UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
  x
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  For
the quarterly period ended June 30, 2009
   ̈
   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 of 1934 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 large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
Accelerated Filer  ̈ Accelerated Filer
 ̈ Non-Accelerated
Filer (Do not check if a smaller reporting Company)  ̈ Smaller Report
Company x
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  xYes ̈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
  
  SITESTAR
CORPORATION
  Index
  Page NumberPART I.  FINANCIAL INFORMATIONItem 1.
                          Financial StatementsCondensed Consolidated Balance Sheets as of June30, 2009 (unaudited) and December 31, 2008 (audited)
                          
                          3-4Condensed Consolidated Statements of Income for thethree months ended June 30, 2009 and 2008 (unaudited)
                          
                          5Condensed Consolidated Statements of Income for thesix months ended June 30, 2009 and 2008 (unaudited)
                          
                          6Condensed Consolidated Statements of Cash Flows forthe six months ended June 30, 2009 and 2008 (unaudited)
                          
                          7-8Notes to unaudited Condensed Consolidated Financial Statements
                          
                          9-24Item 2.
                          Management's Discussion and Analysis
                          
                          25-32Item 3.
                          Quantitative and Qualitative Disclosures About Market Risk
                          
                          32Item 4.
                          Controls and Procedures
                          
                          32-34Part II.  OTHER INFORMATION
                          
                          35Item 1.
                          Legal Proceedings
                          
                          35Item 1A.
                          Risk Factors
                          
                          35Item 2.
                          Unregistered Sales of Equity Securities and Use of Proceeds
                          
                          35Item 3.
                          Defaults Upon Senior Securities
                          
                          35Item 4.
                          Submission of Matters to a Vote of Security Holders
                          
                          35Item 5.
                          Other Information
                          
                          35Item 6.
                          Exhibits
                          
                          35-36SIGNATURES
                          
                          36
  2
  PART
I. FINANCIAL INFORMATION
  Item 1.     Financial
Statements
  SITESTAR
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 JUNE
30, 2009 AND DECEMBER 31, 2008
 
 2009
                  
                  
                  2008(Unaudited)
                  
                  
                  (Audited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                  
                  $
                  888,167
                  
                  
                  $
                  527,553Accounts
      receivable, net of allowance of $53,527
                    and
      $26,764
                  
                  
                  938,502
                  
                  
                  
                  738,824Prepaid
      expenses
                  
                  
                  1,297
                  
                  
                  
                  1,227Total
      current assets
                  
                  
                  1,827,966
                  
                  
                  
                  1,267,604PROPERTY
      AND EQUIPMENT, net
                  
                  
                  210,984
                  
                  
                  
                  225,212CUSTOMER
      LIST, net of accumulated
                    amortization
      of $9,129,655 and $7,973,341
                  
                  
                  3,105,498
                  
                  
                  
                  4,224,414GOODWILL,
      net of impairment
                  
                  
                  1,288,559
                  
                  
                  
                  1,288,559DEFERRED
      INCOME TAXES
                  
                  
                  811,161
                  
                  
                  
                  421,031OTHER
      ASSETS
                  
                  
                  501,290
                  
                  
                  
                  583,637TOTAL
      ASSETS
                  
                  $
                  7,745,458
                  
                  
                  $
                  8,010,457
  See the
accompanying notes to the unaudited condensed consolidated financial
statements.
  3
  SITESTAR
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS, continued
 JUNE
30, 2009 AND DECEMBER 31, 2008
    2009
                        
                        
                        2008(Unaudited)
                        
                        
                        (Audited)LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIESAccounts
      payable
                        
                        $
                        149,747
                        
                        
                        $
                        80,892Accrued
      income taxes
                        
                        
                        555,505
                        
                        
                        
                        754,777Accrued
      expenses
                        
                        
                        87,500
                        
                        
                        
                        94,882Deferred
      revenue
                        
                        
                        1,173,076
                        
                        
                        
                        1,157,597Notes
      payable
                        
                        
                        417,114
                        
                        
                        
                        569,372Total
      current liabilities
                        
                        
                        2,382,942
                        
                        
                        
                        2,657,520NOTES
      PAYABLE, less current portion
                        
                        
                        750,615
                        
                        
                        
                        915,615NOTES
      PAYABLE - STOCKHOLDERS, less current portion
                        
                        
                        484,296
                        
                        
                        
                        539,281TOTAL
      LIABILITIES
                        
                        
                        3,617,853
                        
                        
                        
                        4,112,416STOCKHOLDERS'
      EQUITYPreferred
      Stock, $.001 par value, 10,000,000 sharesauthorized,
      0 shares issued and outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, $.001 par value, 300,000,000 shares
                          authorized,
      91,326,463 and 91,326,463 shares issued and
                          outstanding
      on June 30, 2009 December 31,
                          2008 respectively
                        
                        
                        91,326
                        
                        
                        
                        91,326Additional
      paid-in capital
                        
                        
                        13,880,947
                        
                        
                        
                        13,880,947Treasury
      stock, at cost, 13,507,963 and 8,237,805
                          common
      shares on June 30,  2009 and December 31, 2008
                        
                        
                        (657,876
                        )
                        
                        
                        (64,220
                        )Accumulated
      deficit
                        
                        
                        (9,186,792
                        )
                        
                        
                        (10,010,012
                        )Total
      stockholders’ equity
                        
                        
                        4,127,605
                        
                        
                        
                        3,898,041TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                        
                        $
                        7,745,458
                        
                        
                        $
                        8,010,457
  See the
accompanying notes to the unaudited condensed consolidated financial
statements.
 
