UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q/A




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


EXCHANGE ACT
OF 1934




For
the quarterly period ended September 30, 2008




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


For the
transition period from ________________ to _______________




000-27763


(Commission
file number)




SITESTAR
CORPORATION


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




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




7109
Timberlake Road, Lynchburg, VA  24502


(Address
of principal executive offices)




(434)
239-4272


(Issuer's
telephone number)


N/A


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




Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act 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 is a shell company (as defined by Rule
12b-2 of the


Exchange
Act). Yes  ̈ No
x







SITESTAR
CORPORATION




EXPLANATORY
NOTE





This Amendment No. 1 to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008 initially filed with the Securities and
Exchange Commission on November 14, 2008 is being filed to reflect
restatements of Sitestar Corporation‘s Consolidated Balance Sheets as of
September 30, 2008, and the related Consolidated Statements of Income for
the three and nine months ended September 30, 2008 and, Cash Flows for the
nine months ended September 30, 2008 (the “Financial Statements”). These
restatements reflect the effects of adjustments for the accounting related to
various matters detailed in Note 1 to the Consolidated Financial
Statements. These restatements reflect adjustments for transactions related to
corporate income taxes as filed for the year ended December 31,
2008.  In addition, results for 2008 have been restated with respect
to the accounting for such matters where appropriate. Accordingly, amounts
included in Selected Financial Data, are restated. Sitestar Corporation is also
revising the discussion under Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations and Item 9A, Controls and
Procedures in order to reflect the effects of the restatement. Except with
respect to these matters, the Financial Statements in this Form 10-Q/A do
not reflect any events that have occurred after the 2008 Form 10-Q was
filed.


2




SITESTAR
CORPORATION




Index




Page NumberPART
      I.  FINANCIAL INFORMATIONItem
      1.  Financial StatementsCondensed
      Consolidated Balance Sheets as of September30,
      2008 (unaudited) and December 31, 2007 (audited)
                          4-5Condensed
      Consolidated Statements of Income for thethree
      months ended September 30, 2008 and 2007 (unaudited)
                          6Condensed
      Consolidated Statements of Income for thenine
      months ended September 30, 2008 and 2007 (unaudited)
                          7Condensed
      Consolidated Statements of Cash Flows forthe
      nine months ended September 30, 2008 and 2007 (unaudited)
                          8-9Notes
      to unaudited Condensed Consolidated Financial Statements
                          10-34Item
      2.  Management's Discussion and Analysis
                          34-41Item
      3.  Controls and Procedures
                          42-44Part
      II.  OTHER INFORMATION
                          45Item
      1.  Legal Proceedings
                          45Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                          45Item
      3.  Defaults Upon Senior Securities
                          45Item
      4.  Submission of Matters to a Vote of Security
      Holders
                          45Item
      5.  Other Information
                          45Item
      6.  Exhibits
                          45-46SIGNATURES
                          46


3





PART
I. FINANCIAL INFORMATION




Item 1.     Financial
Statements




SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


SEPTEMBER
30, 2008 AND DECEMBER 31, 2007




ASSETS




2008
                    
                    
                    2007(Unaudited)
                    
                    
                    (Audited)RestatedCURRENT
      ASSETSCash
      and cash equivalents
                    
                    $
                    289,195
                    
                    
                    $
                    232,249Accounts
      receivable, net of allowance of $53,690and
      $22,641
                    
                    
                    682,519
                    
                    
                    
                    299,863Prepaid
      expenses
                    
                    
                    1,445
                    
                    
                    
                    16,529Total
      current assets
                    
                    
                    973,159
                    
                    
                    
                    548,641PROPERTY
      AND EQUIPMENT, net
                    
                    
                    237,743
                    
                    
                    
                    236,782CUSTOMER
      LIST, net of accumulatedamortization
      of $7,279,031 and $5,237,054
                    
                    
                    4,373,981
                    
                    
                    
                    5,480,635GOODWILL,
      net of impairment
                    
                    
                    1,288,559
                    
                    
                    
                    1,288,559Deferred
      tax asset
                    
                    
                    299,150
                    
                    
                    
                    -OTHER
      ASSETS
                    
                    
                    605,214
                    
                    
                    
                    677,267TOTAL
      ASSETS
                    
                    $
                    7,777,806
                    
                    
                    $
                    8,231,884




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


4





SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS, continued


SEPTEMBER
30, 2008 AND DECEMBER 31, 2007




LIABILITIES
AND STOCKHOLDERS’ EQUITY




2008
                  
                  
                  2007(Unaudited)
                  
                  
                  (Audited)RestatedCURRENT
      LIABILITIESAccounts
      payable
                  
                  $
                  22,408
                  
                  
                  $
                  78,713Accrued
      income taxes
                  
                  
                  254,263
                  
                  
                  
                  -Accrued
      expenses
                  
                  
                  106,349
                  
                  
                  
                  138,021Deferred
      revenue
                  
                  
                  1,265,030
                  
                  
                  
                  1,361,606Notes
      payable
                  
                  
                  458,879
                  
                  
                  
                  1,268,866Total
      current liabilities
                  
                  
                  2,106,929
                  
                  
                  
                  2,847,206NOTES
      PAYABLE, less current portion
                  
                  
                  990,615
                  
                  
                  
                  1,694,836NOTES
      PAYABLE - STOCKHOLDERS, less current portion
                  
                  
                  539,281
                  
                  
                  
                  686,687TOTAL
      LIABILITIES
                  
                  
                  3,636,825
                  
                  
                  
                  5,228,729STOCKHOLDERS'
      EQUITYPreferred
      Stock, $.001 par value, 10,000,000 shares authorized, 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 September 30, 2008 December
      31, 2007 respectively
                  
                  
                  91,326
                  
                  
                  
                  91,326Additional
      paid-in capital
                  
                  
                  13,880,947
                  
                  
                  
                  13,880,947Treasury
      stock, at cost, 2,955,147 common shares    on June
      30,  2008 and December 31, 2007
                  
                  
                  (63,030
                  )
                  
                  
                  (63,030
                  )Accumulated
      deficit
                  
                  
                  (9,768,262
                  )
                  
                  
                  (10,906,088
                  )Total
      stockholders’ equity
                  
                  
                  4,140,981
                  
                  
                  
                  3,003,155TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                  
                  $
                  7,777,806
                  
                  
                  $
                  8,231,884




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


5




SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


(UNAUDITED)




2008
                
                
                2007RestatedREVENUE
                
                $
                2,485,294
                
                
                $
                1,481,886COST
      OF REVENUE
                
                
                709,708
                
                
                
                472,842GROSS
      PROFIT
                
                
                1,775,586
                
                
                
                1,009,044OPERATING
      EXPENSES:Selling
      general and administrative expenses
                
                
                1,351,087
                
                
                
                782,606INCOME
      FROM OPERATIONS
                
                
                424,499
                
                
                
                226,438OTHER
      INCOME (EXPENSES)
                
                
                (32,439
                )
                
                
                (41,694
                )INCOME
      BEFORE INCOME TAXES
                
                
                392,060
                
                
                
                184,744INCOME
      TAXES
                
                
                (56,165
                )
                
                
                -NET
      INCOME
                
                $
                448,225
                
                
                $
                184,744BASIC
      AND DILUTED EARNINGS PER SHARE
                
                $
                0.00
                
                
                $
                0.00WEIGHTED
      AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
                
                
                91,326,463
                
                
                
                88,063,305





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


6





SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


(UNAUDITED)




2008
                
                
                2007RestatedREVENUE
                
                $
                7,644,538
                
                
                $
                4,450,600COST
      OF REVENUE
                
                
                2,097,509
                
                
                
                1,403,848GROSS
      PROFIT
                
                
                5,547,029
                
                
                
                3,046,752OPERATING
      EXPENSES:Selling
      general and administrative expenses
                
                
                4,335,119
                
                
                
                2,336,151INCOME
      FROM OPERATIONS
                
                
                1,211,910
                
                
                
                710,601OTHER
      INCOME (EXPENSES)
                
                
                (118,971
                )
                
                
                (127,769
                )INCOME
      BEFORE INCOME TAXES
                
                
                1,092,939
                
                
                
                582,832INCOME
      TAXES
                
                
                (44,888
                )
                
                
                -NET
      INCOME
                
                $
                1,137,827
                
                
                $
                582,832BASIC
      AND DILUTED EARNINGS PER SHARE
                
                $
                0.01
                
                
                $
                0.01WEIGHTED
      AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
                
                
                91,326,463
                
                
                
                88,063,305





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


7





SITESTAR
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


(UNAUDITED)





2008
                
                
                2007RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                1,137,827
                
