services to business and residential customers.
 In November 2003, the Company announced the launch of the national dial-up
Internet service that made service available to thousands of cities throughout
the United States.  This expanded service features web acceleration, e-mail
acceleration and pop-up ad blocking. Spam and virus filtering are also included.
 The Company utilizes its own infrastructure, as well as, affiliations that
allow it to expand its network and services to most of the United
States.





The
products and services that the Company provides include:


·
   Internet access services;


·
   Web acceleration services;


·
   Web hosting services;


·
   End-to-end e-commerce solutions; and


·
   Toner and ink cartridge remanufacturing services.





The
Company’s Internet division consists of multiple sites of operation and services
customers throughout the U.S. and Canada.  Sitestar products include
narrow-band (dial-up) services, broadband services (ISDN, DSL, satellite, cable
and wireless) and the Company supports these products utilizing its own
infrastructure and affiliations.  Value-added services include web
acceleration, spam and virus filtering, as well as, spyware
protection.





The
Company’s web design, web hosting and related services provide a way to help
businesses market their products and services over the Internet.





Through
its Internet division, the Company 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.




27




The
Company’s toner and ink cartridge remanufacturing service utilizes empty toner
cartridges and remanufactures them to provide savings to customers over buying
brand new cartridges. This service is available locally and
nationwide.


The
Company’s computer programming and consulting services help companies automate
their businesses.  The Company sold the assets of the programming division
on August 31, 2004 while retaining the rights to the new product that automates
certain functions of crisis centers throughout the nation.





Results
of operations





The
following tables show financial data for the three months ended March 31, 2008
and 2007. Operating results for any period are not necessarily indicative of
results for any future period.





For the three months ended March 31, 2008
                      (unaudited)Corporate
                    
                    
                    Internet
                    
                    
                    TotalRevenue
                    
                    $
                    -
                    
                    
                    $
                    2,544,545
                    
                    
                    $
                    2,544,545Cost
      of revenue
                    
                    
                    -
                    
                    
                    
                    825,218
                    
                    
                    
                    825,218Gross
      profit
                    
                    
                    -
                    
                    
                    
                    1,719,327
                    
                    
                    
                    1,719,327Operating
      expenses
                    
                    
                    43,416
                    
                    
                    
                    1,321,676
                    
                    
                    
                    1,365,092Income
      (loss) from operations
                    
                    
                    (43,416
                    )
                    
                    
                    397,651
                    
                    
                    
                    354,235Other
      income (expense)
                    
                    
                    -
                    
                    
                    
                    (50,235
                    )
                    
                    
                    (50,235
                    )Income
      before income taxes
                    
                    
                    (43,416
                    )
                    
                    
                    347,416
                    
                    
                    
                    304,000Income
      tax
                    
                    
                    (84,754
                    )
                    
                    
                    -
                    
                    
                    
                    (84,754
                    )Net
      income (loss)
                    
                    $
                    (128,170
                    )
                    
                    $
                    347,416
                    
                    
                    $
                    219,246





28





For the three months ended March 31, 2007
                    (unaudited)Corporate
                  
                  
                  Internet
                  
                  
                  TotalRevenue
                  
                  $
                  -
                  
                  
                  $
                  1,439,981
                  
                  
                  $
                  1,439,981Cost
      of revenue
                  
                  
                  -
                  
                  
                  
                  391,026
                  
                  
                  
                  391,026Gross
      profit
                  
                  
                  -
                  
                  
                  
                  1,048,955
                  
                  
                  
                  1,048,955Operating
      expenses
                  
                  
                  3,479
                  
                  
                  
                  704,916
                  
                  
                  
                  708,395Income
      (loss) from operations
                  
                  
                  (3,479
                  )
                  
                  
                  344,039
                  
                  
                  
                  340,560Other
      income (expense)
                  
                  
                  -
                  
                  
                  
                  (31,992
                  )
                  
                  
                  (31,992
                  )Income
      before income taxes
                  
                  
                  (3,479
                  )
                  
                  
                  312,047
                  
                  
                  
                  308,047Income
      tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      income (loss)
                  
                  $
                  (3,479
                  )
                  
                  $
                  312,047
                  
                  
                  $
                  308,568





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 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 three months ended March 31, 2008 and 2007.