 4
  SITESTAR
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
 FOR
THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008
 (UNAUDITED)
  2009
                    
                    
                    2008REVENUE
                    
                    $
                    2,291,192
                    
                    
                    $
                    2,614,699COST
      OF REVENUE
                    
                    
                    846,685
                    
                    
                    
                    562,583GROSS
      PROFIT
                    
                    
                    1,444,507
                    
                    
                    
                    2,052,116OPERATING
      EXPENSES:Selling
      general and administrative expenses
                    
                    
                    1,363,384
                    
                    
                    
                    1,618,940INCOME
      FROM OPERATIONS
                    
                    
                    81,123
                    
                    
                    
                    433,176OTHER
      INCOME (EXPENSES)
                    
                    
                    (29,288
                    )
                    
                    
                    (36,297
                    )INCOME
      BEFORE INCOME TAXES
                    
                    
                    51,835
                    
                    
                    
                    396,879INCOME
      TAXES (EXPENSE) BENEFIT
                    
                    
                    562,992
                    
                    
                    
                    -NET
      INCOME
                    
                    $
                    614,827
                    
                    
                    $
                    396,879BASIC
      AND DILUTED EARNINGS PER SHARE
                    
                    $
                    0.00
                    
                    
                    $
                    0.00WEIGHTED
      AVERAGE SHARESOUTSTANDING
      - BASIC AND DILUTED
                    
                    
                    91,326,463
                    
                    
                    
                    91,326,463
  See the
accompanying notes to the unaudited condensed consolidated financial
statements.
  5
  SITESTAR
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
 (UNAUDITED)
  2009
                      
                      
                      2008REVENUE
                      
                      $
                      4,832,611
                      
                      
                      $
                      5,159,244COST
      OF REVENUE
                      
                      
                      1,672,721
                      
                      
                      
                      1,387,801GROSS
      PROFIT
                      
                      
                      3,159,890
                      
                      
                      
                      3,771,443OPERATING
      EXPENSES:Selling
      general and administrative expenses
                      
                      
                      2,875,491
                      
                      
                      
                      2,984,032INCOME
      FROM OPERATIONS
                      
                      
                      284,399
                      
                      
                      
                      787,411OTHER
      INCOME (EXPENSES)
                      
                      
                      (50,581
                      )
                      
                      
                      (86,532
                      )INCOME
      BEFORE INCOME TAXES
                      
                      
                      233,818
                      
                      
                      
                      700,879INCOME
      TAXES (EXPENSE) BENEFIT
                      
                      
                      589,402
                      
                      
                      
                      -NET
      INCOME
                      
                      $
                      823,220
                      
                      
                      $
                      700,879BASIC
      AND DILUTED EARNINGS PER SHARE
                      
                      $
                      0.01
                      
                      
                      $
                      0.01WEIGHTED
      AVERAGE SHARESOUTSTANDING
      - BASIC AND DILUTED
                      
                      
                      91,326,463
                      
                      
                      
                      91,326,463
  See the
accompanying notes to the unaudited condensed consolidated financial
statements.
 
 6
  SITESTAR
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
 (UNAUDITED)
  2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  823,220
                  
                  
                  $
                  700,879Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization expense
                  
                  
                  1,287,293
                  
                  
                  
                  1,486,286Bad
      debt expense
                  
                  
                  4,119
                  
                  
                  
                  38,914(Increase)
      decrease in:Accounts
      receivable
                  
                  
                  (203,799
                  )
                  
                  
                  (419,398
                  )Prepaid
      expenses
                  
                  
                  (71
                  )
                  
                  
                  (27,376
                  )Increase
      (decrease) in:Accounts
      payable
                  
                  
                  68,856
                  
                  
                  
                  (43,686
                  )Accrued
      expenses
                  
                  
                  (206,654
                  )
                  
                  
                  (17,474
                  )Deferred
      revenue
                  
                  
                  15,481
                  
                  
                  
                  4,207Deferred
      income taxes
                  
                  
                  (390,130
                  )
                  
                  
                  -Net
      cash provided by operating activities
                  
                  
                  1,398,315
                  
                  
                  
                  1,722,352CASH
      FLOWS FROM INVESTING ACTIVITIES:Other
      assets held for resale
                  
                  
                  (403
                  )
                  
                  
                  500Purchase
      of property and equipment
                  
                  
                  (3,000
                  )
                  
                  
                  (12,000
                  )Purchase
      of non-compete
                  
                  
                  (1,000
                  )
                  
                  
                  (70,000
                  )Purchase
      of customer list
                  
                  
                  (67,398
                  )
                  
                  
                  (648,875
                  )Net
      cash (used in) investing activities
                  
                  
                  (71,801
                  )
                  
                  
                  (730,375
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from notes payable
                  
                  
                  -
                  
                  
                  
                  350,855Repayment
      of notes payable – stockholders
                  
                  
                  (54,984
                  )
                  
                  
                  (87,010
                  )Purchase
      treasury stock
                  
                  
                  (593,657
                  )Repayment
      of notes payable
                  
                  
                  (317,259
                  )
                  
                  
                  (1,140,680
                  )Net
      cash (used in) financing activities
                  
                  
                  (965,900
                  )
                  
                  
                  (876,835
                  )NET
      INCREASE (DECREASE) IN CASH AND
CASH  EQUIVALENTS
                  
                  
                  360,614
                  
                  
                  
                  115,142CASH
      AND CASH EQUIVALENTS –BEGINNING OF  PERIOD
                  
                  
                  527,553
                  
                  
                  
                  232,249CASH
      AND CASH EQUIVALENTS -END OF  PERIOD
                  
                  $
                  888,167
                  
                  
                  $
                  347,391
  See the
accompanying notes to the unaudited condensed consolidated financial
statements.
  7
  SITESTAR
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (continued)
 (UNAUDITED)
  SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
  During
the six months ended June 30, 2009 and 2008, the Company accrued income
taxes (benefit) expense of $(589,402) and $0 and paid interest expense of
approximately $48,000 and $111,000, respectively.
  NON-CASH
INVESTING AND FINANCING TRANSACTIONS:
  During
the six months ended June 30, 2009, the Company issued no shares of common
stock.
  8
  SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 
 NOTE
1 – 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 (SEC). 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 (GAAP) 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,
2008 included in the Company’s Annual Report on Form 10-K.  The results for
the six months ended June 30, 2009 are not necessarily indicative of the results
to be expected for the full year ending December 31, 2009.
 