                
                $
                582,832Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization expense
                
                
                2,223,989
                
                
                
                1,011,012Bad
      debt expense
                
                
                31,048
                
                
                
                7,987(Increase)
      decrease in:Accounts
      receivable
                
                
                (413,704
                )
                
                
                (87,599
                )Prepaid
      expenses
                
                
                15,084
                
                
                
                (7,836
                )Deferred
      tax asset
                
                
                (299,150
                )Increase
      (decrease) in:Accounts
      payable
                
                
                (56,305
                )
                
                
                (60,196
                )Accrued
      expenses
                
                
                (31,673
                )
                
                
                (256,564
                )Deferred
      revenue
                
                
                (96,576
                )
                
                
                (40,301
                )Accrued
      income taxes
                
                
                254,262
                
                
                
                -Net
      cash provided by operating activities
                
                
                2,764,802
                
                
                
                1,149,335CASH
      FLOWS FROM INVESTING ACTIVITIES:Other
      assets held for resale
                
                
                1,081
                
                
                
                36,538Purchase
      of property and equipment
                
                
                (32,000
                )
                
                
                (21,033
                )Purchase
      of non-compete
                
                
                (80,000
                )
                
                
                (40,000
                )Purchase
      of customer list
                
                
                (935,322
                )
                
                
                (987,585
                )Net
      cash (used in) investing activities
                
                
                (1,046,241
                )
                
                
                (1,012,080
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from notes payable
                
                
                559,729
                
                
                
                818,337Repayment
      of notes payable – stockholders
                
                
                (147,406
                )
                
                
                (198,506
                )Repayment
      of notes payable
                
                
                (2,073,938
                )
                
                
                (576,097
                )Net
      cash provided by (used in) financing activities
                
                
                (1,661,615
                )
                
                
                43,734NET
      INCREASE IN CASH AND CASH  EQUIVALENTS
                
                
                56,946
                
                
                
                180,989CASH
      AND CASH EQUIVALENTS –BEGINNING OF  PERIOD
                
                
                232,249
                
                
                
                129,453CASH
      AND CASH EQUIVALENTS -END OF  PERIOD
                
                $
                289,195
                
                
                $
                310,442





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


8





SITESTAR CORPORATION AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (continued)


(UNAUDITED)




SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:




During
the nine months ended September 30, 2008 and 2007, the Company accrued income
taxes of $254,263 and paid interest expense of approximately $145,000 and
$119,000, respectively.




NON-CASH
INVESTING AND FINANCING TRANSACTIONS:




During
the nine months ended September 30, 2008, the Company issued no shares of common
stock.





During
the nine months ended September 30, 2008, the Company recognized no impairment
to customer list.


9




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE 1 –
RESTATEMENT OF FINANCIAL STATEMENTS





Subsequent to the issuance of the 2008 financial statements, Sitestar
Corporation determined that the income tax provision should have been included
in the financial statements and adopted the recommendation of the Board of
Directors and determined that previously reported results should be
restated.  The restatement resulted from a material weakness in
internal control over financial reporting, namely, that we did not have
adequately designed procedures to calculate or review the tax
provision.  The effects of the restatement adjustments on Sitestar
Corporation’s originally reported financial position for the periods ended
September 30, 2008, results of operations and cash flows for the three and nine
months ended June 30, 2008 are summarized below.





SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


SEPTEMBER
30, 2008





ASSETS





CURRENT
      ASSETS
                      
                      Previously
                        Reported
                      
                      
                      Net
                        Change
                      
                      
                      RestatedTotal
      current assets
                      
                      $
                      973,159
                      
                      
                      $
                      
                      
                      
                      $
                      973,159PROPERTY
      AND EQUIPMENT, net
                      
                      
                      237,743
                      
                      
                      
                      
                      
                      
                      
                      237,743CUSTOMER
      LIST, net of accumulated amortization of$6,603,388 and $5,237,054
                      
                      
                      4,373,981
                      
                      
                      
                      
                      
                      
                      
                      4,373,981GOODWILL,
      net of impairment
                      
                      
                      1,288,559
                      
                      
                      
                      
                      
                      
                      
                      1,288,559DEFERRED
      TAX ASSET
                      
                      
                      -
                      
                      
                      
                      299,150
                      
                      
                      
                      299,150OTHER
      ASSETS
                      
                      
                      605,214
                      
                      
                      
                      
                      
                      
                      
                      605,214TOTAL
      ASSETS
                      
                      $
                      7,478,656
                      
                      
                      $
                      299,150
                      
                      
                      $
                      7,777,806


10




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE 1 – RESTATEMENT OF FINANCIAL
STATEMENTS, continued





SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


SEPTEMBER
30, 2008





LIABILITIES
AND STOCKHOLDERS' EQUITY





CURRENT
      LIABILITIES
                  
                  Previously
                    Reported
                  
                  
                  Net
                    Change
                  
                  
                  RestatedAccrued
      income taxes
                  
                  $
                  -
                  
                  
                  $
                  254,263
                  
                  
                  $
                  254,263Total
      current liabilities
                  
                  
                  1,852,666
                  
                  
                  
                  254,263
                  
                  
                  
                  2,106,929TOTAL
      LIABILITIES
                  
                  
                  3,382,562
                  
                  
                  
                  254,263
                  
                  
                  
                  3,636,825STOCKHOLDERS’
      EQUITYAccumulated
      deficit
                  
                  
                  (9,813,149
                  )
                  
                  
                  44,887
                  
                  
                  
                  (9,768,262
                  )Total
      stockholders' equity
                  
                  
                  4,096,094
                  
                  
                  
                  44,887
                  
                  
                  
                  4,140,981TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                  
                  $
                  7,478,656
                  
                  
                  $
                  299,150
                  
                  
                  $
                  7,777,806


11





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE 1 –
RESTATEMENT OF FINANCIAL STATEMENTS, continued





SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF INCOME


FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2008





Previously
                    Reported
                  
                  
                  Net
                    Change
                  
                  
                  RestatedREVENUE
                  
                  $
                  2,485,294
                  
                  
                  $
                  -
                  
                  
                  $
                  2,485,294COST
      OF REVENUE
                  
                  
                  709,708
                  
                  
                  
                  -
                  
                  
                  
                  709,708GROSS
      PROFIT
                  
                  
                  1,775,586
                  
                  
                  
                  -
                  
                  
                  
                  1,775,586OPERATING
      EXPENSE
                  
                  
                  1,351,087
                  
                  
                  
                  -
                  
                  
                  
                  1,351,087INCOME
      FROM OPERATIONS
                  
                  
                  424,499
                  
                  
                  
                  -
                  
                  
                  
                  424,499OTHER
      INCOME (EXPENSE)
                  
                  
                  (32,439
                  )
                  
                  
                  -
                  
                  
                  
                  (32,439
                  )INCOME
      BEFORE INCOME TAXES
                  
                  
                  392,060
                  
                  
                  
                  -
                  
                  
                  
                  392,060INCOME
      TAXES
                  
                  
                  -
                  
                  
                  
                  (56,165
                  )
                  
                  
                  (56,165
                  )NET
      INCOME
                  
                  $
                  392,060
                  
                  
                  $
                  (56,165
                  )
                  
                  $
                  448,225BASIC
      AND DILUTED INCOME PER SHARE
                  
                  $
                  0.00
                  
                  
                  $
                  -
                  
                  
                  $
                  0.00WEIGHTED
      AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
                  
                  
                  91,326,463
                  
                  
                  
                  -
                  
                  
                  
                  91,326,463


12





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE 1 –
RESTATEMENT OF FINANCIAL STATEMENTS, continued





SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF INCOME


FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2008





Previously
                            Reported
                          
                          
                          Net
                            Change
                          
                          
                          RestatedREVENUE
                          
                          $
                          7,644,538
                          
                          
                          $
                          -
                          
                          
                          $
                          7,644,538COST
      OF REVENUE
                          
                          
                          2,097,509
                          
                          
                          
                          -
                          
                          
                          
                          2,097,509GROSS
      PROFIT
                          
                          
                          5,547,029
                          
                          
                          
                          -
                          
                          
                          
                          5,547,029OPERATING
      EXPENSE
                          
                          
                          4,335,119
                          
                          
                          
                          -
                          
                          
                          
                          4,335,119INCOME
      FROM OPERATIONS
                          
                          
                          1,211,910
                          
                          
                          
                          -
                          
                          
                          
                          1,211,910OTHER
      INCOME (EXPENSE)
                          
                          
                          (118,971
                          )
                          
                          
                          -
                          
                          
                          
                          (118,971
                          )INCOME
      BEFORE INCOME TAXES
                          
                          
                          1,092,939
                          
                          
                          