For the three months ended March 31, 2008Corporate
                    
                    
                    Internet
                    
                    
                    TotalEBITDA
                    
                    $
                    (43,416
                    )
                    
                    $
                    1,141,512
                    
                    
                    $
                    1,098,096Interest
      expense
                    
                    
                    -
                    
                    
                    
                    (71,686
                    )
                    
                    
                    (71,686
                    )Taxes
                    
                    
                    (84,754
                    )
                    
                    
                    -
                    
                    
                    
                    (84,754
                    )Depreciation
                    
                    
                    -
                    
                    
                    
                    (9,292
                    )
                    
                    
                    (9,292
                    )Amortization
                    
                    
                    -
                    
                    
                    
                    (713,118
                    )
                    
                    
                    (713,118
                    )Net
      income (loss)
                    
                    $
                    (128,170
                    )
                    
                    $
                    347,416
                    
                    
                    $
                    219,246





For the three months ended March 31, 2007Corporate
                  
                  
                  Internet
                  
                  
                  TotalEBITDA
                  
                  $
                  (3,479
                  )
                  
                  $
                  653,361
                  
                  
                  $
                  649,882Interest
      expense
                  
                  
                  -
                  
                  
                  
                  (35,469
                  )
                  
                  
                  (35,469
                  )Taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Depreciation
                  
                  
                  -
                  
                  
                  
                  (14,740
                  )
                  
                  
                  (14,740
                  )Amortization
                  
                  
                  -
                  
                  
                  
                  (291,105
                  )
                  
                  
                  (291,105
                  )Net
      income (loss)
                  
                  $
                  (3,479
                  )
                  
                  $
                  312,047
                  
                  
                  $
                  308,568




29




THREE MONTHS ENDED MARCH 31,
2008 COMPARED TO MARCH 31, 2007 (Unaudited)





REVENUE.





Revenue
for the three months ended March 31, 2008 increased by $1,104,564 or 76.7% from
$1,439,981 for the three months ended March 31, 2007 to $2,544,545 for the same
period in 2008.  Internet sales increased primarily due to the
addition of Internet customers from the asset acquisition of USA Telephone These
acquisitions, for the three months ended March 31, 2008, yielded approximately
$1,307,000 in additional net revenues. This increase from acquisitions was
offset by additional attrition to broadband service.  Sitestar focuses
on marketing and selling Internet access to second-tier markets where broadband
is not prevalent.  The Company’s strategy is to leverage operational
economies of scale to provide dial-up service in these markets where it will
continue to be the core method for connecting to the Internet.





While
Sitestar is currently adding customers through promotional marketing campaigns,
this method for strong and sustainable growth is threatened by competition from
nationally-known ISPs and discount dial-up providers, as well as, from the
future introduction of broadband services.  To increase its dial-up
base, the Company plans to continue to acquire ISPs in these target
markets.





COST OF REVENUE.





Costs of
revenue for the three months ended March 31, 2008 increased by $434,192 or
111.0% from $391,026 for the three months ended March 31, 2007 to $825,218 for
the same period in 2008.  This increase is due to telecommunications
expenses associated with the acquisitions of customers which had not realized
anticipated economies and accounted for approximately $433,624 in additional
direct expenses.





OPERATING
EXPENSES.




Operating
expenses for the three months ended March 31, 2008 increased $656,697 or 92.7%
from $708,395 for the three months ended March 31, 2007 to $1,365,092 for the
same period in 2008.  Amortization expense increased $422,013 or 145.0%
from $291,105 for the three months ended March 31, 2007 to $713,118 for the same
period in 2008.  This increase is due to the acquisition of customer
bases.  Corporate expenses of $43,416 for the three months ended March
31, 2008 consisted primarily of professional fees. Corporate expenses of $3,479
for the three months ended March 31, 2007 consisted primarily of professional
fees.




INCOME
TAXES





For the
three months ended March 31, 2009 corporate income tax expense $84,754 were
accrued.




30




GAIN ON SALE OF
ASSETS.





A gain
was recognized on the sale of the assets of Sitestar Applied Technologies, Inc.
to Servatus Development, LLC of $19,551 and $4,189 for the three months ended
March 31, 2008 and 2007.  This represents, per the Definitive Purchase
Agreement between the parties, 20% of the gross revenue of Servatus Development,
LLC for the three months ended March 31, 2008 and 2007.





INTEREST EXPENSE.





Interest
expense for the three months ended March 31, 2008 increased by $36,217 or 102.1%
from $35,469 for the three months ended March 31, 2007 to $71,686 for the same
period in 2008.  This decrease is a result of retiring debt that carried a
high rate of imputed interest.





MARCH 31, 2008 (Unaudited)
COMPARED TO DECEMBER 31, 2007 (Audited)





FINANCIAL
CONDITION.