 NOTE
2 – 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.
 
 For the
six months ended June 30, 2009 and June 30, 2008:
  2009
                  
                  
                  2008Net
      income available to common shareholders
                  
                  $
                  823,220
                  
                  
                  $
                  700,879Weighted
      average number of common shares
                  
                  
                  91,326,463
                  
                  
                  
                  91,326,463Basic
      and diluted income per share
                  
                  $
                  0.01
                  
                  
                  $
                  0.01
  9
 
 SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 
 NOTE
3 – COMMON STOCK
 
 During
the six months ended June 30, 2009, the Company issued no shares of common
stock.
  NOTE
4 – 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 unit. 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 June 30, 2009 and
2008:
  June
      30, 2009Corporate
                                        
                                        
                                        Internet
                                        
                                        
                                        ConsolidatedRevenue
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        2,291,192
                                        
                                        
                                        $
                                        2,291,192Operating
      Income (loss)
                                        
                                        $
                                        (52,500
                                        )
                                        
                                        $
                                        133,623
                                        
                                        
                                        $
                                        81,123Depreciation
      and amortization
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        624,409
                                        
                                        
                                        $
                                        624,409Interest
      expense
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        26,567
                                        
                                        
                                        $
                                        26,567Intangible
      assets
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        4,624,501
                                        
                                        
                                        $
                                        4,624,501Total
      assets
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        7,745,458
                                        
                                        
                                        $
                                        7,745,458
 
 10
  SITESTAR
CORPORATION
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
  NOTE 4 –
SEGMENT INFORMATION, continued
 
 June 30, 2008Corporate
                              
                              
                              Internet
                              
                              
                              ConsolidatedRevenue
                              
                              $
                              -
                              
                              
                              $
                              2,614,699
                              
                              
                              $
                              2,614,699Operating
      Income (loss)
                              
                              $
                              (26,239
                              )
                              
                              $
                              459,415
                              
                              
                              $
                              433,176Depreciation
      and amortization
                              
                              $
                              -
                              
                              
                              $
                              763,876
                              
                              
                              $
                              763,876Interest
      expense
                              
                              $
                              -
                              
                              
                              $
                              38,832
                              
                              
                              $
                              38,832Intangible
      assets
                              
                              $
                              -
                              
                              
                              $
                              6,427,429
                              
                              
                              $
                              6,427,429Total
      assets
                              
                              $
                              -
                              
                              
                              $
                              7,998,974
                              
                              
                              $
                              7,998,974
 
 Summarized
financial information concerning the Company's reportable segments is shown in
the following table for the six months ended June 30, 2009 and
2008:
 
 June30,
      2009Corporate
                              
                              
                              Internet
                              
                              
                              ConsolidatedRevenue
                              
                              $
                              -
                              
                              
                              $
                              4,832,611
                              
                              
                              $
                              4,832,611Operating
      Income (loss)
                              
                              $
                              (79,615
                              )
                              
                              $
                              364,014
                              
                              
                              $
                              284,399Depreciation
      and amortization
                              
                              $
                              -
                              
                              
                              $
                              1,287,293
                              
                              
                              $
                              1,287,293Interest
      expense
                              
                              $
                              -
                              
                              
                              $
                              48,451
                              
                              
                              $
                              48,451Intangible
      assets
                              
                              $
                              -
                              
                              
                              $
                              4,624,501
                              
                              
                              $
                              4,624,501Total
      assets
                              
                              $
                              -
                              
                              
                              $
                              7,745,458
                              
                              
                              $
                              7,745,458
  11
  SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 
 NOTE 4 –
SEGMENT INFORMATION, continued
 
 June 30, 2008Corporate
                              
                              
                              Internet
                              
                              
                              ConsolidatedRevenue
                              
                              $
                              -
                              
                              
                              $
                              5,159,244
                              
                              
                              $
                              5,159,244Operating
      Income (loss)
                              
                              $
                              (69,708
                              )
                              
                              $
                              857,119
                              
                              
                              $
                              787,411Depreciation
      and amortization
                              
                              $
                              -
                              
                              
                              $
                              1,486,286
                              
                              
                              $
                              1,486,286Interest
      expense
                              
                              $
                              -
                              
                              
                              $
                              110,518
                              
                              
                              $
                              110,518Intangible
      assets
                              
                              $
                              -
                              
                              
                              $
                              6,427,429
                              
                              
                              $
                              6,427,429Total
      assets
                              
                              $
                              -
                              
                              
                              $
                              7,998,974
                              
                              
                              $
                              7,998,974
 
 NOTE
5 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS
  In March
2008, the FASB issued FASB No. 161, Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133.
  FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
does not provide adequate information about how derivative and hedging
activities affect an entity’s financial position, financial performance and cash
flows. Accordingly, this Statement requires enhanced disclosures about an
entity’s derivative and hedging activities and thereby improves the transparency
of financial reporting. This Statement is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008.  The Company is currently evaluating the effect the adoption of
FASB No. 161, but believes it will not have a material impact on its
financial position or on the results of operations.
  In May
2008, the FASB issued FASB Statement No. 162, The Hierarchy of Generally
Accepted Accounting Principles.  This Statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with GAAP in the United States (the GAAP
hierarchy).  The Board concluded that the GAAP hierarchy should reside
in the accounting literature established by the FASB and is issuing this
Statement to achieve that result.  This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. The Company is currently evaluating
the effect the adoption of FASB No. 162, but believes it will not have a
material impact on its financial position or on the results of
operations.
  12


SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009




NOTE
5 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS, continued




In May
2008, the FASB issued FASB Statement No. 163, Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60.  This
Statement clarifies how Statement 60 applies to financial guarantee insurance
contracts, including the recognition and measurement to be used to account for
premium revenue and claim liabilities. These clarifications will increase
comparability in financial reporting of financial guarantee insurance contracts
by insurance enterprises. This Statement requires expanded disclosures about
financial guarantee insurance contracts. This Statement is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and all interim periods within those fiscal years.  The Company is
currently evaluating the effect the adoption of FASB No. 163, but believes
it will not have a material impact on its financial position or on the results
of operations.