                          -
                          
                          
                          
                          1,092,939INCOME
      TAXES
                          
                          
                          -
                          
                          
                          
                          44,888
                          
                          
                          
                          44,888NET
      INCOME
                          
                          $
                          1,092,939
                          
                          
                          $
                          44,888
                          
                          
                          $
                          1,137,827BASIC
      AND DILUTED INCOME PER SHARE
                          
                          $
                          0.01
                          
                          
                          $
                          -
                          
                          
                          $
                          0.01WEIGHTED
      AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
                          
                          
                          91,326,463
                          
                          
                          
                          -
                          
                          
                          
                          91,326,463


13





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RESTATED





NOTE
      1 – RESTATEMENT OF FINANCIAL STATEMENTS,
continued





SITESTAR
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CASH FLOWS


FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2008





Previously
                            Reported
                          
                          
                          Net
                            Change
                          
                          
                          RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                          
                          $
                          1,092,939
                          
                          
                          $
                          (44,888
                          )
                          
                          $
                          1,137,827(Increase)
      decrease in deferred tax asset
                          
                          
                          -
                          
                          
                          
                          (299,150
                          )
                          
                          
                          (299,150
                          )Increase
      (decrease) in accrued income taxes
                          
                          
                          -
                          
                          
                          
                          254,262
                          
                          
                          
                          254,262Net
      cash provided by operating activities
                          
                          
                          2,764,802
                          
                          
                          
                          -
                          
                          
                          
                          2,764,802Net
      cash used in investing activities
                          
                          
                          (1,046,241
                          )
                          
                          
                          -
                          
                          
                          
                          (1,046,241
                          )Net
      cash used in financing activities
                          
                          
                          (1,661,615
                          )
                          
                          
                          -
                          
                          
                          
                          (1,661,615
                          )NET
      INCREASE IN CAHS AND CASH EQUIVALENTS
                          
                          
                          56,946
                          
                          
                          
                          -
                          
                          
                          
                          56,946CASH
      AND CASH EQUIVALENTS – BEGINNING OF YEAR
                          
                          
                          232,249
                          
                          
                          
                          -
                          
                          
                          
                          232,249CASH
      AND CASH EQUIVALENTS – END OF YEAR
                          
                          $
                          289,195
                          
                          
                          $
                          -
                          
                          
                          $
                          289,195





NOTE
2 – BASIS OF PRESENTATION




The
unaudited condensed consolidated financial statements have been prepared by
Sitestar Corporation (the “Company” or “Sitestar”), pursuant to the rules and
regulations of the Securities and Exchange Commission (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 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, 2007 included in the Company’s Annual Report on Form
10-KSB.  The results for the nine months ended September 30, 2008 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2008.


14





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
3 – EARNINGS PER SHARE




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





For the
three months ended September 30, 2008 and September 30, 2007:


2008
                          
                          
                          2007Net
      income available to common shareholders
                          
                          $
                          448,225
                          
                          
                          $
                          184,744Weighted
      average number of common shares
                          
                          
                          91,326,463
                          
                          
                          
                          88,063,305Basic
      and diluted income per share
                          
                          $
                          0.00
                          
                          
                          $
                          0.00





For the
nine months ended September 30, 2008 and September 30, 2007:


2008
                            
                            
                            2007Net
      income available to common shareholders
                            
                            $
                            1,137,827
                            
                            
                            $
                            582,832Weighted
      average number of common shares
                            
                            
                            91,326,463
                            
                            
                            
                            88,063,305Basic
      and diluted income per share
                            
                            $
                            0.01
                            
                            
                            $
                            0.01





NOTE
4 – COMMON STOCK





During
the nine months ended September 30, 2008, the Company issued no shares of common
stock.




NOTE
5 – SEGMENT INFORMATION





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


15




SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED




NOTE
6 – SEGMENT INFORMATION, continued





The
Corporate group is the holding company and oversees the operation of the other
business units. The Corporate group also arranges financing for the entire
organization. The Company’s Internet group consists of multiple sites of
operation and services customers throughout the U.S. and Canada.





The
Company evaluates the performance of its operating segments based on income from
operations before income taxes, accounting changes, non-recurring items and
interest income and expense.




Summarized
financial information concerning the Company's reportable segments is shown in
the following table for the three months ended September 30, 2008 and
2007:





September 30,
      2008Corporate
                      
                      
                      Internet
                      
                      
                      ConsolidatedRevenue
                      
                      $
                      -
                      
                      
                      $
                      2,485,294
                      
                      
                      $
                      2,485,294Operating
      Income (loss)
                      
                      $
                      (19,185
                      )
                      
                      $
                      443,684
                      
                      
                      $
                      424,499Depreciation
      and amortization
                      
                      $
                      -
                      
                      
                      $
                      737,703
                      
                      
                      $
                      737,703Interest
      expense
                      
                      $
                      -
                      
                      
                      $
                      34,069
                      
                      
                      $
                      34,069Intangible
      assets
                      
                      $
                      -
                      
                      
                      $
                      5,998,095
                      
                      
                      $
                      5,998,095Total
      assets
                      
                      $
                      -
                      
                      
                      $
                      7,777,806
                      
                      
                      $
                      7,777,806








September 30,
      2007Corporate
                      
                      
                      Internet
                      
                      
                      ConsolidatedRevenue
                      
                      $
                      -
                      
                      
                      $
                      1,481,886
                      
                      
                      $
                      1,481,886Operating
      Income (loss)
                      
                      $
                      (9,593
                      )
                      
                      $
                      236,031
                      
                      
                      $
                      226,438Depreciation
      and amortization
                      
                      $
                      -
                      
                      
                      $
                      351,742
                      
                      
                      $
                      351,742Interest
      expense
                      
                      $
                      -
                      
                      
                      $
                      33,768
                      
                      
                      $
                      33,768Intangible
      assets
                      
                      $
                      -
                      
                      
                      $
                      3,389,475
                      
                      
                      $
                      3,389,475Total
      assets
                      
                      $
                      -
                      
                      
                      $
                      4,314,519
                      
                      
                      $
                      4,314,519





Summarized
financial information concerning the Company's reportable segments is shown in
the following table for the nine months ended September 30, 2008 and
2007:


16





SITESTAR
CORPORATION


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS


RESTATED




NOTE
6 – SEGMENT INFORMATION, continued





September 30,
      2008Corporate
                    
                    
                    Internet
                    
                    
                    ConsolidatedRevenue
                    
                    $
                    -
                    
                    
                    $
                    7,644,538
                    
                    
                    $
                    7,644,538Operating
      Income (loss)
                    
                    $
                    (88,893
                    )
                    
                    $
                    1,300,803
                    
                    
                    $
                    1,211,910Depreciation
      and amortization
                    
                    $
                    -
                    
                    
                    $
                    2,223,989
                    
                    
                    $
                    2,223,989Interest
      expense
                    
                    $
                    -
                    
                    
                    $
                    144,587
                    
                    
                    $
                    144,587Intangible
      assets
                    
                    $
                    -
                    
                    
                    $
                    5,998,095
                    
                    
                    $
                    5,998,095Total
      assets
                    
                    $
                    -
                    
                    
                    $
                    7,777,806
                    
                    
                    $
                    7,777,806





September 30,
      2007Corporate
                    
                    
                    Internet
                    
                    
                    ConsolidatedRevenue
                    
                    $
                    -
                    
                    
                    $
                    4,450,600
                    
                    
                    $
                    4,450,600Operating
      Income (loss)
                    
                    $
                    (53,320
                    )
                    
                    $
                    763,921
                    
                    
                    $
                    710,601Depreciation
      and amortization
                    
                    $
                    -
                    
                    
                    $
                    1,011,025
                    
                    
                    $
                    1,011,025Interest
      expense
                    
                    $
                    -
                    
                    
                    $
                    118,950
                    
                    
                    $
                    118,950Intangible
      assets
                    
                    $
                    -
                    
                    
                    $
                    3,389,475
                    
                    
                    $
                    3,389,475Total
      assets
                    
                    $
                    -
                    
                    
                    $
                    4,314,519
                    
                    
                    $
                    4,314,519





NOTE
7 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS





In
February 2007, the Financial Accounting Standard Board (FASB) issued FASB
Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (“FAS 159”). FAS 159 permits companies to choose to
measure, on an instrument-by-instrument basis, financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. The Company believes it will not have a material impact on its financial
position or on the results of operations.