Net
accounts receivable increased $322,181 or 107.4% from $299,863 on December 31,
2007 to $622,044 on March 31, 2008.  This increase is substantially due to
the addition of customers from acquisitions.  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 which decreased by $292 or .4%
from $70,739 on December 31, 2007 to $70,447 on March 31,
2008.  Accounts payable increased by $15,564 or 19.8% from $78,713 on
December 31, 2007 to $94,277 on March 31, 2008. Accrued expenses increased by
$25,922 or 18.8% from $138,021 on December 31, 2007 to $163,943 on March 31,
2008. This increase is a reflection of accruing professional
fees.  Deferred revenue increased by $14,341 or 1.1% from $1,361,606
on December 31, 2007 to $1,375,947 on March 31, 2008 representing increased
volume of customer accounts that have been prepaid. The current portion of notes
payable decreased $216,870 or 17.1% from $1,268,866 on December 31, 2007 to
$1,051,996 on March 31, 2008.  This is substantially due to the
curtailment of a line of credit of $200,000 in addition to servicing term
notes.  Long-term notes payable decreased $390,516 or 23.0% from
$1,694,836 on December 31, 2007 to $1,304,320 on March 31, 2008. This decrease
is the result of offsetting principal balance of the purchase note of USA
telephone against collections of accounts receivable by USAT. Long-term notes
payable to stockholders decreased $87,010 or 12.7% from $686,687 on December 31,
2007 to $599,677 on March 31, 2008.





LIQUIDITY AND CAPITAL
RESOURCES





Cash and
cash equivalents totaled $235,931 and $232,249 at March 31, 2008 and at December
31, 2007.  EBITDA was $1,098,096 for the three months ended March 31,
2008 as compared to $649,882 for the same period in 2007.





31




2008
                    
                    
                    2007EBITDA
      for the three months ended March 31,
                    
                    $
                    1,098,096
                    
                    
                    $
                    649,882Interest
      expense
                    
                    
                    (71,686
                    )
                    
                    
                    (35,469
                    )Taxes
                    
                    
                    (84,754
                    )
                    
                    
                    -Depreciation
                    
                    
                    (9,292
                    )
                    
                    
                    (14,740
                    )Amortization
                    
                    
                    (713,118
                    )
                    
                    
                    (291,105
                    )Net
      income for the three months ended March 31,
                    
                    $
                    219,246
                    
                    
                    $
                    308,568





The aging
of accounts receivable as of March 31, 2008 and December 31, 2007 is as
shown:





2008
                  
                  
                  2007Current
                  
                  $
                  244,272
                  
                  
                  
                  39
                  %
                  
                  $
                  171,446
                  
                  
                  
                  57
                  %30
      < 60
                  
                  
                  214,895
                  
                  
                  
                  35
                  %
                  
                  
                  72,337
                  
                  
                  
                  24
                  %60
      +
                  
                  
                  162,877
                  
                  
                  
                  26
                  %
                  
                  
                  56,080
                  
                  
                  
                  19
                  %Total
                  
                  $
                  622,044
                  
                  
                  
                  100
                  %
                  
                  $
                  299,863
                  
                  
                  
                  100
                  %




OFF
BALANCE SHEET TRANSACTIONS




The
Company is not a party to any off balance sheet transactions.




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, our ability to expand our customer base, make strategic
acquisitions, general market conditions, and competition and pricing. Although
we believe 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.


32





CRITICAL
ACCOUNTING POLICY AND ESTIMATES





The
Company’s Management’s Discussion and Analysis of Financial Condition and
Results of Operations section discusses its condensed 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 condensed consolidated financial statements included in this
quarterly report.




Item
3.    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 March 31, 2008.


33





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.





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.


34





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.





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.


35





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.





PART
II.  OTHER INFORMATION





Item
1.     Legal Proceedings





None.





Item
2.     Unregistered Sales of Equity Securities and use of
Proceeds





None.





Item
3.     Defaults Upon Senior Securities





None.





Item
4.     Submission of Matters to a Vote of Security
Holders





None.





Item
5.     Other Information





None





Item
6.     Exhibits





(a)
       The following are filed as exhibits to
this form 10-QSB:





31.1  Certification
of President 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.


36





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.





32
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





SITESTAR
      CORPORATIONDate:
      October 8, 2009By:  /s/ Frank Erhartic, Jr.Frank
      Erhartic, Jr.President,
      Chief Executive Officer(Principal
      Executive Officer andPrincipal
      Accounting Officer)Date:
      October 8, 2009By:  /s/ Daniel A. Judd.Daniel
      A. JuddChief
      Financial Officer(Principal
      Financial Officer)




37