NOTE
6 – ACQUISITIONS





Comcation,
Inc.


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





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





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





Because
the acquisition of Comcation was consummated effective March 1, 2008, there are
limited results of operations of Comcation in the consolidated financial
statements for the six months ended June 30, 2008.





13




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009





NOTE
6 – ACQUISITIONS, continued





The
following table presents the unaudited pro forma condensed statement of
operations for the six months ended June 30, 2008 and reflects the results of
operations of the Company as if the acquisition of Comcation had been effective
January 1, 2008.  The pro forma amounts are not necessarily indicative of
the combined results of operations had the acquisitions been effective as of
that date, or of the anticipated results of operations, due to cost reductions
and operating efficiencies that are expected as a result of the
acquisitions.





2008Net
      sales
                  
                  $
                  5,200,601Gross
      profit
                  
                  $
                  3,802,982Selling,
      general and administrative expenses
                  
                  $
                  3,001,920Net
      income
                  
                  $
                  714,530Basic
      income per share
                  
                  $
                  0.01





N2 the Net,
LLC


Effective
April 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of N2 the Net, LLC, a Tennessee
ISP.  The total purchase price was $48,156 representing the fair value
of the assets acquired which consisted of a $3,650 cash payment at closing with
the remaining balance paid in 11 monthly installments beginning May
2008.  The purchase price has been subsequently adjusted down to
$45,821.





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





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





Because
the acquisition of N2 the Net was consummated effective April 1, 2008, there are
limited results of operations of Comcation in the consolidated financial
statements for the six months ended June 30, 2008.





14




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009





NOTE
6 – ACQUISITIONS, continued





The
following table presents the unaudited pro forma condensed statement of
operations for the six months ended June 30, 2008 and reflects the results of
operations of the Company as if the acquisition of N2 the Net had been effective
January 1, 2008.  The pro forma amounts are not necessarily indicative of
the combined results of operations had the acquisitions been effective as of
that date, or of the anticipated results of operations, due to cost reductions
and operating efficiencies that are expected as a result of the
acquisitions.





2008Net
      sales
                  
                  $
                  5,208,905Gross
      profit
                  
                  $
                  3,801,185Selling,
      general and administrative expenses
                  
                  $
                  2,999,684Net
      income
                  
                  $
                  714,752Basic
      income per share
                  
                  $
                  0.01





Dial Assurance,
Inc.


Effective
May 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of Dial Assurance, Inc., a
Georgia-based wholesale managed modem solution provider.  The total
purchase price was $229,900 representing the fair value of the assets acquired
which consisted of a $100,000 cash payment at closing with the remaining balance
paid in 6 monthly installments beginning June 2008.





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





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





Because
the acquisition of Dial Assurance was consummated effective May 1, 2008, there
are limited results of operations of Dial Assurance in the consolidated
financial statements for the six months ended June 30, 2008.





15




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009





NOTE
6 – ACQUISITIONS, continued





The
following table presents the unaudited pro forma condensed statement of
operations for the six months ended June 30, 2008 and reflects the results of
operations of the Company as if the acquisition of Dial Assurance had been
effective January 1, 2008.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.





2008Net
      sales
                  
                  $
                  5,238,441Gross
      profit
                  
                  $
                  3,792,389Selling,
      general and administrative expenses
                  
                  $
                  3,035,948Net
      income
                  
                  $
                  669,909Basic
      income per share
                  
                  $
                  0.01





United
Systems Access, Inc.


Effective
May 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired certain broadband digital subscriber line (DSL) accounts and
related assets of United Systems Access, Inc., (d/b/a USA Telephone), a
corporation with its headquarters in Maine.  The net purchase price
was $297,965 representing the fair value of the assets acquired which consisted
of a $130,000 cash payment at closing with the remaining balance paid in 60 days
from closing. The purchase price has been subsequently adjusted down to
$263,757.





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





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





Because
the acquisition of  was consummated effective May 1, 2008, there are
limited results of operations of USA Telephone in the consolidated financial
statements for the six months ended June 30, 2008.





16




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009





NOTE
6 – ACQUISITIONS, continued





The
following table presents the unaudited pro forma condensed statement of
operations for the six months ended June 30, 2008 and reflects the results of
operations of the Company as if the acquisition of USA Telephone had been
effective January 1, 2008.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.





2008Net
      sales
                  
                  $
                  5,463,841Gross
      profit
                  
                  $
                  3,955,404Selling,
      general and administrative expenses
                  
                  $
                  3,070,697Net
      income
                  
                  $
                  798,175Basic
      income per share
                  
                  $
                  0.01





AdaNet


Effective
June 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of AdaNet, an Oklahoma
ISP.  The total purchase price was $20,667 representing the fair value
of the assets acquired which consisted of a $3,836 cash payment at closing with
the remaining balance paid in 5 monthly installments beginning July
2008.  The purchase price has been subsequently adjusted down to
$18,542.





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





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





Because
the acquisition of AdaNet was consummated effective June 1, 2008, there are
limited results of operations of AdaNet in the consolidated financial statements
for the six months ended June 30, 2008.