In
December 2007, the FASB issued FASB Statement No. 141, Business Combinations
(“FAS 141”).  This Statement establishes principles and requirements
for how the acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree, recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase, determines what
information to disclose. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the


17





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – RECENTLY ISSUED ACCOUNTING PROUNCEMENTS, continued





beginning
of the first annual reporting period beginning on or after December 15,
2008.  The Company may not apply it before that date. The Company is
currently evaluating the effect the adoption of FAS No. 141, but believes
it will not have a material impact on its financial position or on the results
of operations.




In
December 2007, the FASB issued FASB Statement No. 160, Non-controlling Interests
in Consolidated Financial Statements (“FAS 160”).  This Statement
establishes accounting and reporting standards that require the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled and presented in the consolidated statement of financial
position. This Statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15,
2008.  The Company is currently evaluating the effect the adoption of
FAS No. 160, but believes it will not have a material impact on its
financial position or on the results of operations.




In March
2008, the FASB issued FASB No. 161, Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133.




FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
does not provide adequate information about how derivative and hedging
activities affect an entity’s financial position, financial performance and cash
flows. Accordingly, this Statement requires enhanced disclosures about an
entity’s derivative and hedging activities and thereby improves the transparency
of financial reporting. This Statement is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008.  The Company is currently evaluating the effect the adoption of
FASB No. 161, but believes it will not have a material impact on its
financial position or on the results of operations.




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.


18





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
7 – 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
8 – ACQUISITIONS





Magnolia Internet
Services


Effective
February 1, 2007, the Company entered into an Asset Purchase Agreement pursuant
to which it acquired the Internet related assets of Magnolia Internet Services,
Inc., an Arkansas Internet Service Provider (ISP).  The total purchase
price was $113,812 representing the fair value of the assets acquired which
consisted of a $12,000 cash payment at closing with the balance paid in eleven
equal monthly payments beginning March 2007.





The
definitive agreement states that in the event that actual annualized revenue
differs more than three percent from estimates used at closing, the purchase
price will be adjusted accordingly.  The purchase price has been
adjusted down to $108,470.  The following table summarizes the
estimated fair values of assets acquired and liabilities assumed at the date of
acquisition.  Sitestar has assessed the valuations of certain
intangible assets as represented below.





Customer
      list
                  
                  $
                  93,992Non-compete
      agreement
                  
                  
                  10,000Equipment
                  
                  
                  10,000Deferred
      revenue
                  
                  
                  (5,522
                  )Purchase
      price
                  
                  $
                  108,470





Because
the acquisition of Magnolia Internet Services was consummated on February 1,
2007, there are limited results of operations of this company for the nine
months ended September 30, 2007 included in the accompanying September 30, 2008
and 2007 consolidated financial statements.


19





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
8 – ACQUISITIONS, continued





The
following table presents the unaudited pro forma condensed statement of
operations for the nine months ended September 30, 2007 and reflects the results
of operations of the Company as if the acquisition of Magnolia Internet Services
had been effective January 1, 2007.  The pro forma amounts are not
necessarily indicative of the combined results of operations had the
acquisitions been effective as of that date, or of the anticipated results of
operations, due to cost reductions and operating efficiencies that are expected
as a result of the acquisitions.





2007Net
      sales
                  
                  $
                  4,529,448Gross
      profit
                  
                  $
                  3,104,007Selling,
      general and administrative expenses
                  
                  $
                  2,382,876Net
      income
                  
                  $
                  593,362Basic
      income per share
                  
                  $
                  0.00





OW Holdings,
Inc.


Effective
February 28, 2007, the Company entered into an Asset Purchase Agreement pursuant
to which it acquired the Internet related assets of OW Holdings, Inc., an ISP
having customers throughout the Rocky Mountain region. The total purchase price
was $900,000 representing the fair value of the assets acquired which consisted
of a $600,000 cash payment at closing and the balance which was paid in ninety
days. The purchase price has been adjusted down to $802,452.  The
following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.  Sitestar has assessed
the valuations of certain intangible assets as represented below.





Accounts
      receivable
                    
                    $
                    (2,098
                    )Customer
      list
                    
                    
                    870,680Non-compete
      agreement
                    
                    
                    25,000Equipment
                    
                    
                    10,000Deferred
      revenue
                    
                    
                    (101,130
                    )Purchase
      price
                    
                    $
                    802,452





Because
the acquisition of OW Holdings, Inc. was consummated on February 28, 2007, there
are limited results of operations of this company for the nine months ended
September 30, 2007 included in the accompanying September 30, 2008 and 2007
consolidated financial statements.


20





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
8 – ACQUISITIONS, continued





The
following table presents the unaudited pro forma condensed statement of
operations for the nine months ended September 30, 2007 and reflects the results
of operations of the Company as if the acquisition of OW Holdings had been
effective January 1, 2007.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.





2007Net
      sales
                  
                  $
                  5,209,531Gross
      profit
                  
                  $
                  3,602,862Selling,
      general and administrative expenses
                  
                  $
                  2,675,326Net
      income
                  
                  $
                  799,767Basic
      income per share
                  
                  $
                  0.01





AlaNet Internet
Services


Effective
June 21, 2007, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of AlaNet Internet Services, Inc.,
an Alabama ISP.  The total purchase price was $51,306 representing the
fair value of the assets acquired which consisted of a $4,275 cash payment at
closing and the balance was paid in eleven monthly installments beginning July
2007.  The purchase price has been adjusted down to
$45,629.





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





Accounts
      receivable
                  
                  $
                  3,880Customer
      list
                  
                  
                  58,549Non-compete
      agreement
                  
                  
                  5,000Deferred
      revenue
                  
                  
                  (21,800
                  )Purchase
      price
                  
                  $
                  45,629





Because
the acquisition of AlaNet Internet Services was consummated on June 21, 2007,
there are limited results of operations of this company for the nine months
ended September 30, 2007 included in the accompanying September 30, 2008 and
2007 consolidated financial statements.


21





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
8 – ACQUISITIONS, continued





The
following table presents the unaudited pro forma condensed statement of
operations for the nine months ended September 30, 2007 and reflects the results
of operations of the Company as if the acquisition of AlaNet had been effective
January 1, 2007.  The pro forma amounts are not necessarily indicative of
the combined results of operations had the acquisitions been effective as of
that date, or of the anticipated results of operations, due to cost reductions
and operating efficiencies that are expected as a result of the
acquisitions.





2007Net
      sales
                  
                  $
                  4,514,803Gross
      profit
                  
                  $
                  3,093,501Selling,
      general and administrative expenses
                  
                  $
                  2,366,960Net
      income
                  
                  $
                  588,201Basic
      income per share
                  
                  $
                  0.01





United Systems Access,
Inc.


Effective
November 1, 2007, the Company entered into an Asset Purchase Agreement pursuant
to which it acquired the Internet related assets of United Systems Access, Inc.
(d/b/a USA Telephone), a corporation  with its headquarters in
Maine.  The total purchase price was $3,750,000 representing the fair
value of the assets acquired which consisted of a $1,000,000 cash payment at
closing with a second $1,000,000 in 30 days with the remaining balance due in 36
monthly installments beginning January 2008.  Net post closing
collections on account and vendor payments of $684,385 by USA Telephone was
offset against the balance due USA Telephone on the purchase note.





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





Customer
      list
                  
                  $
                  4,292,656Non-compete
      agreement
                  
                  
                  350,000Deferred
      revenue
                  
                  
                  (892,656
                  )Purchase
      price
                  
                  $
                  3,750,000





Because
the acquisition of USA Telephone was consummated effective November 1, 2007,
there are no results of operations of this company for the nine months ended
September 30, 2007 included in the accompanying September 30, 2008 and 2007
consolidated financial statements.


22





SITESTAR
CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


RESTATED





NOTE
8 – ACQUISITIONS, continued





The
following table presents the unaudited pro forma condensed statement of
operations for the nine months ended September 30, 2007 and reflects the results
of operations of the Company as if the acquisition of USA Telephone had been
effective January 1, 2007.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.





2007Net
      sales
                  
                  $
                  7,902,949Gross
      profit
                  
                  $
                  5,547,936Selling,
      general and administrative expenses
                  
                  $
                  4,084,383Net
      income
                  
                  $
                  1,248,993Basic
      income per share
                  
                  $
                  0.01





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 nine months ended June 30, 2007 and 2008.


23


SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 RESTATED
 
 NOTE
8 – ACQUISITIONS, continued
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the nine months ended September 30, 2007 and reflects the results
of operations of the Company as if the acquisition of Comcation had been
effective March 1, 2007.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.
 
 2007Net
      sales
                    
                    $
                    4,523,560Gross
      profit
                    
                    $
                    3,105,172Selling,
      general and administrative expenses
                    
                    $
                    2,396,973Net
      income
                    
                    $
                    578,146Basic
      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 due in 11 monthly installments beginning May
2008.  The purchase price has been subsequently adjusted down to
$45,821.
 