17




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009





NOTE
6 – ACQUISITIONS, continued





The
following table presents the unaudited pro forma condensed statement of
operations for the six months ended June 30, 2008 and reflects the results of
operations of the Company as if the acquisition of AdaNet had been effective
January 1, 2008.  The pro forma amounts are not necessarily indicative of
the combined results of operations had the acquisitions been effective as of
that date, or of the anticipated results of operations, due to cost reductions
and operating efficiencies that are expected as a result of the
acquisitions.


2008Net
      sales
                  
                  $
                  5,174,149Gross
      profit
                  
                  $
                  3,784,285Selling,
      general and administrative expenses
                  
                  $
                  2,993,117Net
      income
                  
                  $
                  704,636Basic
      income per share
                  
                  $
                  0.01





Velocity West,
Inc.


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





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





Customer
      list
                    
                    $
                    400,000Non-compete
      agreement
                    
                    
                    10,000Deferred
      revenue
                    
                    
                    (50,000
                    )Purchase
      price
                    
                    $
                    360,000


The
following table presents the unaudited pro forma condensed statement of
operations for the six months ended June 30, 2008 and reflects the results of
operations of the Company as if the acquisition of Velocity West had been
effective January 1, 2008.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.




18




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009





NOTE
6 – ACQUISITIONS, continued





2008Net
      sales
                  
                  $
                  5,332,210Gross
      profit
                  
                  $
                  3,881,000Selling,
      general and administrative expenses
                  
                  $
                  3,044,777Net
      income
                  
                  $
                  836,223Basic
      income per share
                  
                  $
                  0.01




ISP Holding Company,
LLC


Effective
November 1, 2008, the Company entered into an Asset Purchase Agreement pursuant
to which it acquired the Internet related assets of ISP Holding Company, LLC
d/b/a DONOBi Internet Services, an ISP with headquarters in
Washington.  The total purchase price was $475,000 representing the
fair value of the assets acquired which consisted of a $150,000 cash payment at
closing with the remaining balance due in 12 monthly installments beginning
December 2008.





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





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





Because
the acquisition of DONOBi Internet Services was consummated effective November
1, 2008, there are no results of operations of ISP Holding Company in the
consolidated financial statements for the six months ended June 30,
2008.





19




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009





NOTE
6 – ACQUISITIONS, continued





The
following table presents the unaudited pro forma condensed statement of
operations for the six months ended June 30, 2008 and reflects the results of
operations of the Company as if the acquisition of DONOBi Internet Services had
been effective January 1, 2008.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.


2008Net
      sales
                  
                  $
                  5,693,315Gross
      profit
                  
                  $
                  4,108,040Selling,
      general and administrative expenses
                  
                  $
                  3,098,406Net
      income
                  
                  $
                  900,940Basic
      income per share
                  
                  $
                  0.01





Pulaski Networks,
LLC


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





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





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





Because
the acquisition of Pulaski Networks was consummated effective February 10, 2009,
there are limited results of operations of Pulaski Networks in the consolidated
financial statements for the six months ended June 30, 2009.





20




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009





NOTE
6 – ACQUISITIONS, continued





The
following table presents the unaudited pro forma condensed statement of
operations for the six months ended June 30,2009
and reflects the results of operations of the Company as if the acquisition of
Pulaski Networks had been effective January 1, 2009.
 The pro forma amounts are not necessarily indicative of the combined
results of operations had the acquisitions been effective as of that date, or of
the anticipated results of operations, due to cost reductions and operating
efficiencies that are expected as a result of the acquisitions.


2009Net
      sales
                  
                  $
                  5,222,828Gross
      profit
                  
                  $
                  3,826,474Selling,
      general and administrative expenses
                  
                  $
                  3,000,953Net
      income
                  
                  $
                  738,989Basic
      income per share
                  
                  $
                  0.01





NOTE
7 — PROVISION FOR INCOME TAXES





The
reconciliation of the effective income tax rate to the federal statutory rate as
of June 30, 2009 and December 31, 2008 is as follows:




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 June 30, 2009 and
December 31, 2008 are as follows:





2009
                        
                        
                        2008Accounts
      receivable
                        
                        $
                        21,411
                        
                        
                        $
                        19,762Amortization
      of Intangible assets
                        
                        
                        3,342,165
                        
                        
                        
                        2,953,689Less
      valuation allowance
                        
                        
                        2,552,420
                        
                        
                        
                        2,552,420Deferred
      tax
      asset
                        
                        $
                        811,156
                        
                        
                        $
                        421,031





21




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009





NOTE
7 — PROVISION FOR INCOME TAXES, continued





At June
30, 2009 and December 31, 2008, the Company has provided a valuation allowance
for the deferred tax asset since management has not been able to determine that
the realization of that asset is more likely than not.  Net operating loss
carry forwards was entirely applied for the year ended December 31,
2007.





NOTE
8 – 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 $1,270,065 and $1,467,168 for the six
months ended June 30, 2009 and 2008.





NOTE
9 – DEFERRED REVENUE





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





Revenue
Recognition





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





22




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009





NOTE
10 - NOTES PAYABLE




Notes
payable at June 30, 2009 and December 31, 2008 consist of the
following:


2009
                        
                        
                        2008Non-interest
      bearing amount due on acquisition of N2theNet paid in eleven monthly
      installments of $4,046 starting May 2008.
                        