 The
following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.  Sitestar has assessed
the valuations of certain intangible assets as represented below.
 
 Customer
      list
                    
                    $
                    40,512Non-compete
      agreement
                    
                    
                    5,000Accounts
      receivable
                    
                    
                    2,328Equipment
                    
                    
                    10,000Deferred
      revenue
                    
                    
                    (12,019
                    )Purchase
      price
                    
                    $
                    45,821
 
 Because
the acquisition of N2 the Net was consummated effective April 1, 2008, there are
limited results of operations of Comcation in the consolidated financial
statements for the nine months ended September 30, 2007 and
2008.
  24
  SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 RESTATED
 
 NOTE
8 – ACQUISITIONS, continued
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the nine months ended September 30, 2007 and reflects the results
of operations of the Company as if the acquisition of N2 the Net had been
effective April 1, 2007.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.
 
 2007Net
      sales
                    
                    $
                    4,539,957Gross
      profit
                    
                    $
                    3,123,453Selling,
      general and administrative expenses
                    
                    $
                    2,358,558Net
      income
                    
                    $
                    635,545Basic
      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
due 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 nine months ended September 30, 2007 and
2008.
  25
 
 SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 RESTATED
 
 NOTE
8 – ACQUISITIONS, continued
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the nine months ended September 30, 2007 and reflects the results
of operations of the Company as if the acquisition of Dial Assurance had been
effective May 1, 2007.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.
 
 2007Net
      sales
                    
                    $
                    4,559,317Gross
      profit
                    
                    $
                    3,136,695Selling,
      general and administrative expenses
                    
                    $
                    2,375,950Net
      income
                    
                    $
                    630,932Basic
      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 nine months ended September 30, 2007 and
2008.
  26
 
 SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 RESTATED
 
 NOTE
8 – ACQUISITIONS, continued
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the nine months ended September 30, 2007 and reflects the results
of operations of the Company as if the acquisition of USA Telephone had been
effective May 1, 2007.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.
 
 2007Net
      sales
                    
                    $
                    4,736,895Gross
      profit
                    
                    $
                    3,294,869Selling,
      general and administrative expenses
                    
                    $
                    2,412,143Net
      income
                    
                    $
                    754,957Basic
      income per share
                    
                    $
                    0.01
 
 AdaNet
 Effective
June 1, 2008, the Company entered into an Asset Purchase Agreement pursuant to
which it acquired the Internet related assets of AdaNet, an Oklahoma-based
Internet Service Provider.  The total purchase price was $20,667
representing the fair value of the assets acquired which consisted of a $3,836
cash payment at closing with the remaining balance due in 5 monthly installments
beginning July 2008.  The purchase price has been subsequently
adjusted down to $18,542.
 
 The
following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.  Sitestar has assessed
the valuations of certain intangible assets as represented below.
 
 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 nine months ended September 30, 2007 and 2008.
  27
 
 SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 RESTATED
 
 NOTE
8 – ACQUISITIONS, continued
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the nine months ended September 30, 2007 and reflects the results
of operations of the Company as if the acquisition of AdaNet had been effective
June 1, 2007.  The pro forma amounts are not necessarily indicative of the
combined results of operations had the acquisitions been effective as of that
date, or of the anticipated results of operations, due to cost reductions and
operating efficiencies that are expected as a result of the
acquisitions.
 
 2007Net
      sales
                    
                    $
                    4,468,567Gross
      profit
                    
                    $
                    3,062,688Selling,
      general and administrative expenses
                    
                    $
                    2,340,661Net
      income
                    
                    $
                    593,590Basic
      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., a
Texas-based ISP and wholesale managed modem solution provider.  The
total purchase price was $360,000 representing the fair value of the assets
acquired which consisted of a $100,000 cash payment at closing with the
remaining balance due in 12 monthly installments beginning September
2008.
 
 The
following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.  Sitestar has assessed
the valuations of certain intangible assets as represented below.
 
 Customer
      list
                    
                    $
                    400,000Non-compete
      agreement
                    
                    
                    10,000Deferred
      revenue
                    
                    
                    (50,000
                    )Purchase
      price
                    
                    $
                    360,000
 
 Because
the acquisition of Velocity West was consummated effective August 1, 2008, there
are limited results of operations of Velocity West in the consolidated financial
statements for the nine months ended September 30, 2007 and
2008.
  28
 
 SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 RESTATED
 
 NOTE
8 – ACQUISITIONS, continued
 
 The
following table presents the unaudited pro forma condensed statement of
operations for the nine months ended September 30, 2007 and reflects the results
of operations of the Company as if the acquisition of Velocity West had been
effective August 1, 2007.  The pro forma amounts are not necessarily
indicative of the combined results of operations had the acquisitions been
effective as of that date, or of the anticipated results of operations, due to
cost reductions and operating efficiencies that are expected as a result of the
acquisitions.
 
 2007Net
      sales
                    
                    $
                    4,610,600Gross
      profit
                    
                    $
                    3,192,871Selling,
      general and administrative expenses
                    
                    $
                    2,366,598Net
      income
                    
                    $
                    694,560Basic
      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, a Washington-based Internet Service
Provider.  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 nine months ended September 30, 2007
and 2008.
  29
 
 SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 RESTATED
 
 NOTE
9 -- PROVISION FOR INCOME TAXES
 
 The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes.” Deferred taxes are provided on the liability method, whereby
deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
 Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will be realized.
 Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
 
 The
provision for federal and state income taxes for the nine months ended September
30, 2008 and 2007 included the following:
 
 2008
                        
                        
                        2007Current
      provision:Federal
                        
                        $
                        216,123
                        
                        
                        $
                        -State
                        
                        
                        38,139
                        
                        
                        
                        -Deferred
      provision:Federal
                        
                        
                        (254,278
                        )
                        
                        
                        316,569State
                        
                        
                        (44,872
                        )
                        
                        
                        55,865Valuation
      allowance
                        
                        
                        -
                        
                        
                        
                        (372,434
                        )Total
      income tax provision
                        
                        $
                        (44,888
                        )
                        
                        $
                        -
 
 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 September 30, 2008
December 31, 2007 are as follows:
 
 2008
                      
                      
                      2007Accounts
      receivable
                      
                      $
                      21,476
                      
                      
                      
                      9,056Amortization
      of Intangible assets
                      
                      
                      2,830,094
                      
                      
                      $
                      2,177,997Loss
      carry-forward
                      
                      
                      -
                      
                      
                      
                      365,367Less
      valuation allowance
                      
                      
                      2,552,420
                      
                      
                      
                      2,552,420Deferred
      tax asset
                      
                      $
                      299,150
                      
                      
                      $
                      -
 
 At
September 30, 2008 and December 31, 2007, the Company has provided a valuation
allowance for the deferred tax asset since management has not been able to
determine that the realization of that asset is more likely than not.  Net
operating loss carry forwards $285,561 were applied for the year ended December
31, 2007. Loss carry forwards are set to begin expiring in 2021 for both federal
and state purposes.
  30
 
 SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 RESTATED
 
 NOTE
10 – 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 $2,192,950 and $965,513 for the nine months
ended September 30, 2008 and 2007.
 
 NOTE
11 – 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.
 
 NOTE
12 - NOTES PAYABLE
  Notes
payable at September 30, 2008 and December 31, 2007 consist of the
following:
 2008
                                
                                
                                2007Bank
      note payable in monthly interest and principal payments of $1,784.
      Interest is payable prime plus 4.5%, (9.75% as of  December 31,
      2007).  The note is guaranteed by a stockholder of the Company and
      secured by a deed of trust against personal residences of three
      stockholders.  Also, the bank has a blanket lien against all other
      current and future assets of Sitestar.net.
                                
                                $
                                -
                                
                                
                                $
                                58,242Bank
      line of credit reissued on April 12, 2008 with a principal limit of
      $300,000.  Interest is payable at an annual rate of prime plus
      .25% (7.50% as of December 31, 2007).  The note is secured by a
      deed of trust on the Company’s building and is personally guaranteed by
      officers and directors of the Company.
                                
                                
                                -
                                
                                
                                
                                300,000
  31
 
 SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 RESTATED
 
 NOTE
12 - NOTES PAYABLE, continued
 
 Non-interest
      bearing amount due on acquisition of AlaNet Internet Services payable in
      eleven monthly installments of $4,276 through April 2008.
                            
                            
                            -
                            
                            
                            
                            20,807Bank
      note payable in twelve monthly interest and principal payments of $30,650.
      Interest is payable at an annual rate of 9.25%.   The note
      is guaranteed by officers and directors of the Company and secured by
      shares of Company stock owned by the officers and directors of the
      Company.
                            
                            
                            -
                            
                            
                            
                            322,048Bank
      note payable in twenty four monthly interest and principal payments of
      $21,167. Interest is payable at an annual rate of
      8.5%.   The note is guaranteed by officers and directors of
      the Company and secured by shares of Company stock owned by officers and
      directors of the Company.
                            
                            
                            -
                            
                            
                            
                            438,264Bank
      bridge note originally payable on February 1, 2008. Interest is payable at
      an annual rate of 8.5%.  The note was refinanced on February 21,
      2008 at an annual interest rate of 8.5% and is payable in twelve payments
      of $21,760 and is personally guaranteed by officers and directors of the
      Company and secured by real estate owned by officers and directors of the
      Company.
                            
                            
                            -
                            
                            
                            
                            250,000Non-interest
      bearing amount due on acquisition of USA Telephone payable in monthly
      installments of $25,000 starting January 2008.
                            
                            
                            1,290,615
                            
                            
                            
                            1,574,341Non-interest
      bearing amount due on acquisition of N2theNet payable in eleven monthly
      installments of $4,046 starting May 2008.
                            
                            
                            23,522
                            
                            
                            
                            -Non-interest
      bearing amount due on acquisition of Dial Assurance payable in six monthly
      installments of $21,650 starting June 2008
                            
                            
                            34,141
                            
                            
                            
                            -Non-interest
      bearing amount due on acquisition of AdaNet payable in five monthly
      installments of $3,836 starting July 2008
                            
                            
                            3,866
                            
                            
                            
                            -
  32
 
 SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 RESTATED
 
 NOTE
12 - NOTES PAYABLE, continued
  Non-interest
      bearing amount due on acquisition of USA Telephone payable in 60 days from
      closing.
                              
                              
                              50,292
                              
                              
                              
                              -Non-interest
      bearing amount due on acquisition of Velocity West payable in twelve
      monthly installments of $21,667 starting September 2008.
                              
                              
                              47,058
                              
                              
                              
                              -Less
      current portion
                              
                              
                              (458,879
                              )
                              
                              
                              (1,268,866
                              )Long-term
      portion
                              
                              $
                              990,615
                              
                              
                              $
                              1,694,836
 
 The
future principal maturities of these notes are as follows:
  Twelve
      months ending September 30, 2009
                        
                        $
                        458,879Twelve
      months ending September 30, 2010
                        
                        
                        990,615Twelve
      months ending September 30, 2011
                        
                        
                        -Twelve
      months ending September 30, 2012
                        
                        
                        -Twelve
      months ending September 30, 2013
                        
                        
                        -Thereafter
                        
                        
                        -Total
                        
                        $
                        1,449,494
 
 NOTE
13 - ALLEVIATION OF GOING CONCERN
 
 At
September 30, 2007, the Company reported that it had a working capital
deficiency of $566,269. This condition raised substantial doubt about the
Company's ability to continue as a going concern at that time.
  The
Company had income from operations for each of the two years ended December 31,
2007 of $956,170 and $1,179,677. The Company also had positive cash flows from
operations of $2,805,883 and $2,465,289 for the two years ended December 31,
2007. In addition, the Company projects positive cash flows for the next twelve
months. With this positive trend of operating income, cash flows, and projected
cash flow over the next twelve months, the Company’s management considers the
facts and circumstances, which raised substantial doubt about the Company’s
ability to continue as a going concern, to be alleviated.
  33
 
 SITESTAR
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 RESTATED
 
 NOTE
13 - ALLEVIATION OF GOING CONCERN, continued
 
 The
Company also plans to continue to increase revenue by acquiring customers in
target markets at competitive prices and selling value-added products and
services to the existing customer base to maximize average revenue per user
(ARPU). The Company will continue to reduce overall operating expenses by
leveraging economies of scale, deployment of new technologies, and reducing
supplier costs by securing more favorable rates and terms through wholesale
partnerships and other methods.
 
 NOTE
14 –SUBSEQUENT EVENTS
 
 On
October 22, 2008, the Company issued a press release announcing a stock
repurchase program that authorizes the repurchase of up to 10,000,000 shares of
the Company’s common stock.  The shares will be purchased on the open
market at prevailing prices or in privately negotiated
transactions.
 
 Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations
  General
  The
following discussion and analysis should be read in conjunction with the
Company’s consolidated financial statements and related footnotes for the year
ended December 31, 2007 included in the Annual Report on Form 10-KSB.  The
discussion of results, causes and trends should not be construed to imply any
conclusion that such results or trends will necessarily continue in the
future.
 
 Overview
  The
Company is a national Internet Service Provider and computer services company
offering a broad range of services to business and residential customers.
 In November 2003, the Company announced the launch of the national dial-up
Internet service that made service available in thousands of cities throughout
the United States.  This expanded service features web acceleration, e-mail
acceleration and pop-up ad blocking. Spam and virus filtering are also included.
 The Company utilizes Company owned infrastructure, as well as, third party
affiliations that allow it to expand its network and services to most of the
United States.
 The
products and services that the Company provides include:
 ·
   Internet access services;
 ·
   Web acceleration services;
 ·
   Web hosting services;
 ·
   End-to-end e-commerce solutions; and
 ·
   Toner and ink cartridge remanufacturing
services.
  34
 
 SITESTAR
CORPORATION
 
 Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
 
 The
Company’s Internet division consists of multiple sites of operation and services
customers throughout the U.S. and Canada.  Sitestar products include
narrow-band (dial-up) services, broadband services (ISDN, DSL, fiber-optic,
satellite, cable and wireless) and the Company supports these products utilizing
Company owned infrastructure and third party
affiliations.  Value-added services include web acceleration, spam and
virus filtering, as well as, spyware protection.
 
 The
Company’s web hosting and related services provide a way to help businesses
market their products and services over the Internet.
 
 Through
its Internet division, the Company sells and manufactures computer systems,
computer hardware, computer software, networking services, repair services and
toner and ink cartridge remanufacturing services from the Lynchburg, Virginia
location.
 
 The
Company is a factory authorized service center for many national-brand computer
equipment companies. The Company’s toner and ink cartridge remanufacturing
service utilizes empty toner cartridges and remanufactures them to provide
savings to customers over buying brand new cartridges. This service is available
locally and nationwide.
 
 The
Company’s computer programming and consulting services help companies automate
their businesses.  The Company sold the assets of the programming division
on
 
 August
31, 2004 while retaining the rights to the new product that automates certain
functions of crisis centers throughout the nation.
 
 Results
of operations
  The
following tables show financial data for the nine months ended September 30,
2008 and 2007. Operating results for any period are not necessarily indicative
of results for any future period.
  35
 
 SITESTAR
CORPORATION
 
 Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
 
 For the nine months ended September 30,
      2008
                    (unaudited)Corporate
                  
                  
                  Internet
                  
                  
                  TotalRevenue
                  
                  $
                  -
                  
                  
                  $
                  7,644,538
                  
                  
                  $
                  7,644,538Cost
      of revenue
                  
                  
                  -
                  
                  
                  
                  2,097,509
                  
                  
                  
                  2,097,509Gross
      profit
                  
                  
                  -
                  
                  
                  
                  5,547,029
                  
                  
                  
                  5,547,029Operating
      expenses
                  
                  
                  88,893
                  
                  
                  
                  4,246,226
                  
                  
                  
                  4,335,119Income
      (loss) from operations
                  
                  
                  (88,893
                  )
                  
                  
                  1,300,803
                  
                  
                  
                  1,211,910Other
      income (expense)
                  
                  
                  -
                  
                  
                  
                  (118,971
                  )
                  
                  
                  (118,971
                  )Income
      before income taxes
                  
                  
                  (88,893
                  )
                  
                  
                  1,181,832
                  
                  
                  
                  1,092,939Income
      taxes
                  
                  
                  (44,888
                  )
                  
                  
                  -
                  
                  
                  
                  (44,888
                  )Net
      income (loss)
                  
                  $
                  (44,005
                  )
                  
                  $
                  1,181,832
                  
                  
                  $
                  1,137,827
 
 For the nine months ended September 30,
      2007
                    (unaudited)Corporate
                  
                  
                  Internet
                  
                  
                  TotalRevenue
                  
                  $
                  -
                  
                  
                  $
                  4,450,600
                  
                  
                  $
                  4,450,600Cost
      of revenue
                  
                  
                  -
                  
                  
                  
                  1,403,848
                  
                  
                  
                  1,403,848Gross
      profit
                  
                  
                  -
                  
                  
                  
                  3,046,752
                  
                  
                  
                  3,046,752Operating
      expenses
                  
                  
                  53,320
                  
                  
                  
                  2,282,831
                  
                  
                  
                  2,336,151Income
      (loss) from operations
                  
                  
                  (53,320
                  )
                  
                  
                  763,921
                  
                  
                  
                  710,601Other
      income (expense)
                  
                  
                  -
                  
                  
                  
                  (127,769
                  )
                  
                  
                  (127,769
                  )Income
      before income taxes
                  
                  
                  (53,320
                  
                  
                  
                  636,152
                  
                  
                  
                  582,832Income
      taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      income (loss)
                  
                  $
                  (53,320
                  )
                  
                  $
                  636,152
                  
                  
                  $
                  582,832
  36
 
 SITESTAR
CORPORATION
 
 Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
 
 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 nine months ended September 30, 2008 and 2007.
 