                        $
                        -
                        
                        
                        $
                        11,921Non-interest
      bearing amount due on acquisition of DONOBI  payable in twelve
      monthly installments of $27,083 through November 2009
                        
                        
                        117,114
                        
                        
                        
                        257,451Non-interest
      bearing amount due on acquisition of USA Telephone payable in thirty six
      monthly installments starting January 2008
                        
                        
                        1,050,615
                        
                        
                        
                        1,215,615Total
                        
                        
                        1,167,729
                        
                        
                        
                        1,484,987Less
      current portion
                        
                        
                        (417,114
                        )
                        
                        
                        (569,372
                        )Long-term
      portion
                        
                        $
                        750,615
                        
                        
                        $
                        915,615





The
future principal maturities of these notes are as follows:




Twelve
      months ending June 30, 2010
                      
                      $
                      417,114Twelve
      months ending June 30, 2011
                      
                      
                      300,000Twelve
      months ending June 30, 2012
                      
                      
                      300,000Twelve
      months ending June 30, 2013
                      
                      
                      150,615Twelve
      months ending June 30, 2014
                      
                      
                      -Thereafter
                      
                      
                      -Total
                      
                      $
                      1,167,729





23




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009





NOTE
11 - NOTES PAYABLE - STOCKHOLDERS




Notes
payable - stockholders at June 30, 2009 and December 31, 2008 consist of the
following:




2009
                  
                  
                  2008Note
      payable to officer and stockholder on a line of credit of $750,000 at an
      annual interest rate of 10% interest.  The accrued interest and
      principal are due on January 1,
    2012.
                  
                  $
                  379,711
                  
                  
                  $
                  379,711Note
      payable to stockholder. The note is payable on January 1, 2012 and bears
      interest at an annual rate of 8.0%.
                  
                  
                  104,585
                  
                  
                  
                  104,585Note
      payable to stockholder. The note was paid in full on June 30, 2009 and
      bears interest at an annual rate of 8.0%.
                  
                  
                  -
                  
                  
                  
                  54,985Less
      current portion
                  
                  
                  -
                  
                  
                  
                  -Long-term
      portion
                  
                  $
                  484,296
                  
                  
                  $
                  539,281





The
future principal maturities of these notes are as follows:




Year
      ending June 30, 2010
                      
                      $
                      -Year
      ending June 30, 2011
                      
                      
                      -Year
      ending June 30, 2012
                      
                      
                      484,296Year
      ending June 30, 2013
                      
                      
                      -Year
      ending June 30, 2014
                      
                      
                      -Total
                      
                      $
                      484,296





24





SITESTAR
CORPORATION





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, 2008 included in the Annual Report on Form 10-K.  The
discussion of results, causes and trends should not be construed to imply any
conclusion that such results or trends will necessarily continue in the
future.





Overview




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





The
products and services that the Company provides include:


·
   Internet access services;


·
   Web acceleration services;


·
   Web hosting services;


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


·
   Toner and ink cartridge remanufacturing services.





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





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





The
Company also markets, sells and manufactures computer systems, computer
hardware, computer software, networking services, repair services and toner and
ink cartridge remanufacturing services from the Lynchburg, Virginia
location.


25





SITESTAR
CORPORATION





Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued





Results
of operations




The
following tables show financial data for the six months ended June 30, 2009 and
2008. Operating results for any period are not necessarily indicative of results
for any future period.





For the six months ended June 30, 2009 (unaudited)Corporate
                    
                    
                    Internet
                    
                    
                    TotalRevenue
                    
                    $
                    -
                    
                    
                    $
                    4,832,611
                    
                    
                    $
                    4,832,611Cost
      of revenue
                    
                    
                    -
                    
                    
                    
                    1,672,721
                    
                    
                    
                    1,672,721Gross
      profit
                    
                    
                    -
                    
                    
                    
                    3,159,890
                    
                    
                    
                    3,159,890Operating
      expenses
                    
                    
                    79,615
                    
                    
                    
                    2,795,876
                    
                    
                    
                    2,875,491Income
      (loss) from operations
                    
                    
                    (79,615
                    )
                    
                    
                    364,014
                    
                    
                    
                    284,399Other
      income (expense)
                    
                    
                    -
                    
                    
                    
                    (50,581
                    )
                    
                    
                    (50,581
                    )Income
      (loss) before income taxes
                    
                    
                    (79,615
                    )
                    
                    
                    313,433
                    
                    
                    
                    233,818Income
      taxes
                    
                    
                    (589,402
                    )
                    
                    
                    -
                    
                    
                    
                    (589,402
                    )Net
      income (loss)
                    
                    $
                    509,787
                    
                    
                    $
                    313,433
                    
                    
                    $
                    823,220





26


SITESTAR
CORPORATION





Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued





For the six months ended June 30, 2008 (unaudited)Corporate
                    
                    
                    Internet
                    
                    
                    TotalRevenue
                    
                    $
                    -
                    
                    
                    $
                    5,159,244
                    
                    
                    $
                    5,159,244Cost
      of revenue
                    
                    
                    -
                    
                    
                    
                    1,387,801
                    
                    
                    
                    1,387,801Gross
      profit
                    
                    
                    -
                    
                    
                    
                    3,771,443
                    
                    
                    
                    3,771,443Operating
      expenses
                    
                    
                    69,708
                    
                    
                    
                    2,914,324
                    
                    
                    
                    2,984,032Income
      (loss) from operations
                    
                    
                    (69,708
                    )
                    
                    
                    857,119
                    
                    
                    
                    787,411Other
      income (expense)
                    
                    
                    -
                    
                    
                    
                    (86,532
                    )
                    
                    
                    (86,532
                    )Income
      (loss) before income taxes
                    
                    
                    (69,708
                    )
                    
                    
                    770,587
                    
                    
                    
                    700,879Income
      taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      income (loss)
                    
                    $
                    (69,708
                    )
                    
                    $
                    770,587
                    
                    
                    $
                    700,879





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 six months ended June 30, 2009 and 2008.