 For
      the nine months ended September 30, 2008Corporate
                    
                    
                    Internet
                    
                    
                    TotalEBITDA
                    
                    $
                    (88,893
                    )
                    
                    $
                    3,550,408
                    
                    
                    $
                    3,461,515Interest
      expense
                    
                    
                    -
                    
                    
                    
                    (144,587
                    )
                    
                    
                    (144,587
                    )Taxes
                    
                    
                    44,888
                    
                    
                    
                    -
                    
                    
                    
                    44,888Depreciation
                    
                    
                    -
                    
                    
                    
                    (31,039
                    )
                    
                    
                    (31,039
                    )Amortization
                    
                    
                    -
                    
                    
                    
                    (2,192,950
                    )
                    
                    
                    (2,192,950
                    )Net
      income (loss)
                    
                    $
                    (44,005
                    )
                    
                    $
                    1,181,832
                    
                    
                    $
                    1,137,827
 
 For
      the nine months ended September 30, 2007Corporate
                    
                    
                    Internet
                    
                    
                    TotalEBITDA
                    
                    $
                    (53,320
                    )
                    
                    $
                    1,766,127
                    
                    
                    $
                    1,712,807Interest
      expense
                    
                    
                    -
                    
                    
                    
                    (118,950
                    )
                    
                    
                    (118,950
                    )Taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Depreciation
                    
                    
                    -
                    
                    
                    
                    (45,512
                    )
                    
                    
                    (45,512
                    )Amortization
                    
                    
                    -
                    
                    
                    
                    (965,513
                    )
                    
                    
                    (965,513
                    )Net
      income (loss)
                    
                    $
                    (53,320
                    )
                    
                    $
                    636,152
                    
                    
                    $
                    582,832
 
 NINE MONTHS ENDED SEPTEMBER
30, 2008 COMPARED TO SEPTEMBER 30, 2007 (Unaudited)
  REVENUE.
 
 Revenue
for the nine months ended September 30, 2008 increased by $3,193,938 or 71.8%
from $4,450,600 for the nine months ended September 30, 2007 to $7,644,538 for
the same period in 2008.  Internet sales increased primarily due to
the addition of Internet customers from the asset acquisition of USA
Telephone.
  37
 
 SITESTAR
CORPORATION
 
 Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
 
 This
acquisition, for the nine months ended September 30, 2008, yielded approximately
$3,452,000 in additional net revenues. This increase from acquisitions was
offset by additional attrition to broadband service.  Sitestar focuses
on marketing and selling Internet access to second-tier markets where broadband
is not prevalent.  The Company’s strategy is to leverage operational
economies of scale to provide dial-up service in these markets where it will
continue to be the core method for connecting to the Internet.
 
 While
Sitestar is currently adding customers through promotional marketing campaigns,
this method for strong and sustainable growth is threatened by competition from
nationally-known ISPs and discount dial-up providers, as well as, from the
future introduction of broadband services.  To increase its dial-up
base, the Company plans to continue to acquire ISPs in these target
markets.
 
 COST OF REVENUE.
 
 Costs of
revenue for the nine months ended September 30, 2008 increased by $693,661 or
49.4% from $1,403,848 for the nine months ended September 30, 2007 to $2,097,509
for the same period in 2008.  This increase is due to telecommunications
expenses associated with the acquisitions of additional customers.  It
also reflects the economies of an increased customer base as indicated by
decrease in the cost of revenue percentage by 4.1% from 31.5% for the nine
months ended September 30, 2007 to 27.4% for the same period in
2008.
 
 OPERATING
EXPENSES.
  Operating
expenses for the nine months ended September 30, 2008 increased $1,998,968 or
85.6% from $2,336,151 for the nine months ended September 30, 2007 to $4,335,119
for the same period in 2008.  Amortization expense increased $1,227,437 or
127.1% from $965,513 for the nine months ended September 30, 2007 to $2,192,950
for the same period in 2008.  This increase is due to the acquisition of
customer bases.  Bad debt expenses increased $698,304 or 185.7% from
$375,962 for the nine months ended September 30, 2007 to $1,074,266 for the same
period in 2008.   Corporate expenses of $88,893 for the nine
months ended September 30, 2008 consisted primarily of professional fees.
Corporate expenses of $53,320 for the nine months ended September 30, 2007
consisted primarily of professional fees.
  INCOME
TAXES
 
 For the
nine months ended September 30, 2009 corporate income tax expense $254,262 were
accrued.
  38
 
 SITESTAR
CORPORATION
 
 Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
  GAIN ON SALE OF
ASSETS.
 
 A gain
was recognized on the sale of the assets of Sitestar Applied Technologies, Inc.
to Servatus Development, LLC of $19,551 and $10,761 for the nine months ended
September 30, 2008 and 2007.  This represents, per the Definitive Purchase
Agreement between the parties, 20% of the gross revenue of Servatus Development,
LLC for the nine months ended September 30, 2008 and 2007.
 
 INTEREST EXPENSE.
 
 Interest
expense for the nine months ended September 30, 2008 increased by $25,637 or
17.7% from $118,950 for the nine months ended September 30, 2007 to $144,587 for
the same period in 2008.  This increase is a result of acquiring debt to
finance the acquisition of additional customers.
 
 JUNE 30, 2008 (Unaudited)
COMPARED TO DECEMBER 31, 2007 (Audited)
 
 FINANCIAL
CONDITION.
 
 Net
accounts receivable increased $382,656 or 127.6% from $299,863 on December 31,
2007 to $682,519 on September 30, 2008.  This increase is substantially due
to the addition of customers from acquisitions.  Due to the slow
moving nature of inventory, management has reclassified it on the balance sheets
from current assets to other assets held for resale which decreased by $1,081 or
01.5% from $70,739 on December 31, 2007 to $69,658 on September 30,
2008.  Accounts payable decreased by $56,305 or 71.5% from $78,713 on
December 31, 2007 to $22,408 on September 30, 2008. Accrued expenses decreased
by $31,672 or 22.9% from $138,021 on December 31, 2007 to $106,349 on September
30, 2008.  Deferred revenue decreased by $96,576 or 07.1% from
$1,361,606 on December 31, 2007 to $1,265,030 on September 30, 2008 representing
increased volume of customer accounts that have been prepaid. The current
portion of notes payable decreased $809,987 or 63.8% from $1,268,866 on December
31, 2007 to $458,879 on September 30, 2008.  This is substantially due
to the curtailment of a line of credit of $300,000 and the early payoff of
$1,068,554 of debt as of December 31, 2007.  Long-term notes payable
decreased $704,221 or 41.6% from $1,694,836 on December 31, 2007 to $990,615 on
September 30, 2008. This decrease is the result of servicing term notes and the
early payoff of term notes payable. Long-term notes payable to stockholders
decreased $147,406 or 21.5% from $686,687 on December 31, 2007 to $539,281 on
September 30, 2008.
  39
 
 SITESTAR
CORPORATION
 
 Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
 
 LIQUIDITY AND CAPITAL
RESOURCES
  Cash and
cash equivalents totaled $289,195 and $232,249 at September 30, 2008 and at
December 31, 2007.  EBITDA was $3,461,515 for the nine months ended
September 30, 2008 as compared to $1,712,807 for the same period in
2007.
 
 2008
                    
                    
                    2007EBITDA
      for the nine months ended September 30,
                    
                    $
                    3,461,515
                    
                    
                    $
                    1,712,807Interest
      expense
                    
                    
                    (144,587
                    )
                    
                    
                    (118,950
                    )Taxes
                    
                    
                    44,888
                    
                    
                    
                    -Depreciation
                    
                    
                    (31,039
                    )
                    
                    
                    (45,512
                    )Amortization
                    
                    
                    (2,192,950
                    )
                    
                    
                    (965,513
                    )Net
      income for the nine months ended September 30,
                    
                    $
                    1,137,827
                    
                    
                    $
                    582,832
 
 The aging
of accounts receivable as of September 30, 2008 and December 31, 2007 is as
shown:
 
 2008
                    
                    
                    2007Current
                    
                    $
                    363,882
                    
                    
                    
                    53
                    %
                    
                    $
                    171,446
                    
                    
                    
                    57
                    %30
      < 60
                    
                    
                    167,165
                    
                    
                    
                    25
                    %
                    
                    
                    72,337
                    
                    
                    
                    24
                    %60
      +
                    
                    
                    151,472
                    
                    
                    
                    22
                    %
                    
                    
                    56,080
                    
                    
                    
                    19
                    %Total
                    
                    $
                    682,519
                    
                    
                    
                    100
                    %
                    
                    $
                    299,863
                    
                    
                    
                    100
                    %
 
 At
September 30, 2007, the Company reported that it had a working capital
deficiency of $566,269. This condition raised substantial doubt about the
Company's ability to continue as a going concern at that time.  The
Company had income from operations for each of the two years ended December 31,
2007 of $956,170 and $1,179,677. The Company also had positive cash flows from
operations of $2,805,883 and $2,465,289 for the two years ended December 31,
2007. In addition, the Company projects positive cash flows for the next twelve
months. With this positive trend of operating income, cash flows and projected
cash flow over the next twelve months, the Company’s management considers the
facts and circumstances, which raised substantial doubt about the Company’s
ability to continue as a going concern, to be alleviated.
  The
Company also plans to continue to increase revenue by acquiring customers in
target markets at competitive prices and selling value-added products and
services to the existing customer base to maximize average revenue per user
(ARPU). The Company will continue to reduce overall operating expenses by
leveraging economies of scale, deployment of new technologies, and reducing
supplier costs by securing more favorable rates and terms through wholesale
partnerships and other methods.
  40
 
 SITESTAR
CORPORATION
 
 Item
2.     Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
  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.
 
 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.
  41
  Item
3.    Controls and Procedures
 
 We
identified a material weakness in our internal control over financial reporting
with respect to accounting for the income tax provision, namely, that we did not
have adequately designed procedures to calculate or review the tax provision.
Solely as a result of this material weakness, we concluded that our disclosure
controls and procedures were not effective as of December 31,
2008.
  As of May
14, 2009, we began evaluating the tax provision and remediated the related
internal control weakness. We have evaluated the effectiveness of our disclosure
controls and procedures and internal controls over financial reporting as of
December 31, 2008, including the remedial actions discussed
above.  This evaluation was carried out under the supervision and with
the participation of our management, including our principal executive officer
and principal financial officer.  Based on this evaluation, these
officers have concluded that our disclosure controls and procedures are
effective.  Except for the aforementioned income tax controls and
procedures, there were no significant changes to our internal controls during
the last fiscal quarter ended June 30, 2008.  Disclosure controls and
procedures and internal controls over financial reporting are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in the
reports that we file under the Exchange Act is accumulated and communicated to
our management, including principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
  Management’s
Report on Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally
accepted accounting principles. As required by Rule 13a-15 under the Exchange
Act, as of the end of the period covered by this report, we carried out an
evaluation under the supervision and with the participation of our management,
of the effectiveness of the design and operation of our disclosure controls and
procedures.
 
 In
designing and evaluating our disclosure controls and procedures, we and our
management recognize that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily was required to apply
its judgment in evaluating and implementing possible controls and
procedures.
  42
 
 The
effectiveness of our disclosure controls and procedures and our internal control
over financial reporting is subject to various inherent limitations, including
cost limitations, judgments used in decision making, assumptions about the
likelihood of future events, the soundness of our systems, the possibility of
human error, and the risk of fraud.  Moreover, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions and the risk
that the degree of compliance with policies or procedures may deteriorate over
time.  Because of these limitations, there can be no assurance that
any system of disclosure controls and procedures or internal control over
financial reporting will be successful in preventing all errors or fraud or in
making all material information known in a timely manner to the appropriate
levels of management.
  Based on
our assessment, management has concluded that our internal control over
financial reporting was ineffective as of the end of the fiscal year to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles as a result of the
material weaknesses in internal control as described and defined below. We
reviewed the results of management’s assessment with the Audit Committee of our
Board of Directors. In addition, on a quarterly basis we will evaluate any
changes to our internal control over financial reporting to determine if a
material changed occurred.
 
 Material
Weaknesses in Internal Controls
  Bagell,
Josephs, Levine & Company, L.L.C. (“Bagell”) our independent registered
public accounting firm, has provided us with an unqualified report on our
consolidated financial statements for the fiscal year ended December 31,
2008. However, during the conduct of our audit for the year ended December
31, 2008 Bagell identified a material weakness in the calculation of the tax
provision and have advised our board of directors that the following material
weakness existed at December 31, 2008. As defined by the Public Company
Accounting Oversight Board Auditing Standard No. 5, a material weakness is a
deficiency or a combination of deficiencies in internal control over financial
reporting such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis.
  The
material weakness exists in the internal control over financial reporting with
respect to accounting for the income tax provision, namely, that we did not have
adequately designed procedures to calculate or review the tax provision. Solely
as a result of this material weakness, we concluded that our disclosure controls
and procedures were not effective as of December 31,
2008.
  43
 
 While
this material weakness did not have an effect on our reported results, it
nevertheless constituted a deficiency in our controls. In light of this material
weakness and the requirements enacted by the Sarbanes-Oxley act of 2002, and the
related rules and regulations adopted by the SEC, our Chief Executive Officer
and Chief Accounting Officer concluded that, as of December 31, 2008, our
controls and procedures needed improvement and were not effective at a
reasonable assurance level. Despite this deficiency in our internal controls,
management believes that there were no material inaccuracies or omissions of
material fact in this annual report.
  Since the
discovery of the material weaknesses in the tax provision we began evaluating
the tax provision and remediated the related internal control weakness. We have
evaluated our disclosure controls and procedures as currently in effect,
including the remedial actions discussed above, and we have concluded that, as
of this date, our disclosure controls and procedures are effective.
  We have
discussed our corrective actions and future plans with our board of directors
and Bagell as of the date of this annual report, and believe the planned actions
should serve to correct the above listed material weaknesses in our internal
controls. However, we cannot provide assurance that either we or our independent
auditors will not in the future identify further material weaknesses or
significant deficiencies in our internal control over financial reporting that
we have not discovered to date.
 
 Inherent
Limitations of the Effectiveness of Internal Control.
 
 A control
deficiency exists when the design or operation of a control does not allow
management or employees, in the ordinary course of performing their assigned
functions, to prevent or detect misstatements on a timely basis.  A
significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the Company’s ability to initiate,
authorize, record, process, or report external financial data reliably in
accordance with GAAP, such that there is a more than remote likelihood that a
misstatement of the Company’s annual or interim financial statements that is
more than inconsequential will not be prevented or detected.
  44
 
 PART
II.  OTHER INFORMATION
  Item
1.     Legal Proceedings
 
 On
January 16, 2008, Sitestar filed a complaint against Frederick T. Manlunas in
the Superior Court of the State of California, County of Orange, Case No. 30
2008 00101457, for breach of written contract and specific performance
regarding shares in Sitestar that Mr. Manlunas failed to provide to Sitestar
under the Stock Redemption Agreement, and declaratory relief regarding the
parties' respective duties and rights
 under the
Stock Redemption Agreement and Secured Note. On May 28, 2008, Mr. Manlunas filed
a cross-complaint against Sitestar for reformation, breach of contract,
negligent misrepresentation, and fraudulent inducement, alleging damages of
$148,692.  Trial is scheduled for January 26, 2009.
 
 A
complaint was filed in Belmont County, Ohio that alleges there was a breach of
the agreement for the purchase and sale of Internet Service Provider accounts
dated July 1, 2006.  The Complaint alleges the Company defaulted upon
its obligation under the contract and owes First USA, Inc. the sum of
approximately $150,000.
  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.
  45
  SITESTAR
CORPORATION
 
 PART
II.  OTHER INFORMATION, continued
 
 31.2
Certification of Chief Financial Officer Pursuant to the Securities Exchange Act
of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
 
 32
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 
 SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  SITESTAR
      CORPORATIONDate:
      October 8, 2009By:
                      /s/ Frank Erhartic, Jr.Frank
      Erhartic, Jr.President,
      Chief Executive Officer(Principal
      Executive Officer andPrincipal
      Accounting Officer)Date:
      October 8, 2009By:
                      /s/ Daniel A. Judd.Daniel
      A. JuddChief
      Financial Officer(Principal
      Financial
Officer)
  46