For
      the six months ended June 30, 2009Corporate
                        
                        
                        Internet
                        
                        
                        TotalEBITDA
                        
                        $
                        (79,615
                        )
                        
                        $
                        1,649,177
                        
                        
                        $
                        1,569,562Interest
      expense
                        
                        
                        -
                        
                        
                        
                        (48,451
                        )
                        
                        
                        (48,451
                        )Taxes
                        
                        
                        589,402
                        
                        
                        
                        -
                        
                        
                        
                        589,402Depreciation
                        
                        
                        -
                        
                        
                        
                        (17,228
                        )
                        
                        
                        (17,228
                        )Amortization
                        
                        
                        -
                        
                        
                        
                        (1,270,065
                        )
                        
                        
                        (1,270,065
                        )Net
      income (loss)
                        
                        $
                        509,787
                        
                        
                        $
                        313,433
                        
                        
                        $
                        823,220




27


SITESTAR
CORPORATION





Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued





For
      the six months ended June 30, 2008Corporate
                  
                  
                  Internet
                  
                  
                  TotalEBITDA
                  
                  $
                  (69,708
                  )
                  
                  $
                  2,367,391
                  
                  
                  $
                  2,297,683Interest
      expense
                  
                  
                  -
                  
                  
                  
                  (110,518
                  )
                  
                  
                  (110,518
                  )Taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Depreciation
                  
                  
                  -
                  
                  
                  
                  (19,118
                  )
                  
                  
                  (19,118
                  )Amortization
                  
                  
                  -
                  
                  
                  
                  (1,467,168
                  )
                  
                  
                  (1,467,168
                  )Net
      income (loss)
                  
                  $
                  (69,708
                  )
                  
                  $
                  770,587
                  
                  
                  $
                  700,879





SIX MONTHS ENDED JUNE 30,
2009 COMPARED TO JUNE 30, 2008 (Unaudited)




REVENUE





Revenue
for the six months ended June 30, 2009 decreased by $326,633 or 6.3% from
$5,159,244 for the six months ended June 30, 2008 to $4,832,611 for the same
period in 2009.  Internet sales decreased primarily due to customer
attrition to broadband services and offset in part by the addition of Internet
customers from asset acquisitions.  To insure continued strength in
revenues, the Company has acquired and plans to continue to acquire the assets
of additional ISPs and fold them into its operations to provide future
revenues.





COST
OF REVENUE





Costs of
revenue for the six months ended June 30, 2009 increased by $284,920 or 20.5%
from $1,387,801 for the six months ended June 30, 2008 to $1,672,721 for the
same period in 2009.  Cost of revenue increased as a result of increasing
the product mix with more broadband services which carries a higher cost of
providing bandwidth and connectivity.  This is a reflection of the
acquisitions of fiber and DSL customers late in  the second quarter
and fourth quarters of 2008.


28





SITESTAR
CORPORATION





Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued





OPERATING
EXPENSES




Operating
expenses for the six months ended June 30, 2009 decreased $108,541 or 3.6% from
$2,984,032 for the six months ended June 30, 2008 to $2,875,491 for the same
period in 2009.  Amortization expense decreased $197,103 or 13.4% from
$1,467,168 for the six months ended June 30, 2008 to $1,270,065 for the same
period in 2009.  Wages decreased $71,678 or 19.1% from $375,950 for
the six months ended June 30, 2008 to $304,272 for the same period in
2009.  These decreases were offset in part by an increase in bad debt
expense of $132,062 or 16.6% from $796,035 for the six months ended June 30,
2008 to $928,097 for the same period in 2009. Corporate expenses for the six
months ended June 30, 2009 and June 30, 2008 consisted primarily of professional
fees of $74,303 and 65,466.




INCOME
TAXES





For the
six months ended June 30, 2009 and June 30, 2008 corporate income tax (expense)
benefit of $589,402 and $0 were accrued.




INTEREST
EXPENSE





Interest
expense for the six months ended June 30, 2009 decreased by $62,067 or 56.2%
from $110,518 for the six months ended June 30, 2008 to $48,451 for the same
period in 2009.  This decrease is a result of reducing debt to finance the
acquisition of additional customers.





JUNE 30, 2009 (Unaudited)
COMPARED TO DECEMBER 31, 2008 (Audited)





FINANCIAL
CONDITION





Net
accounts receivable increased $199,678 or 27.0% from $738,824 on December 31,
2008 to $938,502 on June 30, 2009.  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 increased by $607 or 0.9%
from $70,239 on December 31, 2008 to $70,846 on June 30,
2009.  Accounts payable increased by $68,855 or 85.1% from $80,892 on
December 31, 2008 to $149,747 on June 30, 2009. Accrued expenses decreased by
$7,382 or 1.3% from $94,882 on December 31, 2008 to $87,500 on June 30,
2009.


29





SITESTAR
CORPORATION





Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued





Deferred
revenue increased by $15,479 or 1.3% from $1,157,597 on December 31, 2008 to
$1,173,076 on June 30, 2009 representing increased volume of customer accounts
that have been prepaid. The current portion of notes payable decreased $152,258
or 26.7% from $569,372 on December 31, 2008 to $417,114 on June 30,
2009.  This is due to the curtailment of term notes financing the
purchase of customer bases.  Long-term notes payable decreased
$165,000 or 18.0% from $915,615 on December 31, 2008 to $750,615 on June 30,
2009. This is due to the curtailment of term notes financing the purchase of
customer bases. Long-term notes payable to shareholders decreased $54,985 or
10.2% from $539,281 on December 31, 2008 to $484,296 on June 30,
2009.  This is due to the early payoff of one note.





LIQUIDITY AND CAPITAL
RESOURCES




Cash and
cash equivalents totaled $888,167 and $527,553 at June 30, 2009 and at December
31, 2008.  EBITDA was $1,569,562 for the six months ended June 30,
2009 as compared to $2,297,683 for the same period in 2008.





2009
                  
                  
                  2008EBITDA
      for the six months ended June 30,
                  
                  $
                  1,569,562
                  
                  
                  $
                  2,297,683Interest
      expense
                  
                  
                  (48,451
                  )
                  
                  
                  (110,518
                  )Taxes
                  
                  
                  589,402
                  
                  
                  
                  -Depreciation
                  
                  
                  (17,228
                  )
                  
                  
                  (19,118
                  )Amortization
                  
                  
                  (1,270,065
                  )
                  
                  
                  (1,467,168
                  )Net
      income for the six months ended June 30,
                  
                  $
                  823,220
                  
                  
                  $
                  700,879





The aging
of accounts receivable as of June 30, 2009 and December 31, 2008 is as
shown:





2009
                  
                  
                  2008Current
                  
                  $
                  624,033
                  
                  
                  
                  67
                  %
                  
                  $
                  433,518
                  
                  
                  
                  59
                  %30
      < 60
                  
                  
                  162,902
                  
                  
                  
                  16
                  %
                  
                  
                  159,585
                  
                  
                  
                  22
                  %60
      +
                  
                  
                  151,567
                  
                  
                  
                  17
                  %
                  
                  
                  145,721
                  
                  
                  
                  19
                  %Total
                  
                  $
                  938,502
                  
                  
                  
                  100
                  %
                  
                  $
                  738,824
                  
                  
                  
                  100
                  %




30





SITESTAR
CORPORATION





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, the Company’s ability to expand the Company’s customer base, make
strategic acquisitions, general market conditions and competition and
pricing.





Although
the Company believes the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
contained in the report will prove to be accurate.


31





SITESTAR
CORPORATION





Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued





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.    Quantitative and Qualitative Disclosures About Market
Risk




Item
4.    Controls and Procedures





The
Company has evaluated the effectiveness of the disclosure controls and
procedures and internal controls over financial reporting as of June 30, 2009.
This evaluation was carried out under the supervision and with the participation
of the Company’s management, including the Principal Executive Officer and
Principal Financial Officer. Based on this evaluation, these officers have
concluded that the disclosure controls and procedures are effective. There were
no changes in internal control over financial reporting during the last fiscal
quarter ended June 30, 2009 that materially affected, or is reasonably likely to
materially affect internal control over financial
reporting.


32





SITESTAR
CORPORATION




Controls
and Procedures, continued




designed
to ensure that information required to be disclosed by the Company in the
reports that the Company file under the Exchange Act is accumulated and
communicated to the Company management, including Principal Executive Officer
and Principal Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.





Disclosure
Controls and Internal Control over Financial Reporting





Company
management is responsible for establishing and maintaining adequate internal
control over the Company’s financial reporting. Management did not use a
framework to conduct the required evaluation of the effectiveness of the
Company’s internal control over financial reporting since, in the view of
management, comparison with a framework was unwarranted because the size of the
Company's current operations are such that management is aware of all current
transactions.





An
evaluation was conducted under the supervision and with the participation of the
Company's management, including the President (Principal Executive Officer) and
Chief Financial Officer (Principal Accounting and Financial Officer), of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of the quarter ended June 30, 2009 covered by this quarterly report on
Form 10-Q.





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.


33





SITESTAR
CORPORATION





Controls
and Procedures, continued





While
this material weakness did not have an effect on our reported results, it
nevertheless constituted a deficiency in our controls. In light of this material
weakness and the requirements enacted by the Sarbanes-Oxley act of 2002, and the
related rules and regulations adopted by the SEC, our Chief Executive Officer
and Chief Accounting Officer concluded that, as of December 31, 2008, our
controls and procedures needed improvement and were not effective at a
reasonable assurance level. Despite this deficiency in our internal controls,
management believes that there were no material inaccuracies or omissions of
material fact in this annual report.




Since the
discovery of the material weaknesses in the tax provision we began evaluating
the tax provision and remediated the related internal control weakness. We have
evaluated our disclosure controls and procedures as currently in effect,
including the remedial actions discussed above, and we have concluded that, as
of this date, our disclosure controls and procedures are effective.




We have
discussed our corrective actions and future plans with our board of directors
and Bagell as of the date of this annual report, and believe the planned actions
should serve to correct the above listed material weaknesses in our internal
controls. However, we cannot provide assurance that either we or our independent
auditors will not in the future identify further material weaknesses or
significant deficiencies in our internal control over financial reporting that
we have not discovered to date.





Inherent
Limitations of the Effectiveness of Internal Control





A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the internal control system are
met. Because of the inherent limitations of any internal control system, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.





The
Company's management, including the President (Principal Executive Officer) and
Chief Financial Officer (Principal Accounting and Financial Officer), confirm
that there was no change in the Company's internal control over financial
reporting during the quarter ended June 30, 2009 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.


34





SITESTAR
CORPORATION





PART
II.  OTHER INFORMATION




Item
1.     Legal Proceedings





A
complaint has been filed in Belmont County, Ohio by First USA, Inc. alleging a
breach of agreement for the purchase and sale of Internet Service Provider
accounts dated July 1, 2006.  The Company took a purchase price
adjustment based on a material warranty misrepresentation of customer counts and
revenues by First USA.  The complaint demands judgment of approximately
$150,000.The
Company will vigorously defend this claim.  A pre-trial or scheduling
conference has been rescheduled in the third quarter of 2009.





Item
1A.   Risk Factors




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-Q:


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 2002.31.2
              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.




35





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:
      August 14, 2009By:
                /s/ Frank Erhartic, Jr.Frank
      Erhartic, Jr.President,
      Chief Executive Officer(Principal
      Executive Officer andPrincipal
      Accounting Officer)Date:
      August 14, 2009By:
                /s/ Daniel A. Judd.Daniel
      A. JuddChief
      Financial Officer(Principal
      Financial Officer)


36